Q1 2024 Stellar Bancorp Inc Earnings Call
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Stellar Bancorp, Inc. First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise.
Ladies and gentlemen, thank you for standing by and welcome to the Sterling Bancorp, Inc.
First quarter 2024 earnings call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Operator: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. I will now hand today's call over to Courtney Theriot, Chief Accounting Officer. Please go ahead.
If you'd like to ask a question. During this time simply press star followed by the number one on the telephone keypad.
If you want to withdraw your question Press Star one again.
Speaker Change: I will now hand todays call over to call it their chief Accounting Officer. Please go ahead.
Courtney Theriot: Good morning. Our team would like to welcome you to our earnings call for the first quarter of 2024. This morning's earnings call will be led by our 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.
Speaker Change: Good morning, actually I would like to welcome you to our earnings call for the first quarter of 2024.
Speaker Change: Starting with the earnings call will be led by our CEO, Bob Franklin and CFO.
Speaker Change: Also in attendance today are Steve Retzloff executive Chairman of the company regulatory President of the company and CEO of the bank and go with the 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 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.
Speaker Change: Before we begin I need to remind everyone that remarks made today constitute forward looking statements as defined in the private Securities Litigation Reform Act of 90 to 95 as amended.
Speaker Change: We intend all such statements can be covered by the safe Harbor provisions for forward looking statements contained in the act.
Speaker Change: 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 release are subject to change we disclaim any obligation to publicly update and any forward looking statements, except as may be required by law.
Courtney Theriot: 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.stellar.bank, for additional information about the risk factors associated with forward-looking statements. At the conclusion of our remarks, we will open the line and allow time for questions. I will now turn the call over to our CEO, Bob Franklin.
Speaker Change: Please see the last page of the text in this morning's earnings release, which is available on our website at IR dot stellar to Dodd Frank for additional information about the risk factors associated with forward looking statements.
Speaker Change: 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.
Robert R. Franklin: Thank you, Courtney. Good morning, and welcome to the Stellar Bancorp First Quarter Earnings Call. The Stellar Bank team remains focused on building the Stellar Way. Thank you to all the Stellar team members for continuing your efforts to strengthen our bank and create shareholder value. Our aim has not changed as we continue to build capital, strengthen liquidity, and closely watch our credit. We are a community bank. That is our heritage and our culture. We work with our customers as they work with us. Higher interest rates have put a strain on existing cash flows on certain projects.
Robert R. Franklin: Thank you Courtney and good morning, and welcome to the stellar Bancorp first quarter earnings call.
Robert R. Franklin: Excuse me then the stellar bank team remains focused on building the stellar way. Thanks.
Robert R. Franklin: Thank you to all the stellar team members for continuing your efforts to strengthen our bank and create shareholder value.
Robert R. Franklin: Our aim has not moved as we continue to build capital strengthen liquidity and closely watch our credit.
Robert R. Franklin: We are a community bank that is our heritage and our culture.
Robert R. Franklin: We work with our customers as they work with us higher interest rates have put a strain on existing cash flows on certain projects, depending on the timing of underwriting we continue our efforts to identify potential challenges early.
Robert R. Franklin: Depending on the timing of underwriting, we continue our efforts to identify potential challenges early. As with new projects, we look to guarantee or support additional collateral and or paydowns as we work with our customers to get through the project cycle. Our intent is to stay close to our customers and closely watch those credits. We intend to stay well-reserved in the event we need to address stress.
Robert R. Franklin: As with new projects, we'd look to guarantor support additional collateral <unk> pay downs as we work with our customers to get through the project cycle.
Robert R. Franklin: Our intent is to stay close to our customers and closely watch those credits, we intend to stay well reserved in the event, we need to address stress.
Robert R. Franklin: As we work with our customers and identify stress, we may see our classified list expand a bit, but it does not appear that the ultimate stress level will result in significant losses, or the requirement of significant equity going into a project, or the pay down over the years has allowed us to exit credits without the losses that might otherwise be expected. Our customers are also bolstered by our good markets, holding asset values, and a significant amount of capital chasing deals. Houston saw its population grow by almost 140,000 people last year, second only to Dallas-Fort Worth.
Robert R. Franklin: As we work with our customers and identify stress we may see our classified list expand a bit.
Robert R. Franklin: But it does not appear that the ultimate stress level will result in significant losses.
Robert R. Franklin: Requirement of significant equity going into a project or the pay down over the years has allowed us to exit credits without the losses that might otherwise be expected.
Robert R. Franklin: Our customers are also bolstered by our good markets holding asset values and a significant amount of capital chasing deals Houston saw our population grow by almost 140000 people last year second only to Dallas Fort worth we created over 100000, new jobs last year.
