Midland States Bancorp, Inc. Q2 FY2022 earnings call

Management Statement and Operational Highlights

• Strong Financial Performance: Generated net income of $21.9 million ($0.97 per share), pretax pre-provision earnings $35.9 million. Loan growth 18% annualized, net interest margin expanded, efficiency ratio improved to 53.1%.
• Commercial Banking Success: Commercial teams driving loan growth, St. Louis market loans up 11% QoQ and 23% over six months, deposits in St. Louis up 19% over six months.
• Acquisition: Completed FNBC branch acquisition, accretive to earnings, added low-cost deposits and presence in Chicagoland.
• Cost Management: Focus on operational efficiencies, leveraging technology, renegotiating vendor contracts to manage expenses.

Segment Performance

• Loans: Total loans increased $256 million from prior quarter. Commercial real estate portfolio grew 10% in Q2, and consumer loans saw growth via fintech partnership with LendingPoint. Total loans in St. Louis market up 11% QoQ and 23% over six months.
• Deposits: Total deposits rose $127 million from prior quarter. Noninterest-bearing and lower-cost interest-bearing deposits increased, with St. Louis deposits up 19% over six months.
• Net Interest Income/Margin: Net interest income up 7.9% QoQ. Net interest margin rose 15 basis points in Q2 due to favorable shift in earning assets and higher rates on new loans.
• Wealth Management: Assets under administration decreased $446 million from prior quarter due to market performance, leading to lower wealth management revenue.
• Noninterest Income: $14.6 million in Q2, down 6.4% QoQ, primarily from 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 and benefits, but expected to remain in $41 million to $42 million range post-FNBC acquisition.
• Asset Quality: Nonperforming loans increased $4 million, but trends generally favorable except for one commercial real estate loan; provision for credit losses was $4.7 million.

Guidance

• Loan Growth: Expect loan growth in second half but at lower pace than first half due to smaller pipeline and economic concerns.
• Net Interest Margin: Modeling suggests NIM expansion in back half of year, with potential 5-10 basis points increase in 100 basis point rate environment.
• Wealth Management: Expect fintech partnerships in second half of 2022 to contribute to financial performance in 2023; new Head of Wealth Management hired to drive growth.

Risks

• Economic Conditions: Impact of inflation and higher interest rates on customers; potential impact on loan demand and credit quality.
• Market Performance: Impact on assets under administration in wealth management.
• Regulatory Changes: Uncertainties related to regulatory environment affecting operations and financial performance.

Q: Near-term expectations for NIM expansion, year-end and peak NIM?

A: Modeling shows NIM improvement in back half, deposit betas 30%-35%.

Q: Loan growth outlook, drivers, stress in segments?

A: Loan growth to slow, equipment finance strong, commercial real estate to slow.

Q: Deposit growth, funding for loans?

A: Focus on deposits, loan-to-deposit ratio around 90%, need to grow deposits.

Q: Wealth management investments, acquisitions?

A: Focus on building internal teams first, then potential acquisitions.

Q: Balance sheet mix, card revenue sustainability?

A: Balance sheet mix stable; card revenue trend positive but seasonal.

Q: Credit trends, commercial client sentiment?

A: Delinquency low, no immediate credit issues.

Q: St. Louis market growth?

A: Strategic focus on St. Louis, added leadership and teams, seeing traction.