Mercantile Bank (MBWM) Q2 2018 Earnings Conference Call Transcript

Mercantile Bank (MBWM 2.71%)
Q2 2018 Earnings Conference Call
Jul. 17, 2018 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Mercantile Bank Corporation second-quarter 2018 earnings results conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mike Houston of Lambert, Edwards & Associates. Please go ahead.

Mike Houston -- Lambert, Edwards & Associate

Thank you, Michelle. Good morning, everyone and thank you for joining Mercantile Bank Corporation's conference call and webcast to discuss the company's financial results for the second quarter of 2018. I'm Mike Houston with Lambert, Edwards, Mercantile's Investor Relations firm. And joining me today are members of their management team, including Bob Kaminski, president and chief executive officer; Chuck Christmas, executive vice president and chief financial officer; Ray Reitsma, president of Mercantile Bank Michigan; and Bob Worthington, SVP, chief operating officer and general counsel.

We will begin the call with management's prepared remarks, and then open the call to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to the factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call.

If anyone does not already have a copy of the press release issued by Mercantile today, you can access it at the company's website, www.mercbank.com. At this time, I'd like to turn the call over to Mercantile's president and chief executive officer, Bob Kaminski.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Thank you, Mike, and good morning, everyone. Thank you all for joining us. On the call today, I'll provide an update on overall performance, growth initiatives and asset quality; then Mercantile Bank's president, Ray Reitsma, will review our loan portfolio development and progress for the quarter. Following Ray's remarks, our CFO, Chuck Christmas, will provide details on our financial results.

Afterwards, we will open the call for Q&A. We're pleased to announce strong quarterly results for the period resulting from improved operating performance and balance sheet growth. This was evident in the healthy net interest margin, increased fee income, controlled overhead costs, sound asset quality and continued strength in our commercial loan pipeline during the quarter. Results were also supported by a lower regulatory tax rate.

In particular, let me highlight several areas of strategic focus during the quarter as we look forward to the second half of the year. Our solid financial performance was led by a total revenue increase of $2.5 million, or 8.1%, from the prior-year second quarter. Net interest income during the quarter largely contributed to the positive result and was up 7.5%, reflecting a higher level of earning assets and an increased net interest margin. We continue to build momentum in generating non-interest income, with a 12.6% increase from the prior-year second quarter.

The increase in non-interest income was primarily attributed to higher credit and debit card revenue, mortgage banking activity income and payroll service fees. We remain very pleased with the continued growth in these areas of our business as a result of our ongoing strategic initiatives throughout the past several quarters. During the second quarter of 2018, the net interest margin remained at a healthy level of 3.92%, up slightly from the 3.85% in the prior-year period. We are very pleased with the ongoing strength and relative stability we've experienced in our core net interest margin, which depicts our continued focus on prudent loan pricing and sound asset quality.

We believe these two areas of focus will lead to continued healthy margins throughout the balance of 2018 and into the future. Our asset quality performance metrics once again reflect a strong portfolio during the quarter. Total nonperforming assets were $5.8 million at June 30, 2018, or 0.18% of total assets. Our lenders and management team continue to diligently monitor our loan portfolio, searching for potential signs of stress.

The level of past-due loans remains nominal, and loan relationships on the internal watch list have generally declined in number and dollar volume during the first six months of 2018. Total deposits decreased $10 million during the second quarter. However, the mix of total deposits was positively impacted as noninterest-bearing deposits increased $54 million, while interest-bearing deposits decreased $64 million. Borrowed funds for the quarter were unchanged relative to the prior-year quarter-end, and wholesale funds continue to comprise approximately 11% of the total funding base, consistent with the linked quarter.

Continued growth in noninterest-bearing deposits and overall local deposit base remain a strategic priority for Mercantile. Turning to the Michigan economy. The trend lines we have witnessed for many quarters remain positive. Employment in our primary market continues to grow, and real estate conditions continue to be healthy.

These favorable trends, coupled with our value-added approach to banking and our wide array of products and services, have allowed us to successfully attract new customers and retain existing clients. We remain confident that the strong financial results achieved during the first half of 2018 will continue in the current year period and beyond. That concludes my remarks. I'll turn it over to Ray.

