MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of March 31, 2026, as compared to December 31, 2025, and unaudited consolidated operating results for the three months ended March 31, 2026 and 2025. This disclosure should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes appearing elsewhere herein and the audited financial statements and accompanying notes provided in our Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on March 2, 2026.
In addition to the historical information contained herein, this Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of such term under the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including interest rates and other general economic, business and political conditions; the impact of federal trade policy, inflation, deposit volatility and potential regulatory developments; the performance of our loan portfolio and our ability to manage credit risk; changes in the financial markets; the effects of armed conflict, including the scope and duration of disruptions in global energy markets relating to war in Iran; changes in the business environment resulting from the adoption of artificial intelligence, including fraud and cybersecurity risk; operational risks, including with respect to fraud and information technology; changes in business plans as circumstances warrant; risks related to legal proceedings; risks related to mergers and acquisitions and the integration of acquired businesses; changes to U.S. and state tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," or "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires Management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the greatest effect on the Company's reported financial position and results of operations are set forth in "Note 1 - Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2025.
For additional information regarding critical accounting estimates, see the section titled "Critical Accounting Estimates" included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2025. There have been no material changes in the Company's application of critical accounting estimates since December 31, 2025.
Allowance for Credit Losses on Loans
Management's evaluation process used to determine the appropriateness of the allowance for credit losses on loans is subject to the use of estimates, assumptions, and judgments. The evaluation process combines many factors: Management's ongoing review and grading of the loan portfolio leveraging probability of default and loss given default, consideration of historical loan loss and delinquency experience, trends in past due and nonaccrual loans, risk characteristics of the various classifications of loans, concentrations of loans to specific borrowers or industries, existing economic conditions and forecasts, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect future credit losses. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the allowance for credit losses on loans, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. As an integral part of their examination process, various regulatory agencies also review the allowance for credit losses on loans. Such agencies may require additions to the allowance for credit losses on loans or may require that certain loan balances be charged-off or downgraded into criticized loan categories when their credit evaluations differ from
those of management, based on their judgments about information available to them at the time of their examination. The Company believes the level of the allowance for credit losses on loans is appropriate.
Factors Affecting Comparability
Each factor listed below affects the comparability of our results of operations for the three months ended March 31, 2026 and 2025, and our financial condition as of March 31, 2026 and December 31, 2025, and may affect the comparability of financial information we report in future fiscal periods.
Sale of equipment finance portfolio. During the fourth quarter of 2025, we sold substantially all of our equipment finance portfolio resulting in a loss on sale of $21.4 million. As previously disclosed, we ceased originating new equipment finance loans and leases effective as of September 30, 2025.
Redemption of Subordinated Notes. On September 30, 2025, we redeemed all of our outstanding Fixed-to-Floating Rate Subordinated Notes due September 30, 2029, with an interest rate of 7.91%, which had an aggregate principal amount of $50.8 million. The aggregate redemption price was 100% of the aggregate principal amount of the subordinated notes, plus accrued and unpaid interest.
Goodwill impairment. During the first quarter of 2025, we determined that a triggering event had occurred at our Banking reporting unit as a result of further deteriorated credit quality coupled with trends in our stock price. We performed a quantitative impairment test on our Banking reporting unit as of March 31, 2025 and engaged a third-party service provider to assist Management with the determination of the fair value. The resulting calculation indicated that the carrying amount exceeded the fair value of our Banking reporting unit. As a result of the assessment, we recognized $154.0 million of goodwill impairment expense. The impairment expense did not impact our regulatory capital ratios, tangible common equity ratio or our liquidity position.
Results of Operations
Overview. The following table sets forth condensed income statement information of the Company for the three months ended March 31, 2026 and 2025:
| Three Months Ended March 31, | |||||||||||
| (dollars in thousands, except per share data) | 2026 | 2025 | |||||||||
| Income Statement Data: | |||||||||||
| Interest income | $ | 86,022 | $ | 99,355 | |||||||
| Interest expense | 28,605 | 41,065 | |||||||||
| Net interest income | 57,417 | 58,290 | |||||||||
| Provision for credit losses | 5,003 | 10,850 | |||||||||
| Noninterest income | 22,122 | 17,763 | |||||||||
| Noninterest expense | 50,424 | 203,005 | |||||||||
| Income (loss) before income taxes | 24,112 | (137,802) | |||||||||
| Income tax expense | 5,649 | 3,172 | |||||||||
| Net income (loss) | 18,463 | (140,974) | |||||||||
| Preferred dividends | 2,228 | 2,228 | |||||||||
| Net income (loss) available to common shareholders | $ | 16,235 | $ | (143,202) | |||||||
| Per Share Data: | |||||||||||
| Basic earnings (loss) per common share | $ | 0.74 | $ | (6.58) | |||||||
| Diluted earnings (loss) per common share | $ | 0.74 | $ | (6.58) | |||||||
| Performance Metrics: | |||||||||||
| Return on average assets | 1.16 | % | (7.66) | % | |||||||
| Return on average shareholders' equity | 13.15 | % | (79.89) | % | |||||||
During the three months ended March 31, 2026, we generated net income of $18.5 million, or diluted earnings per common share of $0.74, compared to a net loss of $141.0 million, or diluted loss per common share of $6.58, in the three months ended March 31, 2025. Earnings for the first quarter of 2026 compared to the first quarter of 2025 increased primarily due to a $152.6 million decrease in noninterest expense (which included the prior year goodwill impairment charge), a $5.8
million decrease in provision for credit losses and a $4.4 million increase in noninterest income. These results were partially offset by a $0.9 million decrease in net interest income and a $2.5 million increase in income tax expense.
Net Interest Income and Margin. Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest-bearing deposits and borrowings). Net interest income is influenced by many factors, primarily the volume and mix of interest-earning assets, funding sources and interest rate fluctuations. Noninterest-bearing sources of funds, such as demand deposits and shareholders' equity, also support interest-earning assets. Net interest margin is calculated as net interest income divided by average interest-earning assets. Net interest margin is presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to a pretax-equivalent income, assuming a federal income tax rate of 21% for both 2026 and 2025.
The FOMC concluded its April 2026 meeting by leaving interest rates unchanged, citing low average job gains, elevated inflation, and a high level of uncertainty about the economic outlook stemming from developments in the Middle East. Federal Reserve policymakers voted to leave the benchmark federal funds rate unchanged at its current range of 3.50% to 3.75%. The move follows the central bank's decision to hold rates steady in January and March 2026 after three successive 25-basis-point rate cuts in September, October and December 2025. Economic data showing a slowdown in the labor market, inflation continuing to run higher than the Federal Reserve's 2% target and the unrest in Iran prompted policymakers to continue to pause rate cuts.
During the three months ended March 31, 2026, net interest income, on a tax-equivalent basis, decreased to $57.6 million compared to $58.5 million for the three months ended March 31, 2025. The tax-equivalent net interest margin increased to 3.91% for the first quarter of 2026 compared to 3.49% in the first quarter of 2025.
