Q3 2024 Stellar Bancorp Inc Earnings Call
Greetings and welcome to the stellar Bancorp third quarter earnings release Conference call. At this time all participants are in listen only mode. A brief question and answer session will follow after the formal presentation. If he would like to ask a question at that time. Please.
Sorry, followed by number one on your telephone keypad. Thank you.
Speaker Change: I will now turn the call over to Courtney Theriot, Chief Accounting Officer, you May now begin.
Courtney Theriot: Thank you operator, and thank you to all who have joined our call today. Good morning, our team would like to welcome you to our earnings call for the third quarter 2024.
Speaker Change: This morning's earnings call will be led by our CEO, Bob <unk> and CFO.
Speaker Change: Also in attendance today are Steve Retzloff executive Chairman of the company raised materially President of the company and CEO of the Bank and go with senior Executive Vice President and Chief Credit Officer of the bank.
Before we begin I need to remind everyone that some of the remarks made today constitute forward looking statements as defined in the private Securities Litigation Reform Act of 90 to 95 I Love It.
Speaker Change: We intend all such statements to 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 such beliefs are subject to change.
Speaker Change: Disclaim any obligation to publicly update any forward looking statement, except as may be required by law.
Speaker Change: Please see the last page of the text in this morning's earnings release, which is available on our website at IR, Scott Zeller Bancorp, Inc. Dot com 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.
Yes, Thank you Courtney.
Bob Franklin: Welcome to the stellar Bancorp third quarter earnings call.
Bob Franklin: I'll begin by thanking our team for the great work, they're doing every day to build our brand and to continue to provide the great service. Our bank is known for in our markets.
Bob Franklin: As we passed our second anniversary as stellar Bancorp, we are proud of our progress towards building a strong infrastructure needed to cross the $10 billion, Mark and our focus on capital liquidity and credit.
Bob Franklin: We have de risk our balance sheet by significantly increasing our liquidity, reducing our CRE concentrations and building capital.
Bob Franklin: We believe that we have provided the banks maximum optionality and are well positioned for the future.
Bob Franklin: Soon we will have the stress of the presidential election behind us and it appears that interest rates are attempting to normalize combined with the strong markets. We serve the runway for 2025 appears to be good.
We will be approaching the market with a more balanced lending philosophy, and we will continue to build strong relationships to support both sides of the balance sheet.
Bob Franklin: Our capital base is strong and allows us optionality.
Bob Franklin: Top of mind will always be safety and organic growth with respect to M&A. We will continue our efforts to look at well balanced franchises that will help us grow our bank with an emphasis on funding profiles.
Bob Franklin: We will also weigh our opportunities to buyback our stock increase our dividends or pay down subordinated debt in an effort to return excess capital to shareholders.
Speaker Change: The markets. We serve are some of the best in the country and we are well positioned to succeed in these markets in the coming years I'll now turn over the call to Paul <unk>, our CFO for more detail on the quarter.
Paul: Thanks, Bob and good morning, everybody we.
Speaker Change: We are pleased to report third quarter net income of $33 9 million or <unk> 63 per diluted share, which represents an annualized ROE of one 7% and an annualized ROE ATT of $13 six 3%.
Speaker Change: This compares with second quarter earnings of $29 8 million or 56 cents per diluted share, which signified a earlier.
Speaker Change: 113% and our return on average tangible common equity of 12, 2%.
Speaker Change: A key driver of our performance in the third quarter was an approximate $6 million reversal of provision for credit losses on loans, primarily due to a decrease in the specific allowance related to individually evaluated loans, thanks to significantly lower nonperforming loans.
And to a lesser extent lower loan balances.
Speaker Change: While net charge offs were elevated in the third quarter totaling $3 $9 million.
More than 88% of the charge offs had been previously specifically reserved for.
Speaker Change: Setting aside the provision reversal, we feel very good about our quarter over quarter progress in our core pretax pre provision earnings power largely due to improvement in our net interest margin excluding purchase accounting adjustments.
Speaker Change: We are very pleased with our ability to protect our earnings power over this rate cycle, while de risking the balance sheet, bringing our CRE and C&I rig concentrations solidly within regulatory guidance and lowering our loan deposit ratio from approximately 92% a year ago to about 86% at the most recent quarter.
