CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the fourth quarter and year-ended 2022 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Cherie, and I am your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephones. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please note, this call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carabino. You may proceed.

Thank you, Cherie, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year-end of 2022. Joining me this morning are Dave Rager, President and Chief Executive Officer, and Alan Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31st, 2021, and in particular, the information set forth in Item 1A, Risk Factors Therein. For a more complete version of the company's safe harbor disclosure, Please see the company's earnings release issued in connection with this call. Now, I will turn the call over to Dave Breger. Dave?

Thank you, Christina. I just want to make a quick comment before I start my prepared comments, but we're experiencing a little bit of a windstorm down here in Southern California, so I apologize if there's a little background noise. We can't turn off the wind, unfortunately. But good morning, everyone. The bank generated full year and fourth quarter earnings, record full year and fourth quarter earnings. Full year net income in 2022 was $235.4 million, which represents an 11% increase over 2021. For the fourth quarter of 2022, we reported net income of $66.2 million, or 47 cents per share, representing our 183rd consecutive quarter of profitability. We previously declared a 20 cent per share dividend for the fourth quarter of 2022, or a dividend payout ratio of approximately 42%. This dividend represented our 133rd consecutive quarter of paying a cash dividend to our shareholders. Fourth quarter net income of $66.2 million, or 47 cents per share, compared with $64.6 million for the third quarter of 2022, or 46 cents per share, and $47.7 million, or 35 cents per share, for the year-ago quarter. For the fourth quarter of 2022, our pre-tax, pre-provision income was $95.4 million, compared with $91.9 million for the prior quarter. Pre-tax pre-provision income grew by approximately 43% when compared to the $66.8 million earned in the year-ago quarter. We recorded a provision for credit losses of $2.5 million for the fourth quarter of 2022 compared to $2 million for the third quarter and no provision for the year-ago quarter. As previously mentioned, net income was $235.4 million for the year ended 2022, a $22.9 million increase compared to 2021. Diluted earnings per share were $1.67 for 2022 compared with $1.56 for 2021. Pre-tax pre-provision income grew by 25% from $272 million for 2021 to $339 million in 2022. In 2022, we provisioned $10.6 million for credit losses, which compares to a $25.5 million recapture of provision for credit losses in 2021. Continued expansion in our net interest margin contributed significantly to our earnings growth, for both the full year and fourth quarter of 2022. Our net interest margin grew by 23 basis points compared to the third quarter of 2022, while growing by 33 basis points over the full year of 2021. Our 2022 full year average earning assets grew by more than $1.3 billion compared to 2021, which included the acquisition of Suncrest Bank that occurred in January 2022. However, fourth quarter average earning assets decreased by $521 million from the third quarter. This quarterly decrease in average earning assets reflects the decline in our funds held on deposit at the Federal Reserve, which declined from more than $2 billion on average in the fourth quarter of 2021 to approximately $125 million on average for the fourth quarter of 2022. In contrast to the decline in our Fed balance, both our loans and investment portfolio have grown throughout 2022. Now, let's discuss loans in more detail. Total loans at year end were $9.1 billion or $1.2 billion or 15% increase from the end of 2021. Our new loan production remained strong in the fourth quarter and throughout 2022. New loan commitments were approximately $480 million in the fourth quarter, which compares with approximately $450 million in the third quarter. After excluding loans acquired from Suncrest and PPP loan forgiveness, year-over-year loan growth was $634 million for a growth rate of approximately 8%. From September 30th to December 31st of 2022, loans grew by $305 million, or 3.5%, While average outstanding loan balances grew by $160 million, $169 million, or 2%. After excluding PPP loan forgiveness and the seasonal increase in dairy and livestock loans, fourth quarter loan growth was $189.7 million, or approximately 9% annualized. Dairy and livestock loans increased by $123.8 million from the prior quarter, as many of our dairies choose to defer their mill proceeds into the first