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First Merchants Corp (NASDAQ:FRME)
Q1 2021 Earnings Call
Apr 22, 2021, 2:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the First Merchants Corporation First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded.

This presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements can often be identified by the use of words like believes, expect or may and include statements relating to First Merchants business plan, growth strategies, loan and investment portfolio; asset quality, risk and future costs. These statements are subject to significant uncertainties that may cause results to differ materially from those set forth in such statements, including changes in economic conditions, the ability of First Merchants to integrate recent acquisitions, changes in regulations and requirements of the company as regulators, litigation, changes in the creditworthiness of customers, fluctuations in market rates and interest, and other risks and factors identified in First Merchants filings with the Securities and Exchange Commission. First Merchants undertakes no obligation to update any forward-looking statement whether written or oral, relating to the matters discussed in this presentation or press release. In addition, the company's past results of operation do not necessarily indicate its anticipated future results.

I would now like to turn the conference over to Mark Hardwick, CEO. Please go ahead.

Mark Hardwick -- Chief Executive Officer

Good morning, everyone, and welcome to First Merchants first quarter 2021 conference call. We released our earnings today at approximately 8:00 AM Eastern Standard Time. Hopefully, you've all found your way to our slide presentation. But if not, you can access the slides by following the link on the second page of our earnings release. Betsy, thanks for the introduction and for covering the forward-looking statement on Page 2.

On Page 3, you will see today's presenters and our bios to include President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki.

Page 4 is a nice one page snapshot of the First Merchants geographic footprint and a few relevant financial highlights for your review. We feel the first quarter return on assets of 1.39% and return on tangible equity of 15.87%, reflect the strength of First Merchants overall balance sheet and our earnings model. We're also pleased to see that our stock price return to the levels that we -- that are more reflective of a top quartile performing bank with a price tangible book multiple as of March 31 of just over 2x of tangible book.

Now, Mike Stewart Stuart will cover Slide 5 and 6 and provide some line of business commentary.

Mike Stewart -- President

Thank you, Mark and good afternoon. As you look at the next two slides, I want to provide an update on our line of business activities and their contribution to the quarterly results that Michele and John will review in detail and provide insight into the geographic markets we serve. I'll start with our Private Wealth Advisory business. We closed on the previously announced acquisition of Hoosier Trust Company on April 1. Their business of trust and investment services will integrate with our existing businesses in the Indianapolis market. We welcome the team from Hoosier Trust and their clients as part of the First Merchants family.

As talked about last quarter, our private wealth team is now fully integrated into each of our markets and it assures we can grow in a balanced full service banking approach. Michele will offer additional insights to the performance of this line of business, but the wealth management fee income within our non-interest income category has grown nearly 7% over the first quarter of prior year. Additionally, the loan balances of the private banking team grew 7% for the quarter, both demonstrating quality organic growth.

Moving on to the consumer line of business; the core growth of deposits was strong with both the stimulus checks and organic unit growth driving the consumer deposit balances up over $250 million for the quarter. As Michele will highlight next, our deposit costs continued to decline again this quarter 6 basis points, be nearly equally shared between the consumer and commercial business units. Our consumer loan balances contracted yet again this quarter and was the sole business to show decline. HELOC utilization continues to decline. Average usage sits at 40%, down from 42% last quarter and 46% a year-ago. Further, with improving home values across the Midwest coupled with the low mortgage rate environment, first mortgage refinances have continued to be used to repay consumer debt. I do look for this trend to update through the balance of the year.

As we discussed last quarter, our consumer clients continue to accelerate their usage of our digital product sets. And we continue to align our people and technology to increase revenue and retention rates, while improving the client experience through ease of use, speed of transaction and product pull through rates. We want to further our digital capabilities. So in the first quarter, we partnered with Terafina for a new online account origination platform. We intend to offer this new onboarding experience to all of our markets by end of year. Lastly, the previously announced banking center consolidations we talked about in December are moving forward with all announced full service locations being consolidated by the end of the second quarter.

