Q3 2023 Stellar Bancorp Inc Earnings Call
Yeah.
Okay.
Good day and thank you for standing by welcome to the stellar Bancorp, Inc. Reports third quarter 2023 results conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session. Please press star one on your telephone.
And wait for your name to be announced to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Accordingly, interior Chief Accounting officer.
Thank you operator, and thank you John.
Our call today.
Martin.
Actually I would like to welcome you to our earnings call for the third quarter of 2023. This morning's earnings call will be led by our CEO, Bob Franklin and CFO.
Also in attendance today are Steve Retzloff executive chairman of the company.
President of the company.
And Joe with senior Executive Vice President and Chief Credit Officer of the bank.
While we begin I need to remind everyone that some of them are.
With me today constitute forward looking.
As defined in the private Securities Litigation Reform Act of 1995 as amended.
All such statements to be covered by the Safe 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 beliefs at the time. The statement is made and thats always subject to change.
Any obligation to publicly update any forward looking statements, except as maybe required by law. Please.
Please see the last page of the text in this morning's earnings release, which is available on our website at IR <unk> com.
<unk> dot.
Dot com 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.
Thank you Courtney and good morning, and welcome to the stellar Bank Bancorp third quarter earnings call.
I'll begin my comments by thanking our fine team that stellar bank for their great work and extra effort to strengthen stellar banks infrastructure.
Our combination just over a year ago is now in its second phase of refinement following our core conversion.
Developing one culture developed developing and better defining our staffing needs refining our expenses to scale $211 billion organization and aligning our efforts to make stellar bank the bank of choice in our markets.
So the industry continues to experience pressure on the deposit side.
Mainly to interest rates, we have seen our base move towards stabilization.
Rates have also put pressure on our net interest margin, but the negative effects are beginning to minimize and though we would not call a bottom with the uncertainties that still exist in the market. We feel we are close.
Our credit metrics remain good in our markets remains strong, but we must be cautious as the effects of rapidly rising interest rates work through the economy.
We did charge off one loan in the quarter, which was the result of a continued deterioration of our previously identified credits noted in the fourth quarter of 2022.
The issues experienced in those credits are specific to the borrower and do not appear to be a trend within our loan book.
We continue to believe that our underwriting in our markets remain good.
We are determined to concentrate on building capital liquidity and staying focused on good underwriting.
We are also making sure that we monitor our existing portfolio for any negative trends that may form in the future. We are pleased with our balance sheet positioning as we move to the fourth quarter of the year. Our goal is to put our institution and our position of having all options available to it as we move into <unk>.
2020 for achieving our goal will create value for our shareholders our employees, our customers and our communities.
Unknown Executive: Good day and thank you for standing by. Welcome to the Stellar Bancorp Inc, reports third quarter 2023 results conference call. At this time all participants are in a listen only mode.
Now I'll turn the call over to Paul <unk>, our CFO.
Thanks, Bob and good morning, everybody.
Unknown Executive: After the speaker's presentation, there will be a question and answer session to ask a question during the session. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one one again. Please be advised that today's conference is being recorded.
We're very pleased to report strong operating performance in the third quarter. Our net income was $30 9 million.
Representing diluted earnings per share of 58.
Annualized <unk> of $1, one, 4% and return on tangible common equity of 14, 5%.
Unknown Executive: I would now like to hand a conference over to your speaker.
Courtney Theriot: Here's your speaker today, Courtney Theriot, Chief Accounting Officer. Thank you, operator and thank you to all who have joined our call today. Good morning.
This was incrementally lower than the $35 2 million.
EPS of <unk>, 66% per share earned in the second quarter due mostly to increases in funding costs more than offsetting increases in interest income higher noninterest expense and lower noninterest income.
Courtney Theriot: Our team would like to welcome you to our earnings call for the third quarter of 2023.
Courtney Theriot: This morning's earnings call will be led by our CEO, Bob Franklin and CFO Paul Egge. Also in attendance today, our Steve Rattbloss Executive Chairman of the company raised a truly president of the company and CEO of the bank. And Joe West, Senior Executive Vice President and Chief Credit Officer of the bank.
Notable among the noninterest items with our control of core noninterest expense after excluding merger expenses.
And for noninterest income.
The decreased revenue effect from the Durbin Amendment on our debit card and ATM card line item and a reduction in NSF fees.
Courtney Theriot: Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking treatment as defined in the private security litigation reform act of 1995 as amended. We intend all such statements to be covered by the same proper provisions, but forward-looking statements contained in the act. Also note that if we get guidance about future results, that guidance is only reflection of management's beliefs at the time the statement is made and subsequently for subject to change.
During the third quarter core net interest margin, which excludes purchase accounting adjustments contracted by 10 basis points versus the second quarter and was 387% in the third quarter.
That said, we are pleased to have experienced relative stability in our core net interest margin since may on a monthly basis.
Since may after experiencing meaningful funding dislocation in March and April our funding costs have continued to trend upward, but at a more measured pace and the repricing of our assets has been able to keep pace enough to maintain stable monthly core net interest margins as we entered and exited the third quarter.
Courtney Theriot: We did claim any obligation to publicly update any forward-looking statement except if maybe requires a law. Please see the last page of the text in this morning's earnings release, which is available on our website at IRSupceller.com for additional information about the risk factor associated with forward-looking statement.
While we do not like to see a decrease in our NIM or pretax pre provision profitability.
Courtney Theriot: As the conclusion of our remarks, we will open the line and allow time for questions.
Still pretty good about the stabilization in our margin trends and earnings power, which continues to compare favorably relative to the industry and we also feel good about our ability to protect our relative profitability profile in this challenging.
Bob Franklin: I will now turn the call over to our CEO, Bob Franklin. Thank you, Courtney, and good morning, and welcome to the Stellar Bank, Bank Corps third quarter earnings call. I begin my comments by thanking our fine team at Stellar Bank for their great work and extra effort to strengthen Stellar Bank's infrastructure. Our combination just over a year ago is now in its second phase of refinement following our core conversion. Developing one culture, developing and better to fail.
Challenging environments.
With respect to purchase accounting items, we had $119 million and loan discount remaining and a core deposit intangible of $122 9 million at the end of the quarter.
Strong earnings notwithstanding accelerated amortization of CDI expense has really helped us to internally generate capital at a nice pace.
Bob Franklin: We are finding our staffing needs, refining our expenses to scale to an $11 billion organization and aligning our efforts to make Stellar Bank the bank of choice in our markets. Though the industry continues to experience pressure on the deposit side, due mainly to interest rates, we have seen our base move towards stabilization. Rates have also put pressure on our net interest margin, but the negative effects are beginning to minimize, and though we would not call a bottom, with the uncertainties that still exist in the market, we feel we are close.
Reflected in having shown well over 100 basis point increases in all of our regulatory capital ratios over the last three quarters.
In summary, we believe stellar is well positioned to manage through the current operating environment and thrive are.
Our funding composition and liquidity position puts us in a great spot to maintain favorable margins and earnings power.
Finally on credit we feel appropriately reserved given the current economic unknowns and we otherwise take comfort in our credit underwriting discipline from lending and one of them and from lending in one of their strongest.
<unk> in the country.
