Welcome to the Q2 2022 Midland States Bancorp, Inc. Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during that session, you will need to press star one one on your phone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Tony Rossi of Financial Profiles. Mr. Rossi, please go ahead. Thank you, Chris. Good morning, everyone, and thank you for joining us today for the Midland States Bancorp second quarter 2022 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 Webcasts and Presentations page of Midland's Investor Relations website to download a copy of the presentation. 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. 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. 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 gonna start on slide 3 with the highlights of the second quarter. Despite an increasingly challenging operating environment, we continue to generate improvement in our financial performance as a result of the strategic initiatives we have implemented over the past few years to strengthen our commercial and retail banking teams, increase our focus on higher growth markets, and improve operational efficiencies. Our strong execution on these strategies produced another strong quarter of very strong loan growth, additional expansion in our net interest margin, and greater operating leverage. This resulted in a stronger quarter with net income of $21.9 million or 97 cents per share. Pre-tax pre-provision earnings of $35.9 million, and increases in our ROA, ROE, and ROTCE relative to the prior quarter as we continue to generate a higher level of performance. The most significant driver of our improved performance is the higher level of productivity we are seeing from our commercial banking teams. Our teams are doing an outstanding job of developing new commercial relationships, and our strong loan production resulted in 18% annualized growth in total loans. Our commercial banking teams are focused on relationship lending within our markets across a variety of loan types. As a result, total loans within our community banking markets were up $192 million. We continue to see a higher level of growth in St. Louis as a result of our increased focus on this market. Total loans in the St. Louis market were up 11% from the prior quarter and have increased 23% over the past six months. Our St. Louis team is also doing a very good job of developing more commercial deposit relationships, which has resulted in our deposits in the St. Louis market increasing 19% over the past six months. The strong loan growth we are seeing is helping us to drive positive trends in a number of key metrics. Our net interest margin increased 15 basis points in the second quarter on top of the 25 basis point increase in the first quarter, as the strong growth in loans resulted in a favorable shift in earning assets, while we also benefited from higher rates on new loan originations. The higher revenue we are seeing from the loan growth and margin expansion is also helping us to realize more operating leverage as we effectively manage our expense levels. This resulted in an improvement in our efficiency ratio to 53.1% from 55.7% in the prior quarter. In addition to our strong organic growth, we also completed our branch purchase transaction with FNBC Bank & Trust late in the second quarter. We are very pleased to be able to execute on this transaction that perfectly fits our acquisition criteria at the current time. It's low risk and easily digestible, so it won't distract the organization and disrupt the strong execution we are seeing on our growth and efficiency improvement strategies. It's immediately accretive to earnings and provides a meaningful amount of low-cost deposits that we can use to fund our strong loan growth. From a strategic perspective, the addition of a branch in Mokena provides another physical presence in the greater Chicagoland area that will support the increased business development efforts we have in this higher growth market. It's the ideal type of small tuck-in deal that nicely complements the strong organic growth that we are generating without presenting any execution or integration risk. At this point, I'm gonna turn the call over to Eric Lemke to provide some additional details around our second quarter performance. Eric Lemke? Thanks, Jeff. Again, good morning, everyone. I'm starting on slide 4, and we'll take a look at our loan portfolio. Our total loans increased $256 million from the end of the prior quarter. The strongest growth came in the commercial real estate portfolio, which increased 10% during the second quarter. We also had small increases across most of our other portfolios, which were partially offset by declines in commercial FHA warehouse credit lines and the continued forgiveness of PPP loans. During the second quarter, we began to originate loans through our new fintech partnership with LendingPoint, which accounted for the growth we had in the consumer loan portfolio. Turning now to slide 5, we'll look at our deposits. Total deposits increased $127 million from the end of the prior quarter, a portion of which was attributable to the FNBC branch acquisition that Jeff previously discussed. We had an increase in non-interest-bearing deposits and in all of our lower cost interest-bearing deposits, while our time deposits were essentially unchanged during the period. Our commercial banking and treasury management teams are doing a good job of developing new commercial deposit relationships that are providing a steady inflow of lower cost deposits to fund our strong loan growth. Turning now to slide 6, we'll walk through the