Earnings Call Transcript
CVB FINANCIAL CORP (CVBF)
Earnings Call Transcript - CVBF Q4 2022
Operator, Operator
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 Sherry, 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. Please note that this call is being recorded. I would now like to turn the presentation over to your host for today’s call, Christina Carrabino. You may proceed.
Christina Carrabino, Host
Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year ended 2022. Joining me this morning are Dave Brager, President and Chief Executive Officer; and Allen 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.cbbank.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 31, 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 Brager, Dave?
Dave Brager, CEO
Thank you, Christina. I want to make a brief comment before I begin my prepared remarks. We’re currently experiencing a windstorm in Southern California, so I apologize for any background noise. Good morning, everyone. The Bank achieved record earnings for both the full year and the fourth quarter. Our full-year net income for 2022 was $235.4 million, representing an 11% increase compared to 2021. For the fourth quarter of 2022, we reported a net income of $66.2 million, or $0.47 per share, marking our 183rd consecutive quarter of profitability. We previously declared a dividend of $0.20 per share for the fourth quarter, with a payout ratio of approximately 42%, which is our 133rd consecutive quarter of cash dividends to shareholders. The fourth quarter net income of $66.2 million or $0.47 per share compares to $64.6 million or $0.46 per share for the third quarter of 2022, and $47.7 million or $0.35 per share for the same quarter last year. Our pre-tax, pre-provision income for the fourth quarter was $95.4 million, compared with $91.9 million from the previous quarter, reflecting a growth of about 43% compared to the $66.8 million earned in the same quarter last year. We recorded a provision for credit losses of $2.5 million for the fourth quarter, up from $2 million the previous quarter and none for the same quarter last year. As mentioned, net income for the year ended 2022 was $235.4 million, a $22.9 million increase from 2021. Diluted earnings per share were $1.67 for 2022, up from $1.56 for 2021. Pre-tax pre-provision income increased by 25%, from $272 million in 2021 to $339 million in 2022. In 2022, we made provisions of $10.6 million for credit losses, compared to a $25.5 million recapture of provisions the year before. The expansion of our net interest margin significantly contributed to our earnings growth for both the full year and the fourth quarter of 2022. Our net interest margin increased by 23 basis points from the third quarter of 2022 and grew by 33 basis points compared to the full-year 2021. Our average earning assets for the year 2022 increased by over $1.3 billion compared to 2021, which included the acquisition of Suncrest Bank in January 2022. However, average earning assets in the fourth quarter decreased by $521 million from the third quarter due to a decline in our funds held on deposit at the Federal Reserve, which fell from over $2 billion on average in the fourth quarter of 2021 to about $125 million on average in the fourth quarter of 2022. In contrast, both loans and the investment portfolio have grown throughout 2022. Total loans at year-end were $9.1 billion, reflecting a $1.2 billion or 15% increase from the end of 2021. Our new loan production remained robust in the fourth quarter and throughout 2022, with new loan commitments around $480 million in the fourth quarter compared to $450 million in the third quarter. Excluding loans acquired from Suncrest and PPP loan forgiveness, year-over-year loan growth was $634 million, which represents a growth rate of approximately 8%. From September 30 to December 31 of 2022, loans grew by $305 million or 3.5%, while average outstanding loan balances rose by $169 million or 2%. Excluding PPP loan forgiveness and considering the seasonal increase in dairy and livestock loans, fourth quarter loan growth was $189.7 million or roughly 9% annualized. Dairy and livestock loans increased by $123.8 million from the previous quarter, as many of our dairies opted to further mill proceeds into the first quarter of the year or prepay their expenses. The core loan growth since the end of the third quarter was primarily driven by an increase in commercial real estate loans, which grew by $199.7 million or 3% annualized. Construction loans rose by about $12 million from the prior quarter, as many of our lines had increased usage due to project progression. C&I loans saw a decrease of $3.5 million even with a modest increase in line utilization from 32% to 33% at year-end. Agribusiness loans fell by $13 million, and SBA loans decreased by $14 million, including an $8 million reduction in PPP loans, of which only $9 million remain from the $1.5 billion originated. We remain cautiously optimistic about our ability to grow high-quality loans in 2023, although higher interest rates and uncertain economic conditions may affect our growth levels this year. At the end of the quarter, non-performing assets, which include non-accrual loans plus other real estate owned, totaled $4.9 million, down from $10.1 million the prior quarter and from $6.9 million a year ago. We had no OREO properties at quarter's end, and the $4.9 million in non-performing loans made up 3 basis points of total assets. During