Midland States Bancorp, Inc. Q4 FY2021 earnings call

Management Statement and Operational Highlights

• Loan Production: Record loan production in Q4, driven by commercial and commercial real estate lending, new bankers, growth in higher areas (Northern Illinois, St. Louis), and technology investments like Salesforce platform.
• Technology Investments: Leveraged tech investments to increase efficiencies, with focus shifting to revenue generation and client service, e.g., rollout of new SBA loan application portal.
• Acquisition: Acquired ATG Trust Company to grow wealth management business.
• Funding: Eliminated higher cost funding sources using strong liquidity, with non-interest-bearing deposits now 37% of total deposits, reducing cost of funds.
• Asset Quality: Non-performing loans declined, charge-offs were lower than reserve levels built during pandemic, and coverage ratio improved.

Segment Performance

• Loan Portfolio: Total loans increased $309 million from the prior quarter. Strong growth in the commercial real estate portfolio; commercial loan portfolio was flat, with growth in equipment finance and conventional commercial loans offsetting declines in PPP loans and commercial FHA warehouse credit lines. Consumer loan portfolio rose $74 million. Annualized loan growth was 25% in Q4, with commercial real estate showing the largest growth, including from the specialty finance group.
• Deposits: Total deposits increased $509 million (9.1%) from the prior quarter, driven by commercial FHA servicing deposits. Non-interest-bearing deposits increased, leading to a $59 million decline in CD balances.
• Net Interest Income: Increased 5.7% QoQ due to higher interest-earning assets, but net interest margin declined 6 basis points due to excess liquidity and unfavorable mix shift of earning assets.
• Wealth Management: Assets under administration increased $159 million QoQ, primarily from market performance. Wealth management revenue was flat QoQ but up 22% YoY.
• Non-Interest Income: $22.5 million in Q4, up 48.7% QoQ, with gains on equity investments and bank-owned life insurance.
• Non-Interest Expense: Adjusted non-interest expense declined, with efficiency ratio improving to 52.6%.
• Asset Quality: Non-performing loans declined 22% QoQ, net charge-offs were $4.6 million (37 basis points of average loans), and provision for credit losses was ~$500,000.

Guidance

• Loan Growth: Expect high single digit loan growth in 2022 driven by commercial loans (equipment finance, commercial real estate) and adding commercial banking talent, particularly in higher growth markets like Chicagoland.
• Expenses: Q1 2022 expense range $40.5 million to $41.5 million, with potential to increase later in the year due to compensation and inflation pressures.
• Technology: Shift in technology investment focus to areas enhancing revenue generation and client service, e.g., SBA portal expansion.
• Earnings: Expect similar earnings to 2021 in 2022, with higher core performance, and continued growth in 2023 as commercial banking platform strengthens and presence in higher growth markets expands.

Risks

• COVID-19 Impact: Continuing impact of pandemic on future performance.
• Interest Rate Risks: Excess liquidity and mix shift of earning assets may affect net interest margin. Uncertainty around deposit beta response to rate changes.
• Loan Payoff Uncertainty: Unpredictability in loan payoff levels affecting growth projections.

Question and Answer

Q: Extending the GreenSky partnership through at least 2023, how should we think about balances?

A: We think it's going to be relatively stable, maybe down slightly, but we'll add new Fintech partners to maintain consumer loan balances.

Q: Expense outlook for 2022?

A: First quarter low end, then may increase due to compensation and inflationary environment.

Q: Importance of Chicago market?

A: St. Louis and Chicagoland are both important, with Chicagoland having short-term M&A disruption opportunities.

Q: How much of the loan portfolio is variable?

A: Our portfolio is roughly 35% variable, with ~$1 billion that will reprice quickly with a 25-basis point rate hike.

Q: How to maintain stable expenses while investing in technology?

A: We're looking for efficiencies across operations, using RPA and renegotiating vendor contracts, then reallocating savings to technology investments like the SBA portal.

Q: Loan growth drivers and fintech partnership impact?

A: Growth from commercial teams, St. Louis, Chicagoland, and specialty finance; fintech partnership will offset GreenSky runoff, starting slow and ramping up later.

Q: Reserve outlook?

A: Net charge-offs expected 20-25 basis points, reserve percentage likely to increase due to new loan mix with higher reserve requirements.

Q: Deposit beta vs prior cycle?

A: Expect better deposit beta than 2015-2018 cycle due to stronger deposit base and better performance in past rate hikes.

Q: Loan growth seasonality?

A: 2022 loan growth should be more balanced compared to 2021's back-loaded growth, with equipment finance typically strong in Q4.