Robert R. Franklin: We created over 100,000 new jobs last year. Our future is bright, and we operate in one of, if not the best, markets in the United States. We maintain a great deposit base, have good liquidity, strong capital, and good credit metrics. We understand what we need to do as the Federal Reserve fights inflation with higher interest rates. Our intention is to stay focused on the fundamentals of our roadmap for success. I will now turn over the call to Paul Egge, our CFO.
Robert R. Franklin: Our future is bright and we operate in one of if not the best markets in the United States, We maintain a great deposit base have good liquidity and strong capital and good credit metrics, we understand what we need to do as the federal reserve fights inflation with higher interest rates.
Our intention is to stay focused on the fundamentals of our roadmap of success I will now turn over the call to Paul <unk> our CFO.
Paul P. Egge: Thanks, Bob, and good morning, everybody. We are pleased to report first quarter net income of $26.1 million, or 49 cents per diluted share, which represents an annualized return on average assets of 0.98% and an annualized return on average tangible common equity of 11.47% as compared to fourth quarter earnings of $27.3 million, or $0.51 per diluted share, which resulted in an ROAA of 1.02% and a return on tangible common equity of 12.61%.
Paul: Thanks, Bob and good morning, everybody. We're pleased to report first quarter net income of $26 1 million or.
Paul: <unk> <unk> 49 per diluted share, which represents an annualized return on average assets of <unk>, 98% and an annualized return on average tangible common equity of 11, 47% as compared to fourth quarter earnings of $27 3 million or <unk> 51 per diluted share, which made for an Roe.
Paul: A one 2% and a return on tangible common equity of 12 six 1% at.
Paul P. Egge: As Bob mentioned in his commentary, we are continuing our focus on capital, liquidity, and credit in 2024. As it relates to balance sheet management, this means that we have been taking a defensive posture, putting a lower emphasis on loan growth and a higher emphasis on optimizing asset and liability composition, building liquidity, maintaining a neutral interest rate risk position, and accruing capital. And on the earnings front, we are doing our best to protect earnings power, notwithstanding pressures from the current interest rate environment and managing the responsibilities that come from having crossed the $10 billion asset threshold.
Paul: As Bob mentioned in his commentary we are continuing our focus on capital liquidity and credit in 2024.
Paul: So as it relates to balance sheet management. This means that we have been taking a defensive posture, putting a lower emphasis on loan growth and a higher emphasis on optimizing asset and liability competition building liquidity, maintaining a neutral interest rate risk position and accruing capital.
Paul: And on the earnings front, we are doing our best to protect earnings power notwithstanding pressures from the current interest rate environment and managing the responsibilities that come from having crossed the $10 billion asset threshold.
Paul P. Egge: Net interest income for the quarter was $102.1 million, representing a decrease of $3.8 million from the $105.9 million booked in the fourth quarter of 2023. Most of this difference can be attributed to purchase accounting accretion decreasing $3.2 million relative to the prior quarter. This translated into a net interest margin of 4.26% in the first quarter, relative to 4.4% in the fourth quarter of 2023. However, excluding Perks County accretion, the net interest margin was unchanged from the linked quarter at 3.91%.
Paul: Net interest income for the quarter was $102 1 million representing.
Paul: Representing a decrease of $3 $8 million from the $105 9 million booked in the fourth quarter of 2023.
Paul: Most of this difference can be attributed to purchase accounting accretion decreasing $3 $2 million relative to the prior quarter.
Paul: This translated into a net interest margin of 426% in the first quarter relative to four 4% in the fourth quarter of 2023.
Paul: Excluding purchase accounting accretion net interest margin was unchanged from the linked quarter at 391%.
Paul P. Egge: Walking further down the income statement, we booked a $4.1 million credit provision in the quarter versus about $1 million in the prior quarter, largely reflective of appropriately conservative reserving for potential problem credit. Since annualized net charge-offs were very manageable at only four basis points of average loans, this provision puts our allowance for credit losses up to 1.22% of total loans from 1.16% in the prior quarter. Moving on to non-interest income, while not as large a portion of our revenue mix, non-interest income was a bright spot at $6.3 million for the quarter, thanks largely to a nearly half-million dollar gain on asset sales and some FBIC income as well. Last, non-interest expense for the quarter was in line with our expectations at around $71.4 million, which reflects certain seasonal dynamics such as annual merit increases and a seasonal uptick in payroll taxes from bonuses.
Paul: Walking further down the income statement, we booked a $4 1 million credit provision in the quarter versus about $1 million in the prior quarter largely reflective of appropriately conservative reserving for potential problem credits.
Paul: Since annualized net charge offs were very manageable at only four basis points of average loans. This provision puts our allowance for credit losses up to 122% of total loans from 116% in the prior quarter.
Paul: Moving on to noninterest income, while not as large a portion of our revenue mix noninterest income was a bright spot at $6 3 million for the quarter. Thanks, largely to nearly half a million dollar gain on asset sales and some FDIC income in the quarter.