Average Balance Sheet, Interest and Yield/Rate Analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended March 31, 2026 and 2025. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2026 | 2025 | ||||||||||||||||||||||||||||||||||
| (tax-equivalent basis, dollars in thousands) |
Average balance |
Interest & fees |
Yield/ Rate |
Average balance |
Interest & fees |
Yield/ Rate | |||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Federal funds sold and cash investments | $ | 89,412 | $ | 809 | 3.67 | % | $ | 68,671 | $ | 718 | 4.24 | % | |||||||||||||||||||||||
Investment securities: | |||||||||||||||||||||||||||||||||||
| Taxable investment securities | 1,530,737 | 18,150 | 4.81 | 1,253,976 | 14,975 | 4.84 | |||||||||||||||||||||||||||||
Investment securities exempt from federal income tax (1) | 61,696 | 552 | 3.63 | 57,911 | 542 | 3.80 | |||||||||||||||||||||||||||||
| Total securities | 1,592,433 | 18,702 | 4.76 | 1,311,887 | 15,517 | 4.80 | |||||||||||||||||||||||||||||
Loans: | |||||||||||||||||||||||||||||||||||
Loans (2) | 4,211,988 | 65,559 | 6.31 | 5,014,364 | 77,668 | 6.28 | |||||||||||||||||||||||||||||
Loans exempt from federal income tax (1) | 42,333 | 485 | 4.64 | 43,030 | 450 | 4.24 | |||||||||||||||||||||||||||||
| Total loans | 4,254,321 | 66,044 | 6.30 | 5,057,394 | 78,118 | 6.26 | |||||||||||||||||||||||||||||
| Loans held for sale | 6,892 | 102 | 6.01 | 326,348 | 4,563 | 5.67 | |||||||||||||||||||||||||||||
| Nonmarketable equity securities | 31,547 | 583 | 7.50 | 35,614 | 647 | 7.37 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 5,974,605 | 86,240 | 5.85 | 6,799,914 | 99,563 | 5.94 | |||||||||||||||||||||||||||||
| Noninterest-earning assets | 496,233 | 667,940 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 6,470,838 | $ | 7,467,854 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Deposits: | |||||||||||||||||||||||||||||||||||
| Checking and money market deposits | $ | 3,172,416 | $ | 18,031 | 2.31 | % | $ | 3,509,814 | $ | 25,140 | 2.90 | % | |||||||||||||||||||||||
| Savings deposits | 491,073 | 321 | 0.27 | 516,784 | 329 | 0.26 | |||||||||||||||||||||||||||||
| Time deposits | 736,018 | 5,541 | 3.05 | 821,706 | 6,831 | 3.37 | |||||||||||||||||||||||||||||
| Brokered time deposits | 31,366 | 310 | 4.01 | 225,703 | 2,315 | 4.16 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 4,430,873 | 24,203 | 2.22 | 5,074,007 | 34,615 | 2.77 | |||||||||||||||||||||||||||||
| Short-term borrowings | 33,236 | 231 | 2.82 | 73,767 | 700 | 3.85 | |||||||||||||||||||||||||||||
FHLB advances | 273,444 | 2,670 | 3.96 | 299,578 | 3,163 | 4.28 | |||||||||||||||||||||||||||||
| Subordinated debt | 27,022 | 380 | 5.70 | 77,752 | 1,387 | 7.23 | |||||||||||||||||||||||||||||
| Trust preferred debentures | 51,948 | 1,121 | 8.75 | 51,283 | 1,200 | 9.49 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 4,816,523 | 28,605 | 2.41 | 5,576,387 | 41,065 | 2.99 | |||||||||||||||||||||||||||||
| Noninterest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 996,926 | 1,052,181 | |||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 87,907 | 123,613 | |||||||||||||||||||||||||||||||||
| Total noninterest-bearing liabilities | 1,084,833 | 1,175,794 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 569,482 | 715,673 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 6,470,838 | $ | 7,467,854 | |||||||||||||||||||||||||||||||
Net interest income / net interest margin (3) | $ | 57,635 | 3.91 | % | $ | 58,498 | 3.49 | % | |||||||||||||||||||||||||||
(1)Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21%. Tax-equivalent adjustments totaled $0.2 million for both the three months ended March 31, 2026 and 2025.
(2)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(3)Net interest margin during the periods presented represents: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.
Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period's average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period's volume. Changes which are not due solely to volume or rate have been allocated proportionally to the change due to volume and the change due to rate.
| Three Months Ended March 31, 2026 compared with Three Months Ended March 31, 2025 | |||||||||||||||||
| Change due to: |
Interest Variance | ||||||||||||||||
| (tax-equivalent basis, dollars in thousands) | Volume | Rate | |||||||||||||||
| Earning assets: | |||||||||||||||||
| Federal funds sold and cash investments | $ | 202 | $ | (111) | $ | 91 | |||||||||||
| Investment securities: | |||||||||||||||||
| Taxable investment securities | 3,317 | (142) | 3,175 | ||||||||||||||
| Investment securities exempt from federal income tax | 35 | (25) | 10 | ||||||||||||||
| Total securities | 3,352 | (167) | 3,185 | ||||||||||||||
| Loans: | |||||||||||||||||
| Loans | (12,459) | 350 | (12,109) | ||||||||||||||
| Loans exempt from federal income tax | (7) | 42 | 35 | ||||||||||||||
| Total loans | (12,466) | 392 | (12,074) | ||||||||||||||
| Loans held for sale | (4,600) | 139 | (4,461) | ||||||||||||||
| Nonmarketable equity securities | (75) | 11 | (64) | ||||||||||||||
| Total earning assets | (13,587) | 264 | (13,323) | ||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||
| Checking and money market deposits | (2,167) | (4,942) | (7,109) | ||||||||||||||
| Savings deposits | (16) | 8 | (8) | ||||||||||||||
| Time deposits | (679) | (611) | (1,290) | ||||||||||||||
| Brokered deposits | (1,959) | (46) | (2,005) | ||||||||||||||
| Total interest-bearing deposits | (4,821) | (5,591) | (10,412) | ||||||||||||||
| Short-term borrowings | (333) | (136) | (469) | ||||||||||||||
| FHLB advances | (265) | (228) | (493) | ||||||||||||||
| Subordinated debt | (813) | (194) | (1,007) | ||||||||||||||
| Trust preferred debentures | 15 | (94) | (79) | ||||||||||||||
| Total interest-bearing liabilities | (6,217) | (6,243) | (12,460) | ||||||||||||||
| Net interest income | $ | (7,370) | $ | 6,507 | $ | (863) | |||||||||||
Interest Income. For the three months ended March 31, 2026, interest income, on a tax-equivalent basis, decreased $13.3 million to $86.2 million as compared to the same period in 2025, primarily due to a decline in earning assets as described below. The yield on earning assets decreased nine basis points to 5.85% from 5.94%.
Average earning assets decreased to $5.97 billion in the first quarter of 2026 from $6.80 billion in the same quarter of 2025. Average loans and average loans held for sale decreased $803.1 million and $319.5 million, respectively. These decreases were partially offset by an increase in investment securities of $280.5 million.
Average loans decreased $803.1 million in the first quarter of 2026 compared to the same quarter of 2025. During the fourth quarter of 2025, the Company sold substantially all of its equipment finance portfolio. As a result, equipment finance loan and lease average balances decreased $728.7 million (to $55.4 million) for the three months ended March 31, 2026 compared to the same period of 2025. Proceeds from the sale of substantially all of the portfolio were used to purchase investment securities and reduce higher-cost funding for the Company.
