NOTE

– SECURITIES

The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
2018
U.S. Government agency debt obligations	$	196,109,000	$	310,000	$	(9,342,000	)	$	187,077,000
Mortgage-backed securities		44,263,000		187,000		(792,000	)		43,658,000
Municipal general obligation bonds		103,235,000		427,000		(1,165,000	)		102,497,000
Municipal revenue bonds		3,688,000		4,000		(58,000	)		3,634,000
Other investments		500,000		0		0			500,000
	$	347,795,000	$	928,000	$	(11,357,000	)	$	337,366,000
201 7
U.S. Government agency debt obligations	$	175,953,000	$	99,000	$	(6,352,000	)	$	169,700,000
Mortgage-backed securities		38,967,000		335,000		(510,000	)		38,792,000
Municipal general obligation bonds		121,040,000		891,000		(638,000	)		121,293,000
Municipal revenue bonds		3,978,000		30,000		(30,000	)		3,978,000
Other investments		2,010,000		0		(29,000	)		1,981,000
	$	341,948,000	$	1,355,000	$	(7,559,000	)	$	335,744,000

Securities with unrealized losses at year-end

2018

and

2017,

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
Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
2018
U.S. Government agency debt obligations	$	31,220,000	$	1,136,000	$	136,445,000	$	8,206,000	$	167,665,000	$	9,342,000
Mortgage-backed securities		11,460,000		136,000		23,762,000		656,000		35,222,000		792,000
Municipal general obligation bonds		28,923,000		299,000		43,961,000		866,000		72,884,000		1,165,000
Municipal revenue bonds		1,188,000		11,000		1,372,000		47,000		2,560,000		58,000
Other investments		0		0		0		0		0		0
	$	72,791,000	$	1,582,000	$	205,540,000	$	9,775,000	$	278,331,000	$	11,357,000
2017
U.S. Government agency debt obligations	$	35,677,000	$	434,000	$	115,374,000	$	5,918,000	$	151,051,000	$	6,352,000
Mortgage-backed securities		10,179,000		156,000		21,084,000		354,000		31,263,000		510,000
Municipal general obligation bonds		12,807,000		114,000		54,703,000		524,000		67,510,000		638,000
Municipal revenue bonds		0		0		1,187,000		30,000		1,187,000		30,000
Other investments		1,510,000		29,000		0		0		1,510,000		29,000
	$	60,173,000	$	733,000	$	192,348,000	$	6,826,000	$	252,521,000	$	7,559,000

(Continued)

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

NOTE

– 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.

December 31, 2018,

360

debt securities with fair values totaling

$278

million had unrealized losses aggregating

$11.4

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 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 values of debt securities at

December 31, 2018,

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 one year or less		1.89%	$	27,286,000	$	27,223,000
Due from one to five years		2.32		50,143,000		49,585,000
Due from five to ten years		2.62		108,765,000		104,945,000
Due after ten years		3.13		116,838,000		111,455,000
Mortgage-backed securities		2.76		44,263,000		43,658,000
Other investments		5.37		500,000		500,000
		2.71%	$	347,795,000	$	337,366,000

mortgage-backed securities were sold in

2018

2016.

Mortgage-backed securities totaling

$5.0

million were sold in

2017,

resulting in a nominal net gain.

municipal general obligation bonds were sold in

2018.

Municipal general obligation bonds totaling

$2.6

million and

$0.3

million were sold during

2017

and

2016,

respectively, resulting in a nominal net gain/loss.

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

$98.2

million and

$112

million at

December 31, 2018

and

December 31, 2017,

respectively, with estimated market values of

$97.4

million and

$112

million at the respective dates. Securities issued by all other states and their political subdivisions had a combined amortized cost of

$8.7

million and

$12.9

million at

December 31, 2018

and

December 31, 2017,

with estimated market values of

$8.7

million and

$13.0

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.

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

$104

million and

$119

million at

December 31, 2018

and

2017,

respectively. Investments in FHLBI stock are restricted and

may

only be resold to, or redeemed by, the issuer.

(Continued)

MERCANTILE BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018