Paul: Noninterest expense for the quarter was in line with our expectations at around $71 4 million.
Paul: Which reflects certain seasonal dynamics, such as annual merit increases and a seasonal uptick in payroll taxes from bonus payments.
Paul: We remain focused on managing expenses as effectively as possible, while also managing investments in the infrastructure necessary to operate above the $10 billion threshold.
Paul P. Egge: We remain focused on managing expenses as effectively as possible while also managing investments in the infrastructure necessary to operate above the $10 billion threshold. Given cumulative industry pressures, we feel good about our results, our ability to protect earnings power relative to the industry, and our positioning for the future. As it relates to capital, we've been very successful growing our regulatory capital ratios since the merge. Total risk-based capital was 14.62% at the end of the first quarter, relative to 14.02% at the end of 2023 and 12.39% at the end of 2022.
Paul: Given cumulative industry pressures, we feel good about our results our ability to protect earnings power relative to the industry and our positioning for the future.
Paul: As it relates to capital we've been very successful growing our regulatory capital ratios since the merger totaled.
Paul: Total risk based capital was $14, 60% at the end of the first quarter relative to 14, 2% at the end of 2023 and 12, 39% at the end of 2022.
Paul: This progress has been consistent across all regulatory capital ratios and is reflective of our tangible book value growth since closing the merger.
Paul: Relatively strong earnings notwithstanding accelerated amortization of CDI expense has been a really solid driver to our internal capital generation since the merger and we like our prospects for continued internal capital generation.
Paul P. Egge: This progress has been consistent across all regulatory capital ratios and is reflective of our tangible book value growth since closing the merger. Relatively strong earnings notwithstanding accelerated amortization of CDI expense have been a really solid driver of our internal capital generation since the merger, and we like our prospects for continued internal capital generation. On the topic of purchased accounting items, we ended the quarter with $110.5 million in core deposit and tangible assets and a loan discount of $98.2 million for May.
Paul: On the topic of purchase accounting items, we ended the quarter with $110 5 million and core deposit intangible assets and a loan discount of $98 $2 million remaining.
Paul: Our funding profile remains strong despite seeing our noninterest bearing deposits fall below the 40% threshold, but it highlights the extent to which funding mix impacts our business.
Paul: <unk> has the potential to be somewhat of a drag on go forward net interest margin, but we remain bullish on our ability to continue to compare favorably in the industry on NIM and the value of our strong deposit franchise in the Houston region.
Paul: Speaking of Houston, Bob mentioned that 2023 data on the metropolitan area of extraordinary population gains.
Paul: I'll only add that the population growth staff of Houston and Dallas in 2023 are notably far ahead of the pack relative to the most populous metro areas in the U S in both absolute value and percentage terms.
Paul P. Egge: Our funding profile remains strong despite seeing our non-interest-bearing deposits fall below the 40% threshold, but it highlights the extent to which funding impacts our business. This has the potential to be somewhat of a drag on future net interest margins, but we remain bullish on our ability to continue to compare favorably in the industry on NIM and the value of our strong deposit franchise in the Houston region. Speaking of Houston, Bob mentioned the 2023 data on the Metropolitan Area's Extraordinary Population. I'll only add that the population growth stats of Houston and Dallas in 2023 are notably far ahead of the pack relative to the most populous metro areas in the U.S. in both absolute value and percentage.
Paul: Key drivers continue to be jobs and relative affordability.
Paul: So the overall strength of the markets, we serve and our strategic positioning gives us further comfort and stellar.
Paul: Potential for success in 2024 and beyond.
Paul: Thank you and I will now turn the call back over to Bob.
Robert R. Franklin: Thank you Paul and operator, we're ready to take questions. If there are any.
Operator: Thank you if you want to ask a question press star one on your telephone keypad.
Speaker Change: The question has been answered and you'd like to remove yourself from the queue Press star one again, well pause for just a moment to compile the Q&A roster.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Your first question is from David.
David: With Raymond James.
David: Hey, good morning, everybody.
David: Alright.
David: Yes.
David: Maybe let's start with loans I'm curious some of the drivers behind.
David: The decline in loan balances I mean, we talk about a slower pace of growth, but I was curious maybe you or if your appetite for credit has changed or demand has weakened.
Paul P. Egge: Key drivers continue to be jobs and relative affordability. So the overall strength of the markets we serve and our strategic positioning gives us further comfort in Stellar's potential for success in 2024 and beyond. Thank you, and I will now turn the call back over to Bob.
David: And just any color on how the pipeline is trending and expectations for growth and maybe what youre hearing from your clients more broadly.
Ray: Hey, David It's Ray.
Robert R. Franklin: Thank you, Paul and operator. We're ready to take questions if there are any. Thank you.
Ray: So when you look at the first quarter of that.
