Bank of Marin Bancorp (NASDAQ:BMRC) Q4 2022 Earnings Conference Call January 23, 2023 11:30 AM ET
Company Participants
Andrea Henderson – Director of Marketing
Tim Myers – President and CEO
Tani Girton – EVP and CFO
Conference Call Participants
Matthew Clark – Piper Sandler
Jeff Rulis – D.A. Davidson
David Feaster – Raymond James
Andrew Terrell – Stephens
Tim Coffey – Janney Montgomery Scott
Andrea Henderson
Good morning, and thank you for joining Bank of Marin Bancorp’s Earnings Call for the Fourth Quarter Ended December 31, 2022. I’m Andrea Henderson, Director of Marketing for Bank of Marin, and thank you for your patience this morning.
During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question-and-answer session. [Operator Instructions] This conference call is being recorded on January 23, 2023.
Joining us on the call today are Tim Myers, President and CEO; and Tani Girton, Executive Vice President and Chief Financial Officer. Our earnings press release which was issued this morning can be found on our website at bankofmarin.com, where this call is also being webcast.
Before we get started, I wanted to note that we will be discussing some non-GAAP financial measures on the call. Please refer to the reconciliation table on Page 3 of our earnings press release for both GAAP and non-GAAP measures.
Additionally, the discussion on this call is based on information we know as of Friday, January 20, 2023, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings press release, as well as our SEC filings.
Following our prepared remarks, Tim and Tani will be available to answer your questions.
And now I’d like to turn the call over to Tim Myers.
Tim Myers
Thank you, Andrea. Good morning, everyone, and welcome to our call.
We are pleased with our record fourth quarter and full year earnings. Both reflected the strength of our relationship banking model, paired with disciplined expense control, liquidity and credit risk management efforts. As always, we remain dedicated to disciplined underwriting and prudent lending.
Origination fees in the fourth quarter for a $240 million in full year production represented the second best since 2019 without the need to compromise credit quality. In fact, we saw a steady derisking of credit portfolio over the course of the year. We are of course mindful of recessionary concerns and associated impact on loan demand. However, we will continue to rely on our balanced approach to meeting customer needs, while maintaining a strong credit culture in order to navigate any economic slowdown.
We provide exceptional service and local market expertise deepening ties with our customers without competing strictly on price or taking unnecessary risks. Although our loan balances declined modestly from the third quarter, we funded $35 million in commercial loans in early January 2023, that had been scheduled to close in the fourth quarter of 2022. $20 million of that is expected to remain on our balance sheet as we have participation commitments for $15 million of that total amount.
Our asset-sensitive balance sheet helped our performance in 2022 driving yields on interest earning assets. And we will be diligent about protecting our net interest margin in 2023. More than half of total deposits were non-interest bearing at the close of 2022. While our cost of deposits rose just two basis points in the fourth quarter, rising rates boosted our tax equivalent net interest margin by 10 basis points in the fourth quarter and 23 basis points over the fourth quarter of the prior year.
Finally, earnings and synergies generated from our 2021 acquisition of American River Bank further contributed to our improved efficiency ratio, allowing us to allocate resources towards our strategic initiatives as we head into the new year.
In Q1 2023, we will deliver on our plans to further gain efficiencies from the merger by consolidating four Northern Sonoma County branches into two that have overlapping customer coverage. Also in the quarter, we will close two additional branches where we will be able to serve customers effectively from nearby locations. These efforts are expected to generate savings of $470,000 in 2023 and approximately $1.4 million per year thereafter that will be reinvested in both talent and technology.
Now I’ll turn to some additional highlights. We produced record net income of $12.9 million in the fourth quarter compared to $12.2 million in the third quarter. Diluted earnings per share of $0.81 compared to $0.76 in the third quarter. For full year 2022, we generated record earnings of $46.6 million, up from $33.2 million in 2021.
Diluted earnings per share were $2.92 for the quarter compared to $2.30 per share the prior year. Noninterest-bearing deposits accounted for 51.5% of total deposits at the close of the year, down slightly from the third quarter, but our average cost of deposits remained very low at just 8 basis points. While the market anticipates interest rates will climb further in the first quarter, we will continue to carefully manage deposit pricing on a customer-specific basis.
