Mercantile Bank Corporation (MBWM) Earnings Call Transcript & Summary

Good morning, and welcome to the Mercantile Bank Corporation Fourth Quarter 2023 Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Zack Mukewa, Lambert Investor Relations.

Thanks, Ed. 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 fourth quarter of 2023. Joining me today are members of Mercantile's management team, including Bob Kaminski, President and Chief Executive Officer; Chuck Christmas, Executive Vice President and Chief Financial Officer; and Ray Reitsma, Chief Operating Officer and President of the Bank. We will begin the call with management's prepared remarks and presentation to review the quarter's results, then open the call to questions. Before turning the call over to management, 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's 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 fourth quarter 2023 press release and presentation deck issued by Mercantile today, you can access it at the company's website at www.mercbank.com. At this time, I would like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski. Bob?

Thank you, Zack, and thanks to all of you for joining us on the conference call today. This morning, Mercantile released its fourth quarter and full year earnings, which demonstrated a strong finish to 2023. For the quarter, Mercantile earned $1.25 per share on revenues of $57 million. For the full year, our company earned $5.13 per share on revenues of $226 million. We also announced a cash dividend of $0.35 per share, payable on March 13, 2024. Headline in the news for the fourth quarter was extremely strong commercial loan growth. We remain very pleased to see the ongoing work of our lending teams to build robust pipelines bearing some meaningful fruit as we ended 2023. This growth is a prime illustration of the effectiveness of the consultative relationship banking approach employed by Mercantile. Net interest margin for the fourth quarter was 3.92% and averaged slightly over 4% for all of 2023, continuing to demonstrate Mercantile's ability to effectively manage loan yields and deposit costs. Asset quality remains extremely strong with non-performing assets and loan losses continuing at nominal levels during 2023. Our customer base and our markets continue to demonstrate solid metrics despite some uncertainty in the economic environment. Our lending teams remain closely engaged as always with their clients, which provides the ability to quickly identify any emerging trends. Ray and Chuck will provide more detail on our financial performance next. The strength of our year in 2023 has positioned us well for 2024 and beyond. Our suite of products and services in the markets we serve set the table for our excellent staff of bankers to continue working to exceed our customers' expectations and fulfill our strategic objectives. I'll now turn the call over to Ray and then to Chuck for their comments. Ray?

Thanks, Bob. My comments will focus on commercial loan growth, asset quality and non-interest income. Commercial loan growth was very solid this year, increasing $260 million or 8.5%. Commercial loan growth in the fourth quarter was $178 million or 22% annualized. This remarkable performance by our commercial team reflects our long-term efforts to build value-added relationships. And while the results were somewhat concentrated in the quarter, the foundation for this growth was laid over a much longer period of time. Commercial growth in the fourth quarter resides primarily in the C&I segment at $70 million and the owner-occupied real estate segment at $46 million with the growth in each portfolio being heavily weighted towards increases in market share versus organic portfolio growth. When taken together, these categories represent 65% of the overall growth for the quarter. The balance of the growth primarily occurred in non-owner-occupied real estate at $35 million and multifamily real estate at $24 million. These increases were achieved despite pay-offs totaling approximately $44 million. After the strong loan funding activity in the quarter, the commercial loan pipeline remains very strong at a very strong level of $573 million consisting of $311 million committed under construction facilities and $262 million under other commercial loan commitments. Retail loan growth for the year totaled $120 million consisting of an increase in 1-4 family mortgages. Growth in this asset class moderated throughout the year and was $20 million in the fourth quarter due to a focus on increasing the portion of originated loans that are sold. Construction commitments related to this asset type remained stable at $46 million. Asset quality remains very strong as non-performing assets sold $3.6 million at year-end 2023 or less than 7 basis points of total assets compared to $7.7 million 1 year ago and $5.9 million at the end of the prior linked quarter. Past due loans #24 and in dollars represent 4 basis points of total loans. We remain vigilant in our underwriting standards and monitoring to identify any deterioration within our portfolio. Our lenders are the first line of observation and defense to recognize areas of emerging risk. Our risk weighting model is robust with a continued emphasis on current borrower cash flow, providing prep sensitivity to any emerging challenges within borrowers' finances. That said, our customers continue to report strong results to-date and have not begun to experience the impacts of a potential recessionary environment in any systemic fashion. Total non-interest income grew 6.3% during the fourth quarter of 2023 compared to the fourth quarter of 2022 with growth reported in virtually every category. Credit and debit card income grew 3.9%. Service charges on accounts grew 5.5%, reflecting 18% growth in the overall activity levels resulting from a growing base of C&I customers, which was partially offset by an increase in the earnings credit rate. Despite very tight housing inventory in the markets we serve and increases in mortgage rates, mortgage banking income increased 5.6% as we sold a greater portion of our volume than in the comparable prior quarter and our lending team builds market share in a very competitive environment. Swap income grew 7.3% in support of the general growth in our commercial portfolio and the subset of customers desiring a fixed rate. Finally, our payroll services income grew 10.7% as we achieved greater penetration in our commercial customer base. Over the course of the year, Mercantile grew our deposit base by $224 million, including $36 million in growth in repo accounts. We were not immune to the industry-wide migration of deposits from non-interest-bearing to interest-bearing accounts. However, non-interest-bearing accounts comprise 32% of deposits. The balance of our funding requirements was financed with the Federal Home Loan Bank advances. We continue to diligently pursue a number of strategic initiatives around deposit generating opportunities that exist within portions of our customer base and in the markets we serve. That concludes my comments. I will now turn the call over to Chuck.

