SECURITIES

The amortized cost and fair value of available for sale securities and the related pre-tax gross unrealized gains

and losses recognized in accumulated other comprehensive income are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2017
U .S. Government agency debt obligations	$	165,551,000	$	208,000	$	(4,591,000	)	$	161,168,000
Mortgage-backed securities		39,304,000		405,000		(214,000	)		39,495,000
Municipal general obligation bonds		121,803,000		1,750,000		(243,000	)		123,310,000
Municipal revenue bonds		4,099,000		51,000		(16,000	)		4,134,000
Other investments		2,002,000		0		(19,000	)		1,983,000

	$	332,759,000	$	2,414,000	$	(5,083,000	)	$	330,090,000

December 31, 201 6
U .S. Government agency debt obligations	$	159,271,000	$	106,000	$	(7,337,000	)	$	152,040,000
Mortgage-backed securities		47,329,000		486,000		(423,000	)		47,392,000
Municipal general obligation bonds		120,284,000		312,000		(1,549,000	)		119,047,000
Municipal revenue bonds		7,699,000		23,000		(91,000	)		7,631,000
Other investments		1,979,000		0		(29,000	)		1,950,000

	$	336,562,000	$	927,000	$	(9,429,000	)	$	328,060,000

(Continued)

MERCANTILE BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SECURITIES

(Continued)

Securities with unrealized losses at

September 30, 2017

and

December 31, 2016,

aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
September 30, 2017
U.S. Government agency debt obligations	$	81,981,000	$	2,496,000	$	47,265,000	$	2,095,000	$	129,246,000	$	4,591,000
Mortgage-backed securities		21,482,000		121,000		9,416,000		93,000		30,898,000		214,000
Municipal general obligation bonds		10,280,000		90,000		8,436,000		153,000		18,716,000		243,000
Municipal revenue bonds		0		0		1,101,000		16,000		1,101,000		16,000
Other investments		1,502,000		19,000		0		0		1,502,000		19,000

	$	115,245,000	$	2,726,000	$	66,218,000	$	2,357,000	$	181,463,000	$	5,083,000

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
December 31, 201 6
U.S. Government agency debt obligations	$	110,160,000	$	7,172,000	$	5,073,000	$	165,000	$	115,233,000	$	7,337,000
Mortgage-backed securities		3,670,000		4,000		37,072,000		419,000		40,742,000		423,000
Municipal general obligation bonds		65,895,000		1,360,000		27,734,000		189,000		93,629,000		1,549,000
Municipal revenue bonds		1,921,000		90,000		206,000		1,000		2,127,000		91,000
Other investments		1,479,000		29,000		0		0		1,479,000		29,000

	$	183,125,000	$	8,655,000	$	70,085,000	$	774,000	$	253,210,000	$	9,429,000

(Continued)

MERCANTILE

BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SECURITIES

(Continued)

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to the length of time

and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability we have to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those debt securities whose fair value is less than their amortized cost basis, we also consider our intent to sell the security, whether it is more likely than

not

that we will be required to sell the security before recovery and if we do

not

expect to recover the entire amortized cost basis of the security. In analyzing an issuer’s financial condition, we

may

consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.

September 30, 2017,

195

debt securities and

one

mutual fund with fair values totaling

$181

million have unrealized losses aggregating

$5.1

million. After we considered whether the securities were issued by the federal government or its agencies and whether downgrades by bond rating agencies had occurred, we determined that the unrealized losses were due to changing interest rate environments. As we do

not

intend to sell our debt securities before recovery of their cost basis and we believe it is more likely than

not

that we will

not

be required to sell our debt securities before recovery of the cost basis,

unrealized losses are deemed to be other-than-temporary.

The amortized cost and fair value of debt securities at

September 30, 2017,

by maturity, are shown in the following table. The contractual maturity is utilized for U.S. Government agency debt obligations and municipal bonds. Expected maturities

may

differ from contractual maturities because borrowers

may

have the right to call or prepay obligations with or without call or prepayment penalties. Securities

not

due at a single maturity date, primarily mortgage-backed securities, are shown separately. Weighted average yields are also reflected, with yields for municipal securities shown at their tax equivalent yield.

	Weighted Average Yield			Amortized Cost		Fair Value

Due in 201 7		1.51	%	$	3,307,000	$	3,307,000
Due in 201 8 through 2022		2.20			95,857,000		96,451,000
Due in 202 3 through 2027		2.71			99,198,000		98,217,000
Due in 202 8 and beyond		2.94			93,091,000		90,637,000
Mortgage-backed securities		2.06			39,304,000		39,495,000
Other investments		2.03			2,002,000		1,983,000

Total available for sale securities		2.53	%	$	332,759,000	$	330,090,000

Securities issued by the State of Michigan and all its political subdivisions had a combined amortized cost of $

113

million at

September 30, 2017

and

$109

million at

December 31, 2016,

with estimated market values of

$114

million and

$107

million, respectively. Securities issued by all other states and their political subdivisions had a combined amortized cost of

$13.4

million and

$19.5

million at

September 30, 2017

and

December 31, 2016,

respectively, with estimated market values of

$13.6

million and

$19.5

million, respectively. Total securities of any other specific issuer, other than the U.S. Government and its agencies and the State of Michigan and all its political subdivisions, did

not

exceed

10%

of shareholders’ equity.

(Continued)

MERCANTILE

BANK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SECURITIES

(Continued)

The carrying value of U.S. Government agency debt obligations and mortgage-backed securities that are pledged to secure repurchase agreem

ents was

$122

million and

$132

million at

September 30, 2017

and

December 31, 2016,

respectively. Investments in Federal Home Loan Bank stock are restricted and

may

only be resold or redeemed by the issuer.