Credit quality, as I noted, is strong and improving. With fourth quarter nonaccrual loans declining $8.2 million or 77% in the fourth quarter and representing only 0.12% in total loans down from 0.49% at September 30. Our efficiency ratio for the fourth quarter was 50.92% compared to 52.24% for the prior quarter and 56.92% in the fourth quarter of 2021. The improvement was driven by lower operating expenses and higher net interest income on both loans and securities.
Given the consistency of our performance and record earnings, our Board of Directors declared a quarterly cash dividend of $0.25 per share payable on February 10, 2023. This represents the 71st consecutive quarterly dividend paid by Bank of Marin Bancorp.
Now I’ll turn the call over to Tani to discuss our financial results in more detail.
Tani Girton
Thank you, Tim. Good morning, everyone.
We are proud of our fourth quarter earnings, which translated into a return on assets of 1.2% and return on equity of 12.8%, up from 1.1% and 11.7% in the third quarter. Net interest income of $33.4 million in the fourth quarter increased $343,000 over the prior quarter as higher yields more than offset the 2.2% sequential decline in earning assets and the 2 basis point increase in cost of deposits.
For the full year, net interest income was $127.5 million, up 21.4% from 2021 as a result of higher earning assets generated from the acquisition, as well as deposit growth in 2021 and lower funding costs primarily related to the early retirement of subordinated debt in 2021.
Loan balances were down 3% in the fourth quarter as $55 million in payoffs consisting largely of real estate asset sales and cash paydowns more than offset new production of $36 million. Deposits were also down in the fourth quarter, decreasing by $329 million or 8.4% from the prior quarter. While some of the decline can be attributed to our commercial customers’ year-end activity and specific planned events, we have been anticipating outflows of pandemic surge deposits for some time.
At the end of 2021, the bank held $521 million in cash and deposit network balances in anticipation of expected and potential unexpected outflows. Over the course of the year, those balances as well as $112 million in borrowings and $164 million reduction in loans financed deposit outflows and growth in the securities portfolio.
Our fourth quarter tax equivalent net interest margin improved 10 basis points, driven by the higher yields on interest-earning assets, partially offset by a 6 basis point increase in our cost base interest-bearing liabilities. There was no provision for credit losses on loans in the fourth quarter compared to a provision of $422,000 in the third quarter, an increase in qualitative risk factors to account for the ongoing deterioration in the economic outlook not captured in the quantitative portion of the allowance was offset by the decrease in loan balances.
Fourth quarter noninterest income of $2.6 million was down slightly from the third quarter, mostly due to the reduction in fee generating deposit network balances. 2022 noninterest income decreased — sorry, increased $773,000 over 2021 due to higher fees on balances held at deposit networks and more transaction volume due to the larger size of the bank. Those increases were partially offset by the reduction in earnings on bank-owned life insurance.
Noninterest expense of $18.3 million in the fourth quarter was down $368,000 in the third quarter. Decreases from the prior quarter included a $957,000 reduction in salaries and employee benefits, largely due to a bonus accrual adjustment and an increase to the discount rate applied to retirement plans.
In addition, other real estate-owned expenses declined due to a $345,000 valuation adjustment in the prior quarter. Full year noninterest expense increased $2.6 million over 2021 as a result of our larger size investments in software and equipment, the valuation adjustment on real estate owned and accelerated costs associated with upcoming branch closures. Those increases were partially offset by the $5.6 million reduction in pretax merger-related and conversion costs.
We continue to reap the positive benefits of operating leverage as our efficiency ratios were 50.9% and 54.4% for the fourth quarter and full year, respectively, both improved from 52.2% in the prior quarter and 63.1% in 2021. As there were substantially more acquisition-related expenses in 2021, the year-over-year improvement on a non-GAAP basis was 374 basis points. All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 15.9% at December 31, compared to 15.1% at September 30. And the bank’s diluted based capital ratio was 15.7% at December 31 compared to 14.7% at September 30.
