Q2 2025 Stellar Bancorp Inc Earnings Call
Thank you for standing by. My name is Rebecca and I will be your conference operator. Today at this time I would like to welcome everyone to the Stellar Bank Q2 earnings release conference call 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. I will now turn the call over to Courtney Serio. Please go ahead.
Courtney Serio: Thank you, operator. And thank you to all who have joined our call today.
Courtney Serio: Good morning. Our team would like to welcome you to our earnings call with the second quarter of 2025.
Speaker Change: This morning's earnings call will be led by our CEO of Bob Franklin and CFO Paul eki.
Also in attendance today, our Steve readsoft executive chairman of the company, Rave the Tuli president of the company and CEO of the bank. And Joe West, Senior Executive Vice, President and chief credit officer of the bank.
Before we begin I need to remind everyone that some of the remarks made today constitute for looking statements as to find in the private Securities. Litigation Reform Act of 1995 as amended
Speaker Change: We intend all such statements to be covered by the Safe Harbor. Provisions for forward-looking statements contained in the app.
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.
We just claim any obligation to publicly update, any forward-looking statements.
Speaker Change: Except us 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 IRS stellar. Bank for additional information about the risk factors associated with war, 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.
Bob Franklin: Good morning and welcome to the Stellar bag. Corp, second quarter earnings call.
Bob Franklin: We are pleased to share our results for the quarter evidencing, the great work. Our team is performed toward our goals for growth
Bob Franklin: In the first quarter, we described how we thought the year would play out with our loan volume. Stabilizing with payoffs in the second quarter, giving us momentum for growth in the third and fourth quarter.
Bob Franklin: Our pipeline is healthy and continues to support growth.
Bob Franklin: we are seeing great results from our business development efforts with new alone, originations nearly doubling in the second quarter when compared to the first
Bob Franklin: This is the highest level since 2022 and we believe it marks the return to organic growth.
Bob Franklin: By the resilient Texas Marketplace, which provides Stellar bank with great opportunities.
Bob Franklin: Our markets have seen m&a activity, pick up as many in the country focus on business business, friendly States.
Bob Franklin: With this consolidation comes some disruption and we anticipate potential for both customer acquisition and talent as a result.
Bob Franklin: Our foundation is our great balance sheet, exhibiting strong capital and liquidity and highlighting our commitment to gore funding.
Bob Franklin: These attributes provide us with a good net interest margin and plenty of optionality in the marketplace.
Attribute to our disciplined approach around relationship banking.
Bob Franklin: We continue to focus on expanding existing relationships and building new ones.
Bob Franklin: Our our strategy is clear continue to build Stellar into the bank of choice in our markets for Small Business Leaders.
Speaker Change: We are a Community Bank and we understand our that our commitment to relationship banking is what will drive long-term value for our shareholders. And with that, I'm going to turn the call over to Paul Ley for further, call on the quarter.
Thanks um and good morning everybody. We are pleased to report, second quarter, 2025 net, income of 26.4 million or 5451 cents per diluted share, which is up from net income of 24.7 million or 46 cents per share in the first quarter.
These Q2 results represent an annualized Roa of 1.01% and an annualized Roat, CE of 12.16 percent.
Speaker Change: G highlights of our Q2 performance, were non-interest, expense management, and low, credit costs primarily due to low, net charge offs.
Speaker Change: Our balance sheet grew incrementally, thanks largely to deposit growth. While loans ended the quarter slightly up from the first quarter.
Speaker Change: during the second quarter, net interest income was 98.3 million representing a slight decrease in the 99.3% in the first quarter of 2025,
This was due largely to lower earning Assets in slightly, lower net, interest margin for the quarter this translated into fill and helping net interest margin of 4.18% in the second quarter relative to 4.2% in the first quarter.
Speaker Change: Purchase County accretion in the second quarter was 5.3 million, which was relatively flat compared to the 5.4 million in the first quarter.
Speaker Change: Excluding purchase accounting accretion tax equivalent. Net interest income decreased slightly in the quarter to 93.1 million from 94 million in the prior quarter and net interest margin. Excluding accretion was 3.95% down from 3.97% in the prior quarter.
Speaker Change: Margin performance. During the second quarter was impacted by higher funding costs more than offsetting higher yields on earning assets.
