Q1 2022 Midland States Bancorp Inc Earnings Call
Good day and thank you for standing by welcome to the Q1 2020 to Midland States Bancorp, Inc Earnings Conference call.
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I would now like to hand, the conference over to your speak today, Mr. Tony Rossi of financial profiles, Mr. Rossi the floor is yours.
Thank you Chris Good morning, everyone and thank you for joining us today for the Midland States Bancorp first quarter 2022 earnings call.
Joining us from Midlands management team are Jeff Ludwig President and Chief Executive Officer, and Eric Lemke, Chief Financial Officer, we.
We will 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 Midlands Investor Relations website to download a copy of the presentation before.
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.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
These 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.
Additionally, 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 as we expected we saw a continuation of many of the positive trends we experienced in the second half of last year, most notably we had very strong loan growth and expanding net interest margin and disciplined expense control.
This resulted in a strong quarter with net income of $20 $7 million or <unk> 92 per share and pre tax pre provision earnings of $32 million relative.
Relative to the first quarter of 2021, our return on average assets return on average tangible common equity and adjusted pretax pre provision return on average assets have all increased which reflects the consistent improvement we are seeing in the level of profitability as we.
<unk> strong organic growth and realize more operating leverage.
Despite the first quarter's typically being a seasonally slower period for loan production, we had another strong quarter of loan originations.
We had $673 million in new commercial and commercial real estate originations, which is a 115% higher than in the first quarter of last year, a higher level of loan originations reflects the more productive commercial banking teams, we have built and.
And the increased presence, we now have in higher growth markets.
Our loan production was more heavily weighted towards commercial real estate. This quarter as we continue to see good results from our specialty finance group that primarily originates loans for multifamily and senior care properties and provides a bridge to HUD financing.
Within commercial lending, our Midland equipment finance team had a strong quarter of originations with production being about 60% higher than the first quarter of 2021, although a higher level of payoffs impacted the growth we had in this portfolio.
From a geographic perspective, we had a strong quarter in loan production in the St. Louis market, which reflects the improved business development capabilities. We have following changes in leadership and additional resources, we have added to the team.
The record level of loan production resulted in 24% annualized growth in total loans.
Strong growth in loans enabled us to redeploy a lot of our excess liquidity into the loan portfolio, which resulted in a favorable shift in our mix of earning assets and significant expansion in our net interest margin.
We are seeing higher rates on new loan originations, which is also contributing to the increase in our net interest margin, notably we are generating the strong loan growth and increase in net interest income, while maintaining relatively flat expense levels as.
As we have mentioned in the past we've kept the size of our overall banking teams relatively consistent.
But we have made many changes in personnel over the past couple of years that have upgraded the quality and productivity of the teams.
And we are also continuing to realize more efficiencies from the investments we have made in our technology platform.
As a result, while we are seeing some degree of inflationary pressure, particularly in labor costs, we've been able to largely offset this pressure by increasing efficiencies and productivity, which allows more of the strong organic growth. We are generating to fall to the bottom line and improve our earnings and returns.
At this point I'm going to turn the call over to Eric to provide some additional details around our first quarter performance.
Thanks, Jeff and again, good morning, everyone I'm, starting on slide four and we'll take a look at our loan portfolio. Our total loans increased $315 million from the end of the prior quarter as Jeff mentioned, the strongest growth came in the commercial real estate portfolio, which increased 16% during the first quarter.
So had small increases in equipment finance conventional commercial and consumer loans.
These increases were partially offset by declines in commercial FHA warehouse credit lines residential real estate loans and the continued forgiveness of our PPP loans.
Turning to slide five we'll take a look at our deposits total deposits decreased $53 million from the prior quarter. The largest decline was in non interest bearing deposits, which was primarily attributable to fluctuations in end of period balances of commercial FHA servicing deposits.
We had growth in interest bearing checking money market and savings deposits, which was due to inflows from new business development as well as some clients and customers starting to transfer balances out of non interest bearing accounts.
