Yahoo Finance

Paul Egge

Thanks, Bob, and good morning, everybody. We are very pleased to report first quarter 2025 net income of $24.7 million or $0.46 per diluted share, which represents an annualized return on average assets of 94 basis points and an annualized return on average tangible common equity of 11.48%. Key highlights of our first quarter performance included a reduction of noninterest expenses and a meaningful repurchase of common stock, along with the continuation of core net interest margin progress after seeing inflection during 2024.
Our balance sheet shrunk during the quarter on a point-to-point basis, largely due to the seasonal outflow of government banking deposits and cash balances that had significantly inflated our balance sheet at year-end, which we acknowledged during our last earnings call. Looking at it on an average basis, the linked quarter decrease in assets was much less significant and more reflective of the decrease in loans experienced during the quarter. The net result is a smaller but stronger and more core balance sheet with a very strong capital position, and that's notwithstanding our share repurchase activity during the quarter. And if not for 2 less days to earn interest in the first quarter, earnings would have been up relative to the prior quarter.
Notwithstanding broader economic uncertainty, we believe we are well positioned to return to a reasonable level of growth during the year, albeit later than initially planned. And incremental growth will position us well to deliver operating leverage and earnings improvement in 2025. Net interest income for the quarter was $99.3 million, representing a decrease from the $103 million booked in the fourth quarter. This was largely due to lower purchase accounting accretion and 2 less days to earn interest due to the 90-day quarter. This translated into a net interest margin of 4.2% in the first quarter relative to 4.25% in the fourth quarter of 2024.
Purchase accounting accretion in the first quarter was $5.4 million relative to $7.6 million in the fourth quarter. Excluding purchase accounting accretion, tax equivalent net interest income decreased slightly in the quarter to $94 million from $95.5 million in the prior quarter and net interest margin, excluding purchase accounting accretion, was 3.97%, up from 3.94% in the prior quarter. Key drivers to the strong margin performance during the first quarter included the relative stability in maintaining a strong proportion of noninterest-bearing deposits, which represented over 37% of our deposit base, a 14 basis point improvement in our cost of funds, driven by a 21 basis point improvement in our cost of interest-bearing liabilities. Also, we had incrementally higher securities yields and pretty strong loan yields after excluding purchase accounting accretion.
Walking further down the income statement, we booked a provision for loan losses from the first quarter of $3.6 million. In combination with minimal net charge-offs of $163,000 during the quarter, this brings our allowance for credit losses on loans to $83.7 million or 1.15% of loans from $81.1 million or 1.09% of loans at the end of the prior year.
Moving on to noninterest income. We earned $5.5 million for the first quarter versus $5 million in the fourth quarter, noting that the first quarter benefited from small gains on sales of assets. Next, noninterest expense for the quarter was down -- was down $5.1 million to $70.2 million from $75.3 million in noninterest expense during the fourth quarter. This is better than planned and reflective of both some timing-driven dynamics and our focus on holding the line on expenses where we can. Our strong bottom line results have driven a continuation of our track record of growing our regulatory capital ratios and tangible book value per share since the merger.
Total risk-based capital was 15.94% at the end of the first quarter relative to 16% at the end of 2024 and 14.02% at the end of 2023. Our regulatory capital ratios at the bank actually ticked up. Year-over-year, tangible book value per share increased 14.3% from $17.23 to $19.69 per share, and that is after the effect of both dividends and the share repurchases.
We continue to like our prospects for strong internal capital generation and the optionality that it creates, which we feel is very valuable in the current operating environment. During the first quarter, we acted on this optionality through share repurchases, buying back 1.4 million shares of our stock at a weighted average price of $27.99 per share. Additionally, we repurchased 679,000 shares at a weighted average price of $25.83 per share since the end of the first quarter, representing in total nearly 4% of our shares outstanding at year-end.
The Board of Directors also authorized a new share repurchase program, which allows us to repurchase up to $65 million in shares through May of 2026. While our preference would be to deploy capital through growth and M&A, we appreciate having the flexibility to pursue capital optimization through buybacks when appropriate.
In closing, we really like where we sit, both financially and strategically. We've laid the foundation to support adding more scale to the Stellar Bank platform, and it remains our goal to deliver positive operating leverage during the year while maintaining a really strong balance sheet and the financial flexibility to be opportunistic. Thank you, and I will now turn the call back over to Bob.

Robert Franklin

Thank you, Paul. I think, operator, we're ready for questions.

Question and Answer Session

Operator

(Operator Instructions) David Feaster, Raymond James.

