Midland States Bancorp, Inc. Q3 FY2021 earnings call

• Quarterly Highlights: Generated net income $19.5 million ($0.86 per diluted share), adjusted pretax pre-provision income $28.4 million (+5.2% QoQ).
• Loan Growth: Excluding PPP loans, total loans increased annualized 12.3%, balanced across commercial, commercial real estate, and consumer portfolios.
• Deposit Mix: Total deposits increased 7.8%, with growth in non-interest bearing and low-cost accounts, improving deposit mix.
• Net Interest Margin: Increased 5 basis points due to lower cost of funds and elimination of higher cost funding sources.
• Asset Quality: Non-performing loans declined 11%, net charge-offs down 26%, able to release pandemic-related reserves.
• PPP and Deferrals: PPP loans declined $64 million to $82 million, fees $2.2 million in Q3; loan deferrals declined 68% to $34 million, almost all making partial payments.
• GreenSky Partnership: Expect new loan originations to continue through 2022, portfolio to decline $400-$450 million in next 12 months, focus on diversifying with other fintech partnerships.
• Servicing Deposits: Received $400 million in servicing deposits, to be redeployed in earning assets.
• Commercial Banking Talent: Added banking talent in Northern Illinois and St. Louis, increasing productivity and loan pipeline.

Loan Portfolio

• Total loans increased ~$80 million from prior quarter, driven by commercial loan production, commercial FHA warehouse lines, equipment finance, and consumer loans. Excluding PPP loans, commercial warehouse credit lines, and GreenSky consumer loans, total loans increased at an annualized rate of 6%.
• Equipment finance portfolio deferrals down 74% to $9 million by 9/30, 88% of deferred borrowers making partial payments. Hotel/motel portfolio deferrals down 82% to $7 million, remaining borrowers making partial payments. GreenSky consumer loan portfolio had 700,000 deferred loans (0.1% of total loans) with 25 basis point delinquency rate.

Deposits

• Total deposits increased $405 million (7.8%) from prior quarter, driven by commercial FHA servicing deposits and other commercial deposits.

Net Interest Income and Margin

• Net interest income increased 2.6% QoQ, net interest margin increased 7 basis points excluding accretion income due to lower cost of funds and elimination of higher cost funding sources.

Wealth Management

• Assets under administration declined $19 million due to market performance, but wealth management revenue increased 9.9% due to ATG contribution.

Non-Interest Income

• Decreased 13.1% QoQ primarily due to impairment on commercial mortgage servicing rights; excluding impairments, down 2.1%.

Non-Interest Expense

• Adjusted non-interest expense declined ~$200,000, efficiency ratio improved to 58.8%.

Asset Quality

• Non-performing loans decreased $6.7 million, net charge-offs $3 million (25 basis points of average loans), negative provision for credit losses $200,000

• GreenSky: New loan originations to continue through 2022, portfolio to decline $400-$450 million in next 12 months, expect to offset runoff with other business areas.
• Deposit Maturity: $184 million of CDs maturing, expected to reduce deposit costs.
• FHLB Prepayment: Unwound $130 million of FHLB advances, saving ~$2.2 million annually in interest expense, with prepayment penalty offset by swap gain.
• Loan Growth Outlook: Short-term loan growth expected due to strong pipelines, but GreenSky runoff will impact loan balances in late 2023/early 2024.

• GreenSky Runoff: Impact on loan portfolio and net interest margin as GreenSky loans decline.
• Deposit Volatility: Servicing deposits may have some volatility as loans are rate modified.
• Credit Quality: Potential charge-offs as GreenSky portfolio runs off and new loans are originated.

Q: Reserve impact from GreenSky runoff and future growth?

A: Expect reserve ratio to increase from 25 basis points as GreenSky portfolio runs off and commercial real estate loans are added.

Q: Servicing deposits volatility?

A: Fairly stable with some movement due to loan rate modifications, but baseline expected to stay.

Q: FHLB prepayment details?

A: Unwound $130 million of FHLB advances, saving ~$2.2 million annually, prepayment penalty $4.9 million offset by $1.8 million swap gain.

Q: GreenSky yield impact and replacement CRE yields?

A: GreenSky yields ~350-375 basis points, replacement CRE loans expected to have similar top-line yields.

Q: Fintech partnerships and product focus?

A: Primarily consumer-focused, similar to GreenSky but smaller in scale.

Q: Loan growth outlook post-GreenSky runoff?

A: Short-term growth due to pipelines, but runoff will cause loan balance pressure in late 2023/early 2024.

Q: Capital priorities and buybacks?

A: Prioritize building capital ratios, buy back stock if stock trades at evaluation where earn back is <1 year, else retain earnings and look for small integration opportunities.