the fourth quarter, we had credit charge-offs of $127,000 and total recoveries of $143,000, leading to net recoveries of $16,000 compared to net recoveries of $379,000 for the third quarter of 2022. For the full year 2022, we experienced charge-offs of $197,000 and recoveries totaling $1.1 million, resulting in net recoveries of $893,000. Classified loans for the fourth quarter were $78.7 million, up from $63.7 million in the prior quarter and $56.1 million in the year-ago quarter. This rise in classified loans from the previous quarter resulted from a downgrade on a $13 million loan for a senior living facility acquired from Suncrest. As of December 31, 2022, classified loans included $22.8 million in loans from Suncrest, reflecting an increase in classified loans since the end of 2021. Now, let’s move to deposits. We began to see a decline in deposits in November, which is typical as we often experience seasonal lows from November through February. In addition to this usual seasonality, some customers allocated excess funds with our Citizens Trust Group, and the slowing housing market has adversely affected deposit levels in our specialty banking group focused on escrow, title, and property management clients. Furthermore, our clients continue to deal with inflation, contributing to cash burn. During the fourth quarter, non-interest-bearing deposits averaged $8.7 billion, down $307 million or approximately 3% from the average in the third quarter. Year-over-year, we saw a $377 million increase in average balances compared to the fourth quarter of 2021, including $513 million in non-interest-bearing deposits acquired from Suncrest early in 2022. Total deposits and customer repos averaged $14.2 billion in the fourth quarter of 2022, reflecting a $524 million or 3% decline compared to the prior quarter, although up by $497 million from the fourth quarter of 2021. Non-interest-bearing deposits constituted about 63.6% of our average deposits in the fourth quarter, compared to 63.4% in the previous quarter and 63.8% in the same quarter last year. As of December 31, 2022, total deposits and customer repos stood at $13.4 billion, down from $14.3 billion on September 30, 2022, and $13.6 billion a year earlier. Our non-interest-bearing deposits at December 31, 2022, were $8.2 billion, compared to $8.8 billion in the previous quarter and $8.1 billion a year ago. The bank's funding is primarily sourced from core customer deposits and repos, which together had a total cost of 8 basis points in the fourth quarter. This cost of deposits increased from 5 basis points in the previous quarter and 3 basis points from the year-ago quarter, while the Fed funds rate rose by 425 basis points since the fourth quarter of last year. The seasonal growth in dairy and livestock loans, combined with seasonal declines in deposits and cash burn due to inflation pressures, led to overnight borrowing from the Federal Home Loan Bank, averaging $161 million in the fourth quarter and peaking at $995 million at year-end. With a slowdown in loan demand and normal historical deposit inflows starting the year, we anticipate our borrowings to decrease in the first half of this year. I will now turn the call over to Allen to discuss our investments, the allowance for credit losses, and capital.
Allen Nicholson, CFO
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 pretax 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 AFS 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 is 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 a $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 a downside forecast. We continue to have the largest individual scenario weighting on the baseline forecast with downside risk weighted among multiple forecasts. As of December 31, 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 decline 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 10b5-1 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 31, 2022, our common equity Tier 1 capital ratio was 13.5% and our total risk-based capital ratio was 14.4%. The company's tangible common equity ratio at December 31 was 7.4%. I'll now turn the call back to Dave, for further discussion of our fourth quarter earnings and net interest income.
Dave Brager, CEO
Thanks, Allen. 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, the 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 5 basis points in the third quarter to 13 basis points in the fourth quarter. During this period, 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 8 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 funds and 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 onto 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 BankCard 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 we'll 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 customer deposits that are now being managed by CitizensTrust 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% on 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 was 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 vested 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 and 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 are 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 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 are committed to supporting our customers, associates, 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 Allen and I will be happy to take any questions that you might have.