Moving on to the commercial line of business; our non PPP commercial loans grew in the quarter by roughly $37 million, a 3% annual rate. Round 2 PPP volumes drove the balance of the loan growth for the commercial segment. We have previously discussed line of credit utilization, which again decreased during the quarter, down another one half of 1% and down over 10% from the prior year. The rate of decline looks to be at a bottom and our pipeline is very good. After the strong fourth quarter of loan closings, which we talked about last quarter 10%, in addition to all the PPP forgiveness activity and Round 2 efforts our teams have been working on the pipeline looks to be able to deliver continued growth in subsequent quarters and affirms my expectation on mid to high single-digit annual growth rates. Like the consumer group, the commercial group had strong deposit growth while managing interest expense lower. Michele will also cover the non-interest income in more detail, but derivative hedging activities were muted this quarter and contributed to our non-interest income decline.

The map you see on Page 6 represents both the demographics of a growing economic environment. It's the heart of the Midwest that drives our growth and a stable source of talent to lead our business efforts across all of our lines of business. Over the past month, I've been back out in our markets, and have witnessed the reemergence of business activities by both our bankers and our communities. While and even from state to state, all markets are reopening or have reopened and the business, the climate is very good. And we noted that we reopened our banking centers in February.

Mark, I'm excited for Michele to provide the complete review of the quarter results and operating metrics and for John to share the soundness of our portfolio and efforts around PPP and deferral activities.

I'll give it back to you.

Mark Hardwick -- Chief Executive Officer

Yes, thanks, Mike. Now, if you turn to Page 7, we just have a few more highlights before Michele covers the details of the financials. As my quote mentioned in the press release and consistent with Mike's comments, we're really pleased to be back in the office and serving our customers in a more personal way again, as the vaccination rollout progresses nicely in our entire footprint.

Michael Joyce, the President of our First Merchants Private Wealth Advisors, his team is very excited about the acquisition of Hoosier Trust, and the addition of $1.5 million of annual revenue that now is part of his business. Mike mentioned some of the brands consolidations. And I would just point out that, at least to date through our earnings day today, we've consolidated 13 of the 17 announced locations. And we continue to reinvest the savings into the digitization initiatives that we discussed on previous calls. Our initial digital investment is being channeled into Terafina. As Mike mentioned, it's a new online account origination platform and along with that investment in technology, we've also made significant investment in IT talent in order to optimize our investment and to create a real state-of-the-art user experience.

The PPP program dominated our lending efforts in Q1, at least as you look at the details of the numbers, and we realized fee income from that program of about $7.5 million dollars to the amortization and -- or through just the forgiveness process. Michele will discuss our CECL adoption, that's now complete and we combined with capital and financial metrics, the bank is positioned to maximize future growth opportunities.

So, at this point, Michele will further discuss our financials.

Michele Kawiecki -- Chief Financial Officer

Thanks, Mark. My comments will begin on Slide 8. We experienced significant balance sheet growth during the quarter, which you can see on Lines 1 through 4, its total assets increased by $562 million or 16%. We had $590 million of deposit growth during the quarter, reflecting an influx of stimulus payments, coupled with organic growth. This liquidity funded $76 million of loan growth and an investment of $554 million in the bond portfolio. We are pleased to report net income on Line 17, increased $4.3 million or 38.5% over the fourth quarter, leading us to earnings per share of $0.91 which is shown on Line 22, which is an $0.08 increase over prior quarter. I will walk through the income and expense components in more detail on later slides.

On Line 23, you will see that tangible book value per share declined $1.29 this quarter. As Mark mentioned, we adopted the CECL standard at the beginning of the year, which caused tangible book value per share to decline by $1.26. Additionally, the increasing yield curve caused a reduction in the unrealized gain on the investment portfolio, which is reflected in the accumulated other comprehensive income component of equity. So that also caused a reduction in tangible book value this quarter as well.

Moving up to Line 19, return on average equity increased over 1% to a strong -- I'm sorry, 10.75%. In the highlights, an increase in pre-tax, pre-provision earnings of $1.2 million over Q4 2020 is noted, which brings the pre-tax, pre-provision return on average equity to a strong 12.7%. The efficiency ratio shown on Line 21 was a low 50.23%. We feel all these ratios reflect a strong and efficient core business that will produce greater needs in the future.