Speaker Change: <unk>.
Speaker Change: Not to mention all while managing the increased expense associated with crossing the 10 billion asset threshold.
Speaker Change: Net interest income for the quarter was $101 $5 million, representing a slight increase from the $101 4 million booked in the second quarter of 2024.
Speaker Change: This translated into a net interest margin of $4, one 9% in the third quarter relative to four two.
Speaker Change: Two 4% in the second quarter of 2024.
Speaker Change: Purchase accounting accretion in the third quarter was $6 8 million relative to $10 1 million in the prior quarter.
Speaker Change: Excluding the purchase accounting accretion net interest income increased in the quarter about $3 4 million to $9 $94 8 million from $91 4 million in the prior quarter.
Speaker Change: And net interest margin was 391%.
Speaker Change: Up from 382% in the prior quarter.
Key drivers to the margin performance in the third quarter included the ability in our noninterest bearing deposit portfolio, representing about 38% of our deposit base.
Speaker Change: A three basis point improvement in our cost of funds driven by a five basis point improvement in our cost of interest bearing liabilities.
Speaker Change: Higher securities yield.
And higher loan yields after excluding purchase accounting accretion offsetting this lower loan balances.
Speaker Change: Walking further down the income statement, we booked the aforementioned $6 million reversal of provision for credit losses on loans in the third quarter.
Speaker Change: In combination with the net charge offs during the quarter. This brings our allowance for credit losses on loans to $84 $5 million or one 2% of loans from $94 $8 million or 123% of loans at the end of the second quarter.
Speaker Change: That said since Npls decreased nearly 37% from $50 9 million to $32 1 million during the third quarter. We ended the quarter with an allowance coverage ratio to nonperforming loans of 262, 9% from one eight from 180.
Six 2% at the end of the second quarter.
Moving on to noninterest income, we earned $6 3 million for the quarter versus $5 4 million in the second quarter.
Speaker Change: I will note that the current quarter benefited from $1 $3 million of FDIC income and a small gain on asset sales.
Speaker Change: Noninterest expense for the quarter was $71 1 million down slightly from the $71 $2 million in noninterest expense from the second quarter.
Speaker Change: Excluding some nonrecurring items, such as severance and certain other items noninterest expense was roughly in line with our expectations.
Speaker Change: Our strong bottom line results have driven a continuation of our track record of growing our regulatory capital ratios since the merger.
Total risk based capital was $15, 91% at the end of the third quarter relative to $14 eight 2% at the end of 2023 and $12 three 9% at the end of 2022.
Speaker Change: This progress has been consistent across all regulatory capital ratios and is reflective of our tangible book value growth since closing the merger. Thanks to a relatively strong earnings profile, notwithstanding accelerated amortization of CDI expense.
Speaker Change: Since our first quarter and post merger at the end of 2022, we have grown tangible book value per share by 37, 5% from $14 <unk> per share to $19 and 28 <unk> per share after dividends, representing a compound annual growth rate of 20%.
Speaker Change: We continue to like our prospects for strong internal capital generation and the Optionality that creates which we feel is very valuable in the current operating environment.
Speaker Change: During the third quarter, we started to repurchase shares for the first time since the merger buying back $108. Nine 108 108000 shares at an average price of $26 <unk> under our repurchase program.
Speaker Change: While on the topic of capital. We also intend to redeem the $40 million of bank level subset that we have on our books in September and we're in December pardon me.
Speaker Change: So given cumulative industry pressures and our position of just over $10 billion in assets, we feel very good about our balance sheet and earnings power relative to the industry.
Positioning for future organic and inorganic growth opportunities and the potential for meaningful operating leverage when we add more scale to the stellar bank platform.
Texas and more specifically our markets within Texas continued to exhibit strength relative to the rest of the country.
Speaker Change: We feel the combination of the economic strength and resilience of our core markets and our home field advantage.
Speaker Change: Largest locally focused banks in our market, we serve will sustain growth and success into 2025 and beyond.
Speaker Change: Thank you and I'll now turn the call back over to Bob.
Bob Franklin: Yes, Thanks, Paul Operator, I think we are ready for questions. Please.
