2023 Mercantile Bank Corporation Earnings Call
Speaker Change: [music].
Good morning, and welcome to the Mercantile Bank Corporation fourth quarter 'twenty twenty-three earnings results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions.
Ask a question. Please press Star then one to withdraw your question. Please press Star then two please note. This event is being recorded wed now like to turn the conference over to Zac, Okay, well Lambert Investor Relations. Please go ahead.
Zac: Thanks, Ed Good morning, everyone and thank you for standing in Boston for a bank called pressure on this conference call and webcast to discuss the company's financial results for the fourth quarter 2023.
Speaker Change: Joining me today are members of a market that was my name's my team, including Bob Kaminski.
Speaker Change: Let me walk you thought Chuck Christmas Executive Vice President and Chief Financial Officer, and Ray Reitsma preparing us.
Speaker Change: Well begin the call with management's prepared remarks, and president Sean to review the quarter's results and then open the call to questions.
Sean: Before turning the call over to Mike.
Sean: 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 on the plans and objectives of the company's business.
Sean: Actual results could differ materially from any forward looking statements made today.
Sean: A lot of describing the company with Securities and exchange Commission's findings.
Sean: Company assumes no obligation to update any forward looking statements made during the call.
Sean: If anyone does not already have a copy of the fourth quarter earnings press release issued by mercantile today you can access.
Sean: The company's website at Www <unk>.
Sean: At this time I'd like to turn the call over to the market.
Market: So Bob Kaminski Bob.
Robert B. Kaminski: Thank you Zack and thanks to all of you for joining us on the conference call today.
Robert B. Kaminski: This morning, Mercantile released its fourth quarter and full year earnings, which demonstrated a strong finish to 2023.
Robert B. Kaminski: 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.
Robert B. Kaminski: We also announced the cash dividend up <unk> 35 per share.
Robert B. Kaminski: Animal on March 13th 2024.
Robert B. Kaminski: Headline in the news for the fourth quarter was extremely strong commercial loan growth.
Robert B. Kaminski: We remain very pleased to see the ongoing work of our lending teams to build robust pipelines bearing some mean meaningful fruit as we ended 2023.
Robert B. Kaminski: This growth is a prime illustration of the effectiveness of the consultative relationship banking approach employed by mercantile.
Robert B. Kaminski: Net interest margin for the fourth quarter was 392% and.
Robert B. Kaminski: It averaged slightly over 4% for all of 2023.
Robert B. Kaminski: Continuing to demonstrate mercantile has ability to effectively manage loan yields and deposit costs.
Asset quality remains extremely strong with nonperforming assets of loan losses, continuing a nominal level nominal levels during 2023.
Robert B. Kaminski: Our customer base and our markets continues to demonstrate solid metrics. Despite some uncertainty in the economic environment.
Robert B. Kaminski: Our lending teams remain closely engaged there's always what their clients, which provides the ability to quickly identify any emerging trends.
Robert B. Kaminski: Chuck will provide more detail on our financial performance next.
Charles E. Christmas: The strength of our year end 2023 has positioned us well for 2024 and beyond our suite of products and services in the markets. We serve so that the tail of our excellent staff all bankers to continue working to exceed our customers' expectations and fulfill our strategic objectives.
Speaker Change: And now I'll turn the call over to Ray and then to Chuck for their comments right.
Raymond E. Reitsma: Thanks, Bob My comments will focus on commercial loan growth asset quality and noninterest income.
Raymond E. Reitsma: Loan growth was very solid this year, increasing $260 million or eight 5%.
Raymond E. Reitsma: <unk> loan growth in the fourth quarter was $178 million or 22% annualized.
Raymond E. Reitsma: This remarkable performance by our commercial team reflects our long term efforts to build value added relationships.
Raymond E. Reitsma: And while the resorts results were somewhat concentrated in the quarter. The foundation for this growth was weighed over a much longer period of time.
Raymond E. Reitsma: 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 with the growth in each portfolio being heavily weighted towards increases in market share versus organic portfolio growth.