On Slide 9, shows the highlights of our investment portfolio. The top right graph shows the trend in the portfolio yield. The yield on the portfolio declined 8 basis points during the quarter, which was more than we anticipated. That was the result of significant portfolio growth invested in yields that were lower than where the portfolio was averaging. However, the portfolio contributed $19 million of interest income this quarter, an increase of $1.8 million over the prior quarter, and the overall portfolio yield continues to outpace that of peers. On the bottom left are some investment highlights. We are pleased to see the current purchase yield increase to 2.7%, up from the purchase yield of 1.65% at the beginning of the quarter. The roll off yield for the remaining year is 2.54%, so we could see a bit more compression in overall portfolio yield over the course of the year depending on how the rate environment shapes.

The adoption of CECL requires us to establish an allowance for credit losses for investments. So we recorded a reserve for held to maturity municipal bonds securities in the amount of $245,000. That was estimated using Moody's published 10 year cumulative default rates for AA rated securities, which reflects the high quality of the bonds we hold.

On Slide 10, in the bottom left corner, you will see the first quarter loan yield was a strong 3.98%. Excluding the impact of PPP loans, loan yield was 3.85%. Yield on new and renewed loans in the fourth quarter averaged 3.63%, up from 21 basis points from the yield on new and renewed loans from last quarter. On the bottom right is the loan rate mix which shows that 61% of the total loan portfolio is variable and 39% is fixed with 8% of those fixed rate loans being PPP loans. Excluding the PPP loans, 67% of our loan portfolio is variable rate. So when the Fed starts to increase rates, the repricing of the portfolio will create significant interest income growth.

Slide 11 shows the details related to our allowance for credit losses on loans. On the bottom right of the slide is a roll forward of our allowance balance. Starting on the left of that graph, we ended Q4 2020 with an allowance balance of $130,600,000. We adopted CECL on January 1, 2021 with a day one increase of $74,055,000, bringing the balance to $204,700,000. During the first quarter, we had $3.6 million in charge-offs net of recoveries, which reduce the allowance balance, and we did not book any provision expense this quarter. Therefore the ending allowance for credit losses on loans was $201,082,000. The coverage ratio trended in the graph on the top left. Our coverage ratio at the end of Q1 was 2.16%, up from 1.41% from prior quarter. Excluding PPP loans, the coverage ratio is a robust 2.34%.

CECL also requires that we book a reserve for unfunded commitments, which was valued at $20,500,000 recorded in liabilities and is separate from the allowance for credit losses on loans balance. Any future changes in the valuation of that reserve will be recorded through provision for credit losses on the income statement. We do think our allowance balance reflects a cautious posture given the quality of our loan portfolio, which John Martin will cover in his remarks and we're glad to get the CECL implementation behind us.

Now, we will move to Slide 12. On the bottom left, you will see the cost of deposits continues this downward trend to 21 basis points in the first quarter. As Mike pointed out, this is a 6 basis point decline from the prior quarter and 67 basis point decline from Q1 2020. Despite large average deposit balance growth, interest expense from deposits declined $1.3 million on a linked quarter basis due to strong deposit pricing discipline.

Slide 13 shows the trending of our net interest margin. Line 1 shows net interest income on a fully tax equivalent basis of $105.1 million. When you back out noncore interest income items such as fair value accretion shown on Line 2, and the impact of PPP loans on Line 3, our core net interest income totals $94.1 million compared to the prior quarter total of $92.4 million. The increase in core net interest income was $1.7 million. Stated net interest margin on Line 6 totaled 3.23% for the quarter. Adjusted for fair value creation and the impact of PPP loans brings us to core net interest margin of 3.04%, which is a 9 basis points lower than the fourth quarter margin of 3.13%.

We calculate our margin on a 360 days basis; so losing 2 days of income in the month of February always has the calculated effect of lowering our stated margin. When quantifying the impact of that, it results in 7 basis points of margin reduction. So eliminating that impact brings core margin to 3.11% for the first quarter. So to summarize, we had just a couple of basis points of core margin compression, which was primarily due to the impact of increased liquidity.

