MSBI - Earnings call transcript Q3 2019 | Midland States Bancorp, Inc.

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Operator

Ladies and gentlemen, and thank you for standing by and welcome to the Q3 2019 Midland States Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

to of conference Financial like speaker, to now Rossi Tony Profiles. would hand over the your I Please go ahead sir.

Tony Rossi

quarter Midland Thank you, joining Bancorp the for thank and call. third States Sidney. Good us morning, today everyone, XXXX earnings you for

are Joining Ludwig, Chief Spring, Accounting President Don Jeff Officer. us and management Officer; and Midland's Chief from team Executive

We discussion this using slide as presentation a be morning. will part our of

a Webcasts not Relations results & open so the visit of download Presentations website questions. for of have already, discuss done the you up The the If and presentation. Investor page Midland's to will will management copy the please call then team we quarter third

Before such factors that are the cause different implied obligation actual call results expressed call. financial uncertainties. performance we that could future forward-looking or and to you by statements the update involve on Various like of available SEC These forward-looking factors be to the this Company Company's remind Midland during States future website. any risks contains Company's condition begin, from disclaims statements. and Bancorp the conference with materially made The I'd any to results forward-looking in respect discussed filings, any to statements are which

quantitative available to release Additionally, to non-GAAP to on for supplement, be but the the the the GAAP which contains management not information may reconciliation the press well are as website refer financial substitute measures. discussed GAAP most measures, non-GAAP intended measures. other and The of to today, directly as the comparable

Jeff? like the to I'd over turn Jeff. to that, with And call

Jeffrey Ludwig

our with We highlights start income an earnings in we by per includes On adjusted call. per generated on share. share, and basis, that of Midland the $X.XX everyone. morning, Slide earnings am I States per impacted quarter. expense Good going acquisition to $X.XX $X.XX integration which net had earnings share. third in the to the X Welcome

of complete days hard quarter over after conversion then HomeStar XX our was systems just weekend. very with little in the the Financial Group transaction closing last of mid-July closing. acquisition was to the systems this of the conversion months in completed deal worked after announced and completed highlight the three a The teams Both

I would for teams to adding their to franchise. convey efforts my thanks to like the HomeStar exceptional our in

Our quarter transaction, attractive of the an impact ratio. the low-cost adding reduced that reflected loan-to-deposit our third deposit our liquidity that base results deposits initial of this benefits of cost provided mainly excess lowered and positive

our from Kankakee, suite larger see and as provide. fully and transaction We offer clients additional can this savings expect benefits new the we in Midland capacity that projected services to the broader lending and realize cost products of

priorities. standpoint, organic an of another on our quarter From solid execution we had strategic

to risk-adjusted prudently that our manage and on We yields. more focus areas loan continue attractive provide production

high-quality group an by continues million finance portfolio equipment third generating Our of outstanding in opportunities to another $XX and job balances lending quarter. grew our do this the in

we and loans. Over the the generator are real our particular particularly when other seeing asset a during increased portfolio a great banks structures valuable being has has finance commercial aggressive past term and – been has XX% offered for company. equipment been for and extremely pricing commercial estate by time This year,

third time continue in of from million X.X% our core side quarter, intentional the we This from basis, were the million of a organic growth balance brokered perspective. of deposits. had very the deposit $XXX organic quarter other the total the On gathering an sheet, good quarter. core On run-off the end deposits a in $XXX while we of prior or resulted deposit up

resulted the in gathering the even and core deposits improved addition third quarter HomeStar of improvement. success The our an had in mix more deposit we

down organization. the to This of another from the XX.X% efficiency ratio additional efficiencies quarter had drive throughout XX.X% expense and quarter. third in prior strong the in driving also management quarter our We helps

issued quarter, took existing our put also significant During the We used us refinance capital longer-term million management. position of to enhance debt debt our some to $XX in expenses subordinated steps million to a subordinated with notes of $XXX and repay less we senior funding. third that we and

with addition, repurchase our our common Board XX% capital previously dividend annually, track for of to least Combined million at with shareholders. by another In our of of stock. as the up repurchase Directors returning provides announced, stock $XX increasing long program to the authorized of our us tool record

Now Don? to financial quarter. performance turn I to our more am on call the over to details going the in Don walk through

Donald Spring

Thanks, X. to on our start Jeff. with am loan Slide portfolio I going

Our of added through total loans was end $XXX the loans increase to quarter. prior of outstanding increased the acquisition. the attributable $XXX million HomeStar million the from

our million organic $XX in increased by commercial basis, outstanding The in from of the quarter. an balances X.X% loans up primarily were equipment of On end total the or driven which the $XX came finance or from total leases billion business, our by the portfolio driver growth and primary loans XX.X% prior growth this portfolio.

