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spk01: Good morning, my name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the Stellar Bank fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Courtney Cario, Chief Accounting Officer. Courtney, you may begin your conference.
spk00: Thank you, Operator, and thank you to all who have joined our call today. Good morning. Our team would like to welcome you to our earnings call for the fourth quarter of 2023. This morning's earnings call will be led by our CEO, Bob Franklin, and CFO, Paul Ege. Also in attendance today are Steve Wetzeloff, Executive Chairman of the company, Ray Vitulli, president of the company and CEO of the bank, and Joe West, senior executive vice president and chief credit officer of the bank. Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the state's harbor provisions for forward-looking statements contained in the act. Also note that if we give guidance about future results, that guidance is only a reflection of management's belief at the time that the statement is made, and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statement, except as may be required by law. Please see the last page of the text in this morning's earnings release, which is available on our website at ir.steller.bank. for additional information about the risk factors associated with forward-looking statements. At the conclusion of our remarks, we will open the line and allow time for questions. I will now turn the call over to our CEO, Bob Franklin.
spk03: Thank you, Courtney, and good morning, and welcome to the Stellar Bank Fourth Quarter Earnings Call. As we conclude 2023, I will begin by thanking the outstanding team at Stellar Bank Their hard work and dedication allowed us to bring two banks together while dealing with the external pressures of current economic circumstances. Every day we make strides in developing the Stellar way. Our team is working hard to ingrain our values across our organization and our culture becomes more clear each day. We are pleased with our results for 2023 given all of the industry stresses while we focused on capital, liquidity, and credit. Our discipline around these tenants allowed us to build capital, stabilize our valuable deposit franchise, maintain strong net interest margin while maintaining good credit metrics, and finish the year with a nice return on shareholders' equity for our shareholders. Our mantra for 2024 is optimize. The heavy lifting is behind us. We must seek to optimize process, expense, people, and future. We will keep our focus on capital, liquidity, and credit as we expect a less robust economy in 24 as the Federal Reserve continues to tame inflation. However, we operate in some of the best markets in the country, and we are well positioned to take advantage of the opportunities we expect to be presented to us over the year. We believe that these efforts and market dynamics will provide for a rewarding value creation for our shareholders. I will now turn the call over to Paul Legge, our CFO, for more details on the quarter and the year.
spk02: Thanks, Bob, and good morning, everybody. After a year marked by industry disruption, we are very pleased to close out a strong and transformational 2023 for Stellar Bancorp. Our net income for the year was $130.5 million, representing diluted earnings per share of $2.45, an ROAA of 1.21%, and a return on tangible common equity of 15.75%. As Bob noted, our focus entering into 2023 was on capital, liquidity, and credit, and we feel we have performed well on all of these fronts, all while protecting earnings power, notwithstanding significant industry turbulence and competitive pressure during the year. On capital in particular, we were very successful growing our regulatory capital ratios in 2023. We increased our total risk-based capital ratio to 14.02% at year end from a starting point of 12.39% a year in 2022 and showed similar improvement across all of our regulatory capital ratios. Driving this capital build was our growth in tangible book value, which grew 21.4% over the year to $17.02 per share at the end of 2023 from $14.02 per share at the end of 2022. During the year, we also maintained a very strong funding profile marked by 40% non-interest-bearing deposits, along with a disciplined strategy with respect to our interest-bearing funding. As a result, we've been able to manage pretty well through a competitive, high interest rate environment to maintain healthy margins and core earnings balance. All the while, we've been able to maintain a strong credit profile. Turning our focus to the fourth quarter, we earned $27.3 million, or 51 cents, per diluted share, making for an ROEAA of 1.02%, and a return on tangible common equity of 12.61%. This was despite a higher expense load during the quarter due primarily to non-recurring items that I'll detail shortly. Fourth quarter earnings were incrementally lower than the $30.9 million or 58 cents per diluted share earned in the third quarter due mostly to higher non-interest expenses more than offsetting higher non-interest income and lower provision. Notable among non-interest items during the quarter was a nearly $2.4 million in other non-interest income from SBIC investments. And on the expense side, we recognize a $2.4 million expense relating to the FDIC special assessment, $1.9 million of severance expense, and elevated professional fees during the quarter relating mostly to initiatives associated with crossing the $10 billion asset threshold. During the fourth quarter, we saw our net interest margin tick up a few basis points from the third quarter. Net interest margin was 4.40% during the fourth quarter, up from 4.37% in the third quarter. And excluding purchase accounting accretion, NIM was 3.91% in the fourth quarter, relative to 3.87% in the prior quarter. We have been very pleased with the relative stability in our net interest margin during the back half of 2023, as the continued repricing of our assets has kept pace to offset an upward trend in funding costs, which has showed some signs of leveling off in the fourth quarter. We feel pretty good about stabilization in our margin trends and outlook, which continues to compare favorably relative to the industry, and we also feel good about our ability to protect our relatively strong profitability profile in this challenging environment. With respect to purchase accounting items, we ended the year with $106.8 million in loan discount remaining and a core deposit intangible asset of $116.7 million. Strong earnings notwithstanding accelerated amortization of CDI expense has been a really strong driver to our internal capital generation in 2023, and we like our prospects for continued internal capital generation in 2024 as well. In summary, we believe Stellar is well positioned to perform in 2024. Our capital, funding, and liquidity position puts us in a good spot to maintain favorable margins and earnings power. On credit, we feel appropriately reserved given current economic unknowns, and we otherwise take comfort in our credit underwriting discipline, and perhaps most importantly, the fact that we operate in some of the strongest markets in Texas and the country. Thank you, and I will now turn the call back over to Bob.
spk03: Thank you. Excuse me. Thank you, Paul. And operator, we'll be happy to take questions.
spk01: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of David Feaster from Raymond James. Please go ahead. Your line is open.
spk05: Hey, good morning, everybody. Morning, David. Maybe just starting out on the rate sensitivity side, you've obviously got a great core deposit franchise. We've seen core margin expansion throughout this rising rate cycle, but today you actually screen closer to rate neutral, maybe modestly liability sensitive. Just given the increased prospects of rate cuts, I'm curious how you think about the impacts of potential cuts on the margin and And how quickly you'd expect to be able to reprice deposits lower if we do get cuts this year?
spk02: We take comfort in really a neutral interest rate risk profile. And our mantra, another mantra for 2024 is to be ready for anything. And that's true on the interest rate sensitivity. We are very neutral and To the extent we see rates down, there is a measure of sensitivity to the front end of the curve, particularly money markets and really short CD funding. So we see our ability to reprice there as to be pretty strong. But once again, we're not trying to make a bet on rates with our interest rate position. we feel well positioned for really any rate outcome in 2024.
spk05: Okay, that's helpful. And maybe just touching on the loan declines, actually, maybe before I go there, how do you think about your ability to reprice deposits and the sensitivity of those clients? I mean, again, we were pretty slow to increase deposit rates, do you think we'll be able to, you know, just kind of given the liquidity challenges in the market, I'm just curious how you think about repricing some of those deposits or, you know, including the competitive landscape?
spk02: You know, I think where you get the most ability to reprice is going to be in your exception universe, as well as your, naturally, the wholesale funding that's staying pretty short, you can reprice
spk06: Yeah, David, I would just add to that. Paul mentioned that probably our largest opportunities in that money market where, you know, on our sheet rates, we took a very measured approach. So that might be we really weren't very aggressive on the up. So on the down, it would probably be similar. But we did, as we handled the exception pricing, that would be where we would target first. The time deposits that we put on during this time were short term. And then, of course, we enjoy a 40% plus MIB. So I think, as Paul mentioned, it would be in that money market bucket.
