Good day, thank you for standing by. Welcome to the Stellar Bancorp, Inc. fourth quarter 2022 earnings 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 this session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Courtney Theriot, Chief Accounting Officer. Please go ahead.
Good morning, and thank you to all who have joined our call today. We would like to welcome you to our earnings call for the fourth quarter of 2022. This morning's earnings call will be led by Stellar's CEO, Bob Franklin, and CFO, Paul Egge. Also in attendance today are Steve Retzloff, 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 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 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.stellarbancorpinc.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. Welcome to Stellar Bancorp's fourth quarter earnings call and our first as a combined organization. I will begin by thanking our dedicated staff that is working tirelessly to make Stellar Bank an outstanding organization. This is an all-bank team effort. Our team is responding to the challenge. We are divided by two operating systems. We are fully engaged in supporting the successful system integration in February of 2023. Completion of this conversion is an important step in solidifying the combination of our two banks. The fourth quarter provides us with a first look at both our balance sheet, adjusted for purchase accounting with market valuations and our income statement, which will provide insight into the expenses associated with our merger along with day two provisions.
The fourth quarter is one dominated by purchase accounting adjustments and merger-related expenses. Our goal today is to help guide the reader of our financials to a core franchise and reveal the core earnings power created by our combination. We have also been proactive in our decision-making, given the current interest rate environment and the economic environment. Throughout the fourth quarter, we look to make business decisions that best fit our current focus on liquidity, capital, and credit. First of all, we took care to make proper reserves as we turn into a more challenged economic environment. Secondly, we sold some of our challenged credits, our more- challenged credits, which would have been longer-term workouts with uncertain outcomes, opting for certainty which decreased our classified credits and allowed us to realize values greater than our indicated marks.
Having to mark to market the CBTX Securities portfolio for the transaction meant we own the securities today at market value. We felt it an opportune time to sell some of those securities and bolster our liquidity. Later, Paul and the team will provide more detail to aid in understanding the changes to our financials. Regulatory approval was a key factor in the timing of our closing. Between announcement and final approval, the interest rate environment changed significantly by the Federal Reserve increasing interest rates at a very rapid pace. Therefore, the purchase marks that were affected by interest rates have been a moving target. Today, a majority of that work is done, and we have had a chance to review the results. We have never been more bullish on the long-term success of this financial combination.
Our ability to deliver for our constituencies, our shareholders, our customers, our employees, and our communities in which we operate has never been better. However, in the near term, we cannot ignore the actions that the Federal Reserve is taking to slow our economy and contain inflation. We know from lessons learned in previous cycles to be cautious. The end of this interest rate cycle remains unclear, but we will be vigilant as to the effects on our customers and our operating economic environment. We will stay disciplined in managing our capital, our liquidity, and the credit in our bank as we continue to build Stellar Bank. Our franchise resides in one of the most robust economies of the country. Our long-term future is bright, and we will stay determined to increase shareholder value. Our belief is that Stellar Bank is well-positioned to deliver on that promise.
I will now turn the call over to Paul Egge.
Thanks, Bob, good morning, everybody. We are very pleased to be reporting our first quarter as a combined company as our merger went effective on the first day of October. For accounting and financial reporting purposes, all of our filings contain comparative information relative to legacy ABTX financial results with historical shares and per-share numbers adjusted for the reverse merger. Given the transformative nature of the merger to create Stellar, I will focus my commentary on the here and now of Stellar, sticking to what we believe are the most salient takeaways from our combined financial condition at the end of 2022, our Q4 operating performance, and what it all means for our outlook. I'll turn the call back to Bob, and he'll open it up for questions.
