Midland States Bancorp, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021 Midland States Bancorp earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. If you ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your host, Tony Rossi of Financial Profiles. You may begin. Thank you, Kevin.

Thank you, Kevin. Good morning, everyone, and thank you for joining us today for the Midland States Bancorp Third 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'll 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. Before we begin today, I have some sad news to share. Last week, we lost a beloved member of the Midland family when Leon Holschbach, our former president and CEO, passed away after a long battle with ALS. Besides being the driving force of an unprecedented period of growth that turned Midland into one of the largest community banks in Illinois, Leon was a great friend and mentor to so many of us at the company. His energy, enthusiasm, and heart helped build the Midland culture that serves as our foundation today. We were fortunate to have him as a friend and a colleague, and he will be deeply missed. Now, moving to our usually prepared remarks, I'm going to start on slide three with the highlights of the third quarter. We executed well and delivered a strong quarter driven by positive trends across most areas of our operation. Everything that we have been working on over the past couple of years, from adding more banking talent to streamlining our cost structure to optimizing our funding sources, is generating the desired results. We are seeing stronger, more diversified loan growth, a decline in our cost of funds, and an increase in our net interest margin. Higher levels of reoccurring fee income and improving efficiencies. All of this combined to produce another strong quarter of earnings. We generated net income of $19.5 million, or 86 cents per diluted share. And our core earnings power continued to improve as our adjusted pre-tax, pre-provision income was $28.4 million in the third quarter, an increase of 5.2% from the prior quarter. Throughout this year, we have talked about our progress in adding new commercial banking talent, particularly in higher growth markets in northern Illinois and St. Louis. Combined with a steady increase in loan demand as the economy continues to strengthen, the new additions are helping to drive a higher level of organic loan growth. Excluding PPP loans, our total loans increased at an annualized rate of 12.3% in the third quarter. The loan growth was well balanced with increases in commercial, commercial real estate, and consumer portfolios, offsetting declines in PPP loans and residential real estate loans. When both commercial FHA warehouse lines and PPP loans are excluded, our total loans increase an annualized rate of 8.2%, which is well above the rate we have seen over the past several years, largely due to improved growth in commercial lending. This is attributable to a number of factors. We have increased our focus on this area, which has resulted in a higher level of productivity among our existing banking teams. We are getting good contributions from the new bankers we have added over the past year, and we are benefiting from our increased presence in higher growth markets. As a result, conventional C&I lending is becoming a stronger complement to our equipment finance group, which has been the primary driver of commercial loan growth over the past few years and which continues to generate solid growth. We are also effectively generating full banking relationships with commercial clients, which is positively impacting our deposit mix. During the third quarter, our total deposits increased 7.8% from the end of the prior quarter, with all the growth coming in non-interest bearing and low-cost checking in money market accounts. A portion of the growth was attributable to higher balances of commercial FHA servicing deposits, while the remainder was largely from new and expanded relationships with our commercial clients. The improved deposit mix, combined with the elimination of higher cost funding sources last quarter, helped drive an 11 basis point decline in the cost of our average interest-bearing liabilities. This had a positive impact on our net interest margin as it increased five basis points from the prior quarter. With the more productive commercial banking team we have built, and growth in our reoccurring fee income, most notably in wealth management as a result of the ATG Trust Company acquisition, we are generating more revenue while also keeping our expense levels relatively stable. This is enabling us to realize more operating leverage as we continue to grow the bank and our efficiency ratio improved to 58.8% in the third quarter from 60.2% in the prior quarter. Another area where we are seeing positive trends is asset quality. We are continuing to successfully resolve non-performing loans while the inflow of new non-performers is slowing. As a result, our total non-performing loans declined by 11% from the end of the prior quarter, while our net charge-offs were down by 26%. With the improved asset quality, we were able to release a little more of the reserve that we had built up during the height of the pandemic. Moving to slide four will provide an update on our PPP efforts and the impact these loans had on various line items in the third quarter. As the forgiveness process continued, our PPP loans declined by about $64 million and brought our total balances to $82 million at the end of the third quarter. We recognized $2.2 million in fees during the third quarter, up a bit from the $2 million that we recognized in the prior quarter. As of September 30th, we had $3.5 million in fees to be recognized. Turning to slide five will provide an update on our loan deferrals. During the third quarter, we had a steady flow of borrowers being able to return to regular scheduled payments upon the expiration of their deferral period. As a result, our total deferrals declined by 68% from the end of the prior quarter, with just $34 million remaining at September 30th, or less than 1% of total loans. Of the remaining deferrals, almost all are now making at least a partial payment. At this point, I'm going to turn the call over to Eric to provide some additional detail on the third quarter.