Stellar Bancorp, Inc. (STEL) is a Texas-based bank holding company that has established itself as a leading community bank in the Lone Star State. With a focus on fostering strong customer relationships and delivering tailored financial solutions, Stellar Bancorp has steadily grown its presence and solidified its position within its core markets. Rooted in a Rich History of Community Banking
Stellar Bancorp's origins can be traced back to 1954 when its predecessor, Farmers & Merchants Bank, was founded. Over the years, the company has navigated a dynamic banking landscape, weathering economic cycles and adapting to industry changes with a steadfast commitment to its community-centric approach. In 2022, Allegiance Bancshares merged with CBTX, Inc., forming the current Stellar Bancorp entity, a move that significantly expanded the company's geographic reach and asset base.
Today, Stellar Bancorp operates through its wholly-owned subsidiary, Stellar Bank, which oversees a network of 54 banking centers primarily located in the Houston and Beaumont metropolitan statistical areas (MSAs), as well as one banking center in Dallas, Texas. The bank's focus on serving small to medium-sized businesses, professionals, and individuals has been a key driver of its success, as it strives to meet the unique financial needs of its local communities.
Stellar Bancorp's growth trajectory has been marked by strategic acquisitions and mergers. In 2015, the company acquired FM Bancshares, Inc., which added Farmers Merchants Capital Trust II and Farmers Merchants Capital Trust III to its structure. These trusts were organized to issue trust securities and invest the proceeds in Stellar's junior subordinated debentures, further strengthening the company's capital position and financial flexibility.
Weathering Industry Challenges with Prudent Risk Management
Stellar Bancorp has demonstrated its resilience in the face of industry challenges, such as the COVID-19 pandemic and the recent turbulence in the banking sector. The company has maintained a strong focus on prudent risk management, carefully monitoring its loan portfolio and adapting its strategies to navigate the evolving economic landscape.
As of September 30, 2024, Stellar Bancorp reported total assets of $10.63 billion, a slight decrease from $10.65 billion at the end of 2023. The company's loan portfolio stood at $7.55 billion, down from $7.93 billion at the close of the previous year, reflecting a strategic decision to derisk the balance sheet and reduce its commercial real estate (CRE) and construction and development (C&D) loan concentrations.
Impressive Financial Performance and Capital Strength
Despite the fluctuations in its loan portfolio, Stellar Bancorp has maintained a strong financial performance. For the nine months ended September 30, 2024, the company reported net income of $89.80 million, or $1.68 per diluted share, compared to $103.23 million, or $1.94 per diluted share, for the same period in 2023. The decrease in net income was primarily due to a $25.80 million decline in net interest income, partially offset by an $11.70 million decrease in the provision for credit losses.
The most recent fiscal year (2023) saw Stellar Bancorp achieve revenue of $461.32 million, net income of $130.50 million, operating cash flow of $168.22 million, and free cash flow of $161.36 million. In the most recent quarter (Q3 2024), the company reported revenue of $107.81 million, net income of $33.89 million, operating cash flow of $59.53 million, and free cash flow of $57.69 million. Notably, while revenue decreased by 3.2% year-over-year, net income increased by 9.7% compared to Q3 2023, primarily due to a $6 million reversal of provision for credit losses and a $1.6 million increase in noninterest income, partially offset by a $5.2 million decrease in net interest income and a $1.4 million increase in the provision for income taxes.
One of the standout aspects of Stellar Bancorp's financial profile is its robust capital position. As of September 30, 2024, the company's total risk-based capital ratio stood at 15.91%, well above the regulatory minimum of 8.00% required for "well-capitalized" status. This strong capital base provides Stellar Bancorp with the flexibility to navigate uncertainties, pursue strategic growth opportunities, and maintain a healthy liquidity profile.
Disciplined Deposit and Expense Management
Stellar Bancorp has also demonstrated disciplined management of its deposit base and operating expenses. The company's total deposits declined by 1.50% year-over-year to $8.74 billion as of September 30, 2024, as the bank maintained pricing discipline in a highly competitive deposit market. However, the bank successfully managed its cost of funds, with the cost of average interest-bearing liabilities increasing by only 82 basis points to 3.50% for the nine months ended September 30, 2024, compared to the same period in 2023.
