Q4 2024 Stellar Bancorp Inc Earnings Call
Speaker Change: Good morning and welcome everyone to Stellar Bank Q4 earnings release. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you.
Speaker Change: I would now like to turn the call over to Courtney Theriot. Please go ahead.
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 fourth quarter of 2024. This morning's earnings call will be led by our CEO, Bob Franklin, and CFO, Paul Egge.
Courtney Theriot: Also in attendance today are Steve Retzlaff, Executive Chairman of the Company, Ray Vesulli, President of the Company and CEO of the Bank, and Joe West, 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 Security Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the Safe Harbor Provision for forward-looking statements contained in the Act.
Courtney Theriot: Also note that if we give guidance about future results, that guidance is only a reflection of management's beliefs at the time a statement is made, and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statement if that is to be required by law.
Courtney Theriot: Please see the last page of the text in this morning's earnings release, which is available on our website at ir.sellerbankofeat.com for additional information about the risk factors associated with foreclosing statements.
Courtney Theriot: 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, Paul Franklin.
Thank you, Courtney, and good morning to everyone.
Courtney Theriot: Thank you for joining us for the Stellar Bank Corp's fourth quarter earnings call. I want to start by expressing my gratitude to the outstanding team at Stellar Bank. Their relentless efforts have laid a solid foundation that will support our journey as we grow into the future.
As we move forward, our focus will be on growth.
Courtney Theriot: Our robust capital base and strong balance sheet, coupled with the vibrant markets we serve, pave the way for a promising future for Stellar Bank. With the election now behind us and interest rates stabilizing, we look ahead with optimism.
Courtney Theriot: Although we may not see significant relief in interest rates, the business environment remains favorable.
Courtney Theriot: We remain vigilant about inflation but continue to witness positive trends in job growth, population increasing, limited housing inventories, and an increased push for oil and gas production for both domestic use and export.
These factors will serve as tailwinds as we enter 2025.
Courtney Theriot: Our strategy remains clear. We will expand our relationship-generated, low-cost, core funding base while broadening our loan offerings.
Courtney Theriot: Our commercial real estate portfolio remains well within regulatory guidelines, allowing us to provide a full spectrum of loans to our customers.
Thank you.
Courtney Theriot: The capital we have built up over the past few years will support our organic growth, assist in potential partnerships, and provide the flexibility for share repurchases or increased dividends.
Speaker Change: For Stellar Bank, 2025 is the year of the customer, internal, existing, and future.
We will maintain a straightforward approach.
Speaker Change: grow our existing relationships and cultivate new ones. We are eager to embark on this journey and excited for the year ahead. I'll now turn this call over to Paul Egge, our CFO, for more details on the quarter and the year.
Paul Egge: Thanks Bob. Good morning everybody. We are pleased to report fourth quarter net income of $27.8 million or 52 cents per diluted share, which represents an annualized ROAA of 1.04% and an annualized ROATCE of 10.82%.
And for the full year 2024, net income.
with $117.6 million.
Paul Egge: or $2.20 per looted share, which also represents an ROAA of 1.1% and an ROATCE of 12.18%.
Paul Egge: A key highlight of our fourth quarter performance was a continuation of net interest margin and net interest income progress after inflection earlier in the year.
Paul Egge: We look forward to seeing incremental improvement in 2025 on these fronts, while we also seek to return to a reasonable level of growth in 2025.
Thinking about 2024 as a whole,
Paul Egge: We have built a strong foundation from which to build upon while growing capital at a faster clip than much of the industry.
Paul Egge: de-risking our balance sheet, and protecting our earnings power, notwithstanding the expensive increases that come from crossing the $10 billion asset threshold.
Before moving on...
Paul Egge: I should note that the year-end size of the balance sheet benefited from certain seasonal increases in deposits.
and corresponding cash.
Paul Egge: due to tax receipts from government banking clients during the last days of December, totaling over $300 million in non-interest-bearing and interest-bearing checking deposits at year-end.
Paul Egge: We expect these XX balances to normalize away during the next quarter.
