Midland States Bancorp, Inc. Q2 FY2022 earnings call

• Strong financial performance: Net income $21.9M, $0.97 per share; pretax pre-provision earnings $35.9M. ROA, ROE, ROTCE improved. - Loan growth: Total loans up 18% annualized; community banking loans up $192M; St. Louis market loans up 11% QoQ, 23% past 6 months. - Net interest margin: Increased 15bps in Q2, 25bps in Q1; favorable shift in earning assets and higher new loan rates. - Operational efficiency: Efficiency ratio improved to 53.1% from 55.7% QoQ. - Branch acquisition: Completed FNBC Bank & Trust transaction, accretive to earnings, added low-cost deposits, expanded Chicagoland presence. - Wealth management: New leadership hired, efforts to accelerate growth, focus on cross-selling and talent recruitment.

Loans: Total loans increased $256 million from prior quarter. Commercial real estate portfolio up 10% in Q2; consumer loans grew via fintech partnership with LendingPoint. Deposits: Total deposits increased $127 million, with noninterest-bearing and lower-cost interest-bearing deposits rising. Net Interest Income/Margin: Net interest income up 7.9% QoQ; net interest margin up 15 basis points. New loan rates in June were 4.79%, up 69bps from March. Wealth Management: Assets under administration down $446 million due to market performance, leading to lower wealth management revenue. Noninterest Income: $14.6 million in Q2, down 6.4% QoQ, primarily due to lower wealth management revenue but offset by increases in deposit service charges and interchange. Noninterest Expense: Adjusted noninterest expense up slightly due to higher salaries/benefits; post-FNBC acquisition, Q3 expenses expected to be $41-42 million. Asset Quality: Nonperforming loans up $4 million, but overall portfolio trends favorable; delinquency low. Charge-offs $2.8 million, provision for credit losses $4.7 million.

• Loan growth: Expect loan growth in back half but below first half's double-digit pace; equipment finance expected to remain strong, commercial real estate to slow. - NIM expansion: Modeling suggests 100bps rate increase could improve NIM by 4-4.5%, expecting additional expansion in back half. - Deposit growth: Focus on growing deposits to fund loan growth, but environment uncertain. - Capital management: Evaluating options to strengthen capital ratios for long-term growth.

• Economic conditions: Impact of inflation, higher interest rates on loan demand and customer liquidity. - Credit risk: Potential deterioration in credit quality, though current delinquency low. - Interest rate risk: Uncertainty around peak NIM and deposit betas.

Q: Near-term expectations for NIM expansion?

A: Eric Lemke discussed modeling showing 100bps rate increase could improve NIM by 4-4.5%, expecting additional expansion in back half.

Q: Loan growth outlook?

A: Jeff Ludwig said loan growth to come in below double-digit levels in back half, equipment finance strong, commercial real estate to slow.

Q: Nature of LendingPoint customers and credits?

A: Jeff Ludwig said similar to GreenSky program, home improvement type credit with high FICO borrowers and credit enhancements.

Q: Expectations for provision going forward?

A: Jeff Ludwig said similar to current quarter, hopeful charge-offs will moderate in back half.

Q: Deposit growth and funding for loans?

A: Jeff Ludwig said focused on growing deposits, loan-to-deposit ratio around 90%, may need other sources if deposits insufficient.

Q: Wealth management investments and acquisitions?

A: Jeff Ludwig said focus on building sales/business development teams, may evaluate acquisitions in future if organic growth achieved.

Q: Balance sheet mix rotation?

A: Jeff Ludwig said investment portfolio and cash likely to remain relatively same as current levels.

Q: Sustainability of card revenue and deposit service charges growth?

A: Jeff Ludwig said trend positive but affected by seasonality.

Q: Criticized classified trends and credit sentiment?

A: Jeff Ludwig said nonperformers ticked up slightly, substandard capital ratio down, delinquency lowest in 5 quarters, no immediate credit issues.

Q: St. Louis market growth?

A: Jeff Ludwig said strategic focus on St. Louis for 8 years, recent leadership and team changes driving traction.