Thanks, Ray, and good morning to everybody. As noted on Slide 5, this morning, we announced net income of $20 million or $1.25 per diluted share for the fourth quarter of 2023 compared with net income of $21.8 million or $1.37 per diluted share for the respective prior year period. Net income for the full year 2023 totaled $82.2 million or $5.13 per diluted share compared to $61.1 million or $3.85 per diluted share during the full year 2022. The decline in net income during the fourth quarter of 2023 compared to the fourth quarter of 2022, primarily reflects a lower level of net interest income stemming from a lower net interest margin, which was only partially mitigated by loan growth. The increase in net income for the full year 2023 compared to the full year 2022 primarily reflects a higher level of net interest income resulting from a higher net interest margin and loan growth. Continued strength of loan quality metrics provided for limited provision expense in all time periods. Turning to Slide 6. Interest income on loans increased during the fourth quarter and full year 2023 compared to the prior year periods, reflecting the increasing interest rate environment and solid growth in commercial and residential mortgage loans. Our fourth quarter 2023 loan yield was 104 basis points higher than the fourth quarter of 2022 with average loans up almost 8% over the respective period. Our full year 2023 loan yield was 175 basis points higher than for the full year 2022 with average loans up over 9% over the respective periods. The improved loan yields largely reflect the combined impact of an aggregate 525 basis point increase in the federal funds rate since March of 2022 and approximately 2/3 of our commercial loans having a floating rate. Interest income on securities also increased during the 2023 period compared to the 2022 period, reflecting growth in the securities portfolio and the higher interest rate environment. Interest income on other earning assets, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, was relatively unchanged during the fourth quarter of 2023 compared to the fourth quarter of 2022. While the interest rate yield increased 171 basis points during that time period, our average balance declined 34%. Interest income on other earning assets increased during the full year 2023 compared to the full year 2022, reflecting an increased yield of 409 basis points, which was partially offset by a 76% average balance reduction. In total, interest income was $15.5 million and $89.5 million higher during the fourth quarter and full year 2023 respectively when compared to the prior time periods. We recorded interest expense on deposits in our sweep account product during the fourth quarter and full year 2023 compared to the prior year periods, reflecting the increasing interest rate environment, transfers of deposits from no or low-cost deposit products to higher costing deposit products and enhanced competition for deposits. Our fourth quarter 2023 cost of deposits was 152 basis points higher than the fourth quarter of 2022, while our full year 2023 cost of deposits were 122 basis points higher than during the full year 2022. Interest expense on Federal Home Loan Bank of Indianapolis advances also increased during the 2023 periods compared to the prior year periods, reflecting growth in the advanced portfolio and a higher interest rate environment. Interest expense on other borrowed funds increased during the 2023 periods compared to the prior year periods, reflecting the higher cost of our trust preferred securities. In total, interest expense was $17.5 million and $54.2 million higher during the fourth quarter and full year 2023 respectively when compared to the prior year time period. Net interest income decreased $2.0 million during the fourth quarter of 2023 compared to the fourth quarter of 2022, but increased $35.3 million for the full year 2023 compared to the full year 2022. Our net interest margin declined 38 basis points during the fourth quarter of 2023 compared to the same quarter in 2022. Although our yield on earning assets increased 100 basis points for net time period, our cost of funds was up 138 basis points. Our net interest margin improved 73 basis points between full year 2023 and full year 2022. Our yield on earning assets was up 186 basis