Operator, Operator
Thank you. Our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.
Matthew Clark, Analyst
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?
Dave Brager, CEO
Yes. We don't have the spot rate for the end of the year. I'll start off and then Allen can add to it. I understand your question, but we're initiating new loans at very close to 6%, and in some cases, above 6%. We're letting the cash flow from investment securities run off, which we will use to pay down borrowings and support new loan growth. While we will face some deposit pressures, we've been fortunate and taken a careful approach. We haven't had to make drastic changes to our deposit rates, so I'm confident that we will maintain competitive deposit and overall funding costs. However, I am a bit concerned about making significant changes to the deposit rates, especially since we expect borrowings to be short-term. By short-term, I mean around two to three quarters. We will do our best to protect our margin, but it's clear that there is pressure on the deposit side, and while I expect an increase, I can't specify exactly how much.
Allen Nicholson, CFO
Yes. I mean, Matthew, certainly in the next couple of quarters the cost of overnight borrowings will weigh a little bit on our margin overall. But 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 our earning assets should also improve our earning asset yield. So 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.
Matthew Clark, Analyst
It seems like the borrowings are quite expensive, but they should only be here for two to three quarters, which is encouraging. This suggests that your margin may be lower in the next couple of quarters before it starts to improve. What gives you confidence in the deposit side, and what caused the decline in non-interest-bearing deposits? Additionally, what makes you believe we'll start to rebuild in the second half?
Dave Brager, CEO
Yes, it's a great question. We've conducted extensive analysis regarding deposits. First, I want to emphasize that we haven't lost any significant relationships. We have seen a considerable amount of deposits, between $300 million and $400 million, shifted to our CitizensTrust group, especially in the last couple of quarters, allowing our customers to receive higher yields. As such, those deposits remain with us, and I expect that if the Fed starts to lower rates, that money will still be available. Secondly, the slowdown in the real estate market has adversely affected our Specialty Banking Group, leading to a significant decline in deposits, particularly in Title Escrow, as fewer transactions are taking place due to refinancing. Our escrow deposits peaked in the second quarter, and we’ve seen a consistent decline since then. Additionally, I’ve mentioned in the past that the cash burn of our customers' deposits is a genuine concern; the average checking deposit account has dropped by around $12,000 to $13,000, which is substantial when considering there are over 63,000 accounts. Typically in the fourth quarter, we see a decline ranging from 3% to 6% in average deposits, which doesn't indicate a long-term issue, and we haven't lost our relationships, which is reassuring. On the sales side, we've made adjustments this year; if you previously generated a million-dollar loan or deposit, the incentive was similar. In 2023, we've structured it so that making a deposit earns you approximately three times the incentive compared to a loan. This shift in focus towards deposits should create more opportunities for us.
Matthew Clark, Analyst
Okay. Thank you for the color.
Operator, Operator
Thank you. One moment for our next question. And that will come from the line of Gary Tenner with D.A. Davidson. Your line is open.
Clark Wright, Analyst
Good morning. This is Clark Wright on for Gary Tenner. Thanks for the question. To start maybe if you could talk about expense growth. So maybe just on your expectations for 2023, as it relates to staffing costs and other inflationary pressure that you already mentioned. The incentive structure, is there anything else going on in terms of initiatives to control expenses going forward?
Dave Brager, CEO
Yes. I'm going to let Allen take the bulk of the answer here, but just one quick comment I will make. We've been running a pretty high vacancy rate over the past 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 was an impact and the easing of pandemic. But Allen can give you a little more color, just overall.
Allen Nicholson, CFO
Yes. If you analyze the fourth quarter and account for some of the items Dave mentioned in his remarks, there is about a 1% growth in expenses compared to the previous quarter. This translates to an annualized growth of about 4%. We expect to see continued growth in salary expenses, which is typical since salary increases usually occur mid-year. It's also important to remember that payroll taxes tend to be highest in the first quarter. We will keep investing in technology from a customer standpoint and to improve internal efficiencies, which led to a 10% growth year-over-year in 2022. Additionally, we should be aware that the FDIC is increasing its assessment rates in 2023, creating another expense challenge for us.