Raymond E. Reitsma -- Chief Financial Officer

Thank you, Bob, and good morning, everyone. To echo Bob's sentiments on the quarter, we are very pleased with our strong financial performance during the first half of 2018 and how we are positioned to meet our growth and profitability objectives for this year and beyond. During the quarter, total loans expanded by $85 million. Commercial term loans funded to new and current clients totaled $142 million, up from $111 million during the first quarter of 2018 and consistent in magnitude with each quarter of 2017, which led to a growth rate of 7.6% during 2017.

Our commercial loan portfolio grew $69 million during the second quarter, complemented by growth in our retail portfolio of $16 million. Included in these results is $10 million in loan growth funded by our Troy office, which opened in March of 2017. We remain dedicated to growing the loan portfolio in a disciplined manner with continued emphasis on credit quality and risk-based pricing. Based on expected new loan fundings and current commitments to fund construction projects of $116 million, we are confident that the commercial loan portfolio will expand in future periods.

Although rising interest rates and limited housing inventories in our markets persist, mortgage banking activity is ahead of last year, and the second quarter of 2018 marks the ninth consecutive quarter of residential loan portfolio growth for Mercantile. While purchase activity has increased, it remains constrained by a very tight inventory of homes for sale in our primary markets. With prequalification levels at an all-time high, nearly doubling the second quarter of 2017 level, we believe we are well-positioned to increase our market presence. That concludes my remarks, and I'll hand it over to Chuck.

Charles E. Christmas -- Chief Financial Officer

Thanks, Ray. Good morning, everyone. This morning, we announced net income of $9.4 million, or $0.57 per diluted share, for the second quarter of 2018. During the second quarter of 2017, we earned $7.3 million, or $0.45 per diluted share.

Net income for the first six months of 2018 totaled $20.3 million, or $1.22 per diluted share, compared to $15 million, or $0.91 per diluted share, during the first six months of last year. The successful collection of certain nonperforming commercial loans increased reported net income during the first six months of this year by about $1.7 million, or $0.10 per diluted share, while the bank-owned life insurance claimed during early 2017 increased reported net income during the first six months of 2017 by about $1.1 million, or $0.06 per diluted share. Excluding the impacts of these transactions, diluted earnings per share increased $0.27 or nearly 32% during the first six months of 2018 compared to the respective 2017 period. Net income during the second quarter and first six months of 2018 also benefited from a reduction in the corporate federal income tax rate, which was lowered from 35% to 21% effective January 1 of this year due to the enactment of the Tax Cuts and Jobs Act.

Our effective tax rate has been 19% thus far in 2018, compared to almost 31% during 2017. We remain pleased with our financial condition and earnings performance and believe we are very well-positioned to take advantage of lending and market opportunities while delivering consistent results for our shareholders. Our net interest margin was 3.92% during the second quarter, compared to an average of about 3.88% during the previous four quarters. In addition to ongoing benefits from the recent rate hikes from the FOMC, our yield on earning assets during the first six months of 2018 was positively impacted by successful collection efforts on several nonperforming commercial loans.

These efforts resulted in the recording of interest income that added approximately 5 and 15 basis points to our yield on earning assets during the second quarter and first six months of 2018, respectively. Our cost of funds as a percent of average earning assets increased 4 basis points during the second quarter of 2018, similar to the 5-basis-point increase during the first quarter of the year. The increase is our reflection of higher interest rates on certain money market deposit accounts, time deposits, and borrowed funds, in large part due to the increase in interest rate environment. Excluding all purchase accounting interest income and interest expense entries, our net interest margin was 3.84% during the second quarter of 2018 and 3.81% during the first six months of 2018.

This compares favorably to the 3.69% and 3.66% net interest margins during the second quarter and first six months of 2017, respectively. We recorded $0.8 million in purchase loan accretion of payments received on CRE pool loans during the second quarter of 2018, compared to the $0.5 million guidance figured -- figure I had provided at the end of the first quarter. Based on our most recent valuations and cash flow forecast on purchase loans, we expect to record further quarterly interest income totaling about $0.4 million during the remainder of 2018, and then approximately $250,000 each quarter in 2019. In addition, we expect to receive, in aggregate, about $2 million in principal payments on purchase-impaired CRE pool loans over the next several years, which will be recorded as interest income upon receipt.