On Slide 14, non-interest income totaled $24.1 million for the quarter with total customer related fees of $20.7 million. The quarter-over-quarter decline was largely driven by low derivative hedge fees and the decline in the gain on the sale of mortgage loans. Card payment fees increased by $900,000 with $600,000 of that coming from an annual MasterCard rebate that we receive in the first quarter of each year.

Finally, wealth management fees increased by $200,000 on a linked quarter basis. We do expect mortgage production to increase in Q2 compared to Q1, that coupled with the inclusion of fee income from Hoosier Trust acquisition that Mark mentioned, should lead us to an increase in total non-interest income in Q2.

Moving to Slide 15. Expenses for the quarter totaled $66.1 million, which was $6.4 million less than Q4 2020 expenses of $72.5 million. In the bar graph on the right, you can see the decline in premises and equipment from Q4. As a reminder, Q4 expenses include branch consolidation charges of $4.5 million. Salaries and benefits also declined from Q4, primarily related to a reduction in incentive accruals.

Slide 16 shows the strength of our capital ratios. The tangible common equity ratio at the top of the page is stated at 8.78%, but is 9.10% without the impact of PPP loans. Aside from the impact of PPP loans, the decline in this ratio quarter-over-quarter was due to the same factors that caused the decline in tangible book value per share that I mentioned on an earlier slide. The impact of CECL adoption caused a decline of 45 basis points. And the decrease in net unrealized gains on securities quarter-over-quarter caused a decline of 25 basis points. At the bottom you will see common equity Tier 1, and also the total risk based capital ratios remain at really high levels reflecting the strength of our capital base.

That concludes my remarks. I will now turn it over to our Chief Credit Officer, John Martin.

John Martin -- Chief Credit Officer

Thanks, Michele, and good afternoon, folks. I'll begin my comments on Slide 17 by reviewing the loan portfolio and including industry concentrations that provide an update on loan modifications, touch on the residual pandemic impacted loan portfolios with an update on the PPP loan program, before closing with some asset quality updates.

So turning to Slide 17, in the quarter, we had $76 million of loan growth led by the sponsor finance business, construction lending portfolio and public finance activities. This also included PPP loans, which grew by $75 million as we continued our participation as mentioned earlier in the program during the first quarter. Mortgage loan production remains strong as we head into the second quarter, as we operate a mostly originate and sell model. As Mike mentioned earlier, with some decline in home equity and consumer balances which are really related to home refinance. The core commercial portfolio remains diversified and balanced with a skew toward manufacturing, centered in our geographies with core scalable business lines leading our growth.

Turning to Slide 18, on the left side of the slide have highlighted the PPP reduction, both in aggregate and by year to help provide a sense of the average dollar loan still outstanding by phase or year. I've also included the details for the $186 million and you want to make a note of this or 337 applications that have been submitted for forgiveness to the SBA and which are under review, or highlighting the loans eligible for the streamline forgiveness process for those loans under 150,000. Well, there are a number of factors at play as we contemplate forgiveness and fee recognition. I view the forgiveness peaking in the second quarter -- second and third quarters, while containing a tail as we head into '22 and beyond.

Moving to the right side of this slide, continued modification deferral tracking from last quarter with $65 million and 49 loans with 13 of the 49 really just small dollar consumer loans. The residual result of the pandemic and the portfolio is remarkably muted after peaking early last year at over a $1 billion in modifications. The bar chart below highlights the concentration of the deferrals in the hospitality industry with $49 million of the $65 million above related to the hospitality industry.

So turning to Slide 19, and I broke it out the senior living and hospitality related portfolios. The demand drivers below which include university and think like sporting events, corporate, like convention related hospital, think like the hospital adjacent properties and transit, like vacation or roadside properties are what makes up the hotel portfolio. As activity returns to more normal levels related to those demand drivers, the expectation is that the performance in this space will continue to improve. We are reviewing the hotel portfolio quarterly and continue to see improvement really in this specific -- in specific property results as we go through those reviews. Now with the senior living portfolio, as we had it in the pandemic, we were already focused on some specific projects and markets where we are seeing saturation with the effect of the pandemic that led certain projects to experience weakened occupancy followed by payment difficulties which are highlighted in the asset quality slides on Slide 20.

