Midland States Bancorp, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Midland State Bancorp's fourth quarter earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference has been recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Tony Rossi of Financial Profiles. Thank you. Please go ahead, sir.

Thank you, Brandy. Good morning, everyone, and thank you for joining us today for the Midland States Bancorp Fourth 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 applied 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 the non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release, available on the IR 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 fourth quarter. Our reported results reflected one-time charges related to the prepayment of FHLB advances. Excluding those charges, we delivered another strong performance this quarter despite the continuing challenges presented by the ongoing pandemic. We had adjusted earnings of $12.5 million, or $0.54 per share, which included $3.2 million impairment of commercial mortgage servicing rights. Excluding this impairment charge, we also had adjusted pre-tax, pre-provision income of $28.9 million. This represents an adjusted pre-tax, pre-provision return on average assets of 1.69%, which reflects the strong overall level of profitability that we are now producing. The FHLB prepayments were part of an overall restructuring of our FHLB advances that we did to better match our near-term funding needs and reduce our interest expense. We prepaid $114 million of longer-term advances that had a weighted average rate of 2.1%. These prepayments resulted in a one-time charge of $4.9 million that we expect to earn back in approximately three years. By prepaying these advances, we will reduce our interest expense by $2.3 million in 2021, which should positively impact our net interest margin by two to three basis points. During the quarter, we also added about $200 million in short-term FHLB advances. So despite the prepayments, we are showing an overall increase in FHLB borrowings. These low-cost, short-term borrowings are being utilized to fund the expansion of credit lines we provide to our commercial FHA lending clients. The strong performance this quarter was driven by a continuation of a number of positive trends we are seeing over the past several quarters, most notably a higher level of loan growth that helped drive an increase in our net interest income. Our total loans increased an annualized rate of 13.2% in the quarter as our equipment finance group continues to perform well. and we saw greater utilization of warehouse lines provided to commercial FHA lenders. Due to the nature of the warehouse lines, we'll see some fluctuation in these balances going forward. In addition, we saw improved demand and pricing on commercial real estate loans, which enabled us to grow our CRE balances for the first time in quite a while. On the liability side of the balance sheet, we continue to see an improvement in our deposit mix, and total deposits increased at an annualized rate of 5.6%, driven largely by continued increases in core deposits. This resulted in a further reduction of our cost of deposits. With the strong loan demand, we were able to redeploy some of our excess liquidity into higher-yielding earning assets. Combined with our lower cost of deposits, this helped us to offset lower yields on earning assets, and keep our net interest margin stable during the quarter, excluding the impact of PPP-related income. Looking at asset quality, we continue to be encouraged by the overall trends we are seeing. We were able to successfully resolve some of our larger long-term problem loans during the quarter with no meaningful additional write-downs required. Combined with minimal inflow of new loans into non-accrual, our total non-accrual loans declined by about 20%, from the end of the prior quarter. We continue to see a decline in our level of deferred loans, as well as more borrowers returning to either full or partial scheduled payments. We are closely monitoring these borrowers and receive updates on their business trends and financial performance. And as conditions improve, we continually put new terms in place that will support these borrowers while their business recovers, while also moving them closer to resuming their full scheduled payments. While we are seeing encouraging trends, there's still a great deal of uncertainty regarding the timing of a stronger economic recovery. In light of this, we continue to build our reserve coverage, which now represents 1.18% of total loans and 112% of non-performing loans. Moving to slide four, we'll provide an update on our PPP efforts and the impact that these loans had on various line items in the fourth quarter. Through the end of the year, we had about $93 million of our PPP loans receive forgiveness. And through January 25th, that number is now up to $116 million. This brought our total amount of PPP loans down to $184 million at the end of the year. With the loan forgiveness accelerating, our fee recognition on PPP loans we recognized 3.1 million in fees during the fourth quarter, up from 1.1 million in the prior quarter. This left 4.3 million in fees remaining to be recognized from the first PPP program. In terms of the new PPP program, we have started taking applications, and through January 25th, we had received applications for approximately $60 million in loans. Turning to slide five, we'll provide an update on our loan deferrals. At December 31st, we had $209 million in loan deferrals, which represented a decline of 25% from the end of the prior quarter. Our loan deferrals now represent just about 4% of our total loans. As I mentioned, we are moving more borrowers to at least a partial payment of their deferred loan. As a result, the amount the amount of loans on full payment deferral dropped from $238 million at the end of the last quarter to $106 million, while loans with interest-only deferrals increased to $103 million from $41 million last quarter. The largest contributor to our deferrals continues to be the hotel-motel sector, while one area that we have seen significant improvement in is assisted living facilities. which now do not represent a meaningful portion of our total loan deferrals. At this point, I'm going to turn the call over to Eric to provide some additional details around our fourth quarter performance. Eric.