points, while our cost of funds increased 113 basis points. While we experienced rapid growth in our earning asset yield during the period of March of 2022 through July of 2023 when the Federal Reserve raised the federal funds rate by 525 basis points, meaningful increases to our cost of funds did not begin to materialize until the latter part of 2022 with competition for deposit balances increased deposit rates and depositors began to move funds from low no and lower costing deposit types to higher costing deposit products. We recorded a provision expense of $1.8 million and $7.7 million during the fourth quarter and full year 2023 respectively. The fourth quarter provision expense primarily reflects additions from loan growth, slower mortgage loan prepayment speeds and a modification to our environmental factor grid, which was partially mitigated by the elimination of a $1.2 million specific reserve on a commercial loan relationship that was placed in the non-accrual status during the third quarter of 2023 and paid off in full during the fourth quarter and the elimination of a $1.7 million qualitative factor assessment that addressed the potential impact of the UAW strike against the 3 U.S. based automobile manufacturers that was initiated during the third quarter of 2023, but was settled during the fourth quarter. The full year 2023 provision expense primarily reflects additions from loan growth, slower mortgage loan prepayment speeds and the modification to the environment factor grid, which was partially mitigated by the elimination of a $2.2 million specific reserve on a commercial loan relationship that was placed into non-accrual status during the fourth quarter of 2022 and paid off in full during the first quarter of 2023 and the change in segmentation of our home equity and credit card portfolios within our model. Updated economic forecast throughout 2023 had only a nominal impact on the reserve calculation. We recorded increased overhead costs during the fourth quarter and full year 2023 compared to the prior year periods. Overhead costs increased $1.4 million in the fourth quarter of 2023 compared to the fourth quarter of 2022 and were up $7.3 million during the full year 2023 when compared to the full year 2022. The increased overhead costs primarily resulted from larger compensation and benefit costs, increased FDIC insurance assessments reflecting the industry-wide adjustments effective January 1, 2023, higher swap collateral holding costs and increased allocations to the reserve for unfunded loan commitments. Slide #14 and 15 depict information on our investment portfolio. There were only nominal changes to our investment portfolio during the fourth quarter of 2023, largely limited to ordinary purchases and maturities of municipal bonds. All of our investments remain categorized as available for sale. As of December 31, 2023, about 63% of our investment portfolio was comprised of U.S. government agency bonds with approximately 32% comprised of municipal bonds, all of which were issued by municipal entities within the State of Michigan and a high percentage within our market areas. Mortgage-backed securities, all of which are guaranteed by U.S. government agencies comprise only about 5% of the investment portfolio. The maturity of the U.S. government agencies and municipal bond segments are generally structured on a laddered basis. A significant majority of the U.S. government agency bonds mature within the next 7 years with over 3/4 of the municipal bonds maturing over the next 10 years. The net unrealized loss totaled $64 million at year-end 2023 compared to $83 million at year-end '22 and $93 million as of September 30, 2023. Slides 17, 18 and 19 depict data on our deposit base. You will note that we include sweep accounts in our deposit tables and calculations as those accounts reflect moneys from entities, primarily municipalities and other large customers, who have elected to place their funds in a sweep account that is fully secured by U.S. government agency bonds. Non-interest-bearing checking accounts equated to 30% of total deposits on sweep accounts at year-end 2023, similar to pre-pandemic levels. A large portion of these funds are associated with commercial lending relationships, especially in the commercial and industrial companies. Low level of