spk03: Okay. David, I'd just add, as you think about our approach to the deposit side, when the market changed and people were really aggressive about trying to fund their balance sheets, we felt like we didn't want to get into that competition. It was a bubble. above what we wanted to pay and we wanted to retreat back to something that made sense for us and still maintain our great deposit franchise. Now, as deposit rates start to level out, we can be as competitive as anyone on the deposit front. And we feel like we've got the ability to do what we need to do on a reprice basis to compete in the market. So we just want rates to level out. or give us some kind of idea that we're not going to be paying outsized prices for these things. Okay.
spk05: That's helpful. And maybe just touching on the loan side and the declines in the core, I'm just curious, how much of that is strategic and tightening and pushing higher pricing to kind of slow growth versus weaker market demand and just uncertainty in the economy from the client perspective? Just your appetite for growth today, where you're seeing opportunities and you know, kind of where pricing's holding up?
spk06: Dave, I think it's a combination of both that you mentioned, both our underwriting approach as well as some demand pressure and that, you know, as our customers are trying to get used to this right environment. And so we're seeing it on both fronts. You know, we have a number of quarters in a row where our construction and development originations have declined, and that has been strategic, while our CNI has remained pretty constant. So as a percentage, CNI has increased a little bit. In the fourth quarter, we did drop a little bit compared to the third quarter in total originations, but feel real good about where those came on as rates, still with an eight handle on our new loans. And we renewed another $600 million, also with an eight handle. So we're pretty pleased with that as well. Okay. Terrific.
spk05: That's great. Last one for me, maybe just touching on the expense side. You know, core expenses ticked up a bit. A lot of moving parts in the quarter. I'm just curious, how do you think about a good core expense level and then just the run rate through this year? I mean, how do you think about managing expenses just in light of some of the revenue challenges that we've talked about? Curious how you think about that.
spk02: We guide the 2024 expected expense on a core basis of around $280 million. There's a lot of drivers that we're going to be focused on optimization, as Bob said, to see the extent to which we may be able to do a little better. But ultimately, we feel like to achieve what we want to achieve and to Pursue the initiatives we want to pursue in 2024 to position us best. That's the spend level in the plan. Now, the first quarter tends to have some seasonality to it that's going to drive, going to be a little higher than if you were to divide that by four. But that's where we're targeting.
spk07: Terrific. Thanks, everybody. Thanks, sir.
spk01: Your next question comes from the line of Matthew Only from Stevens. Please go ahead. Your line is open.
spk04: Hey, great. Thanks. Good morning, everybody. Good morning, Matt. I'll start on the professional fees. I think Paul mentioned professional fees was elevated due to these initiatives of crossing $10 billion of assets. Any more color on these initiatives? And then how do you see that line item trending in 2024?
spk02: It was more of a timing dynamic. If you saw, the third quarter was relatively, was a dip from the second quarter, and a lot of work has been done here in the fourth quarter to kind of achieve the goals we wanted to achieve by the end of the year as it relates to all things in the new standards of being over $10 billion in assets. When we look forward, we think about a run rate of professional fees, That would be certainly lower than this fourth quarter. I'd probably say more like $2.5 million, but that has some timing variation on a quarterly basis, similar to what we saw in our trend when you look at that line from the second quarter to the third quarter and the fourth quarter.
spk04: Okay. And I assume that's all embedded in that 24 guidance you mentioned, Paul, of the $280 million.
spk02: Exactly.
spk04: Okay. That's helpful. And then I guess switching over to the loan yields, if I take out the accretion levels, I'm getting a pretty nice uptick in the core loan yields. Any color on the drivers there? And then just remind us on the fixed rate loan repricing dynamics of the bank. Remind us what you expect to reprice higher during the year. And I heard Ray mention some of these new yields are still at the 8% level. Just remind us on the reprice dynamic what they're coming from in some cases. Thanks.