quarter of the following year and or prepay their expenses. The core loan growth from the end of the third quarter was led by continued growth in commercial real estate loans, which grew by $199.7 million, or 3% annualized. Construction loans increased by approximately $12 million from the prior quarter, as many of our lines had increased usage as projects progressed. CNI loans decreased by $3.5 million, despite the overall line utilization rate for CNI loans increasing modestly from 32% to 33% at year end. Agribusiness loans declined by $13 million, and SBA loans decreased by $14 million, including an $8 million decrease in PPP loans. Only $9 million in PPP loans remain from the $1.5 billion in loans we originated. We remain cautiously optimistic about our ability to grow high-quality loans in 2023, although higher interest rates and uncertain economic conditions could impact the level of growth we achieve this year. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $4.9 million compared with $10.1 million for the prior quarter and $6.9 million for the year-ago quarter. At quarter end, we had no OREO properties and the $4.9 million in non-performing loans represented three basis points of total assets. During the fourth quarter, we experienced credit charge-offs of $127,000 and total recoveries of $143,000 resulting in net recoveries of $16,000 compared with net recoveries of $379,000 for the third quarter of 2022. For the full year of 2022, we experienced charge-offs of $197,000 and total recoveries of $1.1 million resulting in net recoveries of $893,000. Classified loans for the fourth quarter were $78.7 million compared with $63.7 million for the prior quarter and $56.1 million for the year-ago quarter. The increase in classified loans from the prior quarter was the result of a downgrade and a $13 million loan on a senior living facility acquired from Suncrest. As of December 31, 2022, classified loans included $22.8 million in loans acquired from Suncrest, which approximates the increase in classified loans from the end of 2021. Now, I'd like to discuss our deposits. A decline in deposits started in November, which is not unusual, as we typically see seasonal lows in deposits from November through February. In addition to this typical seasonality, some of our customers deployed excess funds with our citizens' trust group, and the slowing housing market has negatively impacted the deposit totals in our specialty banking group that focuses on escrow title and property management customers. Additionally, our customers continue to experience an inflationary environment, which has contributed to the cash burn. During the fourth quarter, noninterest-bearing deposits averaged $8.7 billion, a $307 million or approximately 3% decrease from the average balance in the third quarter. Year over year, we had a $377 million increase in average balance when compared to the fourth quarter of 2021, including the $513 million in noninterest-bearing deposits acquired from Suncrest at the beginning of 2022. Total deposits and customer repos were $14.2 billion on average in the fourth quarter of 2022, a $524 million or 3% decrease compared with the prior quarter, while being $497 million higher than the fourth quarter of 2021. Noninterest-bearing deposits were approximately 63.6% of our average deposits for the fourth quarter, compared to 63.4% for the prior quarter and 63.8% for the year-ago quarter. At December 31, 2022, our total deposits and customer repos were $13.4 billion, compared with $14.3 billion at September 30, 2022, and $13.6 billion for the same period a year ago. At December 31, 2022, our non-inspiring deposits were $8.2 billion, compared with $8.8 billion for the prior quarter and $8.1 billion from the year-ago quarter. The bank's funding is primarily core to customer deposits and customer repos, which combined had a total cost of eight basis points in the fourth quarter. This eight basis point cost of deposits compares with five basis points in the prior quarter and three basis points for the year-ago quarter. In comparison, the Fed funds rate has increased by 425 basis points since the fourth quarter of last year. The combination of seasonal growth in dairy and livestock loans, seasonal deposit declines, and the impact of cash burn on deposits from inflationary pressures resulted in borrowing overnight from the Federal Home Loan Bank, averaging $161 million for the fourth quarter and peaking at year end at $995 million. With slowing loan demand, the cash flow from our investment securities, and the normal historical inflows of deposits we experienced from the beginning of the year, we expect borrowings to moderate in the first half of this year. I will now turn the call over to Alan to discuss our investments, the allowance for credit losses, and capital.