Year-end tangible common equity of 8.2% for Bancorp and 8.1% for Bank of Marin were up 76 and 85 basis points, respectively, from the prior quarter due to the decrease in after-tax unrealized losses on available-for-sale securities associated with interest rate decreases during the fourth quarter as well as the contribution from our strong earnings.
Overall, Bank of Marin’s strong balance sheet, liquidity and capital continue to yield healthy results as has been the case across many interest rate and economic cycles. We believe that this will continue in 2023, enabling us to further invest in our strategic initiatives that will further improve profitability and strengthen our franchise.
With that, I’ll turn it back over to Tim to share some final comments.
Tim Myers
Thank you, Tani.
Our performance throughout 2022, combined with our more than 30-year history of delivering attractive returns to our shareholders in all cycles positions Bank of Marin well for the year ahead. We remain highly focused on diligent expense control, prudent risk management and proactive balance sheet positioning. Yet, we also continue to explore new ways to invest in technology upgrades and talent ensuring we can meet both meet clients’ increasing preference for advanced digital banking tools and high-touch service backed by well-established bankers of proven market expertise.
We are committed to our existing clients and continuing to expand our commercial lending to new customers across Northern California, building on the American River Bank acquisition. As we further optimize our delivery channels, we will continue to identify cost-saving opportunities to offset new investments we make, which are exceptional delivery of products and services throughout our footprint.
With that, I want to thank everyone on today’s call for your interest and support. We will now open the call to your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We’ll proceed with our first one on the phone from the line of Matthew Clark from Piper Sandler. Go right ahead.
Matthew Clark
Good morning, Tim, Tani.
Tim Myers
Good morning, Matthew.
Matthew Clark
Maybe first just on your updated thoughts around your deposit beta this cycle, interest bearing deposit beta of only 1% cycle to date. I think on the last call, you spoke about maybe getting towards 20% through this cycle. It seems like you might do a lot better than that at this stage, assuming the Fed’s done here in the first half of the year. Just any commentary around your thoughts around deposit pricing in light of the decline in deposit balances as well.
Tim Myers
Yes, so I’ll start Matthew and then I’ll hand it over to Tani. But bigger picture, if you look at the biggest chunk of deposit runoff both on a year-over-year basis and quarter, it was accounts tied to our – what we call business as usual, we had outflows from accounts side to election cycles and things like that. We did have some runoff in a couple of key client areas where they manage money for other people, where they were looking a higher yield and went to alternative investment vehicles. Very little of the amount we lost both quarter and on a year-to-date basis, we’re losing money to other financial institutions relative to the total. But that can change as the rate environment changes and rate increases further.
I’ll hand it to Tani for more of the specifics.
Tani Girton
So our model beta on the interest bearing deposits is 34%, but historically we’ve achieved less than that, but because we have about 50% of our deposits in non-interest bearing. Obviously, the total beta is going to be roughly half of that. And I’d say, I would just reinforce what Tim said, we’re really proactively reaching out to customers when rate concerns come up and making sure that we’re addressing them on a full relationship basis as opposed to raising rates across the board. We have a significant amount of liquidity, contingent liquidity that we have not tapped into for many, many years. And so that enables us to really be thoughtful about how we manage our cost of deposits.
Matthew Clark
Okay. And then just to round out the margin discussion. If you have it, the spot rate on interest bearing deposits at the end of the year and the average margin in the month of December?
Tani Girton
Let me pull those for you and come back to you on those.
Matthew Clark
Okay.
Tani Girton
You want December 31 rates, is that right, for the month of December?
Matthew Clark
Yes, the spot rate at the end of the year or at the end of December on total deposit costs or interest bearing other one, and then the overall average NIM for the month of December if you had it?
Tani Girton
Okay. Yes, I’ll come back on that. I have to shuffle some papers.
Matthew Clark
Okay, no worry.
Tim Myers
Thank you, Matthew.
Matthew Clark
Yes, and then just on the buyback, there’s some mention in the release about reconsidering – reinitiating the buyback. I guess can you give us a sense for what’s changed other than rates? Capital obviously is up with the benefit of rates, but any other color there would be helpful?