Speaker Change: Thank you we are now opening the floor for a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad. Our first question comes from David Feaster from Raymond James Your line is now open.
David Feaster: Hey, good morning, everybody.
David Feaster: Davidson.
David Feaster: I wanted to start off on the loan side.
David Feaster: And dig into some of the dynamics that you're seeing there obviously loans declined more than expected, but I wanted to get a sense of the drivers of that how much how much thats less appetite for growth and strategic declines in CRE or more of a function of weaker demand.
David Feaster: And continued payoffs and Paydowns just kind of curious what you saw in the quarter. The pulse of your clients and just how you think about growth near term as we head into 2025.
David Feaster: David I think you touched on on all of that.
In particular.
David Feaster: Particular to the third quarter.
We originated about little in excess of 300 million for the quarter, which was $50 million more than the second quarter. So we were pleased with that number.
David Feaster: It didn't fund up to a level.
David Feaster: Pro rata as the previous quarter. So we are probably will probably get a little lift there in future quarters from that and then our payoffs actually were a little bit a little bit less so we had payoffs of $230 million in the quarter.
David Feaster: And then what we call. It I think you know our waterfall, but what we call our carried which is R.
Advances compared to our payments.
David Feaster: That because of our posture around.
David Feaster: Construction and development.
David Feaster: For the last few quarters, we're starting to see that to be actually a negative to loan growth. So our our now our payments are exceeding our advances because of that posture around CND.
David Feaster: I think as this.
David Feaster: Track record now in that $300 million, we feel good about that and think that we're really positioned for when we see some increased demand in the economy lets us our team we have a track record of being able to originate more than that to get some get some growth and we are ready for that.
Speaker Change: Yes, David I think.
David Feaster: From from our standpoint, when we put the two banks together, we look very much like to community banks coming together and I think there was.
David Feaster: The reason for us to reformulate, our loan portfolio into something that look more like a larger bank Kevin.
David Feaster: The market actually gave us that opportunity to do that I think we've sort of repositioned ourselves.
David Feaster: We've hired some really nicely and our people to help us.
David Feaster: Sort of balance out what that portfolio it looks like going forward, but we feel really good about what our position is today about making loans.
Speaker Change: That's great and then maybe on the other side of the coin too I mean, it's been pretty impressive what you've done on on the funding cost side and it seems like the benefit is some of those hires are are coming to fruition, but I was just curious what are you seeing on the deposit front.
Speaker Change: I mean, you were able to reduce deposit costs. Even ahead of fed cuts. So I'm just curious how reception been from clients, thus far as you start reducing rates.
Speaker Change: How you think about.
Speaker Change: The deposit outlook.
Speaker Change: Just in general as rates are coming down and your ability to re price is lower.
Speaker Change: Well on the on the customer.
Speaker Change: How do we feel around the customer sentiment.
Speaker Change: Third quarter was the largest of the last three quarters as far as.
Speaker Change: Dollar amount of opened accounts real pleased with that came on at a lower rate than the previous quarter. So that's good too.
Speaker Change: The nib mix of those new account support.
Speaker Change: Support, where we where we have on the whole as far as our net balance so all of those are encouraging.
Speaker Change: And we really feel good about how our.
Speaker Change: R R.
Speaker Change: What caused that played out through the cycle, we've been able to exhibit a high level of discipline and what you saw in the third quarter was reflective of that.
Speaker Change: Definitely reflective of <unk>.
Speaker Change: <unk> wholesale funds roll off incrementally and then otherwise just good core execution.
Speaker Change: And we think has.
Speaker Change: Possession potential to bear fruit in the future, but it takes time.
Okay.
And then you know I was.
Speaker Change: Just wanted to get us into the margin trajectory as we look forward inclusive of fed cuts I mean, the core NIM will expand.
Speaker Change: Expansion was better than we had expected.
Speaker Change: And again, great to see the decline in deposit costs ahead of the cuts, but obviously theres a lot of moving parts right you've got the sub debt redemption to that that's going to help but just wanted to get a sense.
Speaker Change: Of the margin trajectory as we look forward assuming more cuts around the horizon.
Certainly we feel we feel pretty good about where our margin said so there are a lot of moving parts.
Speaker Change: So we know that we're going to be able to defend it very well.