Before diving in, I'll note that while I won't be directly referencing the accompanying investor presentation, there's a good amount of detail included in the presentation regarding merger accounting adjustments, non-GAAP items, and other information. I'll start with our financial condition, which reflects the impact from purchase accounting and the strategies we executed in the fourth quarter. We ended the year with $10.9 billion in assets after accounting for the merger and results of operations for the quarter. As we previewed on our third quarter call, the fair value purchase accounting adjustments were meaningful given where the yield curve was at the effective time of the merger. The impact of losses in the securities portfolio to equity were already accounted for in AOCI, amounting to $69.8 million after tax.
The impact of bringing the CBTX loan portfolio over at fair value was even more significant, as the fair value mark on the loan portfolio totaled $166.4 million and was mostly interest rate-related. The combination of these items led to more goodwill resulting from the merger, incrementally impacting capital and tangible book value per share. Going forward, we'll effectively earn that loan mark back through pretty significant purchase accounting accretion to loan yields over the life of the acquired loans. The next most significant merger accounting adjustment was the $138.1 million core deposit intangible created in the merger. This totaled approximately 3.97% of core deposits, which is relatively high and reflective of the nature of the yield curve at 9/30 and the high-quality composition of the CBTX deposit franchise.
The resulting CDI will be amortized on an accelerated basis over 10 years using sum-of-the-years'-digits method. This expense represents a partial offset to the beneficial dynamic of purchase accounting accretion revenue from the loan marks. The last significant merger-related item I'll note is the day two provision of loan losses for non-PCD loans under CECL, which totaled $28.2 million, along with a $5 million day two provision for unfunded commitments on loans running through the income statement. We also brought over $7.5 million in allowance for credit losses on PCD loans, which did not run through the income statement.
As for our progress during the quarter, we ended the quarter with $7.75 billion in loans, which after adjusting for the previously mentioned merger-related fair value marks on loans, reflects an increase in loans over the quarter of around $200 million. This represents what we feel like is an appropriate deceleration of loan growth from prior quarters given current market dynamics. During the quarter, we saw deposits decrease $116.9 million in the quarter from a combined $9.38 billion at 9/30 to $9.27 billion at the end of 2022. $100.7 million of this decrease came by way of interest-bearing deposits.
Even though we saw an incremental decrease in non-interest-bearing deposits totaling $16 million, we feel great about our deposit composition, with 45.6% of our deposits being transactional, non-interest-bearing deposits. The cost of our interest-bearing deposits has continued to increase, reflective of current industry markets and a fiercely competitive deposit market. We feel very good about how we've been able to manage these dynamics relatively speaking. Strategically, we're really pleased with our balance sheet positioning going into 2023, particularly considering our loan deposit ratio of 83.7%, solid capital levels, and a strong core earnings power to support a healthy go-forward capital build. Pivoting to earnings, our fourth quarter results were noisy. Our bottom line was $2.1 million in net income, translating to $0.04 in EPS.
These headline numbers were impacted significantly by merger-related and non-recurring items, which obscure the continuation of many positive operating trends both ABTX and CBTX brought into the Stellar combination. Net interest income and net interest margin were extremely strong, thanks in part to purchase accounting accretion into loan yields. Even after adjusting for this, we're very proud of our revenue profile, notwithstanding market dynamics driving cost of funds upward. Headline NIM was 4.71%, after excluding purchase accounting accretion, adjusted net interest margin was 4.38%. Purchase accounting accretion was $8.2 million in the quarter. The future recognition of purchase accounting accretion will be driven by its scheduled and non-scheduled paydown behavior in the acquired portfolio.
Our current expectations are for 2023 would be to recognize between $26 million and $30 million of purchase accounting accretion income into yield. This will be partially driven by our expectation that fewer lower yielding loans will pay down early in the current interest rate environment. Walking down the income statement, it's hard not to notice that outside provision for loan losses in the quarter totaling $44.8 million. We hit on this in the merger accounting discussion, but it's important to note that after excluding that day two CECL provision of $28.2 million on non-PCD loans and $5 million provision for unfunded commitments, our quarterly provisioning amounted to $11.6 million, reflective of our more conservative view on credit given increasing economic uncertainty, loan growth, and changes in specific reserves.