trends in our net interest income and margin. Our net interest income increased 7.9% from the prior quarter, primarily due to the higher average loan balances and the increase in our net interest margin. We brought down our average cash balances by $158 million and our investment securities portfolio by $76 million from the end of the prior quarter, with those funds redeployed into the loan portfolio to support our strong loan growth. This favorable shift in our mix of earning assets as well as higher average rates on cash investment securities and loans helped drive a 15 basis point increase in our net interest margin. As interest rates increase, we're seeing improvement in new loan pricing, which is also positively impacting our net interest margin. In the month of June, the average rate on our new and renewed loans was 4.79%, an increase of 69 basis points from the month of March. In particular, we are seeing significantly higher rates on commercial loans, which includes our Midland Equipment Finance. Turning to slide seven, we'll look at trends in our wealth management business. Our assets under administration decreased by $446 million from the end of the prior quarter, primarily due to market performance. The decrease in assets under administration resulted in lower wealth management revenue in the second quarter. On slide 8, we'll review our non-interest income. We had $14.6 million in non-interest income in the second quarter, a decrease of 6.4% from the prior quarter. The decrease was primarily due to the lower wealth management revenue, which offset increases in deposit service charges and interchange revenue resulting from the growth in our client base. Now turning to slide 9, we'll review our non-interest expense. On an adjusted basis, excluding integration and acquisition expenses, our non-interest expense was up slightly from the prior quarter, primarily due to higher salaries and benefits expense resulting from a modest increase in staffing levels and higher incentive compensation. With the completion of the FNBC branch acquisition, we'll have a slight increase in expenses in the third quarter, but they should remain within the range of $41 million-$42 million that we have previously guided for our run rate in 2022. As we have done over the past couple of years, we continue to have opportunities to renegotiate vendor contracts to help us generate cost savings to offset the increases we are seeing in labor costs and the investments we're making in various initiatives to grow and further diversify the company. We're also continuing to leverage our technology investments to drive more automation throughout the organization in order to further improve efficiencies and control expenses. Turning now to slide 10, we'll look at our asset quality trends. Our non-performing loans increased $4 million from the end of the prior quarter, which was attributable to one commercial real estate loan where no loss is currently expected. Outside of this one credit, trends in the portfolio were generally favorable, with continued upgrades of watch list loans as more borrowers demonstrate sustained performance with the impact of the pandemic declining. While there is broader concern about how inflation and higher interest rates will impact customers, through June 30, the delinquency rate in our consumer portfolio remains exceptionally low and has actually declined a bit since the beginning of the year. Should any deterioration begin to occur, we have approximately $39 million in an escrow account that is available to cover any losses on the GreenSky portfolio. We had $2.8 million in charge-offs in the quarter, or 20 basis points of average loans, and we recorded a provision for credit losses on loans of $4.7 million, which was largely related to the growth in total loans and changes in our economic forecast. Now on slide 11, we show the components of the change in our allowance for credit losses from the end of the prior quarter. Our allowance for credit losses increased by approximately $2 million. This increase was driven by the growth in total loans, changes in the mix of the portfolio, and changes in forecasts from weakening economic conditions. On slide 12, we show our ACL broken out by portfolio. While our overall coverage ratio remained relatively stable, we increased coverage a bit within the commercial portfolio, primarily due to changes in economic variables and forecasts. With that, I will turn the call back over to Jeff. Jeff? All right. Thanks, Eric. We'll wrap up on slide 13 with some comments on our outlook. Although the operating environment will continue to be challenging, we expect most of the positive trends we have seen in the first half of the year to continue over the rest of 2022. Our loan pipeline remains strong, particularly in equipment finance, but smaller than it was at the start of the second quarter. We still expect to see growth in our loan portfolio over the second half of the year, but not at the same level that we have had in the first half, given the smaller loan pipeline and the likelihood that higher rates and concern about weakening economic conditions will start to have a greater impact on loan demand. With continued loan growth and further expansion in our net interest margin as we benefit from our asset sensitivity, we should continue to see higher levels of revenue, more operating leverage, and further increases in pre-tax pre-provision earnings and returns during the second half of the year. As we mentioned on our call last quarter, while we continue to improve our near-term financial performance, we are also making good progress