Good morning, thank you for joining Bank of Marin Bancorp's earnings call for the fourth quarter ended December 31st, 2022. I am 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. At that time, if you have questions, please press 1 followed by 4 on your telephone. If at any time during the conference call you need to reach an operator, please press star 0. This conference call is being recorded on January 23rd, 2023. Joining us on the call today are Tim Myers, President and CEO, and Tawnia Kirtley , 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 20th, 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 Tawnia will be available to answer your questions.
Now I'd like to turn the call over to Tim Myers.
Thank you, Andrea. Good morning, everyone. 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. Originations eased in the fourth quarter, Our $240 million in full year production represented the second best since 2019 without the need to compromise credit quality. In fact, we saw steady de-risking of credit portfolio over the course of the year. We are, of course, mindful of recessionary concerns and associated impact on loan demand. 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 have 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 2 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 4 Northern Sonoma County branches into 2 that have overlapping customer coverage. In the quarter, we will close 2 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. 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.
Non-interest-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 non-accrual loans declining $8.2 million or 77% in the fourth quarter and representing only 0.12% of 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 Tawnia Kirtley to discuss our financial results in more detail.
Thank you, Tim. Good morning, everyone. We're 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 two basis point increase in cost of deposits.
For the full year, net interest income was $107.5 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 $65 million in payoffs, consisting largely of real estate asset sales and cash pay downs 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 of 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 non-interest income of $2.6 million was down slightly from the third quarter, mostly due to the reduction in fee-generating deposit network balances. 2022 non-interest income 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. Non-interest 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. Other real estate-owned expenses declined due to a $345,000 valuation adjustment in the prior quarter. Full year non-interest 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 pre-tax merger-related and conversion costs.
We continue to reap the positive benefits of operating leverage as our efficiency ratios were 50.9% and 64.4% for the fourth quarter and full year respectively, both improved from 52.2% in the prior quarter and 63.1% in 2021. 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. The Bank's Total risk-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. 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 Myers to share some final comments.
Thank you, Tawnia. 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 Bancorp well for the year ahead. We remain highly focused on diligent expense control, prudent risk management, and proactive balance sheet positioning. We also continue to explore new ways to invest in technology upgrades and talent, ensuring we can 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 to ensure exceptional delivery of products and services throughout our footprint.
I want to thank everyone on today's call for your interest and support. We will now open the call to your questions.
Thank you. If you would like to register any question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If this question has been asked or like to draw your registration, please press the 1 followed by the 3. Questions can also be submitted via the webcast page by clicking the Ask Question tab and typing your question to the box that appears below the tab. One moment please for our first question on the line. We do have a few questions queued up. We'll proceed with our first one on the phone from the line of Matthew Clark from Piper Sandler. Go right ahead.
Yeah. Good morning, Tim, Tawnia Kirtley.
Good morning, Matthew.
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 toward 20% through the cycle. It seems like you might do a lot better than that at this stage, assuming the Fed's, you know, 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?
I'll start, Matthew, and then I'll hand it over to Tawnia Kirtley. 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, you know, what we would call business as usual. We have outflows from accounts tied to election cycles and things like that. We did have some runoff in a couple key client areas where they manage money for other people, where they were looking for higher yield and went to alternative investment vehicles. Very little of the amount we lost, both quarter and on a year-to-date basis, were losing money to other financial institutions relative to the total. You know, that can change as the rate environment changes and rate increases further. I'll hand it to Tawnia Kirtley for more of the specifics.
Our model beta on the interest-bearing deposits is 34%, but historically, we've achieved less than that. Because we have about 50% of our deposits in non-interest bearing, obviously, the total beta is gonna be roughly half of that. I'd say, you know, 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. That enables us to really be thoughtful about how we manage our cost of deposits.
Okay. 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?
Let me pull those for you and, come back to you on those.
Okay.
You want December 31st rates, is that right? Or the month of December?
Yeah. The spot rate at the end of the year or at the end of December on total deposit costs or interest bearing, either one, and then the overall average NIM for the month of December, if you had it?
Okay. Yeah. I'll come back on that. I have to shuffle through some papers.
No worries.
Thank you, Matthew.
Yeah. Just on the on the buyback, there's some mention in the release about, you know, reconsidering reinitiating the buyback. I guess, can you give us a sense for, you know, what's changed other than rates? You know, capital obviously is up with the benefit of rates, but any other color there would be helpful.