We expect our net interest margin to be in a range of 3.85% to 3.9% throughout the remainder of 2018. This forecast assumes no further changes in the prime and LIBOR rates. Our interest rate risk measurements continue to reflect an improved net interest margin in an increasing interest rate environment. The quality of our loan portfolio remains very strong and -- with continued low levels of nonperforming loans and loan charge-offs.

Nonperforming assets as a percent of total assets equaled only 18 basis points as of the end of the second quarter. Similar to the first quarter of 2018, we recorded a net loan recovery of about $0.5 million during the second quarter of this year. Loan charge-offs totaled just $0.3 million during the second quarter and less than $1 million during the first six months in total. We recorded a provision expense of $0.7 million during the second quarter, in large part driven by commercial loan growth and modifications to environmental factors within our loan loss reserve methodology.

We expect to record quarterly provision expense of $0.5 million to $1.0 million during the remainder of 2018. Our loan loss reserve totaled $21.2 million at the end of the second quarter, or 0.89% of total originated loans. This coverage ratio has remained steady for many quarters, and no significant changes are expected for at least the remainder of 2018. In regards to CSO, we hope to have our model up and running by the end of the third quarter and plan to run this new model in parallel to our existing model through the end of 2019.

We recorded non-interest income of $4.6 million during the second quarter of 2018, compared to the guidance of $4.7 million to $4.9 million provided at the end of the first quarter. While we recorded increases in most fee income categories as expected, income from our mortgage banking operations came in less than expected, in large part due to a higher proportion of our originated loans being booked to our portfolio instead of sold. In addition, as Ray mentioned, the inventory of homes listed for sale throughout our markets, especially in the Western Michigan area, remains low and is negatively impacting our new mortgage loan volume. For the remainder of 2018, we currently forecast noninterest income to total $4.9 million to $5.1 million during the third quarter and $4.6 million to $4.8 million during the fourth quarter.

We recorded noninterest expense of $21.4 million during the second quarter of 2018, well within the guidance we provided at the end of the first quarter. Currently, we expect quarterly noninterest expense to total $21.0 million to $21.5 million during the remainder of 2018, with our effective tax rate remaining at about 19%. We remain a well-capitalized banking organization. As of quarter-end, our bank's total risk-based capital ratio was 12.9% and in dollars, was approximately $88 million higher than the 10% minimum required to be categorized as well-capitalized.

Those are my prepared remarks. I'll now turn the call back over to Bob.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Thank you, Chuck. We'll now open the call to questions and answers.

Questions and Answers:

Operator

[Operator instructions] The first question comes from Brendan Nosal, Sandler O'Neill and Partners. Go ahead.

Brendan Nosal -- Sandler O'Neill and Partners -- Analyst

Hey, good morning, guys. How are you?

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Good morning.

Brendan Nosal -- Sandler O'Neill and Partners -- Analyst

I just want to start off with how your customers are feeling today. And then more specifically, just given the back and forth that we're hearing on the tariff side of things and what it can mean for the State of Michigan, how are you and your customers feeling about this issue? Or is it just kind of too early to tell?

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Yes. Brendan, this is Bob. I think it's really too early to tell. You hear, obviously, a lot of back and forth, what we all read and hear in the media as far as how the tariffs might play out and then even further on, how it will affect people here in the ground at West Michigan.

I think everybody's taking a wait-and-see approach. I think everybody is aware of the situation. And it's a very fluid situation as countries try to assemble their negotiating teams to figure out where this is all going. But I think generally, the feel from our client base is that people are generally optimistic about the economy.

There's very few signs of distressed areas right now. I think it's providing ample opportunities for growth for our clients. And the overall sense is generally optimistic at this point.

Brendan Nosal -- Sandler O'Neill and Partners -- Analyst

All right, great. And then moving on to the fee side of things. The guidance for the last two quarters of the year, it feels like you tempered it a little bit. Is this just a function of what happened this quarter with you guys choosing to place more loans in portfolio as opposed to selling them? Or is there something else that's going on in the fee guidance?

Charles E. Christmas -- Chief Financial Officer

No, I think -- this is Chuck. I think most of it is surrounding the mortgage area. But I think it has more to do with the low inventory that we have out there. If you look at our prequalifications, we have twice as many prequalified borrowers right now than we did a year ago.