uninsured deposits totaling about 48% as of year-end 2023 has remained relatively stable over many years. On Slide #18, we provide information on depositors with balances of $5 million or more. As of December 31, 2023, we had 71 relationships, which aggregated $1.1 billion. About 80% of the relationships and approximately 90% of the total deposits were with businesses and/or individuals with the remaining comprised of municipal entities. When compared to 5 years ago, we had 32 relationships with deposit balances over $5 million aggregating $450 million. Of those 32 relationships, 25 continue to have balances over $5 million today and have grown those deposit balances by over $160 million in aggregate. As a commercial bank, a majority of our deposits are comprised of commercial accounts. On Slide #18, we depict our deposit balances as of year-end 2023 and 2022. Throughout 2023, we experienced transfers of funds from no and low-cost checking and savings deposits to higher paying money market and time deposits, a trend we expect to continue, although at a reduced pace. On Slide #20, we depict our primary sources of liquidity as of year-end 2023. We do periodically use our unsecured federal funds lines of credit with a major correspondent bank. However, we have not utilized this line since late April 2023. Our deposit at the Federal Reserve Bank of Chicago equals $52 million at year-end 2023. To offset the impact of loan fundings and net deposit withdrawals during the first half of 2023 and to assist in the rebuilding of our on-balance sheet liquidity position, we obtained $111 million in broker deposits and $90 million in FHLB advances during the second quarter of 2023 combined with $70 million in FHLB advances during the first quarter of 2023. To offset significant commercial loan fundings in late 2023, we increased our broker deposits and Federal Home Loan Bank advances portfolios, $57 million and $10 million respectively, during the fourth quarter of 2023. We had not obtained any new broker deposits or FHLB advances during the third quarter of 2023. Our level of wholesale funds as a percentage of total funds was 14% at year-end 2023 compared to 7% at year-end '22. We remain in a strong and well capitalized regulatory capital position. Our bank's total risk-based capital ratio was 13.4% at year-end 2023, about $177 million above the minimum threshold to be categorized as well capitalized. We did not repurchase shares during 2023. We have $6.8 million available in our current repurchase plan. While net unrealized gains and losses in our investment portfolio are excluded from regulatory capital calculations, on Slide #16, we depict our Tier 1 leverage and our total risk-based capital ratios assuming the calculations did include that adjustment. While our regulatory capital ratios were negatively impacted by the pro forma calculations, our capital position remained strong. As of year-end 2023, our Tier 1 leverage capital ratio declined from 12.2% to 11.3% and our total risk-based capital ratio declined from 13.4% to 12.5%. Our excess capital as measured by the total risk-based capital ratio is also negatively impacted. However, it totaled a strong $127 million over the minimum regulatory amount to be categorized as well capitalized. On Slide #21, we share our latest assumptions on the interest rate environment and key performance metrics for 2024 with a caveat that market conditions remain volatile, making forecasting difficult. This forecast is predicated on the federal funds rate staying unchanged for the first 6 months of 2024 and then declining by 25 basis points during both the third and fourth quarters of 2024. We are projecting total loan growth in the range of 4% to 6%, similar to what we experienced during 2023. While we experienced solid commercial loan fundings throughout 2023 and our commercial loan pipeline remains very strong, we continued to experience a high level of pay-offs and pay-downs. We are forecasting our net interest margin to remain in a narrow range throughout 2024 along with fee income and overhead costs as well. In closing, we are very pleased with our 2023 operating results and financial condition and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all financial institutions. Those are my prepared remarks. I'll now turn the call back over to Bob.

