First Merchants' CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: First Merchants (FRME)

First Merchants Corporation (NASDAQ:FRME)

Q1 2013 Earnings Call

April 25, 2013 2:30 PM ET

Executives

Mike Rechin – President and CEO

Mark Hardwick – EVP and CFO

John Martin – EVP and Chief Credit Officer

Analysts

Scott Siefers – Sandler O’Neill

Brian Martin – FIG Partners

Daniel Cardenas – Raymond James

Scott Siefers – Sandler O’Neil

Operator

Hello and welcome to the First Merchants Corporation First Quarter 2013 Earnings Call and Webcast. All participants will be in listen-only mode. (Operator Instructions).

During the call management will make forward-looking statements about the company’s relative business outlook. These forward-looking statements and all other statements made during the call do not concern historical facts or subject to risks and uncertainties that may materially affect the actual results. Specific forward-looking statements include but are not limited to any indications regarding the financial service industry, the economy and future growth of the balance sheet or income statement. Please note that this event is being recorded.

I would now like to turn the conference over to Mike Rechin, President and Chief Financial Officer. Mr. Rechin, please go ahead.

Mike Rechin

Thank you Keith. Welcome everyone to our earnings conference call and webcast of the first quarter ending March 31, 2013. Joining me on our call today are Mark Hardwick, our Chief Financial Officer; and John Martin, our Chief Credit Officer. We’ve released our earnings and our press release at 10.30 AM Eastern Daylight Savings Time and our presentation speaks the material from the release of the direction that point to the webcast are also contained at the backend of the release and my comments this afternoon will begin on page 4, a slide titled first quarter 2013 highlights.

Earlier today First Merchants Corporation reported first quarter earnings per share of $0.38 or $11 million of net income available to our common shareholders. In contrast, we reported $0.46 per share in the first quarter of 2012. Each of the periods contained unique items worthy a discussion and in each period those unique items were favorable to the company and our shareholders.

Our goal for this call is to illuminate or clarify the results to assure our core business is well understood, in short our current quarter tallies a healthy underlying business supplemented by a typical level of credit recoveries from earlier in the cycle. The specifics of the elevated financial items contained in each of the year-over-year first quarter will be addressed shortly by Mark and John.

If the slide continues, we see momentum in most recurring line items driving revenue, are our core net interest margin and our loan mix are achieving our targets well our overall loan volume beneath our current goals set for year. You may recall our pipelines somewhat peaked at the end of the September quarter and then manifested themselves in our heaviest loan growth quarter of 2012 in the fourth quarter, which then mapped as at a lower level of pipeline to begin the year. They have replenished themselves, I feel good about where we’re going in our goals for having mid-to-high single digit loan growth for the year kind of remain intact at this point. We might have a chance to discuss that later perhaps in the questions at the end of the program.

Our insurance mortgage and trust business has gotten off to a fast start providing the right direction to our most key non-interest income categories. By composition our non-interest income in the current quarter is more recurring in its framework in a year ago and we recorded not only our purchase gain from the FDIC transaction we also had wholly claim, which drove that category and bond sale gains in the first quarter of 2012 three times the level of the quarter we just concluded.

Now I’m just going to share the asset quality profile and looking past the recovery activity, I am most pleased with the metrics that we take into the balance of 2013. Our total NPAs are down 18% from year-end, 32% from March 31st of 2012. Our reserve level ends the quarter at 97% of its year ago level and a 146% of our non-accrual loans, I feel like we’re well situated.

Lastly management shares are confidence with our Board of Directors on our current earnings in our outlook on April the 9th First Merchants Board of Directors approved an increase to $0.05 per share through next dividend payment in June of this year.

At this point, I was going to ask Mark to provide greater detail on our results.

Mark Hardwick

Thank you, Mike. My comments start on slide 6 labeled total asset’ Loans on line three increased year-over-year by just over 3%, and John Martin will present portfolio segmentation later in the call and you will notice the consistent of – in his comments with our press release detail that our commercial and industrial loans plus our commercial real estate loans increased by more than 8% year-over-year.