Speaker Change: It's all going to be about execution now late in the quarter is when we will redeem that sub debt, which obviously will be a positive but early in this quarter, we had a.
Speaker Change: Sub debt.
Speaker Change: Issuance that when variable so.
Speaker Change: You really hit the nail on the head as it relates to there being a lot of moving parts.
But we're very comfortable about where we sit in especially.
Speaker Change: We feel like if and when we get rate cuts will take what the market gives us in terms of that front end exposure of deposits taken away a little bit of that pressure on costs and of course, we tend to invest.
Speaker Change: All across the curve and we think that has long term benefits.
Speaker Change: Hard to.
Speaker Change: Hi.
Speaker Change: Okay, great guidance as to where it's going to be in the next three months in the next six months with all the moving parts that actually we feel we're in a great position to defend it and depending on how loan growth and other factors play out perhaps even improve it.
Speaker Change: Okay. That's helpful. Thank you.
Speaker Change: Your next question comes from Matt Olney from Stephens. Your line is now open.
Matt Olney: Hey, good morning, Thanks for taking the question guys want to go back to the loan growth discussion.
Matt Olney: And it sounds like there is still some some some uncertainty maybe in the near term in the fourth quarter.
Matt Olney: Just looking for more color on the borrower sentiment and kind of what what borrowers are saying and then as we think about 2025.
Matt Olney: You know I am curious if if we think we can get back to that mid single digit pace that we've that we've talked about previously and are more more normal kind of a macro economy is that a reasonable goal, especially as you kind of layer in some of these new C&I producers as they as they gain more traction.
Matt Olney: Yes.
Matt Olney: Yes, Matt I think that that is what we're focused on but.
I think we're still.
Matt Olney: I want to see the smoke clear on the election.
Matt Olney: And really more around this inflation rate and where rates are going to go.
Matt Olney: Our markets are still pretty good I wouldn't say that that loan demand is huge.
Matt Olney: It's good it's still.
Matt Olney: Houston still provides in our markets. Other markets also still provide good places for us to make loans, but.
Matt Olney: Our goal would be to get back to that mid single digit and that's that's what we're shooting for next year. If we're given the proper market to do it in.
Matt Olney: So that's kind of what our thoughts are.
Speaker Change: Okay I appreciate that Bob and then I guess switching gears on the expense side.
Speaker Change: I didn't know there were some some noncore items this year.
Speaker Change: Think we've been targeting about $280 million for the full year, but looks like we're trending a little bit above that just any updated thoughts on.
Expense levels from here.
Speaker Change: Certainly.
That $70 million quarterly run rate is what we target and unfortunately.
Speaker Change: There tends to be noise, and we had some noise and seasonality.
Speaker Change: All of our quarters year to date generally trending more in that $71 million run rate.
We are working as hard as we can do it.
Speaker Change: <unk> the bank well from an infrastructure structure standpoint, and really hold the line.
Speaker Change: On that expense growth. So yes, we have.
Speaker Change: We have had.
Speaker Change: Some items that have had us.
Speaker Change: 1 million running about $1 million above of our $70 million target.
Speaker Change: But we're still.
Speaker Change: Doing our best to hold the line and we see at <unk>.
Speaker Change: Fourth quarter expenses were going to be targeting that same level.
Speaker Change: Managing it along those lines.
Okay.
Speaker Change: That's great Paul Thanks for the color.
Paul Operator: Thanks, Matt.
Paul Operator: Your next question comes from Andrew <unk> from Piper Sandler Your line is now open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Good morning.
Speaker Change: Just had a couple of questions one on the purchase accounting accretion just looking for what you guys expect that to be going forward kind of.
Speaker Change: In 2025.
Speaker Change: It should be waning.
Speaker Change: In the near in the fourth quarter, we expect around $7 million and we'll see it kind of trail off now.
Speaker Change: <unk> purchased recognition of purchase accounting accretion income has been hard to predict with Paydowns and.
Speaker Change: The waxing and waning of that so.
I'd expect.
Speaker Change: Run rate.
Speaker Change: Yes.
Speaker Change: Decay from that $7 million.
Speaker Change: That we expect in the fourth quarter, we still have a.