Turning in strong million the organic to quarter, to was of deposits. in X.X% or we of deposits quarter $XXX the million $X.XX an deposits growth from third mentioned, the billion by end at end increase prior quarter. million of driven acquisition, the Total had due increase the also on majority Slide although of HomeStar were of The core the deposit X. increase as the approximately $XXX we Jeff the $XXX had

implement strategy improve core in us to funding. deposit enabled liquidity continue reduce to portfolio deposit management our gathering reposition non-core our success our and our to to Our

deposits the balances of deposits represented During brokered of time deposits, at September million. time XX. the HomeStar’s addition another total just this deposits X% of With by $XX and run-off, third intentionally quarter, we our reduced brokered

on end of under $XXX The administration. under At Slide was the $X.XX X. increase end of HomeStar’s to primarily of Turning increase to Management quarter. billion assets from our the Wealth were quarter, with prior the of addition million assets due an the administration

in and the from prior the HomeStar. was to from X% quarter increased the to an which fees, revenue million, Management Wealth state $X contribution Our increase attributable

net our X. income net Slide interest to margin Turning and on interest

from Our net quarter interest income the the to HomeStar. contribution due from increased X.X% prior primarily

impact interest the income, the in margin as were accretion lower yields. net quarter deposit of relatively unchanged earning costs decline a prior asset our by from essentially offset was Excluding

The the to that costs to lower likely the impact deposits. of a Exclusive our was of to of will due deposit decline rates as down recent move primarily of HomeStar’s in deposit result believe started be cuts. during impact we cost rate see to we and cost able HomeStar, continue plateau it’s third we quarter the the

average some lower on focus rate average of us portfolio renewed that continue attractive to on a risk-adjusted the environment, loans, the as yield yields seen result to to while accretion new more excluding rate and overall our exceed have we declines in Moving loans our income. on loans enabled add the our

loan or the was higher average third the rate our income basis overall than excluding During quarter, on average the X.XX% XX renewed loan our and points accretion on loans yields new portfolio.

neutral sheet Looking standpoint. continue through a balance to ahead, we relatively sensitivity be

subordinated of debt will points until cost issued average we June the cost temporarily our debt borrowing our raise we in by subordinated higher XXXX. However, new resume seven basis

will some the expect to remain temporary excluding to net income cost apply pressure the stable although of modest the average accretion borrowing We forward, to relatively increase going margin continue in downside. our impact interest our

quarter expecting the our of impact terms XXXX. $X.X loans, we of the are fourth in In not prepayments accretion on does of million scheduled include income, acquired which

income income income income our non-interest X, unchanged at contributor wealth non-interest our million. prior our largest to relatively to to the million for recurring management of The that to remains was from fee our Moving Slide quarter generate this single on large target and total $XX.X source the business. $X non-interest we revenue continues

We highest strong had level with rate million in FHA of our a our quarter loss $XXX commitments, two years. production business loan quarter in commercial in this

to high However, rights and we impairment this as last returned cost, we premium, to gain normalized these and of items in unusually mortgage after had both business $X.X more unusually million levels. quarter’s low indicated servicing

result, in FHA within $X excluding impairment million $X.X came range we million a the to at our the the $X As revenue are and per commercial million revenue of quarter. quarter for in

recognized X. efficiency in and Turning of to We $XX,XXX. the acquisition million incurred held-for-sale also Slide and gain MSR's expense on $X.X and ratio a our in third quarter, expenses integration on

which expense by of these operations. primarily Excluding our increased linked-quarter adjustments, due addition HomeStar’s was the X.X% to basis a on non-interest

previously last quarter. strong XX.X% in XX.X% combination management higher discussed expense with that Jeff revenues from ratio to The efficiency lowered our