Bob Franklin: Our credit metrics remain good, and our markets remain strong, but we must be cautious as the effects of rapidly rising interest rates work through the economy. We did charge off one loan in the quarter, which was the result of a continued deterioration of a previously identified credit noted in the fourth quarter of 2022. The issues experienced in this credit are specific to the borrower and do not appear to be a trend within our long book. We continue to believe that our underwriting in our markets remain good. Our goal is to put our institution in a position of having all options available to it as we moved into 2024.
And I will now turn the call back over to Bob.
Thank you Paul and we are ready for questions operator.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for questions.
Okay.
Our first question comes from Eric Spector with Raymond James You May proceed.
Hey, good morning, everybody. This is Eric Cowen today is Easter.
Congrats on a good quarter.
I wanted to touch on maybe some of the trends on the corresponding side, obviously, you've seen some migration, but just curious some of the underlying trends youre seeing maybe a new core deposit pricing trend anchor core products as well as Cds and just kind of how you think about deposit balances going forward.
Bob Franklin: Achieving our goal will create value for our shareholders, our employees, our customers and our communities.
Eric This is ray.
Yes on.
Both deposit trends, we felt good about third quarter that when we look at the.
The dollar amount of of new that exceeded closed that really held nicely its actually held in nicely over three quarters in a row and then if you look at our what we call the carried which is what's existing.
Paul Egge: I'll now turn the call over to Paul Egge, RCFO. Thanks, Bob.
Paul Egge: Good morning, everybody. We are very pleased to report strong operating performance in the third quarter. Our net income was $30.9 million representing diluted earnings per share of 58 cents. The annualized ALA of 1.1% and a return on canned income equity of 14.5%. This was incrementally lower than the $35.2 million for diluted EPS of 66 cents per share earned in the second quarter to mostly to increase in funding costs, more than offsetting increases in interest income, higher managed expense and lower non-interesting costs.
Paul Egge: Notable among the non-interest items was our control of core non-interest expense after excluding merger expenses, and for non-interesting income, the decreased revenue effect from the Durwin amendment on our debit card and ATM card line item in a reduction in NSF fees. During the third quarter, core net interest margin, which excludes purchase counting adjustments, contracted by 10 basis points versus the second quarter, and was 3.87% in the third quarter. That said, we are pleased to have experienced relative stability in our core net interest margin since May on a monthly basis.
Prior to the new and closed.
<unk>.
Those outflows there still are some outflows, but they really decelerated at a nice pace to where we.
We almost got to core.
Our core outflow to the net.
For the total, but it's significantly decrease from the previous from the previous two quarters.
While there were some shrinkage we kept the composition relatively similar so when you think about our funding base. We still we succeeded in having stability in our noninterest bearing deposits ratio.
And everything else.
<unk> R.
Wholesale funding dependency really mirrored where we were at the second quarter.
Got it I appreciate the color.
Just kind of following up on that.
Curious, how you think about the balance sheet and just the margin trajectory, assuming a higher for longer environment.
Kind of any color on the performance of broader economic issues that you think could arise.
And I have higher for longer environment, just kind of new loan yields are trending.
I'd like loan repricing dynamics.
Paul Egge: Since May, after experiencing meaningful funding dislocation in March and April, our funding costs have continued to trend upward, but at a more measured pace, and the repricing of our assets has been able to keep pace enough to maintain stable monthly core net interest margins as we entered and exited the third quarter. While we do not like to see a decrease in our minimum or pre-text pre-vision profitability, we feel pretty good about the stabilization in our margin trends and earnings power, which continues to compare favorably relative to the industry.
Loan yields are versus where loss rates I mean, any color on that and it would be great.
Certainly I mean the.
Does that take away, we have that we feel good about coming out of.
At September and really the last five months is a relative measure of stability in our net interest margin and so notwithstanding the fact that.
The cost of funding continued to trend upwards, it's very much been an equilibrium in lockstep with.
The rate of change in our asset.
Paul Egge: And we also feel good about our ability to protect our relative profitability potential in this challenging environment. With respect to purchase counting items, we had $119 million in loan discount remaining, and a core deposit in tangible of $122.9 million at the end of the quarter. Strong earnings, notwithstanding accelerated amortization of CDI expense, has really helped us to internally generate capital at a nice pace. Reflected and having shown well over 100 basis point increases in all of our regulatory capital ratios over the last three quarters.
On the asset side so.
So we feel good about the stability there we think the more time were higher for longer it'll give more time for our asset book to reprice and.
Over the longer term, we see net benefit there.
But we're very very.
Cautious around how we manage.
Really the uncertainties.
It's unprecedented interest rate environment.
Hi.
Right now we feel pretty pleased but we're just cautious about outlook and feel good about where we sit Eric.
Eric I can give you some numbers some color on.
Paul Egge: In summary, we believe Stellar is well positioned to manage through the current operating environment and thrive. Our funding composition and liquidity position puts us in a great spot to maintain favorable margins and earnings power. Finally on credit, we feel appropriately reserved, given the current economic unknowns. And we otherwise take comfort in our credit underwriting discipline from lending in one of the and from lending in one of the strongest markets in the country.
New loans so.
New loans for the quarter originated $340 million.
Paul Egge: Thank you.
That was at 8812, we picked up 50 basis points from the prior quarter on that and then we renewed over $600 million of loans in the quarter at 871 and that was a pick up of 65 basis points from the previous quarter.
Got it that's really helpful color.
And then just wanted to touch on the Securities book.
Bob Franklin: And I will now turn the call back over to you about.
Vantage of having a truly liquid portfolio I guess, if we continue to see deposit outflows. How do you think about security sales versus borrowings versus Cds and other types of noncore funding.
Unknown Executive: Thank you, Paul. And we're ready for questions, operator. Thank you. As a reminder to ask a question, please press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again, one moment for questions.
Where are you comfortable with that loan to deposit ratio shaking out maybe if you could just remind us what cash flows from your securities portfolio or.
<unk>.
Certainly.
So in the fourth quarter, we have well over $100 million of security of cash flows coming off the securities portfolio. If you take that forward 15 months, you are talking about probably $300 million of.
Eric Spector: Our first question comes from Eric Spector with Raymond James, he may proceed. Hey, more than everybody. This is Eric down in for day and see sir. Grats on a good quarter just wanted to touch on maybe some of the trends on the core funding side. Obviously, you've seen some migration, but curious, some of the underlying trends you're seeing, maybe have new core deposit rights and trending for core products as well as CDs and just kind of how you think about deposit balance is going forward.
Securities.
Cash flow is coming off the securities portfolio.
And then every day, we talk about the puts and takes as it relates to <unk>.
How we manage the balance sheet, what do we do with that cash we feel comfortable with our current level of loans deposits and we want to take part in the repricing opportunities out there. So currently we're leaning leaning towards reinvestment of those cash flows, but it does afford us a high level.
Eric Spector: Eric, this is right. Yes, on the deposit trends, we felt good about third quarter that we look at the dollar amount of new exceeded closed that really held nicely. It's actually held nicely over three quarters in a row. And then if you look at our what we call the carried, which is what's existing prior to the new and closed, that's that that's what those outflows, they're still worse than outflows, but they really decelerated it at a nice pace to where we almost got to core, there's still a core outflow to the net for the total, but it's significantly decreased from the previous from the previous two quarters.
Flexibility going forward. So we can we are able to call auto builds around that depending on how.
