Midland States Bancorp, Inc.

Previous wording

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.

Current wording

Management's discussion and analysis explains the significant factors affecting the Company's financial condition and results of operations as reflected in the unaudited consolidated balance sheet as of June 30, 2026, as compared to December 31, 2025, and unaudited consolidated operating results for the three and six months ended June 30, 2026 and 2025. This discussion should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes included in this Form 10-Q 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.

Previous wording

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.

Current wording

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 the Middle East; 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,” "should," “propose,” “may,” “plan,” “seek,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “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.

Previous wording

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.

Current wording

Each factor listed below affects the comparability of our results of operations for the three and six months ended June 30, 2026 and 2025, and our financial condition as of June 30, 2026 and December 31, 2025, and may affect the comparability of financial information we report in future fiscal periods.

Previous wording

Overview. The following table sets forth condensed income statement information of the Company for the three months ended March 31, 2026 and 2025:

Current wording

Overview. The following table sets forth condensed income statement information of the Company for the three and six months ended June 30, 2026 and 2025:

Previous wording

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 thefirst quarter of 2026 compared to thefirst 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.

Current wording

Net income for thefirst six months of 2026 was $38.4 million, or $1.56 per diluted common share, compared with a net loss of $129.0 million, or a diluted loss per common share of $6.13, in thefirst six months of 2025. The increase reflected a $151.8 million decrease in noninterest expense (which included the prior year goodwill impairment charge), a $16.4 million decrease in provision for credit losses, and a $4.6 million increase in noninterest income. These benefits were partially offset by a $5.5 million increase in income tax expense. Net interest income was essentially unchanged.

Previous wording

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.

Current wording

For the second quarter of 2026, net interest income, on a tax-equivalent basis, increased $0.8 million to $59.8 million, and tax-equivalent net interest margin increased 42 basis points to 3.98% compared to the second quarter of 2025.

Previous wording

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 thethree 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.

Current wording

Average Balance Sheet, Interest and Yield/Rate Analysis. The following table presents average balances, interest income and expense and the corresponding average yields earned and rates paid for the three and six months ended June 30, 2026 and 2025. 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.

Previous wording

(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.

Current wording

(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 and $0.3 million for the three months ended June 30, 2026 and 2025, respectively.

Previous wording

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.

Current wording

Average loans decreased $855.4 million in the second quarter of 2026 compared to the same period in 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 $685.1 million (to $47.6 million) in the second quarter of 2026. Proceeds from the sale of substantially all of the portfolio were used to purchase investment securities and reduce higher-cost funding for the Company.

Previous wording

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%.

Current wording

For the first six months of 2026, interest income, on a tax-equivalent basis, decreased $23.1 million to $174.6 million compared to the same period in 2025, primarily due to a decline in average interest-earning assets. The yield on interest-earning assets decreased six basis points to 5.87% from 5.93%.

Previous wording

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.

Current wording

Average interest-earning assets decreased $716.6 million to $6.00 billion in the first six months of 2026 compared to the same period in 2025. Average loans and average loans held for sale decreased $829.4 million and $177.1 million, respectively. These decreases were partially offset by an increase in average investment securities of $265.3 million.

Previous wording

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.

Current wording

The $184.7 million of average loans held for sale in the first six months of 2025 included $178.0 million of GreenSky consumer loans. The Company completed the sale of this portfolio in the second quarter of 2025.

Previous wording

Interest expense on deposits decreased $10.4 million to $24.2 million for thethree 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.

Current wording

Interest expense on deposits decreased $7.8 million to$24.5 million for thesecond quarter of 2026 compared to the same period in 2025, driven primarily by the rate cuts enacted by the Federal Reserve Bank beginning in late 2024 and a decrease in average balances.

Previous wording

Average balances of interest-bearing deposit accounts decreased $643.1 million, or 12.7%, to$4.43 billion for thethree 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 andnon-core consumer loan portfoliosin 2025 were used to reduce higher-cost deposit funding for the Company, including servicing deposits and brokered deposits.

Current wording

Average balances of interest-bearing deposit accounts decreased $332.9 million to $4.51 billionin the second quarter of 2026 compared to the same period in 2025. 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 funding for the Company, including servicing deposits and brokered deposits.

Previous wording

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.

Current wording

For the first six months of 2026, interest expense decreased$23.1 million to$57.2 million compared to the same period in 2025. The cost of interest-bearing liabilities decreased to 2.38% from 2.95%due to a decrease in both the rates paid on deposits and average balances.