The $326.3 million of average loans held for sale in the first quarter of 2025 included $320.9 million of GreenSky consumer loans. The Company completed the sale of this portfolio in the second quarter of 2025.
Interest Expense. Interest expense decreased $12.5 million to $28.6 million for the three months ended March 31, 2026 compared to the same period in 2025. The cost of interest-bearing liabilities decreased to 2.41% for the first quarter of 2026, compared to 2.99% for the first quarter of 2025 due to a decrease in both the rates paid on deposits and a decrease in average balances.
Interest expense on deposits decreased $10.4 million to $24.2 million for the three months ended March 31, 2026 compared to $34.6 million in the same quarter of 2025, driven primarily by the rate cuts enacted by the Federal Reserve Bank beginning in late 2024.
Average balances of interest-bearing deposit accounts decreased $643.1 million, or 12.7%, to $4.43 billion for the three months ended March 31, 2026 compared to the same period one year earlier. Proceeds from the sales of substantially all of our equipment financing portfolio and non-core consumer loan portfolios in 2025 were used to reduce higher-cost deposit funding for the Company, including servicing deposits and brokered deposits.
Interest expense on subordinated debt decreased $1.0 million for the three months ended March 31, 2026, compared to the prior year, due to a decrease in average balances. The average balance decreased $50.7 million for the three months ended March 31, 2026, compared to the same period in 2025, due the redemption of $50.8 million of debt as of September 30, 2025.
Provision for Credit Losses. The Company's provision for credit losses totaled $5.0 million and $10.9 million for the three months ended March 31, 2026 and 2025, respectively. Provision expense for the first quarter of 2026 included $0.4 million recapture of provision for credit losses on unfunded commitments. The decrease in the provision for credit losses for the three months ended March 31, 2026 compared to the same period in 2025 was due in part to the sale of the equipment finance portfolio that occurred in late 2025, and the Company's continued efforts to remediate nonperforming loans and improve credit underwriting.
The provision for credit losses on loans recognized during the three months ended March 31, 2026 was made at a level deemed necessary by Management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by Management, the results of which are used to determine provision for credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.
Noninterest Income. The following table presents the major components of our noninterest income for the three months ended March 31, 2026 and 2025:
| Three Months Ended March 31, |
Increase (decrease) | ||||||||||||||||
| (dollars in thousands) | 2026 | 2025 | |||||||||||||||
| Noninterest income: | |||||||||||||||||
| Wealth management revenue | $ | 8,248 | $ | 7,350 | $ | 898 | |||||||||||
| Service charges on deposit accounts | 3,355 | 3,305 | 50 | ||||||||||||||
| Interchange revenue | 3,528 | 3,151 | 377 | ||||||||||||||
| Residential mortgage banking revenue | 626 | 676 | (50) | ||||||||||||||
| Income on company-owned life insurance | 2,076 | 2,334 | (258) | ||||||||||||||
Loss on sales of investment securities, net | (1,731) | - | (1,731) | ||||||||||||||
| Credit enhancement income | 3,360 | (578) | 3,938 | ||||||||||||||
| Other income | 2,660 | 1,525 | 1,135 | ||||||||||||||
| Total noninterest income | $ | 22,122 | $ | 17,763 | $ | 4,359 | |||||||||||
Wealth management revenue. Wealth management revenue increased $0.9 million, or 12.2%, for three months ended March 31, 2026 as compared to the same period in 2025, driven by growth in assets under administration. Assets under administration increased 9.1% to $4.47 billion at March 31, 2026 from $4.10 billion at March 31, 2025.
Credit enhancement income. In 2025 and through December 30, 2025, the Company was party to one third-party loan origination program, wherein the third-party provider offered various credit enhancements with respect to loans originated under the program, including contributions to reserve accounts, yield maintenance and certain other payments. When the allowance for credit losses on loans was recorded, a credit enhancement derivative was also recorded on our balance sheet with a corresponding entry to credit enhancement income in recognition of the partner's legal commitment to indemnify or reimburse the Company. The credit enhancement asset was relieved as credit enhancement payments and recoveries were received from the partner or taken from the partner's cash reserve account. Effective December 31, 2025, the Company modified its third-party lending and servicing arrangements with its sole partner, eliminating the credit enhancement derivative. The new arrangements provide a credit enhancement by the partner which protects the Company by indemnifying or reimbursing incurred losses. We estimate and record an allowance for expected credit losses and a corresponding credit enhancement asset on the balance sheet through credit enhancement income.
The Company recognized $3.4 million of credit enhancement income during the three months ended March 31, 2026, which correlated to a similar amount of provision for credit losses as a result of the new arrangement entered into at December 31, 2025.
Other noninterest income. Other income increased $1.1 million for the three months ended March 31, 2026, as compared to the same period in 2025. In 2026, the Company recognized $2.1 million in gains from the sale of mortgage servicing rights and $0.6 million in servicing fees related to GreenSky consumer loans, which were sold in the second quarter of 2025. These gains were partially offset by $1.7 million of losses in our limited partnership investments and the elimination of operating lease revenue due to the sale of our equipment finance portfolio in the fourth quarter of 2025. Operating lease revenue totaled $0.8 million in the first quarter of 2025.
Noninterest Expense. The following table sets forth the major components of noninterest expense for the three months ended March 31, 2026 and 2025:
| Three Months Ended March 31, |
Increase (decrease) | ||||||||||||||||
| (dollars in thousands) | 2026 | 2025 | |||||||||||||||
| Noninterest expense: | |||||||||||||||||
| Salaries and employee benefits | $ | 26,157 | $ | 26,416 | $ | (259) | |||||||||||
| Occupancy and equipment | 4,535 | 4,498 | 37 | ||||||||||||||
| Data processing | 7,065 | 6,919 | 146 | ||||||||||||||
| FDIC insurance | 529 | 1,463 | (934) | ||||||||||||||
| Professional services | 2,242 | 2,741 | (499) | ||||||||||||||
| Marketing | 1,241 | 793 | 448 | ||||||||||||||
| Communications | 431 | 329 | 102 | ||||||||||||||
| Loan expense | 3,305 | 1,335 | 1,970 | ||||||||||||||
| Loan servicing fees | 1,116 | 750 | 366 | ||||||||||||||
| Impairment on goodwill | - | 153,977 | (153,977) | ||||||||||||||
| Amortization of intangible assets | 717 | 911 | (194) | ||||||||||||||
| Other expense | 3,086 | 2,873 | 213 | ||||||||||||||
| Total noninterest expense | $ | 50,424 | $ | 203,005 | $ | (152,581) | |||||||||||
Salaries and employee benefits. For the three months ended March 31, 2026, salaries and employee benefits expense decreased $0.3 million as compared to the same period in 2025. The Company incurred severance expense of $0.4 million and $1.4 million for the three months ended March 31, 2026 and 2025, respectively. In addition, the decrease was partially offset by increased medical insurance expense.
FDIC insurance expense. The decrease in FDIC insurance expense for the three months ended March 31, 2026, as compared to the same period of 2025 was due to a lower assessment base in the first quarter of 2026, a shift in loan mix due to the sale of the equipment finance and non-core loan portfolios in 2025, and the decline in nonperforming loans.