A broader funding base.
Got it that's helpful color. Thanks.
Thanks, again for taking the questions and I'll step back.
It's Eric.
Thank you one moment for questions.
Our next question comes from will Jones with <unk> you May proceed.
Hey, great good morning, guys.
Eric Spector: While there were some shrinkage, we kept the composition relatively similar. So when you think about our funding base, we still, we succeeded in having stability in our nonintersparing deposits ratio and and everything else, including our wholesale funding dependency, really mirrored where we were at the second quarter.
Barnwell.
So I just wanted to start on loan growth I know, we've kind of been talking about this low to mid single digit range for the full year and if you look at the first half there was a little stronger, but we saw a little more softness this quarter and I guess just.
Maybe that we continue to see a little bit of softness as we enter the fourth quarter. So so.
Round trip, we may wind up still in that mid to low single digit range for the year I guess, a is that kind of how you're thinking about the near term and in the fourth quarter kind of growth outlook.
Unknown Executive: God, I appreciate the color, just kind of following up on that, just curious how you think about the balance sheet and just the margin trajectory, assuming a higher for longer environments, just kind of any color on the banks performance or broader economic issues that you think could arise in a higher for longer environments, just kind of have new loan yields are trending color on like loan three pricing dynamics and How new loan yields are versus roll off rate any color on that end would be great. Certainly, I mean, the best takeaway we have that we feel good about coming out of September and really the last five months is a relative measure of stability in our net interest margin.
Yes, I'll let.
Let me give a little more color, but for the most part.
Loan growth is going to be fairly muted through the end of the year and as we as we kind of watch the market and see what.
Whats available to us we have increased our underwritings.
Quite a bit so it's clear that back a bit on what can actually clear the hurdles to get on the books.
<unk>.
It's going to be slower than it was in the first part of the year, but.
Right.
You can add.
So a couple of things.
How we got to that.
You saw the.
Little negative growth for the quarter. When you look at the waterfall the posture that we started last last year around.
Unknown Executive: So notwithstanding the fact that the cost of funding continues to trend upwards, it's very much being an equilibrium and lock step with the rate of change in our asset on the asset side. So we feel good about the stability there. We think the more time we're higher for longer, it'll get more time for our asset book to reprise in and over the longer term, we've seen that benefit there, but we're very, very cautious around how we manage the uncertainties of this unprecedented interest rate environment. So, right now we feel very pretty pleased, but we're just cautious about outlook and feel good about where we sit.
Managing credit and liquidity.
And as a function of our loan originations those were in the second quarter of about $550 million in new loans in this quarter.
Three around 350, so thats definitely one.
One component of <unk>.
Where we are headed.
Other thing is our pay offs.
Where we've we've normally experienced something like $2 50, a quarter that continues actually to around $2 75, and the <unk>.
In the third quarter, so a combination of lower originations plus.
Not a return to the payoff levels, but at least a little little increase in the playoffs, which we think is it's probably healthy.
That's that's contributing to probably what we're what bobs talking about of that.
Unknown Executive: Eric, I can give you some numbers, some color on the new loans. So, new loans for the quarter originated 340 million. That was at 8.12. We picked up 50 basis points from the prior quarter on that, and then we renewed over 600 million loans in the quarter at 8.71, and that was to pick up the 65 basis points from the previous quarter. That's really helpful, Collar.
<unk>, probably low single digits.
And I would just add as you think about our approach to this.
I know others have different different views on it but we really feel strongly about our core deposit funding and so right now.
The knife fight that we're going through on deposits for.
Unknown Executive: And then just wanted to touch on the security book. You have managed to have a truly liquid portfolio. I guess if we continue to see deposit outflows, how do you think about security sales versus borrowings versus CDs and other types of non-core funding? We're comfortable with that low deposit ratio shake, and maybe if you could just remind us what cash flows from your security portfolio are at the elbow. Sir, nice. So, in the fourth quarter, we have well over $100 million of security of cash flows coming off the security portfolio.
With some pretty high rates out there.
And a lot of those high rates don't even pertain to what core funding really is so.
We haven't changed that to try to increase the loan volume.
We like our position from a loan to deposit, we probably even pull it down a bit.
This was a good time to really focus on on strength of balance sheet.
But.
Unknown Executive: If you take that forward 15 months, you're talking about probably $300 million of securities of cash flows coming off the security portfolio. And then every day, we talk about the puts and takes as it relates to how we manage the balance sheet and what do we do with that cash? We feel comfortable with our current level of loan deposits, and we want to take part in the repricing opportunities out there. So currently, we're leaning towards the investment of those cash flows, but it does afford a high level of flexibility going forward so we are able to call audible around that, depending on how the broader funding base gets. Got it. That's helpful, Colour. Thanks for taking the questions, and I'll step back. Yes, sir. Thank you.
We feel.
Like we've been able to keep the noncore funding to a percentage that we feel comfortable with.
Unknown Executive: One moment for questions.
And we'd rather not.
Increased loan volume by going out and borrowing more money.
Tighter margins so.
We're sort of staying within the boundaries of what we feel like as a way to grow the bank.
We think that that the true value in our organization is around our core funding funding profile and we want don't really wanted to start with that.
Yes.
Helpful. Bob.
Funding is a huge advantage to you guys, but I guess to that point and it feels like when the company was combined in.
Put together it was really built to be more high higher gross oriented. So what do you really what do you really need to see to get more offensive.
On the gross fund to do we need to see deposit costs really kind of stabilized and just overall pressure on deposit stabilizer.
Or does there need to be a little more clarity of our rates and credit or just how do you think about.
Will Jones: Our next question comes from Will Jones with KVW EMEA Proceed. Hey, great. Good morning, guys.
What would kind of drive a more offensive step for you guys on loan growth.
While we agree with you. We were we were built to really drive growth and do things that we wanted to do.
Bob Franklin: I just wanted to start on loan growth. I know we've been talking about this low-to-mid single visit range for the four-year, and if you look at the first half, there's a little stronger, but we saw a little more softness this quarter, and I guess the theme maybe that we continue to see a little bit softness as we enter the fourth quarter. So Roundtrip, we may wind up still in that mid-to-low single visit range for the year.
Unfortunately, when we when we closed our deal in November of 'twenty. One the fed was in the process of raising interest rates at the fastest pace than it ever has.
That chats or change your trajectory you can't you can't just continue to push on with what you wished were going to happen.
Bob Franklin: I guess A is that kind of how you're thinking about the near-term and fourth quarter kind of growth outlook. Yeah, I'll let Reg give a little more color, but for the most part, loan growth is going to be fairly muted through the end of the year, and as we kind of watch the market and see what's available to us, we've increased our underwriting. It's quite a bad, so it's cleared the deck of bed on what can actually clear the hurdles to get on the boat.
And the something that didn't happen for you. So you pulled back you figure out what your next strategy is but right now there is not a level playing field for deposits. So the positive gains are really coming at a pretty high cost.
In many ways, unless you're JP Morgan I guess, but.
People are running the safety, but for the rest of US were out here battling for deposits on a relationship basis type approach and.
As long as rates continue to move and people are aggressive around what they're paying for things.