Raymond E. Reitsma: 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 in multifamily real estate at $24 million. These increases were achieved despite payoffs totaling approximately $44 million. After the strong loan funding activity in the quarter the commercial loan pipeline remains.
Raymond E. Reitsma: Very strong.
Raymond E. Reitsma: At a very strong level of $573 million, consisting of $311 million committed under construction facilities and $262 million under other commercial loan commitments.
Raymond E. Reitsma: 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 it was $20 million in the fourth quarter due to a focus on increasing the portion of originated loans that are sold.
Raymond E. Reitsma: 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 and 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 in dollars.
Raymond E. Reitsma: We have four basis points of total loans, we remain diligent.
Raymond E. Reitsma: Vigilant in our underwriting standards and monitoring to identify any deterioration within our portfolio. Our lenders are the first line of observation and defense recognize areas of emerging risk a.
Raymond E. Reitsma: Our risk rating model is robust with a continued emphasis on current borrower cash flow, providing perhaps 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 from a potential recessionary environment in any systemic fashion.
Raymond E. Reitsma: Total noninterest income grew six 3% during the fourth quarter of 2023 compared to the fourth quarter of 2022 with growth reported in virtually every category.
Raymond E. Reitsma: And debit card income grew three 9% service charges on accounts grew five 5%, reflecting 18% growth in the overall activity levels, resulting from our growing base of C&I customers.
Raymond E. Reitsma: Customers, which was partially offset by an increase in the earnings credit rate.
Raymond E. Reitsma: Despite very tight housing inventory in the markets, we serve and increases in mortgage rates mortgage banking income increased five 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.
Raymond E. Reitsma: Swap income grew seven 3% and supported the general growth in our commercial portfolio and the subset of customers desiring a fixed rate.
Raymond E. Reitsma: Finally, our payroll services income grew 10, 7% as we achieve greater penetration in our commercial customer base.
Raymond E. Reitsma: 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.
Raymond E. Reitsma: The migration of deposits from noninterest bearing to interest bearing accounts, however, noninterest bearing accounts comprised 32% of deposits with.
Raymond E. Reitsma: The balance of our funding requirements was financed with the federal home loan bank.
Raymond E. Reitsma: Advances, we continue to diligently pursue a number of strategic initiatives around 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 sharp.
Sharp: Thanks, Ray and good morning to everybody as noted on slide five 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.
Sharp: 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.
Sharp: <unk> strength of loan quality metrics provided for limited provision expense in all time periods.
Turning to slide six 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.
Sharp: Our fourth quarter of 2023 loan yield was 104 basis points higher than the fourth quarter of 2022 with average loans up almost 8% over the respective period.
Sharp: Our full year 2023 loan yield was 175 basis points higher than for the full year of 2022 with average loans up over 9% over the respective periods the.
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.
Sharp: Interest income on Securities also increased during the 2023 periods compared to the 2022 periods, reflecting growth in the securities portfolio and the higher interest rate environment.
Sharp: Interest income on other earning assets the 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%.
Sharp: 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.
Sharp: 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.
Sharp: We recorded interest expense on deposits and 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.
An enhanced competition for deposits.
Sharp: 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 of 2022.
Sharp: 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 the higher interest rate environment.
Sharp: Interest expense on other borrowed funds increased during the 2023 periods compared to the prior year periods, reflecting the higher costs.
Of our trust preferred securities.
Sharp: In total interest expense was $17 $5 million and $54 $2 million higher during the fourth quarter and full year of 2023, respectively, when compared to the prior year time periods.
Sharp: 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.
Sharp: Our net interest margin declined 38 basis points during the fourth quarter of 2023 compared to the same quarter in 2022.
Sharp: Although our yield on earning assets increased 100 basis points during that time period, our cost of funds was up 138 basis points.
Sharp: Our net interest margin improved 73 basis points between full year 2023, and full year 2022, our yield on as earning assets was up 186 basis points, while our cost of funds increased 113 basis points.
Sharp: While we experienced rapid growth in our earning asset yield during the period of March of.