The allowance on line four totaled $69 million or 2.36% of loans and a 147% of non-accrual loans, which we believe are healthy levels. Net charge-offs totaled $2.9 million as recoveries, totaled $6.3 million for the quarter. Of the $6.3 million, $3.8 million ran to the allowance and $2.5 million was recorded in interest income.

The composition of our loan portfolio on slide 7 is reflective of a commercial bank balance sheet with community bank granularity and it continues to produce very good loan yields. The portfolio yield for the first quarter of 2013 totaled 5.17% with the $2.5 million recovery and 4.8% without it down 27 basis points from this time last year.

On slide eight our $870 million bond portfolio continues to perform well producing higher than average yields with moderately longer duration than our peer group. Our 369 yield compares favorably to the peer group of approximately 2.7% and our duration remains just a year longer totaling 3.7 years. The net gain in our portfolio totals $33.8 million and maturities for the remainder of the year totaled just $107 million with the yield of 318 and in 2014 our maturities will be $126 million with the yield of 3.5%.

Now on slide nine non-maturity deposits on line one are up over more than 9% year-over-year and represents 75% of our total deposits. As reported on Form 8-K on January released on January the 8th we elected to redeem 22.7 million of preferred stock due to the strength of our net income, our credit quality improvements and our capital ratio improvements. Tangible common equity continues to grow nicely now totaling $11.24 per share an increase of $1.19 over – over this time last year or nearly 12%.

As previously mentioned the mix of our deposits on slide 10 continues to improve and our total deposit expenses now just 46 basis points down from 66 basis points as of the first quarter of 2012. Our regulatory capital ratios on slide 11 are well above the OCC and Federal Reserve’s definition well capitalized and Basel III minimums and the small decline in our total risk-based capital ratio on line one was due to the reduction of our SPLF as I previously mentioned. We were especially pleased to across the 10% Tier 1 common threshold on line four this quarter and we expect to be over 8% tangible common equity on line five if not next quarter then the quarter after.

The corporation’s net interest margin on slide 12 totaled 4.25%, 4.25 for the quarter and when adjusted for fair value accretion of $771,000 totaled 4.17%. However to me the most satisfying number isn’t actually on the graph is when you normalize our margin by taking out to $2.5 million of interest recoveries and fair value accretion our total net interest margin is 390 and that’s down to 6 basis points over the first quarter of 2012 which I feel like it’s a great accomplishment given the challenging yield curve and operating environment that we are operating within.

A total non-interest income of slide 13 does have some volatility as Mike mentioned with changes in the level of security gains and losses. We are pleased at on line 11 that we increased by more than 7% year-over-year as insurance commission income, mortgage gains and gains from the sale of back to back customer hedges were better than last year’s results. Our non-interest expense on slide 14 totaled 34.7 million for the quarter up just 700,000 or a little over 2% from the prior year a salary and benefits, salary and benefit expense increased by 1.4 million.

As highlighted in the release our base hours increased by $237,000 which is about I think it was 1.9% and our production incentives increased by $616,000 as benefits increased $583,000.

If you turn to slide 15 our pre-tax, pre-provision run rate is strong and increasing as our credit quality continues to improve and as we reduce the preferred stock dividend expense our bottom line EPS is more directly correlated with our pre-tax, pre-provision run rate as reflected on slide 16. We are very satisfied with the trend lines represented on slide 16 and we feel like we have a nice strong quarter to start off 2013.

John Martin will now discuss our satisfying asset quality trends.

John Martin

Alright. Thanks Mark and good afternoon everyone. I’ll be covering asset quality starting on page 18 followed by allowance coverage in non-performing asset migration. Before I conclude with the portfolio trends and several high level thoughts in the portfolio before turning the call back over to Mike.

Please turn to page 18. Asset quality continues a positive trend both year-over-year and in the linked quarter as Mark mentioned but the linked quarter non-accrual loans on line one declined $6.6 million and were down $27.7 million year-over-year approximately 12.4% and 37% respectively. ORE was essentially flat for the quarter falling from $13.3 million to $13.1 million. Well the number of the units did not move substantially we sold roughly the same number of properties that we transferred into ORE. Of note was a $2.3 million manufacturing facility that transferred into the category which offset some of the much of the larger improvement in the quarter.

