Q4 2023 Mercantile Bank Corp Earnings Call

Participants

Robert Kaminski; President, Chief Executive Officer, Director; Mercantile Bank Corp

Raymond Reitsma; Chief Operating Officer, Executive Vice President of Mercantile and President of the Bank, Director; Mercantile Bank Corp

Presentation

Operator

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 of Lambert Investor Relations. Please go ahead.

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'll 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. It's a fact of 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 2011 and three 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'd like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski. Bob?

Robert Kaminski

Thank you, Zach, 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 13th, 2024.
Headline 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 variance, I mean with 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 nonperforming assets and loan losses continuing at nominal level nominal levels during 2023. Our customer base and our markets continues 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 and 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 turn the call over to Ray and then to Charles for their comments.

Raymond Reitsma

Right. Thanks. My comments will focus on commercial loan growth, asset quality and net 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 and relationships and while the reserve 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 and $70 million and the owner-occupied real estate segment at $46 million, with the growth with the growth in each portfolio being heavily weighted toward 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 nonowner-occupied real estate at $35 million in multifamily real estate at $24 million. These increases were achieved despite payoffs totaling approximately $44 million after the strong loan funding activity of 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 one to four-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 nonperforming assets totaled $3.6 million at year-end 2023 or less than seven basis points of total assets compared to $7.7 million one year ago and $5.9 million at the end of the prior linked quarter past due loans number 24 and represent four basis points of total loans. We remain diligent and 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 risks. Our risk rating model is robust with a continued emphasis on current borrower cash flow, providing prompt sensitivity to any emerging challenges within borrowers finances. That said, our customers continue to report strong results today and have not begun to experience impacts of a potential recessionary environment in any systemic fashion.
Total noninterest 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 credit card customers, which was partially offset by an increase in the earnings credit rate despite very tight housing inventory and 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. In 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. And Mercantile grew our deposit base by $224 million, including $36 million in growth in repo accounts. We were not immune to the industry wide. Our migration of deposits from noninterest-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 from deposit generating opportunities that exist within portions of our customer base and 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. Our $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 in 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 two thirds of our commercial loans have any floating rate. Interest income on securities also increased during the 2023 periods compared to the 2022 periods, reflecting growth in the securities portfolio and a 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 our 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 increase in 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. We're 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 period 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 period compared to the prior year period, reflecting the higher costs 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 periods.
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 to 100 basis points during that 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 assets 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 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 when 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, any 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. It was placed into nonaccrual 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 address the potential impact of the UAW strike against the three U.S. based automobile manufacturers that was initiated during the third quarter of 2023, but was settled during the fourth quarter.
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 nonaccrual 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. Period's overhead costs increased $1.4 million from 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 cost primarily resulted from larger compensation and benefit costs, increased FDIC insurance assessments, reflecting the industry wide adjustments effective January first, 2023, higher swap collateral holding costs and increased allocations to the reserve for unfunded loan commitments.
Slide numbers 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 of maturities of municipal bonds. All of our investments remain categorized as available for sale as of December 31st, 2023, about 63% of our investment portfolio was comprised of US 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 US government agency bonds mature within the next seven years with over three-fourths 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 30th, 2023.
Slide 17, 18 and 19 to pick data on our deposit base. You will note that we include sweep accounts in our deposit tables and calculations as those accounts reflect monies from entities, primarily municipalities and other large customers who have elected to place their funds in a sweep account that is fully secured by US government agency bonds. Noninterest-bearing checking accounts equated to 30% of total deposits and sweep accounts at year end 2023, similar to pre pandemic levels. A large portion of those of these funds are associated with commercial lending relationships, especially 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 number 18, we provide information on depositors with balances of $5 million or more. As of December 31st, 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 comprise of municipal entities. When compared to five 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 number 18, we depict our deposit balances at the year end 2023 and 2022. Throughout 2023, we experienced transfers of funds from low and low cost checking and savings deposits to higher pay and money market and time deposits, a trend we expect to continue, although at a reduced pace.
On slide number 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 equaled $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 FHA 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 brokered deposits and Federal Home Loan Bank advances portfolios, $57 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 yearend 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 number 16, we depict our Tier one leverage and our total risk-based capital ratios. Assuming the calculations did include that adjustment, while our regulatory capital ratios were negatively impacted by it by the pro forma calculations, our capital position remains strong. As of year end 2023, our Tier one 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 access look, 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 number 21, we share our latest assumptions on the interest rate environment and key performance metrics for 2024. With the caveat that market conditions remain volatile, making forecasting difficult this forecast is predicated on the federal funds rate staying unchanged for the first six 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 due during 2023. While we experienced solid commercial loan fundings throughout 2023, and our commercial loan pipeline remains very strong. We continue to experience a high level of payoffs and paydowns. We are forecasting our net interest margin to remain in a narrow gap 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 now my Those are my prepared remarks. I'll now turn the call back over to Bob.