Sharp: 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.
Sharp: And depositors began to move funds from low no and lower costing deposit types to higher costing deposit products.
Sharp: We recorded a provision expense of $1 $8 million and $7 $7 million during the fourth quarter and full year 2023, respectively.
Sharp: The fourth quarter provision expense, primarily reflects additions from loan growth.
Sharp: Slower mortgage loan prepayment speeds at 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 into non accrual status. During the third quarter of 2023 and paid off in full during the fourth quarter.
Sharp: And the elimination of a $1 7 million qualitative factor assessment.
Sharp: 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.
Sharp: Full year 2023 provision expense, primarily reflects additions from loan growth.
Sharp: Lower 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.
Sharp: In our 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.
Sharp: The change in segmentation of our home equity and credit card portfolios within our model.
Sharp: Updated economic forecast throughout 2023 had only a nominal impact on the reserve calculation.
Sharp: We recorded increased overhead costs during the fourth quarter and full year 2023 compared to the prior year periods.
Sharp: Overhead costs increased $1.4 million during 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 2020 to the.
Sharp: The increased overhead costs, primarily resulted from larger compensation and benefit costs.
Sharp: Increased FDIC insurance assessments, reflecting the industry wide adjustments effective January one 2023.
Sharp: Higher swap collateral holding cost and increased allocations to the reserve for unfunded loan commitments.
Sharp: Slide number 14, and 15 depict information on our investment portfolio. There are 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 assessments, we remain categorized as available for sale.
Sharp: As of December 31, 2023 about 63% of our investment portfolio was comprised of U S government agency bonds.
Sharp: 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.
Sharp: Mortgage backed securities all of which are guaranteed by U S government agencies comprise only about 5% of the investment portfolio.
Sharp: The maturity of the U S government agencies.
Sharp: And municipal bonds segments are generally structured on a ladder basis is.
Sharp: Significant majority of the U S 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.
Sharp: Compared to $83 million at year end, 'twenty, two and $93 million as of September 32023.
Slide 17, 18, and 19 to pick data on our deposit base.
Sharp: 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 U S government agency bonds.
Sharp: 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.
Sharp: 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.
Sharp: As of December 31, 2023, we had 71 relationships, which aggregated $1 $1 billion.
Sharp: About 80% of their relationships and approximately 90% of the total deposits with businesses Andrew in individuals.
Sharp: With the remaining comprised of municipal entities when compared to five years ago, We had 32 relationships with deposit balances over $5 million aggregating $450 million.
Sharp: All of those 32 relationships twenty-five continue to have balances over $5 million today and have grown those deposit balances by over $160 million in aggregate.
Sharp: As a commercial bank a majority of our deposits are comprised of commercial accounts on slide number 18, we depict our deposit balances as of year end 2023 and 2022.
Sharp: 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.
Sharp: On slide number 20, we depict our primary sources of liquidity as of year end 2023.
Sharp: 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.
Sharp: 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 it.
Sharp: <unk> advances during the second quarter of 2023.
Sharp: Combined with $70 million in FHL be advances during the first quarter of 2023.
Sharp: To offset significant commercial loan fundings of late 2023, we increased our broker deposits and federal Federal home loan bank advances portfolios $57 million and $10 million, respectively. During the fourth quarter of 2023.
Sharp: We had not obtained any new broker deposits or FH I'll be advances during the third quarter of 2023.
Sharp: Our level of wholesale funds as a percentage of total funds was 14% at year end 2023 compared to 7% at year end 'twenty two.
Sharp: 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.
Sharp: We did not repurchase shares during 2023, we have $6 $8 million available in our current repurchase plan.
Sharp: Well 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.
Sharp: While our regulatory cap ratios were negatively impacted by by.
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% or.
Our excess look our excess capital as measured by the total risk based capital ratio is also negatively impacted however, it totals a strong $127 million over the minimum regulatory amount to be categorized as well capitalized.
Sharp: On slide number 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.
Sharp: 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.
Sharp: 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 payoffs and paydowns.
