Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Second Quarter 2019 Midland States Bancorp 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. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to turn the conference over to Mr. Tony Rossi of Financial Profiles. Sir, please begin.

Thank you, Harvard. Good morning, everyone, and thank you for joining us today for the Midland States Bancorp second quarter 2019 earnings call. Joining us from Midland's Management Team are Jeff Ludwig, President and Chief Executive Officer; and Steve Erickson, Chief Financial Officer.We will be using a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Webcasts & Presentations Page of Midland's Investor Relations website to download a copy of the presentation. The management team will discuss the second quarter results and then we will open up the call for questions.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 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 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 3 with the highlights of the second quarter. We generated $0.67 in earnings per share, which compared to $0.57 in the prior quarter. Our strong financial performance has enabled has enabled us to deliver a steady growth in our book value and tangible book value per share.In addition, we continue to rebuild our capital ratios following the Alpine acquisition last year. The second quarter represents a continuation of the trends we have seen over the past few quarters, many of which reflect our strong execution on the strategic priorities we have outlined for enhancing shareholder value. We remain very disciplined in our balance sheet management from both the loan production and deposit gathering perspectives.We continue to focus our new loan production on areas that provide more attractive risk-adjusted yields, and we have another strong quarter of growth in our equipment finance portfolio. The impact of the focus on more adjusted risk – on attractive risk-adjusted yields can be seen in our average rate on our new and renewed loans, which was 5.61% in the second quarter or 58 basis points higher than the average yield in our portfolio, excluding accretion income. We are generating a significant amount of non-interest income from a diverse array of business lines.In the second quarter, our non-interest income accounted for approximately 30% of our total revenue with strong contributions from our wealth management, community banking and commercial FHA businesses. We are also doing a good job of instilling discipline and expense management across the organization, which is resulting in improved efficiencies.We had another strong quarter of expense control with our non-interest expense declining by nearly $1 million from the prior quarter. This helped driver our efficiency ratio down to 61.6% in the second quarter from 64.7% in the prior quarter. As we outlined at the start of the year, in a challenging environment for balance sheet growth, we believe that improving efficiencies could be a catalyst for earnings growth.Our strong execution on this strategic priority has been a key factor in the improvement we have seen in our profitability this year. As we announced earlier this month, we are able to complete our acquisition of HomeStar Financial Group in just over three months after announcing this transaction. With the addition of HomeStar, we now have the number one deposit market share in Kankakee, Illinois, with more than a 30% market share.HomeStar provides an attractive, low-cost deposit base with excess liquidity that will enhance our funding profile and give us more flexibility in loan production going forward. And we continue to expect the acquisition to be approximately 9% accretive to earnings in 2020, which sets us up to deliver a solid year of earnings growth for our shareholders.Now I'm going to turn the call to Steve to walk through more details on our financial performance this quarter. Steve?

Thanks, Jeff. I'm going to start with our loan production portfolio on Slide 4. Our total loans outstanding declined $18.6 million from the end of the prior quarter. This is primarily due to declines the portfolios that we are deemphasizing due to the less attractive risk-adjusted yields in the current environment, most notably, residential and commercial real estate. This was partially offset by growth in our commercial loans and leases.Our equipment finance group continues to perform well and our total outstanding balances increased by $74 million or 17.1% from the end of the prior quarter. Year-over-year, this portfolio is up $242 million or 91% and the expansion of the equipment finance business has had the positive impact that we anticipated when we made the investment to bring this new team onboard.Turning to deposits on Slide 5. Total deposits were $4.01 billion at the end of the second quarter, a decline of approximately $25.1 million from the end of the prior quarter. During the second quarter, we implemented a strategy to reposition our deposit portfolio in order to improve our liquidity management and reduce our non-core funding.We intentionally reduced our balances of brokered money market by $70.5 million and brokered time deposits by $41.2 million. We partially offset this reduction with new funding raised through retail deposit campaigns. The rates offered in deposit campaigns were slightly higher than the brokered deposits that they replace, which increased our cost of deposits. But the campaigns were successful in bringing in new deposit customers, which now provide good opportunities for cross-selling our other products and services and enhancing the profitability of these relationships.Turning to Wealth Management on Slide 6. At the end of quarter, our assets under administration were $3.13 billion, an increase of $28.8 million from the end of the prior quarter. The…