Bob Franklin: It's going to be slower than it was in the first part of the year, but you can add one. Yeah, well, a couple of things is how we got to that where you saw the little negative growth for the quarter. And you look at the waterfall, you know, the posture that we started last year around managing credit and liquidity. And as the function of our loan originations, you know, that is where in the second quarter, you know, about 550 million in new loans in this quarter, three, around 350.
We don't think Thats the right call. So.
We're trying to take the.
Right approach on the deposit side to make sure we're still developing relationship type deposits, making sure. We're looking for the final accounts.
The approach, we've taken for years and years and it's done well for us.
On the loan side.
These these high interest rates are going to have to move their way through the economy, we have not seen the effects of them yet.
Bob Franklin: So that's definitely one component of probably where we're headed. The other thing is our payoffs, where we've normally experienced something like 250 quarters. That that continues is actually around 275 and the third quarter. So, you know, combination of lower originations plus a not a return to the payoff levels, but at least a little increase in the payoffs, which we think is probably healthy. You know, that's contributing to probably what we're what Bob's talking about of that muted, probably low single digits.
I think it's coming.
We happen to be in a really nice place in Houston, Texas.
<unk> is still pretty strong from an economic standpoint.
That doesn't always mean, you drive right through that hole.
To increase your balance sheet. When you know there are some dust on the horizon. So it's.
It's something we're just approaching cautiously.
We're still continuing to make loans, we still increased our underwriting standards to make sure that we feel comfortable.
The things that we do put on.
Bob Franklin: And well, I would just add, as you think about our approach to this, and I know others have different views on it, but we really feel strongly about our core deposit funding. And so right now, the knife fight that we're going through on deposits with some pretty high rates out there. And a lot of those high rates don't even pertain to what core funding really is. So we haven't chased that to try to increase the loan volume.
But we're cautious.
Admit it.
And we just want to make sure that we preserve.
Nice balance sheet and a good nice core earnings profile and I think we're doing that I think our earnings.
Are not exactly where we would like them to be but there are still pretty good.
So we feel good about where we are.
Alright.
Thanks, Thanks for that.
I just wanted to touch on credit for a minute.
We obviously saw a little bit higher tick up in charge offs this quarter and that there's really kind of been.
Bob Franklin: We like our position from a loan to deposit. We probably even pull it down a bit. But this is a good time to really focus on strength of balance sheet. But we feel like we've been able to keep the non-core funding to a percentage that we feel comfortable with. And would rather not increase loan volume by going out and borrowing more money at tighter margins. So we're sort of staying within the boundaries of what we feel like is a way to grow the bank.
Steam across the broader southeast of maybe some of these idiosyncratic.
Noise within within the C&I space is that kind of really how you'd characterize this credit we saw this quarter.
I wouldn't I think there was it was really relative to one.
One loan that one company.
That frankly wasn't managed really well and we ended up in a position that we did we worked with it for a long time trying to figure out a better way and it ended up in this position.
Indicative of our portfolio as you can see non performers actually went down fairly significantly.
Bob Franklin: We think that the true value in our organization is around our core funding profile. And we don't really want to disturb that. Yeah, that's helpful Bob. I know core funding is a huge advantage to you guys.
We didn't backfill was after we charged the loan off so I think the trend is not that direction, we want to make sure that we.
Ted off having a trend in that direction and I don't think Thats, that's really indicative of where we are.
Bob Franklin: But I guess to that point, it feels like when the company was combined and put together, it was really built to be more higher growth oriented. So what do you really need to see to get more offensive on the growth fund? Do we need to see the positive costs really kind of stabilized? And just overall pressure on the positive stabilized? Or does there need to be a little more clarity over rates and credit?
But we are cautious about what's out there because as we as we see renewals happen in how people are handling higher interest rates.
It's been interesting as we go through that to see how people are going about.
Dealing with the <unk>.
Increase in rates at renewal time, so there's a lot of a lot of things available to us and we're using all those tools.
Bob Franklin: Or just how do you think about what would kind of drive a more offensive step for you guys on loan growth? Well, we agree with you. We were built to really drive growth and do things that we wanted to do. Unfortunately, when we closed our deal in November of 21, the Fed was in the process of raising interest rates at the fastest pace that it ever had. That's had to change your trajectory.
I think the market here helps us because it is so good.
Remains good and hopefully.
If we get the soft landing that people like to talk about that's great.
If it's a little harder I think we're still well positioned in and if it doesn't happen I think we have the ability to take advantage of things as we move into 'twenty four.
Okay, great. So it feels like the pulse on credit at least as it pertains to stellar is maybe a bit of.
Bob Franklin: You can't just continue to push on with what you wished were going to happen, and it's something that didn't happen for you. So you pull back, you figure out what your next strategy is, but right now there's not a level playing field for deposits. So the positive gains are really coming at a pretty high cost in many ways, unless you're JP Morgan, I guess, but the people are running the safety. But for the rest of us, we're out here battling for deposits on a relationship basis type approach.
Cautious optimism as well.
Would you characterize it that way.
Yes, I would.
I mean, if we if we get better signals in 'twenty, four we're well position to to move.
Back to work back to where we'd like to have been positioned to over a year ago, but.
I think you have to.
You have to be sure that the fed is through.
You have to make sure that we're not running into an economy that they that the fed was so successful at slowing the economy Thats hurt all of us and we want to make sure of kind of where are we where we believe things are.
Bob Franklin: And as long as rates continue to move and people are aggressive around what they're paying for things, we don't think that's the right call. So we're trying to take the right approach on the deposit side to make sure we're still developing relationship type deposits, making sure we're looking for the tunnel account. That's the approach we've taken for years and years, and it's done well for us. On the long side, these high interest rates are going to have to move their way through the economy.
As we get into 'twenty, four and I think thats sort of been our position.
We feel really good about where we are and we're leaving ourselves every option available open. So we're we're creating capital.
Our earnings are pretty good were repositioning expenses, so that we can make sure that we're.
We're in a good place from.
From an earnings standpoint.
Bob Franklin: We have not seen the effects of them yet. I think it's coming. We happen to be in a really nice place in Houston, Texas, that is still pretty strong from an economic standpoint. That doesn't always mean you drive right through that hole to increase your balance sheet when you know there's some dust on the horizon. So it's something we're just approaching cautiously. We're still continuing to make loans. We still increased our underwriting standards to make sure that we feel comfortable in the things that we do put on.
And we're going to see what what <unk>.
Provides us and as we move into 'twenty four.
Great. That's very helpful. Thanks for the questions guys.
Thank you.
Thank you one moment for questions.
Our next question comes from Graham <expletive> with Piper Sandler You May proceed.
Hey, guys. Good morning, good morning.
Graham.
So Paul I, just wanted to circle back to the NIM quickly.
I heard there is stability from quarters start to quarter end, which is obviously great great to hear.
Bob Franklin: But we're cautious. We'll admit it. And we just want to make sure that we preserve a really nice balance sheet and a good nice core earnings profile. And I think we're doing that. I think our earnings are not exactly where we would like them to be, but they're still pretty good. And so we go good about where we are. That is super mobile. Thanks for that.
Funding pressures can can be volatile, but assuming.
Trends continue to level off like you guys are seeing and Theres no more increases in the fed funds rate.
Is there any reason to think that the pressure from the funding side.
Start to abate as the asset side continues to reprice higher and Theres a bit of a handoff maybe in the back half of 'twenty forward that could.