Paul Egge: Net interest income for the quarter was $103 million, representing a slight increase from the $101.5 million booked in the third quarter.
Paul Egge: This translated into a net interest margin of 4.25% in the fourth quarter relative to 4.19% in the third quarter.
Paul Egge: Purchase accounting accretion in the fourth quarter was 7.6 million dollars relative to 5.8 million dollars in the third quarter.
Paul Egge: Excluding purchase accounting accretion, tax equivalent net interest income increased slightly in the quarter to $95.5 million from $94.8 million in the prior quarter.
Paul Egge: And that interest margin was 3.94% on an adjusted basis, up from 3.91% in the prior quarter.
Paul Egge: A 14 basis point improvement in our cost of funds, driven by a 19 basis point improvement in our cost of interest bearing liability.
Paul Egge: We also had higher securities yields and maintained strong loan yields after Parcher County accretion.
[inaudible]
Paul Egge: Walking further down the income statement, we booked a provision for credit losses on loans in the fourth quarter of $942,000.
Paul Egge: In combination with net charge-offs during the quarter, this brings our allowance for credit losses on loans to $81.1 million, or 1.09% of loans, from $84.5 million, or 1.12% of loans at the end of the third quarter.
Paul Egge: Moving on to non-interest income, we earned $5 million for the fourth quarter versus $6.3 million in the third quarter.
Paul Egge: while noting that that third quarter number benefited from $1.3 million of lumpy SBIC income and a small gain on sale of assets.
Paul Egge: Up, down from $290.5 million in 2023, but higher than our initial $280 million guidance in annual expenses for the year.
Paul Egge: Higher professional fees and outside operating expenses, severance expense and salaries were among the drivers of our expense story in 2024.
Paul Egge: For 2025, we expect modest growth in line with inflation of non-interest expense to about $295 million, although we are continuously seeking to hold the line where we can on expenses.
Thank you. Thank you.
Paul Egge: Our strong bottom line results have driven a continuation of our track record of growing our regulatory capital ratios and tangible value per share since the merger.
Paul Egge: Total risk-based capital was 16.06% at the end of the fourth quarter relative to 14.02% at the end of 2023 and 12.39% at the end of 2022.
Paul Egge: dollars and ten cents per share after dividends representing a compound annual growth rate of 19.3 percent over the last two years.
Paul Egge: We continue to like our prospects for strong internal capital generation and the optionality that it creates, which we feel is very valuable in the current operating environment.
Paul Egge: During the fourth quarter, we did not repurchase any shares of our stock, but we did redeem the $40 million of bank-level sub-debt in December.
Paul Egge: We will continue to evaluate share repurchases in 2025, notwithstanding our preference to find more strategic uses of capital deployment, like M&A.
Paul Egge: Entering into 2025, we really like where we sit both financially and strategically.
Paul Egge: It is our goal to deliver positive operating leverage during the year while we continue to manage through what we expect to be an improving operating environment for banks.
Paul Egge: We've laid the foundation to support adding more scale to the Stellar Bank platform, which will drive our ability to deliver more meaningful operating leverage as we create space from that $10 billion asset threshold.
Paul Egge: Meanwhile, Stellar Bank will continue to seek to exploit our home field advantage in some of the best markets in the country.
Bob Franklin: Thank you and I will now turn the call back over to Bob.
Thank you.
Thank you, Paul, and we're ready for questions, operator.
Thank you.
Speaker Change: At this time, I would like to remind everyone in order to ask a question, simply press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
[inaudible]
Speaker Change: And our first question comes from the line of Will Jones with KBW. Will, please go ahead.
Yeah. Hey, guys. Thanks. Good morning.
Good morning, Will.
Speaker Change: I just wanted to start on expenses. I know that, you know, that full year they came maybe a little bit ahead of where you were expecting to be. But broadly, you know, speaking of expenses, containment was still a pretty strong suit for you guys this year. I did want to ask about...
Speaker Change: Higher professional fees this quarter, whether there's anything to kind of read into or anything kind of unique that that was happening in that line this year or this quarter.