Professional services expense. For the three months ended March 31, 2026, professional services expense decreased $0.5 million as compared to the same period in 2025. The Company incurred additional audit and consulting expenses in 2025 as a result of the restatements of prior years' financial statements and as a result of contractual changes in the Company's third-party lending and servicing arrangements.
Marketing expense. The increase in marketing expense for the three months ended March 31, 2026, as compared to the same period of 2025, was primarily the result of increased brand marketing and program expenses related to deposit account acquisition.
Loan expense. Effective December 31, 2025, the Company modified its third-party lending and servicing arrangements with its sole partner, whereby the Company pays credit insurance to the program sponsor in exchange for the sponsor to reimburse the Company for incurred loan losses. Incurred losses are recognized as loans are charged-off through the allowance for credit losses. Reimbursements of incurred losses are recognized as a reduction of our credit enhancement asset. Credit insurance expense totaled $2.2 million in the first quarter of 2026.
Impairment on goodwill. As mentioned previously, the Company recognized $154.0 million of goodwill impairment expense during the first quarter of 2025 in its Banking reporting unit.
Income Tax Expense. Income tax expense was $5.6 million for the three months ended March 31, 2026, as compared to $3.2 million for the three months ended March 31, 2025. The resulting effective tax rates were 23.4% and 19.6% for the three months ended March 31, 2026 and 2025, respectively. The effective tax rate calculation for the three months ended March 31, 2025, excludes the goodwill impairment charge of $154.0 million, as this item is not deductible for tax purposes.
Financial Condition
Assets. Total assets were $6.55 billion at March 31, 2026, as compared to $6.51 billion at December 31, 2025.
Loans. The loan portfolio is the largest category of our assets. The principal segments of our loan portfolio are discussed below:
Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and farm operations. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but may also include collateralization by inventory, accounts receivable and equipment, and generally include personal guarantees. The commercial loan category also includes loans originated by the equipment financing business that are secured by the underlying equipment, of which we sold substantially all of our equipment finance portfolio during the fourth quarter of 2025.
Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial facilities, retail centers, multifamily properties, skilled nursing and assisted living facilities. Our commercial real estate loan portfolio also includes farmland loans. Farmland loans are generally made to a borrower actively involved in farming rather than to passive investors.
Construction and land development loans. Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development loans. Interest reserves are generally established on real estate construction loans.
Residential real estate loans. Our residential real estate loans are loans secured by residential properties that generally do not qualify for secondary market sale.
Consumer loans. Our consumer loans include direct personal loans, indirect automobile loans, lines of credit and installment loans originated through home improvement specialty retailers and contractors. Personal loans are generally secured by automobiles, boats and other types of personal property and are made on an installment basis.
Lease financing. Our equipment leasing business provides financing leases to varying types of businesses nationwide for purchases of business equipment and software. The financing is secured by a first priority interest in the financed asset and generally requires monthly payments. As previously disclosed, we ceased originating new equipment finance loans and leases effective as of September 30, 2025.
The following table presents the balance and associated percentage of each major category in our loan portfolio at March 31, 2026 and December 31, 2025:
| March 31, 2026 | December 31, 2025 | ||||||||||||||||||||||
| (dollars in thousands) | Book Value | % | Book Value | % | |||||||||||||||||||
| Loans: | |||||||||||||||||||||||
| Commercial | $ | 1,216,511 | 28.0 | % | $ | 1,178,521 | 27.1 | % | |||||||||||||||
| Commercial real estate | 2,322,198 | 53.5 | 2,342,664 | 53.8 | |||||||||||||||||||
| Construction and land development | 276,469 | 6.4 | 286,140 | 6.6 | |||||||||||||||||||
| Residential real estate | 344,511 | 8.0 | 349,623 | 8.0 | |||||||||||||||||||
| Consumer | 135,081 | 3.1 | 144,075 | 3.3 | |||||||||||||||||||
| Lease financing | 43,803 | 1.0 | 50,981 | 1.2 | |||||||||||||||||||
| Total loans, gross | 4,338,573 | 100.0 | % | 4,352,004 | 100.0 | % | |||||||||||||||||
| Allowance for credit losses on loans | (67,875) | (69,219) | |||||||||||||||||||||
| Total loans, net | $ | 4,270,698 | $ | 4,282,785 | |||||||||||||||||||
Total loans decreased $13.4 million, or 0.3%, to $4.34 billion at March 31, 2026, compared to December 31, 2025. The portfolio mix remained stable during the first quarter of 2026.
The following tables present our outstanding loans by business sector at March 31, 2026 and December 31, 2025. The Company's loan portfolio is assigned to the following internal business sectors:
•Community bank represents predominately in-market loans originated through our banking center network.
•Specialty finance provides bridge loan financing for commercial real estate projects, primarily multi-family and healthcare. These projects can include construction and short term financing in anticipation of obtaining permanent secondary market financing. The loans are typically outside of the Company's primary market areas.
•Non-core and other includes our third-party origination and servicing programs, our equipment finance portfolio of loans and leases originated to varying types of businesses throughout the United States for purchases of business equipment and software and capital market credits, including loans to finance the sale of the GreenSky portfolio.
| March 31, 2026 | ||||||||||||||||||||||||||
| (dollars in thousands) | Community bank | Specialty finance | Non-core and other | Total | ||||||||||||||||||||||
| Commercial | $ | 728,215 | $ | 261,247 | $ | 227,049 | $ | 1,216,511 | ||||||||||||||||||
| Commercial real estate | 2,007,309 | 311,701 | 3,188 | 2,322,198 | ||||||||||||||||||||||
| Construction and land development | 237,684 | 38,772 | 13 | 276,469 | ||||||||||||||||||||||
| Residential real estate | 339,478 | 1,794 | 3,239 | 344,511 | ||||||||||||||||||||||
| Consumer | 84,291 | - | 50,790 | 135,081 | ||||||||||||||||||||||
| Lease financing | - | - | 43,803 | 43,803 | ||||||||||||||||||||||
| Total | $ | 3,396,977 | $ | 613,514 | $ | 328,082 | $ | 4,338,573 | ||||||||||||||||||
| December 31, 2025 | ||||||||||||||||||||||||||
| (dollars in thousands) | Community bank | Specialty finance | Non-core and other | Total | ||||||||||||||||||||||
| Commercial | $ | 688,277 | $ | 248,112 | $ | 242,132 | $ | 1,178,521 | ||||||||||||||||||
| Commercial real estate | 1,979,383 | 358,457 | 4,824 | 2,342,664 | ||||||||||||||||||||||
| Construction and land development | 226,295 | 59,832 | 13 | 286,140 | ||||||||||||||||||||||
| Residential real estate | 344,523 | 1,782 | 3,318 | 349,623 | ||||||||||||||||||||||
| Consumer | 89,749 | - | 54,326 | 144,075 | ||||||||||||||||||||||
| Lease financing | - | - | 50,981 | 50,981 | ||||||||||||||||||||||
| Total | $ | 3,328,227 | $ | 668,183 | $ | 355,594 | $ | 4,352,004 | ||||||||||||||||||
Community bank portfolio increased $68.8 million, or 2.1%, between December 31, 2025 and March 31, 2026. This growth partially offset the anticipated declines in the specialty finance and non-core and other business sectors of $54.7 million and $27.5 million, respectively.