Yeah. We wanna 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 other potential impacts on capital. We don't wanna be boxed into not doing it. We wanna have the ability to do that, and it's something we talk regularly with the board about.
Okay. Last one for me. Just on your office exposure. Can you just remind us, you know, 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?
As of December 31st, 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. We have good cushion, and we are proactively working with borrowers where we think there's significant exposure to that environment you're alluding to, and revaluating those properties. We haven't really seen the trend materially worsen for our portfolio. You know, we're not lending to the Salesforce Tower buildings of the world, but that does affect other properties. That loan-to-value is pretty consistent throughout all the various submarkets. We have, again, valuations change.
We proactively do that when we have properties we have concerns on, but that gives a significant cushion to work with those borrowers. In the vast majority of cases, we have sponsorship behind those and work closely with them to make sure we stay on track for repayment.
Great.
Matthew, I pulled those spot rates for you. For the month of December, the cost of deposits was 8 basis points. The net interest margin was 3.27% tax equivalent.
Thank you.
Mm-hmm.
Did I fully answer your question, Matthew, on the real estate?
Yeah, you did. Thanks very much.
You're welcome.
Thank you. We'll get our next question on the phone line from the line of Jeff Rulis from D.A. Davidson. Please go right ahead with your question.
Thanks. Good morning.
Good morning, Jeff.
Looking at the 3 commercial real estate payoffs. Were those legacy Bank of Marin credits or acquired through American River?
Are you talking about the ones that reduced nonaccruals?
Yes.
Yeah, those were legacy Bank of Marin. We had one earlier, the $7 million one we've referred to, before. That was a long-standing nonaccrual at Bank of Marin. 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.
Gotcha. You know, some of that success or movement, would you chalk it up to timing or was there any shift in aggressiveness, you know, seeing kind of potentially what could be ahead economically speaking? Was there a, "Hey, 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.
Yeah, it's partially. It's both. The, you know, the one larger loan that I just referenced, that's been on the books a long time. If you're talking about the smaller ones, we were very proactive in resolving that situation with the borrower. Certainly that was in the back of our minds that this external environment is not going to get any better. We worked with them closely and came to a mutually agreeable solution. There's no question that this environment played into that.
Okay. Hopping over to the 2023 expense growth rate. You know, how should we think about maybe year-over-year figure given the branch consolidation savings that are expected to be a partial offset? Just, you know, not specific and/or just the puts and takes of how you see expenses in 2023?
I'd say, you know, we had quite a few vacancies in 2022. We've resolved a lot of that. That's an upward push, however, and then also, you know, we plan to invest some of the savings from the branch closures and other efficiencies that we realize into some of our strategic initiatives. On the other hand, you know, we had, you know, we had very few expenses related to the merger and conversion in 2022. I'd say in general, you know, you're probably gonna see kind of a normal uptick in expenses, but there are, you know, 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.
Yep. Okay. Maybe the last one just on the, on the payoff activity. Do you get a sense that any of that was sort of year-end timing driven or, and/or do you have any visibility that the payoffs could subside going forward, especially given where rates are, and where they've been?
Yeah, we do. Well, I'll start that last part. We do think it's going to subside. If you look at the full year trend, you know, asset sales have been, you know, typically one of the largest components. That was actually down year-over-year. Cash payoffs, we're de-leveraging. That was pretty flat. We did have a larger jump in payoffs from project completions in part because we had a $25 million construction loan payoff that was very lumpy. The biggest component, the largest increase category-wise year-over-year was just third party refinancings. 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.
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 light and happened anyway. Having banks compete over those kind of things forced that decision early on. There was a timing aspect to that. That was over half of those 30 third-party refinancing. 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. We did, like I said, see a couple of those key categories actually decline.
Tim, I guess consistent with your initial comments, sort of strong year of origination, but you did quite a bit of de-risking under the hood, if you will, for our eyes. There was a bit of churn in there that you feel better about the quality of the book.
Yes.
Okay. All right. Thank you.
Thank you very much.
Thank you. We'll get your next question on the line. From the line of David Feaster with Raymond James. Go right ahead.
Hey, good morning, everybody.
Morning, David.
I just wanted to go back to the deposit side. You know, we touched on it a bit when you talked about the betas. I'm just curious, you know, 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? You talked about excess liquidity being used to pay down debt. Are you looking for more outflows to continue? Is the first question. How do you think about funding that? I mean, Tawnia Kirtley, you talked about tapping 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.
Going back to your first question.
