Stellar Bancorp(STEL) - 2024 Q3 - Quarterly Report

Revenue Generation - The company generates most of its income from interest income on loans, interest income from investments in securities, and service charges on customer accounts[121]. - Net interest income is the largest source of revenue, calculated as the difference between interest income on earning assets and interest expense on liabilities[121]. - The company measures net interest margin, which is calculated as net interest income divided by average interest-earning assets[121]. Credit Losses and Allowance - The allowance for credit losses is based on expected losses, historical loss experience, and qualitative considerations, making it a critical accounting estimate[125]. - The company evaluates loans with similar risk characteristics collectively and applies reserve factors based on historical lifetime loss and current economic conditions[126]. - Individual credit loss estimates are performed for nonaccrual loans and modified loans classified as troubled loan modifications[127]. - The company assesses the overall quality of the loan portfolio and the adequacy of the allowance for credit losses on loans through a loan review process[127]. - Changes in the allowance for credit losses can be attributed to historical lifetime loss, specific reserves for individually evaluated loans, and changes in qualitative factors[127]. - A 5% increase in historical loss rates would have increased funded reserves by $1.8 million, while a 5$3.0 million[128]. - The allowance for credit losses recorded a reversal of $6.0 million for the three months ended September 30, 2024, compared to a provision of$2.3 million for the same period in 2023[155]. - The allowance for credit losses on loans was $84.5 million, or 1.12$91.7 million, or 1.16%, as of December 31, 2023[184]. - The allowance for credit losses on unfunded commitments was $10.0 million as of September 30, 2024, down from$11.3 million at December 31, 2023[185]. Interest Income and Expense - Net interest income for the three months ended September 30, 2024, was $101.5 million, a decrease of$5.2 million, or 4.9%, compared to $106.7 million for the same period in 2023, primarily due to increased funding costs[137]. - Interest income for the three months ended September 30, 2024, was$151.8 million, an increase of $507 thousand, or 0.3$151.3 million for the same period in 2023, driven by higher-yielding securities and loans[138]. - Interest expense for the three months ended September 30, 2024, was $50.3 million, an increase of$5.7 million, or 12.8%, compared to $44.5 million for the same period in 2023, primarily due to higher funding costs[139]. - Interest income increased to$452.4 million for the nine months ended September 30, 2024, up $13.7 million, or 3.1$438.6 million in the same period in 2023[147]. - Interest expense rose to $147.3 million for the nine months ended September 30, 2024, an increase of$39.5 million, or 36.7%, compared to $107.8 million for the same period in 2023[148]. - The cost of average interest-bearing liabilities increased to 3.50$33.9 million, or $0.63 per diluted share, compared to$30.9 million, or $0.58 per diluted share for the same period in 2023, reflecting an increase primarily due to an$8.3 million decrease in the provision for credit losses[134]. - Annualized return on average assets for the three months ended September 30, 2024, was 1.27%, up from 1.14% in the same period of 2023, while return on average equity increased to 8.49% from 8.34%[135]. - For the nine months ended September 30, 2024, net income was $89.8 million, or$1.68 per diluted share, compared to $103.2 million, or$1.94 per diluted share for the same period in 2023, primarily due to a $25.8 million decrease in net interest income[136]. - Noninterest income increased by$1.6 million, or 34.2%, to $6.3 million for the three months ended September 30, 2024, compared to$4.7 million for the same period in 2023[156]. - Noninterest income for the nine months ended September 30, 2024, totaled $18.0 million, an increase of$338 thousand, or 1.9%, compared to $17.7 million for the same period in 2023[157]. Loan Portfolio and Asset Quality - Total loans decreased by$374.0 million, or 4.7%, to $7.55 billion as of September 30, 2024, compared to December 31, 2023[168]. - The commercial and industrial loan portfolio decreased by$61.1 million, or 4.3%, to $1.35 billion as of September 30, 2024[169]. - Commercial real estate loans decreased by$95.5 million, or 2.3%, to $3.98 billion as of September 30, 2024[172]. - Commercial real estate construction and land development loans decreased by$170.1 million, or 16.0%, to $890.3 million as of September 30, 2024[174]. - The residential real estate loan portfolio increased by$65.1 million, or 6.2%, to $1.11 billion as of September 30, 2024, compared to December 31, 2023[175]. - The residential construction loans portfolio decreased by$105.9 million, or 39.6%, to $161.5 million as of September 30, 2024, from$267.4 million as of December 31, 2023[176]. - The consumer and other loan portfolio decreased by $4.3 million, or 6.6$60.0 million as of September 30, 2024, from $64.3 million as of December 31, 2023[177]. - Nonperforming assets totaled$35.1 million, or 0.33% of total assets, at September 30, 2024, down from $39.2 million, or 0.37$32.14 million as of September 30, 2024, compared to $39.19 million at December 31, 2023[181]. - Total charge-offs for all loan types amounted to$5.855 million for the nine months ended September 30, 2024, compared to $9.721 million for the same period in 2023[184]. Deposits and Funding - Total deposits as of September 30, 2024, were$8.74 billion, a decrease of $130.9 million, or 1.5$8.87 billion at December 31, 2023[198]. - Noninterest-bearing deposits decreased by $243.8 million, or 6.9$3.30 billion, while interest-bearing deposits increased by $112.9 million, or 2.1$5.44 billion[198]. - The company had a total borrowing capacity of $2.98 billion as of September 30, 2024, with$1.86 billion available and $1.12 billion outstanding[200]. - Total immediate contingent funding sources were$4.33 billion, or 49.6% of total deposits at September 30, 2024, with an additional potential $1.55 billion from brokered deposits, bringing total contingent funding sources to approximately$5.89 billion, or 67.4% of deposits[214]. Capital and Equity - Total shareholders' equity increased to $1.63 billion at September 30, 2024, up from$1.52 billion at December 31, 2023, primarily due to net income of $89.8 million[219]. - The Bank was well-capitalized under regulatory capital guidelines, with total capital to risk-weighted assets at 15.91% as of September 30, 2024, exceeding the minimum required ratio of 8.0%[221]. - Common Equity Tier 1 capital to risk-weighted assets was 13.62% as of September 30, 2024, above the minimum required ratio of 4.5%[221]. Interest Rate Risk Management - The Asset Liability Committee (ALCO) manages interest rate risk by formulating strategies based on the current outlook on interest rates and other factors[226]. - During the nine months ended September 30, 2024, the overall interest rate profile was affected by a decrease in noninterest-bearing deposits and certain interest-bearing deposits, alongside increases in certificates of deposits and borrowed funds[228]. - A simulation model estimates the potential impact on net interest income under various interest rate scenarios, with a +300 basis points change resulting in a 5.9% increase in net interest income[229]. - The economic value of equity is projected to change by -4.9% with a -200 basis points interest rate change, compared to a 0.0% change in a stable rate scenario[229]. - The company does not face foreign exchange rate or commodity price risk, focusing instead on managing interest rate exposure through balance sheet structuring[225]. Operational and Regulatory Compliance - The effectiveness of the company's disclosure controls and procedures was confirmed by the Chief Executive Officer and Chief Financial Officer as of the end of the reporting period[230]. - There were no changes in the company's internal control over financial reporting that materially affected its operations during the quarter ended September 30, 2024[231]. - The company is not currently involved in any legal proceedings that would materially affect its business or financial condition[232].