Speaker Change: Now it's timing related to certain outside auditing outsource auditing engagements
Okay.
Bob Franklin: And then, Bob, maybe just one for you, broader picture. You know, I'd read into your operating leverage comments and the press release. You know, I know...
Bob Franklin: you know, kind of relative to your size, you know, presents kind of some of its own challenges and, you know, you really need to see, you know, growth come back in earnest to see organic operating leverage. But to really kind of take that next step on profitability, do you feel like, you know, M&A needs to play a role for you guys?
Bob Franklin: Well, I think it really depends on speed. I mean, we can certainly get there faster if we can do M&A.
Bob Franklin: But we don't want to make a big mistake. So we're very calculating around how we go about seeking M&A partners.
Bob Franklin: We can get there on an organic basis, it's just gonna be a bit slower and.
Bob Franklin: I think we'll continue to try to manage our expense level.
Bob Franklin: as we grow the bank. But we haven't focused on growth in the last couple of years and this is a focus for us today. And we'll fight through some payoffs here.
Bob Franklin: probably early in the year, but I think we'll build momentum as we move into the first couple of quarters. So we expect good things from an organic.
Bob Franklin: basis, but you know M&A is certainly out there because it would just help us get there a little quicker from an operating leverage standpoint.
Yeah, okay.
That's our home, Ed.
Bob Franklin: Last one, Paul. Let me just jump into the margin real quick. I know in the past, you know, we kind of talked about, you know, we're relatively neutral from a, you know, rate positioning standpoint. I guess just, we'll just reaffirm that that's still how you guys are viewing it today. And, you know, as we look to 25, whether we see, you know, 2 cuts, 3 cuts, 5 cuts, could you just confirm maybe that you still see the same glide path to the margin as we kind of move to the balance of next year?
Bob Franklin: We sit in a great position of strength as it relates to our margin. We're really pleased with where it sits on an absolute basis and then as well when you adjust for Percy County accretion. As long as we're able to maintain a core funded balance sheet, which is really our goal, we see continued strength.
Bob Franklin: Now, with respect to our positioning, we try to stay neutral, and we're pleased with the fact that...
Bob Franklin: Even if rates were to stay up high, we have continued repricing that should benefit us incrementally. That being said,
Bob Franklin: We're big fans of an upward sloping yield curve So we kind of feel like we win no matter what We're sitting in a great spot and we can withstand the current environment. We think better than a lot of the industry
Thank you.
Bob Franklin: Yeah, not a bad spot to be. Well, we're looking forward to 2025, thanks guys.
Thanks Will.
Speaker Change: And your next question comes from the line of Matt Olney with DefenseMath. Please go ahead.
Matt Olney: Hey, yeah, thanks. Good morning. Just want to clarify the loan growth outlook for 2025. I think back in October, we talked around a mid-single-digit growth for 2025, and as you look at the pipelines and consider some of the paydowns that you referenced on the existing book, just want to see if that mid-single-digit level is still a reasonable goal for 2025.
Speaker Change: I think that's a that's still a good number on word
Speaker Change: I think as we see some real estate payoffs around people finally understanding that interest rates are probably going to stick around in this neighborhood for a while.
Speaker Change: We'll fight some payoffs at first, but then our goal is to get back to around that mid-single digit.
Speaker Change: That's the plan. Matt, Matt, we're also, I think you mentioned momentum and fourth quarter loan originations were the highest we've had in six quarters, so we do have some momentum going into 25 and expect that to continue.
Speaker Change: Okay, thanks for that, Ray. And then on the other side, on the deposit side, I think those deposit balances were relatively flat in 2024. Would love to hear updated thoughts on expectations to grow deposit levels in 2025.
Well, on the...
Speaker Change: If you look at 24, yeah, you're right about the number, but we really like the leading indicator of what we onboarded.
Speaker Change: So we had 58% of our number of our accounts were new, of our new accounts were new new, meaning the customers were not here before.