David Feaster

I want to start on the loan side. It sounds like we're cautiously optimistic about potential for accelerating growth that this might hopefully is kind of the trough here. Could you just, I guess, first off, touch on the pulse of your clients. Obviously, there's a ton of uncertainty out there. So I'd be curious, what are you hearing from your clients?
And just how the pipeline is trending? And how much of this decline is a function of payoffs and paydowns being elevated and higher than expected versus slower originations just given the uncertainty?

Robert Franklin

Let me set this up a little bit, and I want Ray to come in and fill in. One of the things we've been focused on, David, is -- I mean, I think when you see an MOE come together, especially the way ours did is 2 real community, small community banks and then combine into a bank that's over $10 billion in assets, there's some redistribution of how the loan book should look. And we've been attempting to kind of reconfigure what that -- what the loan side of our balance sheet looks like. In other words, be able to do across the board any type of loan that we want to do without being totally reliant on these sort of smaller real estate loans that we have all done in the past as a smaller community bank.
So across the board, be able to do the things that we want to do. So there's a bit of real focus on it. And letting some of this stuff roll out. So we were -- when we started this journey, we were over the regulatory guidance in both categories, both C&D and CRE. So what we've done is focused on getting those balances back down to what looks more like a larger bank balance sheet.
So we've done that. We continue to see some of that roll off that we've really kind of focused on letting roll off. And then as we add to it, it's a little bit different focus on what we're adding to it. But I'm going to let Ray fill in the gaps here.

Ramon Vitulli

Thanks, Bob. David, on the -- to your question around pipeline and kind of the waterfall. So in the first quarter, our loan originations, and this kind of goes to this -- the build of the pipeline and what we're seeing. If you compare it to the past 4 quarters, we've had 2 good quarters of solid originations that were in excess of the second quarter '24 and third quarter '24. So fourth quarter of '24 and first quarter, we're trending in the right direction, and it supports what we're seeing in the pipeline as far as deal flow as well as just the absolute value of the pipeline, both in expansion of our existing customer base and new market share gain opportunities.
So if you look at where that's building, it's so long as we can convert, it will continue to generate higher loan originations. And then we've got to see where those fund. But if they fund the way we think they're going to fund, that obviously gives us a lift to offset the payoffs, which have been about, call it, $275 million to $300 million a quarter. The other component of the waterfall that really kind of goes to what Bob just talked about is that what we call our carried loans, which is our advances less our payments on the whole book. And because of the posture that Bob mentioned, that has not given us a lift over the past 4 quarters.
So as we continue to originate and get availability that will then fund, we should see took a positive lift in the carried, which will help the overall loan growth story, which we -- as we said, should be in the second half of the year. We're seeing a little bit of growth in our unfunded commitments, which is good, which is kind of the leading indicator for that. So we feel good about it. Our team is laser-focused. We know what's needed on the origination side in order to generate the growth.
And to your question about customer sentiment, it's kind of the way we're talking about it. It's still early to tell. We have seen maybe some pull-through of things like maybe some inventory purchases early, but we still think it's too early in that aspect. And as far as deal flow, what we're seeing on in committee and what we're seeing in the pipelines, it's positive.

David Feaster

Okay. That's great color. And maybe just touching on the deposit side. I mean you used some pretty strong language in the press release, saying the market is intensely competitive. Could you just elaborate on that and touch on some of the trends you're seeing, obviously, exclusive of the government deposits, just where are you having success winning new relationships? How do you think about core deposit growth and opportunities to further optimize funding and maybe drive some further improvements in deposit costs even exclusive of Fed cuts?

Ramon Vitulli

Well, we still -- we really like our new account origination story. So first quarter onboarded in both number and dollar amount more than the fourth quarter. The NIM mix is consistent with our overall bank NIM mix. And you got to also -- you can't talk about new accounts without closed accounts and closed accounts were at the lowest level in 4 quarters. So -- and of that -- of those new accounts, close to 40% were to customers that weren't here before, which we really love that trend.
I think it talks about the stellar brand, where we sit in the market, our success in having doors open for us. And we continue as we sit sixth in the MSA and deposit market share, kind of the opportunity to continue to take market share gains.

Paul Egge

And that's notwithstanding our track record of not really being a market leader in price. We don't buy our deposit base. We work in a hard way, and it's reflective of the new account openings being skewed towards the way we want it, a lot of noninterest-bearing deposits and things along those lines.

David Feaster

Okay. That's great. And then just maybe shifting gears to credit quickly. Not surprising to see some migration in nonaccruals. It seems like it's across several segments, but maybe notably in CRE.
Obviously, you've got a track record of being really conservative on credit, very disciplined. I was just hoping you could touch on what you're seeing on the credit side and maybe what you're watching more closely and especially anything that you're maybe more concerned with just given the trade wars, tariff issues, those impacts, all those issues.