The total allowance for credit losses ended the year at $93.2 million or 1.2% of loans. Before moving on, I should note that we did have a higher than usual net charge-offs number during the quarter, totaling $5.7 million, of which $4.6 million related to the proactive sale of $35.4 million in loans. Most of these loans came over with meaningful marks such that the actual sale netted a gain despite the charge-offs. This is a good segue into our non-interest income, which was also bolstered by these gains and other gains totaling $4 million. $1.9 million related to the loan sale we just mentioned.
About $1 million came from the sale of branch assets. The remainder came from that strategic sale in October of more than $350 million in acquired securities to support our liquidity profile. Bob mentioned this, and we discussed this on our prior earnings call. Moving on to non-interest expense. This was elevated in the quarter due to the recognition of $11.5 million in merger-related expenses and the introduction of merger CDI amortization into our expense base, which totaled $6.3 million for the quarter. During 2023, scheduled CDI amortization expense from the merger will total $24.5 million in addition to the $2.3 million in scheduled CDI amortization from prior deals.
Holding aside the M&A expense noise and the introduction of CDI amortization expense, we feel very good about our core operating expenses in the fourth quarter, a result of both legacy ABTX and CBTX doing an exceptional job holding the line on non-interest expenses in an otherwise very inflationary environment. We're proud of being able to do this without hindering growth since the merger announcement. From an overall performance standpoint, after excluding merger-related expenses and the non-recurring gains, purchase accounting accretion, and that CDI amortization, we feel very good about where we've set the bar for our adjusted pre-tax, pre-provisioned earnings power in the fourth quarter at Stellar at $53 million. This represents 1.92% of average assets. We believe this strong core operating earnings power will drive rapid capital builds.
Once the non-recurring merger noise subsides, the remaining merger-related accounting items will be additive to our core operating earnings power since we expect merger-related purchase accounting accretion to exceed the amortization that CDI created in the merger. In summary, we feel pretty good about our combined positioning on earnings, liquidity, capital, and credit, which we know will prepare us for a wide range of economic scenarios. As we look into 2023 and beyond, we are hyper-focused on maintaining the absolute and relative financial and strategic gains from our merger. We feel well-positioned to withstand and advance our business, notwithstanding the potential challenges 2023 can bring. Thank you. I will now turn the call back over to Bob.
Thanks, Paul. We'll be happy to answer some questions around trying to help the folks get through this kind of noisy quarter. Operator, we're ready for questions.
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 while we compile our Q&A roster. Our first question comes from the line of David Feaster with Raymond James. Your line is open. Please go ahead.
Hey, good morning, everybody.
Good morning.
Good morning.
I just wanted to start maybe with if you could just give us some color on the economic backdrop in Houston. Obviously, the economy is strong, but I was hoping you could kind of give us a pulse from your perspective on your clients, how demand for loans is trending, and then also your appetite for credit. I mean, obviously the economic backdrop's a bit uncertain. So where are you seeing, where are you still seeing good risk-adjusted returns? Ultimately, how do you think about loan growth for this year?
All right, David, I'll start on that. This is Ray. On the economic background in Houston is still strong. We had, you know, don't have full 2022 job numbers in yet, but it's expected to be somewhere around 150,000 in job growth for the year, which is a strong year.
You know, maybe taper down a little bit in December. That looks good. Our pipeline going into the fourth quarter, we knew was a little, was less than the prior quarter, and that really manifested itself through less originations in the fourth quarter, but still really strong. Think about it, we originated about $1 billion in the third quarter and on a combined basis, and then about $850 million or so in the fourth quarter. Kind of knowing that the demand had tapered just a little bit it did in our pipeline, it did manifest that way in originations. I think I'll let Bob talk about kind of how Kind of the message around our approach to lending given the uncertainties in the economic environment.