XX, to our Moving we Slide asset look quality. at

Our portfolio stable this significant loans. additions generally non-performing to was quarter new with no

them As to moved non-performing with had net we the a against third in loans. non-performing number in reduction indicated charge-offs of a call, reserves elevated on our quarter in resulted specific stood which loans charge-offs corresponding existing last that

end $X.X dropped total of while in to provision the of represented reserves net from loans loans million for million; non-performing an average X.XX% points quarter. at of from losses related the XX an non-performing of charge-offs recorded specific in our We Our $X.X of established the to loan existing X.XX% loans a the loan. third last quarter provision was increase basis

million $X.X was we of underlying appraisal data recent on a result collateral. received additional that the This

brought accounted of credit basis basis allowance marks and XX total quarter points. our provision September to XX, of The third as points loans XX for our another

to With Jeff. back call Jeff? turn that, the over I'll

Jeffrey Ludwig

Don. Thanks,

with wrap Slide some our will outlook. on XX comments up We on

focus synergies As on integrating and projected for be that acquisition we the on will XXXX we finish HomeStar our all acquisition. capitalizing fully primary out the this

start have the completed costs on all Now to in faced system the have are XXXX. of that we we conversion, by the track

We branch continually focus efficiencies our the that on continue assess company. in we changing to light driving as network throughout of And customer greater needs. process, part of

of put customer minimally two identified part from consolidated acquisition branch additional be service. to closed efficiency and have to Midland integration, be the that next year. addition one branch the areas can These branches branches disruption consolidations as other consolidated position in improvements with three will that our will be HomeStar can expected In footprint realize other we us that of HomeStar to in

quarters. the In don’t over meaningful with growth terms see trends experienced areas We change of to attractive be low-single-digit we loan the yields. the expect coming growth from any few have the expect in primarily that risk-adjusted range in production, past loan more to still generate we

on strong have and we further drive HomeStar about as from our strategic XXXX growth the we earnings accretion to the to improvement realize good efficiencies. in acquisition priorities, earnings continue execution we With and our ability additional feel the realize

be call. With the have. that, answer happy open any might we'll you questions Operator, to

Operator

Andrew from comes first [Operator with question Liesch Instructions] Sandler Our O'Neill.

is open. line Your

Andrew Liesch

Good guys. morning

Jeffrey Ludwig

Andrew. morning, Good

Andrew Liesch

here question liquidity on A loan and the growth.

inflows HomeStar a well. liquidity good good and base the then deal added as to deposit So,

interest the about sound much like loan a So, it but much, near down thoughts what are Or the operating doesn’t you ratio that towards your driving this loan-to-deposit with back up have comfortable more in stepping XXX%? are on you XX%, too level? growth

Jeffrey Ludwig

in prior at operating I comfortable XXX%. were above we Yes, When on end probably we probably, more will probably, of is like a under a XXX% on quarters, so, operate a and I to am bit think we XXX% be and under are of where that’s the little higher going quarter-to-quarter. again, would the want number fluctuate we little again, it depending ideally what’s to XXX% probably will a that on where

number off deposits last improves be We’ve over that or broker which could lowers quarters, that paying actually been the ratio That lower. several ratio.

So, we the than today thing year a I on is, sheet lot have we more think ago. good did flexibility a the balance

lot ratio the non-core lower and on A liquidity, more sheet. a balance loan-to-deposit funding lower

think, to growth that. that sense, we be are and loan forward we So, well going able we’ll see I positioned on as capitalize makes

Andrew Liesch

Is pretty then good curious just driving that that was core generated anything growth? was I success And there the just some quarter. You deposit that? on what this inflows, had Okay. unique

Jeffrey Ludwig

A things. couple

We are campaigns. deposit some running

the the we are running We’ve is some there. on traction front. we are as taxes. commercial with are seasonal municipalities in calling are there inflow – I and And new customers there to then, on and think probably are starting market campaigns bankers products introduced money we seeing good Our some some side get in collecting getting that

times. focused flow had little that gathering servicing really loan-to-deposit company, on and of as that in deposits deposit bit a an area, overall, good uptick comes money very and ratio. the a goes deposit kind of But which We lowering at saw we

and quarter level good deposit good So, of see it that growth, so. was really to it’s a core

Andrew Liesch

step I’ll Great. back. Certainly.

Operator

question And McEvoy Terry next Thank our you. comes with Stephens. from

Your line is open.