Previous wording

Interest expense on subordinated debt decreased $1.0 million for thethree 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 thethree 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.

Current wording

Interest expense on subordinated debt decreased $2.0 million for thefirst six months of 2026 compared to the same period in 2025, driven primarily by a decrease in average balances of $50.7 million, due to the redemption of$50.8 million of debt in September 2025.

Previous wording

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 thefirst 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.

Current wording

Provision for Credit Losses. The provision for credit losses totaled $6.8 million and $17.4 million for the three months ended June 30, 2026 and 2025, respectively. For thesix months ended June 30, 2026 and 2025, the Company recorded provision expense of $11.8 million and $28.2 million, respectively. Provision expense forthe three and six months ended June 30, 2026 included recapture of provision for credit losses on unfunded commitments of $0.3 million and $0.7 million, respectively. The decrease in provision for credit losses for the three and six months ended June 30, 2026, compared to the same periods 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.

Previous wording

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.

Current wording

The provision for credit losses on loans recognized during the three and six months ended June 30, 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.

Previous wording

Noninterest Income. The following table presents the major components of our noninterest income for the three months ended March 31, 2026 and 2025:

Current wording

Noninterest Income. The following table presents the major components of our noninterest income for the three and six months ended June 30, 2026 and 2025:

Previous wording

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.

Current wording

Wealth management revenue. Wealth management revenue increased $1.4 million, or 18.8%, and $2.3 million, or 15.5%, for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025, driven by growth in assets under administration. Assets under administration increased 14.4% to $4.78 billion at June 30, 2026 from $4.18 billion at June 30, 2025.

Previous wording

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.

Current wording

The Company recognized$3.1 million and $6.4 million of credit enhancement income during the three and six months ended June 30, 2026, respectively, which correlated to a similar amount of provision for credit losses as a result of the new arrangement entered into at December 31, 2025.

Previous wording

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.

Current wording

For the six months ended June 30, 2026, other income increased$0.6 million, compared to the same period in 2025. In 2026, the Company recognized $2.1 million in gains from the sale of our residential servicing portfolio and a portion of our commercial servicing portfolio, partially offset by 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 $1.3 million in the first half of 2025.

Previous wording

Noninterest Expense. The following table sets forth the major components of noninterest expense for thethree months ended March 31, 2026 and 2025:

Current wording

Noninterest Expense. The following table sets forth the major components of noninterest expense for the three and six months ended June 30, 2026 and 2025:

Previous wording

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.

Current wording

Salaries and employee benefits. For the three and six months ended June 30, 2026, salaries and employee benefits expense increased$1.7 million and $1.4 million, respectively, compared to the same periods in 2025, primarily due to increased variable compensation expense, including annual bonuses, and increased medical insurance expense. These increases were partially offset by lower severance expense in both periods compared to the same periods in 2025.

Previous wording

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.

Current wording

FDIC insurance expense. The decrease in FDIC insurance expense for the three and six months ended June 30, 2026, compared to the same periods in 2025 was due to a lower assessment base in both the second quarter and first six months of 2026, a shift in loan mix due to the sale of the equipment finance and non-core loan portfolios in 2025, and a decline in nonperforming loans.

Previous wording

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.

Current wording

Professional services expense. For the three and six months ended June 30, 2026, professional services expense decreased$1.1 million and$1.6 million, respectively, compared to the same periods 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.

Previous wording

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.

Current wording

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$2.5 million and$4.7 million for the three and six months ended June 30, 2026, respectively.

Previous wording

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.

Current wording

Income Tax Expense. Income tax expense was $5.9 million and $11.5 million for the three and six months ended June 30, 2026, respectively, compared to $2.8 million and $6.0 million for the same periods in 2025. Effective tax rates were 22.9% and 23.1% for the three and six months ended June 30, 2026, respectively, compared to 19.1% and 19.4% for the same periods in 2025. The effective tax rate calculation for the six months ended June 30, 2025, excludes the goodwill impairment charge of $154.0 million, as this item is not deductible for tax purposes.

Previous wording

Assets. Total assets were $6.55 billion at March 31, 2026, as compared to $6.51 billion at December 31, 2025.

Current wording

Assets. Total assets were $6.70 billion at June 30, 2026, as compared to $6.51 billion at December 31, 2025.