Which resulted in that 2 basis point change versus the first quarter.
Speaker Change: We should note that that first quarter benefited from some deposit, seasonality that impacted deposit funding costs to the positive in that quarter.
Speaker Change: Second quarter margin, including purchase accounting accretion and the cost of deposits. We experienced still reflect an incremental improvement from the fourth quarter of 2024. So we continue to feel good about our ability to defend an incrementally. Improved, our top tier margin profile,
Speaker Change: Walking further down the income statement, we booked a provision for credit losses of 1.1 million in the second quarter which was driven primarily by an increase in our allowance for unfunded commitments. Due to a nice increase in our unfunded loan commitments. During the quarter,
Speaker Change: To a lesser extent. This was also driven by minimal this, this level of, uh, provision was driven by, uh, minimal net charge offs.
Speaker Change: Our allowance for credit losses on loans ended the quarter at 83.2 million or 1.14% of loans, which is down 1 basis point. Uh, from the 1.15% of loans, uh, that we had at the end of the first quarter.
Moving on to non-interest income. We earned 5.8 million for the second quarter, 2025 versus 5.5 million in the first quarter.
Speaker Change: Uh, here, we must note. Those second quarter benefited from additional earnings, uh, from Federal Reserve Bank dividends as a result of Stellar, becoming a member of the FED, uh, at the beginning of the second quarter.
Speaker Change: next, non-interest, expense for the quarter was essentially flat at approximately 70 million dollars,
Speaker Change: This is better than planned in reflective of our focus on holding the line where we can on expenses.
Our solid bottom line results, have driven internal Capital generation, and our ability to maintain a very strong balance sheet and capital position.
Speaker Change: A little bit. Capital was 15.98% at the end of the second quarter relative to 15.97% at the end of the first quarter.
Speaker Change: Year-over-year, tangible Book value increased 10.8% from 18 to 19.18 per share to 19.94 dollars per share. And this is after the effect of dividends in some significant share repurchase activity over the last year.
Speaker Change: On the topic of share repurchases, we bought back 791,000 shares of our stocks at a weighted average price of 26.8 uh per share during the quarter.
Speaker Change: In closing, we really like where we fit both financially and strategically, we are positioned to deliver positive operating leverage by adding more scale to the Stellar Bank platform and maintain a really strong balance sheet. We believe this will give us the financial flexibility of the opportunistic.
Speaker Change: Thank you. And I will now turn the call back over to Bob.
Bob Franklin: Thank you, Paul operator. I think we're ready for questions. Thank you.
Your first question comes from the line of David Fester with Raymond James.
David Fester: Hey, good morning everybody.
Speaker Change: All right, Dave, um, I wanted to start first on the growth Outlook. We saw loans stabilize this quarter, um, which is encouraging. I, I was just hoping you could maybe touch on on the competitive landscape for loans, um, you know, kind of origination activity relative to to pay off and pay downs and some of the just, you know, what's driving the payoffs and pay downs. And I when do you think we can start seeing originations offset that headwind. And and growth start to accelerate
Bob Franklin: Hey, David. Um, yeah, so the the originations that says Bob mentioned um nearly doubled in the second quarter compared to the first. Um and we our pipelines, kind of support that level of continued originations. And when you look at the uh, waterfall of what kind of where that needs to be,
Bob Franklin: Um, you know, we've got, we've got a pretty good feel around where where payoffs are and you know, a lot of those are coming from just, you know, trades of of properties as they sell. Um, but kind of at that level we originated 600 and call it 640 million in the second quarter and that that kind of resulted in this slight growth. Um so you know, we know that's probably the bar where origination is greater than that, we'll receive
Bob Franklin: Result in some growth. The the other component is what we call our carried, which is our advances. Um
Bob Franklin: Less our payments. And because of the loans that we have been putting on, we should see a lift in future quarters in that area where in previous quarters that's actually been a a a a decrease for us because of uh, where we sit with unfunded and our in our loans book. So kind of the 2 factors to your question about going forward is continued on the origination path. And then see those ones that look, uh, have some advantages that will exceed the payments to give us a list there. Um, we like where these loans where the rates came on for these loans. There it's healthy as well. And um even in as as you know the markets we serve are extremely competitive but we have, um, our Bankers are out on the street. Uh, we've had some new hires that are starting to get some traction. Uh, we've had winds and uh, Dallas Market and continue to have uh get get some market share gains here and in the Houston Bowmont region.