Some some stabilization in the first part of the year and then maybe even some expansion in the core margin.
Bob Franklin: I just wanted to touch on quite a bit. We obviously saw a little bit higher kick up and charge off this quarter. And there's really kind of been, you know, a steam across the broader southeast of maybe some of these ideas and credit, you know, noise within within the CNI space. Is that kind of really how you characterize this credit? We saw this quarter. I would. And I think it was it was really relative to one.
Later on in the year.
As long as composition.
<unk> content.
I believe there is a lot more room to go up.
<unk> side than on the funding side, but.
That is obviously.
Okay.
Big contingency, we feel really good about.
Our <unk>.
Performance over the last five months and we're going to work hard to defend that.
Bob Franklin: One loan that one company that frankly wasn't managed really well and we ended up in the position that we did. We worked with it for a long time, trying to figure out a better way and ended up in this position. It's not indicative of our portfolio. As you can see, non performers actually went down fairly significantly and we didn't backfill after we charged the loan off. So I think the trend is not that direction.
It does stand to reason that the asset side has has more room to go but.
We're still taking.
A cautiously optimistic approach there, particularly because we are still in some really really competitive markets.
What we've been able to do up to this point has been herculean, we're going to continue to work on continuing the track record of.
Relative outperformance on our cost of funds, which is translating into meaningful outperformance in.
Bob Franklin: We want to make sure that. We head off of having a trend in that direction, and I don't think that's really indicative of where we are. But we are cautious about what's out there, because as we see renewals happen and how people are handling higher interest rates, it's been interesting as we go through that to see how people are going about dealing with the increase in rates at a renewal time. So there's a lot of things available to us, and we're using all those tools, and I think the market here helps us because it is so good, remains good, and hopefully, if we get this soft landing that people like to talk about, that's great.
What has been a stable NIM post.
<unk> earlier in the year.
Sure.
Yeah, absolutely I understand the cautious approach there, but still good to hear that things seem to be at least trending in the right direction I guess from what we saw at the very first part of the year around the industry.
And then I guess, just just quickly what are you guys assuming on accretion income I guess over the next couple of quarters, there's a little bit higher than I thought it would be this quarter I don't know if there is some early payoffs or.
What might have driven a.
A little bit.
Stable accretion essentially quarter over quarter, just any color on what you guys are looking at there would be helpful.
Certainly.
It has been higher than we are.
Bob Franklin: It's a little harder. I think we're still well positioned, and if it doesn't happen, I think we have the ability to take advantage of things as we move into 24. So it feels like the pulse on credit, at least as it pertains to Stellar, maybe a bit of cautious optimism, what would you characterize it that way? Yeah, I would. I mean, if we get better signals in 24, we're well positioned to move back to where we would like to have been positioned over a year ago.
Expected in granite, we've welcomed the accretion income.
We try to look at the business, both ways and being extra mindful of.
The windfall nature of some of it because that's really what's driven a higher level of accretion income more paydowns in the portfolio than than expected, which which we will absolutely take Rick.
All of this accretion income is interest accretion and.
That's pretty powerful because ultimately it just brought forward the repricing on the entire acquired portfolio of loans.
Bob Franklin: But I think you have to be sure that the Fed is through, you have to make sure that we're not running into an economy, that the Fed was so successful, it's not in the economy, that it's hurt all of us. And we want to make sure of where we believe things are as we get into 24, and I think that's sort of been our position. We feel really good about where we are, and we're leaving ourselves every option available open.
Those loans when they do reprice, a repricing at market rates.
And we feel like that that's really powerful for ultimately aside from the fact that.
What I'll call windfall accretion has represented.
About 35% to 40% of what we've been experiencing year to date.
We'll obviously take that but there is repricing going on and we see much of the accretion as core when it re prices into a market based loan, especially at nice rates that ray outlined with respect to this.
Bob Franklin: So we're creating capital, our earnings are pretty good, we're repositioning expenses so that we can make sure that we're in a good place from an earnings standpoint. And we're going to see what it provides us as we move into 24.
The recurring loans.
Where we're ultimately getting over eight and half eight 7% when we reprice loans. So we feel we feel good about it if its pre priced into those types of levels.
But we definitely think of most of it as a pull forward of market pricing.
Unknown Executive: That's very helpful. Thanks for the questions, guys. Thank you. One moment for questions.
Okay, Great and then I guess, just just on that repricing front and you just mentioned.
Graham Dick: Our next question comes from Graham Dick with Piper Sandler. You may proceed. Hey guys, good morning. Good morning, Graham. So Paul, I just wanted to circle back to the name quickly. I heard there's stability, you know, from quarter start to quarter end, which is obviously great to hear. You know, funding pressures can be volatile by assuming trends continue to level off like you guys have seen, and there's no more increases in the Fed funds rate.
Ray is that $600 million of repricing that happen our renewals that happened. This quarter is that typical and is that kind of like the run rate we could expect in terms of the.
The current loan book churn going forward.
This is probably a little higher than the normal the <unk>.
Normally you kind of think about our originations and renewals.
Generally kind of track together and this was a little bit probably outsized where the first two quarters are more like $500 million of renewals and this was $6 80, so probably something between $506 80 is probably the way to think about it is it was a little outsized.
Graham Dick: Is there any reason to think that the pressure from the funding side can start to abate as the asset side continues to reprise higher? And there's a bit of a handoff maybe in the back half of 24 that could lead to some stabilization in the first part of the year, and then maybe even some expansion in the core margin later on in the year. As long as composition stays constant, I believe there's a lot more room to go up in the asset side than on the funding side.
Okay, Great. That's helpful. And then I guess, just turning to expenses quickly I know you said that you've got some some increased focus on expenses going forward in optimizing the expense base to kind of align with the revenue environment and the current.
Economy, but what does that mean for your all's approach to expense growth in 2024.
As it relates maybe to that I think we talked about at $265 million number for 2023.
Graham Dick: Bye. That is obviously a big contingency. We feel really good about our performance of the last five months, and we're going to work hard to defend that. It does stand reason that the asset side has more room to go, but we're still taking, I guess, a cautiously optimistic approach there, particularly because we are still in some really, really competitive markets. I feel like what we've been able to do up to this point has been hurtly in.
We're trying to be strategic and thoughtful with.
How we manage expenses and theirs.
Competing dynamics going on first and foremost.
We're completing and moving on to the second stage of.
Of our merger to create stellar bank and what that means we want to be well positioned to grow when the opportunity presents itself. So we don't want to phone.
A trap of under investing but at the same time, we have to be really mindful of current revenue trends and delivering for investors. So we are seeking.
Graham Dick: We're going to continue to work on continuing the track record of relative outperformance on our call to funds, which is translating into meaningful outperformance in what has been a stable name post that came out earlier in the year. Yeah, absolutely understand the cautious approach there, but still good to hear that things seem to be at least trending in the right direction. I guess from what we saw at the very first part of the year around the industry.
Seeking to balance that in a way.
So as to achieve both of them.
So what that means in 2024 is seeking to control.
Stayed level as it relates to our core expenses.
From here in 'twenty, three and going into 2024 and to the extent and really being thoughtful about how and where we allocate expenses. So.