Speaker Change: and then we're watching those accounts as they grow, as they mature.
And in dollar terms, our net new of...
Speaker Change: New exceeding closed was it was really strong So I think all those the leading indicators of where we're headed in 25. We're good. We're continuing to onboard Nice clients and then on the loan side we had
Speaker Change: Some good C&I growth is the percentage of our originations, which obviously helps our deposit proposition when we get those treasury accounts going with those loans.
Thank you. Thank you.
Speaker Change: Okay. All right. Appreciate that. And then just lastly for me, going back to the comment about, you know, the goal of positive operating leverage for 2025.
Speaker Change: It looks like that guidance you gave us for expenses implies kind of a low to, low to mid single digit growth year over year.
Speaker Change: So to get that positive operating leverage, should we be thinking about revenue growth in a manner similar to low to mid or a little bit higher? How are you thinking about the positive operating leverage comment?
Speaker Change: Precisely. You somewhat answered your own question. It's about 3% in growth and non-interest expense.
Speaker Change: The revenue dynamics, we believe, support that much or higher on a higher base of revenue, and that will deliver operating leverage as long as we can execute on incremental growth.
Okay, thanks for the commentary, guys.
Thank you, Pat.
Thank you.
Speaker Change: Again, if you would like to ask a question, simply press star followed by the number 1 on your telephone keypad.
Speaker Change: And your next question will come from the line of Stephen Skouten with Piper Sandler. Stephen, please go ahead.
Stephen Skouten: Yeah, thanks. Good morning guys. Appreciate it. I guess if I could follow up one more question on that operating leverage, you know, if I look at consensus numbers, it's, you know, maybe assuming earnings are down on a year over year basis and some of that provision related, but.
Stephen Skouten: I'm just wondering, I guess, are you guys thinking about operating leverage core execration or are you thinking about that on a gap basis? And if so, what do you think analyst expectations are kind of missing as it relates to those to that trend line?
Stephen Skouten: I think you guys will reset your expectations based on where our year-end was and how we've delivered throughout 2024 it does it does feel like
Stephen Skouten: has been relatively light and we're seeking to be better clearly.
and what's out there in consensus numbers.
Speaker Change: Got it. That's helpful. And then for that accretion, I think, you know, it was in the $47 million range and $23, $33 million, give or take, this year. Would you expect that to kind of decline at a similar pace, you know, apart from obviously some unexpected paydowns and such? Is that the right way to think about it?
Speaker Change: That's the right way to think about it. I mean, we've benefited from a decent amount of windfall earnings over the last two years, in addition to what's scheduled accretion. We have currently remaining a loan discount of $73.7 million left.
Speaker Change: and we see it diminishing and flattening out in the next year.
percent.
Speaker Change: Okay, great. And then the deposit growth this quarter was pretty fantastic, especially some really strong non-insured deposit growth, and you paid down borrowing.
Speaker Change: You guys have a ton of on balance sheet liquidity at this point. What do you start to do now that you've kind of tackled the
Speaker Change: How do you think about the investments of that liquidity as you move forward, assuming the strength of your deposit base continues to shine through?
Speaker Change: Well, we do need to note that part of that growth and year-end balance sheet is going to be transitory relating to the seasonality of our operating account business in the government space.
So that is...
When you pull that out, we're more.
Speaker Change: flat on a quarter-over-quarter basis with respect to the overall deposit, sorry.
Speaker Change: particularly high level of cash on the balance sheet, since we don't expect that funding to stay on our balance sheet for more than a month or so.
Speaker Change: Some of that excess liquidity is a mirage, but we do seek, and we have been seeking, to hold a high level of securities and cash on our balance sheet, and we like that, so long as it's not at the detriment of our ability to drive a good earnings profile.
Speaker Change: Okay, extremely helpful. And then just last thing for me is you talked about even I think even in the release you guys noted the the potential desire to
Speaker Change: To partner and pursue some M&A. How do you think about the value of your your currency? You know Let's call it around 150 a book and and how that allows you guys to Potentially pursue M&A or is that a hindrance that kind of current share levels?