Robert Kaminski

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

Question and Answer Session

Operator

(Operator Instructions) Daniel Tamayo, Raymond James.

Good morning, everybody. Good morning, guys. And maybe I maybe start just on the on the margin guidance subs kind of following up on what you were talking about there. Chuck, I'm just curious if you're assuming you 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 within that? Is that impacted or how much is that impacted by the rate cuts in your in your assumption?

Yes, I think you are going to consider a we expect to see some further on compression here in the first quarter. Just from the same types of experiences that we have been experiencing that we experienced in the back half of 2023. But we feel that, but when we get into the second quarter that that the repricing on our liability side becomes much less of an impact. And then we'll begin in the third and fourth quarter.
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 on this will continue for several years. We also have with a laddered approach we do have on especially US government agency bonds that are earning, say 1% maturing and able to either be repriced in a higher rate environment and or put into loan 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 myriad of different scenarios that are out there. And I think that there are 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 some of that reduction in interest income, especially commercial loans will be mitigated in a large way by reductions in deposit costs as well.

Okay. On that last point, I wanted to follow up on how are you thinking about deposit repricing once once you do have lower rates? And then if you could if you have any indexed deposits, if you could disclose what those are you doing?

Thanks. Yes, and the last one, we don't have much in the way of index deposits. We do have some larger minimum money market accounts on the bit primarily on the business side that we have index over the last, I would say, couple of quarters after the federal funds rate. But I would say in large part, 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 is 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 two 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 we've been doing, as I mentioned, and as you've seen, we have been into the broker deposit arena here basically over the last 12 months, probably last nine months specifically and most of that is relatively short term. And we're already starting to see, as you would expect some price through a 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. And so I think some aggressive rate relatively us, let's say, aggressive or relatively similar reductions in money market rates in time, local time deposit rates with the Federal Reserve and the Federal Reserve cuts along with how we've structured the brokered deposit portfolio.
I think provide some mitigation and anything that happens on the interest income part side of things along with those investment maturities.

Okay. Well, I appreciate all that all that color.

Operator

Eric Zwick, Hovde Group.

Good morning, everyone. I'm Chuck, 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% that it was pre pandemic obviously, interest rates are still quite a bit higher than they were pre-pandemic. So would you still expect some our change in the composition of the deposits? Is it likely or possible that those noninterest-bearing deposits could kind of move lower here in the near to midterm?

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. And a lot of those deposits tend to be the operating accounts. Our businesses as well. And why I think they've I think what we've seen is we haven't seen a reduction in the number of deposit accounts and noninterest-bearing checking accounts. I think what we have seen is businesses looking at saying, hey, we have some extra excess balances sitting in noninterest-bearing checking. We're going to take a portion of those monies, the excess portion and put that into higher interest earning account and deposit accounts such as money market rates that they want lots of liquidity or maybe even up some of that into time deposit 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 and under that And under those scenarios have likely moved already.

Got it. Appreciate the color there. And I guess another potential use of some of those excess funds could 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 in 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 that in itself, that fully funded would be high single digit growth. But you mentioned there's also the opportunity and likelihood of still seeing paydowns 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 or the real opportunity today. If you could just talk a little bit of color about in terms of where you are and expect that type of market share gains to come from, which of your competitors you're competing against 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?

