Midland States Bancorp, Inc.

Good morning, ladies and gentlemen, and welcome to the second quarter of Midland State's Bancorp, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to turn the conference over to your host, Mr. Tony Rossi. Please go ahead.

Thank you, Deb. Good morning, everyone, and thank you for joining us today for the Midland States Bancorp Second Quarter 2021 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. We're going to start on slide three with the highlights of the second quarter. We continue to see the higher level of profitability that we targeted through the strategic initiatives we implemented over the past couple of years to focus more of our attention and resources on higher return businesses, creating a more consistent revenue mix, and improving efficiencies. On a gap basis, we generated net income of $20.1 million, or $0.88 per diluted share. As we announced last month, we had a number of items that impacted our second quarter results both positively and negatively. These include a tax benefit related to a settlement of a prior tax issue stemming from the treatment of gains on FDIC-assisted transactions, the professional fees we incurred in pursuing the tax benefit, and an FHLB advance prepayment penalty. When these items are excluded, we had adjusted earnings of $19.8 million, or 86 cents per diluted share, which still represents the highest quarterly earnings in the history of the company. We are also seeing improvement in our level of returns, with return on equity coming in at 12.6% and return on tangible common equity coming in at 17.9% for the quarter, both of which were higher than the prior quarter and significantly above the levels that we have historically generated. The improved profitability has enabled us to make significant progress on our goal to strengthen our capital ratios. During the second quarter, our tangible common equity ratio increased 45 basis points and is now back above 7%. While loan demand is improving, we continue to have significant excess liquidity. So we took the opportunity to use a portion of the excess liquidity to eliminate some of the higher cost funding sources, including an $85 million long-term FHLB advance that had an interest rate of 2.54%, and $31 million of sub-debt that had an interest rate of 4.54%. In aggregate, the elimination of this higher cost funding will reduce our interest expense by $3.6 million annually, and have a positive impact on our net interest margin of approximately 10 basis points. With economic conditions steadily improving, we are seeing higher levels of loan demand, which positively impact our production of equipment finance, commercial real estate, and construction loans during the second quarter. And we continue to utilize our GreenSky partnership to give us the flexibility to add high-quality loans with attractive risk-adjusted yields to offset runoff we are seeing in other portfolios, most notably our residential real estate portfolio, where we continue to see a high level of refinancing activity. Excluding PPP loans and commercial FHA warehouse lines of credit, our total loans increased at an annualized rate of 6%, which was at the high end of our expected range. We are seeing a strong increase in non-interest income, which increased nearly 18% over the prior quarter and accounted for 26% of our total revenue. A portion of the increase is attributed to more debit cards that we are issuing through our online account opening platform. The increase in debit card issuance combined with the increase in general economic activity is driving a higher level of interchange fees. During 2019, the last normalized year, our interchange revenue was typically in the range of about $3 million per quarter. During the second quarter of 2021, we had $3.8 million in interchange revenue, which is a run rate that will result in more than $3 million per year in incremental revenue. This is just one of the areas where we are seeing a strong return on the investment we have made in expanding and enhancing our digital banking capabilities. Our non-interest income was also positively impacted by a 10% increase in wealth management revenue, which was largely due to the one-month contribution we received from the ATG Trust Company after completing this acquisition in the beginning of June. This acquisition brought our assets under administration to more than $4 billion and our wealth management revenues to $6.5 million for the quarter. And our wealth management revenue should further increase as we get the full quarter impact of ATG and also begin leveraging their strong referral sources to enhance our business development efforts. Moving to slide four, we're provided an update on our PPP efforts and the impact that these loans had on various line items in the second quarter. As the forgiveness process continued, our PPP loans declined by about $65 million and brought our total balances to $147 million at the end of the second quarter. We recognized $2 million in fees during the second quarter, down a bit from the $2.1 million that we recognized in the prior quarter. As of June 30, we still had $5.6 million in fees to be recognized. Turning to slide five will provide an update on our loan deferrals. As you may recall, we had a bit of an increase in loan deferrals last quarter as we granted additional three-month deferrals to help certain hotel borrowers get through the soft part of their year. Most of those deferrals have now expired, while we have saw a significant number of borrowers resume scheduled payments. This resulted in a 51% decrease in total deferrals, with just $107 million remaining at June 30th. or 2.2% of total loans. And borrowers have been able to make their partial payments with 79% of the loans deferred making interest only or some other form of partial payment up from 40% at the end of the prior quarter. At this point, I'm gonna turn the call over to Eric to provide some additional details on the second quarter performance.