Alan. Thanks, Dave. Good morning, everyone. Our investment portfolio declined by $70.2 million from the end of the third quarter to $5.8 billion. primarily due to the decline in investment securities available for sale or AFS securities. AFS securities totaled $3.26 billion at the end of the fourth quarter, which was inclusive of a pre-tax net unrealized loss of $500 million. The decline in AFS securities reflects principal cash flows, which offset a $28 million increase in market value. It is highly unlikely that we would sell any AF securities as the bank has ample off-balance sheet sources of liquidity, including more than $3 billion of unused borrowing capacity at the end of 2022. Investment securities held to maturity, or HTM securities, totaled approximately $2.55 billion at December 31, 2022. Cash flows from HTM securities were reinvested in the purchase of approximately $32 million in municipal securities with tax-equivalent yields on these HTM securities greater than 5%. The growth in our investment portfolio over the last year resulted in HTM investments increasing by $628 million and AFS securities increasing by $71 million. Securities have grown as a percentage of average earning assets from approximately 33% in the fourth quarter of 2021 to 39% on average in the fourth quarter of 2022. In addition to the increase in the size of our securities portfolio, the tax equivalent yield on the portfolio grew from 1.52% in the fourth quarter of 2021 to 2.12% in the third quarter of 2022, and now to 2.36% in the fourth quarter. Our Fed balance averaged approximately $125 million for the fourth quarter of 2022, compared to $625 million in the third quarter and $2 billion in the fourth quarter of 2021. At December 31, 2022, our ending allowance for credit losses was $85.1 million, or 0.94% of total loans, which compares to $82.6 million, or 0.94% of total loans, at September 30. For the fourth quarter ended December 31, 2022, we recorded a provision for credit losses of $2.5 million compared to $2 million for the quarter ending September 30, 2022. There was no provision for credit losses in the year-ago quarter. The provision for credit losses in the fourth quarter was driven by loan growth, which resulted in $190 million of core loan growth after excluding temporary seasonal growth in dairy and livestock loans as well as the decline in PPP loans. For the full year 2022, we had a provision for credit losses of $10.6 million compared to a recapture provision for credit losses of $25.5 million in 2021. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These U.S. economic forecasts include a baseline forecast as well as downside forecasts. We continue to have the largest individual scenario weighting on the baseline forecast with downside risks weighted among multiple forecasts. As of December 31st, the resulting weighted forecast assumes GDP will increase by 0.3% in 2023, including a decline in GDP for the first half of 2023, followed by modest growth of 1.3% for 2024, and then to grow by 2.8% in 2025. The unemployment rate is forecasted to be 4.8% in 2023, 5.1% in 2024, and then declined to 4.5% in 2025. Now turning to our capital position, for the year, shareholders' equity decreased by $133 million to $1.95 billion at the end of 2022. Equity increased from the end of 2021 by $197 million for the issuance of 8.6 million shares to the former shareholders of Suncrest. Equity also increased due to year-to-date income of $235.4 million, which was offset by $108.1 million in dividends, representing a 46% dividend payout ratio. Interest rates increased during 2022, resulting in an increase in the unrealized loss on our available-for-sale securities and a $351 million decline in equity from the end of 2021. In combination, the ASR and the 10b-5-1 stock repurchase plans we initiated in 2022 have resulted in the year-to-date repurchase of approximately 4.9 million shares at an average share price of $23.40. which reduced our common stock by $115 million. Our overall capital position continues to be very strong. Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers. At December 31st, 2022, our common equity tier one capital ratio was 13.5% and our total risk-based capital ratio was 14.4%. The company's tangible common equity ratio at December 31st was 7.4%. I'll now turn the call back to Dave for further discussion of our fourth quarter earnings and net interest income. Thanks, Alan.