Ray: While we did originate we originate about $335 million of new loans up a little bit from the.
Operator: Thank you. If you'd like to ask a question, press star 1 on your telephone keypad. If your question has been answered and you'd like to remove yourself from the queue, press star 1 again. We'll pause for just a moment to compile the Q&A roster. Your first question is from David Feaster with Ramon James.
Ray: The fourth quarter, but kind of in line with the.
Ray: The quarter prior to that which really talks about this posture that we've had.
Around.
Ray: Around loan origination so.
Ray: That level of $3 35 could could generate.
Ray: Low single digit growth, but we're still seeing.
David Pipkin Feaster: Hey, good morning, everybody.
Ray: And what we believe to be healthy payoffs, we had $256 million of payoffs in the quarter. So when you take that and or as you look at our where we've.
Ramon A. Vitulli: I'd like to start with loans. I'm curious about some of the drivers behind, um, the decline in loan balances. I mean, we'd talk about a slower pace of growth, but I was curious maybe if your appetite for credit has changed or demand has weakened, and just any color on how the pipeline's trending and expectations for growth, and maybe what you're hearing from your clients more broadly.
Ray: What we've done around construction development lending, where we're really in that what we call. The carried piece, we're not getting the lift of where you would have advances exceeding payoffs like we had in the past so thats really.
Ray: Bringing nothing to the loan growth piece, because it's about equal. So it's really a function of what are those new loans fund that and what it what it was or payoff experience. So that's really what drove the net decrease.
Ramon A. Vitulli: Hey, David, it's Ray. So when you look at the first quarter of that, while we did originate, we originated about $335 million of new loans, up a little bit from the fourth quarter, but kind of in line with the..., quarter prior to that, which really talks about this posture that we've had around loan origination. So, you know, that level of 335 could generate low single-digit growth, but we're still seeing what we believe to be healthy payoffs.
Ray: I think that 300, and 300 million or so plus range it could still deliver low single digit it just depends on.
Ray: Were those fund and what happens if that if those payoffs levels continue that $2 $52 56 for the quarter and payoffs is consistent with what we've seen really over the last five quarters and payoffs.
Ray: And of those new loans booked we felt really good around around where those are coming in pricing wise those new loans came on at 849, which is really a high level Mark when you look over the past four or five quarters.
Ramon A. Vitulli: We had $256 million in payoffs in the quarter. So when you take that and as you look at what we've done around construction development lending, where we're really in that what we call the carried piece, we're not getting the lift of where you would have advances exceeding payoffs like we have in the past.
David: David Ive got you.
David: Okay.
David: The we do have some restrict our underwriting around a lot of this and so I think that's slowed the pace of it a bit.
Speaker Change: And then just higher interest rates I think a slow demand of that so.
Speaker Change: The combination of all of that there is still there's still business out there, but it is slower than it has.
Speaker Change: Ask them.
Ramon A. Vitulli: So that's really... for bringing nothing to the loan growth piece because it's about equal. So it's really a function of what those new loans fund at and what our payoff experience is. So that's really what drove the net decrease. I think in that $300 million or so plus range, it could still deliver a low single digit. It just depends on where those funds are found and what happens if those payoffs levels continue. That $256 million for the quarter in payoffs is consistent with what we've seen really over the last five quarters in payoffs.
Speaker Change: Okay. That's helpful.
Speaker Change: And then maybe just touching on the other side with core deposit trends, especially on the Niv front.
Speaker Change: How did that trend throughout the quarter was that front end or back end weighted and just could.
Speaker Change: Could you touch on your core deposit growth initiatives, and where you are having success.
Speaker Change: Especially just kind of thoughts on how you think about <unk> trends as well.
Speaker Change: Well.
Speaker Change: We still like what we're seeing on the.
Speaker Change: On our new account onboarding, it still looks to support that kind of the nib that we've historically maintained.
Ramon A. Vitulli: So, and of those new loans booked, we felt really good about where those are coming in pricing-wise. Those new loans came on at $849, which is really a high-level mark when you look over the past four or five quarters.
Speaker Change: Our number of accounts, we're really good in the knit category just our dollar was a little little less than previous quarters, and the dollar amount associated that with which isn't uncommon those business accounts, usually don't start at a very high level. So.
David Pipkin Feaster: Thank you. Thank you.
Speaker Change: We're still onboarding solid accounts.
Ramon A. Vitulli: You know, we do have some stricter underwriting around a lot of this, and so I think that slowed the pace of it a bit. And then just higher interest rates, I think, have slowed demand a bit. So, combination of all of that, there's still business out there, but it is slower than it used to be.
Speaker Change: Of course, the MIB will take and then on the.
Speaker Change: On the interest bearing <unk>.
Speaker Change: Those came on it.
Speaker Change: We're pleased with the rate that those came on compared to the portfolio and.