Tim Myers
Yes, we want to be prepared, Matthew. We think at this valuation, it’s really attractive for us to buy back stock. We have to continue to watch trends in the economy and credit risk and for other potential impacts on capital. But we don’t want to be boxed into not doing it. We want to have the ability to do that and it’s something we talk regularly with the Board about.
Matthew Clark
Okay. And then last one from me. Just on your office exposure, could you just remind us the outstandings there and the kind of split between downtown metro office relative to rural and what you’re seeing there in terms of the impact of ongoing tech layoffs and how that exposure might perform over the coming months?
Tim Myers
So as of December 31, we had about $450 million in total office commercial real estate. The loan to value based on the most recent valuations we have on file and obviously that changes all the time is just under 44%. San Francisco is $82 million of that. That loan to value is the same. So we have good cushion and we are proactively working with borrowers where we think there is significant exposure to that environment you’re alluding to and reevaluating those properties.
So, we haven’t really seen the trends materially worsen for our portfolio. We’re not lending to the Salesforce Tower buildings of the world, but that – as a fact other properties. But that loan to value is pretty consistent throughout all the various submarkets. So we have again, valuations change, but we proactively do that and we have properties, we have concerns on.
But that that gives us significant cushion to work with those borrowers. And in the vast, vast majority cases, we have sponsorship behind those and work closely with them to make sure we stay on track for repayment.
Tani Girton
Matt, I’ve pulled those spot rates for you. So for the month of December, the cost of deposits was 8 basis points and the net interest margin was 3.27% tax equivalent.
Matthew Clark
Thank you.
Tim Myers
Did I fully answer your question Matthew on the real estate?
Matthew Clark
Yes, you did. Thanks very much.
Tim Myers
You’re welcome.
Operator
Thank you. We’ll get to our next question on the phone line from the line of Jeff Rulis from D.A. Davidson. Please go right ahead with your question.
Jeff Rulis
Thanks, good morning.
Tim Myers
Good morning, Jeff.
Tani Girton
Good morning.
Jeff Rulis
Looking at the three commercial real estate payoffs, were those legacy Bank of Marin credits or acquired through American River?
Tim Myers
Are you talking about the ones that reduce non-accruals?
Jeff Rulis
Yes.
Tim Myers
Yes, those were legacy Bank of Marin. So we had one earlier, the $7 million one we’ve referred to before. That was a longstanding non-accrual of Bank of Marin. And then the other small ones related to a similar borrower were legacy Bank of Marin. If you’re talking about the payoffs overall, there was a chunk related to acquired loans.
Jeff Rulis
Got you. And just would you – some of that success or movement, would you chalk it up to timing or was there any shift in aggressiveness seeing kind of potentially what could be ahead economically speaking, was there a, let’s chase some of these down just trying to get a sense for if it was timing or some self-directed things in-house?
Tim Myers
Yes, it’s partially both. So the one larger loan that I just referenced, that’s been on the books for long time. If you’re talking about the smaller ones, we were very proactive in – resolving that situation with the borrower and certainly that was in the back of our minds that this external environment is not going to get any better. And so, we worked with them closely and came to a mutually agreeable solution. So there’s no question that this environment played into that.
Jeff Rulis
Okay. Hopping over to the 2023 expense growth rate, how should we think about maybe year-over-year figure given the branch consolidation savings that are expected to be a partial offset, just not specific and/or just the puts and takes of how you see expenses in ’23?
Tani Girton
So I’d say we had quite a few vacancies in 2022. We’ve resolved a lot of that. So that’s an upward push. However, and then also, we plan to invest some of the savings from the branch closures and other efficiencies that we realize into some of our strategic initiatives. So, but on the other hand, we had very few expenses related to the merger and conversion in 2022.
So I’d say in general, you’re probably going to see kind of a normal uptick in expenses, but there are a lot of moving parts in both directions that can counterbalance each other. We do also have sort of the typical first quarter increase associated with bonuses and 401(k) contributions that go along with those bonuses.
Jeff Rulis
Yes, okay. Maybe a last one just on the payoff activity – can you get a sense that any of that was sort of year-end timing driven or and/or do you have any visibility that payoffs could subside going forward, especially given where rates are and where they’ve been?