Terence McEvoy

Hi, everyone. thanks. Good morning

Jeffrey Ludwig

Terry. morning, Good

Terence McEvoy

expect assuming The margin behind FED going the cut commentary cut, what would margin interest you that and was let’s do was being another forward, say if the were XX rate not, basis about with stable if statement, points? you and your the to I wondering

Jeffrey Ludwig

react down on cuts then Yes, offset margin. with to so rate we to on But able beginning rates do are continue cuts begin we’ll deposit the couple to our impacts. the of little to we are move that initially forward. a bit to going first The that deposit the put pressure of some and rate side

that sheet the Our on happen. loans rate those cuts books some has move when balance

a a lot percentage probably than other companies. smaller it’s But of

able So, and work to I the sure that’s the cut being on for pressure think on quarter than able impact work time, over maybe able pressure the little books be should – to to work We out margin. rate will early. other we sub it. through on through be the rate through be two or a these put put debt a But another of little some going cuts to

Terence McEvoy

branch maybe as the And reductions happening, month deal? once say on What first at expense and expecting. just I get with follow-up quarter HomeStar full third least the are well as benefits a I the expenses, was I better your Okay. thoughts of then, just fourth you than on and conversion the the quarter the would guess, this question trends then earlier quarter the are

Jeffrey Ludwig

I any next quarter down continue this that say quarter. expenses so and as adjusted current what away be basis is, to cost the last system into but and begin impacted trend don’t targets, cost to fully on will specific people the will have and go quarter an weekend I conversion in Yes, the happened will

So, trend give that well consolidations you will continue a next of without in number are to branch as and improvement that we hit number, specific on quarter doing year that more the some additional, line. And the expense then giving will us first the additional down.

Terence McEvoy

Jeff. Understood. Thanks,

Operator

comes And you. Perito KBW. from Thank question next Michael with our

open. is line Your

Michael Perito

morning. good Hey,

Jeffrey Ludwig

Good morning, Mike.

Donald Spring

Good morning.

Michael Perito

to want elevated. I we of - want appreciate dots on why on. Don, to I color drawing remarks start prepared kind I a your But hit the was to in couple credit. things have on and I if take the mean, the kind the together about provision kind mapping provisioning peer which I you guys just Midwestern XX a rate, point kind group been kind is. really XX of in is a have basis of step at the last Xx back where of four of probably quarters

I environment two-part that some I kind moderating? question, of the you into just going would to - I Or have about general any is something continue provisioning you other And am seeing, I guys forward? think insight guess two, credit Or mean, expect one, you be that helpful. thoughts do are

Jeffrey Ludwig

Yes, take I’ll challenging question. this, of a so, Mike, little a

need So, to we knew at we this we quarter. had take take, additional provisioning would to

was provisioning four to $X are to or that we quarters mark. back we ago think, I can that So, hopeful million at start move that it where three

those. We the issues are, some last been the couple quarters received in through we some working that of appraisal of non-performers and on some

So, down. it’s to predict. we that migrate are for hopeful that of But hard sit here sort and can us

non-performers appraisals is there and thing do those in are the to basis reserves. didn’t come we good appraisals going annual make need see quarter. to any we this we ordered as be The have in come non-performers to will in, adjustments But on that

we our kind up am credit quarter. I but guess, current there that additional I quarters where probably at We out. we got well, good So, of quarter, to normal put looked provision a provisions line. and I But would question had your the a not really had are are in have a as we answering business real come more

a So, good I back that question I I I sense $X But next today. be normalized quarter. your hopeful million can don’t sit guess, answering am that could without $X here it specifically, have more again get million. we as to

Michael Perito

X.XX% that's provisioning of highly the achievable, doing kind the extrapolate, a third the think level you ROAs Trying in, of mean, we're that a guys of you mean, question. Okay. if are or year Yes, – because I I mean, guys to quarter. in the from normalizes of could so. behind rate – thought if the I past appear bit credit kind elevated it kind range if is that's X.XX%, you

Jeffrey Ludwig

that are work ROA expectation is some That ourselves XXX% internally XX%. efficiency help to in under the are for XX% our efficiency set work targets we’ve XXXX%. and over get low And drive our get and to a tandem. us that’s to should those type which That get work ROA of to an through more

your on doesn't really ratio, what the your the efficiency of out but ratios, provision because are out quarter hurts out our and now taken part calculations. this provision the ROA the of ratio taken impairments efficiency where does and and of come Now quarter happened it’s not up of efficiency those showed ROA

Michael Perito

Right.

should the And Okay. are you just we just appetite repurchases today? that guys feeling about be guess, And move can then, thinking forward talk here? kind how share about of about as you secondly you guys capital then, I for