on long-term initiatives to enhance the value of the Midland franchise. One of the initiatives is the Banking-as-a-Service strategy that we discussed last quarter, and we expect to add fintech partnerships over the second half of the year, which will put us in a position to see this initiative start to become a contributor to our financial performance in 2023. Another initiative is to accelerate growth in our wealth management business. We recently hired a new head of wealth management, Jane Lato, who has held several senior wealth positions at a number of large financial institutions, and she will be leading our efforts in this area. As you know, we have made a number of wealth management acquisitions over the past several years, in which we have added expertise in new areas, and we have the opportunity to increase revenue by adding financial advisors and enhancing our cross-selling within our client base. Improving our cross-selling will be a key focus now, as well as recruiting more talent and enhancing our overall business development capabilities. It will take some time for these efforts to gain traction, but we feel very good about the leadership and strategies in place, and we believe that over the long term, we will increase our organic growth rate in this business. Through the first six months of the year, we have executed very well and delivered strong results for our shareholders. Our return on average assets was 1.19% in the second quarter, and pre-tax, pre-provision income increased 33% over the second quarter of 2021. In addition, we are delivering strong returns on average tangible common equity with a 19% return in the second quarter. Strong earnings performance will allow us to continue to grow our franchise and build capital as growth slows towards the back half of the year. On our last earnings call, we mentioned that we would be evaluating other options to strengthen our capital ratios to support the continued growth of our franchise. Evaluating these options will continue to be a priority for the company as we are highly focused on making capital management decisions that are in the best long-term interest of our shareholders. We believe the franchise we have built is well-positioned to drive strong, profitable growth when economic conditions are favorable, while effectively managing credit and interest rate risk so that we can preserve shareholder value and continue to deliver solid results when economic conditions deteriorate. With that, we'll be happy to answer any questions you might have. Operator, please open the call. Yes. Thank you. As a reminder, to ask a question, you'll need to press star one one on your phone. Please stand by as we compile the Q&A roster. Our first question comes from Manuel Navas of D.A. Davidson. Your line is open. Hi. Good morning. This is Clark Wright on for Manuel. In terms of your near-term expectations for NIM expansion, what are you looking at in terms of the year-end, and then also pertaining to that, the peak NIM to the rate cycle? Eric, you wanna sort of talk about. Yeah, Clark, good question. Good morning to you. As we think about sort of our NIM, as we've done our modeling, I know we've talked in the past about our loan portfolio, and that's roughly around 55% fixed rate, the remaining being variable. However, that fixed rate, primarily if you look at our MEF portfolio, turns pretty quickly, and we're seeing higher prices there or higher pricing on new activity. As we kind of think about the back half of the year, our modeling shows us that in an up 100 basis point environment, we basically improve our NIM somewhere between 4 and 4.5%. As we look up a hundred, we think that translates to an additional 5-10 basis points on our near-term NIM through the back half of the year. Peak NIM, that's a really tough question to answer in this kind of rate environment. We are looking for additional expansion through the back half of the year, somewhere into that range. Thank you. Just in terms of deposit betas that are going into those assumptions, and kind of what do those look like as well on the other side? Our deposit betas that we're using are somewhere in that 30-35 range. Now thus far, through the rate increases through the second quarter, we've been able to be below that. We think our model inputs have been conservative up till now. I think we're kind of expecting that the betas we've seen through the second quarter will be a little bit higher through the third and the fourth as we see additional rate increases. We're pretty comfortable with what we have in our model. Thank you. Appreciate it. Thank you. One moment for our next question. Our next question comes from Damon DelMonte of KBW. Your line is open. Hey, good morning, guys. Hope you're all doing well today. Just wanted to start off with the loan growth outlook. I mean, obviously two very, very strong quarters to start the year. I think understandably, you know, that pace isn't sustainable through the whole year. As you kind of look at your pipelines and you think about some of the drop off in growth pace of growth in the back half of the year, can you just put a little bit more perspective around kind of where you see that settling in? Is it kind of more in the mid-single digit range, or do you think you could still stay at the double digit level? Yeah, I think it's gonna come in below the double digit levels. I think as we think about the back part of the year. I mean, our first six months have been really strong. We do think it's gonna come back a little bit in the back part of this year. Okay. As far as the drivers of that, anywhere in particular