Overall, we still have a healthy pipeline, even as we think about 2023 and think about our loan growth in 2023, even all of that probably still in the low to mid single digits. Turn it over to Bob.
Yeah, David, I think what we're trying to adjust to is what may happen in the future, which for us is uncertainty. Nobody likes uncertainty. I think we need to be in front of this stuff. We're enhancing our credit underwriting, making sure that we do the right things, and it slows things down a bit. Also in these rising interest rate environments, we see these cycles where at first, the rising interest rates are sort of ignored. Customers continue to buy at low cap rates, and then they start to find it's very difficult to get things financed at the rates that they are trying to buy the assets. You start to see cycles of really repricing of those assets.
We get to the point where people are hesitant because now there's a lot of talk about when are the rates going to come back down again. You get people, "Well, I'm going to hold off on my project until maybe rates come down. I don't want to borrow at 8%." We're in that phase where there's a lot of uncertainty. We want to be cautious around that as we move through this cycle. We still have a decent pipeline. It's not as robust as what we had in 2022. We had some pretty substantial loan growth in 2022. We do believe the Fed. We think the Fed is going to continue on to possibly have rates around that 5.25 number.
We have to be prepared for the effects of that. We're watching our portfolio and watching what we put on.
Okay. That makes sense. Kind of along the same line, this is where I think, you know, the timing of the deal is really opportune, just given the economic backdrop. You know, I wanted to get an update. We talked, we got the conversion and integration upcoming. I was hoping you could just maybe update us on the timing of the synergies. Is that timeline still on track? Then, you know, just whether you've identified any other levers to pull, just given the increased scale to help maybe decelerate expense growth and whether there's any change to that overall synergy target.
Totally. No change to the synergy target. It has been invaluable in really offsetting what's been a very inflationary environment. As you know from prior calls, we've been able to hold the line and really pull through a lot of merger cost savings up to this point. We're going to be getting perhaps almost all the way there by mid-year. There's a couple of expense items that will drop off to absolutely finish things at the end of 2023, but that's relatively low, relatively small compared to the overall kind of success on cost saves. We do continue to have more levers.
I appreciate your hitting on the fortuitous timing of the merger because, we feel like this merger gives us a lot more financial flexibility going into uncertain times and more levers to potentially, pursue additional cost savings. We're just better off, with combined scale to confront, these uncertain times. We'll be better off when it's time to go back on offense.
We are—
Yeah.
on schedule for conversion.
Terrific. That, this kind of $68 million, you touched on the CDI and some of those impacts, but this kind of $68 million run rate's a pretty good starting base on a core basis?
Actually, that's a hair high. You know, I look at kind of core expenses now that you have the introduction of that very large CDI expense coming from the merger. Core non-merger related or non-redundant expenses in 2022 is probably going to run around $265 over the year. You know, you can chop that into quarters as you see fit. There's a broad target for us. Naturally, our execution will be a function of what's coming by way of opportunities. We're not going to shy away from opportunities if the right people and/or investments come along in 2023. Currently, that's our target, give or take.
Was that 255 or 265?
Sixty-five.
Okay.
With the CDI, of course.
Got it. Just last one for me. I wanted to touch on the $35 million in loan sales. Sounds like we're just kinda cleaning things up just given the deal and, you know, the uncertain backdrop, just kinda getting ahead of some issues or some potential issues. Just curious if you could give us some color on that. What did you sell? Were these on the Allegiance or CBTX side, or both? Then was there anything unique in this pool where you're saying this is something maybe we want to pull back on or anything we're a little bit that makes us a bit cautious at this point?
Yeah, David, what's unique to them is it was basically the hangover that we had from COVID. We had about 4 or 5 credits that were really struggling at post-COVID, and we were having to put pretty heavy marks on those credits anyway. They were rocking along. They were still alive and still trying to be worked out, but it was going to be long-term workouts for us with real uncertainty as to what the end might be. We opted for certainty around what those losses might be in those portfolios as we were able to come inside our marks. That's really what we did. We sort of cleared the COVID piece of that.
