Midland States Bancorp, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 Midland States Bancorp, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's call is being recorded. If you require additional assistance, you may press star then 0 to reach an operator. I would now like to hand the call over to Tony Rossi. Please go ahead.

Thank you, Michelle. Good morning, everyone, and thank you for joining us today for the Midland States Bancorp third quarter 2020 earnings call. Joining us from Midland's management team are Jeff Ludwig, President and Chief Executive Officer, and Eric Lemke, Chief Financial Officer. We will be using a slide presentation as part of our discussion this morning. If you have not done so already, please visit the webcast and presentations page of Midland's Investor Relations website to download a copy of the presentations. 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. 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 third quarter. Our reported results reflected the one-time charges related to the branch and facilities optimization plan that we announced last month, and I will talk more about that plan a little later in the call. Excluding those charges, we delivered a strong performance this quarter in light of the continuing challenges presented by the ongoing pandemic, with adjusted earnings of $12 million, or 52 cents per diluted share. This performance was driven by solid balance sheet growth, significant contributions from many of our sources of non-interest income, and disciplined expense management. While overall economic activity remains muted due to the pandemic, we are effectively targeting those areas of the economy where we are seeing healthy loan demand. As a result, we were able to generate annualized loan growth of 8.4% during the quarter. and we continue to see positive trends in gathering core deposits, which resulted in 6.8% annualized growth in our total deposits this quarter. Looking at asset quality in general, we were pleased with the trends that we saw during the quarter and the improvement we saw in the health of most of our borrowers. This was most notably in the decline we saw in deferred loans, as the vast majority of these loans returned to regular payment schedules during the third quarter. We did see an increase in nonperforming assets, but this was largely driven by three commercial real estate relationships. These were three credits that were adversely graded prior to the pandemic, and with the downturn in the economy, their conditions deteriorated to an extent where they moved to nonaccrual status. Outside of these loans, we didn't see other migration to nonperforming during the third quarter. Given the uncertainty of the pace of the economic recovery, we continued to add to our loan loss reserves, resulting in our allowance for credit losses increasing to 1.07% of total loans. As we have throughout the year, we continue to benefit from the diversity of our business model and our ability to generate significant contributions from a variety of areas. Wealth management continues to provide a stable source of reoccurring revenue. Our equipment finance group had another outstanding quarter, generating the second highest level of originations in its history, just behind their performance last quarter. And our residential mortgage group continues to effectively capitalize on the demand for refinancing and produced a strong quarter of loan originations and gain on sale income. Aside from our financial performance, this was a very productive quarter for the company, as we made significant progress in our work to optimize our operating model and improve our ability to deliver consistent earnings growth in the future. This included the sale of our commercial FHA loan origination platform and the announcement of a series of planned branch and corporate office reductions, which I will discuss in more detail on the next slide. Moving to slide four. I'll start with the review of our sale of the commercial FHA loan origination platform to Dwight Capital. We were able to structure this transaction in a way that will eliminate the volatility that this business had on our overall financial performance while maintaining some of the positive benefits for Midland. With the disposition of the origination platform, we have reduced the expenses associated with this business by $8 to $9 million per year. At the same time, we maintain the servicing portion of the business that provides a meaningful source of low-cost servicing deposits and contributes approximately $300,000 in revenue per quarter. As a nationwide mortgage banking firm and one of the largest originators of commercial FHA loans, the White Capital has significant funding needs, and the relationship that we have formed as part of this transaction will provide Midland with the opportunity to provide warehouse lines of credit, and bridge loans that will generate interest income for the company. And in fact, the warehouse line of credit extended to Dwight was one of the contributors to loan growth in the quarter. So we will be able to offset some of the lost revenue from the origination platform and do it in a way that is more profitable for Midland. And with the size of our commercial FHA operation now much smaller, we will be able to focus our attention and resources on more profitable areas of the company. While there was no significant gain on the sale of this transaction, it did result in a $3 million tax charge recorded in the third quarter. Turning to the branch and facilities optimization plan that we announced, we felt that the pandemic presented an opportune time to make a comprehensive evaluation of all of our real estate holdings. Clearly, the pandemic has accelerated the shift towards digital banking, and we determined that there were a number of smaller branches that it no longer made economic sense to continue operating. We identified 13 branches which represented 20% of our network that could be consolidated. Four of these branches have been closed since March due to the pandemic. So customers have already made adjustments to use other branches. And most of the branches being consolidated are located within three miles of another Midland branch. So we expect a relatively smooth transition for our customers and only a modest amount of deposit attrition. We also identified five other branches that we will be renovating and upgrading to reduce their size and better utilize those facilities to serve retail and commercial customers. In addition to the branches, we are exiting three corporate locations, including facilities in St. Louis and Denver. We expect this plan to reduce operating expenses by approximately $6 million in 2021. Taken together with the sale of the commercial FHA loan origination platform, we believe the collective impact of these actions will help drive further improvement in our efficiency ratio and provide more operating leverage as we continue to grow our balance sheet in the future. Moving to slide five, we'll provide an update on our PPP efforts and the impact that these loans had on various line items in the third quarter. we had approximately $278 million of PPP loans on our balance sheet at the end of the quarter. We have now started the process of helping our clients apply for forgiveness. Through October 9th, we have submitted approximately $72 million in loans for forgiveness and had received approval from the SBA on a little more than $3 million. While it is difficult to predict how quickly the SBA will start approving more loans, At this point, we are expecting 25 to 30 percent of our PPP loans to receive forgiveness during the fourth quarter, with the remainder occurring sometime in 2021. Turning to slide six, we'll provide an update on our loan deferrals. At September 30th, we had $279 million in loan deferrals, which represented a decline of 69 percent from the end of the prior quarter. our loan deferrals now represent just under 6% of our total loans. Approximately $238 million are full payment deferrals, with the remainder being interest-only deferrals. The largest contributor to our deferrals continue to be the hotel-motel sector, which we will speak in more detail in just a bit. At this point, I'm going to turn the call over to Eric to provide some additional details around our third quarter performance. Eric.