The following table shows the contractual maturities of our loan portfolio and the distribution between fixed and adjustable interest rate loans at March 31, 2026:
| March 31, 2026 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Within One Year | One Year to Five Years | Five Years to 15 Years | After 15 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Fixed Rate |
Adjustable Rate | Fixed Rate |
Adjustable Rate | Fixed Rate |
Adjustable Rate | Fixed Rate |
Adjustable Rate | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial | $ | 80,035 | $ | 463,253 | $ | 223,706 | $ | 117,038 | $ | 190,225 | $ | 101,970 | $ | - | $ | 40,284 | $ | 1,216,511 | |||||||||||||||||||||||||||||||||||
| Commercial real estate | 357,842 | 181,970 | 906,850 | 333,309 | 264,501 | 258,816 | 5,494 | 13,416 | 2,322,198 | ||||||||||||||||||||||||||||||||||||||||||||
| Construction and land development | 33,836 | 78,108 | 17,266 | 90,952 | 388 | 55,874 | - | 45 | 276,469 | ||||||||||||||||||||||||||||||||||||||||||||
| Total commercial loans | 471,713 | 723,331 | 1,147,822 | 541,299 | 455,114 | 416,660 | 5,494 | 53,745 | 3,815,178 | ||||||||||||||||||||||||||||||||||||||||||||
| Residential real estate | 4,695 | 6,487 | 6,519 | 18,504 | 17,135 | 36,681 | 170,521 | 83,969 | 344,511 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer | 19,585 | 649 | 64,437 | 274 | 44,018 | 6,118 | - | - | 135,081 | ||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 3,708 | - | 38,199 | - | 1,896 | - | - | - | 43,803 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans | $ | 499,701 | $ | 730,467 | $ | 1,256,977 | $ | 560,077 | $ | 518,163 | $ | 459,459 | $ | 176,015 | $ | 137,714 | $ | 4,338,573 | |||||||||||||||||||||||||||||||||||
Loan Quality
We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile, credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.
Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans was $67.9 million, or 1.56% of total loans, at March 31, 2026, compared to $69.2 million, or 1.59% of total loans, at December 31, 2025. The
following table allocates the allowance for credit losses on loans by loan category:
| March 31, 2026 | December 31, 2025 | ||||||||||||||||||||||
| (dollars in thousands) | Allowance | Percent (1) | Allowance | Percent (1) | |||||||||||||||||||
| Commercial | $ | 24,577 | 2.02 | % | $ | 23,676 | 2.01 | % | |||||||||||||||
| Commercial real estate | 27,653 | 1.19 | 28,284 | 1.21 | |||||||||||||||||||
| Construction and land development | 2,568 | 0.93 | 2,619 | 0.92 | |||||||||||||||||||
| Total commercial loans | 54,798 | 1.44 | 54,579 | 1.43 | |||||||||||||||||||
| Residential real estate | 6,203 | 1.80 | 6,652 | 1.90 | |||||||||||||||||||
| Consumer | 4,203 | 3.11 | 4,804 | 3.33 | |||||||||||||||||||
| Lease financing | 2,671 | 6.10 | 3,184 | 6.25 | |||||||||||||||||||
| Total allowance for credit losses on loans | $ | 67,875 | 1.56 | % | $ | 69,219 | 1.59 | % | |||||||||||||||
(1)Represents the percentage of the allowance to total loans in the respective category.
We measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan and borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the impact of certain current macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.
In estimating expected credit losses as of March 31, 2026, we utilized certain forecasted macroeconomic variables from Oxford Economics in our models. The forecasted projections included, among other things, (i) U.S. gross domestic product ranging from 1.9% to 2.4% over the next four quarters; (ii) the 10-year treasury rate averaging 4.2% over the next four quarters; and (iii) Illinois unemployment rate averaging 4.7% through the first quarter of 2027.
We qualitatively adjust the model results based on this scenario for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already fully captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. The qualitative factor adjustment at March 31, 2026, was approximately 55 basis points of total loans, decreasing slightly from 57 basis points at December 31, 2025.
The allowance allocated to commercial loans totaled $24.6 million, or 2.02% of total commercial loans, at March 31, 2026, compared to $23.7 million, or 2.01%, at December 31, 2025. Outstanding loan balances increased $38.0 million, or 3.2%, during the first three months of 2026. Specific allocations for loans that were individually evaluated increased $0.7 million, and quantitative factor adjustments increased $0.2 million.
The allowance allocated to commercial real estate loans totaled $27.7 million, or 1.19% of total commercial real estate loans, at March 31, 2026, decreasing $0.6 million, from $28.3 million, or 1.21% of total commercial real estate loans, at December 31, 2025. Outstanding loan balances decreased $20.5 million, or 0.9%, during the first three months of 2026. Specific allocations for loans that were individually evaluated decreased $0.7 million. Modeled expected credit losses increased $0.7 million and qualitative factor adjustments decreased $0.6 million. The commercial real estate portfolio does not include significant exposure to urban office properties.
The allowance allocated to construction and land development loans totaled $2.6 million, or 0.93% of total construction and land development loans, at March 31, 2026, compared to $2.6 million, or 0.92% of total constructions loans, at December 31, 2025. Modeled expected credit losses increased $0.1 million and qualitative factor adjustments related to construction loans decreased $0.1 million. There were no specific allocations for construction loans that were evaluated for expected credit losses on an individual basis at March 31, 2026, or December 31, 2025.
The allowance allocated to residential real estate loans totaled $6.2 million, or 1.80% of total residential real estate loans, at March 31, 2026, decreasing $0.5 million, from $6.7 million, or 1.90% of total residential real estate loans, at December 31, 2025. Modeled expected credit losses decreased $0.6 million and qualitative factor adjustments increased $0.1 million. There were no specific allocations for residential real estate loans that were evaluated for expected credit losses on an individual basis at March 31, 2026, or December 31, 2025.
The allowance allocated to consumer loans totaled $4.2 million, or 3.11% of total consumer loans, at March 31, 2026, compared to $4.8 million, or 3.33%, at December 31, 2025. Modeled expected credit losses decreased $0.6 million.
The allowance allocated to the lease portfolio totaled $2.7 million, or 6.10% of total commercial leases, at March 31, 2026, decreasing $0.5 million, from $3.2 million, or 6.25% of total commercial leases at December 31, 2025. Outstanding lease balances decreased $7.2 million, or 14.08%, during the first three months of 2026. The Company ceased originating leases as of September 30, 2025.