So flipping to Slide 20, overall asset quality remain stable. We had a $3.6 million decrease in nonaccruals associated with the $2.6 million of charge downs related to two senior living projects previously moved to nonaccrual. Other real estate owned is relatively low with a book balance of $600,000 resulting overall in a 65 basis point level of NPAs and 90 days past due to loans and ORE [Phonetic]. Classified loans were stable as well down $2.3 million with net charge offs of $3.6 million or 16 basis points. The portfolio continues to trend in the right direction with the help of the PPP program and an improved economic environment. This has led to better overall borrower financial performance heading into 2021 and improvement in the residential -- excuse me, residual pandemic impacted portfolios.

So flipping to Slide 21, I've once again included the asset quality roll forward, which reconciles changes in asset quality. New non-accrual loans on Line 2 fell back from the fourth quarter and were only $6.5 million compared to the $16 million in the prior quarter. Growth charge offs were higher at $4.3 million as we recognized the previously mentioned $2.6 million loss associated with the two senior living related loans, which have an original loan balance of roughly $27 million. Overall, ending NPAs and 90 days past due remain stable and improving as highlighted on Line 13. And then finally, I would just close by saying that we continue to focus on ways to ensure improvement of the residual pandemic portfolios are winding down the delivery of the -- of new PPP loans and continuing to extend our balance sheet to new business across all regions and business lines.

Thanks for your attention. I'll turn the call back over to you, Mark.

Mark Hardwick -- Chief Executive Officer

Thanks, John. If you look at Slides, 22 and 23, they're just nice snapshots. I think highlight the track record of First Merchants from both a growth perspective and financial performance. And then Page 24 is really a listing of some of the priorities that we're focused on as an as a management team to really drive our performance over the next several years as we continue to grow the company. I feel like we're making great strides across the board, both in our lines of business and administratively. And as the year progresses, we'll be sharing even more detail about performance under each of these 10 items that we're listing. So, I feel like the quarter was pretty clean and easy to understand. If there's anything that feels extraordinary to us, it's just the impact of PPP in a number of different ways throughout the balance sheet and the income statement. But we've -- we clearly were appreciative of your investment. And we appreciate your attention today.

And that's it this time. We are happy to open up the conference for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Scott Siefers from Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler -- Analyst

Good afternoon, everybody. Thank you for taking the question. First question is on the margin. So sort of the core margin excluding PAAs and PPP down only a couple of basis points, I think you suggested, Michele, once you account for day count. So where does it go from here relative to that 311 level?

Michele Kawiecki -- Chief Financial Officer

Yes, I think our core net interest margin, I was just looking at even the month of March, which is always kind of a great jumping off point because of the February noise and our core margin for March was 310. So that's probably a good indicator of where we're going to be. I think if there's any compression at all, it would probably depend on how much incoming liquidity we have. This quarter, we had really great growth in deposits, and put it to work in the investment portfolio. And to the degree that we can get that invested in our loan portfolio, obviously, the yields are higher, and that that's a little more helpful for margin. So I think it's probably dependent on liquidity growth. Otherwise, I would still expect stability in our margin.

Scott Siefers -- Piper Sandler -- Analyst

Okay, perfect. That's great. Thank you. And then let's see, just with the reserve, I guess the timing of when you guys adopted CECL makes it a bit more complicated than others. But maybe what's sort of the steady state reserve that we would be working down toward? In other words, in the CECL adjustment, presumably there was, I guess, like COVID adjustment in there as well. So what would you consider sort of a steady state reserve that we end up working back down toward?

