MSBIP — Midland States Bancorp, Inc.

Summary of Midland States Bancorp (MSBIP) Q4 2022 Earnings Call

1. Key Financial Results and Metrics:

• Net Income: $29.7 million, or $1.30 per share, including a $17.5 million gain from the termination of interest rate swaps and $6.7 million in charges related to commercial mortgage servicing rights and real estate impairment.
• Core Earnings: Adjusted pre-tax pre-provision earnings of $33.2 million.
• Return on Assets: 1.31%, up from 1.18% in 2021.
• Return on Tangible Equity: 20.8%, up 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: Slight increase in non-performing loans; net charge-offs at just 3 basis points of average loans.
• Capital Ratios: All increased except total capital ratio, which decreased due to $40 million subordinated debt payoff.

2. Strategic Updates and Business Highlights:

• Continued focus on profitable growth and operating leverage while maintaining strong credit quality.
• Significant loan growth in Eastern Illinois (22%) and St. Louis (40%) markets, driven by enhanced business development capabilities.
• Plans to exit the GreenSky partnership to improve liquidity and capital, with expected reductions in loan balances between $100 million and $300 million.
• Initiatives to build a Banking-as-a-Service (BaaS) platform aimed at deposit gathering, with a selective approach to new partnerships.

3. Forward Guidance and Outlook:

• 2023 expected to be challenging due to potential recession; however, management anticipates continued strong financial performance and profitability.
• Loan growth forecast is uncertain due to economic conditions, but there is optimism for growth in commercial banking and Equipment Finance.
• Plans to maintain expense management discipline while leveraging investments in banking talent and technology.
• Anticipated stability in net interest margin, with potential for expansion if interest rates moderate.

4. Bad News, Challenges, or Points of Concern:

• Economic uncertainty poses risks to loan growth and overall financial performance.
• Slight increase in non-performing loans raises concerns about asset quality, particularly in commercial real estate.
• Decline in total deposits attributed to shifts in commercial depositors moving to interest-bearing accounts, indicating competitive pressures.
• The termination of interest rate swaps may impact future earnings as the company adjusts to a more neutral interest rate sensitivity.

5. Notable Q&A Insights:

• Management expressed caution regarding loan growth, indicating a more selective approach to new loan production across the portfolio.
• There is an expectation for a modest increase in loan loss provisions, although management aims to keep it lower than previous quarters.
• Discussions highlighted the potential for margin stabilization, with a focus on growing net interest income despite pressures from rising deposit costs.
• Management emphasized the importance of maintaining a balanced loan-to-deposit ratio, ideally closer to 90%, while acknowledging current levels near 100%.

Overall, Midland States Bancorp reported strong financial performance in Q4 2022, with record earnings and solid loan growth, albeit with caution regarding future economic conditions and their impact on growth and asset quality.