Speaker Change: Okay, that's helpful and maybe touching on the other side, the funding side, you know, obviously there's there's been some noise there. Uh, I'm just curious maybe the competitive landscape for funding in your markets and just the the strategy and ability to continue to drive core deposits going forward. And I would you expect funding costs to kind of remain relatively stable or maybe increase just just kind of curious your thoughts on the funding side.
Speaker Change: you know, on on time, we've seen a little bit of the of
Speaker Change: uh, not so much on the competitive side on the time, deposits on the, on the money market. There's absolutely competitive, uh, part there and we we we dealt with that through, kind of what we call a measured approach with exception pricing, where we need it. Um, you know, where our uh the second quarter in our net new. So our in terms of dollar of open less closed was the highest in 3/4 in the second highest in 6/4 and the mix of that 50% in the second quarter was to new customers. That that have not been in Stellar bank before. So, you know, our our approach and strategy is to is to expand our existing customer base, but then go out and and kind of tackle with the market will give us and we're well positioned for that.
Speaker Change: Okay.
Speaker Change: Um and just last 1 for me, you guys have done a great job managing expenses. I I'm curious as you look at expenses going forward is there more wood to chop on that front? Um or just given the disruption around you? Whether there could be some opportunities to maybe invest in new talent and and maybe be a bit offensive here.
Speaker Change: So uh, I characterize our expense management that's holding the line where we can uh and that is so that we can be opportunistic when the right opportunities come up as opposed to kind of feeling like we're on the deficit on spend and more spend with kind of put us in uh a less optimal place. So
Speaker Change: uh, the net effect of, um, our strategy of holding the line where we can, uh,
Speaker Change: Opens up the possibility. Uh,
Speaker Change: To be opportunistic, but, uh, it's still a dynamic where we're going to focus on holding the line where we can so that the revenue growth, outpaces, uh, expense Dynamics.
David Fester: yeah, David I think
David Fester: Grow the bank.
David Fester: Um the the nice part for us, I think to some extent is that that the the back office builds around the things that we had to do over going over, 10 billion dollars is is pretty well done. So we're not we don't expect growth in that area, um, but you know, we certainly are looking for additional talent to help help grow the bank and, and in the future. So, uh, we won't let that keep us from from acquiring down.
David Fester: Okay, that's helpful. Thanks everybody.
David Fester: Thank you.
Your next question comes from the line of will Jones with KBW.
Yeah. Hey guys. Good morning.
Morning. Well.
Will Jones: So, so Paul, if I could just just weave together, some of the commentary on on, just, maybe the deposit cost competition landscape. Um, and just, just remember that with, with your, your desire to see some growth in the back half of the Year could, could you just, you know, piece out what, what the implications are for, for how the margin could Trend? Um, you know, as as we move into the third and fourth quarters of this year?
Will Jones: So we feel really good about our position, our ability to to defend our margin. Um there has been a little bit of mix shift in the uh kind of funding based and that's been largely strategic, we've replied um a little less on fhlb borrowing and brokered funds. In the second quarter of actually I should say we're
Will Jones: I have a little less on fhlb borrowings and brokered, uh, CDs in the second quarter and instead, um, relied on a lower lower cost alternative to fhlb funding, which was a uh, uh interest bearing demand, uh, brokered which we've lowered our, uh, exposure to. But ultimately that drove a little bit of the shifting cost in the um,
Will Jones: Kind of funding base during the second quarter relative to the first quarter. But really, we feel awesome about where we stand currently in terms of at our low relative low points on usage of wholesale funds. Um, at the end of the second quarter and funding composition is what's going to drive our ability to drive improvements to margin. Uh if it stays more consistent as it currently stands, you know, uh we'll be able to go probably improve basis, improve margin kind of on a basis. Point by basis, point night sight basis, if we're able to, um, kind of continue to decrease our, um, usage of wholesale funds. We've made, uh, be able to drive, uh, a little better Dynamic. Uh, so really focusing on staying core is what's going to help us drive? Uh, what we think is a structurally, strong core margin in our business, um, to the extent, we backslide, uh,
Will Jones: we we like our ability to
Will Jones: Still defend where we're at?