Speaker Change: We're just still fighting the fight if when you look on the nib.
Speaker Change: It did drop there as a function of that of where where we had some broker deposits that took an impact that had an impact on the net when you look at the book without that it's still we still like where that sits.
David Pipkin Feaster: Okay, that's helpful. And then maybe just touching on the other side with core deposit trends, you know, especially on the NIB front. How did that trend throughout the quarter? Was that front end or back end weighted in? Could you touch on your core deposit growth initiatives and where you're having success, you know, and, you know, especially just kind of thoughts on how you think about NIB trends as well?
Also just a just a point that that decrease mostly came in that carrier what we call that carried portfolio. So the decrease was not a function of some kind of outsized level of closed accounts.
Speaker Change: Okay.
Speaker Change: Okay. That's good.
Speaker Change: Good color and then maybe just touching on asset quality more broadly.
Speaker Change: You guys have a great reputation as being a very conservative underwriter.
Ramon A. Vitulli: Well, we still like what we're seeing on our new account onboarding. It still looks to support that kind of NIB that we've historically maintained. Our number of accounts were really good in the NIB category. Just our dollar was a little less than previous quarters, and the dollar amount associated with that, which isn't uncommon. Those business accounts usually don't start at a very high level.
Speaker Change: The quick downgrades slowed upgrades Im curious what youre seeing on credit more broadly if you could touch on.
Speaker Change: What drove the increase in non accruals.
And just kind of what youre seeing.
Speaker Change: Perhaps more broadly on the credit front.
Speaker Change: Yes.
Joe: This is Joe.
Joe: In the non accrual space.
Ramon A. Vitulli: So we're still onboarding solid accounts. On the interest-bearing portion, those came on at a rate, we're pleased with the rate that those came on compared to the portfolio. And we're just still fighting the fight. You know, when you look at the NIB, when you look that it did drop, there is a function of that where we had some broker deposits that took an impact, that had an impact on the NI
Joe: A good portion of that about 60% of that was comprised of two C&I credits that we are currently actively managing that.
Speaker Change: Good morning management.
Speaker Change: Issues and experienced some problems. So we are actively managing those.
Speaker Change: So that drove most of that increase.
Speaker Change: A couple of isolated cases.
Speaker Change: A couple of smaller construction loans have run into problems and were.
Speaker Change: Appropriately watching those in <unk>.
Ramon A. Vitulli: When you look at the book without that, it's still, we still like where that sits. Also, just a point, that decrease mostly came in what we call the carried portfolio. So the decrease was not a function of some kind of outside level of closed account.
Speaker Change: Driven by.
Speaker Change: Some unexpected cost increases.
Speaker Change: Well, so that's kind of the driver of that and we also had to owner operated CRE loans.
Speaker Change: Rather the issues.
Speaker Change: We're dealing with so.
Speaker Change: That comprises the $18 million adjusted NPA is that you see reported in the Q.
David Pipkin Feaster: Okay, that's good color. And then maybe just touching on asset quality more broadly. You guys have a great reputation as being a very conservative underwriter, quick to quick downgrade, slow to upgrade. I'm curious what you're seeing on credit more broadly. Could you touch on, you know, what drove the increase in non-accruals? And just, again, kind of what you're seeing, perhaps more broadly, on credit?
Speaker Change: Okay.
Thanks for the color and everybody. Thank you.
Speaker Change: Okay. Thanks, Dave.
Speaker Change: As a reminder to ask a question press star one on your telephone keypad.
Speaker Change: Your next question is from the line of Matt Olney with Stephens.
Matthew Covington Olney: Hey, Thanks, good morning, everybody.
Matthew Covington Olney: Alright.
Matthew Covington Olney: I wanted to ask about.
Matthew Covington Olney: Core loan yields we saw some nice positive movements in the loan yields ex accretion.
Joe F. West: Hi, this is Joe. In the non-accrual space, a good portion of that, about 60% of that, was comprised of two CNI credits that we are currently actively managing that have run into some management issues and experienced some problems. So we're actively managing those. The so that drove most of that inquiry. In a couple of isolated cases, there were a couple of smaller construction loans that have run into problems, and we're appropriately watching those. They were driven by some unexpected cost increases as well.
Matthew Covington Olney: <unk>.
Matthew Covington Olney: Just remind us of your fixed and variable rate loan repricing schedule.
Matthew Covington Olney: That's coming up and just any more color on.
Matthew Covington Olney: Those recent levels that you've been receiving as far as newer loan yields and just any kind of commentary on kind of core loan yield outlook from here. Thanks.
Matthew Covington Olney: Matt I'll give you just a little bit of color there on so on the new loans as I mentioned 300.
$30 million came on at 849 is the note rate and then really on the on the repricing opportunity. That's probably just describe it in the amount of loans that renewed in the quarter, just all whether fixed or variable and that was mentioned before we typically renew around $600 million a quarter.