Thank you, Chuck. That concludes management's prepared comments, and we'll now open the call up to the Q&A session.

[Operator Instructions] And our first question comes from Daniel Tamayo of Raymond James.

Good morning, everybody. Maybe we'll start just on the margin guidance, just kind of following up on what you were talking about there, Chuck. I'm just curious if you're assuming given the tight band you mentioned, just kind of a little bit of a decline in the first half of the year. And then what would be [ stable-ish ] in the back half, but then that's -- is that impacted or how much is that impacted by the rate cuts in your assumption?

Yes. I think we're -- we expect to see some further compression here in the first quarter just from the same types of experiences that we have experienced -- that we experienced in the back half of 2023. But we feel that when we get into the second quarter that the repricing on our liability side becomes much less of an impact. And then when we get into the third and fourth quarter, when we project the 25 basis point cut at the beginning of both those quarters, we also are projecting a decline in certain deposit accounts as well. And so those will materially offset any impact that we have on the loan repricing side. And then we also have -- and this will continue for several years. We also have, with the laddered approach, we do have especially U.S. government agency bonds that are earning, say, 1% maturing and able to either be repriced in a higher rate environment and/or put into the loan portfolio growth.

Okay. And if there were more cuts similar to what the forward curve is implying, how do you think that would impact your guidance?

Yes. There's clearly a lot of -- a myriad of different scenarios that are out there. I think that the -- I think the more aggressive the rate cuts are, it's likely that that would have some compression on our net interest margin. But one of the things that we've been working hard at, especially over the last, I would say, 12 to 18 months is to position our balance sheet, especially on the liability side, to position for a declining interest rate environment. So we think that some of that reduction in interest income, especially on commercial loans, will be mitigated in a large way by reductions in deposit costs as well.

Okay. That last point I just wanted to follow-up on. How are you thinking about deposit repricing once we do have lower rates? And then if you could -- if you have any indexed deposits, if you could disclose what those are you're doing that?

Yes. On the last one, we don't have much in the way of indexed deposits. We do have some larger money market accounts on the -- primarily on the business side that we have indexed over the last, I would say, couple of quarters to the federal funds rate. But I would say, in large part, and I think this is true for most community banks, is that especially when you look at money market rates and CD rates, those tend to reprice definitely on a timing basis similar to that of Federal Reserve actions. And I would say this is going to be the million-dollar question is we definitely have seen a ramp up in the rates on those 2 deposit products, especially over the last, I would say, 12 months, probably 18 months. And there's expectations on our part that with the Fed does get -- especially if the Fed becomes very aggressive in reducing rates, we would expect those rates to come down relatively quickly as well. The other thing that we've been doing, as I mentioned, is you've seen we have been into the broker deposit arena here basically over the last 12 months, probably the last 9 months specifically and most of that is relatively short-term. And we're already starting to see, as you would expect, some price reductions in some of the maturities that are starting to come up now. And of course, that market tends to be very much tied into the interest rate environment. So I think aggressive -- relatively similar reductions in money market rates and local time deposit rates with the Federal Reserve, any Federal Reserve cuts along with how we've structured the broker deposit portfolio I think provides some mitigation on anything that happens on the interest income side of things along with those investment maturities.

And our next question comes from Erik Zwick with Hovde Group.

Chuck, I wanted to maybe just start with a follow-up a little bit on the deposits. And I know you noted that the concentration of non-interest-bearing deposits is now back to about the same level, I think around 30%, but it was pre-pandemic. Obviously, interest rates are still quite a bit higher than they were pre-pandemic. So would you still expect some change in the composition of the deposits? Is it likely possible that those non-interest-bearing deposits could kind of move to lower here in the near to mid-term?