The following table provides an analysis of the allowance for credit losses on loans, provision for credit losses on loans and net charge-offs for the three months ended March 31, 2026 and 2025:
| Three Months Ended March 31, | |||||||||||
| (dollars in thousands) | 2026 | 2025 | |||||||||
| Balance, beginning of period | $ | 69,219 | $ | 111,204 | |||||||
| Charge-offs: | |||||||||||
| Commercial | 2,062 | 13,300 | |||||||||
| Commercial real estate | 3,838 | 723 | |||||||||
| Construction and land development | 35 | - | |||||||||
| Residential real estate | 65 | 72 | |||||||||
| Consumer | 896 | 453 | |||||||||
| Lease financing | 737 | 3,448 | |||||||||
| Total charge-offs | 7,633 | 17,996 | |||||||||
| Recoveries: | |||||||||||
| Commercial | 474 | 498 | |||||||||
| Commercial real estate | 1 | 1 | |||||||||
| Construction and land development | - | - | |||||||||
| Residential real estate | 75 | 18 | |||||||||
| Consumer | 158 | 48 | |||||||||
| Lease financing | 178 | 553 | |||||||||
| Total recoveries | 886 | 1,118 | |||||||||
| Net charge-offs | 6,747 | 16,878 | |||||||||
| Provision for credit losses on loans | 5,403 | 10,850 | |||||||||
| Balance, end of period | $ | 67,875 | $ | 105,176 | |||||||
| Gross loans, end of period | $ | 4,338,573 | $ | 5,018,053 | |||||||
| Average total loans | $ | 4,254,321 | $ | 5,057,394 | |||||||
| Net charge-offs to average loans | 0.64 | % | 1.35 | % | |||||||
| Allowance for credit losses to total loans | 1.56 | % | 2.10 | % | |||||||
Individual loans considered to be uncollectible are charged-off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans when the collectability of a loan balance is unlikely. Recoveries on loans previously charged-off are added to the allowance.
The following tables present charge-offs by business sector for the three months ended March 31, 2026 and 2025:
| Three Months Ended March 31, 2026 | |||||||||||||||||||||||
| (dollars in thousands) | Community bank | Specialty finance | Non-core and other | Total charge-offs | |||||||||||||||||||
| Commercial | $ | 41 | $ | - | $ | 2,021 | $ | 2,062 | |||||||||||||||
| Commercial real estate | 3,838 | - | - | 3,838 | |||||||||||||||||||
| Construction and land development | 35 | - | - | 35 | |||||||||||||||||||
| Residential real estate | 65 | - | - | 65 | |||||||||||||||||||
| Consumer | 221 | - | 675 | 896 | |||||||||||||||||||
| Lease financing | - | - | 737 | 737 | |||||||||||||||||||
| Total | $ | 4,200 | $ | - | $ | 3,433 | $ | 7,633 | |||||||||||||||
| Three Months Ended March 31, 2025 | |||||||||||||||||||||||
| (dollars in thousands) | Community bank | Specialty finance | Non-core and other | Total charge-offs | |||||||||||||||||||
| Commercial | $ | 37 | $ | 64 | $ | 13,199 | $ | 13,300 | |||||||||||||||
| Commercial real estate | 723 | - | - | 723 | |||||||||||||||||||
| Construction and land development | - | - | - | - | |||||||||||||||||||
| Residential real estate | 72 | - | - | 72 | |||||||||||||||||||
| Consumer | 183 | - | 270 | 453 | |||||||||||||||||||
| Lease financing | - | - | 3,448 | 3,448 | |||||||||||||||||||
| Total | $ | 1,015 | $ | 64 | $ | 16,917 | $ | 17,996 | |||||||||||||||
Charge-offs for the three months ended March 31, 2026 were $7.6 million, compared to $18.0 million for the three months ended March 31, 2025. Commercial real estate charge-offs in the first quarter of 2026 included $2.6 million related to a loan that was moved to held for sale in the quarter. The Company expects this note sale to close in the second quarter of 2026. In the first quarter of 2025, non-core commercial loan charge-offs included $11.1 million related to a third-party loan program, and $2.1 million related to our equipment finance portfolio.
Nonperforming Loans. The following table sets forth our nonperforming assets by asset category as of the dates presented. Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest. The balance of nonperforming loans reflect the net investment in these assets.
| (dollars in thousands) | March 31, 2026 | December 31, 2025 | |||||||||
| Nonperforming loans: | |||||||||||
| Commercial | $ | 14,040 | $ | 14,925 | |||||||
| Commercial real estate | 39,982 | 45,333 | |||||||||
| Construction and land development | - | 155 | |||||||||
| Residential real estate | 3,879 | 3,861 | |||||||||
| Consumer | 77 | 47 | |||||||||
| Lease financing | 813 | 1,162 | |||||||||
| Total nonperforming loans | 58,791 | 65,483 | |||||||||
| Other real estate owned and other repossessed assets | 514 | 606 | |||||||||
| Nonperforming assets | $ | 59,305 | $ | 66,089 | |||||||
| Nonperforming loans to total loans | 1.36 | % | 1.50 | % | |||||||
| Nonperforming assets to total assets | 0.91 | % | 1.01 | % | |||||||
| Allowance for credit losses to nonperforming loans | 115.45 | % | 105.71 | % | |||||||
In 2025, the Company prioritized improving its credit quality by tightening its loan underwriting standards and pursuing opportunities to resolve nonperforming loans, which included the sale of specific loans or portfolios. The Company
ceased originations of new construction loans included in our Specialty finance portfolio in the fourth quarter of 2024. In the third quarter of 2025, the Company ceased originations in the equipment finance portfolio, selling substantially all of the portfolio during the fourth quarter of 2025. These actions are reflected in the continued reduction of nonperforming loans. Nonperforming loans decreased to $58.8 million, or 1.36% of total loans, at March 31, 2026, compared to $65.5 million, or 1.50% of total loans at December 31, 2025.
We did not recognize interest income on nonaccrual loans during the three months ended March 31, 2026 or 2025 while the loans were in nonaccrual status.
Investment Securities. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions. In the periods presented, all investment securities of the Company are classified as available for sale and, therefore, the book value of investment securities is equal to the fair market value.