Joe F. West: So that's kind of the driver in that, and we also had two owner-operated CRE loans that ran into issues that we're dealing with. So that comprises the $18 million jump in the NPAs that you see reported in the queue.
David Pipkin Feaster: Okay. Thanks for the call, everybody.
Operator: As a reminder to ask a question, press star 1 on your telephone keypad. Your next question is from the line of Matt Olney with Stevens.
Matthew Covington Olney: It was $643 million for the first quarter and that renewed at 805. So if you kind of think about whats coming on with market new pricing.
Matthew Covington Olney: Hey, thanks. Good morning, everybody.
Matthew Covington Olney: 643, plus 328, now Theres a theres a funded component of that that's the that's the note amount, but I think that gives you kind of sum.
unknown: [inaudible] I want to ask about core loan yields. We saw some nice positive movements in the loan yields, X the accretion. Just remind us of your fixed and variable rate loan repricing schedule that's coming up and any more color on those recent levels that you've been receiving as far as newer loan yields and just any kind of commentary on the kind of core loan yield outlook from here. Matt, I'll give
Matthew Covington Olney: The range of what we're talking about with that.
Matthew Covington Olney: Close to was that a $1 billion between new and renewed with an eight handle.
Speaker Change: Yes, okay.
Speaker Change: That's helpful. And then I guess, just following up with that love to hear from them, maybe a credit perspective.
Ramon A. Vitulli: Matt, I'll give you just a little bit of color there on so on the new loans as I mentioned three hundred and thirty million came on at 849 is the note rate and then really on the on the repricing opportunity I'd probably just describe it in the amount of loans that renewed in the quarter just of all whether fixed or variable and that was mentioned before we typically renew around six hundred million dollars a quarter it was six hundred forty three million for the first quarter and that renewed at 805 so if you kind of think about what's coming on with market new pricing it was 643 plus 328 now there's a there's a funded component of that that's the that's the note amount but I think that gives you kind of some the range of what we're talking about with that you know close to was that a billion dollars between new and renewed with an aid handle
Speaker Change: Sure.
Speaker Change: As you renew those loans at higher levels.
Speaker Change: Just how that's being digested with some of the borrowers with higher debt.
That expense I don't know, if Joe or anybody else has any any views on just.
Speaker Change: The discussions with those with those borrowers digesting that.
Joe: Yes, Matt.
Joe: We have had conversations with our borrowers about that they've known it.
Joe: Got a maturity coming out to the right. So it will be higher and.
They are accepting of that.
Joe: We have a lot of good guarantor support.
Joe: And our loan portfolio.
Guarantors of stepped up.
Joe: <unk>, we're going to do that but for the most part.
Joe: Alright.
Joe: There hasnt been much pushback at all about not being able to afford that they know this is coming.
Joe: We would.
Joe: Working with them in.
Joe: Does the move up in the rates that they are paying they fully understand and have been able to absorb it.
Matthew Covington Olney: And then I guess just following up with that, I'd love to hear from maybe a credit perspective, you know, as you renew those loans at higher levels, just how that's being digested by some of the borrowers with higher debt expenses. I don't know if Joe or anybody else has any views on just the discussions with those borrowers.
Joe: Yes.
Joe: Matt with the the dynamics that are going on in Houston.
Joe: The ability to still price up on leases is still out there with exception of office, which we're not talking about office, but for most of the stuff that we have there is still ability to increase rates now they've got to get through a lease cycle. So that's why we're trying to bridge the gap with folks to get from one lease cycle to the next slide thanks.
Joe F. West: Yeah, Matt, as we had conversations with our borrowers about that, they've known that if they've got a maturity coming up, that the rate's going to be higher, and they've been accepting of that. You know, we have a lot of good guarantor support in our loan portfolio, and so guarantors have stepped up when it's been necessary for them to do that. But for the most part, I would say the – there hasn't been much pushback at all about, you know, not being able to afford it. They know this is coming, and we've been, you know, working with them, and the move up in the rates that they're paying, they fully understand that and have been able to absorb it.
Joe: The increase those rates and move on we still have.
Joe: Rate increases, there's not a huge amount of stuff coming onto the market.
Joe: So these guys are pretty well positioned to be able to increase rates on their tenants when they get the opportunity, but they've got to get the opportunity. So.
Joe: We actually feel good about our position we've got guarantors that can bridge the gap there, sometimes we get additional collateral paydowns that.
Joe: The market is helping us along with.
Joe: The borrowers themselves.
Joe: Okay.
Speaker Change: Okay I appreciate that and then I guess.
Speaker Change: From an overall perspective of the net interest margin, obviously, you've got the headwind of the deposit cost offset by this core loan yield dynamics.