Sharp: We are forecasting our net interest margin to remain in it.
Sharp: Narrow graph narrow range throughout 2024, along with fee income and overhead costs as well.
Sharp: 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 B. Kaminski: Thank you Chuck that concludes management's prepared comments and we'll now open the call up to the Q&A session.
Speaker Change: Thank you we will now begin the question and answer session to ask a question Press Star then one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we'll pause momentarily to assemble our roster.
Speaker Change: And our first question comes from.
Speaker Change: Daniel Tamayo of Raymond James.
Daniel Tamayo: Good morning, everybody.
Daniel Tamayo: Good morning, guys.
Daniel Tamayo: Sure.
Maybe we start just on the on the margin guidance I'm just kind of following up on what you were talking about there Chuck.
Daniel Tamayo: I'm just curious if if you're assuming given the tight band as you mentioned I'm, just kind of a little bit of a decline in the first half of the year and then.
Daniel Tamayo: What would be stable ish in the back half, but then that's is that you know.
Daniel Tamayo: Impacted or how much is that impacted by the rate.
Daniel Tamayo: Great cuts in your in your assumption.
Yes, I think when I considered we expect to see some further compression here in the first quarter just from the same types of experiences that we have a bad experience that we experienced in the back half of 2023, but.
Daniel Tamayo: But we feel that when we get into the second quarter that that the repricing on our liability side becomes much less of an impact.
Daniel Tamayo: 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.
The impact that we have.
Daniel Tamayo: The loan repricing side and then we also have and this will continue for several years. We also have with a ladder approach, we do have especially U S government agency bonds.
Daniel Tamayo: Our earnings say, 1%.
Daniel Tamayo: Maturing and able to either be repriced in a higher rate environment.
Daniel Tamayo: <unk> put into the loan portfolio growth.
Daniel Tamayo: Okay.
Daniel Tamayo: And and if there were more cuts similar to what the forward curve is implying.
Daniel Tamayo: How do you think that would impact your guidance.
Yes, there is there's clearly a lot a myriad of different scenarios that are out there.
Daniel Tamayo: And I think that there I think that the more aggressive the rate cuts are its 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.
Daniel Tamayo: We think 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.
Daniel Tamayo: Okay.
Daniel Tamayo: That that last point I wanted to follow up on how how are you thinking about deposit repricing.
Daniel Tamayo: Once and once we do have lower rates.
Daniel Tamayo: And then if you could if you have any indexed deposits if you could disclose what those are.
Speaker Change: Youre doing that thanks.
Speaker Change: And the last one we don't have much in the way of of index deposits. We do have some larger minute money market accounts on the primarily on the business side that we have index over the last I would say a 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 <unk>.
Speaker Change: Rates and CD rates those tend to reprice is definitely on a timing basis similar to that of federal reserve actions and.
Speaker Change: And I would say you know this is going to be you know 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.
Speaker Change: And there is expectations on our part.
That was 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 and as you've seen we have been into the broker deposit arena.
Speaker Change: Here basically over the last 12 months, probably the 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 with 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.
Speaker Change: So I think <unk>.
Speaker Change: <unk> relatively small.
Speaker Change: Let's say aggressive relatively similar reductions in money market rates and local time deposit rates, what 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 a lot with those investment maturities.
Speaker Change: Okay, well I appreciate all that Oh that color Chuck I'll step back.
Speaker Change: Welcome to <unk>.
Speaker Change: Yeah.
And our next question comes from Erik Zwick with <unk> group.
Good morning to everyone. Chuck wanted to maybe just start with a follow up a little bit on the deposits and I know you noted that the.
Speaker Change: 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.
Speaker Change: No change in the composition of the deposits is it likely or possible that those noninterest bearing deposits could move lower here in the near to midterm.
Speaker Change: 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. So it is definitely slowed over time.
A lot of those deposits tend to be the operating accounts.
Speaker Change: <unk> does 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 are noninterest bearing checking accounts I think what we've seen is business is 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.
Speaker Change: 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.