The following table sets forth the book value and percentage of each category of investment securities at March 31, 2026 and December 31, 2025:
| March 31, 2026 | December 31, 2025 | ||||||||||||||||||||||
| (dollars in thousands) | Balance | Percent | Balance | Percent | |||||||||||||||||||
| Investment securities available for sale: | |||||||||||||||||||||||
| U.S. government sponsored entities and U.S. agency securities | $ | 25,219 | 1.6 | % | $ | 19,823 | 1.3 | % | |||||||||||||||
| Mortgage-backed securities - agency | 1,252,051 | 78.6 | 1,193,750 | 78.4 | |||||||||||||||||||
| Mortgage-backed securities - non-agency | 83,002 | 5.2 | 97,089 | 6.4 | |||||||||||||||||||
| Asset-backed student loans | 20,374 | 1.3 | 34,215 | 2.2 | |||||||||||||||||||
| State and municipal securities | 71,654 | 4.5 | 73,458 | 4.8 | |||||||||||||||||||
| Collateralized loan obligations | 84,577 | 5.3 | 46,854 | 3.1 | |||||||||||||||||||
| Corporate securities | 55,678 | 3.5 | 57,812 | 3.8 | |||||||||||||||||||
| Total investment securities, available for sale, at fair value | $ | 1,592,555 | 100.0 | % | $ | 1,523,001 | 100.0 | % | |||||||||||||||
The following table sets forth the book value, maturities and weighted average yields for our investment portfolio at March 31, 2026:
| (dollars in thousands) | Balance | Percent | Weighted average yield | ||||||||||||||
| Investment securities available for sale: | |||||||||||||||||
| U.S. government sponsored entities and U.S. agency securities: | |||||||||||||||||
| Maturing within one year | $ | - | - | % | - | % | |||||||||||
| Maturing in one to five years | - | - | - | ||||||||||||||
| Maturing in five to ten years | 4,657 | 0.3 | 4.95 | ||||||||||||||
| Maturing after ten years | 20,562 | 1.3 | 5.17 | ||||||||||||||
| Total U.S. government sponsored entities and U.S. agency securities | $ | 25,219 | 1.6 | % | 5.13 | % | |||||||||||
| Mortgage-backed securities - agency: | |||||||||||||||||
| Maturing within one year | $ | 2 | - | % | 2.51 | % | |||||||||||
| Maturing in one to five years | 17,485 | 1.1 | 1.66 | ||||||||||||||
| Maturing in five to ten years | 3,011 | 0.2 | 1.78 | ||||||||||||||
| Maturing after ten years | 1,231,553 | 77.3 | 4.46 | ||||||||||||||
| Total mortgage-backed securities - agency | $ | 1,252,051 | 78.6 | % | 4.42 | % | |||||||||||
| Mortgage-backed securities - non-agency: | |||||||||||||||||
| Maturing within one year | $ | - | - | % | - | % | |||||||||||
| Maturing in one to five years | 10,074 | 0.6 | 6.41 | ||||||||||||||
| Maturing in five to ten years | - | - | - | ||||||||||||||
| Maturing after ten years | 72,928 | 4.6 | 4.71 | ||||||||||||||
| Total mortgage-backed securities - non-agency | $ | 83,002 | 5.2 | % | 4.91 | % | |||||||||||
| Asset-backed student loans: | |||||||||||||||||
| Maturing within one year | $ | - | - | % | - | % | |||||||||||
| Maturing in one to five years | - | - | - | ||||||||||||||
| Maturing in five to ten years | 340 | - | 4.56 | ||||||||||||||
| Maturing after ten years | 20,034 | 1.3 | 4.48 | ||||||||||||||
| Total asset-backed student loans | $ | 20,374 | 1.3 | % | 4.49 | % | |||||||||||
State and municipal securities (1): | |||||||||||||||||
| Maturing within one year | $ | 727 | - | % | 3.05 | % | |||||||||||
| Maturing in one to five years | 13,460 | 0.8 | 2.36 | ||||||||||||||
| Maturing in five to ten years | 25,743 | 1.6 | 2.78 | ||||||||||||||
| Maturing after ten years | 31,724 | 2.1 | 5.12 | ||||||||||||||
| Total state and municipal securities | $ | 71,654 | 4.5 | % | 3.74 | % | |||||||||||
| Collateralized loan obligations: | |||||||||||||||||
| Maturing within one year | $ | - | - | % | - | % | |||||||||||
| Maturing in one to five years | 5,994 | 0.4 | 5.44 | ||||||||||||||
| Maturing in five to ten years | 32,782 | 2.1 | 5.77 | ||||||||||||||
| Maturing after ten years | 45,801 | 2.8 | 5.64 | ||||||||||||||
| Total collateralized loan obligations | $ | 84,577 | 5.3 | % | 5.67 | % | |||||||||||
| Corporate securities: | |||||||||||||||||
| Maturing within one year | $ | 3,052 | 0.2 | % | 8.60 | % | |||||||||||
| Maturing in one to five years | 14,816 | 0.9 | 5.65 | ||||||||||||||
| Maturing in five to ten years | 37,810 | 2.4 | 3.79 | ||||||||||||||
| Maturing after ten years | - | - | - | ||||||||||||||
| Total corporate securities | $ | 55,678 | 3.5 | % | 4.55 | % | |||||||||||
| Total investment securities, available for sale | $ | 1,592,555 | 100.0 | % | 4.50 | % | |||||||||||
(1)Weighted average yield for tax-exempt securities are presented on a tax-equivalent basis assuming a federal income tax rate of 21%.
The table below presents the credit ratings for our investment securities classified as available for sale, at fair value, at March 31, 2026:
| Amortized | Fair | Average credit rating | |||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | cost | Value | AAA | AA+/- | A+/- | BBB+/- | <> | Not Rated | |||||||||||||||||||||||||||||||||||||||
| Investment securities available for sale: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government sponsored entities and U.S. agency securities | $ | 25,381 | $ | 25,219 | $ | - | $ | 25,219 | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||||||||||||||||
| Mortgage-backed securities - agency | 1,337,062 | 1,252,051 | - | 1,252,051 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities - non-agency | 84,099 | 83,002 | 16,120 | 66,882 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Asset-backed student loans | 20,484 | 20,374 | - | 20,374 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| State and municipal securities | 75,981 | 71,654 | 7,400 | 61,663 | 170 | - | - | 2,421 | |||||||||||||||||||||||||||||||||||||||
| Collateralized loan obligations | 84,865 | 84,577 | 61,577 | 23,000 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Corporate securities | 57,546 | 55,678 | - | - | 7,436 | 38,130 | 7,672 | 2,440 | |||||||||||||||||||||||||||||||||||||||
| Total investment securities, available for sale | $ | 1,685,418 | $ | 1,592,555 | $ | 85,097 | $ | 1,449,189 | $ | 7,606 | $ | 38,130 | $ | 7,672 | $ | 4,861 | |||||||||||||||||||||||||||||||
Liabilities. At March 31, 2026, liabilities totaled $5.99 billion compared to $5.95 billion at December 31, 2025.
Deposits. We emphasize developing total client relationships with our customers in order to increase our retail and commercial core deposit bases, which are our primary funding sources. Our deposits consist of noninterest-bearing and interest-bearing demand, savings and time deposit accounts.
Total deposits increased $15.7 million to $5.44 billion at March 31, 2026, compared to December 31, 2025. Retail deposits increased $81.6 million driven primarily by growth in existing consumer and small business customer relationships as a result of targeted initiatives. Deposits among wealth management clients declined $22.8 million, reflecting normal fluctuations in client cash balances. Servicing deposits decreased $20.0 million due the sales of the residential servicing portfolio and a portion of the commercial servicing portfolio. Brokered deposits decreased $17.2 million.
| (dollars in thousands) | March 31, 2026 | December 31, 2025 | |||||||||||||||||||||
| Balance | Percent | Balance | Percent | ||||||||||||||||||||
| Noninterest-bearing demand | $ | 1,013,808 | 18.6 | % | $ | 1,040,411 | 19.2 | % | |||||||||||||||
| Interest-bearing: | |||||||||||||||||||||||
| Checking | 1,886,212 | 34.7 | 1,855,215 | 34.2 | |||||||||||||||||||
| Money market | 1,295,781 | 23.8 | 1,248,942 | 23.0 | |||||||||||||||||||
| Savings | 495,899 | 9.1 | 487,742 | 9.0 | |||||||||||||||||||
| Time | 748,367 | 13.8 | 792,069 | 14.6 | |||||||||||||||||||
| Total deposits | $ | 5,440,067 | 100.0 | % | $ | 5,424,379 | 100.0 | % | |||||||||||||||
The following table presents the maturity of uninsured time deposits as of March 31, 2026:
| (dollars in thousands) | Amount | |||||||
| Three months or less | $ | 31,204 | ||||||
| Three to six months | 18,578 | |||||||
| Six to 12 months | 15,299 | |||||||
| After 12 months | 4,455 | |||||||
| Total | $ | 69,536 | ||||||
Capital Resources and Liquidity Management
Capital Resources. Shareholders' equity is influenced primarily by earnings, dividends, issuances and redemptions of common and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available-for-sale investment securities, fair value hedges and cash flow hedges.