There just is not enough housing inventory out there for those folks to buy the homes. And so that's -- as I mentioned, that's having an impact on our overall volume, but it -- you're right. I already mentioned, we did sell less loans than what we were projecting. Most of it has to do with the fact the balances and jumbo versus conforming.

And so we go ahead and portfolio those, and those are -- virtually are all ARMs. And so no significant interest rate risk. It's -- so it's both of those, but I think it has more to do -- when we're looking at our projections, I think it has more to do with the inventory issue than what we're selling versus putting in the portfolio.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Yes, this is Bob. I can't really overstate the impact of that low inventory on the market right now. And I think we've told this story back in most recent quarters, but it is so tight right now that home goes on the market and usually within a week, they have -- the seller has many, many offers, and most of these offers are above the asking price, and the home sells within a very short period of time. So that's continued to be the theme throughout 2018.

And as Chuck mentioned, prequalifications are there. So if that frees up just a little bit, I think you'll see a continued boost in our volume with the fact that people want to buy a home. They just can't find one that's for sale.

Brendan Nosal -- Sandler O'Neill and Partners -- Analyst

Got it. OK, that makes a bunch of sense. And then last one for me on expenses. You were within the range you offered last quarter of $21 million to $21.5 million.

You kept the range for the remainder of the year. Is there anything that makes you think you could potentially drop back to the midpoint or below the midpoint? Or does it feel like where we were this quarter is probably a decent assumption going forward?

Charles E. Christmas -- Chief Financial Officer

Yes. Hopefully, we can be at the lower-end range. Obviously, like all banks, we run some accruals throughout the year for some expenses that are more lumpy throughout the year. Obviously, we keep an eye on those.

We feel really good about our accruals. A couple of them looked like maybe they're a little bit over-accrued. Obviously, we'll keep an eye on those over the next couple of quarters. So knock on wood that there might be a little bit of relief there.

But for the most part, our operating framework is pretty consistent, and we don't have any significant one-time items that we're currently looking at on the expense side. So feel pretty good about the guidance. Hopefully, we can be on the lower end. But I'm pretty confident we can be within that guidance.

Brendan Nosal -- Sandler O'Neill and Partners -- Analyst

All right. Great. Thanks for taking my questions.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Damon DelMonte, KBW. Go ahead.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Hi. Great. So first question, just kind of touching on loan growth. Can you talk about what areas of the footprint you're seeing the best opportunity for growth right now?

Robert B. Kaminski Jr. -- President and Chief Executive Officer

This is Bob, Damon. And I think as we talked about in prior quarters, I think certainly, the West Michigan area, with Grand Rapids as the home base for the company and our largest market, we have the largest market presence and certainly providing a larger proportion of the share of the -- proportional share of the opportunities. But we are seeing some very good opportunities in all of our markets just relative to the size of those markets and the presence that we have there. But certainly, West Michigan is the area where we've continued to experience the greatest growth, translated into loans, but it's going well in all of our markets

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

OK, great. And then on the deposit side, overall deposits were down a couple percent. But you had some good noninterest deposit growth. The other categories kind of dragged that down a little bit.

Was there anything unique to this quarter as far as the overall net outstanding decreasing? Or could you give a little color on what your outlook is for deposit growth?

Charles E. Christmas -- Chief Financial Officer

Yes, Damon, this is Chuck. Happy to do so. I think the decline is reflective of primarily CDs to public units. If there's one area that's been crazy competitive, and it's been this way for quite a while now, it's in the domain of larger jumbo-sized public CDs.

I think we're down to less than $90 million. It might be like closer to $80 million right now. And so if you scratch that out, even excluding the noninterest-bearing checking accounts, which continue to grow, as you mentioned, we actually saw some growth in our core deposits. We treat our public units, for the most part, the CD side anyways, more like wholesale funding and participate in that market as need be.

And since we've had steady deposit growth on the local side and have been able to augment that at appropriate rates and matching maturities with some regular wholesale fundings, such as brokered CDs and FHLB, we've kind of stepped out of that public unit market, especially for the multimillion, the very, very large CDs. We continue to have good relationships with the smaller municipalities, those that will invest, say, $100,000, $250,000, maybe $0.5 million. We've got good relationships with them. We can negotiate and be competitive there.