The recent property transferred just mentioned now represents the second largest value property in the category behind the $2 million well land well and that was our OREO that was appraised and written down in the quarter by approximately $700,000. On line 3 renegotiated loans declined $7.3 million driven primarily by A notes from the prior year periods seasoning and paying as agreed for at least six months. The AB note probably that restructure is a continuation of a strategy mentioned during prior calls well we resolve borrower over a leverage by creating a performing A note or recognizing a loss in the current quarter through a charge-off of the B note.

Skipping down to lines 8 and 9 we continue to experience improvement in year-over-year levels of classified and criticized assets down 23.3% and 29% in the linked quarter 6.6% – 6.4% and 3% respectively. Classified assets include roughly $6 million of investments in all periods presented. So all in all asset quality continues on an improving trend in the first quarter this is highlighted by lower criticized and classified assets reflecting stronger customer performance in the resolution of non-performing loans through restructures.

Let’s turn to page 19, our slide 19. Allowance coverage to non-accrual loans Mark mentioned continues as quarterly trend upwards from a 130% to 146% improved coverage highlighted on the top of graph resulted from the decline in non-accrual balances which outpaced the reduction in the allowance. The strong allowance coverage to non-accrual loans combined with reducing levels of criticized and classified assets should lead the further reductions in the allowance in coming periods. As you can see on the bottom bar chart the allowance as a multiple of charge-off continues to increase. We did have a $1 million increase in gross charge-off as compared to the linked quarter which was offset by $3.7 million in recovery.

Just a quick word on that we had three large – the three largest recoveries for the quarter were between $600,000 and $900,000 with the largest recovery coming from A charged-off B note with occurred in 2011 for the recovery of the charged off loans are part of each quarter’s results the increase in recoveries help to drive net charge-offs in provisioning lower for the quarter. As further improvements continue our modeling shows allowance coverage continuing its trends towards the 2% level.

Now turning to slide 20. As presented in previous calls the non-performing asset reconciliation highlights the progression of problem loans and other assets during the quarter the high level in the far right column Q1 2013 starting on line 1 we saw a meaningful decline total NPA’s changed for the – our NPA’s change for the quarter are $15.1 million from $81.4 million down to an ending balance at $66.3 million. On a more granular basis on line 2 of column 13 Q1 13 the level of new non-accruals remain stable from the previous quarter at $6.9 million and remained at a more moderate level which allow for future progress in lowering non-accruals. As mentioned previously you can see the effect of the $2.1 million a $2.3 million building moving into ORE are able to dispose of $2.3 million in ORE on line eight. So overall migration continues to move in the right direction driven by lower non-accrual loans, positive activity in ORE and lower restructures and 90 days past due resulting in an 19% decline in NPA’s and 90 days past due for the quarter.

Now turning to slide 21, both the linked quarter and year-over-year we experienced growth in key areas of core loan portfolio in the face of softness in non-mortgage retail lending. On line one, C&I lending was up 2.5% in the linked quarter and 16.8% year-over-year likewise on line three, investment real estate is up 2.2% and 14.1% respectively.

And well our construction lending on line two was down $22.7 million or 23% of the category in the linked quarter. This was driven by projects moving out of the construction to both the permitted market and the banks portfolio. We would expect to see the construction portfolio continue to fluctuate as projects fund stabilize and move to the permitted market.

So then before I turn the call back over to Mike, I would just say that the portfolio continues to trend favorably in asset quality both year-over-year and in the first quarter and with respect to recoveries as we continue to use A B note, the A B note approach to help sustain and work with our borrowers and as the economy improves, it would be reasonable to expect that we would be able to harvest additional B note recovery. And having said that we don’t project these recoveries due to the just inherent, unexpected nature of the B note.

With respect to ORE and credit related expenses well relatively flat for the quarter at $2.2 million, we would expect that with continued improvement in asset quality and market conditions these were expenses would begin to decline modestly over the coming quarters.