Michele Kawiecki -- Chief Financial Officer

It probably depends on what you consider -- what kind of economic environment you consider a steady state. One of the things that I have suggested to folks and granted back at the end of 2019, unemployment and so forth were at 50 year lows. So I don't know if that's the steady state. But if you go back to our disclosures at that time, we had a reserve of $80 million at the end of 2019. And that was before any of the pandemic hit. And so we had suggested that we would have like about a $55 million increase in reserve at that time. And so that would have brought our coverage ratio to somewhere around 150, I think of coverage. And so, that -- it kind of depends on what you're considering steady state, but that is at least a data point, that might be helpful.

Scott Siefers -- Piper Sandler -- Analyst

All right. That's perfect. So it seems then like absent any real surprises, we'd be sort of working the reserve down the combination of loan growth and maybe just some credit leverage, meaning under providing relative to charge-offs over the next several quarters. Is that fair enough?

Michele Kawiecki -- Chief Financial Officer

I think that's right, yes.

Scott Siefers -- Piper Sandler -- Analyst

Okay, perfect. Thank you. And then I guess one final question. I think you guys have about $20.5 million in remaining PPP fees. Do you know how that breaks out roughly between rounds?

Michele Kawiecki -- Chief Financial Officer

Yes. So Round, oh, sorry, I've to look through my notes. So our -- round one, we have unearned fees of $7.2 million. And then on round two, it is 13.3.

Scott Siefers -- Piper Sandler -- Analyst

Okay, perfect. All right. That does it for me. Thank you very much.

Mark Hardwick -- Chief Executive Officer

Thanks, Scott.

Operator

Our next question comes from Terry McEvoy from Stephens. Please go ahead.

Terry McEvoy -- Analyst

Hi. Thanks. Good afternoon, everybody.

Mark Hardwick -- Chief Executive Officer

Hi, Terry.

Terry McEvoy -- Analyst

Maybe just was hoping to get your thoughts on future loan growth. There was real strength in the sponsor, finance book, construction was up and in a few areas, as you mentioned, like home equity were down. So maybe some comments on loan pipeline in ex PPP, what you'd expect over the coming quarters, where there could be some upside and where do you think there could continue to be some roll off? Thanks.

Mike Stewart -- President

Sure. Mike Stewart here. I'll try to give you some more insight. Again, the activity levels that I look forward to continue to give us in that position that we talked about regularly in that mid to single high digit loan growth and I really feel like that's where our pipelines currently are. When you look across the segments that you'd asked about, our commercial industrial activity, businesses are performing well, absent supply chain issues and maybe some labor nuances. Their business volumes are growing and reinvesting back in businesses and the activity level that we see. Beyond just M&A activity with replenishment of equipment and real estate is just continuing to grow, the investment real estate has remained robust for us on the areas that we focus on. As John points out, we don't focus on hospitality as an example, or traditional retail, but we think about multifamily and what's going on in suburbian, what's going on with office -- no, it's not office, with industrial warehouse space, in particular, really good asset classes in this distribution model that continue to grow and we're very active in that space. And feel good about that. Yes, the sponsor activity is a nice part of our business are focused on that C&I. There's good equity sitting on the sidelines ready to put that money to work and M&A activity of the sponsors has went from a low point in the second quarter of last year and continue to build as they find good opportunities were positioned well in that space.

So I look for that to go. And that's also augmented with some of our continued people. Focus that we talked about last quarter. Our commercial teams across all of our markets have invest -- invested in additional skill set capabilities to round out the size of organization we are, whether it's in our new Michigan marketplace, or back in our Ohio [Phonetic] markets in Indiana. So new talent growing in our opportunities just gives us more looks across the way The consumer portfolio; we're just going to keep watching what focuses, what happens there when you think about the consumer at large, the use of their, look stimulus checks, the need of them to spend, we're starting to see the spend activity increase when you look at credit card and usage on that regard. So we very well might see an uptick in our consumer portfolios as the time goes on. But that's a relatively small piece of our overall loan book.

Terry McEvoy -- Analyst

Appreciate that. Thank you. And maybe as my follow-up a question for Mark. Capital is high, the reserve is high. And I guess depending who you ask, and you mentioned it on Slide 4 here. The stock price is relatively high at 2x tangible book, I guess my question is, you're in a great position for to take advantage of this M&A window that might be open. What are your thoughts on M&A? And any specific markets kind of stand out? or specific bank sizes that you're kind of comfortable with today? Thank you.