On the expense side, Stellar Bancorp has been proactive in managing its overhead, with noninterest expense increasing by just 0.50% year-over-year for the nine-month period ended September 30, 2024. The company has also made strategic investments to strengthen its infrastructure and prepare for the challenges associated with crossing the $10 billion asset threshold, a milestone it achieved during the second quarter of 2024.
Navigating a Changing Regulatory Landscape
As Stellar Bancorp has surpassed the $10 billion asset mark, the company has had to navigate an evolving regulatory environment. The increased compliance requirements and heightened scrutiny that come with being a larger institution have prompted the bank to enhance its internal controls, risk management practices, and operational processes. While these changes have resulted in additional expenses, Stellar Bancorp has remained focused on maintaining its operational efficiency and delivering value to its shareholders.
Looking Ahead: Capitalizing on Market Opportunities
Despite the industry headwinds and regulatory challenges, Stellar Bancorp remains optimistic about its future prospects. The company's management believes that the economic strength and resilience of its core Texas markets, combined with its status as the largest locally focused bank in its served regions, will continue to drive growth and success in the years to come.
Stellar Bancorp is well-positioned to capitalize on opportunities in its markets, with a focus on balanced lending, strengthening customer relationships, and strategic capital allocation. The company's recent share repurchase program, which began in the third quarter of 2024, and its planned redemption of $40 million in subordinated debt, demonstrate its commitment to optimizing its capital structure and delivering value to shareholders.
Looking ahead to 2025, management is targeting a mid-single digit loan growth pace, assuming a more normal macroeconomic environment. On the margin outlook, while acknowledging there are many moving parts, the company feels well-positioned to defend its margin and potentially improve it, depending on factors such as loan growth.
Key Business Segments and Loan Portfolio
Stellar Bancorp operates through several key business segments, each contributing to its diverse loan portfolio:
1. Commercial and Industrial Loans: This segment decreased by $61.1 million, or 4.3%, to $1.35 billion as of September 30, 2024. These loans generally involve more credit risk but typically yield higher returns.
2. Commercial Real Estate (CRE) Loans: The CRE loan portfolio decreased by $95.5 million, or 2.3%, to $3.98 billion as of September 30, 2024. Notably, 47.1% of these loans were owner-occupied.
3. CRE Construction and Land Development Loans: This segment saw a significant decrease of $170.1 million, or 16.0%, to $890.3 million as of September 30, 2024. As of that date, 12.8% of these loans were owner-occupied.
4. 1-4 Family Residential Loans: This portfolio increased by $65.1 million, or 6.2%, to $1.11 billion as of September 30, 2024.
5. Residential Construction Loans: This segment decreased by $105.9 million, or 39.6%, to $161.5 million as of September 30, 2024.
6. Consumer and Other Loans: This portfolio decreased by $4.3 million, or 6.6%, to $60.0 million as of September 30, 2024.
Overall, Stellar Bancorp's total loan portfolio decreased by $374 million, or 4.7%, to $7.55 billion as of September 30, 2024, primarily driven by reductions in the commercial real estate construction and land development, and residential construction loan portfolios. The allowance for credit losses on loans was $84.5 million, or 1.12% of total loans, as of September 30, 2024.
Liquidity and Financial Strength
Stellar Bancorp maintains a strong liquidity position, with cash and cash equivalents of $399.24 million as of December 31, 2023. The company's debt-to-equity ratio stands at 0.105, indicating a conservative approach to leverage. Stellar Bancorp also has access to a substantial line of credit with the Federal Home Loan Bank (FHLB) of Dallas, with a total borrowing capacity of $2.98 billion, of which $1.86 billion was available as of September 30, 2024. This robust liquidity profile provides the company with ample flexibility to navigate market fluctuations and pursue growth opportunities.
As Stellar Bancorp navigates the dynamic landscape, investors will be closely watching the company's ability to maintain its strong financial performance, prudent risk management, and strategic positioning within its core Texas markets. With its proven track record, disciplined approach, and unwavering commitment to its community-banking model, Stellar Bancorp appears poised to continue its path of sustainable growth and value creation in the coming years.