Well, I think that's always a possibility. But I think when we look at the trends that we've seen in our deposit balances from that particular segment going into other segments, it has definitely slowed over time. A lot of those deposits tend to be the operating accounts of businesses as well. And while I think they've -- I think what we've seen is we haven't seen a reduction in the number of deposit accounts, non-interest-bearing checking accounts. I think what we have seen is businesses looking at saying, hey, we have some excess balances sitting in non-interest-bearing checking. We're going to take a portion of those moneys, the excess portion and put that into higher interest-earning account -- deposit accounts such as money market rates that they want lots of liquidity or maybe even some of that into time deposits -- relatively short-term time deposits if they want a little bit of a higher rate. So I would say that given where we are in the interest rate cycle, my expectation is that a significant portion of balances that will have moved under those scenarios have likely moved already.

Got it. I appreciate the color there. And I guess, another potential use of some of those excess funds can potentially be paying down some draws that they have or higher rate debt, which I think you called out in the press release. And so just kind of maybe using that thought and transitioning to the expectation for loan growth, if I just look at the kind of $357 million of unfunded commercial and residential construction loans that you have, just as that in itself that fully funded would be high-single-digit growth, but you mentioned there's also the opportunity in likelihood of still seeing pay-downs and prepayments. So just curious, maybe more from the organic aspect of what's not already committed. And I think you mentioned that kind of market share gains are the real opportunity today. If you could just talk a little bit of color about in terms of where you expect that type of market share gains to come from? Which of your competitors you're competing that wins most? And also maybe just any themes that you're seeing in terms of specific industries or categories that seem to be -- have the strongest opportunity today?

Yes, this is Ray. The strongest opportunities for growth that we're seeing are related to ownership transitions, sometimes groups coming in buying companies that we're funding, also ESOP ownership transitions and the like. So that's been an area that we've done well in over the last year or 2 and sort of bunched up in the fourth quarter in terms of actually funding. But the competition that we see there is from regional banks primarily and the larger national banks have been less active in the markets that we serve. So that has helped us create an increase in market share. So as I mentioned in my comments, the growth is definitely more towards those types of events that are market share-related for us than an organic growth within our customers' borrowing needs, which are pretty stable. As it relates to the backlog numbers that you talked about, those numbers are right in line with what we've experienced over the last, I'm going to say, 8 quarters, probably even longer. And as we've alluded to in this call on a number of occasions, the pay-offs that come and tamp that down from a funding standpoint are unpredictable, but they're absolutely out there, they remain out there. So I think if you look at our funding levels compared to our backlog levels over a reasonable period of time like a couple of years, it would suggest that our growth rate is going to change a lot, but it does provide a firm basis to say that we will continue to have growth.

And one last question for me and then I'll step aside. Technology continues to be very important in community banking and likely requires almost annual kind of ongoing spend at this space. So I'm just curious if you have, as you look at this year and maybe into next, any material upgrades you need or is it more just kind of a constant renewal of contracts? And how you think about how you're positioned relative to your peers today from a technology perspective?

Yes. Our investment has been very consistent and we expect it to continue to be. From time to time, you get things are new, but it tends to be more along the lines of shining up the objects that we have rather than buying new objects and continuing to meet the types of needs that our customers have presented for a long time in better and better ways. We're constantly striving to make our banking easier one to do business with, easier to connect with no matter where you are. And those types of expenditures are the types that we continue to make. I would expect that the levels would be fairly consistent with what we've done in the past, certainly not moving outside of an order of magnitude up or down, but quite consistent. And our long-term investments, our long-term consistency of investment allows it to be the case.

Yes, Erik, this is Bob. As we talked about on numerous occasions, Mercantile has always been committed to making those investments when we have the opportunity to provide additional tools and resources for our clients and our team to be able to serve those clients. And that's certainly not going to change in the future, and we remain committed to that strategy.

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

Hope everybody is doing well today. Just wanted to start off on the credit front. Things obviously are pretty sound with you guys right now. And I just wanted to maybe get a little perspective, Chuck, from you on the outlook for the provision over the coming quarters if you kind of take into account what you're seeing maybe on the horizon for any troubled credits? And then also like kind of how that balances with where the loan loss reserve is?