Mark Hardwick -- Chief Executive Officer

Yes, thanks, Terry. Yes, we do feel like balance sheet is well positioned for growth in a number of different ways. With strong liquidity, we have a great team that I think is really actively engaged in growing our loan portfolio organically as well as our fee income sources. But M&A is something that, if you look at our history, it's clear that we usually have about one acquisition a year. And we'd love to stay on that pace. So we're more active. And our footprint, which we always talk about is just being Indiana and the four contiguous states. And we typically think of organizations that are less than 25% of our total asset range. So we're active and we're busy and continuing to have great communication with CEOs through our -- evaluating their options. So, we'll see if something happens this year, but we're certainly interested and would love to continue to put our capital to work.

Terry McEvoy -- Analyst

Great. Thank you, Mark.

Mark Hardwick -- Chief Executive Officer

Thank you, Terry.

Operator

Our next question comes from Daniel Tamayo from Raymond James. Please go ahead.

Daniel Tamayo -- Raymond James -- Analyst

Good afternoon, everybody. Maybe just we touch on the expense outlook. I think last quarter, you guys mentioned that the expectations were somewhere in the range of $68 million to $70 million per quarter. And we're running a little bit below that in the first quarter, obviously, good thing, but with the investments that you talked about, including the partnership with Terafina, how are you thinking about that quarterly run rate going forward?

Michele Kawiecki -- Chief Financial Officer

Yes, I think I would reinforce the guidance that we gave last quarter with that expense run rate of $68 million to $70 million. Expense management this quarter was really outstanding, but I do think total expenses will creep up a little higher as we get further into the execution of our plans and our strategic initiatives.

Daniel Tamayo -- Raymond James -- Analyst

Okay, terrific. And then maybe following up on the discussion Mark, that you were just having around M&A. Given we're at 2x tangible book, you do have the share repurchase authorization in place, but how do you -- how would you feel about share purchases at these current prices? Or if not, what would be a potential entry point to get back and involved in that? Thanks.

Mark Hardwick -- Chief Executive Officer

Dan, we have our next Board meeting, our annual shareholder meeting is announced as of May 11th. And we will have that discussion again at the -- in the boardroom. So it kind of depends on the outlook and we feel like for the next couple of years, at least, given the amount of stimulus and the vaccinations that are occurring, the economic outlook continue to be strong and improving. And if that's the case, that makes our stock prices look more attractive. So, I think my goal at the end of the day is to make sure that we maintain our tangible common equity around 11 -- oh, I'm sorry, around 9% because it just drives a much higher return on tangible equity and return on equity. So I was really thrilled with the 1587 return on tangible we had this quarter and I'd love to keep it in that range by managing the capital base to 9% TC versus letting it creep up to 9.5, or 9.75, or 10, like we've been in the past. So it's, I guess, as we're looking at our options, it's dividends, which will likely look at again at the May 11, Board meeting. The share repurchase activity, and just weighing that against actual cash and acquisitions, as we evaluate the opportunities that are in front of us.

Daniel Tamayo -- Raymond James -- Analyst

Terrific. That's all I had. I appreciate the color.

Mark Hardwick -- Chief Executive Officer

Yes. Thanks, Terry or Dan.

Operator

Our next question comes from Bryce Rowe with Hovde Group.

Bryce Rowe -- Hovde Group -- Analyst

Thanks. Good afternoon. Thanks for taking the question here. I wanted to ask about the bond portfolio and opportunities possibly to put more excess liquidity to work there. Obviously, we've seen a big jump in the bond portfolio in the first quarter. And was wondering with the level of excess liquidity continuing to look elevated and possibly be elevated for the foreseeable future here was wondering if you will continue to add to the bond portfolio in a meaningful way, like you've done here recently.