that you feel more confident? Are there any segments that are starting to maybe show signs of stress from, you know, the supposed recession that we're entering? Maybe that we're already in. Maybe. I think our equipment finance business, I mean, our backlog there is probably as big as it's been, and part of that's driven off of supply chain issues where customers want equipment and equipment's not getting to them quite yet. There's a good backlog. I do think we'll continue to see good growth in the equipment finance business. You know, I think on the commercial real estate side, that will slow as we get to the back part of the year. I do think, you know, we've done a nice job growing commercial real estate and just that is just gonna naturally slow. I think that's where I see some slowness, and I do see the equipment finance business still doing quite well through the back part of the year. Okay, great. One last question on the loan book. The LendingPoint relationship, could you just remind us what the nature of those customers are and the size of those credits and Yeah. Any kind of color on that would be great. Thanks. Yeah. It's real similar to our GreenSky program, home improvement type of credit with high FICO type of borrowers with credit enhancements similar to our GreenSky portfolio, where we have waterfall cash flows and escrow balances. We feel really good about that credit. Got it. Okay. Just one final question on credit itself. You know, you noted that in the provision this quarter, you know, incorporated some softness in the economy. How should we think about provision going forward? Something similar to this quarter's level or possibly a little bit higher if the macro trends continue to go in that direction? Yeah. I'll give you the CEO view, right? Mm-hmm. I think similar to this quarter, you know, and I said this in an audit committee yesterday. I'm hopeful that our charge-offs will begin to moderate some in the back part of the year too, which, you know, so even if the economy, you know, the view of the economy turns a little bit, maybe that's a little bit of a help. You know, those are two things that are difficult to project forward. Yeah, I think similar to this quarter. Got it. Okay. That's all that I had. Thanks a lot. Appreciate it. Yep. Thanks. Thank you. One moment for our next question. Our next question comes from Terry McEvoy of Stephens Inc. Your line is open. Morning, everyone. Morning. Maybe just talk about your expectations for deposit growth and whether you think you can fund your future loan growth with more core deposits, or do you think you'll have to rely on other sources of borrowings and funding? Yeah. I think we've been—I mean, we've had a really good year. We've been focused on deposits from the get-go this year. Our community bank group has increased deposits this year by, I think, right around $280 million. They've done a really good job of deposits. The servicing deposits in the beginning of the year were sort of a downdraft that's sort of offsetting some of that. But we're active. Our teams are real active with calling efforts. You know, we are running some retail specials, and we did all through the second quarter. We'll continue to do that towards the back part of the year, to get ahead of, you know, where deposits, you know, may or may not go. I mean, we've seen a lot of earnings reports with banks having a decrease in deposits, and we've seen an increase. Now, we did an acquisition of a branch which helped, but even taking that out, we grew deposits in the quarter and have grown deposits nicely this year. We'll continue to be highly focused. You know, our loan deposit ratio is in that, right around that 90, maybe a little higher. We, you know, need deposits to continue to grow, and we'll continue to be focused on that. I do think we can, you know, grow deposits in the back part of the year as well. There's a lot of things going on in the environment that makes maybe that prediction you know maybe in that 60%-70% probability phase. If we can't get enough, right, we'll need to find some other sources of funds, which we can do. Thanks for that, Jeff. Could you just remind me the size of the escrow deposits connected to the FHA business? Are those high beta relationships? They are high beta relationships. We probably have, I don't know, $800 million, something in that range, in servicing deposits with a couple different customers. The deposits themselves are pretty granular to properties. But they are sort of pegged to Fed funds. They do move fairly quickly with Fed funds move. All that's sort of baked into our ALCO model, which, you know, Eric talked about a NIM increase even with that, we see NIM increasing with a 100 basis point increase in rates, and we've seen it in the first half of the year. Okay. Thanks. Just the last question here. Wealth management, you talked about new leadership. I guess, will there need to be some investments in that business to achieve the results that you're looking for? And you've done some acquisitions over the years within that area. Is that something that you're evaluating as well? Yeah. You know, the acquisition side is probably on the lower end of what we're wanting to do. I sort of, you know, compare this, if you will, to where our commercial banking was two years ago, where we really need to focus on you know, building our sales and business development teams out, energizing our team with some new leadership and demonstrate to ourselves and to others that we can grow at a higher rate organically and not have the M&A sort of distractions that go on that sort of distract you from