One of the contributors to the new business development is the increased focus we have and growing our market share in St. Louis in the first quarter, we had $120 million increase in our commercial deposit balances in this market.
Looking at slide six we will walk through the trends in our net interest income and margin. Our net interest income increased four 7% from the prior quarter, primarily due to higher average loan balances and the increase in our net interest margin, we brought down our cash balances by $348 million.
From the end of the prior quarter, which was primarily redeployed into the loan portfolio to fund our strong loan growth.
This favorable shift in our mix of earning assets drove a 25 basis point increase in our net interest margin or 26 basis points when accretion income is excluded.
As interest rates increase we are seeing improvement in new loan pricing, which is also positively impacting our net interest margin in the month of March the average rate on our new and renewed loans was 410% an increase of 17 basis points from the month of December the <unk>.
Most significant driver of this increase is our equipment finance business. Although we are seeing some higher rates on originations across all of our commercial lending.
Turning to slide seven we will look at the trends in our wealth management business our assets under administration decreased by $173 million from the end of the prior quarter, primarily due to market performance.
Despite that decrease our wealth management revenue was essentially flat with the prior quarter as seasonal tax preparation fees offset the decrease in assets under administration.
Compared to the first quarter of the prior year, our wealth management revenue increased 20%, which reflects our strong progress on growing our recurring sources of fee income.
Turning now to slide eight we'll look at noninterest income.
We had $15 $6 million in noninterest income in the first quarter, a decrease of 37% from the prior quarter, which included a number of onetime items. Excluding these items most areas of noninterest income were slightly down from the previous quarter, except for impairment on commercial.
Mortgage servicing rights, which decreased $1 $7 million due to refinancing activity as interest rates continue to increase.
Turning to slide nine.
We will take a peek at our noninterest expenses on an adjusted basis, excluding the FHL be advanced prepayment fee recorded last quarter and immigration and acquisition expenses. Our noninterest expense was essentially flat with the prior quarter, we had slight variances in each major line item some a bit higher.
A bit lower which all essentially offset each other and enabled us to come in at the low end of the range of guidance, we provided for operating expenses in 2022.
Looking ahead to the second quarter, we expect to keep expenses relatively stable, although the completion of the F&B see branch acquisition will bring on some additional personnel and occupancy expenses.
Turning to slide 10, we'll look at asset quality trends, our nonperforming loans increased $10 $3 million from the end of the prior quarter, which was entirely attributable to one commercial real estate, while an where no loss is currently expected outside of this one credit trends in the portfolio were generally favorable with continued upgrade.
<unk> of watch list loans as more borrowers demonstrates sustained performance with the impact of the pandemic declining.
We had $2 $3 million and net charge offs in the quarter or 17 basis points of average loans.
We recorded a provision for credit losses on loans of $4 1 million, which was largely related to the growth in total loans.
On slide 11 will show the components of the change in our allowance for credit losses from the end of the prior quarter. Our ACL increased by approximately $1 9 million. The increase was driven by growth in total loans and changes in the mix of the portfolio.
And then on slide 12, we show the allowance for credit losses segmented by portfolio given the positive trends, we're seeing we continue to bring down our coverage ratios in most areas of the portfolio.
And with that I'll turn the call back over to Jeff Jeff. Thanks, Eric will wrap up on slide 13, with some comments on our outlook our loan pipeline remains very healthy and we continue to see good demand in both commercial and commercial real estate lending.
Based on our current pipeline, we expect another quarter of strong loan growth beyond that is difficult to predict the level of loan growth in the second half of the year as it is uncertain, how rising interest rates will impact loan demand.
Just on current trends, we expect low double digit loan growth in 2022, although higher rates could impact loan demand, resulting in slower growth during the back part of the year.
We're already seeing significant expansion in our net interest margin and as we continue to grow loans and the fed continues to increase rates, we should see further expansion in our and our margin.