Ramon A. Vitulli: And Matt, with the dynamics that are going on in Houston, the ability to still price up on leases is still out there, with the exception of office, which we're not talking about. But for most of the stuff that we have, there's still the ability to increase rates. Now, they have to get through a lease cycle. So that's where we're trying to bridge the gap with folks and get from one lease cycle to the next so that they can increase those rates and move on. But we still have great increases. There's not a huge amount of stuff coming onto the market.
Speaker Change: Going the other direction.
Speaker Change: Paul I'm curious kind of what your thoughts are on the core margin from here.
Paul: Sure thing I mean, we're fighting battles on a couple of fronts first.
Paul: Overall cost of interest bearing debt.
Paul: Positive deposit mix shifts as well as this uptick of non performers on the loan revenue type hits from the other end so.
Paul: We feel good about our positioning as it relates to.
Ramon A. Vitulli: So these guys are pretty well positioned to be able to increase rates on their tenants when they get the opportunity, but they have to get the opportunity. So we actually feel good about our position. We have guarantors that can bridge the gap there. Sometimes we get additional collateral paydowns, but the market is helping us along with the borrowers themselves.
Paul: Maintaining a relatively strong margin.
Paul: But we definitely see.
Paul: Pressure in the second quarter relative to where we were in the first quarter.
Paul: Okay.
Paul: And then just lastly on.
Paul: On the investment security side. It looked like there was a nice step up of the overall balances from <unk> into <unk>.
Matthew Covington Olney: Okay, appreciate that. And I guess from the overall perspective of the net interest margin, obviously, you've got the headwind of the deposit costs offset by this core loan yield dynamic going the other way. Paul, I'm curious kind of what your thoughts are on the core margin from here. Sure.
Paul: Any color on that step up in specifically.
Paul: From your recent purchases.
Speaker Change: Certainly we're focused on liquidity.
Speaker Change: You heard Bob and I mentioned in our prepared remarks and building liquidity through our securities portfolio.
Paul P. Egge: Sure thing. I mean, we're fighting battles on a couple of fronts. First, it's overall cost and interest rate deposits, deposit mix shifts, as well as this uptick in non-performers on the loan revenue side hitting us from the other end. So we feel good about our positioning as it relates to maintaining a relatively strong margin, but we definitely see pressure in the second quarter relative to where we were in the first quarter.
Speaker Change: Incrementally has been something that we've been trying to be thoughtful about that.
Speaker Change: The types of securities, we're going into our largest cash flow oriented.
Since liquidity.
Speaker Change: Sure.
Speaker Change: So paramount when getting high level of principal back from the standpoint of cash flows from that overall securities portfolio, We think we'll be able to post.
Speaker Change: Better yields in the go forward.
Matthew Covington Olney: And then, just lastly, on the investment security side, it looked like there was a nice step up in the overall balances from 4Q into 1Q. Any color on that step up and specifically from your recent purchases?
Speaker Change: As a byproduct of that build in the portfolio.
Okay guys. That's all for me. Thank you.
Thanks, Matt.
Speaker Change: Your next question is from the line of John <unk> with Janney.
John: Hey, good morning, guys.
John: Just a follow up.
John: Just to follow up on Matt's question on the Securities portfolio. Paul would you I guess Directionally would you expect it to remain relatively stable going forward or how should we think about that.
Paul P. Egge: Certainly. Well, we're focused on liquidity, as you heard Bob and I mention in our prepared remarks, and building liquidity through our securities portfolio has, incrementally, been something that we've been trying to be thoughtful about. The types of securities we're going into are largely cash flow-oriented since liquidity is important, and so paramount when getting a high level of principal back from the standpoint of cash flows from that overall securities portfolio. We think we'll be able to post better yields in the bill forward as a byproduct of that bill in the portfolio.
John: We're on a path of trying.
John: An intermediate target of getting to.
Paul: Securities as a percentage of assets of more like 15%. We're at about 14, 2% currently.
Speaker Change: So we've got Jeff.
Speaker Change: A little bit incremental ways to go before we kind of read the tea leaves as to how we want to manage our balance sheet.
Speaker Change: But that is an interim target for us.
Speaker Change: Okay.
Speaker Change: On the fee.
Speaker Change: Income side in other income what was the SBA impact this quarter.
Matthew Covington Olney: Okay, guys, that's all for me. Thank you.
Operator: Your next question is from the line of John Rodis, Wajani.
Speaker Change: I believe those around $400000.
John Lawrence Rodis: Just a follow-up. Just to follow up on Matt's question on the securities portfolio, Paul, I guess, directionally, would you expect it to remain relatively stable going forward, or how should we think about that?
Speaker Change: So we can't necessarily set our watch too when we get some FDIC income, but we have a diversified range of.
Speaker Change: <unk> and then we.
Speaker Change: We welcome it when it comes.
