Stellar Bancorp, Inc. Q1 FY2024 earnings call

• The Stellar Bank team focuses on building capital, strengthening liquidity, and monitoring credit.
• Houston's strong population and job growth (e.g., 140,000 population growth in 2023) bolsters the bank's position.
• Higher interest rates strain some project cash flows, but the bank identifies potential challenges early, using guarantor support, collateral, and paydowns.
• Maintains a great deposit base and good liquidity, though noninterest-bearing deposits fell below the 40% threshold.

Net interest income for the first quarter was $102.1 million, a decrease of $3.8 million from the fourth quarter of 2023. The net interest margin was 4.26% in Q1 compared to 4.4% in Q4 2023; excluding purchase accounting accretion, it was unchanged at 3.91%. Noninterest income was $6.3 million for the quarter, with gains from asset sales and SBIC income contributing. Noninterest expense was $71.4 million. Total risk-based capital was 14.62% at the end of Q1, up from 14.02% at the end of 2023 and 12.39% at the end of 2022. Core deposit intangible assets stood at $110.5 million, and loan discount was $98.2 million remaining.

• There is potential pressure on the $280 million expense guidance for 2024.
• Target to increase securities as a percentage of assets to around 15%, currently at 14.2%.
• Focus on building liquidity through the securities portfolio, aiming for better yields in the future.

• Higher interest rates straining cash flows of certain projects.
• Potential expansion of classified credit list, though ultimate stress not expected to cause significant losses.
• Impact of funding mix on net interest margin.
• Uncertainties related to economic conditions and credit quality.

Q: David Feaster asked about loan balances decline, credit appetite, pipeline trends and client feedback.

A: Ray Vitulli responded that loan origination was around $335 million, with $256 million in payoffs, and new loans came in at favorable pricing.

Q: David Feaster asked about core deposit trends.

A: Ray Vitulli discussed NIB deposits, noting a drop due to broker deposits but still positive on new account onboarding.

Q: David Feaster asked about asset quality.

A: Joe West said nonaccruals were driven by C&I credits, construction loans, and CRE loans with management issues.

Q: Matt Olney asked about core loan yields, repricing schedule.

A: Ray Vitulli talked about new loan rates at $8.49 and renewed loans at $8.05, with borrowers accepting higher rates.

Q: Matt Olney asked about securities portfolio.

A: Paul Egge discussed liquidity focus, securities target of 15%, and SBIC income around $400,000.

Q: John Rodis asked about securities portfolio direction and fee income.

A: Paul Egge mentioned securities target progress and SBIC impact, with other income including a gain on asset sale.