Got it. That makes sense. Thanks, everybody.
Thanks, David.
Thank you. One moment for our next question. Our next question comes from the line of Brad Milsaps with Piper Sandler. Your line is open. Please go ahead.
Hey, good morning, guys.
Morning.
Morning.
Thanks for, thanks for all the color. Maybe I wanted to start with the core net interest margin, Paul. Maybe could you give us an updated sense of, you know, kind of what you feel like your maybe loan or earning asset beta will be going forward, as well as kind of how to think about the, you know, the interest-bearing or the total deposit beta at the combined company and how that, you know, would impact your core NIM?
Certainly. Well, we're actually really proud of where our kind of cumulative beta is up to this point. We've obviously had a measure of acceleration in the cost of funds here in the fourth quarter. A lot of people calculate it certain different ways, but we're solidly in the low end of the low teens relating to cumulative cycle deposit betas on the overall portfolio. This is hugely benefited from our very large non-interest-bearing deposit base, and that's been really powerful in holding down that overall deposit beta and ultimately giving time for our loan betas to move. Really, our loans are going to be changed as a function of repricing opportunities. For some loans, we have to wait there.
Ray can probably comment a little more on the composition of the loan portfolio, but we feel good about the overall kind of pace of things, notwithstanding the fact that we've seen the cost of deposits start to accelerate a little more to give time for that repricing on the asset side.
Yeah, just a little color on the loan, on the loan yield side, or at least the average weighted rate on those loans. For the fourth quarter, loans came on at a weighted average rate of 6.64%, which was a nice increase from the previous quarter. Just to show a little bit of the intra-quarter, we did have that towards the last half of the quarter, loans were coming on at 6.90%. Feel really good about where the new loan originations are as far as that rate, the rate on those loans.
Yeah, no, that's helpful. Ray, can you just give us a, a new kind of breakdown of, you know, kind of variable versus fixed, you know, stuff that would reprice, you know, immediately with changes?
Sure. Yeah. In the combination, obviously, we had, you know, Community came with higher concentration of floating in the total portfolio. On a combined basis, we're around 58% fixed, 42% floating. I'd have to where we are on the floating and kind of breaking through, I don't think I have that handy.
Yeah. Sure. No problem. I mean, it looked like the loan beta was just under 30% in the quarter. Basically you're that should continue to improve as some of this repricing takes place.
Right.
Got it. Okay. Paul, just I think I heard you correctly. It looks like you have about a little over $150 million in discount in total that you'll recognize over the life of the loan, that's versus about $130 million of CDI or so that you set up. Is that the way to think about it?
That's the way to think about it. Now, the CDI-
Okay.
We gave you a little bit of guidance as to how it's scheduled expense that will come through. I think we've included that in the investor presentation and I mentioned in my comments. We're amortizing that on an accelerated basis.
Got it. Then I know you had the loans that you sold and cleaned up this quarter, so that probably drove a little bit of higher core provision. You know, a lot of companies when they come together, you know, because of the marks, they, you know, maybe have a really low provision, you know, for a certain period of time. Can you sort of help us think about, you know, how you guys will be tackling that? I know there's a lot of moving parts with CECL and marks, et cetera, but, just kind of curious how to think about sort of your core loan loss provisioning rate.
Yeah. I think where we sit right now is how we're looking at net loan growth in the future. It's a lot of moving parts that got our provisions, pardon me, our allowance for credit losses to 1.2% of loans. Kind of in a rule of thumb as to how we were looking at the budgeting, we think that's appropriate for net loan growth expectations in 2023. There was a lot that went into it, and a big piece of that is a little bit of what we're seeing in the economy. We definitely leaned a little bit more conservative relative to prior periods, and we believe that's appropriate. We'll continue to keep our finger on the pulse as want to go forward.