Clark Wright, Analyst
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 the fourth quarter. Maybe if you could talk about the pipeline at year-end? And then as bank operator even more cautious. Do you see any opportunities for additional growth moving forward from any particular segments?
Dave Brager, CEO
Yes. I want to make a few remarks about this. Last year was truly exceptional for us and not typical. Some of this success stemmed from our ability to remain operational during the pandemic, allowing our bankers to continue engaging with customers, which led to impressive loan growth, averaging 8%. Excluding external factors like PPP and seasonal variations in dairy, our annualized growth rate in the fourth quarter was 9% and 8% for the year overall. This exceeded our usual growth rates. We are still targeting mid- to low single-digit growth. However, there is no doubt that our pipelines have slowed down. I reviewed this with our sales leaders recently to gauge future expectations. Last year, we funded over $2 billion in total loans, marking the highest in the history of Citizens Business Bank. I would be very surprised if we reached that level again this year, as our pipelines have begun to slow. Rate increases have begun to influence people's decisions, and refinance activity has diminished, although there is still purchasing activity. On the positive side, I do not anticipate much refinance activity due to other lenders offering lower rates. We plan to stay disciplined in our pricing and credit underwriting, which typically aligns with our expected low- to mid-single-digit loan growth in 2023.
Clark Wright, Analyst
Awesome. Thank you.
Operator, Operator
Thank you. One moment for our next question. And that will come from the line of Kelly Motta with KBW. Your line is open.
Kelly Motta, Analyst
Hi, good morning.
Dave Brager, CEO
Good morning.
Kelly Motta, Analyst
I want to revisit the size and mix of the balance sheet. I appreciate that you will be funding out of the cash flows from your securities book. I understand that some of the deposit run-off is seasonal, so it should help replace those borrowings. However, as we look forward, I know you've changed your incentive structure to encourage more deposits. Given the pressure on funding, do you anticipate being able to grow the balance sheet throughout the year, or is the expectation more toward a stable balance sheet? Any insight on this would be greatly appreciated.
Dave Brager, CEO
Yes. Our goal is to grow every year. With the excess deposits from the last couple of years and the significant amount of stimulus, much of that isn't sustainable and is starting to decline. We have a very specific focus on a certain type of customer, so overall market growth isn't our primary objective. We're concentrated on attracting the right customers for our bank, which is challenging because many financial institutions are after the same clientele. However, we believe we have an effective process and a compelling narrative. Our aim is to grow the balance sheet, but we will face challenges, particularly concerning cash outflows from customers' accounts. Nonetheless, I believe we will perform well compared to our competitors in various areas and will be able to grow the bank.
Kelly Motta, Analyst
Thanks so much for the color. Next one on credit, I mean, there is almost nothing to speak of NPAs, are super low, no net charge-offs. Just wondering, just given kind of where we are in the cycle? Are you starting to hear any concern or chatter from your borrowers, like are they starting to feel pressure now after the amount of rate hikes we had on cash flow? And any sort of color on that would be helpful.
Dave Brager, CEO
Yes. I believe that credit costs can only go in one direction for us, especially since we reported net recoveries last year and have very low non-performing assets. Overall, our customers remain strong and financially stable enough to manage through some recurring challenges. It's important to note that our commercial and industrial loan utilization rate is only at 33%, indicating limited borrowing activity right now. However, I do think that the effects of borrowing will continue to stress our customers, which is something we are monitoring closely. We maintain a disciplined approach to credit evaluation, both at the time of lending and in our follow-up processes. We have a robust monitoring system in place to ensure we stay connected to our borrowers and avoid any surprises. As we progress through the year, we may encounter additional challenges, but I don’t expect these to substantially impact us. The greatest effects will likely be felt by consumers and smaller businesses rather than larger companies.
Kelly Motta, Analyst
Understood. Thank you. Thank you so much. I'll step back.
Dave Brager, CEO
You're welcome.
Operator, Operator
Thank you. One moment for our next question and that will come from the line of Eric Spector with Raymond James. Your line is open.
Eric Spector, Analyst
Hey, good morning, everybody.
Dave Brager, CEO
Good morning.