Joe West

Yes, this is Joe. The migration was in the -- on the owner-occupied CRE, not -- I wouldn't classify it as anything related to tariffs or just some owner-occupied CRE with management issues, and then we noticed that and granted it appropriately and put appropriate reserves against it. What we're seeing, as Ray said, it's a little early in this tariff issue to know how what's going to affect it. There's a lot of talking, but we haven't really seen too much in the way of any deteriorating financial reports from the customers. So I think it's a wait-and-see attitude, but we're just taking a cautious approach to it as we examine new credits and just wait and see what happens.

David Feaster

Has there been any adjustments to underwriting or risk ratings or management as a result of this?

Joe West

No. I mean we've always had a strong focus on primary sources of cash flow. We'll continue to do that as we grade our credits and look at our credits. We want to know how we're going to get paid back and then what's the secondary source of repayment that will follow on behind that, it's coming from credit enhancement like guaranteed or additional collateral. But no, it's just a strong focus on operating cash flow.

Operator

Matt Olney, Stephens.

Matt Olney

I want to dig more into capital. I think Paul mentioned the active buyback in the first quarter and even more activity in recent weeks. I think that makes a lot of sense considering the valuation and the capital. Just would love to hear just updated thoughts from capital from here, including consideration for additional debt redemption just with the context, of course, of just economic uncertainty.

Robert Franklin

Yes, Matt, I think we're -- we continue with the same posture that we've had on trying to decide what the right use of the capital is. We continue to build capital at a pretty significant rate. There's some sub debt that we are thinking about possibly retiring. I think we weigh that versus the benefits of what buybacks might be or what refinancing that debt might look like and what the benefits of that are, but we're losing capital treatment on some of that sub debt.
So it's -- we're going to make a decision around that a little later in the year. But we continue to build capital, which allows us some flexibility. It's certainly enough capital for what we think our growth is going to be over the next couple of years. And so we have the ability to use it for some other things at this point. We haven't given up on M&A. I think M&A is still out there for us, although I think it's been put on hold like a lot of folks.
But I think people are still talking. We're still talking. We're still talking to folks about transactions. I think it's a little bit different if you think about public to public versus public to private, those conversations are a bit different. And most of ours tend to be with the private at this point.
But -- so all of these things are still on the table. And I think we're going to have to balance that out over the rest of the year as to what the best place and utilization of that capital is. But that's kind of how we're approaching it.

Matt Olney

Okay. Appreciate that. And I guess other capital options, some of that your peers are considering at this point. I'm curious if this is on your radar as far as a focus, just whether it's I think, security purchases, whether it's kind of a smaller wholesale trade with some wholesale funding or even a few years ago, I think you guys purchased some loans as well. Are those other options are being considered?
Or is the focus still on, like you said, the buyback with kind of a longer-term eye on M&A?

Robert Franklin

Yes. I mean we're a core bank. And this is where we keep our focus. We don't manage this thing on a quarter-by-quarter basis. We've got a very good game plan around what we want this to look like in the markets that we're in.
And we're on track to build this bank the way that we think that it ought to be built in our market. So to do something on an ad hoc basis is probably not in our DNA.
So we're going to continue on an organic basis to focus on our -- the great markets that we're in, look for opportunities to add the partnership with someone else in the future. And then we can look at dividends or buybacks as those opportunities arise. I think we tend to like buybacks just because from a tax standpoint, it seems to be a little bit better way to return capital to shareholders, although dividends are nice also. So we'll continue to manage that as we go along.

Paul Egge

And for what it's worth, you've seen both. We increased dividends in the fourth quarter, and we've chosen to be selectively active on the share repurchase. So we appreciate that flexibility, and we think we sit in the catbird seat relating to having a lot of -- plenty of options and an ability to do a lot of things. But I'll end where Bob started. Our goal is to continue to be a core bank.

Matt Olney

Okay. Appreciate the commentary there. And then I guess, switching gears, the other positive theme in the quarter that I saw was just a nice improvement on your interest-bearing deposit costs. Would love to appreciate just how much more room you think you have to bring that down, whether the Fed kind of stays put or continues to cut rates and then core margin ticks a little bit higher. I'd love to appreciate your view of kind of the outlook there.