Sorry, that was a big question.
Yeah. 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. Since the beginning of 2022, we've lost about $400 million. You could, you know, you could say, well, there's $400 million in question. However, you know, 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.
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. You know, that gives us a lot of flexibility. As you said, we do have some unrealized losses in securities portfolio. You know, the duration on those securities is multiyear, so, you know, we're not inclined to sell at significant losses to finance a cash need for several months. 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, you know, generally average about $100 million per year.
I think I got all your questions there, but let me know if I didn't.
No, that was terrific. Maybe touching on the credit side. You, you guys have such a conservative approach and good insights. I'd just be curious, maybe as you look at your portfolio and you stress some of the floating rate borrowers, where you know, we've seen borrowing costs go up materially. Are you seeing a material change in debt service coverage ratios? As we look at the prospects of another, you know, 50 basis points of hikes, how do you think about the cash flows and the, and the collateral values for some of these loans as they come up for renewal? Ultimately, how do you think that impacts credit quality?
I mean, would you expect to see more TDRs or I'm just curious how you think about approaching that and what your thoughts are at a high level.
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. We are constantly doing that on both floating and fixed rates. You know, 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'll affect the cash flow vacancy rates. 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 to substandard in the past. Those have not worsened. In the meantime, we're cleaning out the portfolio of things we can control, in a, you know, mutually agreeable way with our customers, to create runway for dealing with potential future problems.
Right now, we feel good. 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.
Yeah. Okay. You know, one thing you said in your prepared remarks, Tim, just you talk 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...
Retail network, it's an extremely important part of our customer service model. At some point, when you get into cycles like this, it begs the question of, you know, how many do you need covering what service area? What we're closing, certainly two of those were redundant. With American River Bank, we both had branches in Healdsburg and Santa Rosa, we had put off doing that. The other two are in markets where there's service nearby, so we can continue to service our customers. That includes looking at commercial banking.
We've always had a model of having regionally centric commercial banking offices serving relatively narrowly defined markets. We just need to always look and say, "Okay, is this the right way to deliver our relationship 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 operating leverage into our model. As we've talked about before, we're gonna continue to look for ways to drive that.
Makes sense. Thank you.
You're welcome.
I will proceed to our next question on the line. It is from Andrew Terrell with Stephens. Please go right ahead.
Hey, morning, Tim. Morning, Tawnia.
Morning, Andrew.
Hey, 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 thoughts on just how the pipeline stood and overall kind of loan growth expectations, and then, maybe more specifically, any pockets of strengths within the portfolio, where you would anticipate more growth, and then conversely, any areas where you're kind of, pulling back?
Yeah. No, it's a good question. In terms of the timing, yeah. If you're looking at our pipeline now at Q1, it's not quite as robust as it was last year, but that last year was a very different rate environment. What's encouraging is it is increasing. Depending on where you set your threshold for probability to close, it's actually a 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 requests in San Francisco. By and large, we're gonna continue to 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.
We are looking closely at everything. The timing certainly on the payoffs, yes, we had you know, 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. 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.
The production across our regions was fairly typical. You know, 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 leads to loan growth.
That's great color. I appreciate it. Maybe just, kind of sticking on that point, the competitive dynamics for new loan growth today. I would be curious, 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?
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 gonna 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 this time. I can't really promise how the spreads are gonna continue by way of competition, but we're certainly happy for the higher yields and being asset sensitive helps.
Okay. Maybe last one for Tawnia. Do you have an expected tax rate for 2023?
That's, that's a tough one. I mean, I think it, you know, kind of hovers around 26%. 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.
You know, played a smaller role in reducing the tax rate. On the other hand, you know, we didn't have as many nondeductible merger expenses in 2022. There's nothing jumping out on, you know, in the horizon to have a significant impact on our tax rate.
Okay. That's it for me. Thank you for taking the questions.
Thank you.
We'll get to our next question on the phone lines. It is from Woody Lay with KBW. Go right ahead.
Hey, good morning, guys.
Morning, Woody.
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?
Well, I think that's been a bit of a moving target. You know, early on, when deposits were running up, there was obviously a focus and a lot of talk about the leverage ratio. Tangible common equity to tangible assets has certainly taken sort of more airspace about conversations. We're really looking at all of those, honestly. 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.
Yep, makes sense. Just last for me, I believe in your opening remarks, you sort of mentioned that you're focused on improving profitability ratios. You know, if I sort of look at the sort of focus on Pre-tax, Pre-provision, I mean, do you think Q4 is sort of the high watermark, or do you think you can continue to see improvement in the year ahead?