Thanks for your attention and I’ll turn it over to Mike now.

Mike Rechin

Thanks John. I would like to cover slides 23 and 24 before taking any questions that the audience may have. Slide 23 is a reaffirmation not a re-crafting of our operating strategy. It says we are a service driven alternative to super regional banks, my colleagues at First Merchants know our goal to be a service driven preference extends the smaller community banks and credit union as well. It means customized solutions for our clients needs delivered by local decision makers in the skin of an agile, powerful community bank.

As prior calls have highlighted, we’ve made consistent prudent investments and talent in every business listed on this slide. Our investment has been affordable through the continuing utilization of additional technology and separate processes. We feel the results reflect progress towards higher performance targets that we’ve set across the company we feel like we’re moving directionally correct.

Moving to slide 24, building on a proud history, committing to a one company, one culture as we did a handful years ago when we combined charters, most basically its providing much needed lending deposits investing and risk management advise our communities need.

In last quarter’s call, I noted the launch of a few signature project; we’ve undertaken for 2013. The projects are managed in-house with primarily 2013 completion dates. As the slide states the outcomes should be cleaner compliance for a more sound and fast consumer lending experience, the other primary thrust is a clear dedication and delineation of existing resources in commercial and cash management areas.

The only true new product if you will, new product aspect of these projects is the continuing rollout of additional functionality of online and mobile banking, which are really targeted in the last third of the year, probably the fall in fourth quarter.

Couple of last points, we promoted our Chief Credit Officer to Executive Vice President on the Corporation. John Martin joined our company five years ago little longer than that, he and his colleagues have advanced the company in many ways, I give credit to John in large part, driving of the policy through a credit cycle and through the combination of nine banks into one, developing a culture that’s replicable amongst all of our communities that’s focused on growth in a safe and sound way. Externally working with the regulators to make sure we meet their expectations in a fast changing environment and then internally. John Martin and Mike Stewart, defining for 1100 people that can grow and see between aggressive market coverage and sound underwriting hard to do as everyday job, you made a big difference for us.

Next bullet point continuing to assess the M&A environment opportunity, we’ve been talking about that and trying to act on it, the relatively low activity on our part of houses to sharpen, I reflect back on Shelby County a year ago, different type of addition to our company vis-à-vis the FDIC route, but when I think one year later what their customers of that bank, the local management that were part of that bank and the community impact that we’ve made in 12 or 13 months it reinforces our ability to execute in the back-office and then the Main Street as well.

And the last point Mark highlighted our first quarter repayment of 25% of our SBLF obligation when the bullet point says evaluate hybrid capital structure alternatives. We’ve had other bright folks in the financial institution space just highlight to us other ideas that are attractive in an attractive market for capital availability.

We’re going to evaluate those as we look at as you know the subordinated debt obligations we have and the remaining SBLF. So, feel like it’s a good time to be a good listener. And at that point, we like to listen to some questions. So, if Keith if you could open up the line, we’re available.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions). And the first question comes from Scott Siefers from Sandler O’Neill.

Scott Siefers – Sandler O’Neill

Good afternoon guys.

Mike Rechin

Good afternoon Scott, Mike.

Scott Siefers – Sandler O’Neill

Hey Mike. Let’s say I think first question probably best for you Mark, so on the margin, you know core right now I guess once you get rid of the discount accretion right around 390 or so, I think you’ve been getting about 7 basis points from this kind of accretion over the last couple of quarters. So, on an ongoing basis the margin was maybe down 7 basis points fourth quarter first quarter, how defensible do you think the current level is what are sort of the puts and takes as you look out over the remainder of the year I know you’ve got perhaps some flexibility with you’re making the balance sheet a bit more efficient, but how are you thinking about that dynamic as we look forward?

Mark Hardwick

The level of fair value accretion that we had this quarter, I would expect to at least meet those numbers going forward, the remainder of the year. And if you look at year-over-year the core decline of what 6 basis points and I think we’ll see a like amount of pressure over the coming year, just as we have some reduction in the overall yield in the loan portfolio and some reduction in the bond portfolio of overall yield on interest income.