Previous wording

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.

Current wording

Lease financing. Our equipment leasing business historically provided 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.

Previous wording

•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.

Current wording

•Specialty finance provides bridge loan financing for commercial real estate projects, primarily multi-family and healthcare. These projects include short term financing in anticipation of obtaining permanent secondary market financing. The loans are typically outside of the Company’s primary market areas. The Company ceased originations of new construction loans in the fourth quarter of 2024.

Previous wording

•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.

Current wording

•Non-core and other includes our third-party origination and servicing programs, our remaining equipment finance portfolio of loans and leases and capital market credits, including loans to finance the sale of the GreenSky portfolio.

Previous wording

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.

Current wording

The community bank portfolio increased $75.0 million, or 2.25%, between December 31, 2025 and June 30, 2026. This growth was more than offset by the anticipated declines in the specialty finance and non-core and other business sectors of $136.1 million and $47.2 million, respectively.

Previous wording

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:

Current wording

Analysis of the Allowance for Credit Losses on Loans. The allowance for credit losses on loans was $62.5 million, or 1.47% of total loans, at June 30, 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:

Previous wording

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.

Current wording

In estimating expected credit losses as of June 30, 2026, we incorporated certain macroeconomic variables from the Capital Economics forecast dated June 30, 2026 into our credit loss models. The Capital Economics forecast reflected a generally stable macroeconomic outlook relative to the prior quarter, including modest economic growth and unemployment levels that remained consistent with management's assessment of the economic environment. The forecasted projections included, among other things, (i) U.S. gross domestic product ranging from 1.5% to 2.1% over the next four quarters; (ii) annual consumer price index averaging 3.1% over the next four quarters; and (iii) U.S. unemployment rate averaging 4.3% through the second quarter of 2027. These assumptions resulted in lower modeled loss estimates for certain portfolios. In addition, the relative stability of the economic outlook and the absence of incremental economic risks not otherwise reflected in the models supported management's reduction of certain qualitative adjustments.

Previous wording

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.

Current wording

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 qualitative 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 June 30, 2026, was approximately 49 basis points of total loans, decreasing from 57 basis points at December 31, 2025. The reduction primarily reflected continued improvement in portfolio credit quality and management's assessment that certain risks requiring qualitative adjustments have moderated since December 31, 2025.

Previous wording

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.

Current wording

The allowance allocated to commercial loans totaled $23.1 million, or 1.95% of commercial loans, at June 30, 2026, compared to $23.7 million, or 2.01%, at December 31, 2025. Modeled expected credit losses increased $0.8 million, while qualitative factor adjustments decreased $1.4 million. There were no specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis at June 30, 2026, or December 31, 2025.

Previous wording

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.

Current wording

The allowance allocated to commercial real estate loans totaled $25.3 million, or 1.10% of commercial real estate loans, at June 30, 2026, compared to $28.3 million, or 1.21%, at December 31, 2025. Commercial real estate loan balances decreased $45.7 million, or 2.0%, during the first six months of 2026. Net charge-offs were $12.3 million for the first six months of 2026, including an $8.6 million charge-off in connection with the execution of a resolution strategy for a previously identified nonperforming commercial real estate relationship. Excluding the effect of charge-offs, modeled expected credit losses increased $0.3 million and qualitative factor adjustments decreased $2.0 million. Specific allocations for loans that were individually evaluated decreased $1.3 million. The commercial real estate portfolio does not include significant exposure to urban office properties.

Previous wording

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.

Current wording

The allowance allocated to construction and land development loans totaled $2.0 million, or 0.82% of construction and land development loans, at June 30, 2026, compared to $2.6 million, or 0.92%, at December 31, 2025. Construction and land development loan balances decreased $42.3 million, or 14.8%, during the first six months of 2026. Modeled expected credit losses decreased $0.1 million and qualitative factor adjustments decreased $0.5 million. There were no specific allocations for construction loans that were evaluated for expected credit losses on an individual basis at June 30, 2026 or December 31, 2025.

Previous wording

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.

Current wording

The allowance allocated to residential real estate loans totaled $5.6 million, or 1.61% of residential real estate loans, at June 30, 2026, compared to $6.7 million, or 1.90%, at December 31, 2025. Modeled expected credit losses decreased $1.1 million. There were no specific allocations for residential real estate loans that were evaluated for expected credit losses on an individual basis at June 30, 2026, or December 31, 2025.