But we just stepped out of the larger units for now.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Yes, OK. That's good color. And then as it relates to the margin, I think your guidance for the remainder of the year was that 3.85% to 3.90% range. That takes into account the projected accretable yield.

Is that correct?

Charles E. Christmas -- Chief Financial Officer

Yes.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

OK. And you had said that was around $700,000 for each of the remaining quarters in '18?

Charles E. Christmas -- Chief Financial Officer

I said about $400,000 per quarter for '18, and then probably $200,000, $250,000 next year per quarter.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Gotcha. OK. Great. Thanks for clarifying that.

That's all that I had. Thank you very much.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Kevin Reevey, D.A. Davidson. Go ahead.

Kevin Reevey -- D.A. Davidson -- Analyst

Thanks. Good morning, guys.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Good morning, Kevin.

Kevin Reevey -- D.A. Davidson -- Analyst

So first question is related to the number of FTEs. It looks like there were some sizable -- it was a sizable increase linked quarter. How much of that was due to hiring of new commercial lenders and residential mortgage lenders?

Charles E. Christmas -- Chief Financial Officer

Yes. Kevin, this is Chuck. A vast, vast majority of that increase is a reflection of our summer college internship program. This year, we brought on 30 college students.

And we've got great folks throughout our bank helping us out this summer. So a vast, vast majority of that is that college internship program. On the lender side, we continue to always look for solid commercial and mortgage lenders to join us, and we'll continue to endeavor to do so. But I think on an overall basis, we would see [Audio gap] to go closer to where we were at the end of the first quarter, and then just some very gradual increases on a core basis as we move forward just to hire additional folks as our assets and overall operations grow.

Kevin Reevey -- D.A. Davidson -- Analyst

And then on the CRE line item, it looks like your owner-occupied loan balances grew, but it wasn't as strong as your nonowner-occupied. Are you seeing any significant pay-downs in the owner-occupied? And can you talk a little bit about the competitive environment?

Raymond E. Reitsma -- Chief Financial Officer

Sure. This is Ray. The owner-occupied pay-downs just have resulted from the liquidity of our C&I borrowers. They've been experiencing strong performance and have made pay-downs here and there across the portfolio that just reflect the liquidity that they've built up over time.

On the CRE side, it's a little bit more lumpy, and we would just experience pay-downs from time to time. It's a good time to sell assets. And from time to time, our customers are doing that.

Kevin Reevey -- D.A. Davidson -- Analyst

And then the line utilization looks like it was about 50% at the end of last quarter. Where was it at the end of the second quarter? Did you see any significant bump up there?

Charles E. Christmas -- Chief Financial Officer

No. Kevin, it continues to stay right around 50%.

Kevin Reevey -- D.A. Davidson -- Analyst

OK. And then my last question is, one of your competitors, I know there's an RFP out for municipal deposits at the state level. Are you guys competing for those deposits at all?

Charles E. Christmas -- Chief Financial Officer

Not at this current time. As I mentioned before, that's kind of an arena that we pretty much stay on the sidelines due to the hyper competitiveness and what the impact of that is having on rates. What we find is that tends to be very wholesale. It's very rate-driven.

And what we find is we can tap into the brokered market, broker CD market and/or on the FHLB market at a cheaper price. And we can actually get longer-term CDs and advances, which helps us manage our interest rate risk.

Kevin Reevey -- D.A. Davidson -- Analyst

Great. Thanks, guys.

Raymond E. Reitsma -- Chief Financial Officer

Thank you.

Operator

The next question comes from John Rodis, FIG Partners. Go ahead.

John Rodis -- FIG Partners -- Analyst

Good morning, guys. Chuck, did you say you had a small amount of interest recoveries this quarter? I think you said 5 basis points. Did I hear that right?

Charles E. Christmas -- Chief Financial Officer

That includes the accretion.

John Rodis -- FIG Partners -- Analyst

That includes the accretion, OK. So a very small amount then. And then, I guess, Chuck, your margin guidance of 3.85% to 3.90%, what does that assume for your excess liquidity since what -- interest deposits came down roughly, what, $95 million or $100 million linked quarter. Does that assume they sort of stay at the lower level?