To continue to be able to fund our loan growth with low cost deposits. Our Treasury management group is having more success in bringing in large commercial deposit relationships and the closing of the NBC branch acquisition. Later this quarter, we'll provide another source of low cost deposits.
As Eric mentioned, we expect to keep expenses relatively flat, which should lead to further operating leverage as our expected loan growth and margin expansion generate higher levels of revenue.
With the combination of continued balance sheet growth and expanding margin and greater operating leverage we expect to see further improvement in earnings and our level of profitability as we move through the year. While we continue to see good results from the efforts, we have made to enhance our business development capabilities and improve our financial performance.
We are also making good progress on our long term initiatives to further enhance the value of the Midland franchise over.
Over the past few years, we've talked about the investments we've made that has significantly strengthened our technology platform. One of the strategies of our long term technology roadmap is to position the company to effectively compete within the banking as a service space.
Our relationship with Green Sky has given us valuable experience that we will leverage with other fintech partnerships that can be meaningful contributors to our balance sheet growth and fee income in the years ahead with.
With the improvement we have made in our technology platform. We are now in a position to begin implementing our broader banking as a service initiative.
Earlier this month, we announced the partnership with zinc terror, which will help us develop new partnerships with other fintech that will contribute low cost deposits and increased the number of customers.
Using our payment solutions, we have a pipeline of potential fintech partnerships that we are in the early discussions with and we look to bring onboard towards the second half of the year.
We expect to announce a new partnership with a consumer lender similar to Green Sky. While we also are reviewing other fintech focusing on deposit gathering.
We are being very balanced and the implementation of this initiative doing it in a way that does not require much incremental investment in our technology platform and enables us to learn from the experiences that we can prudently manage the growth in the area over the coming years over the long term, we expect banking as a service to be.
Another important catalyst for our earnings growth and further improvement in our financial performance.
And finally, strengthening our capital ratios will continue to be a priority for the company.
With the efforts we have made to increase loan production, having been very successful and the pipeline remains very healthy we want to make sure that we can continue to have the capital strength to support our strong balance sheet growth as well as continue to have the ability to execute on attractive transit transactions like the F N B C.
Branch purchase so as we move through the year, we will be evaluating the best options for strengthening our capital ratios as well as optimizing our capital stack as we have some subordinated debt that is callable. Later later this year that we may redeem.
Whenever capital actions, we take will be in the best long term interest of shareholders and enable us to continue executing on the strategies that have contributed to the improvement in our financial performance.
With that we'll be happy to answer any questions you might have operator, please open up the call.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key standby as we compile the Q&A roster.
Our first question comes from Terry Mcevoy Stephens Your line is open.
Hi, good morning, nice start to the year, Jeff and Eric.
Thank you.
Maybe first question could you just maybe expand on the growth in the CRE portfolio.
Multifamily retail some segments that may be kind of contributed to that growth and maybe.
Maybe as a follow up there how are you stress testing the portfolio as rates continue to rise or are expected to continue to rise how are you stress testing and getting comfortable with the.
The relative size of your CRE portfolio.
Yes, so most of the CRE growth came in our multifamily senior care and industrial warehouse portfolios.
Retail was up a little bit, but not a lot. So those three portfolios were the main drivers.
And all of our underwriting we're stressing.
Deal by deal, we strive to interest rates, we stress cap rates.
<unk>.
As part of the underwriting process. So we think we're a deal by deal doing that we also.
Once a year do full stress testing on commercial real estate, where we will stress those things in a portfolio level.
So we're doing that on a on a regular basis.
Thanks for that and then as a follow up I mean, a lot of the discussion we just heard was <unk>.
Growing revenue.
So I don't know if I am surprised but to keep your expenses 41 to 42 I thought that would maybe go higher given the revenue initiatives can you maybe talk about how you're balancing the investments and then where your <unk>.
Looking for opportunities to reduce expenses to keep that flat this year or at least next quarter.
Yeah, I mean, our we've talked about our commercial banking team now for several quarters that we've we've held that relatively flat actually.