Speaker Change: Yeah, that's great. I'm pretty sure that's helpful response. Um, and I know you've talked in the past just about your desire to to see Security's balances grow a little bit. Um, but as a as a look this quarter they they at least, you know, leveled out um on an average basis here. Uh did you feel like you've done? All you need to do in terms of um building up that Bond portfolio?
Speaker Change: Yes. Absolutely. I mean we're still incrementally, uh, we're we're satisfied with the size of it and we'd incrementally uh grow grow to a degree, but it's uh we're focused on growing loans. Uh, we feel like we have a great liquid balance sheet. I'd say when you track the average, balances in the second quarter versus the first quarter. The first quarter when we had, uh,
Speaker Change: Benefited from the seasonality of uh our government banking business. We did uh
Speaker Change: Incrementally, invest in some Securities and a ladder such that uh, uh, you had higher average, balances in the first quarter so that that uh is a seasonal anomaly. Um, but where we were in the second quarter is, uh, pretty much where we want to be, and I would say more on a percentage of assets basis. So it's, we're able to grow assets. We'll try to maintain around the same percentage of assets, uh, Dynamic that we currently hold.
Speaker Change: Okay, great, thanks, Paul. And then um, you know, excess Capital that that you guys have. I mean it's it's a high class problem um and you're you're deploying that
Speaker Change: Uh, somewhat through BuyBacks. Um, but but valuations have also moved a little bit, um, from where you bought back in the first and second quarter, um, does that still play a role, you know, near-term or or or do you really, you know, lean more into the organic growth? Um as you see that opportunity picking up
Speaker Change: Thanks.
Because the number 1, use of capital that we want to, uh, uh, engage in and, uh, secondarily. There's other strategic uses of capital for which we feel like we benefit from optimal flexibility on that front. And then, you know, last Sherry purchases are an awesome tool for us. We were very active, uh, in the first half of the Year, our demand for Sherry purchases is, uh, really graduated based on uh, price. Um, so we're going to be uh, if you guys might have seen in the first half of the year, uh, we'll able and willing to be pretty aggressive, um, when we feel like uh, that Dynamic is merited.
Speaker Change: Understood. All right guys, that's all for me. Thanks.
Speaker Change: Thank you as well.
Speaker Change: Ladies and gentlemen, if you would like to ask a question press star followed by the number 1 on your telephone keypad,
At this time. Your next question comes from Matt, Ally with Stevens.
Matt Ally: Hey thanks. Good morning, everybody.
Speaker Change: Sorry, Matt.
Uh, want to go back to the loan growth discussion and and dig in more to the originations that uh uh really improved this quarter that that Bob noted, any color on the mix of originations. I, I know you guys have been working hard building out um kind of a cni more of a middle Market strategy over the last uh, year or so, just any color on that progress and just the overall origination mix.
Speaker Change: Yeah. Matt the um, no, it's it's as you as you mentioned, the, um, we've had a good mix of cni.
Um, in that in there, you know, we got down to, um, really low levels on our concentrations on, um, Crescent and C and D. So there's there's a little back bill in in those areas as well. But, uh, we continue to push. Um, and look at opportunities on the cni side and we're pleased with where that's been, um, not only in the second quarter, but just over the past few quarters of our mix, um,
Speaker Change: In the cni front. So it's kind of kind of all across the board not uh that it looks similar to how we've originated. It's just that at a high at higher, uh, absolute dollar amounts
Speaker Change: Okay, uh, appreciate that. And then I want to go back on to the expense discussion and and and Paul you mentioned the banks in a nice job kind of holding the line. Uh so far this year and looks like expenses are pretty flat year-over-year. Through the first half of the Year based on where we're at today, you think it's reasonable to assume expenses, just continue to remain flat uh for the remainder of the year in 25 as compared to to 24 absent. Any of those Investments that uh, you'll be, you know, opportunistic looking for
Speaker Change: Yeah. Absent opportunity to speak investment. Uh that's the goal is uh is is is is is hold the line right here. We're really pleased with the fact that uh
Uh, we've been able to outperform, uh, our where we initially budgeted. And where we initially, uh,
Speaker Change: Kind of positioned the expense story. Um, and we're really pleased with, uh,
Speaker Change: Us actually kind of meeting last year's guidance and beating this year's guidance. So um, that's that's the goal. But uh
Pardon and parcel to that is having that flexibility to be opportunistic.