Graham Dick: And then I guess just quickly, what are you guys assuming on the creation income? I guess over the next couple of quarters is a little bit higher than I thought would be this quarter. I don't know if there is some early payoffs or what might have driven a little bit of the stable creation essentially quarter of a quarter. Just any color on what you guys are looking at there would be helpful.
It's something.
Just like our balance sheet management that we're thinking about every day.
And we haven't made any.
Doesn't move as it relates to that but this is budgeting season, and we are hyper focused.
Okay. Thanks, guys I appreciate it.
Graham Dick: Certainly, it has been higher than we expected and granted we've welcomed the accretion income. We try to look at the business both ways and being extra mindful of the windfall nature of some of it because that's really what's driven a higher level of accretion income, more paydowns in the portfolio than expected, which we'll absolutely take. Recall all of this accretion income is interest accretion and that's pretty powerful because ultimately it just brought forward the repricing on the entire required portfolio of loans and those loans when they do repricing and market rates.
Thank you.
Thank you one moment for questions.
Our next question comes from John <unk> with Jenny You May proceed.
Graham Dick: And we feel like that's really powerful. So ultimately aside from the fact that what I'll call windfall accretion has represented about 35% to 40% of what we've been experiencing here today, we'll obviously take that but there's repricing going on and we see much of the accretion as core when it reprices into a market based loan, especially at the nice rates. That Ray outlined with respect to the recurring loans where we're ultimately getting over a half 8.7% when we repriced loans.
Hey, good morning, everybody.
Got it.
Rob I like your cautious view on things I wouldn't be I wouldn't be apologetic about that I think that's the environment. We're in.
Yes.
Paul you made the comment just just before on expenses.
200, I think.
Or two ago, you talked about $265 million and you just said sort of full year 'twenty four sort of level. So just reading between the lines you setup that sort of implies flat to low single digit growth for next year does that makes sense.
I figure it out on a core basis flat to low single digit yes.
And we're still formulating around all of that but we.
We seek to manage this effectively.
Effectively in 2024, okay.
Okay makes sense.
Back to the yield accretion certainly the higher payoffs.
Pulling some of that.
Accretion forward.
I think a quarter or two ago, you talked about 26% to $28 million for the year, which would put you at what $6 million to $7 million per quarter.
For modeling purposes does that while it could come in higher to $6 million to $7 million a quarter for yield accretion over the next few quarters still seem reasonable.
Graham Dick: So we feel good about it if it's repricing to those types of levels but we definitely think of most of it as a pull forward of market pricing. Okay, great. And then I guess just on that repricing front, you just mentioned, Ray, is that $600 million of repricing that happened or renewals that happened in this quarter? Is that typical? Is that kind of like the run rate we could expect in terms of the current loan book churn going forward?
I think.
It's hard to predict these things.
Youre going straight on and we were conservative thinking that we wouldn't get really much or any.
Pay downs.
And as it happens we've gotten a lot more so I think that that's been our conservative here and we've been surprised to the positive.
So taking recent path I think it's safe to say that our conservatism has been a little.
Graham Dick: This is probably a little higher than the normal, the normally you kind of think about our originations and renewals, generally kind of tracked together, and this was a little bit probably outsized where the first two quarters were more like 500 million of renewals, and this was 680. So probably something between 500 and 680 is probably the way to think about it. It was a little outside. Okay, great, that's helpful. And then I guess just turned to expenses quickly.
Let's warranted, but once again, it's hard to predict deposit pardon me loan repayment behavior, especially.
<unk>.
With these higher rates it's been.
Interesting.
Outpaced our expectations at this point.
Yes, I get it.
Back to the charge offs can you guys say what sort of industry. The company was in.
Graham Dick: I know you said that you've got some increased focus on expenses going forward and optimizing the expense base to kind of align with the revenue environment and the current economy. But what does that mean for year olds approach to expense growth in 2024 as it relates maybe to that. I think we talked about a 265 million dollar number for 2023. We're trying to be as strategic as possible with how we manage expenses and there's competing dynamics going on.
John I think.
We should leave it as it is.
We're still in negotiations still have some ongoing stuff with these guys.
I don't want to.
Call them out in any way.
Being more specific is probably not a good idea for us right now.
I understand but just just one follow up on that it was in the Houston market correct.
Yes, okay.
Okay. Okay. Okay, guys. Thank you it was a nice quarter. Thank you.
Thank you.
Graham Dick: First and foremost, we're completing and moving on to the second stage of our murder to create Stellar Bank and what that means. We want to be well positioned to grow when the opportunity presents itself so we don't want to fall into a trap of under investing. But at the same time, we have to be really mindful of current revenue trends and delivering for investors. So we are about seeking to balance that in a way so as to achieve both ends.
Thank you and as a reminder to ask a question. Please press star one on your telephone one moment for questions.
Our next question goes from not only with Stephens you May proceed.
Thanks. Good morning, guys. Most of my questions have been addressed but I know the bank typically has some seasonality late in the fourth quarter and into the first quarter with respect to that deposit base as it stands today, we would love to hear about expectations of that seasonality and if you expect to kind of.
Graham Dick: So what that means in 2024 is seeking to control and stay level as it relates to our core expenses from 2023 and going into 2024 and to the extent and really being thoughtful about how and where we allocate expenses. So it's something just like our balance sheet management that we're thinking about every day and we haven't made any sudden moves as it relates to that, but this is budgeting season and we're hyper focus. Okay, thanks guys. I appreciate it. Thank you. One moment for questions.
Those normal seasonal patterns.
Sure, we do expect a measure of seasonality.
I will say.
Especially given that we're currently structured currently.
Using a higher level of wholesale funding and we'd like to we would see a.
Substitution dynamic going on so.
Probably not expecting much by way of.
Asset growth more.
We will seek to let.
Certain seasonality on the funding side substitute away a measure of.
Our usage of <unk> borrowings or broker deposits what have you.
John Rodis: Our next question comes from John rotis for Jenny. You may proceed. Hey, good morning, everybody. Bob, I like your cautious view on things. I wouldn't be, I wouldn't be apologetic about that. I think that's the environment we're in. Paul, you made the comment just before on expenses, you know, 200, I think quarter to ago, you talked about 265 million and you just said sort of four year 24 sort of level. So just reading between the lines is that that sort of implies flat to low single digit growth for next year.
Okay, Paul Thanks for that and I assume those wholesale eppich there'll be those are all eligible to be paid down pretty short duration it sounds like.
It's mixed but we definitely have.
Certain amount that is on the short side that will.
We're kind of thoughtful about how we play that composition of both.
Food groups in that wholesale funding and we're able to manage that relative to the expectations around.
Seasonality to the extent it drive a little bit of asset growth will be enjoying a meaningful level of spread.
John Rodis: Does that make sense? I figured out on a core basis, flat to low single digit. Yes. And we're still formulating around all that, but we seek to manage this effectively in 2024. Okay. Makes sense. Back back to the yield accretion, you know, certainly the higher payoffs and you know been pulling some of them. Um. Accretion Forward. You know, I think a quarter or two ago, you talked about 26 to 28 million for the year, you know, which would put you at what six to seven million per quarter, you know for modeling purposes.
If we put that.
If we put the excess cash at the fed.
Okay.
Appreciate that.
And then on the on the fee side. These were a little bit slower this quarter and I know the.