Raymond Reitsma

Yes. This is Ray. The are the strongest opportunities for growth that we're seeing are related to ownership transitions, sometimes P of groups coming in buying companies that were funding also Aesop ownership transitions and the like. So that's been an area that we've done well in over the last year or two 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 inorganic growth within our customers' borrowing needs, which are pretty stable.
As it relates to the back log numbers that you talked about, those numbers are right in line with what we've experienced over the last, I'm going to say eight quarters probably even longer. And as we've alluded to in this call, on a number of occasions, the payoffs that come in 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 Tom, it does provide a firm basis to say that we will continue to have growth.

Thanks. And one last question for me and then I'll step aside. Your technology continues to be very important and community banking IT, it likely requires a almost annual kind of ongoing spend at this pace. So just curious if you have as you look at this year and maybe into next, any material upgrade do 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.

Raymond Reitsma

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 and better and better ways. We're constantly striving to make our bank an 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. And 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 in our long-term investments in our long-term consistency of investment allows it to be the case.

Robert Kaminski

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

Excellent. Bob, Chuck, Ray I appreciate all the answers today.

Robert Kaminski

Thank you.

Operator

(Operator Instructions) Damon DelMonte, KBW.

Hey, good morning, guys. Hope everybody's doing well today on the data center morning. Just wanted to start off on the incentive 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, you kind of take into account, but you're seeing maybe on the horizon for some any troubled credits? And then also like kind of how that balances with the loan loss reserve as.

Yes. Thanks, Damon. I mean, clearly, the economic conditions will have always has a big impact on the reserve, as you know. And as Ray mentioned, Joanne, as you see 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 them. 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 from my expectation is that our loan portfolio will continue to stay strong and that all or any large percentage of our provision. Our number will be reflective of loan growth that we have. But clearly we're looking at the pro forma base at the end of each quarter. We're looking at our qualitative measurements in my prepared remarks.
I specifically talked about clearly having a reserve from specific reserves from time to time to relatively large ones here in the last five 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 are 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 any things 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 see and where we needed to change some change, some things up a little bit. So yes, on an overall basis, I would think that with the provision expense, primarily reflecting loan growth and that 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. Thank you. And then if we could just circle back on the commentary you made earlier in the Q&A and the margin. I just kind of missed what you were saying. What was some of the levers in the second half of the year that you think will help kind of keep the margin in that, that three, 73, 80 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 now when you get in the out years. So even if rates come down, say 100, 200 basis points, there's still some positive repricing that would be taking a taking place, especially starting in the back half of this year on a pretty regular basis for the next several years. And that whether we reinvest reinvest those monies into the investment portfolio, are we able to use some of those funds to fund loan growth, though definitely be some positive repricing going on there the other thing is, as you know, and as I mentioned, we have been using broker deposits more often, and we do use them more often in 2023 than what we had in the previous year or two. In large degree, we went relatively short by short of six months to maybe 18 months. So that portfolio will reprice relatively quickly and again, those especially those two items together with the we'll definitely be looking at local deposit rates with the opportunity to reprice downward, especially in money markets and time deposits. Most of our local time deposits are short as well. And so the reductions of interest expense on that side will we believe will largely mitigate the negative impact of declining interest rates in our commercial loan portfolio.

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

Yes. It's something that we look at. You know, clearly the stock was down as our bank stocks were earlier this year or earlier in 2023 with the chaos that was going on, but certainly wanted to not be not be participating in buying back our stock 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 stove top, but I turned the back burner and burners not on. I think it's something that we do. We do look at, I would say, a regular ongoing probably an ongoing basis is a better way of saying that clearly where our stock prices will have a big determinant, whether we want to start engaging on that. But we also look back and say, you know, there's a lot of unknowns that are out there and it probably makes sense to kind of be hoarding our capital, if you will, at this point in time instead of using that for buybacks that 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.

Got it. Okay. That's all I had. That's very helpful. Thanks, and congrats to your lines on a nice win this week. Thank you.

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 Kaminski

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

Operator

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