Speaker Change: If they want a little bit of a higher rate.
Speaker Change: So I would say that given where we are in the interest rate cycle. My expectation is that a significant portion of the balances.
Speaker Change: That will have moved under that under those scenarios have likely moved already.
Speaker Change: Got it appreciate the color there and I guess another potential use of some of those excess funds can potentially be you know paying down some.
It draws are that they have or you know higher rate debt, which I think you called out in the press release.
Speaker Change: And so just kind of maybe using that Don and transitioning to the expectation for loan growth.
Speaker Change: Just look at the kind of 357 million of unfunded commercial and residential construction loans that you have just used that in itself is fully funded would be you know high single digit growth, but you mentioned, there's also the opportunity and likelihood of still seeing you know pay downs in prepayments. So just curious maybe more from the.
Speaker Change: Organic aspect of what's not already committed and I think he 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.
Speaker Change: I expect that that type of market share gains to come from you know which of your competitors. Your computer that's most of them and also maybe just any themes that you're seeing in terms of a specific industries or categories that seem to be having the strongest opportunity today.
Speaker Change: Yeah.
Randy: Yeah. This is Randy.
Randy: The strongest opportunities for growth that we're seeing are.
Randy: Related to ownership transitions.
Randy: Sometimes peak.
Randy: Groups coming in buying companies that were funding also aesop ownership transition.
Randy: And the like so that's been an area that we've done well in over the last year or two in 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.
Randy: The larger national banks.
Randy: Have been less active in the markets that we serve so that has helped us.
Randy: Create an increase in market share.
Randy: As I mentioned in my comments the growth is definitely more towards those types of events that.
Randy: Our market share related for Us then.
Organic growth within our customers borrowing needs, which are pretty stable.
Randy: As it relates to the backlog numbers that you talked about.
Randy: Those numbers are right in line with what we've experienced over the last I'm going to say eight quarters, probably even longer.
Randy: 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 are 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.
Randy: It does provide a firm basis to say that we will continue to have growth.
Speaker Change: Thanks, Alright, and one last question for me and then I'll step aside.
Speaker Change: Technology continues to be very important in community banking and you know likely requires a almost annual kind of ongoing spend at this space. So just curious if you have as you look at this year and maybe into next any material.
Speaker Change: 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.
Speaker Change: Yes.
Speaker Change: Our investment has been very consistent and we expect it to continue to be.
Speaker Change: You know from time to time to get things are new but.
Speaker Change: It tends to be more along the lines of shining up the objects that we have rather than buying new objects and.
Speaker Change: Continuing to meet the types of needs that our customers are 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.
Speaker Change: 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, Eric This is Bob as we talked about on <unk>.
Robert B. Kaminski: Occasions mercantile has always been committed to to.
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 that's sort of I'm not going to change in the future and we remain committed to that strategy.
Speaker Change: Excellent Bob Chuck right I appreciate all the answers today. Thank you.
Speaker Change: Hey, there.
Speaker Change: Thank you again, if you have a question. Please press Star then one.
Speaker Change: Our next question comes from Damon Delmonte with K B W.
Damon Delmonte: Hey, good morning, guys hope everybody's doing well today.
Damon Delmonte: Hmm.
Speaker Change: Good morning, just wanted to start off on that front things. Obviously are are pretty sound with you guys right now and just wanted to maybe get a little perspective, Chuck from you on our outlook for the provision over the coming quarters.
Charles E. Christmas: Take into account, what you're seeing maybe on the horizon for some and any troubled credits and then also like kind of how that balances with where the loan loss reserve is.
Speaker Change: Yes, Thanks Damon.
Speaker Change: Clearly the economic conditions will have always has a big impact on the reserve as you know.
Speaker Change: And as Ray mentioned and as you've seen in the numbers. We continue to have very pristine quality within our loan portfolio we have.
Speaker Change: And identified anything overly systemic within the industries in which we lend to.
Speaker Change: So don't really see anything coming over the horizon, but clearly yeah. These are volatile times and forecast change on a pretty regular basis in a pretty big way.
