Q1 2021 Midland States Bancorp Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Q1 2021 Midland States Bancorp earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone sure.
The choir further assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mr. Tony Rossi of financial profile. Thank you. Please go ahead.
Thank you Stacey good morning, everyone and thank you for joining us today for the Midland States Bancorp first quarter 2021 earnings call joining us from Midland Management team are Jeff Ludwig President and Chief Executive Officer, Eric Lemke, Chief Financial Officer.
I'll be using a slide presentation as part of our discussion this morning.
If you've not done so already please visit the Webcasts and presentations page of Midland Investor Relations website to download a copy of the presentation.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition of Midland States Bancorp that involve risks and uncertainties, including those related to the impact of the COVID-19 pandemic.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
The factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call.
<unk> management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and with that I'd like to turn the call over to Jeff Jeff.
Good morning, everyone welcome to the Midland States earnings call I'm going to start on slide three with the highlights of the first quarter over the last couple of years, we have talked a lot about the strategic initiatives, we have implemented to position the company for improved financial performance. These initiatives range from branch consolidations for the <unk>.
All of the commercial FHA loan origination platform to the acceleration of our investment in technology to improve efficiencies and enhanced revenue generation. Our first quarter performance reflects a significant increase in our level of profitability, resulting from these efforts to enhance efficiencies and optimize our business model.
Despite growing in a low growth low interest rate environment, we generated net income of $18 5 million or <unk> 81 cents per diluted share, which represents the highest level of quarterly earnings in our history.
We are also seeing the improvement in our performance metrics that we targeted our efficiency ratio improved to 56, 9% from 58, 6% a return on average shareholders' equity exceeded 12% in the quarter and a return on average tangible common equity exceeded 17%.
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And our adjusted pre tax pre provision return on average assets.
Was 175%.
All of these metrics represent our best core operating performance since we became a public company. The strong performance is resulting in a significant amount of internally generated capital that is positively impacting our capital ratios and our book value.
Building up our capital ratios was one other one of the priorities for 2021 that we talked about on our last earnings call and in the first quarter all of our capital ratios increased between 21, and 49 basis points and our book value and tangible book value per share increased to two.
2% and three 5% respectively from the end of the prior quarter.
Notably we were able to achieve this improved financial performance without the benefit of high loan balances.
During the first quarter, we saw an elevated level of payoffs and paydowns across most of our major portfolios and our loan production reflected the seasonally slower activity that we typically experienced in the first quarter. However, we continue to have strong inflows of low cost deposits. While this added to our ex.
Liquidity in the near term that continues to improve our positioning to capitalize on stronger loan demand later in the year and redeploy this liquidity into higher yielding earning assets.
On our last earnings call. We also mentioned that while we intended to remain internally focus. This year, we would look on smaller add on acquisitions and niche business lines, such as wealth management.
We were able to find an attractive opportunity with the acquisition of Atg Trust company that we announced in February with nearly $400 million in assets under management Atg will further increase the scale and diversification of our wealth management business Atg has built up a good network of referral sources.
That we can leverage across the broader platform of wealth management and trust services that we provide which we believe will enhance our new business development efforts over the years, we have effectively utilized acquisitions to grow our assets under administration and better leverage our wealth management platform and we expect <unk>.
Atg to contribute to the continued growth and the stable reoccurring fee income that we generate from this line of business.
Moving to slide four we will provide an update on our PPP efforts and the impact that these loans have had on various line items in the first quarter through March 31, we had originated $79 million in loans through the second PPP program during the first quarter approximately 53.
And of the loans from the first program received forgiveness. This brought our total balances of PPP loans to about $212 million at the end of the first quarter.
Non of loans forgiven in the first quarter was lower than the prior quarter, which resulted in lower PPP fee income recognized we recognized $2 $1 million in fees during the first quarter down from $3 1 million last quarter as of March 31, we still had.
$6 million in fees to be recognized which is a little less than half of the total amount of fees earned through the first two rounds.
Turning to slide five we will provide an update on the loan deferrals.
At March 31, we had $219 million in loan deferrals, which was up a bit from the end of the prior quarter, but still under 5% of our total loans.
The increase primarily came from hotel borrowers who had resumed contractual payments after an initial loan modification than experienced some seasonal decline in occupancy during the first quarter. So we provided three months deferrals to help them get through the soft part of the year.
Based on current occupancy trends, we would expect many of these borrowers to get back to scheduled payments during the second quarter.
We also had some new borrowers in the assisted living industry that required modifications during the first quarter, but we've since receive some payoffs on these loans that should result in lower deferrals at the end of the second quarter.