Got it. Just final two for me, just for clarity. The 265 expense number, does that include CDI? Then what would be a good combined tax rate for the combined company?
All right. That includes CDI, but it doesn't include non M&A expenses-
Sure
measure of expenses that we'll be rolling off, mostly in the fourth quarter. First quarter, I should say. I need to make that distinction. What was the last part of the question?
Just the tax rate for the combined company.
All right. I'd put it at a hair under 20, and that'll largely be a function of, you know, the dynamics in the securities portfolio.
Got it. Okay. Thank you very much. I appreciate it.
Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Matt Olney with Stephens. Your line is open. Please go ahead.
Thanks. Good morning, everybody.
Good morning, Matt.
Just following up on that last question from Brad, on expenses. Paul, what's your estimate of the remaining non-core expenses we could see for the rest of the year?
About $5 million front end loaded. Might come in less, might come in more.
want to hit on liquidity. I think you mentioned on the last call that you sold some securities immediately following the deal closing. Remind me of that amount of securities and I guess from here, what kind of cash flow are you looking for from your existing securities on the portfolio in 2023?
Sure thing. We sold about just over $350 million in securities, which represented about 59% of the CBTX portfolio that was brought over. After that sale, we're looking at annual cash flows, approximating maybe falling a hair short of $200 million a year in the first couple years. We see a significant source of liquidity from a cash flow perspective coming out of the securities portfolio in the near term, to better position us.
Okay. Thanks for that, Paul. On the capital front, looks like the CET1's around 10%. It feels like that could build pretty quickly given the profitability here. Any updated thoughts you have on capital? Any other just general capital actions being considered right now?
I'd say the first capital action is to build. We, as a by-product of these merger accounting adjustments ended up with lower capital than we're used to carrying and lower capital than we expected to be carrying post-merger. Obviously a function of the interest rate environment. We wouldn't trade it by the way, because we've got a great earnings stream that comes from this interest rate environment. It did obviously put a transitory hit on kind of that initial capital ratios coming out of the deal here. We feel good about where we stand, but given all the uncertainties in the economy, we're looking forward to seeing that capital build relatively rapidly to give us more financial flexibility going forward to consider other capital strategies. First and foremost, we want to see that build.
We're fine with where it is, but we're more is better, in the current environment, and we look forward to seeing that build first and foremost such that we can be strategic down the line.
Okay. Thanks for that, Paul. I guess a clarification point from previously. I think you mentioned the expected CDI expense from the transaction in 2023, the 24 and a half million dollars in the presentation. Did that include or exclude the additional $2 million from prior deals?
That excludes.
Excludes. Okay. We'll add that as well. Okay, that's all from me. Thanks, guys.
Thanks for asking.
Thank you. Again, if you would like to ask a question at this time, please press star one one on your telephone. One moment for our next question.
Our next question comes from the line of Will Jones with KBW. Your line is open. Please go ahead.
Hey, great. Thanks. Good morning, guys.
Morning, Will.
I just wanted to follow up on the margin discussion. Paul, it sounds like, I know you guys expect maybe deposit costs to accelerate a little bit from here, and you're also optimistic on the loan side with some repricing opportunities upcoming and you're getting, you know, good yields on your new loans coming on. It feels like, you know, just reading the whole picture that, you know, maybe the margin has a little bit of opportunity to expand from here. Maybe that this is not a peak in the fourth quarter. I was hoping you could give us a little, you know, commentary over how you think the margin, you know, proceeds from here.
Certainly. We feel like there is the possibility for additional upside, but we're not focused on that. We're focused on protecting what we feel is a superlative net interest margin profile. It's more about protecting this on the go forward. To the extent we can add to it incrementally, that will be gravy. The real task in 2023 and beyond is protecting the advances we've really built into our business model through this merger. The NIM profile is a big piece of that. We're humbled by the current industry environment, so it's extremely competitive out there, but we are bullish about our ability to maintain the strategic and absolute advantages of merging our two companies here and creating Stellar.