Jeffrey Ludwig

– two now three on We pressure We’ve put think position some particular. Yes, last closed done acquisition we the smaller TCE capital. a in build large just I in and years, ratio try over and ratios so, acquisitions. a or to on to are our fairly capital that we’ve

build which can get need into TCE is the be those we we to to between And X%. goal capital next begin back ratio that X%, up ratios get that to we think year. as will And we

the third buyback, what we not we we was it price say to the stock buying – that and the value. our As in our and will are some I back good be a average there. did be quarter, about back. is really when we’ll guess In buy in relates selective XX.XX stock third good our we shares buybacks price think to on right price I that’s quarter think around the Today is it’s

going to is as shares priced, So, are stock when well we some we I use think back. think we are that to that buy going that the to use

would quarter, next us several see that or I that have at probably using the that in don’t we we the up so of look left So, next using over that quarters. two million the $XX kind as using quarters, in plan

Michael Perito

the I for business. one FHA out actually just, you. little the And on longer. Helpful. then, I think, know just last typically extends commercial that one, one Thank a pipeline

kind XXXX. look have hold if into curious previously and will provided of the revenues next just any How pipelines on kind insights comparatively move whether you have of and we you that the So, of guidance kind as guys you initial think year?

Jeffrey Ludwig

I mean, be. let I what number lower to hard Yes, quarter-to-quarter even might again range. for analyst we take real that us It’s the would think million I encourage of million $XX the exactly $XX XXXX to predict to into feel end to alone that that and

in and real But, I comfortable the range. I to more work of the that spot end reasonable we and the in. range the hard But get the still number of be feel lower think we probably to a range think towards that’s top

Michael Perito

Great. Thanks my I guys for taking questions. appreciate.

Jeffrey Ludwig

Mike. Thanks,

Operator

with [Operator Reevey you. question Instructions] Our Thank from Kevin D.A. next comes Davidson.

is line Your open.

Kevin Reevey

morning. Good

Jeffrey Ludwig

morning, Good Kevin.

Kevin Reevey

first off are deposits cost when NIM opportunities you levers are some tail HomeStar the pull what going their is, the additional cuts? question especially my rate So, from besides funding, to and the have use strategies, to can to what mitigate you forward, compression higher

Jeffrey Ludwig

so, and are all like Yes, looking the are we move sets rates trend as rates coming product we beginning up. just at are rates we to down, those

we down. come As rates as to up, them going they were going are trim

specials this have year year. some will run next earlier that We part CD in get of repriced early

So that sets product front other and on beginning those are down. to CD move rates the will help we

million year a help that that that We the and will debt paid sub guess, the $XX we strategy. down will that’s have I next –

Kevin Reevey

you putting existing floors you for commercial on loans. on new And know any – floors I new Okay. are… loans are your are have that you do

Jeffrey Ludwig

penalties six – last to our in we months agreements of the trying of and floors. we active agreements have probably get and a we’ve loan lot in loan been our prepayments, and floors Yes, pretty

six floors in the I have the negotiated have our floors that. But do to will be loans, to active try help portfolio can do a of some we part been and trying more in although is are those with which get our We clients. and think big we last to challenging months fixed.

rates it’s quickly are So, as cut. not moving being

Kevin Reevey

type typical loan profile? know growth. lastly, leading focus and borrower area I they the is What then, look that of an does are equipment finance far the And their of credit like for as as equipment equipment

Jeffrey Ludwig

business profile. is a is say, businesses probably profile. credit Yes, smaller There kind so, businesses, for equipment It’s years the probably ten, equipment. been soft plus in of ten I’ll not of part it’s – that tangible

one yellow and like our trucks paint and guys say So, to bulldozers of equipment.

a But caterpillar the go big if what of work things part goes do. it’s can equipment So tangible. type that We vendors. we get. back through are it It’s we

force than is vendors, sales probably our to customers. So, closer

is kind business it’s providing where we dealer So, need go point-of-sale through because the of there type at this a I into I point-of-sale the CAT bulldozer, and so. dealer, of Midland, financing are

Kevin Reevey

very Great. much. Thank you

Jeffrey Ludwig

Okay. Kevin. Thanks,

Operator

questions this time. I you. showing any closing to now remarks. Thank for the like to am I further turn not at call And back would management

we right. will next All everyone. And see quarter. Thanks, you

Operator

today’s and you this conference participating. gentlemen, concludes Ladies for Thank call.

You may now disconnect.

Midland States Bancorp (MSBI) 25 Oct 192019 Q3 Earnings call transcript