Tim Myers
Yes, we do. Well, I’ll start with that last part. We do think it’s going to subside. If you look at the full year trend, asset sales have been typically one of the largest components. That was actually down year-over-year. Cash payoffs were deleveraging that was pretty flat. We did have a larger jump in payoffs from project completions and Park as we had $125 million construction loan payoff that was very lumpy.
The biggest component that or the largest increase category wise year-over-year was just third-party refinancing and that – refinancings and that jumped up relatively significantly. But over half of that were acquired loans where we didn’t have the appetite to refinance or continue on with those loans. And so to your question about timing yes, the intense rate competition we had earlier in the year drove a lot of activity and really accelerated that.
Those were undoubtedly things that would have come to life and happen anyway, but having banks compete over those, kind of things, force that decision early on. So, there was a timing aspect of that, but that was over half of those – third-party refinancing, so a little bit of a long-winded answer. But yes, we have every reason to believe that, that trend will subside both in terms of one, those – assets being off the books, but two, the rate environment overall. And we did, like I said see a couple of those key categories actually decline.
Jeff Rulis
Okay. So I guess, consistent with your initial comments, sort of a strong year of originations, but you did quite a bit of de-risking under the hood, if you will, at least – for our eyes, there was a bit of churn in there that you feel better about the quality of the book?
Tim Myers
Yes.
Jeff Rulis
Okay all right, thank you.
Tim Myers
Thank you.
Operator
Thank you very much. We’ll get to our next question on the line – from the line of David Feaster with Raymond James. Go right ahead.
David Feaster
Hi good morning, everybody.
Tim Myers
Good morning, David.
Tani Girton
Good morning.
David Feaster
I just wanted to go back to the deposit side. We touched on a bit when you talked about the betas, but I’m just curious, as we think about the surge deposits or maybe some more of the rate-sensitive money, have we gotten most of that out at this point or are you still seeing more flows on that side. And you talked about excess liquidity being used to pay down debt. And so, are you looking for more outflows to continue, is the first question?
And then how do you think about funding that? I mean Tani, you talked about having some other sources of liquidity. It kind of sounds like maybe additional borrowings would be the primary source to fund outflows versus selling some securities here? And then maybe just touch on the securities cash flows as well?
Tani Girton
Yes okay, so going back to your first question.
David Feaster
Sorry, that was a big question.
Tani Girton
Yes, so if you look at what our deposits have done since just before the pandemic, deposits went up from trough to peak by about $800 million. And since the beginning of – 2022, we’ve lost about $400 million. So you could say, well, there’s $400 million in question. However, the last time we had a situation like this, when we had a deposit surge in reaction to the financial crisis and the Great Recession, we did not lose all of the deposits.
And so as I said before, the beauty of – having all the contingent liquidity that we have enables us to really make choices about where we’re willing to pay capital markets rates versus where we want to raise deposit rates. And that gives us a lot of flexibility. As you said, we do have some unrealized losses in the securities portfolio. The duration on those securities is multiyear. So we’re not inclined to sell at significant losses to finance a cash need for several months.
So it’s better for us to go out into the capital markets or to increase rates selectively on the deposit side. Cash flows off the securities portfolio generally average about $100 million per year. I think I got all your questions there, but let me know if I didn’t.
David Feaster
Yes. No, that was terrific. And then may be touching on the credit side. You guys have such a conservative approach and good insights. But I’d just be curious, maybe as you look at your portfolio and you stress some of the floating rate borrowers where there – we’ve seen borrowing costs go up materially. Are you seeing a material change in debt service coverage ratios and as we look at the prospects of another 50 basis points of hikes?
How do you think about the cash flows and the collateral values for some of these loans as they come up for renewal? And ultimately, how do you think that, that impacts credit quality? I mean, would you expect to see more TDRs or just – I was just curious how you think about approaching that and what your thoughts are at a high level?