Charles E. Christmas -- Chief Financial Officer

Yes. We finally -- after several quarters, we finally got that down to the desired level of $40 million to $50 million. And that's where we've been -- throughout most of the second quarter. That's where we are currently.

And we expect to continue to stay at that level.

John Rodis -- FIG Partners -- Analyst

OK, super. And then maybe guys just one other question. You guys obviously increased your quarterly dividend by $0.02. So it looks like it takes sort of your payout ratio to 35% to 40%.

Is that sort of a level you're comfortable with now?

Charles E. Christmas -- Chief Financial Officer

I think our guidance has always been, John, to be 35% to 40%, but we try to be closer to that 40% level. So given our improved earnings performance, as we've already talked about throughout the conference call, we saw the opportunity to go ahead and increase that a little bit more than $0.01 per share, which we traditionally would have done for the third quarter and keeping us closer to that 40%. And obviously, we're looking at that dividend ratio as well and want to keep that competitive and getting that closer to 2.5%, 2.6%.

John Rodis -- FIG Partners -- Analyst

OK. Great. Thanks, guys.

Charles E. Christmas -- Chief Financial Officer

Thank you.

Operator

[Operator instructiosn] The next question, Daniel Cardenas of Raymond James. Go ahead.

Dan Cardenas -- Raymond James -- Analyst

Hey, good morning, guys.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Good morning, Dan.

Dan Cardenas -- Raymond James -- Analyst

Nice quarter. Congrats. Just a quick question. I'm looking at your loan-to-deposit ratio.

I mean, you had some good loan growth this quarter. Deposits were down modestly, but your loan-to-deposit ratio kind of hit that 104% level. I mean, where do you kind of see that ratio building out throughout the end of the year? And is this the high end of your comfort level? Or do you think it could go a little bit higher?

Charles E. Christmas -- Chief Financial Officer

Yes. Dan, as you know, we've been usually right around that 100% level. It trended up, as you mentioned, right at the end of the second quarter. Like I said, we've always been right around 100%.

So obviously, we're comfortable there. I think the only possibility for that increasing a little bit depends on our use of FHLB advances. Obviously, that kind of plugs the funding gap if we have one as we move forward. So it's just kind of going to be that play between what we can grow from a net-loan standpoint and see what we can continue to grow on the local deposit side.

But I think on an overall basis, that 100% to 105%, we're comfortable there. And I think, for the most part, that's where you would -- you can expect us to be.

Dan Cardenas -- Raymond James -- Analyst

OK, all right. And then what did deposit betas look like this quarter for you guys?

Charles E. Christmas -- Chief Financial Officer

Yes. I think they're pretty similar. As I mentioned in my prepared remarks, our cost of funds as a percent of average earning assets and the other half of the margin, we're up 4 basis points. On an overall basis, I think we're up 5 basis points.

The quarter before, flip-flopped that around maybe. Don't really see any significant change there. Certainly, as the Fed continues to raise rates, and it's a very competitive environment out there. We'll continue to certainly see some pressure, certainly on time deposits, public and others, borrowed funds.

FHLB goes right off the LIBOR curve and our trust preferreds are tied right to -- are three-month LIBOR. So far, we haven't had to touch a large percentage of our consumer deposit products. We have had to touch on occasion our business, non-CDs, non-time deposits, but not any significant degree. So if the marketplace stays consistent, I would expect our cost of funds to continue to go up that 4 or 5 basis points a quarter.

Dan Cardenas -- Raymond James -- Analyst

OK. Perfect, perfect. All my other questions have been asked and answered. Thanks, guys.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Thanks, Dan.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Kaminski for any closing remarks.

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Yes, thank you. That concludes our conference call. Thank you for your interest in our company, and we look forward to talking to you again at the end of the third quarter. Thank you again.

Operator

[Operator signoff]

Duration: 36 minutes

Call Participants:

Mike Houston -- Lambert, Edwards & Associate

Robert B. Kaminski Jr. -- President and Chief Executive Officer

Raymond E. Reitsma -- Chief Financial Officer

Charles E. Christmas -- Chief Financial Officer

Brendan Nosal -- Sandler O'Neill and Partners -- Analyst

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Kevin Reevey -- D.A. Davidson -- Analyst

John Rodis -- FIG Partners -- Analyst

Dan Cardenas -- Raymond James -- Analyst

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