MSBI — Midland States Bancorp, Inc.

Summary of MSBI Q4 2022 Earnings Call

1. Key Financial Results and Metrics

• Net Income: $29.7 million, or $1.30 per share, which included a $17.5 million gain from the termination of interest rate swaps and $6.7 million in impairment charges.
• Core Earnings: Adjusted pre-tax pre-provision earnings were $33.2 million.
• Return on Average Assets: Increased to 1.31% from 1.18% in 2021.
• Return on Average Tangible Equity: Rose to 20.8% from 17.9% in 2021.
• Loan Growth: Total loans increased at a 7% annualized rate, primarily in the commercial portfolio, with Equipment Finance surpassing $1.1 billion.
• Asset Quality: Non-performing loans rose slightly, but net charge-offs were only 3 basis points of average loans.

2. Strategic Updates and Business Highlights

• Loan Portfolio: Continued focus on commercial and construction loans, with selective new loan production due to anticipated economic weakening.
• Deposit Growth: Experienced double-digit growth in Eastern Illinois and St. Louis markets, although total deposits decreased slightly due to shifts in commercial depositors to interest-bearing accounts.
• Wealth Management: Assets under administration increased by $150 million, contributing to a slight rise in revenue.
• Banking-as-a-Service (BaaS): Plans to build partnerships focused on deposit gathering, with a careful selection process for new partners.

3. Forward Guidance and Outlook

• 2023 Expectations: Anticipated challenges due to potential recession; however, management expects to maintain profitability with a conservative approach to loan production.
• Loan Growth: Uncertain, but expected to continue due to a productive commercial banking team and growth in Equipment Finance.
• Net Interest Margin: Aiming for stability, with potential pressure from rising deposit costs but optimistic about asset repricing if interest rates stabilize.
• Credit Quality: Expecting continued good performance in the loan portfolio, with provisions likely to be slightly higher than the current quarter but not dramatically so.

4. Bad News, Challenges, or Points of Concern

• Economic Environment: Concerns about a potential recession impacting loan growth and credit quality.
• Deposit Costs: Increased competition for deposits leading to upward pressure on costs.
• GreenSky Partnership Exit: Planned exit could reduce loan balances by $100 million to $300 million, impacting overall loan growth.
• Non-Interest Income: Potential volatility due to the sale of the commercial mortgage servicing rights portfolio.

5. Notable Q&A Insights

• Loan Growth: Management acknowledged uncertainty regarding loan growth due to the GreenSky exit but remained optimistic about commercial and equipment financing.
• Fee Income Outlook: Expected to grow in line with wealth management initiatives, offsetting losses from the MSR sale.
• Margin Outlook: Management indicated that while there may be near-term pressure, they foresee stability in net interest margins if economic conditions allow.
• Credit Provisioning: Management expects provisions to be slightly higher than the current quarter but remains focused on minimizing charge-offs through improved underwriting practices.

Overall, while Midland States Bancorp demonstrated strong financial performance in Q4 2022, it faces challenges from economic uncertainties and competitive pressures that could impact future growth and profitability.