Tim Myers
So, one of the things you mentioned, David, is our disciplined approach. We’ve long stressed especially commercial real estate for rate sensitivity for higher rates. And we are constantly doing that on both floating and fixed rates and so far within our portfolio, that’s holding up well. I can’t really predict where overall office rent trends are going to be that will affect the cash flow vacancy rates. But right now, we feel good about the position we’re in.
We’ve talked about some of the problem credits that we’ve had that we’ve moved the substandard in the past. Those have now worsened. And in the meantime, we’re cleaning out the portfolio, things we can control in a mutually agreeable way with our customers to create a runway for dealing with potential future problems. But right now, we feel good. But certainly, everything you said in that question is a risk, but I don’t know how to quantify or even fully qualify that for you at this time.
David Feaster
Yes, okay. And then one thing you said in your prepared remarks, Tim, just you – talking about optimizing delivery channels. I was hoping maybe you could expound on that a bit. Talk about some of the things you’re working on. I know you’ve hired a lot of talent. You’ve invested in technology. Just curious what you guys are working on and some of [technical difficulty]?
Tim Myers
Retail network and it’s an extremely important part of our customer service model. But at some point, when you get into cycles like this, it’s begs a question of how many do you need covering what service area. So what we’re closing, certainly two of those were redundant with American River Bank. We had – we both had branches in Healdsburg and Santa Rosa, and we had put off doing that.
The other two are in markets where there’s service nearby. So our customer we can continue to service our customers, but – that includes looking at commercial banking. We’ve always had a model of having regionally centric commercial banking office serving relatively narrowly defined markets, and we just need to always look and say okay, is this, the right way to deliver our relation banking model.
There’s no promise in there that we’re going to do anything else or guarantee, but I think we always have to look at – are we most efficiently delivering on loan growth and C&I deposit growth, core deposit growth in a way that builds our operating leverage into our model. So as we’ve talked about before, we’re going to continue to look for ways to drive that.
David Feaster
Make sense, thank you.
Tim Myers
You’re welcome.
Operator
And we’ll proceed to our next question on the line is from Andrew Terrell with Stephens. Please go right ahead.
Andrew Terrell
Hi, good morning Tim, good morning Tani.
Tim Myers
Good morning, Andrew.
Andrew Terrell
Hi, maybe – just starting on loan growth, looks like timing might have been an issue for some of the fourth quarter loan growth. I guess Tim wanted to hear your thoughts on just how the pipeline stood and overall kind of loan growth expectations? And then maybe more specifically, any pockets of strength within the portfolio where you would anticipate more growth? And then conversely, any areas where you’re kind of pulling back?
Tim Myers
Yes, you know it’s a good question. In terms of the timing, yes, if you’re looking at our pipeline now at Q1, it’s not as quite as robust as it was last year, but last year was a very different rate environment. What’s encouraging is it is increasing. And depending on where you set your threshold for probability close, it’s actually the fairly decent amount given that external environment right now going into Q1.
There’s, not a lot of areas where we’re pulling back per se certainly, we’re going to be cautious about large new investor real estate office property request in San Francisco. But by and large, we’re going to continue to look for – look at credits, the way we always have. And that’s why we do it the way we do. So we don’t – whiplash our customers and our prospects with disparate credit parameters.
But we are looking closely at everything the timing certainly on the payoffs. Yes, we had – a fairly large chunk of the problem loans that paid off. Certainly, the volume did decrease in the fourth quarter. I’m not sure that was fully unexpected, given the rate environment and the caution among the borrowing universe out there in this economic environment. But we are continuing to focus on growing every one of the regions we have.
Certainly, one of the things that was an absorption of time and effort this year was bringing American River Bank into Bank of Marin and then certainly on the commercial banking side embedding credit culture people. It took some time to rebuild that team, as we’ve talked about in the past, and they’re doing a really good job.
So the production across our regions was fairly typical. Marin, Napa, Sacramento, Oakland, and we continue to believe we can drive growth in all those areas, and we’ll continue to look for ways to generate activity that leaves the loan growth.
Andrew Terrell
That’s great color, I appreciate it. And maybe just kind of sticking on that point, the competitive dynamics for new loan growth today and I’d be curious, are you – have you seen spreads compress as rates – market rates have gone up or are you still getting kind of similar spread as 12 months ago for new loans?