Speaker Change: Well, I think at this point it's basically neutral, if you really look at it. It's not necessarily a benefit, but it's not necessarily a detriment either.
Hopefully that will improve, so we're going to seek to.
Speaker Change: to try to do that, but however, I think there's partners out there for us that understand our story and find us an attractive alternative to maybe what they're facing.
Speaker Change: Got it. Very helpful. Thanks for all the time and congrats on closing out the year very strongly. Appreciate it.
Thank you, Stu.
Speaker Change: And your next question comes from the line of John Rodis with James. John, please go ahead.
John Rodis: Good morning, guys. Paul, maybe a question for you on the securities portfolio given, you know, your conversation just about
John Rodis: deposit flows and outflows and then liquidity. How do you see securities portfolio trending in 2025?
John Rodis: We like to keep our security portfolio around 15-16% of our balance sheet.
John Rodis: and we value the opportunity to consider increasing that, but we're really mindful of trying to drive the right...
John Rodis: overall return profile and that I think is what drives that level currently.
John Rodis: Okay, thank you. Thank you, Paul. Helpful. And then just one other question.
John Rodis: and I on provisioning and I guess the reserve level and so forth and I know Cecil plays a big part but can you just talk about how we should be the provision for for 25
[inaudible]
John Rodis: Credit has been great in 2024 and as we look at 2025, it is
Covering the waterfall of
Grokin Mons
relative to charge-offs, and from a planning perspective,
I don't know.
John Rodis: in our reserve, and it's partially a function of CECL, that has been very asset-specific, loans that are individually evaluated. You know, we're very conservative when something falls into that bucket, and to the extent that...
situation works itself out and ends up creating a release.
John Rodis: situation so that that there were a lot of idiosyncrasies there that drove our experience in 2000
We seek to continue to have strong credit in 2025.
John Rodis: We have normalized expectations and we'll continue to manage as best we can.
Matt Olney: Paul, what do you think, talking about normal, what do you think is sort of a normalized net charge off rate for your company?
Matt Olney: Fortunately, we don't have a history of having high net charge-off rates.
Matt Olney: or predecessor companies, but we do think it's prudent to have normalized expectations since
Matt Olney: this great run of credit in the nation. It's pretty long in the tooth. So we think where you guys are at in consensus around the mid-teens is the right
Matt Olney: The right expectation to have, and we'll continue to seek to continue our track record of driving better results than expectations tend to dictate. Paul, just to clarify, is that mid-teens on net charge-offs or is that mid-teens on provision expense?
Matt Olney: Nick Dean's on net charge-offs maybe maybe 16 or so okay okay thank you guys have a nice day
Speaker Change: And your next question comes from the line of David Pfister with Raymond James, please.
Let's go ahead, David.
Hey, good morning everybody!
I just wanted, I wanted to start on
Speaker Change: Just the pulse of your economy, right, and what you're hearing from clients, right? I mean, Houston is seemingly one of the underappreciated markets in Texas. Texas is obviously doing extremely well. I just was hoping you could give us, you know, what are you seeing across your footprint and what are you hearing in the market?
Speaker Change: Well, thanks David for the question because I do agree with you, I think Houston is underappreciated.
Thank you.
The economics here in Houston are really good.
Speaker Change: I think if you think about it in terms of what the effect of interest rates were.
Speaker Change: over the last couple of years, people needed to digest that.
Speaker Change: But I think the economy has allowed people to digest that in a pretty good way.
Speaker Change: which is something we don't play a lot in, but it's...
Speaker Change: has been, has had its own damage, but for the most part, the resiliency of the economy here has allowed us to come through this crazy interest rate environment we've been going through the last couple of years.
in a pretty good way, so.
Speaker Change: We feel good about where we are as we look forward. We feel like we've got the wind behind us in a number of ways.
Speaker Change: with the administration that's changed, the regulatory environment we think is going to change.
a bit and the economy is still rolling on.
I do worry a bit about inflation, but...