Thanks, Steve. We'll wrap up on Slide 11 with some comments on our outlook. We expect to see a continuation of many of the trends we have experienced in the first half of the year, primarily disciplined balance sheet management, strong contributions from our fee income businesses and disciplined expense control. We will be focused on integrating HomeStar and capturing the synergies that we projected for this merger, one of which will be redeploying its excess liquidity into higher earning assets.HomeStar is more than $100 million in excess deposits, which will enhance our funding profile and give us more flexibility in loan production going forward. Our primary focus will remain on the areas that generate the most attractive risk-adjusted yields like equipment finance. Although our total loan balances were down during the first half of the year, we believe stronger growth in the second half will still enable us to meet our target of low single-digit organic loan growth in 2019.This along with the addition of HomeStar will lead to an increase in net interest income in the second half of the year. At the same time, we have good momentum in our fee generating businesses. Collectively, we feel good about the trends we are seeing in the business, and we believe, we are well positioned to deliver solid results over the remainder of the year and into 2020 when we will fully utilize the expected cost saves from the HomeStar acquisition.With that, we'll be happy to answer any questions you might have. Operator, please open the call.

[Operator Instructions] Our first question or comment comes from the line of Terry McEvoy from Stephens. Your line is open.

Good morning, everyone.

Good morning, Terry.

Steve, in your prepared remarks, you mentioned the margin outlook was kind of neutral or flat going forward ex accretion. I'm curious, do your comments take into consideration of potential rate cut and if not, what would your thoughts be on the margin assuming we get a rate cut or two in the second half of the year?

Sure. So when we say relatively then we're talking within a range around kind of that 350 basis points line item. But more importantly, if you look at our new and renewed, even though our new and renewed rates have come down over the past couple of quarters, we still see that they're significantly above the average rate of our portfolio as a whole. So in general, as loans are rolling off, they're still being replaced on average by loans that do have higher yields.So that combined with the fact that, that increase is still higher than our increase in our underlying core funding along with the fact that we will have additional low cost deposits from the HomeStar acquisition, give us confidence that, at least in the next couple of quarters, we'll still be able to maintain that margin level.

And then as a follow-up just kind of sticking with this topic, the new and renewed loan yields of 5.61%, what's the impact from the equipment finance portfolio? And can you just kind of quantify the size of that portfolio today? And what are your thoughts around just concentration issues at some point going forward?

As far as that portfolio is concerned, it just crossed the $500 million mark. On the new and renewed side of things, they are still, from a risk-adjusted yield point of view, higher than the rest of our portfolio. They do also – they follow, as far as pricing is concerned, the LIBOR-swap curve pretty closely. So while we have seen, again, those origination yields come down a bit, as interest rates have fallen, they are still nicely above other loan opportunities that we have. So we do expect that to continue to be a positive to both margin and to growth.As far as concentration, when we look at our portfolio, as a whole, including all of the mass production, and again, the mass production is split between both loans and leases. As we look at our concentrations across the portfolio, we don't see any significant issues with that. We'll be able to stay under our policy concentrations across all categories.

Perfect. Thank you.

Thank you. Our next question or comment comes from the line of Michael Perito from KBW. Your line is open.

Hey. Good morning, everyone. Thanks for taking my questions.

Good morning, Mike.

Good morning.

I wanted to start on the expenses. I think at the beginning of the year, the outlook was $42 million to $43 million a quarter. Obviously, the first couple of quarters of the year have come in below that as you guys have had some success on the initiatives you guys have been executing on. Just curious if you're willing to provide an update kind of on the back half of the year expense outlook now that you've seen the first half of the year unfold?

Yes. I think we're going into integration now with HomeStar, and so we're going to have a bit of noise in Q3 and Q4 as we work through that. So I don't know that we're ready necessarily to give anything specific or give a specific range right now. I will say though that we're pretty comfortable with the consensus estimates for the third quarter with regards to non-interest expense, and we'll revisit this probably at the third quarter call as well.

Okay. And on wealth funding, you had a nice quarter. Can you give us a sense of what the six-month pipeline looks like here as we move into the back half of the year? Any anticipations on closings being pushed out or pulled forward or anything like that on your radar? And the pipeline levels rather support kind of generally consistent revenue opportunity understanding it can move from quarter-to-quarter. But does the outlook still look pretty favorable there?

So Mike, this is Jeff. I think that's right. I mean we've been pretty consistent over many quarters as $3 million to $5 million revenue per quarter is kind of what we think our range is. As we look at where the pipeline is today, I think that we can continue to deliver that. There might be a quarter at the low end of the range, there might could be a quarter at the high end of the range.It's hard for us to predict quarter-to-quarter exactly what it's going to be. But when we look at the pipeline, we still feel good that we can deliver in that range every quarter, at least in the near-term. So we feel good about the business and feel good about where we've kind of guided everybody in terms of the revenue.