From a total head count be down a little.
But the productivity the pipeline management.
We've put salesforce in at this point, probably three or four years ago, and it's it's really has matured and the calling efforts the follow up on pipeline with.
From.
The president of the bank down to RMS.
I think we've done a really nice job of Av.
Of managing pipelines and accountability to pipelines.
And so we've been able to keep head count sort of down.
So we're not adding a lot of.
So we're not adding a lot of people to the commercial team to get the additional growth. So I think thats. Good now over time that that's going to have to change.
But right now that's where we're at.
And then it's.
Looking.
The good thing about taking a pause the pause that we've taken on M&A. The last couple of years is to really.
Dig into.
Vendors dig into how we operate and it seems like quarter in quarter out we're finding.
In some cases bigger pieces and then in other cases little pieces here and there add up over time that are allowing us to continue to grow revenue at least now and hold expenses relatively flat and I cant write that can't go on forever.
But at this point, where we're able to do that.
If I could squeeze one last one of the equipment finance yields up 76% a big jump was there something going on within that business last quarter to contribute to the higher yields.
Yes that business is Ted can be five year contracts at prices on sort of that five year part of the curve.
So as we saw the lift.
During that we were able to kind of nudge those prices up so so when we looked at new new contracts there Terry in the month of March we were at about 530 or so in the month of March compared to the prior December which would have been sort of $4 50 somewhere in the $4 60 somewhere in that range.
So we still continue to see pressure on loan pricing overall, but that's one segment of the business, where we are able to get a little bit of a better lift because it's national.
That part of the curve.
And Theres still been a lot of demand as Jeff mentioned, there was a lot of demand during that first quarter compared to the first quarter in the prior year, which is typically a little bit softer.
Great. Thanks, a lot have a good weekend guys.
Thanks.
Thank you.
Our next question comes from Damon Delmonte of K B W.
Your line is open.
Hey, good morning, guys hope everybody's doing well today.
Good morning.
Yes. Good morning. So my first question just regards to the margin you can talk a little bit about that I mean very impressive expansion in this quarter end.
Good detail on kind of what drove that expansion Todd.
Digging in a little bit deeper to the core margin.
I know, there's a little bit of Accretable yield.
How much was the PPP impact and I'm trying to get to like a core level.
Figure out if there was anything else any other onetime loan fees or are items that might not be repeatable next quarter as we try to model this out.
Yes, Damon this is Eric so on the PPP impact is roughly about five basis points or so to our margin.
Those fees are shrinking of course, they're a little bit over $1 million in the last quarter.
Odds and ends.
Jeff in his remarks mentioned some earlier deferrals that we're seeing in equipment finance.
And so we've seen with the increase in the <unk>.
Rice of that used equipment, we've had some customers that have been selling that equipment paying off their contracts early so we have seen some prepayment fees in that portfolio.
And then a few other kind of odds and ends but not more than just a few basis points overall during the course of the quarter.
Yeah.
Okay. So is.
Is it fair to assume that you are kind of somewhere in the high three <unk> three or your core.
I think probably more like low three <unk>.
Flotek reported okay.
Alright Thats great.
And then I guess.
As far as the commentary on.
Our loan growth so pipelines continue to be strong going into the second quarter here.
Do you expect it to be continued to be driven by.
Commercial real estate or do you see other areas of the portfolio starting to contribute more.
Yeah, I mean, thats, probably going to be the bigger driver.
We look at.
All the growth, but we do expect to see growth on the commercial side as well the equipment finance.
Business should pick up I mean, we should probably have a better second quarter. We typically have a better second quarter than first quarter, and if if paydown slowdown data contribute more to the commercial line.
Consumer.
That would be relatively flat and then more of the growth will probably be in the commercial real estate area.
Got it Okay and then just lastly on the fee income.
Any any kind of guidance there so what to expect for the quarterly run rate I know the other line was lower than in previous quarters.