Net interest income before provision for credit losses was $137.4 million for the fourth quarter compared with $133.3 million for the third quarter and $102.4 million for the year-ago quarter. Fourth quarter earning assets decreased by $521 million on average from the third quarter due to a decrease of $500 million in average funds on deposit at the Federal Reserve. Our earning asset yield increased by 31 basis points compared to the prior quarter. The increase in our earning asset yield was the result of a 24 basis point increase in investment yields, a 22 basis point increase in loan yields, and a shift in the composition of earning assets with average loans growing from 56.6% to 59.7% of average earning assets, while our average amount of funds at the Federal Reserve declined from 4% to approximately 1% of earning assets. Our loan-to-deposit ratio was 70.7% at quarter end, including the level of seasonal dairy and livestock borrowing. We anticipate funding future loan growth with cash flows from our investment portfolio, which approximate $150 million per quarter. Our tax equivalent net interest margin was 3.69% for the fourth quarter of 2022, compared with 3.46% for the third quarter and 2.79% for the fourth quarter of 2021. The increase in our net interest margin was the result of the increase in our earning asset yield while maintaining a low cost of funds that migrated from five basis points in the third quarter to 13 basis points in the fourth quarter. During a period of time, the Federal Reserve increased the Fed funds rate by 125 basis points. Loan yields were 4.78% for the fourth quarter of 2022, compared with 4.56% for the third quarter and 4.29% for the year-ago quarter. Yields on new production during the fourth quarter exceeded the overall portfolio yields, averaging greater than 5%. Current loan projection is generally close to 6%. Our cost of deposits and customer repos were eight basis points for the fourth quarter, and our total cost of funds for the fourth quarter was 13 basis points. Interest-bearing deposits and customer repos decreased on average by $216.9 million from the third quarter, while non-interest-bearing deposits decreased by approximately $307 million on average. We continue to experience modest pressure to increase deposit rates due to the recent increases in market rates. Recent declines in deposit levels, including the typical seasonality, have been impacted by customers using excess liquidity accumulated during the pandemic for ongoing business needs, which have been negatively impacted by inflation. Over the last four quarters, the Fed has raised short-term interest rates by 425 basis points, while our cost of deposits and repos has increased by 5 basis points. Our total cost of funds has risen by 10 basis points from the fourth quarter of last year when factoring in the average overnight borrowings during the fourth quarter of 2022 at an average rate of 4.49%. Moving on to non-interest income. Non-interest income was $12.5 million for the fourth quarter of 2022 compared with $11.6 million for the prior quarter and $12.4 million for the year-ago quarter. Our customer-related fees, including deposit services, international, and merchant bank card services, increased by $500,000 compared to the third quarter and increased by $1.3 million, or 28%, when compared to the fourth quarter of 2021. Income from bank-owned life insurance, or BOLI, decreased by $570,000 compared to the prior quarter, as death benefits declined by $1 million. Income from community development investments, some of which are impacted by mark-to-market adjustments, increased from the prior quarter by approximately $700,000. Our trust and wealth management fees were flat compared to the prior quarter, while decreasing by $245,000 year over year. Market conditions have continued to negatively impact assets under management and trust fee income. As we discussed in the past, a large trust relationship with more than $800 million in assets transitioned to a financial institution outside of California. The transition was completed by the end of 2022 and will have the impact of decreasing our trust fees by approximately $425,000 this year. Offsetting this transfer of assets and the impact of the market on our assets under management and administration We did grow managed assets with $350 million of customer deposits that are now being managed by Citizens Trust in various liquidity strategies. Now expenses. Non-interest expense for the fourth quarter was $54.4 million compared with $53 million for the third quarter and $48 million for the year-ago quarter. Non-interest expense totaled 1.32% of average assets for the fourth quarter of 2022. This compares with 1.25% for the third quarter and 1.19% for the fourth quarter of 2021. Our efficiency ratio was 36.31% for the fourth quarter of 2022 compared with 36.59% for the prior quarter and 41.8% for the fourth quarter of 2021. Employee related expenses increased by $921,000 or 2.8% compared to the third quarter of 2022. This quarter over quarter growth primarily due to distinct items such as our year-end holiday awards, final year-end adjustments to bonus and commission accruals, severance accruals, and increased valuations of performance RSUs that best in early 2023. Employee expense grew by $4.6 million, or 15%, over the fourth quarter of 2021, which includes the impact of the Suncrest acquisition, as well as inflationary pressures on employee compensation. We continue to invest in technology to further automate and scale processes within the bank, resulting in a 4% or $119,000 increase in software expense compared to the prior quarter and a $299,000 or 10% increase over the prior year quarter. There was also a year-over-year increase of approximately $390,000 in consulting expense to support system upgrades and new technology implementations. Occupancy and equipment expense was essentially flat quarter over quarter, but grew by almost $1 million over the fourth quarter of 2021, which includes the net addition of the remaining five banking centers from Suncrest. With the easing of pandemic restrictions, marketing expenses grew by $224,000 over the prior quarter and $470,000 over the fourth quarter of 2021. Legal fees increased by $130,000 over the prior quarter and $177,000 over the fourth quarter of 2021 as well. We were pleased with our results in 2022 and remain committed to the mission and vision of Citizens Business Bank. The fourth quarter and full year of 2022 represented record quarterly and annual earnings for the bank, and we ended the fourth quarter with a return on average assets of 1.60%, and a return on tangible common equity of 23.65%. Our focus on banking the best privately held small to medium-sized businesses and their owners has stood the test of time. We've reported 183 consecutive quarters of profits and just paid our 133rd consecutive quarterly cash dividend, which was increased twice during 2022. We will continue to keep a watchful eye on the overall economy and business environment in order to best serve our customers and associates. we've seen the impact on the bank as well as on our customers from a tight labor market, wage inflation, and overall inflationary pressures. We're committed to supporting our customers, associates, and shareholders and our communities as everyone continues to face potential economic uncertainty. I would like to thank our associates for their hard work and dedication, our customers for their business and ongoing loyalty, and our shareholders for their continued support and trust. As we move into 2023, We will remain disciplined in our approach and we will strive to maintain consistent earnings, strong capital levels, and solid credit quality. This concludes today's presentation. Now, Al and I will be happy to take any questions that you might have.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.