Great. That's, that's super helpful. Thank you for that. Just thinking about the balance sheet as a whole. You know, there's obviously a lot of moving pieces at deal close with, you know, the selling of some loans and the wind down of CBTX bonds. It's really left you in a great spot when you think about it, though, you know, minimal wholesale reliance and a good cash position. Just are you guys happy with where the balance sheet, you know, landed, you know, post-deal close? Is there any more heavy lifting to be done in terms of some restructuring?
Then just, you know, given, you know, the added, you know, flexibility you guys have built into the balance sheet, do you feel like maybe you could be a little bit more aggressive on the loan growth front in the coming year? Ray, I think you've mentioned a low to mid-single digit, you know, growth range, but do you at least come at the high end of that?
We want to afford ourselves the flexibility to be on the high end of that, but we don't want to be in a position where we need to be on the high end of that. This isn't the market to be a hero in. Ultimately, we are managing our balance sheet for ultimate financial flexibility. We just don't want to find ourselves in a pinch relating to capital, liquidity or credit. We'll continue to be strategic to keep ourselves in the have category in all of those important subjects.
Yeah. Well, I think, you know, we finally get an opportunity to shine as a core funded institution. It's something that it's been a while since relationship banking and core funding has been celebrated. I think this is a better time to recognize the value of this franchise. We're going to try to take advantage of that and utilize that to help grow our franchise in the future. We feel like we're well capitalized. Nothing is off the table for us as far as the options that we have. We're going to just see what the right things to do. It also provides us a good backdrop as we move through sort of a more challenged economic times, at least uncertain.
There's no place I'd rather be than Houston, Texas, to operate.
Yep, totally understood. Thanks again, guys. Just one more if I could sneak it in. The buyback, I know you guys have talked about it before, you know, as being a tool in the tool belt. Is that something that, you know, we could see, you know, come to fruition here, you know, now that you have an idea of the pro forma capital and just any thoughts over the buyback would be great.
Sure. We love and value always having that tool in our tool belt. In the near term, we're going to be focused on building capital. We value the flexibility of having that as a tool.
Yep. Got it. Thanks, guys. Appreciate the color.
Thanks, Will.
Thank you. Thank you. One moment please. We do have a follow-up question with Steven. Your line is reopened. Please go ahead.
Yeah, thanks for taking the follow-up. Just want to jump on and ask Paul more about some of the commentary around the core margin. I think you said, Paul, you want to make sure you protect the core margin in 2023. We can interpret that lots of ways. I'm curious any other color you can give us about protecting that margin. Should we assume that's around from the perspective of the bank being pretty asset sensitive, kind of entering a time period of more rate uncertainty? Or how should we interpret that comment?
I'd interpret it more strategic, and then maybe give you a preview of what you'll see when we put out our 10-K. That is, we are actually, at the current juncture, relatively neutral from an industry risk standpoint. That said, we've generally benefited on net interest income in excess of our models by virtue of our betas in our models being more conservative. I would adjust that to say that there still is a asset sensitive lean, but it's not necessarily as pronounced as it was historically with legacy CBTX.
Okay. Is that, would you characterize the bank as satisfied with the current industry positioning and the lean that you mentioned, or are you suggesting there could be potentially additional actions in the future?
We're continually evaluating how we manage the balance sheet. Right now, we feel good about the direction, the direction of our net interest income and the absolute value of our net interest income and margin. The real goal is to protect it and a real bonus if we're able to meaningfully grow it.
Okay. Got it. Thanks, guys.
All right.
Thank you. I'm showing no further questions, and I'd like to hand the conference back over to CEO Bob Franklin for any further remarks.
Michelle, thank you, and thank everyone for their interest in Stellar Bancorp, Inc..
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.