Okay. And then just lastly, Steve, you mentioned I think that the charge-offs could be elevated next quarter as you work through some credits that are close to resolution, but it shouldn't impact the provision. So is it fair to interpret that as the provision should step down in the third quarter or I mean, maybe back to that $2 million, $2.5 million range as you see it today versus the $4 million plus range in the second quarter?

Not necessarily. So let me put it this way. As we have talked about in the past several quarters, that has been something that we've had a difficult time predicting only because we see nothing systemic going on in the portfolio either from the non-performing side of things or with the troubles that we're experiencing with various individual credits.So since it's case by case basis and has been now for three quarters, I don't want to go out there on a limb and say, "Yes, we expect it to normalize," when it just takes one instance with one credit to basically throw that theory out the window. So don’t necessarily want to say that, but yes, as we talked about as those couple of credits gets resolved, those are specifically reserved against. So while it will be an increase, perhaps on the charge-offs side of things, those credits will not necessarily impact provision at all.

Right. So the charge-offs will be elevated. Obviously, anything new will have an impact on the provision, but absent anything new though, did those credits won't have – they won't keep the provision elevated, those credits, I guess?

That is fair to say, yes.

Okay. Great. Thank you, guys for taking my questions. Appreciate it.

Thanks Mike.

Thank you. [Operator Instructions] Our next question or comment comes from the line of Andrew Liesch from Sandler O'Neill. Your line is open.

Good morning, guys.

Good morning, Andrew.

Good morning, Andrew.

Just to remind – just following-up on your credit commentary, not really seeing anything systemic and it just sounds like there's some one-offs, but non-performers have been trending upwards the last few quarters. So just how do you feel about the credit quality in the portfolio? And what you're seeing out there from your borrowers?

Yes. So let me take a shot at it’s a Steve took a shot at it. But we're not seeing anything systemic in the portfolio. It is a credit here and a credit there with unique situations in each one of them. So we think we're going to resolve them in the third quarter. We don't see any – if we saw something we would have to provide for it today. So we don't see anything in the third quarter, but we've seen somethings in the last few quarters.So I think we would – we're hopeful that we can move the provision back to that more like a $2 million to $2.5 million line, but if our credit pops up in the third quarter, we've to provide for it and we'll provide for it. Hopefully, that won't happen. But we're not seeing the trends or delinquencies this quarter. We're lower than the prior quarter. So we don't see trends that are alarming on that. And frankly, non-performing loans this quarter were relatively flat to the prior quarter, up a little, but fairly flat, so.

I guess the better question might be like how has the watch list trended over the last few quarters? Has that been turning up or stable or declining?

It's probably tracked a little bit like non-performers, but we can take a peek at the detail.

Okay. You’ve covered all my other questions. Thanks a lot, guys.

Yep.

Thank you. Our next question comes from the line of Kevin Reevey from D.A. Davidson. Your line is open.

Good morning.

Good morning, Kevin.

So I'm just curious, prior – if you have any specific strategies that you can point to as far as you look to defend the NIM. I know with the deposits coming on from HomeStar, that will definitely help you a lot. Is there anything that you're doing from a balance sheet management standpoint in terms of hedging and the like?

No. We're not doing any hedging transactions at this point. We're doing all pretty much organic type of managements as far as the yield and term we choose to put on, on the asset side, remixing the investments to get yield out of the investment side and then, of course, managing the deposit base and continuing to try and grow that in a meaningful way without damaging the NIM or cost of funds too much, so all pretty much just organically across the balance sheet.

And then speaking of deposits, where are you in your deposit campaign? Is that pretty much done? Or do you expect this to be ongoing throughout the year, as you look to grow your core deposit base?

We anticipate always having new product out there, as the old campaigns roll-off. That being said, the CD campaign that we had started has ended. We do have another campaign out there for money markets right now. But yes, we don't necessarily have any plans for anything overly significant. Again, other than rolling new product into markets to continue to refresh our product set and keep something here to attract new relationships.

And then lastly, the uptick in NPAs was – can you give us some color on that? And was that a legacy MSBI credit or was it part of a recent acquisition?

I think the uptick in non-performing was legacy MSB as a smaller credit, but yes.

Okay. Thank you.

Andrew, your question on, are we seeing anything in watch, what I'll say is, as I look at substandard loans to total loans, the percentage is flat quarter-over-quarter, so it didn't change.

Thank you.

Thank you. I'm showing no additional questions in the queue at this time. I would like to turn the conference back over the management for any closing remarks.

Thank you. I'd like to thank, everybody for joining today and we'll see you next quarter. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.