Speaker Change: The remaining loan discount of $81 million.
Speaker Change: And that will.
Speaker Change: We will be extinguished over time and it.
Speaker Change: I think I think you can assume that it will continue to decay and also be subject to some lumpiness.
Speaker Change: Okay sounds good. Thank you for the detail that's helpful. And then just the other one I had really quick.
Speaker Change: You guys mentioned earlier.
Speaker Change: As far as M&A goes looking at looking at some targets that maybe have a better funding profile just.
Speaker Change: I was curious if you had any other commentary around M&A conversations are picking up and <unk>.
Speaker Change: If we get an administration change here in November if that affects anything going forward.
Speaker Change: Well I don't know I don't know if the administration change.
Speaker Change: It really changes that very much but we're certainly hanging around the hoop on a lot of different fronts.
Speaker Change: Around M&A and it's Raleigh.
Speaker Change: Finding the right partner for us.
Speaker Change: We do think.
Speaker Change: There is a need for us to kind of get away from this.
Speaker Change: This between 10 and $11 billion.
Speaker Change: To help us with some of the expense level that we have but.
Speaker Change: We want to make sure we do the right thing when we do it and find the right partner so.
Speaker Change: We're having a lot of conversations with a lot of different banks, whether they're private or public.
Speaker Change: And that's that's kind of how we're approaching the deal we have we have several folks that we really like out there.
Speaker Change: That are doing a good job in.
But.
Speaker Change: We'll just we'll see where that takes US there is no you can't really necessarily judge timing on that is a lot of it has to do with when somebody wants to come to market.
Speaker Change: Got it. Thank you thanks for taking the questions and congrats on the quarter.
Speaker Change: Thank you. Thank you.
Speaker Change: This is like to ask a question. Please press star one on your telephone keypad.
Paul Operator: Star one on your telephone keypad. Our next question comes from Matt Olney from Stephens. Your line is now open.
Matt Olney: Hey, guys. Thanks for taking the follow up just just wanted to hit on the securities portfolio. Another big quarter of growth. There just curious on I guess a few things. One are you just remind US are you are you targeting any certain size of that portfolio or is that just a.
Matt Olney: Temporary kind of placeholder in the absence of loan growth and then and then two just a bit.
Matt Olney: Thoughts on duration are you, assuming any kind of duration at this point.
Speaker Change: Certainly well our big push early on was to get ourselves to a minimum of 15% of our balance sheet and we consider even increasing that because we believe in the value of our.
Speaker Change: A good strong balance sheet and good liquidity profile, we have a great cash flowing securities portfolio.
Speaker Change: And in the next 24 months projected to bring in 30% of that backend cash flows our current adjusted duration effective duration is about three five years.
Speaker Change: And we have about $300 million in principal cash flows that we expect Jeff in the next 12 months. So we we definitely value the norm.
Speaker Change: Look forward to and will value the normalization of the yield curve.
And the ability.
Speaker Change: Choose our spot as it relates to duration.
Speaker Change: <unk>.
Speaker Change: Optimize our earnings profile.
Speaker Change: Withstanding, having a higher proportion of securities on our balance sheet.
Speaker Change: Okay.
Speaker Change: Okay. Thanks for that Paul and then I guess on the credit side.
Speaker Change: A little higher charge offs, but non accruals loans move lower.
Speaker Change: Any more color on.
Speaker Change: The the credits you addressed this quarter I know there was some deterioration or this year with a few I think there are a few smaller C&I credits that you placed on non accrual status.
Speaker Change: Or would these are credits address in the third quarter, just looking for any color there.
Speaker Change: Yes, Matt.
Yes.
Speaker Change: We did have.
Speaker Change: Some increase in npls throughout the balance of the year.
Speaker Change: What happened in the third quarter was that we had some some favorable things happen, where we were working toward.
Speaker Change: So resolution of all those and.
Speaker Change: That all kind of came into focus in a occurred in Q3, we had pay offs as well as significant pay downs.
Speaker Change: In that group.
Speaker Change: Okay, and I guess anything beyond that as you look at classified list watch list any other notable migrations to call out in recent in recent months.
Speaker Change: Not so much what we've seen.
Speaker Change: Some inquiries that are.