spk06: Matt, on the On the renewed loans, we have a run rate of around $600 million a quarter of renewed loans. For the fourth quarter, those came on renewed at $8.51, coming off of $7.79. I think going forward, they'll probably get closer, obviously, but probably coming off of something in the $7s and then renewing at something in the $8s is what we would expect. And then again on the new, the new was $250 million in new loans that came on at 8%. So I don't know if that helps you with what you're expecting in the fixed rate repricing. I mean, obviously, there's fixed and floating in that $600 million that I'm referring to. So I don't have handy what the fixed rate portion of that is.
spk04: Yep. That's helpful. I guess you mentioned the floating portion. And I think in our models, we're all assuming various things behind what the Fed does this year. Remind us of what's floating at the bank and the Fed were to cut at some point this year, just a dollar amount of loans that would reprice downward pretty quickly from the yield side. Yeah.
spk02: You know, around a little over 40% is variable, but truly floating, you'd be talking about a little over 20%. So that's what will move more immediately relative to a Fed SOFR in particular.
spk04: Okay, perfect. And then on the deposit side, you hit on some leverage you can pull there if rates were to move lower. What about on the non-interest bearing side? A little bit of give up in the fourth quarter, but still one of the kind of highest levels amongst the peers. Any more color or thoughts on where you see the balances kind of stabilizing and what timeline?
spk02: You know, we see – I would ask you to look at the average for the quarter. Point in time at 1231. It looked like it would appear that we went from kind of 42% or 41.5% to right at 40% on that NIV ratio. But if you take it more on an average basis, or if you were to say point in time today, we have enjoyed around 41 or so percent of NIV deposits. And so far, we're really, really pleased with the resilience of that holding up. A little bit of what occurred at 1231 in particular was a large growth in the interest-bearing demand. And that, when that piece grows, you obviously kind of drown out the NIV. And NIV actually point to point was slightly down. So we're really pleased with the resilience of our noninterest-bearing portfolio of customers. And we look forward to maintaining really strong proportion of MIB going forward.
spk04: Okay, guys. I appreciate all the commentary, and congrats on the quarter. Thanks, Matt.
spk01: If you'd like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of John Rodas from Jenny Montgomery Scott. Please go ahead. Your line is open.
spk07: Hey, good morning, guys. Just switching gears, looking at fee income, what was the SBIC impact in the quarter?
spk02: $2.4 million. We recognize $2.4 million of revenue on that SBIC gain.
spk07: And how should we – I mean, that's not really a – I know you have it sometimes, but how should we think about that going forward?
spk02: Yeah, since we can't set our watch to how we recognize gains there, we are very conservative as it relates to how we think about that source of revenue. So I would look at our non-interest expense base X 2.4 million and think about that as our pace in 2024. Okay. And then we are always working. We are always working on initiative to build that. And Ray knows Ray has to speak to that.
spk07: Paul, just one other question on fee income. The card fees were down, I don't know, about 400,000 from the third quarter. Anything going on there? How should we think about that number going forward?
spk06: Interchange. That's our Durban impact. So, you know, just working hard as a team to have more penetration in our cards to try to overcome that. And we've seen good, really good story on our new account onboarding. And so just hope to grow through that and overcome that decrease we've had from Durban.
spk07: Okay, but the hit was started in the third quarter, so it was down, and then it was down even some more in the fourth quarter. So, okay.
spk02: Yes.
spk07: But nothing unusual outside of Durban in that line item?
spk02: No.
spk07: No.
spk02: But we have observed that the impact of Durban was a little bit higher than we initially estimated.
spk07: Okay. And then, Just one other question, guys, I guess, and I know this is a little bit harder, but just on the provisioning, you know, maybe how should we think about, you know, provision level going forward?
spk03: Well, it's formula driven, guys, so we're based on what happens with our loan portfolio, good or bad, and what the increases in that portfolio are will drive loan provision. It's hard to project that, almost as hard as interest rates.
spk02: We do expect credit. We have a conservative stance on credit, especially given economic unknowns. So the way we've planned is for a more normalized level of charge-offs in the industry in 2024. And that obviously plays into reserves.