Shareholders' equity decreased $6.5 million to $559.0 million at March 31, 2026, compared to December 31, 2025. The change in shareholders' equity was the result of dividends to common shareholders of $6.9 million, dividends to preferred shareholders of $2.2 million, repurchases of common stock of $7.9 million, and an increase in accumulated other comprehensive losses of $9.2 million, partially offset by net income of $18.5 million.
In the fourth quarter of 2025, the Company's board of directors authorized a new share repurchase program, pursuant to which the Company is authorized to repurchase up to $25.0 million of common stock through November 2, 2026. The stock repurchase program became effective on November 3, 2025. As of March 31, 2026, $17.4 million, or 822,729 shares of the Company's common stock, had been repurchased under the current program.
Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction, which represents the amount of the Bank's obligation. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. Investment securities with a carrying amount of $10.1 million and $12.2 million at March 31, 2026 and December 31, 2025, respectively, were pledged for securities sold under agreements to repurchase.
The table below presents our sources of liquidity as of March 31, 2026 and December 31, 2025:
| (dollars in thousands) | March 31, 2026 | December 31, 2025 | ||||||||||||
| Cash and cash equivalents | $ | 113,658 | $ | 127,811 | ||||||||||
| Unpledged securities | 894,933 | 812,587 | ||||||||||||
| FHLB committed liquidity | 872,234 | 1,114,294 | ||||||||||||
| FRB discount window availability | 331,924 | 349,026 | ||||||||||||
| Total Estimated Liquidity | $ | 2,212,749 | $ | 2,403,718 | ||||||||||
| Conditional Funding Based on Market Conditions | ||||||||||||||
| Additional credit facility | $ | 255,000 | $ | 351,000 | ||||||||||
| Brokered CDs (additional capacity) | 500,000 | 450,000 | ||||||||||||
| ICS One Way Buy (additional capacity) | 600,000 | 600,000 | ||||||||||||
The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. The Company's main source of funding is dividends declared and paid to it by the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the Company. Management believed at March 31, 2026, that these limitations will not impact our ability to meet our ongoing short-term cash obligations.
Regulatory Capital Requirements
We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for "prompt corrective action", we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.
At March 31, 2026, the Company and the Bank exceeded the regulatory minimums and met the regulatory definition of well capitalized. The following table presents the Company's and the Bank's capital ratios and the minimum requirements at March 31, 2026:
| Ratio | Actual | Minimum
Regulatory
Requirements (1) | Well Capitalized | |||||||||||||||||
| Total risk-based capital ratio | ||||||||||||||||||||
| Midland States Bancorp, Inc. | 15.27 | % | 10.50 | % | N/A | |||||||||||||||
| Midland States Bank | 14.42 | 10.50 | 10.00 | % | ||||||||||||||||
| Tier 1 risk-based capital ratio | ||||||||||||||||||||
| Midland States Bancorp, Inc. | 13.48 | 8.50 | N/A | |||||||||||||||||
| Midland States Bank | 13.17 | 8.50 | 8.00 | |||||||||||||||||
| Common equity tier 1 risk-based capital ratio | ||||||||||||||||||||
| Midland States Bancorp, Inc. | 9.98 | 7.00 | N/A | |||||||||||||||||
| Midland States Bank | 13.17 | 7.00 | 6.50 | |||||||||||||||||
| Tier 1 leverage ratio | ||||||||||||||||||||
| Midland States Bancorp, Inc. | 10.35 | 4.00 | N/A | |||||||||||||||||
| Midland States Bank | 10.10 | 4.00 | 5.00 | |||||||||||||||||
(1)Total risk-based capital ratio, Tier 1 risk-based capital ratio and Common equity tier 1 risk-based capital ratio include the capital conservation buffer of 2.5%.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We are primarily exposed to interest rate risk as a result of offering a wide array of financial products to our customers and secondarily to price risk from investments in securities.
Interest Rate Risk. Interest rate risk is the risk to earnings arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers' ability to prepay residential mortgage loans at any time and depositors' ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk).
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment, funding and hedging activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
Changes in market interest rates may result in changes in the fair market value of our financial instruments, cash flows, and net interest income. We seek to achieve a stable net interest income profile while managing volatility arising from shifts in market interest rates. Our Board of Directors' Risk Policy and Compliance Committee oversees interest rate risk, as well as the establishment of risk measures, limits, and policy guidelines for managing the amount of interest rate risk and its effect on net interest income. The Committee meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors' approved risk limits.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
Interest rate risk measurement is calculated and reported to the Risk Policy and Compliance Committee at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
We use NII at Risk to model interest rate risk utilizing various assumptions for assets, liabilities, and derivatives. NII at Risk uses net interest income simulation analysis which involves forecasting net interest earnings under a variety of scenarios including changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The sensitivity of net interest income to changes in interest rates is measured using numerous interest rate scenarios including shocks, gradual ramps, curve flattening, curve steepening as well as forecasts of likely interest rates scenarios. Modeling the sensitivity of net interest earnings to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. To the extent that actual performance is different than what was assumed, actual net interest earnings sensitivity may be different than projected. We use various ad-hoc reports to continuously refine, stress and validate these assumptions. Assumptions and methodologies regarding administered rate liabilities (e.g., savings accounts, money market accounts and interest-bearing checking accounts), balance trends, and repricing relationships reflect our best estimate of expected behavior and these assumptions are reviewed periodically.
The following table shows NII at Risk at the dates indicated:
| Net interest income sensitivity (Shocks) | |||||||||||||||||||||||
| Immediate change in rates | |||||||||||||||||||||||
| (dollars in thousands) | -200 | -100 | +100 | +200 | |||||||||||||||||||
| March 31, 2026: | |||||||||||||||||||||||
| Dollar change | $ | 2,729 | $ | 201 | $ | 2,545 | $ | 5,813 | |||||||||||||||
| Percent change | 1.2 | % | 0.1 | % | 1.1 | % | 2.5 | % | |||||||||||||||
| December 31, 2025: | |||||||||||||||||||||||
| Dollar change | $ | 921 | $ | (517) | $ | 2,606 | $ | 5,458 | |||||||||||||||
| Percent change | 0.4 | % | (0.2) | % | 1.2 | % | 2.5 | % | |||||||||||||||
We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models -200, −100, +100 and +200 basis point parallel shifts in market interest rates. We were within board policy limits for all scenarios at March 31, 2026.
Tolerance levels for risk management require the continuing development of remedial plans to maintain residual risk within approved levels as we adjust the balance sheet. NII at Risk reported at March 31, 2026 projects that our earnings exhibit increasing profitability in all of our first year rate shock scenarios. Throughout the course of 2025, the Bank has been holding to its non-maturity beta assumptions and lowering rates along with the industry overall. Coupled with market expectations, the Bank continued its strategy of layering on protection to changes in rates through deposit pricing, securities purchase selection and hedging.
Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting. We have price risk from investment securities, derivative instruments, and equity investments.