Tim Myers
So certainly, the yield on loans that we’re booking is up in every category. I really can’t speak to a consistent trend on spreads, but I have no doubt the level and type and nature of the competition that we’re going to see heading into early this year is not the same we saw in the first two quarters of last year.
It’s always a competitive market, but we have a lot of competitors that are focused on very disparate things and different things right now than they were last year at this time. So, I can’t really promise how the spreads are going to continue – by way of competition, but we’re certainly happy for the higher yields and being asset sensitive helps.
Andrew Terrell
Okay. And maybe last one for Tani. Do you have an expected tax rate for 2023?
Tani Girton
That’s a tough one. I mean I think it – kind of hovers around 265. Our tax rate was a little higher this year because as a total percent of the balance sheet. The tax-exempt earnings from munis and bank-owned life insurance played a smaller role in reducing the tax rate. On the other hand, we didn’t have as many non-deductible merger expenses in 2022. So, there’s nothing jumping out on for that – in the horizon to have a significant impact on our tax rate.
Andrew Terrell
Okay that’s it from me. Thank you for taking the questions.
Tim Myers
Thank you.
Operator
And we’ll get to our next question on the phone lines – it is from Woody Lay with KBW. Go right ahead.
Woody Lay
Hi, good morning guys.
Tim Myers
Good morning, Woody.
Woody Lay
I wanted to circle back on the buyback. I know it depends on sort of a myriad of factors, but just as it relates to capital. I mean, do you have a constraining capital ratio that you sort of look at in regards to the buyback?
Tim Myers
Well, I think that’s been a bit of a moving target. Early on, when deposits were running up, there was obviously a focus and a lot of talk about the leverage ratio, now tangible common equity to tangible assets and certainly taken sort of more aerospace about conversations. So we’re really looking at all of those, honestly.
And we want to, again, be in a position to take advantage of opportunities, but being cautious about the impact that would have and how that might affect our margin of safety of capital going forward in the environment.
WoodyLay
Yes. Makes sense. And then just last for me, I believe in your opening remarks, you sort of mentioned that you’re focused on improving profitability ratios. If I sort of look at sort of focus on pretax pre-provision, I mean, do you think 4Q is sort of the high watermark? Or do you think you can continue to see improvement in the year ahead?
Tani Girton
That’s a tough question. I mean, with provisions — okay, you want to talk pretax pre-provision. We still stand to benefit from an increase in interest rates. So not necessarily, but also the balance sheet size does make a difference. So to the extent that our balance sheet is steady, then I think we can continue to see improvement. So there are just a lot of moving factors in that question. So sorry to punt on that one, but I can’t really predict.
WoodyLay
All right, awesome. Thanks guys.
Tim Myers
Thank you.
Operator
[Operator Instructions] We do have a question queued up from the line of Tim Coffey with Janney Montgomery Scott. Go right ahead.
Tim Coffey
Great. Thank you. Good morning. Thank you for the opportunity to ask the questions.
Tim Myers
Good morning, Tim.
Tim Coffey
Tani, I appreciate the color you provided on deposit and potential outflows, and I think that you put you’re spot on. I’m wondering though, where do you think noninterest-bearing deposits as a percentage of total deposits could end at the end of this year?
Tani Girton
So again, that’s another tough question. When we had the Great Recession, we — our noninterest bearing kind of went up from an average of, say, 35% to 40%, 42%. And toward the end of the cycle there, we had every expectation that, that percentage would go down. And it never did, it did nothing but climb.
So I’m not going to predict that it’s going to go up any further. And I’m not going to say that it can’t go down. But I think historically, that is just — that’s a big, big focus for us, and it’s something that we will work hard to maintain. And yes, it can go down from 50%. But I think that given our business model, that’s something that we pay attention to all the time.
Tim Coffey
Right. Okay. And I apologize if I missed it earlier, but were there any costs associated with the branch closures in 4Q?