Speaker Change: Yep. Okay.
Makes sense. Um and then on the discussion around the core margin, I think we've talked about kind of a you know intermediate term goal is getting back to that 4% margin. Um and we've talked on this call about uh deposit cost competition, uh, a little bit more of a headwind now than before is that is that is that 4% core margin is that still, a reasonable goal and, and do you see any kind of potential fed cut? Uh, that we could see that are on this year? And the next year? Do you see that? Um, you know, benefiting the margin as you stand today or is that potentially a more of a a headwind if that were to happen?
Speaker Change: It'll benefit the market.
Speaker Change: I mean, when you
Speaker Change: Get the right cuts.
Speaker Change: kind of,
Special adjustment noise that's hard to parse out. Uh, but by and large,
Speaker Change: That.
Has uh, opens up more, um, kind of structural opportunity for our uh, margin to continue to improve in the medium-term. You know, immediately there could be a little bit of noise, but we like where we fit and we, uh, we like and we were it is Our intention to uh, scratch and Claw back up to a 4 handle on larger.
Speaker Change: Okay.
Appreciate the commentary Paul and then on the capitol front, uh you mentioned the buyback on a previous. Uh question, what about uh I think you also talked about.
Speaker Change: Earlier this year, you paid down some debt. It seems like there's maybe another tranche or 2 of debt. That could be uh redeemed, just any any update on on, uh, the the the debt at this point.
Where uh, looking at that kind of in conjunction. Uh it's in the Playbook uh with Sherry purchases and and how we think about kind of the uses of our excess here. So um, we are we are evaluating that really in line with uh the other options out there. Um,
Speaker Change: So it's it's certainly uh, there for us to consider.
Speaker Change: And then I guess, just on on m&a, you know, we've seen a flurry of of deals in in in your backyard of Alaska.
Speaker Change: Few weeks which is which is great to see. I'm just curious about the the banks m&a discussions and and talking with potential Partners just any uh update on uh maybe maybe the pace of those conversations more recently.
Matt Ally: yeah, Matt I think the the the pace of the conversation have been, you know, fairly
Matt Ally: Kicked up K, kicked up a bit. And I think you know 1 of the things for us is just to make sure we're mindful of this to stay disciplined around pricing and
Matt Ally: um,
Matt Ally: you know, I think some of those exuberance, uh, sometimes causes some
Matt Ally: Some disruption around price around pricing for some of these things. But I I think, you know, we always make sure that we want to not do any damage to the franchise that we already have, and
Um, but we're still we we are still seeking Partners to help.
Matt Ally: Uh, build the balance sheet, build, build the bank. And, uh, there's still some opportunities out there for us and, and, uh,
So we're going to continue those discussions.
Matt Ally: Okay.
Thanks for the update, guys.
Matt Ally: Your next question comes from the line of John Raditz with Janie.
Hey, good morning, guys.
um,
Speaker Change: yeah, I guess most of my questions have been asked and answered but Paul maybe just 1 on
Speaker Change: The other income line item, you highlighted, the FED dividend. So all things equal, all things. Equal going forward in the second half. Does does the other income line probably
Trend. Back more towards sort of the first quarter level.
Speaker Change: Yeah, there, there is, uh, some lumpy pieces that fall into other income. Uh,
Speaker Change: 1 of them is is our fbic income, which sometimes can have some, um,
Speaker Change: Lumpiness to it. But the the key in ongoing um,
Speaker Change: Components to other income is going to be. Uh, and it's the new entrance of these dividends uh as a byproduct of holding fed stock and being a uh, a Fed member. So that that's going to go on in perpetuity um, the some of the other Dynamics. Uh I can't promise that there won't be volatility in that line but net net. Uh what drove most of the difference between the first quarter and the second quarter is a
Speaker Change: Um, ongoing benefits.
Speaker Change: Okay, okay. Sounds good. Thank you.
Bob Franklin: I will now turn the call back over to Bob for closing remarks.
Bob Franklin: Uh thank you operator and thank you to all of you that have joined the call this morning. Uh and we are a jerk. Thank you.
Ladies and gentlemen, that concludes today's call, thank you all for joining. You may now disconnect
Please wait the conference will begin shortly.