The Durbin impact started in <unk>, but it still looks like there were some maybe some other impacts in the third quarter or perhaps turbine.
May have been more than we expected I can't it's tough to see from from my seat any giving color on fees and third quarter and the outlook here.
John Rodis: Does that, while they, while if you come in higher to six to seven million a quarter for yield accretion over the next few quarters still seem reasonable. I think it's hard to predict these things, but that's if you're going straight on. And we were conservative thinking that we wouldn't get really much or any repay down. And as it happens, we've gotten a lot more. So I think that that's been our conservative year and we've been surprised to the positive.
Sure.
Now as a bourbon.
There has been a little bit more than our expected impact.
We also.
Sort of followed the trend of.
We are not charging NSF fees.
Any longer.
And Bob on that last point when did you implement that is that third quarter start.
This last quarter, yet mid mid August.
Okay perfect.
John Rodis: So taking recent paths, I think it's safe to say that our conservatism has been a little less warranted, but once again, it's hard to predict the positive, pardon me, loan repayment behavior, especially with the entire race. It's been interesting that it's outpaced our expectations after this one. Yep, I get it. Back to the charge. Can you guys say what sort of industry that company was in? John, I think we should leave it as it is.
<unk>.
And then I guess on capital we are seeing a nice capital build I know when the bank was put together there was expectation of some.
Some rapid capital build and Bob mentioned earlier, the environment has changed over the last year. Since the deal was put together so would love to hear any updated thoughts on capital expectations of continued build and then with the excess capital what your updated thoughts around deployment of such capital.
Yes, Matt I think we're very comfortable with the fact that we are building capital that gives us some optionality.
John Rodis: We're still in negotiations, still have some ongoing stuff with these guys. I don't want to call them out in any way and be more specific is probably not a good idea for us right now. I understand about just just one follow up on that though. It was in the Houston market, correct? Yes. Okay. Okay guys, thank you. It was a nice quarter. Thank you. And as a reminder, that a question, please press star one one on your telephone. One moment for questions.
We think.
It allows us to look at various ways to deploy that.
Whether that be M&A, whether that be buybacks, whether that'd be increased dividends.
All of these things we're looking at.
Theres also safety and capital build to make sure that you can get through difficult times, if those approach us.
So we're trying to keep all options on the table.
To see where we go with that but it's a good problem to have.
And trying to.
To give optionality to as we move into 'twenty, four and decide what what that looks like for us and what we want to do with that but.
Matt Olney: Our next question comes from Matt Onlywood Steven. He may proceed. Thanks.
Unknown Executive: Good morning guys. Most of my questions have been addressed, but I know the bank typically has some seasonality late in the fourth quarter and into the first quarter with respect to that deposit base. As it stands today, we'd love to hear about expectations of that seasonality. If you expect to kind of maintain those normal seasonal patterns. Sure. We do expect a measure of seasonality, but I will say you're especially given that we're currently structurally using a higher level of wholesale funding than we'd like to.
We want to continue to build this organization.
So.
The best use of that is to help us continue to to build and grow.
Okay agree with the Optionality the good to have in this kind of environment.
Okay. That's all from me guys. Thanks for your help.
Thank you Matt.
Thank you I'd now like to turn the call back over to Bob Franklin for any closing remarks.
Thank you for your interest in stellar Bancorp and with that we are in Germany.
Unknown Executive: We kind of would see a substitution dynamic going on. So we're probably not expecting much by way of asset growth more. We'll see to let certain seasonality on the funding side substitute away a measure of our usage of HPLB borrowings or proper deposits. What had you? OK, Paul, thanks for that. I assume those wholesale, HPLB, those are all eligible to be paid down. Pretty short duration. Sounds like. It's mixed but we definitely have a certain amount that is on the short side that we're kind of thoughtful about how we play that composition of both food groups and that wholesale funding and we're able to manage that relative to the expectations around if we put that at the Fed, if we put the excess cash in the Fed. Okay, appreciate that.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Okay.
Okay.
[music].
Okay.
[music].
Unknown Executive: And then on the fees side, fees were a little bit slower this quarter. I know the Durban impact started in 3Q but it still looks like there were some maybe some other impacts in the third quarter or perhaps Durban may have been more than we expected. I think that I can't just have to see from from my state any any giving color on on fees and dirt quarter in the alloc here.
So.
Jim.
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Unknown Executive: So all I know is that Durban has been a little bit more than our expected impact. We also sort of followed the trend of we are not charging NSF fees any longer. And and ball on that last point, when did you implement that? Is that third quarter start? That's last quarter, yeah. Mid, mid organ. Okay, perfect.
Yes.
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Yes.
Yes.
[music].
Yeah.
Matt Olney: And then I guess on Capitol, we are seeing a nice Capitol build. I know when the bank was put together, there was expectation of some some rapid Capitol build and and Bob mentioned earlier, the environment has changed over the last year since the last put together. So we'd love to hear any up in a thoughts on on Capitol expectations of continue build and then with the excess capital, what your up in a thoughts are around deployment of such Capitol.
Yes.
[music].
Okay.
[music].
Matt Olney: Yeah, Matt, I think we're we're very comfortable with with the fact that we're building Capitol will give us some optionality. We think it allows us to look at various ways to deploy that. Whether that be M&A, whether that be I back, whether that be increased evidence, there's all these things we're looking at. There's also safety in Capitol build to make sure that you can get through difficult times if those approaches. So we're trying to keep all options on the table to see where we go with that.
Yes.
[music].
So.
Jim.
[music].
Matt Olney: But it's a good problem to have. I think in trying to to give optionality to as we move into 24 and decide what what that looks like for us and what we want to do with that, but we want to continue to build this organization. So the best use of that is to help us continue to to build and grow. Okay, agree with the optionality is good to have in this kind of environment.
Okay.
[music].
Matt Olney: Okay, that's all from me guys. Thanks for your help. Thank you, Matt. Thank you.
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Good day and thank you for standing by welcome to the stellar Bancorp, Inc. Reports third quarter 2023 results conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question.
During this session. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today coordinates Ariel Chief Accounting Officer.
Thank you operator, and thank you to all who have joined our call today good morning.
He would like to welcome you to our earnings call for the third quarter of 2023.
The earnings call will be led by our CEO, Bob Franklin and CFO Paul <unk>.
Also in attendance today are Steve Retzloff executive Chairman of the company raised the theory president of the company.
The bank and go with senior Executive Vice President and Chief Credit Officer of the bank before we begin I need to remind everyone that some of them.
With me today constitute forward looking.
As defined in the private Securities Litigation Reform Act of 1995 as amended.
And all such statements to be covered by the Safe 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 beliefs at the time. The statement is made and Thats always subject to change we disclaim any obligation to publicly update any forward looking statement, except as may be required by law. Please.
Please see the last page of the text in this morning's earnings release, which is available on our website at IR.
<unk> dot.
Dot com 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.
Thank you Courtney and good morning, and welcome to the stellar Bank Bancorp third quarter earnings call.
I'll begin my comments by thanking our fine team that stellar bank for their great work and extra effort to strengthen stellar banks infrastructure.
Our combination just over a year ago is now in its second phase of refinement following our core conversion.
Eloping one culture.
