Stellar Bancorp, Inc. (STEL) is a bank holding company headquartered in Houston, Texas, with a focus on providing a diverse 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. The company's principal banking subsidiary, Stellar Bank, has established a solid foundation over the past two years, positioning it for continued growth and success.
Business Overview and History
Stellar Bancorp was formed on October 1, 2022, through the merger of equals between Allegiance Bancshares, Inc. and CBTX, Inc. The merger was completed with CBTX as the surviving corporation, which was then renamed Stellar Bancorp, Inc. As part of the merger agreement, each outstanding share of Allegiance common stock was converted into the right to receive 1.42 shares of common stock of the combined company.
Immediately following the merger, CommunityBank of Texas, N.A., a wholly-owned subsidiary of CBTX, merged with and into Allegiance Bank, a wholly-owned subsidiary of Allegiance, with Allegiance Bank as the surviving bank. On February 18, 2023, Allegiance Bank changed its name to Stellar Bank as part of the operational conversion process.
The merger had a significant impact on all aspects of Stellar Bancorp's financial statements. As a result, financial results for periods after the merger are not directly comparable to financial results for periods prior to the merger. The company's results of operations for the year ended December 31, 2022, reflect Allegiance's results for the first nine months of 2022 and Stellar's results for the fourth quarter of 2022, following the merger on October 1, 2022.
Prior to the merger, Allegiance Bancshares, Inc. had been operating as a bank holding company and the parent company of Allegiance Bank since its founding in 2007. Allegiance Bank provided a diversified range of commercial banking services primarily to small- to medium-sized businesses, professionals, and individual customers within the Houston metropolitan statistical area (MSA) and the Beaumont MSA in Texas. The company derived substantially all of its revenues and income from the operation of Allegiance Bank.
The combined entity became one of the largest banks based in Houston, Texas, with a strong presence across the Houston and Beaumont metropolitan statistical areas (MSAs), as well as a strategic location in the Dallas MSA. This merger created a stronger, more diversified banking platform that is well-positioned to capitalize on the economic growth and opportunities within its target markets.
Financials
As of December 31, 2024, Stellar Bancorp reported total assets of $10.91 billion, total loans of $7.44 billion, total deposits of $9.13 billion, and total shareholders' equity of $1.61 billion. The company's financial performance has been consistently strong, with net income of $115.0 million, or $2.15 per diluted share, for the full year 2024. This represents a decrease from the $130.5 million, or $2.45 per diluted share, reported in 2023. The decrease in net income was primarily due to a $28.8 million decrease in net interest income, partially offset by an $11.8 million decrease in the provision for credit losses and a $1.5 million decrease in noninterest expense.
For the full year 2024, Stellar Bancorp reported revenue of $602.40 million, operating cash flow of $132.62 million, and free cash flow of $127.96 million. In the most recent quarter (Q4 2024), the company reported revenue of $107.99 million and net income of $27.80 million. Year-over-year revenue growth for Q4 2024 was -4.3%, primarily due to lower purchase accounting accretion in 2024 compared to 2023.
Financial Ratios and Liquidity
Stellar Bancorp's financial ratios demonstrate its strong financial position and liquidity. As of December 31, 2024, the company's total risk-based capital ratio was 16.03%, well above the regulatory minimum for a "well-capitalized" institution. Its Tier 1 leverage ratio was 11.31%, also significantly exceeding the well-capitalized threshold.
The company's liquidity position is equally robust, with a loan-to-deposit ratio of 81.50% and a high level of cash and cash equivalents, totaling $911.22 million, or 8.35% of total assets, as of the end of 2024. Stellar Bancorp's strong capital base and ample liquidity provide it with the flexibility to pursue strategic growth opportunities and weather potential economic downturns.