These new modifications offset a decrease in deferrals in our equipment finance portfolio.
At March 31 about 40% of loan deferrals were making interest only or some other form of partial payment at this point I'm going to turn the call over to Eric to provide some additional details around our first quarter performance, Eric Thanks, Jeff and again good morning, everyone.
I'm starting on slide six and we will take a look at our loan portfolio. Our total loans decreased $193 million from the end of the prior quarter as Jeff mentioned, we experienced an elevated level of payoffs and pay downs across most of our major portfolios. During the quarter. This included lower line.
Position from our AG borrowers and the continued run off we are seeing in the residential real estate portfolio due to refinancing activity.
More than a third of the decline in total loans was attributable to period end balances on commercial FHA warehouse credit lines that were $68 million lower than the end of the prior quarter.
While there can be some volatility in the period end balances. This lending area continues to generally increase for us as the average balances were higher in the first quarter than in the fourth quarter offsetting the payoffs and paydowns in other areas was $27 million increase in our PPP loan balances as our production in the <unk>.
Round of the program more than offset the level of forgiveness. We saw on loans originated in the first round.
On slide seven we've provided an update of our equipment finance portfolio as of March 31, we had $46 million of loan deferrals, which represents a decline of 8% since the end of the last quarter.
We continue to see a steady recovery of our borrowers in the transit and ground transportation industry as the trends and business and recreational travel continued to improve we've seen more borrowers returned to scheduled payments as well as others that remain on deferral starting to make some form of partial payment 78 per.
A scent of the borrowers on deferral in this portfolio are now, making a partial payment.
On slide eight we've provided an overview of our hotel portfolio at March 31, we had $117 million of loan deferrals in this portfolio, which as Jeff mentioned is up from the end of the prior quarter as a number of borrowers had to return to a modified loans status as of March 31, we had.
Approximately 21% of our deferred loans in this portfolio, making interest only or some other form of payment.
Looking at slide nine.
We've provided an update on the consumer loan portfolio that we have through our relationship with Green Sky. We had just under $4 million in deferred loans in this portfolio at March 31, which represents about half of 1% of the total loans.
The portfolio continues to perform well over the past few quarters and the delinquency rate has stayed in the 30 to 40 basis point range and in addition to the strong performance escrow account is available to cover any deficiency in Midland principal balances. The escrow accounts stood at just over $30 million at the end of the first quarter.
Our total balances and the Green Sky portfolio remained relatively flat during the first quarter given our current liquidity. We may grow this portfolio during the last half of the year.
Turning to slide 10, we'll take a look at our deposits total deposits increased 240 million or four 7% from the prior quarter. The growth was largely attributable to an increase in demand deposits from commercial customers as well as retail deposit inflows, resulting from the latest round of stimulus.
Payments.
Looking ahead to the second quarter, we will have additional opportunities to re price higher cost time deposits, we have a $159 million of Cds maturing at a weighted average rate of 1.0% or 1.06% excuse me as these deposits renew at current rates, we should we should see a positive impact.
On our deposit costs.
Looking at Slide 11, we will walk through the trends in our net interest income and margin.
Our net interest income decreased three 1% from the prior quarter due to a lower accretion income and lower PPP income.
Excluding accretion income our net interest margin was unchanged from the prior quarter as a favorable shift in the mix of earning assets and a reduction in our average cost of funds were offset by a decline in the average yield on both loans and securities. Our net interest margin for the quarter, excluding the impact of <unk>.
<unk> income was 338%.
We used a portion of our excess liquidity to reduce our balances of <unk> advances as we continue to look to reduce our reliance on wholesale funding our FHA Ob borrowing borrowings were $250 million lower than at the end of the prior quarter.
In the near term our focus will be to support net interest income, even if that means giving up a bit of margin we plan to add to the investment portfolio. During the second quarter to generate some additional interest income, but we still should have plenty of liquidity remaining to redeploy into higher yielding assets as loan growth increases.
And the future excluding the impact of forgiveness of our PPP portfolio.
Turning to slide 12, we will look at the trends in our wealth management business, we had an $80 million increase in our assets under administration, primarily due to market performance the higher assets under administration resulted in a one 1% increase in our revenue compared to the prior quarter.
On slide 13, we will take a look at noninterest income, we had $14 8 million and noninterest income in the first quarter up three 3% from the prior quarter.
We recorded an impairments on commercial mortgage servicing rights in both quarters with the impairment in the first quarter being about $1 million lower than the impairment in the prior quarter <unk>.
Excluding these impairments our noninterest income was down from the prior quarter, primarily due to lower levels of residential mortgage banking revenue and service charges on deposit accounts.