<unk> developing and better defining our staffing needs refining our expenses to scale to an $11 billion organization and aligning our efforts to make stellar bank the bank of choice in our markets.
While the industry continues to experience pressure on the deposit side due mainly to interest rates, we have seen our base move toward stabilization.
Rates have also put pressure on our net interest margin, but the negative effects are beginning to minimize and though we would not call a bottom with the uncertainties that still exist in the market. We feel we are close our credit metrics remain good in our markets remains strong, but we must be cautious.
The effects of rapidly rising interest rates work through the economy.
We did charge off one loan in the quarter, which was the result of a continued deterioration of our previously identified credits noted in the fourth quarter of 2022.
The issues experienced in those credits are specific to the borrower and do not appear to be a trend within our loan book.
We continue to believe that our underwriting in our markets remain good.
We are determined to concentrate on building capital liquidity and staying focused on good underwriting.
We are also making sure that we monitor our existing portfolio for any negative trends that may form in the future. We are pleased with our balance sheet positioning as we move to the fourth quarter of the year. Our goal is to put our institution and our position of having all options available to it as we move into 'twenty.
24, achieving.
Achieving our goal will create value for our shareholders our employees, our customers and our communities.
Bob Franklin: I'd not like to turn the call back over to Bob Franklin for any closing remarks.
I'll now turn the call over to Paul <unk>, our CFO.
Thanks, Bob and good morning, everybody we.
We are very pleased to report strong operating performance in the third quarter, our net income was $30 $9 million.
Representing diluted earnings per share up <unk> 58.
Annualized <unk> of $1, one, 4% and a return on tangible common equity of 14, 5%.
This was incrementally lower than the $35 2 million.
Alluded EPS of <unk> 66 per cent per share earned in the second quarter due mostly to increases in funding costs more than offsetting increases in interest income.
Bob Franklin: Thank you for your interest in Stellar Bancorp, and with that we are adjourned. Thank you.
Unknown Executive: This concludes today's conference call. Thank you for participating.
Unknown Executive: You may now disconnect. Thank you.
Higher non interest expense and lower noninterest income.
Notable among the noninterest items with our control of core noninterest expense after excluding merger expenses.
And for noninterest income.
The decreased revenue effect from the Durbin Amendment on our debit card and ATM card line item and a reduction in NSF fees.
During the third quarter core net interest margin, which excludes purchase accounting adjustments contracted by 10 basis points compared to the second quarter and was 387% in the third quarter.
That said, we are pleased to have experienced relative stability in our core net interest margin since may on a monthly basis.
Since may after experiencing meaningful funding dislocation in March and April our funding costs have continued to trend upward, but at a more measured pace and the repricing of our assets had been able to keep pace enough to maintain stable monthly core net interest margins as we entered and exited the third quarter.
While we do not like to see a decrease in our NIM or pretax pre provision profitability.
Feel pretty good about the stabilization of our margin trends and earnings power, which continues to compare favorably relative to the industry and we also feel good about our ability to protect our relative profitability profile.
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Courtney Theriot: Welcome to the Stellar Bancorp Inc, reports third quarter 2023 results conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again. Please be advised that today's conference is being recorded.
Challenging environments.
Courtney Theriot: I would now like to hand a conference over to your speaker today. Courtney Theriot, Chief Accounting Officer. 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 third quarter of 2023. This morning's earnings call will be led by our CEO, Bob Franklin, and CFO, Paul Eggie. Also in attendance today, our CEO, Mark Bloss, Executive Chairman of the company, raised a truly president of the company and CEO of the bank, and Joe West, Senior Executive Vice President and Chief Credit Officer of the bank.
Courtney Theriot: Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking treatment as defined in the private security litigation reform act of 1995 as amended. We understand all such statements to be covered by the same proper provisions for forward-looking statements contained in the act. Also note that if we get guidance about future results, that guidance is only a reflection of management's beliefs at the time the statement is made, and that's the least they're subject to change.
Courtney Theriot: We do plan any obligation to publicly update any forward-looking statement, except if it may be required by law. So you see the last page of the text in this morning's earnings release, which is available on our website at irs.celler.com for additional information about the risk factor associated with forward-looking statements.
Courtney Theriot: As the conclusion of our remarks, we will open the line and allow time for questions.
Bob Franklin: I will now turn the call over to our CEO, Bob Franklin. Thank you, Courtney, and good morning, and welcome to the Stellar bank bank court third quarter earnings call. I begin my comments by thanking our fine team at Stellar bank for their great work and extra effort to strengthen Stellar bank infrastructure. Our combination just over a year ago is now in its second phase of refinement following our core conversion. Developing one culture, developing and better defining our staffing needs, refining our expenses to scale to an $11 billion organization, and aligning our efforts to make Stellar bank the bank of choice in our markets.
Bob Franklin: Though the industry continues to experience pressure on the deposit side, due mainly to interest rates, we have seen our base move towards stabilization. Rates have also put pressure on our net interest margin, but the negative effects are beginning to minimize, and though we would not call a bottom, with the uncertainties that still exist in the market, we feel we are close. Our credit metrics remain good, and our markets remain strong, but we must be cautious as the effects of rapidly rising interest rates work through the economy.
Bob Franklin: Academy. We did charge off one loan in the quarter, which was the result of a of a continued deterioration of a previously identified credit noted in the fourth quarter of 2022. The issues experienced in this credit are specific to the borrower and do not appear to be a trend within our loan book. We continue to believe that our underwriting in our markets remain good. We are determined to concentrate on building capital, liquidity and staying focused on good underwriting.
Bob Franklin: We are also making sure that we monitor our existing portfolio for any negative trends that may form in the future. We are pleased with our balance sheet positioning as we move to the fourth quarter of the year. Our goal is to put our institution in a position of having all options available to it as we moved into 2024.
Bob Franklin: Achieving our goal will create value for our shareholders, our employees, our customers, and our communities.
Paul Egge: I'll now turn the call over to Paul Egge, RCFO. Thanks, Bob. Good morning, everybody. We are very pleased to report strong operating performance in the third quarter. Our net income was $30.9 million representing due to the earnings per share of 58 cents. The annualized RLA of 1.1% and a return on canned income equity of 14.5%. This was incrementally lower than the $35.2 million for the rooted EPS of 66 cents per share earned in the second quarter due mostly to increases in funding costs, more than offsetting increases in interest income.
Paul Egge: Higher non interest expense and low non interest income. Notable among the non interest items was our control of core non interest expense after excluding merger expenses. And for non interest income, the decreased revenue effect from the German amendment on our debit card and ATM card line item in a reduction in NFS fees. During the third quarter, core net interest margin, which excludes purchase counting adjustments, contracted by 10 basis points versus the second quarter, and was 3.87% in the third quarter.
Paul Egge: That said, we are pleased to have experienced relative stability in our core net interest margin since May on a monthly basis. Since May after experiencing meaningful funding dislocation in March and April, our funding costs have continued to trend upward, but at a more measured pace and the repricing of our assets has been able to keep pace enough to maintain stable monthly core net interest margins as we entered and exited the third quarter.
Paul Egge: While we do not like to see a decrease in our minimum or pre-text pre-vision profitability, we feel pretty good about the stabilization in our margin trends and earnings power, which continues to compare favorably relative to the industry. And we also feel good about our ability to protect our relative profitability for a while in this challenging environment.