Additional liquidity metrics as of December 31, 2024, include:
- Debt/Equity ratio: 0.044
- Available Credit Line: $903 million (FHLB line of credit)
- Current Ratio: 1.25
- Quick Ratio: 1.25
Loan Portfolio and Asset Quality
Stellar Bancorp's loan portfolio is well-diversified, with 52.00% in commercial real estate loans, 18.30% in commercial and industrial loans, 15.00% in 1-4 family residential loans, and the remaining 14.70% in construction, land development, and consumer loans as of December 31, 2024. The company's focus on small- to medium-sized businesses has resulted in an average funded loan size of approximately $510,000, which helps to mitigate concentration risk.
Asset quality remains a strength, with nonperforming assets at just 0.36% of total assets and the allowance for credit losses on loans at 1.09% of total loans as of the end of 2024. The company's conservative underwriting practices and proactive risk management have contributed to its strong credit profile, which is further evidenced by net charge-offs of only 0.09% of average loans during 2024.
Deposits and Funding
Stellar Bancorp's primary source of funds is deposits, which totaled $9.13 billion as of December 31, 2024. The company's deposit base consists of noninterest-bearing demand deposits (39.2% of total deposits), interest-bearing demand deposits (20.3%), money market and savings deposits (24.7%), and certificates and other time deposits (15.8%). Stellar had $1.44 billion in fully collateralized public funds deposits as of the end of 2024, which may be more volatile than other deposit sources.
Strategic Initiatives and Outlook
Stellar Bancorp's strategic priorities center around organic growth, supplemented by selective acquisitions. The company is focused on expanding its relationship-driven commercial banking services, increasing its low-cost core deposit funding base, and leveraging its scalable operating platform to drive operational efficiency and profitability.
For the full year 2025, the company expects modest growth in non-interest expense, in line with inflation, to approximately $295 million. Additionally, Stellar Bancorp is targeting positive operating leverage for the year, aiming to deliver revenue growth that outpaces its expense growth. The company anticipates loan growth in the mid-single digit range for 2025, after facing some paydowns early in the year.
Stellar Bancorp sees its net interest margin remaining strong, with the ability to withstand a stable or slightly declining interest rate environment. The company is looking to maintain its capital ratios and tangible book value growth while evaluating potential M&A opportunities and share repurchases.
In terms of credit quality, Stellar expects a normalization in 2025 after very strong performance in 2024, with net charge-offs potentially in the mid-teen basis point range.
The company's robust capital position, with a total risk-based capital ratio of 16.06% as of the end of 2024, provides it with the flexibility to pursue strategic growth initiatives, including potential acquisitions, while also maintaining the option to return capital to shareholders through share repurchases or increased dividends.
Human Capital and Corporate Culture
As of December 31, 2024, Stellar Bancorp had 1,020 employees. The company emphasizes a culture of collaboration, integrity, and accountability. It has programs in place to develop talent and maintain a diverse workforce, which aligns with its commitment to serving the diverse communities within its market areas.
Industry Trends and Market Position
The banking industry in Stellar Bancorp's markets has seen moderate loan and deposit growth, with increased net interest margins due to the rising interest rate environment. The industry's compound annual growth rate (CAGR) is estimated to be in the low-to-mid single digits. As a small-cap company, Stellar Bancorp operates primarily in the Houston and Beaumont MSAs in Texas, with a strategic presence in the Dallas MSA. The company's focus on commercial banking services for small- to medium-sized businesses in these core Texas markets positions it well to capitalize on regional economic growth.
Conclusion
Stellar Bancorp has established a strong foundation for growth through the successful merger of Allegiance Bancshares and CBTX, creating a well-capitalized and highly liquid regional banking franchise. The company's focus on commercial banking services, conservative underwriting, and scalable operating platform have positioned it well to capitalize on the economic opportunities within its target markets. With a solid financial profile, strategic initiatives aimed at organic growth and prudent capital management, and a clear outlook for 2025, Stellar Bancorp appears poised to deliver long-term value for its shareholders while navigating the evolving economic landscape in its core Texas markets.