So, I think if you start with the core and assume some modest production like we saw over the last 12 months and then build back in for the improvement and fair value accretion. Those to me feel like the kind of numbers that make sense for the remainder of 2013.

Scott Siefers – Sandler O’Neill

Okay that’s good color, I appreciate it. And then John question for you – you gave a lot of good color on sort of the elevated level of recoveries well as just a number of dynamics you’re seeing. I wonder if you could talk about, at this stage in the cycle what would you consider a normal level of recoveries and I guess more broadly and just more importantly what’s kind of an expected level of charge-off, if we would just add back in the recoveries from this quarter, I think we would put charge-off been to like a 90 basis point level which would certainly feel into too high relative to what it feels like the underlying trends are, so how are you thinking about that dynamic/

John Martin

Yeah, what would I look back over the last three quarters or so and you look at the recoveries obviously, and I like to project recoveries going forward is just, you charge them off and there are losses when we take them and they are unexpected when we get them back. When I look back at 6.30, 9.30 and the end of last year, you’re looking at you know 6.30 was, called $2.8 million in recovery and 9.30 was $2.5 million and then at the end of the year it was closer to $1 million and obviously was at 3.7 here. So when I look back at the charge offs and the recoveries it’s lower than it is here and probably somewhere in mid field of the average IP well of those three course probably a realistic expectation but again it depends.

Scott Siefers – Sandler O’Neill

Yeah that’s helpful though. And then kind of along the same lines of credit, you talked about kind of migrating I think you said toward a 2% reserve level do you have a sense given what you see in the portfolio right now for what kind of period of time that might be over?

Unidentified Company Representative

Yeah I look at the model and you look at the asset quality clearly the non-performing asset or non-accrual asset coverage as well as the criticized and classified asset levels are going to start to drive it but it’s going to be in the probably over the next four to seven quarter would be a realistic direction.

Scott Siefers – Sandler O’Neill

Okay perfect that’s helpful and I think that’s it from me and John congratulations on the promotion and thanks a lot.

Unidentified Company Representative

Yeah.

Operator

Thank you (Operator Instruction). Okay, we have a question from Brian Martin from FIG Partners.

Brian Martin – FIG Partners

Hey guys.

Brian Martin – FIG Partners

Hey Mike or Mark could you just talk about the SPLF and just kind of your expectations there and just how quickly you may look to move on something like that I know you mentioned in your prepared comments Mike that you’re I guess you’re kind of looking at other alternatives I guess maybe for that or for others can you may be just prioritize I mean just give a little bit more color there?

Mike Rechin

Brian we have, we’ve been looking at we have $68 million of SPLF remaining and then we have a $55 million of sub-debt and senior with a February 15 maturity date. So, we’re really just I’d like to have a more permanent capital solution in place for the combination of those two items a year in advance of the maturity. So, we are evaluating those alternatives and I think in the last call we were suggesting that we may look at a pattern of paying off our SPLF over kind of a – over a four quarter period I am sorry, a two year period every six months and that’s likely where we’ll be unless we just fell like the available alternatives are attractive enough both from a EPS standpoint and a duration or a term of the available sub-debt which is where we would likely go would cause try to accelerate. But at this point that’s our, schedule is to try to have something year in advance of the maturity of our sub-debt obligation.

Brian Martin – FIG Partners

Okay perfect and then may be just the discount accretion Mark, I mean you talked about kind of maintaining this type of level I guess is which you characterize this quarter as kind of lower than you’ve expected or kind of inline or just how we think about that over the next couple of quarters?

Mark Hardwick

At this level I could see it being a little higher on a, if you were to normalize that I expect to see spikes in those numbers and that comes from many complete repayment of a loan where we had a mark so this level we’re a little higher just kind of what we’re anticipating on an average for the year but I don’t think that it will be a real predictable level number for four straight quarters. Last year the fourth quarter was heavy I am sorry third quarter was heavy in repayments of some of those loans and allowed for a pretty significant spike in the number that how we’re looking at.

