Midland States Bancorp, Inc. Q1 FY2022 earnings call

Highlights

• Strong loan growth, expanding net interest margin, and disciplined expense control. Net income $20.7 million ($0.92 per share), pretax pre-provision earnings $32 million. Loan originations $673 million, 115% higher year-over-year. Commercial real estate and equipment finance had strong originations. St. Louis market had strong loan production.

Operational Efficiencies

• Kept banking teams relatively consistent, upgraded personnel quality and productivity. Realized efficiencies from technology investments, offsetting inflationary pressure in labor costs.

Loan Pipeline

• Healthy loan pipeline, expecting strong loan growth in Q2. Low double-digit loan growth expected in 2022, but higher rates could impact demand later in the year.

Banking-as-a-Service Initiative

• Partnership with Synctera to develop Fintech partnerships, aiming to bring in low-cost deposits and increase payment solution users. Pipeline of potential partnerships, expecting to announce new consumer lender partnership and review others.

Capital Ratios

• Prioritizing strengthening capital ratios, evaluating options to optimize capital stack, including redeeming callable subordinated debt.

Loan Portfolio

• Total loans increased $315 million from prior quarter. Commercial real estate portfolio up 16% in Q1. Small increases in equipment finance, conventional, commercial, and consumer loans. Declines in commercial FHA warehouse credit lines, residential real estate loans, and PPP loan forgiveness.

Deposits

• Total deposits decreased $53 million. Non-interest bearing deposits declined, but interest bearing checking, money market, and savings deposits grew. $120 million increase in commercial deposit balances in St. Louis market.

Net Interest Income and Margin

• Net interest income increased 4.7% from prior quarter due to higher average loan balances and net interest margin expansion. Cash balances reduced by $348 million, redeployed into loans. Net interest margin up 25 basis points (26 basis points excluding accretion income).

Wealth Management

• Assets under administration decreased $173 million due to market performance. Wealth management revenue was essentially flat with prior quarter, up 20% year-over-year.

Non-Interest Income

• $15.6 million in Q1, down 30.7% from prior quarter excluding one-time items. Impairment on commercial mortgage servicing rights decreased due to refinancing activity.

Non-Interest Expenses

• Adjusted non-interest expense essentially flat with prior quarter, within guidance range. FNBC branch acquisition will bring additional personnel and occupancy expenses.

Asset Quality

• Non-performing loans increased $10.3 million, mostly from one commercial real estate loan. Net charge-offs $2.3 million (17 basis points of average loans). Provision for credit losses $4.1 million. Allowance for credit losses increased due to loan growth and portfolio mix changes.

Guidance

• Expect strong loan growth in Q2 based on current pipeline.
• Low double-digit loan growth expected in 2022, but higher rates could impact demand later in the year.
• Net interest margin expected to expand further with loan growth and Fed rate increases.
• Expenses expected to remain relatively flat, leading to operating leverage.
• Banking-as-a-service initiative to be a long-term catalyst for earnings growth.

Risks

• Impact of rising interest rates on loan demand.
• Inflationary pressure, particularly in labor costs, though efficiencies are offsetting some of this.
• Market performance impact on wealth management assets under administration.
• Uncertainty around the impact of banking-as-a-service initiatives on financials in the short term.
• Potential impact of changes in the investment portfolio fair value on tangible book value.

Q: Expand on the growth in the CRE portfolio and how the portfolio is stress tested?

A: Most CRE growth came in multifamily, senior care, and industrial warehouse portfolios. In underwriting, deal-by-deal stress testing of interest rates and cap rates is done, and a full portfolio-level stress test is conducted annually.

Q: Talk about balancing expenses with revenue initiatives and expense reduction opportunities?

A: Productivity of the commercial banking team is high, with managed pipelines and accountability. Digging into vendors and finding small efficiencies over time helps keep expenses relatively flat.

Q: Explain the increase in equipment finance yields?

A: Equipment finance has five-year contracts, and prices on that part of the curve lifted. In March, new and renewed loan rates were 4.10%, a 17 basis point increase from December, with equipment finance being a significant driver.

Q: Discuss the core margin outlook and progression?

A: Core margin is in the low 340s. PPP impact is ~5 basis points. A swap executed reduced asset sensitivity, and expecting core margin to move to the mid-350s by year-end.

Q: Talk about deposit growth expectations and loan deposit ratio?

A: Strong deposit gathering in Q1, with treasury management and retail deposits up. Branch acquisition will supplement deposits, and loan deposit ratio is expected to stay in range with loan and deposit growth.

Q: Ask about Fintech partnerships and GreenSky?

A: Focus is on deposits and payments with Fintech partnerships. GreenSky portfolio is relatively stable, expected to fluctuate 3-5% quarter-to-quarter.

Q: Discuss the swap impact and its effect on M&A?

A: The swap impacts loan yields. M&A focus is on small acquisitions, not big deals, and AOCI impact is monitored but not expected to change major strategies.