Michele Kawiecki -- Chief Financial Officer

What we think volatile liquidity that came in, in the first quarter that -- although we had, we did have really good organic growth, probably about half of that was stimulus payment related, whether it was PPP money, or the EIP payments. And so I wouldn't expect that big of an increase in liquidity in next quarter. But to the degree that we do have it, of course, putting it in loan growth is always going to be our first choice. But as opposed to letting in cash, we probably will continue to buy securities and just take them as available for sale in case we wanted to use liquidity in the future for another purpose.

Mark Hardwick -- Chief Executive Officer

And this is Mark, I will just add, take time, and we're pretty selective in terms of the bonds that we like and you can see that interest bearing deposits that we're we have a sizable number, and we're always looking for opportunities for good investments with the right return profile. And we'll continue to do so this quarter.

Bryce Rowe -- Hovde Group -- Analyst

Okay, that's helpful. And as a follow-up, and maybe you all touched on this here recently as well. But in terms of the FHLB advances on the balance sheet came down a little bit here in the first quarter. Just wondering if there are more opportunities to let those roll off with excess liquidity being what it is.

Michele Kawiecki -- Chief Financial Officer

And I do believe we have some maturing yet this year. I actually don't have that schedule in front of me, but to the degree that we have any of those mature certainly we'll let those roll off. But I'll follow back up with you Bryce and I can get you that number once I did that up.

Bryce Rowe -- Hovde Group -- Analyst

Okay. That would be great, Michele. Appreciate it. Thanks for taking the questions.

Michele Kawiecki -- Chief Financial Officer

Yes, you're welcome.

Operator

[Operator Instructions] Our next question comes from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte -- KBW -- Analyst

Good afternoon, everyone. Hope everybody is doing well today.

Mark Hardwick -- Chief Executive Officer

Yes, we are. Thanks, Damon.

Damon DelMonte -- KBW -- Analyst

Great. Great to hear. So my first question is on fee income. I think you guys noted that there are some seasonal factors that kind of brought numbers down this quarter from last quarter. And you alluded to the fact that you get a bit of a rebound here in the second quarter. Michele, can you give a little bit of guidance on a range of what would be a reasonable expectation?

Michele Kawiecki -- Chief Financial Officer

Yes, last quarter, I told you that I thought we could replicate Q4 levels and that was a good run rate. But we're really seeing some cooling in the derivatives, loan level hedges compared to Q4. And so if I look at the list that we'll get from Who's your trust and also some strong mortgage loan production, I will probably bring that range down a little bit to maybe $25 million to $26 million a quarter.

Damon DelMonte -- KBW -- Analyst

Okay, that's helpful. And then did you say before as for like a point of reference on the reserve level, that if you added where you were pre-pandemic, plus what you would have expected for CECL, you're talking about something on $150 million of a reserve. Is that what you had said?

Michele Kawiecki -- Chief Financial Officer

Yes, $150 million coverage ratio, yes. I think it would have been like $130 million, maybe.

Damon DelMonte -- KBW -- Analyst

$130 million, OK. So if you're at $202 million today, or $201 million today, I mean, did you arguably not take a provision for the remainder of this year or next year? I mean, you still have more than $130 million, so.

Michele Kawiecki -- Chief Financial Officer

Yes, and that's a possibility. Yes.

Damon DelMonte -- KBW -- Analyst

Okay. Okay. Take a look at the model then. Okay. That's all I had. Everything else was asked and answered. Thanks a lot. Appreciate it.

Mark Hardwick -- Chief Executive Officer

Thank you, Dan.

Operator

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

Mark Hardwick -- Chief Executive Officer

Thanks, Betsy. Thanks, everyone for your attendance. And we appreciate all the questions at the end of the call. And I look forward to talking to you again in another 90 days. So I guess, have a great spring. Thanks.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Mark Hardwick -- Chief Executive Officer

Mike Stewart -- President

Michele Kawiecki -- Chief Financial Officer

John Martin -- Chief Credit Officer

Terry McEvoy -- Analyst

Scott Siefers -- Piper Sandler -- Analyst

Daniel Tamayo -- Raymond James -- Analyst

Bryce Rowe -- Hovde Group -- Analyst

Damon DelMonte -- KBW -- Analyst

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