Brian Martin – FIG Partners

Okay and then maybe just lastly just maybe to Mike just on the loan growth and kind of the pipelines if you just kind of talk about how comfortably you are with I think you mentioned getting to kind of mid to high single digit type of number the net basis net growth for the year and just where the pipelines are and how that stacks up and that’s that will be it?

Mike Rechin

Yeah I’d be glad to mention or speak to that with a few numbers to support my thought. From the processes that Chief Banking officers put in place to track at what’s it’s about six or seven quarters old now so internally we begin to rely on it and it would tell you as I mentioned in my earlier comments that our commercial pipeline peaked for 2012 it peaked at the end of 930 at about $360 million it was down a $100 million a year end as a lot of that work it’s going on to the balance sheet as I said we had our best loan growth quarter of the year it’s up $60 million from there and that is credit across the business that it when include the mortgage business but it’s kind of dominated by commercial and well that’s been approved within front of the customer where we are hoping to win their knot get through the documentation period in close.

So that’s 363 to 260 to 320 if you follow where I’m going with those 3 points in time. And within that Brian again I said it’s commercially dominated the fastest growing of them is this business banking unit it’s about two and a half years old it’s a smallest sales force of ten or less we aspired it to be at 12 probably by year end but it’s given a kind of traction living between our retail banking system in the middle market going up but it’s the deposit rich and allowing measure it for purposes of your question in a loan pipeline it’s a whole lot more than that it drives activity in the banking centers and again really hard to have as much impact on the deposit side, great connectivity to – at the senior management level with retail and commercial.

The mortgage business which had a heck of a quarter but beneath the third and fourth quarters it’s really doing pretty well and has a nice pipeline has a pipeline that is 15% higher today than it was in April of 2012 to be clear not higher than it was in the third and fourth quarter when it really kind of where a huge numbers but 15% higher than it was this period last time so that’s the reason I see it like getting back to a mid single-digit growth rate for the year is very achievable and our folks are efforting towards that.

Brian Martin – FIG Partners

Perfect. Thanks for the color. And maybe just one last housekeeping question for John and that was – the OREO line John with credit came better and I guess feeling like things are kind of stabilizing in the market and I guess is your expectation that why and should see some meaningful reductions over the next four, seven quarters is that kind of your outlook?

John Martin

I think that’s fair. I did a little bit of an analysis when I was looking at the OREO, I do it kind of on a quarterly basis and that’s probably fair I mean it’s obviously dependent upon what’s going in out but you’re right as things flow through and migrate through the – from non-accruals to OREO and then out as those non-accruals come down so should those numbers and that’s probably realistic, I feel little bit of by unit and number category and 70% of our properties have been in OREO for less than a year so just by that and assuming that the non-accruals come down you should start to see that number start to little down.

Brian Martin – FIG Partners

Perfect. Okay. Thanks very much for taking the time.

Mike Rechin

Thanks Brian.

Operator

Thank you. And the next question comes from Michael (inaudible) from KBW.

Unidentified Analyst

Hey, good afternoon guys.

Mike Rechin

Good morning Mike.

Unidentified Analyst

So I appreciate the color on the loan growth. I was wondering also these actually we talk little bit about what you’re seeing from a pricing perspective maybe across few of your different lines of commercial residential.

Mike Rechin

Yeah, on – I can. The commercial side was tough it’s the reason we’re enthused about investment in the business banking unit it’s because the pricing is most relying on speed and ability to deliver and as you can probably see with some of the other clients that further up market you go the tighter it gets more competitors that draws. And so what’s playing that balance but we also know that the ability to win customers because a lot of our growth is not organic but gaining share is that when you get a decision maker wanting to move that it doesn’t happen all the time so we’re trying to be sharp as possible well respecting the margin that we’ve taken so long to build what we’re really trying to do is to make sure that we’re selling more than one product and that were just not using our balance sheet for loan balances but are trying to solidify all of our revenue item.

In mortgage side pretty stable, the area that we scuffle with still, retail the deposit side of the business is going terrific, the loan side, the retail consumer lending result I think are uninspiring and so we are trying specials, we’re trying to talk to the customers as much as we possibly can but we don’t have a lot of traction there yet.