Yes. Clearly, the economic conditions will have -- always has a big impact on the reserve, as you know. And as Ray mentioned, as you've seen in the numbers, we continue to have very pristine quality within our loan portfolio. We haven't identified anything overly systemic within the industries in which we lend to. So don't really see anything coming over the horizon. But clearly, these are volatile times and forecast change on a pretty regular basis in a pretty big way. My expectation is that our loan portfolio will continue to stay strong and that any large percentage of our provision number will be reflective of the loan growth that we have. But clearly, we're looking at the -- on a formal basis at the end of each quarter, we're looking at our qualitative measurements. In my prepared remarks, we specifically talked about clearly having to reserve from specific reserves from time-to-time. 2 relatively large ones here in the last 5 quarters, but both of those thankfully have paid off in full. We're able to reverse those. We had done some work here with our CECL model as far as making sure that we're comfortable with the segmentation that we've been using as well as the overall environmental area. So we did make some tweaks on that during the fourth quarter. I don't see anything like that coming anytime soon. I think we've done a good job of sitting back after a few years of using this model and seeing where we needed to shine some things up a little bit. So yes, on an overall basis, I would think that with the provision expense, primarily reflecting loan growth, that will drive the provision expense and that our coverage ratio would stay relatively consistent, all things known at this point in time.

That's great. Great color there. And then if we could just circle back on the commentary you made earlier in the Q&A on the margin, I just kind of missed what you were saying. What were some of the levers in the second half of the year that you think would help kind of keep the margin in that 370 to 380 band in the face of rate cuts?

Yes. There's a couple of things there. When I mentioned the investment portfolio, really starting in 2023, but ramping up a little bit in 2024 and then for the next few years, we have quite a few of our investments, especially the government agency bonds that will be maturing. And those, I would say, on average, over that time period, they are earning maybe around 1%, maybe a little bit higher net when you get into the out years. So even if rates come down, say, 100, 200 basis points, there's still some positive repricing that will be taking place, especially starting in the back half of this year on a pretty regular basis for the next several years, that whether we reinvest those moneys into the investment portfolio, are we able to use some of those funds to fund loan growth. There will definitely be some positive repricing going on there. The other thing is, as you know and as I've mentioned, we have been using broker deposits more often. We do use them more often in 2023 than what we had in the previous year or 2. And in large degree, we went relatively short by short of 6 months to maybe 18 months. So that portfolio will reprice relatively quickly. And again, those -- especially those 2 items together with -- we'll definitely be looking at local deposit rates with the opportunity to reprice downward, especially money markets and time deposits. Most of our local time deposits are short as well. So the reductions of interest expense on that side we believe will largely mitigate the negative impact of declining interest rates in our commercial loan portfolio.

Got it. That's helpful. And then I guess just lastly, any -- I think in your prepared remarks, you noted that you still had $6.8 million of capacity on the buyback. Any thoughts on becoming a little bit more active here in 2024?

Yes, it's something that we look at. Clearly, the stock was down as all bank stocks were earlier this year or earlier in 2023 with the chaos that was going on, but certainly wanted to not be participating in buying back our stocks, wanting to maximize our capital as best as we could. The kind of way that I like to put it is the buyback is definitely on the stope top, but it's on the back burner and the burner is not on. I think it's something that we do look at on a, I would say, a regular or ongoing -- probably ongoing basis is a better way of saying that. Clearly, where our stock price is, we'll have a big determinant whether we want to start engaging on that. But we also look back and say, there's a lot of unknowns that are out there. And it probably makes sense to kind of be holding our capital, if you will, at this point in time instead of using that for buybacks. That's kind of what's been our position really over the last couple of years is let's be cautious on buying back our shares. But again, on an ongoing basis, we look at that as a possibility.

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

Yes. Thank you very much for your interest in our company. We look forward to speaking with you next after the end of the first quarter in April. This call has now ended.

Thank you. The conference has concluded. Thank you for attending today's presentation.