While our refinancing production in the residential mortgage banking business held fairly steady with the prior quarter. We saw a decline in purchase production, which accounted for the lower level of revenue in the first quarter.
Turning to slide 14, we'll review our noninterest expense at $39 $1 million, our noninterest expense came in at the low end of the run rate, we projected to start 2021, even including the small amount of acquisition and integration expenses that we occurred incurred in the first quarter.
This represents a significant decline from the expense levels. We had in 2020 and reflects the first full quarter benefit of the consolidations, we made in our branch network and corporate facilities.
As a reminder, we also recorded an accrual for a onetime rollover of vacation time due to COVID-19 that impacted our salaries and benefits expense last quarter.
While continuing to invest in our technology initiatives. We believe that we can maintain our quarterly operating expense in the range of $39 million to $40 million for the foreseeable future.
Turning to slide 15, we will look at asset quality trends.
Our nonperforming loans decreased $1 $2 million from the end of the prior quarter as we continued to resolve some of our longer term problem loans without any material additional losses being incurred.
However, with the decline in our total loans the ratio of nonperforming loans to total loans increased two basis points to 1.08%.
Our net charge offs continue to be very manageable and were just $1 7 million or 14 basis points of average loans.
We recorded a provision for credit losses of $3 6 million, which was primarily driven by additions to specific reserves as the trends. We saw in the broad portfolio were generally stable to positive during the quarter.
At March 31, approximately 90% of our ACL was allocated to general reserves.
And on Slide 16, we show the components of the change in the allowance for credit losses from the end of the prior quarter.
Our ACO increased $2 2 million and strengthened our reserve to 128 basis points of total loans from 118 basis points at the end of the prior quarter. The biggest contributor to the provision this quarter was additions to specific reserves, which offset some reserve release, resulting from the improvement in economic forecasts utilized in our.
The ACO model.
On slide 17, we show our ACL broken out by our loan portfolio. The reserve build this quarter was primarily driven by an increase in coverage on our commercial real estate portfolios. We continue to add to our reserves in these portfolios due to the ongoing impact of COVID-19, and ongoing loan deferrals in certain portfolio.
Segments, including hotels assisted living and other industries.
In addition to the ACL to total loans, we also track the coverage ratio when excluding loan portfolios with certain credit enhancements, our government guarantees, including the PPP portfolio, our green Sky loans in commercial FHA warehouse lines. When these loans are excluded our ACL coverage increased to 164%.
Compared to one 5%, 2% at the end of the prior quarter.
And with that I will turn the call back over to Jeff Jeff. Thanks, Eric will wrap up on slide 18, with a few comments on our outlook. We're very pleased with our start to the year and delivering on higher profitability that we targeted although Penn depth pandemic is still very much top of mind, we are seeing signs of improving.
Amid conditions and borrowers that were most impacted by the pandemic continue to steadily improve their financial performance.
We believe this should lead to continued reduction in deferrals as we move through the spring and summer and our ACL coverage ratio will remain relatively stable the improving economic conditions is reflected in our growing loan pipeline.
And the new bankers, we added in the areas of SBA agribusiness and specialty finance have been very productive in their first few months.
And are contributing to the increases we are seeing in the loan pipeline.
We're optimistic that the growing pipeline will result in stronger loan production and loan growth as we move through the year with stronger loan growth, we will be able to redeploy our excess liquidity into higher yielding assets generate more revenue growth further increase our operating leverage and drive additional improve.
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The Atg acquisition is on track to close in the second quarter and this will provide a further increase in our fee income over the second half of the year.
The continuation of our strong financial performance in the further improvement we expect to deliver as we enter a more favorable environment for generating loan growth should help us to make additional progress in strengthening our capital ratios, which will better support our continued organic and acquisitive growth in the future with that will be.
Happy to answer any questions you might have operator, please open the call.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from queue. Please press the pound key.
Our first question comes from Terry Mcevoy from Stephens.
Hey, good morning, everyone.
Good morning.
I guess two questions or other.
The leasing business in Green Sky, It sounds like Green Sky, you're thinking about increasing just your concentration of green Sky, if I heard correctly.
If that's the case to what degree and I guess on the leasing at 17, 5% is that an area. You are looking to grow this year or from a concentration standpoint is that kind of your level of comfort.
Yes, so I'll start with the Midland equipment Finance business.
We had a little bit of a slower first quarter, which is not unusual usually the fourth quarter is pretty robust as companies are buying equipment towards the end of the year and.