That's a tough question. I mean, you know, with provisions. Oh, okay, you wanna talk pre-tax, pre-provision. You know, we still stand to benefit from an increase in interest rates. You know, not necessarily, but, you know, also the balance sheet size does make a difference. To the extent that our balance sheet is steady, then, you know, I think we can continue to see improvement. There are just a lot of moving factors in that question. Sorry to punt on that one, but.
No, no.
... I can't really predict.
All right. Awesome. Thanks, guys.
Thank you.
Once again on the phone, so if you'd like to ask a question, it is the one four on your telephone keypad. We do have a question queued up from the line of Timothy Coffey with Janney Montgomery Scott. Go right ahead.
Great. Thank you. Morning. Thank you for the opportunity to ask questions.
Yeah, morning, Tim.
Tawnia Kirtley, I appreciate the color you provided on deposit and potential outflows. I think that you're spot on. I'm wondering, though, where do you think non-interest-bearing deposits as a % of total deposits, you know, could end at the end of this year?
so again, that's another tough question. When we had the Great Recession, we our, non-interest-bearing kinda went up from an average of, say, 35% to 40%, 42%. Toward the end of the cycle there, you know, we had every expectation that that percentage would go down, and it never did. It did nothing but climb. I'm not gonna, I'm not gonna predict that it's gonna go up any further, and I'm not gonna say that it can't go down. I think historically 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.
Right. Okay. I apologize if I missed it earlier, but were there any costs associated with the branch closures in 4Q?
Yeah, we had some, a small amount of accelerated costs. What happens is we have, some, tenant improvements and, lease expense that gets accelerated over the remaining time that we occupy, those properties. 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.
Yeah, that cost is really the differential between the cost we've set for 2023 and the annualized run rate going forward. We're retaining all the employees. We're just gonna reposition them into the nearby branches and other places, there's no employment-related costs there. It's almost entirely what Tawnia mentioned.
Okay. All right. I appreciate that. Thank you. Tim, can you provide some color on the general customer sentiment in the current rate environment? I mean, clearly you're still, you know, able to and open for business and booking loans and I wonder what's the sentiment like? Is there a bit of hesitancy to make investments right now?
I think hesitancy is a good word. I think for a few months there, a couple months at least, it was a bit of silence, right? The rates continued to increase, a lot of doom and gloom news out there are certainly uncertainty around what the news is gonna be. As I mentioned, we're really starting to see the pipeline build back up, people do grow accustomed to higher rates. They're not abnormally, higher long-term rates than we've seen historically, but they're certainly, you know, different than they were most recently. I think there's an adjustment period, but we are seeing that activity increase, that just means we have to work harder to generate that activity. We are committed to doing that.
Right. Okay. Well, great. Those are my questions. Thank you very much.
Okay.
Thank you.
We did have a couple of oh, go ahead, operator.
Oh, certainly. We have one, actually one more question on the phone. It's another follow-up from Andrew Terrell with Stephens. Go right ahead.
Hey, Tim. Hey, Tawnia. Thanks for the follow-up question.
Sure.
Tim. It seems like focus kind of at the company right now is maybe more internally focused. 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.
Sure. Well, as I'm sure you've heard, 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. As you know, they're sold, not bought, so you have to wait for someone to raise their hand. 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.
Understood. Thanks for the question.
You're welcome.
Thank you. We actually have no more questions on the phone line. Please proceed with any online questions.
Great. Thank you. We do have a couple. One was, what is the duration of the securities portfolio? 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, you know, roughly, very roughly half. The held-to-maturity portfolio has a longer duration. That's 5.92% years, and the AFS portfolio is 3.98 years. I think that answers that question. We had another question about the tangible book value per share at year-end. That was $20.85.
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 at losses in order to finance the bank? As I said, I think 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. We don't feel like we'll be forced to take losses that we don't wanna take. What is, excuse me, what is the granularity of the office portfolio, and is there healthcare office included? If so, how much?
I don't have that level of data in front on the granularity.
Excuse me.
Yeah, if we have a contact information on that, we'll have to make that available. I don't have a loan level detail to talk about the granularity on average size.
That it?
Yes, I'm sorry. The second answer is healthcare 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 healthcare office embedded in that or included in that? I don't have that level of detail to provide on the granularity. We'll follow up. 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.