Yahoo Finance Stellar Bancorp, Inc. (NASDAQ:STEL) Q1 2024 Earnings Call Transcript
Stellar Bancorp, Inc. (NASDAQ:STEL) Q1 2024 Earnings Call Transcript April 28, 2024
Stellar Bancorp, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Stellar Bancorp, Inc. First Quarter 2024 Earnings Call. [Operator Instructions] I will now hand today's call over to Courtney Theriot, 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. Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the safe harbor provisions for forward-looking statements contained in the act.
Also note that if we give guidance about future results, that guidance is only a reflection of management's beliefs at the time the statement is made, and such beliefs are subject to change. We disclaim any obligation to publicly update and any forward-looking statements, except as may be required by law. If you 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.
Robert 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 moved 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, 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. 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. The requirement of significant equity going into a project or the paydown 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 our population grow by almost 140,000 people last year, second only to Dallas Fort Worth. 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 of success. I will now turn over the call to Paul Egge, our CFO.
Paul Egge: Thanks, Bob, and good morning, everybody. We are pleased to report first quarter net income of $26.1 million or $0.49 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 made for an ROAA of 1.02% and a return on tangible common equity of 12.61%. As Bob mentioned in his commentary, we are continuing our focus on capital, liquidity and credit in 2024. 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 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. 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. Excluding purchase accounting accretion, net interest margin was unchanged from the linked quarter at 3.91%.
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 4 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 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 $0.5 million gain on asset sales and some SBIC income in the quarter. Last, noninterest 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 bonus payments.
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 ratio since the merger. 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. 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 has been a really solid driver to our internal capital generation since the merger, and we like our prospects for continued internal capital generation.
On the topic of purchase accounting items, we ended the quarter with $110.5 million in core deposit intangible assets and a loan discount of $98.2 million remaining. 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. This 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. Speaking of Houston, Bob mentioned the 2023 data on the Metropolitan areas extraordinary population gains. 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.
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.
Robert Franklin: Thank you, Paul. And operator, we're ready to take questions if there are any.
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