Stellar Bancorp, Inc. (NYSE: STEL), a bank holding company headquartered in Houston, Texas, has demonstrated its ability to navigate the challenging economic landscape with its disciplined focus on capital, liquidity, and credit quality. The company's principal banking subsidiary, Stellar Bank, provides a diversified range of commercial banking services primarily to small- to medium-sized businesses and individual customers across the Houston, Dallas, Beaumont, and surrounding communities in Texas.

Financials

For the fiscal year ended December 31, 2023, Stellar Bancorp reported annual net income of $130.5 million, annual revenue of $461.3 million, annual operating cash flow of $168.2 million, and annual free cash flow of $161.4 million. These strong financial results underscore the company's resilience and ability to deliver consistent performance, even in the face of economic uncertainties.

In the second quarter of 2024, Stellar Bancorp reported net income of $29.8 million, or $0.56 per diluted share, translating to an annualized return on average assets (ROAA) of 1.13% and an annualized return on average tangible common equity (ROATCE) of 12.82%. These results represent a solid improvement from the first quarter of 2024, where the company reported net income of $26.1 million, or $0.49 per diluted share, with an ROAA of 0.98% and ROATCE of 11.47%.

Capital and Liquidity

The company's focus on capital, liquidity, and credit quality has been a key driver of its performance. As of June 30, 2024, Stellar Bancorp's total risk-based capital ratio stood at 15.34%, up from 14.02% at the end of 2023, reflecting the company's commitment to maintaining a strong capital position. This strategic focus has also enabled Stellar to navigate the current interest rate environment and manage its deposit mix effectively.

Net Interest Margin

Stellar's net interest margin (NIM) on a tax-equivalent basis was 4.24% in the second quarter of 2024, a slight decrease from 4.26% in the first quarter. Excluding the impact of purchase accounting accretion, the NIM was 3.82% in the second quarter, down from 3.91% in the first quarter. The company's management team attributes this decline primarily to the full-quarter effect of the deposit mix shift experienced in the first quarter, which led to an increase in the cost of funds.

However, the company remains optimistic about the trajectory of its net interest income, as it believes the second quarter represents a relative trough, and it expects to see improvement in the back half of 2024. Stellar's management has highlighted the stabilization of its non-interest-bearing deposit base as a positive indicator, with the company onboarding a significant number of new accounts in the second quarter, a majority of which were from new customers.

Credit Quality

Stellar's credit quality remains strong, with nonperforming assets totaling $53.4 million, or 0.50% of total assets, as of June 30, 2024, compared to $57.1 million, or 0.53% of total assets, as of March 31, 2024. The company's allowance for credit losses on loans stood at 1.23% of total loans as of June 30, 2024, up from 1.22% as of March 31, 2024. The second quarter of 2024 included a reversal of provision for credit losses of $1.9 million, compared to a $4.1 million provision recorded in the first quarter, reflecting the company's stable credit environment and lower loan balances.

Loan Portfolio

In terms of the company's loan portfolio, total loans decreased by $194.2 million to $7.71 billion as of June 30, 2024, compared to $7.91 billion as of March 31, 2024. This decline was primarily driven by a strategic reduction in the company's commercial real estate (CRE) exposure, which is now within regulatory guidance. Stellar's management team has emphasized a more balanced approach to lending, with a greater focus on small- to medium-sized businesses and the acquisition of operating accounts.

Business Overview

The company's geographic footprint in Texas has been a significant advantage, as the state's economy has remained resilient throughout the current economic cycle. Stellar's markets in Houston, Dallas, and Beaumont have continued to demonstrate strong job growth and population expansion, positioning the company well for future opportunities.

Outlook

Looking ahead, Stellar's management team remains cautious as it navigates the uncertain economic landscape, including the potential impact of higher interest rates and the upcoming presidential election. However, the company's focus on capital, liquidity, and credit quality has provided it with the necessary optionality and strategic flexibility to capitalize on opportunities as they arise.

Conclusion

Stellar Bancorp's consistent performance, strong balance sheet, and strategic positioning within its Texas markets make it a compelling investment opportunity for those seeking exposure to a well-managed, community-focused banking institution. As the company continues to navigate the challenges of the current environment, its ability to maintain a disciplined approach and deliver shareholder value will be closely watched by the investment community.