Midland States Bancorp, Inc. Q3 FY2022 earnings call

Management Statement and Operational Highlights

• Loan Growth: Executed well with strong loan growth despite higher rates, total loans up 28% annualized. Equipment finance portfolio surpassed $1B, with significant investment since 2018 leading to growth.
• Deposit Gathering: Focus on deposit relationships, saw growth in noninterest-bearing deposits and all interest-bearing deposits. Commercial banking teams developing new commercial deposit relationships.
• Net Interest Margin: Impacted by cost of deposits exceeding earning asset yields, but average rate on new originations increased.
• Asset Quality: Positive trends in nonperforming loans, low consumer delinquency; $41M escrow available for GreenSky portfolio losses.
• Equipment Finance: Pipeline strong, expecting continued growth in Q4 and beyond, with $147M in new loans/leases in Q3.
• Banking-as-a-Service: Added Director, expected to enhance franchise value, starting to impact deposits and fee income in 2023.

Segment Performance

• Loans: Total loans increased $403 million from prior quarter. Commercial loans grew at 36% annualized, commercial real estate at 22% annualized. Equipment finance portfolio surpassed $1 billion in Q3. Consumer portfolio increased ~$71 million, with GreenSky and LendingPoint contributions.
• Deposits: Total deposits increased $211 million. Noninterest-bearing deposits accounted for 31.7% of total deposits, up from 29.9% last year.
• Net Interest Income: Increased 4.4% from prior quarter, but net interest margin decreased 2 basis points due to cost of deposits exceeding earning asset yields.
• Wealth Management: Assets under administration decreased $153 million due to market performance, but revenue relatively consistent with prior quarter.
• Noninterest Income: $15.8 million in Q3, up 8.3% from prior quarter, driven by removal of commercial mortgage servicing rights impairment impact.
• Noninterest Expense: Up from prior quarter due to higher salaries/benefits, loan/deposit activity, and branch acquisition impact.
• Asset Quality: Nonperforming loans decreased $10 million, net charge-offs $3.2 million, provision for credit losses $7 million with allowance for credit losses increasing ~$3.7 million.

Guidance

• Loan Growth: Expect moderate loan growth in Q4, though likely lower than earlier in the year, but well-positioned for strong financial performance with loan growth, higher net interest margin, and improved efficiencies.
• Margin: Uncertainty around margin movement due to loan growth and deposit funding, with potential for flat, up, or down margin in near-term.
• Banking-as-a-Service: Initiative expected to start contributing to deposit gathering and fee income in 2023, with steady growth in subsequent years.

Risks

• Mortgage Servicing Rights Sale: Uncertainty around deposit retention as commercial mortgage servicing rights portfolio is sold, with deposits potentially moving to other institutions.
• Economic Conditions: Impact on loan growth and provisioning due to uncertain economic outlook and potential recession.
• Interest Rate Changes: Impact on net interest margin and funding costs, with need to balance cost of funds for loan growth.

Question and Answer

Q: Terry McEvoy asks about servicing sale and deposits, specifically if deposits from commercial mortgage servicing rights portfolio will stay with the company.

A: Eric Lemke responds that deposits from the portfolio may move to another institution if the portfolio is sold, and they are preparing for that possibility.

Q: Terry McEvoy inquires about margin outlook and deposit beta.

A: Jeffrey Ludwig states margin movement is uncertain due to loan growth and deposit funding, with beta in high teens currently.

Q: Nathan Race asks about margin outlook for 2023 and rate sensitivity.

A: Jeffrey Ludwig mentions moving towards neutral rate sensitivity, potentially seeing margin increase but possibly nearing peak, and working on balance sheet management.

Q: Damon DelMonte asks about consumer portfolio and provisioning.

A: Eric Lemke says GreenSky portfolio expected to runoff ~$50M, LendingPoint to make up portion; Eric also mentions $7M provision for credit losses may be peak if loan growth slows and economy remains cautious.

Q: Manuel Navas asks about funding and loan pipeline.

A: Eric Lemke discusses FHLB borrowings and institutional funding, while Jeffrey Ludwig mentions available liquidity and target loan-to-deposit ratio below 90%.

Q: Nathan Race asks about income outlook for wealth management and fee income.

A: Eric Lemke states wealth management revenue has upside with market rebound, and fee lines like service charge and interchange have potential for year-over-year growth