Business typically starts a little slower in the first quarter. So we expect it to sort of pick up and we expect those balances to grow as we move through the balance of the year.
We're sort of targeting of a relatively same production level as we did last year. So.
As the balance gets as the portfolio balance gets bigger and we keep production at about the same level the growth rates, obviously, just going to continue to slow.
And to your to your concentration point, we do sort of have some some targets.
That we think we need to.
Maintain which which we think we can still grow the portfolio. Some but then at some point, we're going to we need to grow the rest of the bank to be able to continue to grow that portfolio.
As it relates to Green Sky, Yes, we are we're going to because of the liquidity that's coming on the balance sheet and PPP as it continues to get forgiven is going to provide even more liquidity.
We're going to.
The increase.
That balance.
I'll say anywhere from maybe 75 million to $150 million is sort of how we think about that for the remaining part of the year.
So not all at once but sort of as we move move through the balance of the year.
Okay.
Then just as a follow up question.
Volatility in commercial FHA warehouse credit lines.
Is that just something we're going to have to live with going forward and maybe could you just talk about.
How large those quarterly swings could be just to frame expectations going forward.
Yes, so it will it will go up.
Up and down and depending at the end of the quarter, whether those those are warehouse lines are drawn or not there'll be fairly large swings in those swings could be in.
$100 million to $200 million range, probably I mean, we've probably got commitments that are around $500 million. So.
Depending on where they're at in there that are closing cycles.
We can see.
$100 million to $200 million.
Swings in that and those spot balances, but we expect the averages to sort of average out.
Not have.
As much swings.
On an average balance point of view during each quarter.
Alright, Thanks, Jeff.
Your next question comes from Michael Perito from K B W.
Mike you there.
I am can you guys hear me.
Yes.
Alright, sorry about that good morning, how are you guys were good good.
Good.
I wanted to start on the expense side, so $39 million to $40 million I guess.
If I heard you guys correctly. It was kind of a near term run rate. Two part question here I guess, one Jeff that the mix of the business has changed.
Decent amount over the last year and a half or sell I was just wondering if you guys had any.
Thoughts about structurally what type of efficiency ratio you guys are targeting with this new mix of business versus historical where you guys had some businesses that put upward pressure on that and then secondly.
I was wondering if you could maybe just provide a little bit more detail on some of the app.
The technology digital investments that are being factored in to that run rate.
And anything you do pull out as particularly meaningful for your involvement here that that we should be mindful of.
Yes, so <unk> internal sort of target.
I probably said this in some meetings is to get under 55% efficiency ratio couple of years ago is to get under under 60 now to get under 55 million.
Or sort of on track and moving in the right direction. So I feel we feel pretty good about about where we're at.
As it relates to technology.
Technology investments that we've made that we are making are sort of in our run rates. So there is not.
Some investments, we're making today, that's going to sort of go away later so.
The investments we've been making in technology have been in our run rates for many quarters now and is in our run rate today.
A big big part of that investment in people.
So I don't I don't see that that necessarily accelerating.
To increase our expenses and nor do I see it decelerating to decrease our expenses.
Helpful.
And then in terms of growth.
Anything you guys are particularly working on upgrading our rolling out in the near term here.
Pablo the bottleneck.
Right.
That's critical.
Yes, so we've rolled out.
Sort of online account opening both on the retail side and the business side, we're seeing sort of good good activity there I think on the retail side.
Seeing about a third of our new account openings happening online so thats encouraging.
We introduced zelle.
Here in the last probably 30 to be about 30 days.
We think that's a big enhancement on the mobile App really good PDP.
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Payment processing.
And we hope by our plan is by the end of the second quarter. The sort of have if you will all of our products.
Accessible online so all deposits.
You can you can sort of buy online loans the same way.
And then it's then it's all about marketing and customer journey marketing in auto in the auto marketing journeys.
So yes, we are.
We're pretty excited about the back part of the year, we've done a lot of work sort of.
Getting these pieces in place and then it becomes.
Marketing.
And.
So how do you drive traffic to your website.
Right.
Okay.
Yes.
On margin.
Eric I hear you correctly that the impact from PPP FERC for forgiveness was seven basis points I guess it was 238, you said excluding versus the $3 45.
Reported.
Correct, yes.
Okay.
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So if I look at the.
Purchase accounting accretion in the PPP I mean that puts you guys kind of on a.
Real adjusted basis about $3, 30, which I think was up.
Modestly.
Over the fourth quarter, but I mean is it fair to think that between some liability repricing here in a.
You guys are able to our successful in adding some of the green sky balances and deploy that liquidity I mean, there should be some some positive movement.