Hey, good morning. Thank you. Maybe just first around the margin in the related outlook. I'm trying to get a sense for your deposit costs here coming into 1Q. Do you have the spot rate on interest-bearing deposits or total deposits at the end of the year? And then if you have it, the average margin in the month of December?

Yeah, we actually don't put the spot rate at the end of the year. There has been – I mean, I'll start and then I'll let Alan sort of jump in, but just a couple of thoughts here. Number one – I understand the question, but we're originating new loans, like I said, very close to 6% and in some cases over 6%. We're allowing the cash flow of the investment securities to run off and utilize that to obviously pay down the borrowings and fund new loan growth. We will continue to have some deposit pressures, but we've been very fortunate and we've really done it on a rightful approach, Matthew. We haven't had to make wholesale changes to our deposit rates, so I feel pretty confident that we'll continue to have best-in-class deposit costs and funding costs overall. But I get a little concerned just making wholesale changes to the deposit rates if I believe that the borrowings are going to be shorter term, shorter term being, you know, two-quarters, three-quarters, somewhere in that range. So I think we're going to defend our margin the best we can. But I do think there is definitely pressure on the – on the deposit side. I expect that to increase to what extent, I can't tell you exactly.

Matthew, certainly in the next couple of quarters, the cost of overnight bonds will weigh a little bit on our margin overall. As Dave said, as we get into the latter half of the year, we do foresee deposit growth impacting positively our overall cost of funds. And then the shift in earning assets should also improve our earning asset yield. So it might be a little choppy the first two quarters, maybe a little bit longer than that, but we're pretty confident of the more medium term.

Okay. Yeah. I mean, that's where I was headed. It seems like these, I mean, you run the math. I mean, the borrowings are pretty costly, but it sounds like they'll be here just for two to three quarters, which is great. And it kind of suggests your margin is going to be probably lower over the next couple of quarters before it turns around. Maybe just on, I guess, what gives you confidence on the deposit side and what drove a lot of the runoff in non-interest bearing and, you know, what gives you confidence that, you know, we kind of start to rebuild here in the second half?

Yeah, it's a great question. We've done a lot of analysis around the deposits and first I'd like to say we haven't lost any significant relationships. The advantage that we have with Citizens Trust, which we moved somewhere between $300 and $400 million over the year, really accelerating in the last couple of quarters to our Citizens Trust group for our customers to get higher yields. So we've kept those deposits in the family, so to speak. And I anticipate as things change and if the Fed begins to slow or decrease rates, that money is still here in the family. The second thing is the slowdown in the real estate markets have really impacted our specialty banking group, and deposits there have also declined pretty significantly, particularly in title escrow. People obviously aren't refinancing their houses, and there's not as many sales transactions going on, so escrow deposits are pretty significantly down. I think we actually peaked in our escrow deposits in the second quarter, and there's been a steady decline since the second quarter of 2022. So those are both things that have happened. And I've been saying this in the past, I think just the cash burn of our customers' deposits is something that's real. Alan's going to laugh at me a little bit, but the average deposit account, checking deposit account at the bank, and there's more than 60,000 of them, has decreased by about I don't know, $12,000, $13,000. And I think if you just take that multiplied by the 63,000 plus accounts, you know, there's a significant impact there. Overall, in the fourth quarter, typically, and we went back and looked like the last four years pre-pandemic, we have a three to five, six percent decrease in our average deposits every fourth quarter. So we don't think this is a long-term thing. We haven't lost the relationships. So I feel good about that. The thing we've done on the sales side, last year if you did a million dollar loan, if you were a salesperson here, relationship manager or manager, if you did a million dollar loan or a million dollar deposit, your incentive was basically the same. this year, 2023, which they already have the plans, in 2023, if you do a deposit, you actually earn about three times the incentive that you do as if you did a million-dollar loan. So we've sort of reallocated the focus to deposits, which it's always been on deposits, but I think that should help drive some additional opportunities for us as well.