those things. Then if we can do that here in the next couple of years, I do think we can go back and look at potential acquisitions in the wealth space. Great. Appreciate that. Have a nice weekend, guys. Yep, thanks. Thank you. Again, to ask a question, please press star one one on your phone. One moment for the next question. We have a question from Nathan Race of Piper Sandler. Your line is open. Yes. Hi, guys. Good morning. Morning. Question on the balance sheet mix going forward. You guys continue to, you know, rotate out securities and redeploy excess liquidity on the balance sheet into loans. Is that dynamic gonna continue over the next couple of quarters? And does that kind of imply like kind of a flattering asset base from here, depending on deposit flows? Or how are you guys kind of thinking about what's kind of the right level of kind of cash on the balance sheet to operate with going forward at this point? You mean, you know, it's not gonna be materially different than what's on the balance sheet today. I think the investment portfolio is gonna be relatively the same. You know, maybe it's down a little or up a little from here, and same with cash. I don't think there's, you know, sort of more remixing that's gonna go on. Okay. Got it. You guys also had nice growth in card revenue and deposit service charges versus the first quarter. I know a lot of that's a function of some of the technology and analytics and CRM initiatives that you guys have undertaken over the last several quarters now. Is that growth kind of sustainable in the back half of this year in terms of what we saw here in the second quarter? Or does it kind of flatline from here, maybe due to some seasonality and a couple of those items during the second quarter? Yeah. We're doing a lot of work on the retail front to, you know, get cards in our customers' hands and encourage card usage, use debit card instead of credit card type of marketing and discussions with our customers. I do think the trend is positive. Now, you do have seasonality and all that good stuff, right? The spring hit, so you get more people out spending. Although, you know, third quarter is usually good, you know, people out doing things, yeah, with back to school and then. I do think the overall trend is up. Whether it's at the same level, it's hard to, you know, it's really hard to predict some of that. Right. Understandable. Maybe just one last one on credit. Just curious if you guys could kind of discuss the criticized classified trends in the quarter outside of the one commercial real estate loan that you called out, where you're not expecting a loss, and just broadly how you guys are just what you're hearing from commercial clients in terms of sentiment, you know, liquidity capacity and just kind of the overall character of your client base at this point, so to speak. Yeah. Non-performers ticked up a little in the quarter, but our substandard to capital ratio went down in the quarter. That's a good sign. You know, we're seeing low delinquency. Our delinquency this quarter has been the lowest it's been in the last five quarters. We're not hearing customers, you know, coming in and saying they need some type of help with their loan right now. You know, so far so good. I, you know, as I sit here today, we're not seeing any immediate credit issues. Got it. That's great to hear. I appreciate you guys taking the questions, and congrats on a great quarter. Thank you. Yep. Yeah, thanks, Nate. Thank you. One moment please for our next question. We have a follow-up from Manuel Navas of D.A. Davidson. Your line is open. Mr. Navas, if your phone is on mute, please unmute your line. Oh, sorry about that. Can you hear me now? Yep. Loud and clear. Perfect. Thank you. Jeff, I guess this question kind of pertains to kind of a high level picture of your enhancing franchise value in kind of moving into St. Louis. What are you doing in specifically the St. Louis market as making it such an attractive area of growth for the firm? Yeah. Back in 2014, we bought a bank in St. Louis. We've been in St. Louis for eight years now. I'll say it wasn't early on as much of a focus of ours as we bought it, we went public, so a lot of energy to that, then a lot of energy to a couple other acquisitions. Back in early 2019, we sort of made a strategic decision to say, we've got, it's a good market. We need to put more executive energy, leadership, build the team, and start to focus on that market 'cause we think there's a lot of opportunity there. So about 18 months ago, we made a leadership change in market, and we've added a few bankers there as well, and some folks on the treasury management side, so on the deposit gathering side as well. Like we're seeing across our whole footprint, with our sales force calling efforts, pipeline management, I think, the combination of all those things has allowed us to begin to gain some good traction in St. Louis and in other markets. St. Louis is really, it's a good size market. There's a lot of opportunity there, and we're seeing, we're winning down there, which is great to see. Thank you for the follow-up. Appreciate it. Have a great weekend. Yep, thanks. Thank you. One moment, please. We also have a follow-up from Nathan Race of Piper Sandler. Your line is open. My question was answered. Thanks. Okay. Thank you. I see that the Q&A session has ended. I would now like to turn the conference back to management for closing remarks. Yep. Thanks everybody for joining today and look forward to seeing everybody in the third quarter. Have a good weekend. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your weekend.