Speaker Change: Below that we have risk rated special mention.
We've taken a really.
Speaker Change: Hard look at the loans in the portfolio. So we have a little bit of.
Speaker Change: Inquiries in the special nature lows.
Speaker Change: Compared to previous titles, but.
I think what Youll see is that.
We're working hard on a resolution of problem credits.
So, but we're also keeping a really clear our toward.
Speaker Change: The cash flows that support the credits and so obviously so many were shown in cash flow will below grade levels appropriately.
Speaker Change: Okay.
Speaker Change: Okay. Thanks, guys appreciate your help.
Speaker Change: Thanks, Matt.
Your next question comes from Catherine Mealor from K B W.
Speaker Change: Your line is now open.
Catherine Mealor: Thanks, Good morning, everyone.
Speaker Change: Good morning Catherine.
Catherine Mealor: I wanted just to follow up on the margin and see if you could just give us a little bit more commentary on your expectations for loan yield repricing I know you've said previously that you have got about 20% truly flooding, 40% variable, 40% fixed and so just if you could kind of talk us through those three buckets and the re <unk>.
Catherine Mealor: Reising opportunity just to kind of give us a sense to where you think loan yields or cowen. Thanks.
Speaker Change: Well, let me kind of.
Speaker Change: Correct, a little bit we're about 55% fixed.
Speaker Change: And about 45% variable and that variable.
Speaker Change: Slipped a month kind of pure floating and.
Speaker Change: Otherwise.
But we do still have.
David again with the truly floating again.
Speaker Change: The truly floating.
Speaker Change: About 2020% of that variable number pardon me, 20% of the total 40.
Speaker Change: 40% to 50% of the variable number.
Speaker Change: 20% of the total number.
Speaker Change: Yes.
Speaker Change: Got it okay great.
Speaker Change: Okay.
Speaker Change: But what you see is the fixed rate loans are about $5, five 9%, which.
Speaker Change: Phil represents repriced.
Speaker Change: With word repricing opportunity.
Speaker Change: And the variable rate loans are sitting spot at seven 7%.
Speaker Change: And Ray can give a little bit of guidance on how the loans.
Speaker Change: That we're originating are coming onto the books, but we feel like are our spot levels have at least some room for improvement as the fixed rate loans pay down or pay off and reprice higher and rate with when she says yes, Catherine so on the $300 million of new loans that we originated weighted average rate was 758 on those loans.
Speaker Change: And in the quarter, we also renewed another $750 million of loans that renewed at 847, so between the $750 300 call it a $1 billion.
Speaker Change: In the quarter that that.
<unk> received a market rate.
Catherine Mealor: Okay great.
Speaker Change: And then mostly of that 20% floating is that mostly tied to chauffeur.
Speaker Change: Climate itself, Brian as Ofer.
Speaker Change: Goodbye.
Speaker Change: Okay great.
Speaker Change: Okay, so still significant upward repricing.
Speaker Change: Opportunities it feels like and then on the on the funding side you mentioned that you still had a large amount of new deposit accounts come in this quarter do you have the kind of average pricing of what that looks like.
Speaker Change: Yes that all in that came on at.
297.
Speaker Change: Which was about a.
Speaker Change: A little bit more than 40, 40 basis point improvement from the prior quarter of our new Onboarding deposit accounts.
Speaker Change: Okay great.
Speaker Change: And then all in the NIM.
Speaker Change: Even with fed cuts it feels like you can keep that core NIM fairly stable just given the kind of balance between those two things.
Speaker Change: And maybe even up a little bit Paul you're saying.
Speaker Change: We where we want to add.
Speaker Change: Set expectations appropriately, we feel really good about our ability to defend NIM and that there is potential for upside there's a lot of moving parts, but we've got great confidence in our ability to maintain really strong NIM.
Speaker Change: Got it okay, great additional color is helpful. Thank you very much.
Speaker Change: Thanks Catherine.
Speaker Change: Thank you I'd now like to hand back over to Bob Franklin for further remarks.
Thank you very much for attending and your interest in stellar Bancorp with that we'll conclude our call. Thank you.
Speaker Change: Thank you for attending today's call you may now disconnect have a wonderful day.
Speaker Change: Please wait the conference will begin shortly.
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