Okay. Thank you for the call.

Yeah, you're welcome.

Thank you. One moment for our next question. And that will come from the line of Gary Tenner with DA Davidson. Your line is open.

Good morning. This is Clark right on for Gary Tenner. Thanks for the question. To start, maybe we could talk about expense growth. Maybe just on your expectations for 2023 as it relates to staffing costs and other inflationary pressures, you already mentioned the incentive structure. Is there anything else that's going on in terms of initiatives to kind of control expenses going forward?

Yeah, I'm going to let Alan take the bulk of the answer here. But just one quick comment I will make. You know, we've been running a pretty high vacancy rate over the past, you know, year, year and a half. And that's starting to come down slightly, so that's a little bit of the impact. Obviously, the Suncrest acquisition, you know, is an impact and the easing of pandemic, but Alan can give you a little more color just overall.

Yeah, so, Clark, I mean, if you look at the fourth quarter and you adjust for some of the items Dave noted as prepared marks, you're looking at about a 1% quarter-over-quarter growth in expenses, you know, and that's so annualized at that 4%. You know, we'll continue to probably see some growth in salary expense, which is natural. I mean, salary increases usually happen in the middle of every year. Of course, our payroll taxes are always at their peak in the first quarter. Keep that in mind. We're going to continue to invest in technology both from customer perspective and including efficiencies internally. And, you know, year over year in 22, we did grow by 10%. So I would just highlight those things. And then also keep in mind the FDICs setting their assessment rates higher in 23. So that'll be also a headwind for us from an expense standpoint.

Got it. Awesome. And then maybe shifting over to loan growth. I mean, you talked already about the seasonality of it. And then you also led to the pipeline. I mean, you've had strong growth up until fourth quarter. Maybe if you could talk about the pipeline at year end. And then, you know, as bank, you know, bank operators, you've been more cautious. Do you see any opportunities for additional growth moving forward from any particular segments?

Yeah, so a couple of comments I want to make on this. I mean, last year was really an unbelievable year for us. I mean, it was not the norm for us. And I think some of that came from the fact that we remained open during the pandemic and our bankers were still calling on customers. And we had some very good success on the loan growth side, averaging 8%. And I'm excluding all the noise, you know, the PPP and the seasonality in dairy and all of those things. We had a 9% annualized growth rate in the fourth quarter, 8% annualized for the year. That was really, I'd say, higher than our typical growth. We are still focused on that low-mid single-digit growth number. The pipelines have definitely slowed down. There's no question about it. I actually just went through this yesterday with our sales leaders, just trying to get an idea of where we saw that going. So we funded over $2 billion in total loans last year, which was the highest loan growth or loan fundings in the history of Citizens Business Bank. I would be extremely shocked if we did that again this year because, as I said, the pipelines have started to slow. I think the rate increases have started to impact people's decisions. There's not as much refinance activity that's occurring. There is still purchase activity that's occurring. So that's on the kind of headwind side. On the tailwind side, we won't see as much refinance activity of our loans of other people offering lower rates, I don't believe. And so, you know, we just remain disciplined in the pricing and in the credit underwriting, and that really generally equates to that kind of low to mid single-digit loan growth for us. And I think that's where we're going to end up in 2023. Awesome. Thank you.