spk07: Paul, when you say normal, what do you think is more normal?
spk02: I would say normal to elevated. For us, both legacy companies have been able to maintain, for the most part, single-digit net charge-off numbers. But when you think about industry and what's a prudent expectation to set when there is an expectation of a credit cycle finally hitting the industry, You have to assume something in the high teens, low 20s in net charge-offs just to provide a little bit of a baseline. And we feel really good about our ability on a relative basis because of where we operate to do better than whatever the industry nationwide metrics end up being.
spk07: Okay. Thanks for the thoughts. Paul, just one other question. The tax rate is around 20%. Still a good number? Yep. Thank you, guys.
spk01: Your next question comes from the line of Matthew Only from Stevens. Please go ahead. Your line is open.
spk04: Yeah, guys. Thanks for the follow-up. Just want to go back to the core margin. We saw the stabilization in the fourth quarter, I think, if you take out the accretion levels. I think a quarter ago, you were a little hesitant to call for the bottom. but assuming the Fed holds off on any moves for a few quarters, any color on kind of what's the confidence level that the core NIM has in fact bottomed here in the fourth quarter?
spk02: You know, it's a real uncertain backdrop. You're going to have a hard time teasing out a bottom out of us, but we feel really good about how positioned we are to defend our margin and defend our net interest income. and will let the results speak for themselves.
spk04: Okay. And then on the capital front, I think, Paul, maybe it was your prepared remarks on the call. Lots of good capital build, not just in the fourth quarter, but also throughout the year. Any updated thoughts around deployment this year? Could this be a year of you lean into stock buybacks, or do you think the environment for something more significant is something you want to focus on and maybe buybacks take a backseat this year?
spk03: Well, Matt, I think we've spent a lot of time making sure that we build capital back to where everyone feels a lot more comfortable and give us optionality on the things that we want to do. And so We want to have as many options available to us as possible, and capital provides that. It'll be interesting to see how the year plays out. I know there's a lot of expectation of rates coming down. Don't know if that's going to be the case or not. I think the economy still seems to be clipping along OK, although there's a little probably going to have some slowdown at some point during the year. So I think until we get a little more certainty around where interest rates are and what the economy is going to do, we're going to continue on the same path that we've been on. But all this is leading into making sure that we have optionality. And if we have the opportunity, whether it's buybacks, M&A, whatever the deployment might be of that capital dividend, So, we want all of those options available to us, and we'll try to choose the right one for the shareholder.
spk04: Okay. Thanks for that, Bob. And let me ask it this way. The capital level is built really nicely in 23. It looks like they're going to build considerably in 24, absent any kind of other actions. Would that be acceptable, you think, for capital levels to continue to build? Or at what point do you feel more urgency to deploy capital? Trying to figure out if this is something where we're getting close to that or give the uncertainty we could let capital levels build here for a while before we feel any urgency to deploy it.
spk03: That's a great question, Matt. I enjoy the joust. If we think about... where we might be from an economy standpoint. If life comes true and we get five interest rate cuts this year or whatever somebody might project, to me that means unemployment's going up, economy's slowing down, maybe credit starts to move in a certain way. I don't know. I don't think there's much certainty around it. Interest rates stay the way they are, maybe a couple of small cuts, gives us a better, and I think we'll have more clarity as we move into the second, third quarter. But we're not against buybacks. We actually like buybacks. But we want to make sure that we have a good, solid capital base to operate on, that no one is questioning our ability to do what we want to do. And we want to keep our options open. And we certainly understand what we can do with that capital, and we're going to do the best thing for the shareholders.
spk04: Okay, guys. Appreciate all the commentary, and see you guys in a few weeks. Thank you.
spk01: We have no further questions in our queue at this time. I will now turn the call over to Bob Franklin, Chief Executive Officer, for closing remarks.
spk03: Thank you, everyone, for their interest today. We look forward to 2024 and continuing to build Stellar Bank in a great way. Thank you very much.
spk01: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
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