<unk> here adjusted for any of the PPP volatility over the next few quarters.
Towards the back half of the year, Mike So kind of.
We're looking at this next quarter, we will conservatively given the decreases in loans that we experienced in the first quarter. Our pipelines are good but it will take us a little a little time to get that those loan balances back.
But we are working on plans to reinvest that excess liquidity that we had at quarter end through Green Sky Securities purchases and a few other things out there. So we may see our NIM come down a couple of basis points in the second quarter, but then build back up and keep it flat with maybe a couple of basis.
Points upside towards the back half of the year.
Yes.
Helpful and then just.
Clarification on the Green Sky peaks right I mean, that's.
I'll call it easy, but that's a fairly straightforward.
Okay.
Growth mechanism for you guys right I mean, you're basically just <unk>.
Indicate that you have more appetite and more volume comes through is that correct.
Necessarily as predictive as maybe like a commercial portfolio with payoffs through the closing dates could be a little bit more hard to pin down.
Yes, Mike I agree with that Green Sky's still has.
Pretty good activity and so it's just a matter of us kind of talking with them about sort of what our credit metrics look like and we don't plan to change those at all and just kind of accepting a little bit more of act of activity and raising our overall levels.
Great and as John mentioned I won't do that all at once.
Yeah no no. It makes sense. Thank you guys for taking my questions I appreciate it.
Thanks.
And once again, if you would like to ask a question that is star followed by the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from queue. Please press the pound key.
Your next question comes from Nathan race from Piper Sandler.
Hi, guys. Good morning, Hello, Good morning, I was hoping to just dive into on the outlook slide the expectations for a relatively stable PCL over the next quarter or two.
Within that would love to get an update in terms of what you guys are seeing in terms of charge off activity and if we can kind of expect provisioning to match charge offs and I know, it's difficult to kind of pinpoint.
Provisioning, Inc. In any given quarter under a seasonal framework.
Just hoping to kind of dive into some of the underlying.
Underlying pieces behind that that ECL outlook.
Yes.
Good morning, So good question so.
Good charge off activity in the first quarter $1 7 million 14 basis points.
As we kind of mentioned in the call. We did have a loan relationship move into nonperforming that added to some of our specific reserves.
And so we do expect to see some charge offs towards the last towards the last half of the year, but I think as I look at our ACL kind of right now and where we're at and as the sort of the economic forecasts continue to improve.
I think we can be in a position, where we will provide for our charge offs and that's roughly my expectation.
So I think one other reasons, we added to the ACO. This particular quarter was because we continue to see some elevated levels of deferrals in those couple of industries. So that would be why we added to sort of our Sierra CRE those commercial real estate loan buckets, but I think going forward.
We will provide for our reserves and sort of keep that ACL, where it is depending on other other circumstances as they as they come in as they occur.
Got it that's helpful. Thanks, and just following up on that so it sounds like.
90% of the reserve.
Kind of unallocated or on other general basis.
It may not necessarily need to provide for that kind of mid single digit growth that we're expecting to kind of build over the course of this year is that a fair characterization.
Yes.
Could be it depends on kind of where some of those loans end up what types of industries and what type of mix.
But I think that very well could be likely Nick.
So as we add green Sky.
Our reserve.
Percentages there are not very significant because of all the credit enhancements, we have Ron Green Sky, So that growth doesn't come with a lot of provisioning.
Got it makes sense.
And then if I could just ask one more on just the appetite for additional share repurchases.
It looks like the remaining authorization is fairly low and I know the price.
One of the major priorities for this year is to continue to build capital levels. So would just love to get some color just in terms of your appetite for additional buybacks.
So the stocks had a great Ron.
Several weeks so just curious on your kind of updated thinking about buybacks.
Appetite with the remaining authorization towards the.
Depleted at this point.
Yes, Yes, I think I was pretty clear on last quarter's call that we would continue to buy our shares back below the tangible book value and we did through the first couple of days of February and then our stock did go on that that nice run and we stopped so at this point.
Ill say, if our stock ever goes back below tangible book value will probably buy it back but at this point net.
I hope that doesn't happen and.
And I don't see it so I think we're on the sidelines on buybacks and now we're clearly focused on building capital ratios and.
Putting all of our our earnings after the dividend and.
And the capital.
Okay, Great sounds good I appreciate all the color. Thank you guys. Thanks.
Yes.
I am showing no further questions at this time I would now like to turn the conference back to management for any closing remarks.
Yes, thanks for joining today, and we had a record quarter and it was a good quarter and we.
Look forward to talking to everybody next quarter, so everybody have a good day. Thanks.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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