Do you think you can get back up over that $16 million quarterly run rate.
Yes, I think so we have a little lighter interchange quarter.
Which I think sort of seasonal and service charges, which sort of the sort of go hand in hand.
And I think just seasonally the first quarter is a little lighter. So we do expect those to come back.
But yes, I think thats not a bad bad number.
Okay, all right great. That's all that I had for now thanks, a lot guys I appreciate it thanks.
Thank you.
And next we have Nathan race of Piper Sandler.
Your line is open.
Yes, hi, guys.
Hello.
Question, just on deposit growth expectations I appreciate some of the decline in the quarter was tied to the FHA.
Hey, servicing partnership so just curious how you guys are thinking about.
<unk> growth over the course of 2022 to continue.
Continued strong loan growth expectations.
And just within that context. It sounds like you guys are in the process of Onboarding some partnerships.
To drive some deposit growth as well so just curious how we should think about the rate sensitivity of those potential deposits coming onboard relative to kind of your lower.
Data deposit franchise.
Historically.
Yeah, I mean, we had.
Other than yes, we had an influx of deposits at the end of the year with the servicing business. So we sort of knew that was going to go out, but we had a really really good first quarter.
<unk>.
And deposit gathering in Treasury management, and retail deposits were nicely up in the quarter as well.
And it's sort of back to the.
The productivity of the team has been really good sales forces driving pipelines, our pipelines in treasury management or earn pretty good spot going into the second quarter. We won some nice accounts in the first quarter I think we expect to win some nice accounts in the second quarter.
And then the branch acquisition is going to supplement that I mean, the cost of funds at.
The branch, we're buying is eight or 10 basis points or bringing in some some nice core deposits there.
So.
It's working both sides of the balance sheet, we got to gather deposits and we got to make loans and thats sort of what we're doing.
And I think we're doing a nice job on on both fronts and then the banking as a service is more of a longer term sort of play I don't see that impacting.
The financials in a big way this year, but as we start to move move into the next year and the years after that.
Sort of where we.
We think there'll be a bigger impact.
Okay got it.
<unk> kind of deposit growth, maybe lagged a little bit in terms of debt of loans.
Yes.
Flexibility to increase your loan deposit ratio from just looking at average balances.
89% in the quarter.
The fair way to.
With the branch acquisition coming in that number should stay relatively in that range up some down some.
Based on.
Where loan growth ended the quarter in deposit growth ended the quarter with the branch acquisition that'll help supplement that.
Okay great.
And then just kind of thinking about the margin outlook from the low $3 40 range on a core basis going forward I believe around 35% of your.
Portfolios floating rate and I imagine most floors will be.
Not a factor.
Assuming the fed moves by half a percent.
Next month.
So just kind of how should we think about the progression of the core margin from here is it fair to just expect by the end of this year that we could get it to.
Core margin on the mid $3 53.
300, <unk> range or how are you guys kind of think about the cadence of the <unk>.
And then.
Over the next few quarters in that low $3 40 range this quarter.
Yes, I guess, that's the magic question right. So we are a little bit less asset sensitive today than we were as of 12 31.
The reason for that is number one but loan growth and putting that cash to work during the course of the quarter.
Are you roughly your numbers about right except for I think now we're about 67, 68% fixed with the rest being variable and some work some rate and then in late March we took a little bit of our asset sensitivity off the table and.
And we executed the receive fixed swaps on approximately $200 million of our fixed of our variable rate loans.
And we picked up.
<unk> 190 to 195 basis points in that trade. So we basically accelerated sort of eight rate increases.
So that took a little of our asset sensitivity off the table too so as I look out over the next quarter, we will pick up.
Let's call it three or four basis points from the swap, which will help offset the PPP fees that we earn income that we talked about earlier.
And then we're largely through our floors for the remaining of that portfolio and we could pick up a couple of basis points as bad as the fed moves that next 50 that we're all expecting.
So as you get through the year with sort of that same cadence if we do see another.