Unidentified Analyst

Alright. Great. Thanks. Then also just kind of related but on the mortgage gain of sale what are the margins do sequentially would did they hang in or did they fall little?

Mike Rechin

Yeah going up.

Mark Hardwick

Yeah gain on sale went up it looks like six basis points from 218 to 224. So we are and there is very little flow I mean we kind of we lock in the pricing within and really tight window. So it can move a little based on delivery but we feel great about that the level of the gain that we had here in the first quarter.

Unidentified Analyst

Okay. Great. Thanks. And then just one more quick one. On M&A what kind of, what market do you guys kind of targeting and are you considering both FDIC and Open Bank Transactions. Just give me a little more color on how you guys are thinking about that going forward?

Mark Hardwick

Sure. The second part of your question Mike on FDIC your traditional we’re capable and interested in looking at each the volume in our contiguous states of FDIC appeared to be modest we were cast it to be modest going forward. The traditional sides more intriguing to us because we feel like it can be a little bit more strategic in terms of perhaps the ability to be contiguous to your franchise don’t always know that but we do like the Midwest our board and management in our planning look for low execution risk. We looked to leverage our key vendors because that ability to integrate companies quickly we think is lease disruptive to the revenue lease disruptive to the employees but in that billion dollars in below space and there is lots of banks half of billion dollars in below and that I feel like are getting brunt of the margin pressure and have lesser revenue outside of the spread business and it seems to be showing up there in a manifest itself in lower tangible book value prices in their currency which I think ought to help our ability to talk to them when the timing can work.

Unidentified Analyst

Okay. Great. Thanks for taking my question guys.

Mike Rechin

Sure.

Operator

Thank you. The next question comes from Daniel Cardenas with Raymond James.

Daniel Cardenas – Raymond James

Hello.

Mike Rechin

Hi, Dan.

Daniel Cardenas – Raymond James

Hi. You let all my questions have been asked. Thanks.

Mike Rechin

Okay. Thanks, Dan.

Operator

Thank you. And we have a follow-up question from Scott Siefers from Sandler O’Neil.

Scott Siefers – Sandler O’Neil

Hey, guys. Hi, Mark I just wanted to follow-up on the margin because I guess as I just I’m looking through my numbers here. So based on what you thought it sounds like you are pretty comfortable that you can pull the number or hold the margin comfortably within the 390s over the course of the next few quarters. What specifically is that allows the margin to find that kind of support. Just given all the kind of rate and pricing dynamics that we’ve got. Have you baked in doing something with the sub that or the senior stuff in there or how does it find the such steady support?

Mark Hardwick

No, it’s we think it’s primarily the strengths of the asset side and it’s stability that we have seen maybe reverses some others obviously our core deposit base keeps the is a really low cost fundings or 75% of our deposits are core and have 46 basis points of cost we don’t expect to see that to continue to come down. But we are really pleased with our loan yields holding in and the maturities of our loan portfolio are relatively de minimis in the whole scheme of things. So every.

Mike Rechin

Lower than the coupon.

Mark Hardwick

Yeah and every bond that matures over the next two years is left in the average portfolio yield. So we feel like we’ve took a little bit of risk in the bond portfolio and extended duration when others maybe weren’t and it’s paying off and then just the community bank space around we operate at a really granular level with a large percentage of our balance sheet a large percentage of our loans and we feel like we have some pricing power.

Scott Siefers – Sandler O’Neil

Okay. Good. Alright then that helps clarified. I appreciate it.

Mark Hardwick

And the range is the you mentioned I think are absolutely the levels that we’re anticipating.

Scott Siefers – Sandler O’Neil

Okay. Good. Thanks again.

Mark Hardwick

Thank you.

Operator

Thank you. (Operator Instructions). As there is nothing else at the present time I would like to turn the call back over to management for any closing remarks.

Mike Rechin

I have none Keith other than to say thank you everyone that took the time on this Thursday to listen in. We look forward to talking to you at the end of the next quarter.

Operator

Thank you. That does conclude today’s teleconference. You may now disconnect your phone lines. Thank you for participating and have a nice day.

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