Thank you. One moment for our next question. And that will come from the line of Kelly Mata with KBW. Your line is open.

Hi. Good morning. Good morning. I would like to kind of circle back to kind of the size and mix of the balance sheets. I appreciate the color that you're going to fund out of cash flows out of your securities book. And I understand some of the deposit runoff is seasonal, so it'll backfill those borrowings. But as we look ahead with, I know you've changed your incentive structure to gather more, incentivize more deposits. Looking ahead with the pressure on the funding, do you expect to be able to grow the balance sheet over the course of the year? Or is the idea, the notion really more of a flat side of the balance sheet? Any color on that would be really helpful.

Yeah, I mean, our goal is to grow every year. Obviously, with all of the excess deposits that occurred over the last couple of years and all the enormous amount of stimulus that occurred, a lot of that, I would say, is not real and is starting to sort of run off. So that's definitely something. But I think for us, we have a very narrow focus on a certain type of customer. So the overall growth in the market is not necessarily what we look to do. We're very focused on the right type of customer for our bank. And so that's always a challenge because every financial institution out there is looking for that same customer. But we believe we have a very good process and a very good story to tell. So our goal is to grow the balance sheet, but there will definitely be headwinds with respect to that, specifically the cash burn in customers' accounts. But I do think that we will perform well relative to our peers in a lot of different areas and be able to grow the bank.

Thanks so much for the color. Next one on credit. I mean, there's almost nothing to speak of. MPAs are super low, no net charge-offs. Just wondering, just given kind of where we are in the cycle, like, are you starting to hear any concern or chatter from your borrowers? Like, are they starting to feel, you know, pressure now after... you know, the amount of rate hikes we've had on cash flows and any sort of color on that because it feels like there's only one direction that credit costs can go, but it looks so good. So any color on that would be helpful.

Yeah, so I think for us there really is only one direction credit costs can go because, you know, we've had net recoveries last year and, you know, we have very low – not performing assets, so that's all positive. But to your broader question and point, yes, we are hearing a little bit more and we're seeing a little bit more. But for the most part, our customers are very strong and well-heeled and have the ability to withstand some of this that is occurring. And remember, we only have a 33% utilization rate on our CNI loans. We don't see a lot of borrowings at this point. I do think that, you know, the impact of those borrowings, I should say, and I do think that we will, you know, continue, that will continue to impact our customers. That will continue to drive, you know, some concern, and we're just paying a close eye. I mean, we're very disciplined in how we evaluate credit, not just when we're making it, but following up. You know, I've mentioned this in the past, and I know my predecessors have mentioned this as well, but we have a very strict monitoring program that we track very closely to make sure we're very close to our borrowers. We just don't want any surprises and I think that as we get through this year we'll probably see some more, but I really don't anticipate it to be anything material impacting us. but there will be some more challenges. And I've said in the past, too, and I'll repeat it, I think, you know, this is a consumer, small business, small operating company, bigger impact than on the larger companies and customers.

As you said, thank you so much. I'll step back.

You're welcome.

Thank you. As a reminder, if you would like to ask a question, please press star 1-1. One moment for our next questions. And that will come from the line of Eric Spector with Raymond James. Your line is open.

Hey, good morning, everybody. This is Eric on the line for David Feaster. Congrats on another solid quarter. I'm just curious what segments of CRE drove the strength this quarter and what's your appetite for growth here, just given the uncertain economic backdrop. Just any color on what segments are providing good risk-adjusted returns from your standpoint. Just any additional color on that, that would be great.

Yeah, so commercial real estate was the primary driver of the growth. It's been kind of typical with almost two-thirds of our loans in commercial real estate. And I think that has been, and then if you want to get a little more into the asset classes within commercial real estate, it's really kind of, I'll say the big three. And the big three has been industrial, multifamily, and to a little bit lesser extent office. We are still seeing very solid credit You know, we have turned away things that we would not normally look at. And so I think that's been something that has been pretty consistent in our history and will be consistent going forward. You know, we have a great, in our investor deck on page 29, it gives a lot of color around the types of deals that we are originating, what our overall portfolio looks like, the largest segment being industrial, office being second. you know, with a good amount of that being owner-occupied. And we're still seeing, you know, more suburban and rural opportunities. We're not doing office loans in downtown LA. That's not what we do. And then multifamily has been growing pretty fast there as well. So underwritten at low loan to values at origination with some tenure and obviously amortization on those loans, I think puts us in a pretty good spot. And then, you know, we focus on operating companies, so that's part of the reason why we have the strong deposit base, because they're operating deposits and they generally stay. And so we want to continue to drive that owner-occupied, you know, operating company type loan.