Speaker Change: My expectation is.
Speaker Change: Is that our loan portfolio will continue to stay strong and that.
Speaker Change: A large percentage of our provision.
Speaker Change: Number will be reflective of the loan growth that we have.
Speaker Change: But clearly we're looking at the.
Speaker Change: Form a base at the end of each quarter, we're looking at our qualitative measurements.
Speaker Change: In my prepared remarks, I, specifically talked about.
Clearly, having a reserve from specific reserves from time to time.
Two 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.
Speaker Change: With our system model as far as making sure that we're comfortable with the segmentation that we've been using.
Speaker Change: 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.
Speaker Change: Cheyenne Sunshine sum things up a little bit so.
Speaker Change: So yeah on overall basis, I would think that with the provision expense, primarily reflecting loan growth.
Speaker Change: That that will drive the provision expense in that our coverage ratio would.
Speaker Change: Would stay relatively consistent.
Speaker Change: <unk> known at this point in time.
Speaker Change: That's great great great color there. Thank you.
Speaker Change: If we could just circle back on the commentary you made earlier in the Q&A in the on the margin.
Speaker Change: Just kind of missed what you were saying what were some of the.
Speaker Change: Levers in the second half of the year that you think would help kind of keep the margin in that that 370 to 380 band in the face of rate cuts.
Speaker Change: Yes, there's a couple of things there what I mentioned in the investment portfolio.
Speaker Change: Really starting in 2023, but ramping up a little bit in 2024, and then for the next few years.
Speaker Change: 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.
Speaker Change: So even if rates come down and say 102 hundred basis points. There is still some positive repricing.
Speaker Change: That would be taking taking place, especially starting in the back half of this year on a pretty regular basis for the next several years.
Speaker Change: That whether we.
Reinvest those monies into the.
Speaker Change: The investment portfolio are we able to use some of those funds to fund loan growth, although 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 than we do use them more opt into 2023.
Speaker Change: What we had in the previous year or two and a large degree we went relatively short by short of six months to maybe 18 months.
Speaker Change: So that portfolio will reprice relatively quickly.
Speaker Change: And again, those especially those two items together with.
Speaker Change: With Oh, we'll definitely be looking at local deposit rates with the opportunity to reprice downward, especially.
Speaker Change: Especially money markets and time deposits most of our local time deposits are short as well.
Speaker Change: 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.
Speaker Change: Got it that's helpful. Thank you.
Speaker Change: I guess, just lastly, any.
Speaker Change: In your prepared remarks, you noted that you still had $6 8 million of of our capacity on the buyback any thoughts on you know.
Speaker Change: Coming a little bit more active here in 2024.
Speaker Change: Yes, it's something that we look at clearly the stock was down is all bank stocks were earlier this year or earlier in 2023.
Speaker Change: What the chaos that was going on.
Speaker Change: But certainly wanted to not be not be participating in buying back our stocks wanting to maximize our capital as best as we could.
Speaker Change: The kind of way that I like to put it is the buyback is definitely on the stove top but it's on the back burner and the burners not on I think is something that we do we do look at I don't know I would say a regular ongoing and it's probably a ongoing basis.
Speaker Change: It was a better way of saying that.
Speaker Change: 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 theres a lot of unknowns that are out there and it probably makes sense to kind of be hurting our capital. If you will at this point in time instead of using that for buybacks.
Speaker Change: That's 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.
Speaker Change: But again on an ongoing basis, we look at that as a possibility.
Speaker Change: Got it okay. That's all that I have that's very helpful. Thanks, and congrats to your lines in a nice win.
Speaker Change: Thanks, Tim and thank you David.
Speaker Change: Yes.
Speaker Change: Thank you. This concludes our question and answer session I would like to turn the conference back over to Bob Kaminski for any closing remarks.
Robert B. Kaminski: 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 and April This call has now ended.
Speaker Change: Thank you the conference has concluded.
Speaker Change: Thank you for attending today's presentation.
Speaker Change: Okay.
Speaker Change:
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Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.
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