Tani Girton
Yes. We had some small amount of accelerated costs. So what happens is we have some tenant improvements and lease expense that gets accelerated over the remaining time that we occupy those properties. And so a small piece of that happened in December. Most of it will happen in 2023, but as you saw, the net impact of that and the savings for the year ends up being positive.
Tim Myers
And that cost is really the differential between the costs we set for 2023 and the annualized run rate going forward. We’re retaining all the employees. We’re just going to reposition them into the nearby branches and other places. So there’s no employment-related costs there. It’s almost entirely what Tani mentioned.
Tim Coffey
Okay. All right. I appreciate that. And then, Tim, can you provide some color on this general customer sentiment in the current rate environment? I mean, clearly, you’re still able to open for business and booking loans but I’m wondering what’s the soon it like? Is there a bit of hesitancy to make investments right now?
Tim Myers
I think hesitancy to the word. I think for a few months there a couple of months at least, it was — it was a bit of silence, right? The rates continue to increase and a lot of doom and gloom news out there are certainly uncertainty around what the news is going to be. But as I mentioned, we’re really starting to see the pipeline build back up. And so people do grow accustomed to higher rates. They are not abnormally higher long-term rates than we’ve seen historically, but they’re certainly different than they were most recently.
So I think there’s an adjustment period. And — but we are seeing that activity increase. And — that just means we have to work harder to generate that activity, but we are committed to doing that.
Tim Coffey
Great, okay. Well, great. Those were my questions. Thank you very much.
Tim Myers
Thanks.
Tani Girton
We did have a couple of — go ahead, operator.
Operator
Certainly. We have actually one more question on the phone. It’s another follow-up from Andrew Terrell with Stephens. Go right ahead.
Andrew Terrell
Hi Tim, hi Tani, thanks for the follow-up question.
Tim Myers
Sure.
Andrew Terrell
Tim, I just wanted to — it seems like focus kind of at the company right now is maybe more internally focus. I just wanted to get maybe an update from you on M&A if that was of interest to you at all or how conversations were going in the market right now?
Tim Myers
Sure. Well, as I’m sure you’ve heard it, it’s slow from what I can tell in the market out there. We always remain open to those opportunities. I’m out there talking to other banks and investment bankers as are many of my competitors. And as you know, they’re sold, not bought. So you have to wait for someone to raise their hand. But no, we remain open to the opportunity, remains a key part of our strategic plan, but I can’t force that activity and then most importantly, finding the right partner when that does and activity increases.
Andrew Terrell
Understood. Thanks for questions.
Tim Myers
You’re welcome.
Operator
Thank you. We actually have no more questions on the phone line. Please proceed with any online questions.
Tani Girton
Great. Thank you. So we do have a couple. One was what is the duration of the securities portfolio?
So the total — the duration of the total portfolio is 4.99 years. However, it’s important to split that up between the available-for-sale portfolio and the held-to-maturity portfolio, which is roughly, very roughly half. But the held-to-maturity portfolio has a longer duration. That’s 5.92 years and the AFS portfolio is 3.98 years. So I think that answers that question.
And then we had another question about the tangible book value per share at year-end that was $20.85. And related to that question, I think similar to a question answered earlier, with the larger accumulated losses on the portfolio, at what point would we start selling securities losses in order to finance the bank?
And as I said, I think we have a lot of — we have a lot of headroom right now to manage our liquidity position, both through our deposit pricing, as well as in the capital markets. So we don’t feel like we’ll be forced to take losses that we don’t want to take.
Unidentified Analyst
What is the granularity of the office portfolio and is their health care office included? So how much?
Tim Myers
I don’t have that level of data in front of me on the granularity. Yes. If we have a contact information on that, we’ll have to make that available, but I don’t have a loan level detail to talk about the granularity on average size. But yes, I’m sorry, the second answer is health care office would be included in commercial office.
For those on the line that didn’t hear the question, it was what is the granularity of the office commercial real estate exposure? And is health care office embedded in that or included in that? I don’t have that level of detail to provide on the granularity, so we’ll follow up.
Tim Myers
With that, I will end this call. Thank you all for joining us. We appreciate your support and your questions. If any of you have any follow-on questions, please reach out to us. We’re happy to answer them. Thank you.
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