Okay. Yeah, that makes sense. Thank you. I just wanted to touch on capital. I know last quarter you kind of talked about With the stock rallying up, you kind of put it on pause. Just with the depreciation of the stock over the last month or so, I'm just curious what your capital priorities are going forward.

Well, we still have an active 10b51 plan. and it has different price thresholds, so it is, I think, possible. A quarter ago, we would have said of unlikely, and I think at this point, as you mentioned, with our stock down a little bit, it is possible we could see some modest buybacks, but not much, I would say. I mean, it's not going to be material.

Okay, thanks. And then, kind of shifting gears, I'm just curious if you could provide an update on some of the tech initiatives and, like, what's on the docket to be added in your term and then any color on efficiencies that I'll be able to address.

Yeah, I'm saying this as a joke. I'm our tech expert, so I'll take this one. As I have a bunch of paper in front of me and they make fun of me. But, no, I think that, for the most part, we're on track with our tech initiatives. Really, as Alan mentioned, it's around efficiencies, robotic process automation we're rolling out more and more processes with that which allows us to do things you know create that capacity and and operate without you know having to hire more people as we grow and so I think those initiatives are on track and We're going to continue to focus on that. The cost associated with that is really minor relative to the benefits that we get out of it, which again is why our efficiency ratio remains in that 36% range. We'll continue to look for opportunities to do that and to improve the efficiency there and continue to drive automation.

Okay, great. Thank you for the color. I'll step back and congrats again on a great quarter. Thank you.

Thank you. Thank you. One moment for our next question. And that will come from the line of Tim Coffey with Jannie Montgomery Scott. Your line is open.

Great, thanks. Good morning, gentlemen.

Good morning.

Hey, I appreciate that question. And Dave, I want to talk, see if you can provide some color on the opportunities to acquire new clients in the current environment. Clearly the balance sheet is well suited to do it. And we've already seen, seen in certain parts of the lending market where banks have started to pull back. Um, how do you view this current environment in terms of adding new clients?

Yeah, I think the way you characterize it is absolutely true. Um, We're seeing more opportunities. We're not doing more necessarily. Our pipeline, as I mentioned earlier, has slowed down, but I think it's a perfect opportunity for us. A low loan-to-deposit ratio, the opportunity to continue to lend for the right borrowers. We're seeing a lot of opportunities even on the deposit side. We've sort of unleashed the hounds a little bit in our municipal group and in our specialty banking group to really go out and get those deposits. And I think the environment is right. We just have to execute. And I think that's something that we talk about daily. So we're working hard to do that. But I agree with your overall assessment.

Okay. And in general, how long is the sales cycle to bring on a new client?

Yeah, it depends. In the specialty banking group and the government services group, it's a little bit longer cycle, but we foresaw some of this coming and actually unleashed that in early to mid last year. Some of those relationships are going to start coming on now. I think it really just depends. If you're talking about an operating company, that sales cycle could be a year or two years of just constantly touching them and talking to them and offering information and help for them. But the real estate sales cycle is much slower just because generally people have a closing date that they have to get to. But for the type of client we go after, it's generally a little bit longer. It continues, I should say, to be disruption in the market, especially with some of the previous mergers and acquisitions that have been announced, and that's creating opportunities for us. But we don't want all their customers. We just want the ones that fit the type of client we go after. Got it.

All right. Thank you. Those are my questions.

You're welcome. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1-1. And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Dave Brager for any closing remarks.

Thank you very much, Cherie. As always, Alan and I appreciate all the questions, and we want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in April for our first quarter 2023 earnings call. And then you can always reach out to Alan and I if you have any questions. Have a great day, and thank you for listening.

Thank you all for participating. This concludes today's program. You may now disconnect.