Stellar Bancorp, Inc. Q4 FY2023 earnings call

• Bob Franklin thanked the team for bringing two banks together in 2023 and emphasized the 2024 mantra of 'optimized', focusing on capital, liquidity, and credit in a less robust economy.
• Paul Egge discussed 2023 results, including strong net income, capital growth, and a strong funding profile. In the fourth quarter, net interest margin was 4.40%, with non-interest items including $2.4 million from FDIC investments and $2.4 million in FDIC special assessment expense. Expenses were elevated due to nonrecurring items.
• Ramon Vitulli and Robert Franklin talked about deposit strategy, noting a measured approach to deposit rates and the ability to be competitive when rates level out, as well as loan underwriting and repricing dynamics.

In 2023, Stellar Bancorp's net income was $130.5 million, with diluted earnings per share of $2.45, an ROAA of 1.21%, and return on tangible common equity of 15.75%. For the fourth quarter, the company earned $27.3 million or $0.51 per diluted share, with an ROAA of 1.02% and return on tangible common equity of 12.61%. On capital, the total risk-based capital ratio increased to 14.02% at year-end 2023 from 12.39% in 2022. Tangible book value grew 21.4% in 2023 to $17.02 per share. The company maintained a strong funding profile with 40% non-interest-bearing deposits.

• Focus on optimizing process, expense, people, and future in 2024. Expect a less robust economy but well-positioned in strong markets. Core margin stabilization is anticipated. 2024 expense guidance is around $280 million, with professional fees expected to be lower than the fourth quarter level.
• Neutral interest rate risk profile, with ability to reprice deposits and loans depending on rate movements.

• Interest rate risk, including sensitivity to rate cuts and repricing dynamics.
• Credit cycle uncertainties affecting loan provisioning.
• Competitive pressure impacting margins and fee income, such as Durbin impact on card fees.
• Impact of FDIC special assessments and other nonrecurring expenses.

Q: Good morning, everybody. Maybe just starting 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 how quickly you'd expect to be able to reprice deposits lower if we do get cuts this year?

A: We take comfort in really a neutral interest rate risk profile. In 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 rate 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, and we feel well positioned for really any rate outcome in 2024.

Q: Hey. Great. Thanks. Good morning, everybody. I'll start on the professional fees. I think Paul mentioned professional fees was elevated due to some -- 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?

A: It was more of a timing dynamic. If you saw the third quarter, it was relatively with 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 the 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.