Paul P. Egge: You know, we're on a path of trying an intermediate target of getting to securities as a percentage of assets of more like 15%; we're at about 14.2% currently, so we've got just a little bit of an incremental way to go before we kind of read the tea leaves as to how we want to manage our balance sheet, but that is an interim target for us. Okay.
Speaker Change: Okay.
Speaker Change: So other income was $3 1 million for the quarter.
Speaker Change: Back out that 400000 was there anything else unusual or upsize this quarter in that other line item.
Speaker Change: The gain actually the gain on sales obviously separate from other income, but the gain on sale that we called out performance was kind of that the largest unusual item. There may have been a couple of smaller items that added up to that.
John Lawrence Rodis: On the fee income side and other income, what was the SBIC impact this quarter?
Speaker Change: Being a higher than expected recovery.
Speaker Change: Okay.
Speaker Change: Okay, and then Paul just just don't expenses.
Paul P. Egge: I believe it was around $400,000. So we can't necessarily set our watch to when we get some FBIC income, but we have a diversified range of investments, and we welcome it when it comes. Okay, and
Speaker Change: 70, $171 4 million for the quarter.
Speaker Change: Think last quarter, you talked about sort of for the year around $280 million or so.
Speaker Change: Do you still feel comfortable with that with that range, maybe maybe a little bit higher just given the first quarter run rate.
John Lawrence Rodis: Okay, and so other income was $3.1 million for the quarter, so take out that $400,000. Was there anything else unusual or of size this quarter in that other line item?
Speaker Change: Well the first quarter was very much aligned with our plan because we are.
Speaker Change: We did expect some seasonal dynamics to make the first quarter be.
Paul P. Egge: The gain on sale is obviously separate from other income, but the gain on sale that we called out before was kind of the largest unusual item. There may have been a couple of smaller items that added up to being higher than expected.
Speaker Change: Relatively larger.
Speaker Change: But as you as we go forward in 2000.
Speaker Change: <unk> 24, we do see potential for some projects.
Speaker Change: To perhaps.
Speaker Change: Put pressure on that $2 80 guidance, we gave last week last quarter.
John Lawrence Rodis: Okay, and then Paul, just on expenses, you know, 71, 71.4 million for the quarter. I think last quarter you talked about sort of for the year around 280 million or so. Do you still feel comfortable with that range? Maybe maybe a little bit higher just given the first quarter run rate?
Speaker Change: But we're working hard really to to managing how we ultimately get the expense levels for our combined company right and the go forward.
Speaker Change: Okay got it.
Speaker Change: Okay. So Paul I guess said another way I mean, I guess this first quarter run rate is probably a better. So you come in a little bit above $2 80, I guess thats, what youre, saying.
Paul P. Egge: Well, the first quarter was very much aligned with our plan because we are. We did expect some seasonal dynamics to make the first quarter be relatively larger, but as we go forward in 2024, we do see potential for some projects to perhaps put pressure on the 280 guidance we gave last week, last quarter, but we're working hard really to manage and how we ultimately get the expense levels for our combined company right in the future.
Speaker Change: I see I see.
Paul: Decent chance that we will have pressure on that $2 80 guidance.
Speaker Change: The first quarter actually isn't as indicative of that just because we.
Speaker Change: We literally hit the nail on the head as it relates to our plan, we expected expenses to be a little more swollen.
Speaker Change: For seasonal reasons here in the first quarter.
Speaker Change: More broader other initiatives that have the potential to put pressure on guidance.
Speaker Change: Okay. Okay.
John Lawrence Rodis: Okay, so Paul, I guess I said it another way. I mean, I guess this first quarter run rate is probably a better one. I mean, you come in a little bit above 280. I guess that's what you're saying. I see a teacher at the park.
Speaker Change: Okay. Thanks, guys.
John: Hey, John.
John: At this time there are no further audio questions I'll now hand, todays call back over to Mr. Franklin for any closing remarks.
Robert R. Franklin: Thank you very much appreciate everyone's interest in stellar bank today.
Paul P. Egge: I see a decent chance that we'll have pressure on that 280 guidance. The first quarter actually isn't as indicative of that just because we literally hit the nail on the head as it relates to our plan. We expected expenses to be a little more swollen for seasonal reasons here in the first quarter. It's more broader other initiatives that have the potential to put pressure on guidance.
And thank you for being on the call.
Speaker Change: This concludes today's call. Thank you for joining you may now disconnect your lines.
Speaker Change: Please wait the conference will begin shortly.
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Speaker Change: Yes.
Operator: At this time, there are no further audio questions. I will now hand today's call back over to Mr. Franklin for any closing remarks.
Okay.
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Speaker Change: Thanks.
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Robert R. Franklin: Thank you very much. I appreciate everyone's interest in Stellar Bank today. Thank you for being on the call.
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Operator: This concludes today's call. Thank you for joining us. You may now disconnect your line. Please wait; the conference will begin shortly.
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