Paul Egge

Certainly. Well, the first quarter, we saw the, what I'll call full quarter impact of a lot of the rate activity you saw in the back half of the year, including in the fourth quarter. And it's -- we work every day to try and optimize that mix, but we kind of see that we've gotten most of what we could out of that. Note, our cost of deposits did not skew as high as a lot of our peers. So we're going to continue to work on working that down.
But ultimately, it's going to continue to be a slog. I don't think we're going to have -- or we'll see the same kind of improvement in the second quarter from the first quarter. But day by day, that's our job to continue to drive an optimal mix of deposits and try to grow that base. So we'll be working just as hard, but the incremental return in terms of improvement is going to be hard to compete with this prior quarter's improvement.

Matt Olney

Okay. And Paul, I guess the last part of that question was just around the core margin. I think the 3.97% ex the accretion. I would love to hear thoughts on kind of directionally where that could go.

Paul Egge

Well, we're pleased with showing incremental improvement, 3 basis points quarter-over-quarter. Our goal would be to get a 4 handle back on our core net interest margin, excluding purchase accounting adjustments. And we think we're on that path. It's just given a lot of the uncertainty, we'd rather under promise and outperform on that front. I think every basis point from here is going to be a win.
And we're just keeping our nose down to drive a core balance sheet. And with that, we believe, will come incremental improvement. But we're already in rare air. So every basis point we get from here is going to be considered a pretty good win, and we're going to continue to work on it.

Operator

(Operator Instructions) Will Jones, KBW.

Will Jones

So I wanted to circle back to the growth conversation. Ray, maybe if you could just help us frame what you kind of see and know is upcoming on the paydown front? I know it's been obviously a headwind for you guys, but more so a headwind for the broader industry. So just so we understand what the bar to chin is on the paydown front? And then just to the comments about growth being more back-end loaded.
I know that you guys are used to kind of growing in that 5% to 8% range. But would you expect we kind of immediately get back to that level? Or is it really more of a slow grind higher as we move into the latter half of 2025?

Ramon Vitulli

Yes. Will, on payoffs, I mean, I think what we feel the kind of the behavior of the portfolio is something like $275 million to $300 million a quarter is kind of what we're experiencing in absolute dollar terms. On the growth side, I think we talked about going into the year more like low to mid-single digits. And obviously, we had the down in the first quarter. But again, as I said earlier, it's going to really come in 2 areas.
One is the -- just what's funded of new production and then also where we start to see advances exceed payments. So I think as we see that pipeline build and those originations start to increase, that should result in getting us over the payoffs and turn into growth. But again, as Bob mentioned in the beginning, we think that will be in the last -- second half of the year.

Will Jones

Yes. Great. Okay. That's helpful color. I wanted to also circle back just on the margin.
I appreciate the new slide, Slide 9, the repricing slide. That's really great. It really helps kind of frame and visualize what the fixed repricing opportunity is. And it really seems like moving beyond 2025, there is still a pretty meaningful repricing story out there. But just curious today on new loans, where you're seeing pricing come in and what you're kind of seeing from a competitive standpoint on loan pricing?

Ramon Vitulli

Yes. Well, I mean, it is competitive for the good loans. So -- but first quarter, our loan originations came on at a weighted average rate of 729 and our renewed loans came on at 748.

Will Jones

Okay. And are you still sticking kind of within the same fixed versus variable SKU in terms of the broader portfolio? Is it really kind of more of a 50-50 mix?

Paul Egge

Correct. On the new Yes, on what's going on new Yes.

Will Jones

Okay. Great. And then just lastly for me. I mean, the expense story this quarter was really quite positive. I know we kind of talked about being more in that $295 million range for this year.
I know it's not as simple as just annualizing what you guys did this quarter, and it sounds like there may be a little bit of timing differences with some costs that are coming through. But could you just help us appreciate where you see expenses trending maybe into the next quarter and the balance of the year?

Paul Egge

Certainly. We work every day on expenses, and we would caution against annualizing the first quarter, although we have our notes to grindstone as it relates to managing expenses, but also -- we want to be as thoughtful as possible about continuing to invest in the business and what's going to drive growth on a go-forward basis. So we look at this quarter as something that we can hold our heads high with respect to. And we like our chances of beating that prior guidance, but we will continue to see incremental investment while always holding the line where we can.
Some of -- probably about 50% of the relative beat there was on timing-related things that are likely going to come later in the month, particularly as it relates to professional services fees and certain external audits and things along those lines that have to get done on a time -- in a timely manner. So not all of it will get pushed into the next year, but we are as diligent as we've ever been, and we're very pleased with our performance on expenses year-to-date.

Operator

That concludes our Q&A session. I will now turn the call over to Bob Franklin for closing remarks.

Robert Franklin

Very good. Thank you very much for joining our first quarter call. And with that, have a great weekend.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.