Eric Spector, Analyst
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 outlook backdrop? Just any color on what segments you are providing good risk-adjusted returns from your standpoint? Just any additional color on that would be great.
Dave Brager, CEO
Commercial real estate was the main contributor to our growth, with nearly two-thirds of our loans in this sector. The key asset classes within commercial real estate include industrial, multifamily, and to a lesser extent, office. We continue to see strong credit quality and have been selective in the deals we pursue, maintaining a consistent approach throughout our history and moving forward. Our investor deck provides detailed information about the types of deals we're originating, with industrial being the largest segment, followed by office, much of which is for owner-occupied spaces. We are also identifying more suburban and rural opportunities, while avoiding office loans in areas like Downtown LA. Multifamily is experiencing rapid growth as well, and we underwrite these loans with low loan-to-value ratios at origination. With some term and amortization structure, we believe we are in a strong position. Additionally, we focus on operating companies, which is a key reason for our solid deposit base, as these deposits tend to be stable. We aim to continue fostering loans for owner-occupied operating companies.
Eric Spector, Analyst
Okay. Yes, that makes sense. Thank you. And I just wanted to touch on capital. I know last quarter you kind of talked about, with the stock rallying up, that you kind of put it on pause, just with the appreciation in the stock or the depreciation stock over the last month or so. Just curious what your capital priorities are going forward?
Allen Nicholson, CFO
We still have an active 10b5-1 plan with varying price thresholds. A quarter ago, we might have described buybacks as unlikely, but now, with our stock down a little, modest buybacks are possible. However, I would emphasize that they are unlikely to be significant.
Eric Spector, Analyst
Okay. Thanks. And then kind of shifting gears, 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 near-term and then any color on efficiencies they'll be able to drive?
Dave Brager, CEO
Yes. I'm saying this is a joke, I’m a tech expert, so I'll take this one. So, 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 Allen mentioned, it's around efficiencies, robotic process automation we're rolling out more and more processes with that which allows us to do things, create that capacity and operate without 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 costs associated with that are really minor, relative to the benefit that we get out of it, which again is why our efficiency ratio remains kind of in that 36% range. And so we'll continue to look for opportunities to do that and to improve that efficiency there and continue to drive automation.
Eric Spector, Analyst
Okay. Great. Thank you for the color. I'll step back and congrats again on a great quarter.
Dave Brager, CEO
Thank you.
Allen Nicholson, CFO
Thank you.
Operator, Operator
Thank you. One moment for our next question. And that will come from the line of Tim Coffey with Janney Montgomery Scott. Your line is open.
Tim Coffey, Analyst
Great. Thanks. Good morning, gentlemen.
Dave Brager, CEO
Good morning.
Allen Nicholson, CFO
Good morning.
Tim Coffey, Analyst
Hey, I appreciate the opportunity to ask a question. Dave, I want to talk, see if you could 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 in certain parts of the lending market where banks have started to pull back. How do you view this current environment in terms of adding new clients?
Dave Brager, CEO
Yes, I believe your characterization is completely accurate. We're encountering more opportunities, but we're not necessarily increasing our output. Our pipelines, as I mentioned earlier, have somewhat slowed down. However, I see this as a great opportunity for us. Even with the loan to deposit ratio, we're still able to find chances to lend to the right borrowers, and we're noticing many opportunities on the deposit side as well. We've activated our municipal group and our Specialty Banking Group to go actively pursue those deposits. The current environment is favorable; we just need to focus on execution, which is something we discuss every day. We're putting in a lot of effort to achieve this, and I concur with your overall assessment.
Tim Coffey, Analyst
Okay. And in general, how long is the sales cycle to bring on a new client?
Allen Nicholson, CFO
Yes, it depends. I mean, in a 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. And so some of those relationships are going to start coming on now. So 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. And there is continuous, I should say, to the 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.
Tim Coffey, Analyst
Got it. All right. Thank you. Those are my questions.
Dave Brager, CEO
Thank you very much, Sherry. As always, Allen 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 Allen and I if you have any questions. Have a great day and thank you for listening.
Operator, Operator
Thank you all for participating. This concludes today's program. You may now disconnect.