Couple of different 50 basis point rise it could be.
Roughly around $3 50, maybe a shade over that in core by the end of the year.
Okay, Great. That's super helpful. Thanks, Eric maybe just one last one on the fee income outlook, excluding mortgage which is a challenge across the industry.
Is your expectation outside of that line too.
<unk> growth just consistent with kind of what what we have.
<unk> been talking about in the last few quarters increased card.
Pending.
And just share gains there across your clients and then also wealth management I imagine would hopefully stabilize.
Equity.
Market valuations, hopefully stabilizing as well.
Yes, I think thats right.
Okay perfect I appreciate guys, taking the questions and all the color congrats on a great quarter.
<unk>.
Thank you.
And to ask again to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
Our next question comes from Manuel Novack of D. A Davidson.
Your line is open.
Hey, good morning.
Good morning.
What are some of that.
Guideposts are metrics, we should watch.
As you kind of create these fintech partnerships or continuing along the banking service.
Evolution.
Really focused on on balance sheet items fee income growth.
Customer number of customers and any color there would be helpful.
Yes, I think our focus is going to be around deposit gathering and.
And payment so interchange.
Where are sort of focused as I mean, we've got.
We're looking at a fintech right now on the loan side, but.
The loan the loan side will be to continue.
Diversify.
<unk> of our Fintech loan.
Partnerships.
Green Sky is a pretty big piece right now so one of the one of the things we'll be doing over the course of the next 12 months.
Enough other fintech that we're more diversified than we are today.
But.
Big focus on the banking as a service is going to be on the deposits and payment side.
Okay. That's helpful.
Maybe I missed it is there any change to your expectations for the Green Sky portfolio.
No no we think it will stay relatively up or down.
345% either way.
Depending on how the quarter goes we've sort of set our limit and we're about at our limit.
And kind of.
Modeling question that swap that you entered into that is that going to show up in your loan yields are at a different part of the average balance sheet. It will show up in loan yields.
Okay. That's helpful. I appreciate that.
And with kind of the swings in OCI and folks have been seen.
And have you seen that impact M&A discussions at all.
And kind of where are you.
Yes.
We're hearing about in your market.
Yes.
We're keeping an eye on it so our investment portfolio.
A decrease in fair value by roughly 48 $49 million during the course of the quarter. So we're keeping an eye on it.
It impacted our tangible book value by call it three 6% or so overall.
One of the things that helped us compared to some of the others in our industry is that we because it will strong loan growth. We haven't had as much a bigger percentage of our balance sheet and investments as some of our peers and then also we've got some forward starting swaps.
That allows us to get some funding on the liability side at pretty attractive rates right now and that increase in value is helping offset our investment securities portfolio. So we have a little bit of a hedge there thats helping us.
Yes, but we're keeping an eye on it pretty closely but don't really expect any major moves to try to address it or change it.
If everyone's keeping an eye on it and that kind of limiting.
M&A discussions do you feel like it's hurting at all.
Yes, I mean, we've been pretty clear that we're really not in M&A.
The World right now I mean, we're going to we're looking at small small acquisitions, we did a small wealth deal all cash last year, we're doing a small branch acquisition, which is all cash.
Yes, we're not looking at big M&A to use our stock today.
So.
From that perspective, not an issue.
It is just this is accounting stuff all of this comes back because we typically hold our bonds until maturity anyway.
And so this these losses for practically everybody you're going to come back unless you have to sell investments to fund loan growth.
And then you got to take losses, but we're not in that position.
So this will all come back.
Overtime.
Okay. That's great. Thank you very much.
Thank you.
Okay. So no further no additional questions at this time I would like to turn the call over to management for any closing remarks.
Yes.
Thank you I want to thank everybody for joining we had.
I think a really good quarter.
And look forward to talking to everybody next quarter.
Have a good weekend thanks.
This concludes today's conference call. Thank you all participating you may now disconnect.
Have a pleasant day and enjoy your weekend.
Yes.
Okay.
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