Speaker Change: For the most part, I think there's clear sailing for us, and we haven't seen that.
And so, with interest rates stabilized, I think people
are able to make better decisions.
Speaker Change: When they think they have a clear understanding of what that borrowing cost is going to be and cost of capital for.
Speaker Change: David, we're waiting on the year-end numbers, but we were trending towards population growth still in excess of 100,000, job growth still in excess of 60,000.
Speaker Change: And as Bob mentioned around rate stabilization, we're definitely seeing that with deal flow as far as what we're seeing in committee around.
Speaker Change: You know, just more opportunity there and more activity, I think, as Bob mentioned, because of the kind of stabilization in the rate environment. And we're winning business, which is great.
Speaker Change: That's great. Markets definitely matter, and you got a good one. And then, you know, just kind of maybe on the other side, right, with a really healthy economy...
Speaker Change: Also, that's where folks want to go, right? We've seen a lot of folks increase their focus on Texas. And I was just hoping you could touch on competition, both for loans and deposits.
Speaker Change: It's always competitive, right? It's a tough market. It's an extremely attractive market, but I'm curious, what do you see from the competitive landscape on pricing, structure, and again, on both loans and deposits?
Speaker Change: Well, you know, we said, I mean, Houston, Texas doesn't go unnoticed by
the world, so
Speaker Change: We basically have every bank and financial institution in the world is right at our back door. So competition is something we're used to, David.
Speaker Change: I think what we're trying to sell to our customers is a very localized thing. And it's, I think,
We found some good reception around the fact that.
Speaker Change: If you look at the Houston market, J.P. Morgan still has 50% of the market. I mean, it's crazy, something that was acquired back in the 80s. And to their credit, they haven't relinquished that.
Speaker Change: Our job is to kind of take some of that back. And I think that's kind of what we're focused on. We now are at a size that we can basically make loans across the spectrum.
Speaker Change: certainly not in competition with J.P. Morgan, but if you look at the top four banks in our markets, they're all very large institutions.
Speaker Change: that have sort of soaked up that business over the years. And I think we can make incremental inroads into those guys. So we're going to continue to build our brand. And I think that's.
Speaker Change: The thing that hasn't stood out yet is that we need to continue to build our brand and get people to understand we're here and what the alternatives are to what they've had in the past.
Speaker Change: And David, we've got, I mean, back to the momentum, we've got momentum there. I mean, over 50% of our new accounts, number of new accounts, were to customers that had not been here before. So, we really love that trend.
That's great.
Speaker Change: and you guys gaining some share. What are you seeing on the hiring perspective? I know you guys have a good training program, but are you seeing opportunities to add new talent? Just kind of curious what you're seeing because that's something that's always been a part of the bank is recruiting.
Speaker Change: Blenders. So just kind of curious what you're seeing on that front.
Speaker Change: Yeah, I mean, hiring is always competitive. I mean, a good a good lender around here with experience.
It's going to be a competitive environment.
especially as more people have a focus on CNI.
and we're seeing that out there, but.
Speaker Change: You know, our ODP program has been really fantastic and been able to provide us with some young people that we can train from the ground up.
Speaker Change: And then I'm going to hit the road with some direction from some of our old salts around here.
Speaker Change: And they've been very effective in gaining inroads into some really nice pieces of business.
Speaker Change: So, as we build out our full spectrum from small business
Speaker Change: to C&I sort of middle, lower middle market to even some corporate business. We're making inroads on all of those levels.
Speaker Change: And I think we'll continue to do that. And we're, you know, we're 24-7 looking for people that can help us build and grow this bank. So that's always top of mind and we'll continue to do that in the future.
That's great. Thanks, everybody.
Thank you.
Speaker Change: There is no further question at this time. I will now turn the call back over to Bob Franklin for closing remarks.
Bob Franklin: Thank you operator and we appreciate everyone's interest in Stellar Bank and we'll conclude this call. Thank you.
Speaker Change: This concludes the meeting. Thank you all for joining. You may now disconnect.
Please wait, the conference will begin shortly.