3.    LOANS AND ALLOWANCE FOR CREDIT LOSSES

Commercial loans are divided among five segments based primarily on collateral type, risk characteristics, and primary and secondary sources of repayment. These segments are then further stratified based on the commercial loan grade that is assigned using our standard loan grading paradigm. Retail loans are divided into one of two groups based on risk characteristics and source of repayment. Our allowance for credit loss pools are consistent with those used for loan note disclosure purposes.

Our loan portfolio segments as of both  June 30, 2026, and  December 31, 2025, were as follows:

Our total loans at June 30, 2026, were $4.92 billion, an increase of $93.7 million, or 1.9%, compared to  December 31, 2025. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at June 30, 2026, and  December 31, 2025, and the percentage change in loans from the end of 2025 to the end of the second quarter of 2026, are as follows:

Age analyses of past due loans were as follows:

Nonaccrual loans were as follows:

Nonaccrual loans represent the entire balance of collateral dependent loans. As of June 30, 2026, and  December 31, 2025, all collateral dependent loans were secured by real estate, with the exception of those classified as commercial and industrial, which were secured by accounts receivable, inventory, and equipment. Interest income recognized on nonaccrual loans totaled $0.5 million and $0.3 million during the six months ended June 30, 2026, and 2025, respectively, reflecting the collection of interest at the time of principal pay off. 

Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The primary risk elements with respect to commercial loans are the financial condition of the borrower, sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. All commercial loans are graded using the following criteria:

The following table reflects amortized cost basis of loans as of  June 30, 2026, and loan charge-offs during the six months ended June 30, 2026, based on year of origination:

There were lines of credit with principal balances of $5.6 million as of December 31, 2025, that were converted to term loans during the first six months of 2026.

The following table reflects amortized cost basis of loans as of December 31, 2025, and loan charge-offs during the six months ended June 30, 2025, based on year of origination:

There were lines of credit with principal balances of $0.7 million as of December 31, 2024, that were converted to term loans during 2025. 

We use a migration to loss methodology to determine historical loss rates for commercial loans given the comprehensive loan grading process employed by Mercantile for over two decades, while an open pool approach is best suited for retail loans given the smaller dollar size of the segments. A baseline loss rate is produced at each reporting date for each loan portfolio segment using bank-specific loan charge-off and recovery data over a defined historical look-back period. The look-back period represents the number of data periods that will be used to calculate a baseline loss rate for each loan portfolio segment. We determined that the look-back period commencing on January 1, 2011, through the current reporting date was reasonable and appropriate, which was used in the calculation of both the June 30, 2026, and  December 31, 2025, allowance for credit losses.

Our historical loss rate is then applied to future loan balances at the instrument level based on remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. Our prepayment speed assumptions are developed at the loan segment level based upon the consideration of all relevant data which we believe could impact anticipated customer behavior, including changes in interest rates, economic conditions, and underlying property valuations. For the commercial portfolio segments, we assumed a 2.0% prepayment speed as of both June 30, 2026, and  December 31, 2025, as we deemed there to be no considerable changes from historical experience. For the retail 1-4 family mortgage and retail other consumer portfolios, we used a prepayment speed of 9.5% as of both  June 30, 2026, and  December 31, 2025. 

During each reporting period, we also consider the need to adjust the historical loss rates as determined to reflect the extent to which we expect current conditions and reasonable and supportable economic forecasts to differ from the conditions that existed for the period over which the historical loss information was determined. These qualitative adjustments may increase or decrease our estimate of expected future credit losses. As of June 30, 2026, and  December 31, 2025, we used a one-year reasonable and supportable economic forecast period, with a six-month straight-line reversion period for all loan segments. The economic forecasts used for our June 30, 2026, allowance calculation reflected a $0.4 million allowance balance reduction. The forecasts used for our December 31, 2025, allowance calculation reflected a $0.3 million allowance balance reduction.

The allowance for PSL and PCD loans acquired from the acquisition of Eastern Michigan Financial Corporation and its wholly owned banking subsidiary, Eastern Michigan Bank, was measured at the loan segment level using proxy expected lifetime loss rates adjusted for qualitative risk factors, including lending management experience, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors, and economic conditions not already captured.

Individual loans exhibiting unique risk characteristics, which differentiated the loans from other loans within the loan segments and were evaluated for expected credit losses on an individual basis, totaled $4.6 million and $7.9 million as of June 30, 2026, and  December 31, 2025, respectively. Individual allowance allocations totaled $0.9 million and $4.0 million as of June 30, 2026, and  December 31, 2025, respectively.

Activity in the allowance for credit losses during the three and six months ended June 30, 2026, and 2025, were as follows: