Stellar Bancorp - Earnings Call - Q2 2025

Executive Summary

• EPS of $0.51 beat S&P Global consensus of $0.446, driven by lower provision, disciplined opex, and modest noninterest income uplift; total revenue of $103.0M missed consensus $104.9M as higher funding costs and slightly lower average earning assets compressed NIM sequentially. EPS consensus and revenue consensus values marked with * (Values retrieved from S&P Global).
• NIM (tax-equivalent) of 4.18% (ex-PAA 3.95%) dipped 2 bps QoQ; cost of deposits rose to 1.97% (vs. 1.90% in Q1), with competitive money market pricing partially offset by brokers and reduced wholesale reliance.
• Originations nearly doubled QoQ (~$640M), supporting a return to organic loan growth in 2H 2025; deposits grew $111M QoQ with core mix improvement (MMDA & savings up, time down) and brokered deposits reduced to $163.2M.
• Credit remained benign: NPL ratio improved to 0.69% (from 0.75% QoQ), ACL/loans at 1.14%; provision fell to $1.1M and annualized NCOs remained ~0.01%.
• Capital and buybacks provide support: total capital ratio 15.98%; 791k shares repurchased at $26.08, while tangible book per share rose to $19.94.

What Went Well and What Went Wrong

What Went Well

• “New loan originations nearly doubled in the second quarter… highest level since 2022, and we believe it marks the return to organic growth” — CEO.
• Core deposit growth and mix: total deposits +$110.9M QoQ; MMDA & savings +$145.2M; brokered CDs reduced by ~$202M QoQ to $163.2M.
• Expense discipline and credit: noninterest expense essentially flat at ~$70.0M; provision down to $1.1M; NPL ratio improved and NCOs remained minimal.

What Went Wrong

• Revenue miss vs consensus: S&P Global consensus $104.9M* vs actual $103.0M*; modest NIM compression (4.18% vs 4.20%) as higher funding costs outweighed earning asset yields. EPS and revenue values marked with * (Values retrieved from S&P Global).
• Noninterest-bearing deposits ratio slipped to 36.71% (from 37.44%), and cost of funds rose to 2.02% QoQ amid competitive money market pricing.
• NPL level remains above prior-year Q2 (0.69% vs 0.66%), with office CRE continuing to warrant monitoring despite granular exposure and maturity dispersion.

Transcript

Speaker 5

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stellar Bancorp Q2 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now turn the call over to Courtney Theriot. Please go ahead.

Speaker 3

Thank you, operator, and thank you to all who have joined our call today. Good morning. I’ve seen the mic to welcome you to our earnings call for the second quarter of 2025. This morning’s earnings call will be led by our CEO, Robert Franklin, and CFO, Paul Egge. Also in attendance today are Steven Retzloff, Executive Chairman of the Company, Ramon Vitulli, President of the Company and CEO of the Bank, and Joe F. West, Jr., Senior Executive Vice President and Chief Credit Officer of the Bank. Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Act.

Also note that if we give guidance about future results, that guidance is only a reflection of management’s beliefs at the time of statements made, and such beliefs are subject to change. We proclaim any obligation to publicly update any forward-looking statements, except as may be required by law. Please see the last page of the text in this morning’s earnings release, which is available on our website at ir.stellar.bank, for additional information about the risk factors associated with forward-looking statements. At the conclusion of our remarks, we will open the line and allow time for questions. I will now turn the call over to our CEO, Robert Franklin.

Speaker 6

Good morning and welcome to the Stellar Bancorp second quarter earnings call. We are pleased to share our results for the quarter, evidencing the great work our team has performed toward our goals for growth. In the first quarter, we described how we thought the year would play out, with our loan volume stabilizing with payoffs in the second quarter, healing up momentum for growth in the third and fourth quarters. Our pipeline is healthy and continues to support growth. We are seeing great results from our business development efforts, with new loan originations nearly doubling in the second quarter when compared to the first. This is the highest level since 2022, and we believe it marks the return to organic growth. In these efforts, we continue to be supported by the resilient Texas marketplace, which provides Stellar Bancorp with great opportunities.

Our markets have seen M&A activity pick up, as many in the country focus on business-friendly states. With this consolidation comes some disruption, and we anticipate potential for both customer acquisition and talent as a result. Our foundation is our great balance sheet, exhibiting strong capital and liquidity and highlighting our commitment to core funding. These attributes provide us with a good net interest margin and plenty of optionality in the marketplace, a tribute to our disciplined approach around relationship banking. We continue to focus on expanding existing relationships and building new ones. Our strategy is clear: continue to build Stellar into the bank of choice in our markets for small business leaders. We are a community bank, so we understand that our commitment to relationship banking is what will drive long-term value for our shareholders.

With that, I'm going to turn the call over to Paul Egge for further color on the quarter.

Speaker 2

Thanks, Bob, and good morning, everybody. We are pleased to report second quarter 2025 net income of $26.4 million or $0.51 per share, which is up from net income of $24.7 million or $0.46 per share in the first quarter. These Q2 results represent an annualized ROAA of 1.01% and an annualized ROACCE of 12.16%. Key highlights of our Q2 performance were non-expense management and low credit costs, primarily due to low net charge-offs. Our balance sheet grew incrementally, thanks largely to deposit growth, while loans ended the quarter slightly up from the first quarter. During the second quarter, net interest income was $98.3 million, representing a slight decrease from the $99.3 million booked in the first quarter of 2025. This is due largely to lower earning assets and slightly lower net interest margin for the quarter.

This translated into still a healthy net interest margin of 4.18% in the second quarter, relative to 4.2% in the first quarter. Purchase accounting accretion in the second quarter was $5.3 million, which was relatively flat compared to the $5.4 million in the first quarter. Excluding purchase accounting accretion, tax equivalent net interest income decreased slightly in the quarter to $93.1 million from $94 million in the prior quarter, and net interest margin excluding accretion was 3.95%, down from 3.97% in the prior quarter. Margin performance during the second quarter was impacted by higher funding costs more than offsetting higher yields on earning assets, which resulted in that two basis point change versus the first quarter. We should note that the first quarter benefited from some deposit seasonality that impacted deposit funding costs to the positive in that quarter.

Second quarter margin, excluding purchase accounting accretion and the cost of deposits we experienced, still reflects an incremental improvement from the fourth quarter of 2024. We continue to feel good about our ability to defend and incrementally improve our top-tier margin profile. Walking further down the income statement, we booked a provision for credit losses of $1.1 million in the second quarter. This is driven primarily by an increase in our allowance for unfunded commitments due to a nice increase in our unfunded loan commitments during the quarter. To a lesser extent, this was also driven by minimal. This level of provision was driven by minimal net charge-offs. Our allowance for credit losses on loans ended the quarter at $83.2 million or 1.14% of loans, which is down one basis point from the 1.15% of loans that we had at the end of the first quarter.

Moving on to non-interest income, we earned $5.8 million in the second quarter of 2025 versus $5.5 million in the first quarter. Here we must note that the second quarter benefited from additional earnings from Federal Reserve Bank dividends as a result of Stellar Bancorp becoming a member of the Fed at the beginning of the second quarter. Next, non-interest expense for the quarter was essentially flat at approximately $70 million. This has better been planned and reflective of our focus on holding the line where we can on expenses. Our solid bottom-line results have driven internal capital generation and our ability to maintain a very strong balance sheet and capital position. Total risk-based capital was 15.98% at the end of the second quarter relative to 15.97% at the end of the first quarter.

Year-over-year tangible book value increased 10.8% from $18.19 per share to $19.94 per share, and this is after the effects of dividends and some significant share repurchase activity over the last year. On the topic of the share repurchases, we bought back 791,000 shares of our stock at a weighted average price of $26.08 per share during the quarter. In closing, we really like where we sit both financially and strategically. We are positioned to deliver positive operating leverage by adding more scale to the Stellar Bank platform and maintain a really strong balance sheet. We believe this will give us the financial flexibility to do opportunistic. Thank you, and I will now turn the call back over to Bob.

Speaker 6

Thank you, Paul. Operator, I think we are ready for questions. Thank you.

Speaker 5

Again, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Feaster with Raymond James.

Hey, good morning, everybody.

Speaker 6

Morning, guys.

I wanted to start first on the growth outlook. You saw loans stabilize this quarter, which is encouraging. I was just hoping you could maybe touch on the competitive landscape for loans, kind of origination activity relative to payoffs and paydowns, and what's driving the payoffs and paydowns. When do you think we can start seeing originations offset that headwind and growth start to accelerate?

Hey, David. Yeah, so the originations, as Bob mentioned, nearly doubled in the second quarter compared to the first. Our pipelines kind of support that level with continued originations. When you look at the waterfall of what kind of where that needs to be, we've got a pretty good feel around where payoffs are. A lot of those are coming from just trades of properties that they sell. At that level, we originated $640 million in the second quarter, and that resulted in this slight growth. We know that's probably the bar where originations greater than that will result in some growth. The other component is what we call our carried, which is our advances less our payments.

Because of the loans that we have been putting on, we should see a lift in future quarters in that area, where in previous quarters that's actually been a decrease, right, because of where we sit with unfunded in our loans book. The two factors to your question about going forward are to continue on the origination path and then see those loans that have some advances that will see the payments together for less there. We like where these loans came, where the rents came on for these loans. It's healthy as well. Even in, as you know, the markets we serve are extremely competitive. We have our bankers out on the street. We've had some new hires that are starting to get some traction. We've had wins in the Dallas market and continue to get some market share gains here in the Eastern Beaumont region.

Okay, that's helpful. Maybe touching on the other side, the funding side, obviously there's been some noise there. I'm just curious, maybe the competitive landscape for funding in your markets and just the strategy and ability to continue to drive core deposits going forward. Would you expect funding costs to kind of remain relatively stable or maybe increase? Just kind of hear your thoughts on the funding side.

On trend, we've seen a little bit of a not so much on the competitive side on the time deposits. On the money market, there's absolutely competitive parts there. We've dealt with that through kind of what we call a measured approach with exception pricing where we need it. Our net news for our in terms of dollar of open less close was the highest in three quarters and the second highest in six quarters. The mix of that, 50% in the second quarter, was to new customers that have not been at Stellar Bank before. Our approach and strategy is to expand our existing customer base but then go out and kind of tackle what the market will give us. We're well positioned for that.

Okay. Just last one for me, you guys have done a great job managing expenses. I'm curious, as you look at expenses going forward, is there more wood to chop on that front? Is this given the disruption around you, whether there could be some opportunities to maybe invest in new talent and maybe be a bit offensive here?

Speaker 2

I characterize our expense management as holding the line where we can. That is so that we can be opportunistic when the right opportunities come up, as opposed to kind of feeling like we're on the deficit on spend and more spend would kind of put us in a less optimal place. The net effect of our strategy of holding the line where we can opens up the possibility to be opportunistic. It's still a dynamic where we're going to focus on holding the line where we can so that the revenue growth outpaces those expense dynamics.

Speaker 6

Yeah, David, I think from that standpoint, we are certainly open for new talent. I think we don't stop looking for additional talent that would help us grow the bank. The nice part for us, I think, to some extent, is that the back office build around the things that we had to do over going over $10 billion is pretty well done. We don't expect growth in that area. You know, we certainly are looking for additional talent to help grow the bank in the future. We won't let that keep us from acquiring talent.

Okay, that's helpful. Thanks, everybody.

Thanks, David.

Speaker 2

Thanks, David.

Speaker 5

Your next question comes from the line of Will Jones with KBW.

Speaker 2

Yeah, hey guys. Good morning.

Speaker 6

Good morning, Will.

Speaker 2

Paul, if I could just read together some of the commentary on just maybe the deposit cost competition landscape, and just pair that with your desire to see some growth in the back half of the year. Could you just tease out what the implications are for how the market could trend on, you know, as we move into the third and fourth quarters of this year? We feel really good about our position, our ability to defend our margin. There has been a little bit of a mixed shift in the kind of funding base, and that's been largely strategic. We've relied a little less on FHLB borrowings and brokered funds in the second quarter.

I should say, relied a little less on FHLB borrowings and brokered CDs in the second quarter and instead relied on a lower-cost alternative to FHLB funding, which was an interest-bearing demand broker, which we've lowered our exposure to. Ultimately, that drove a little bit of a shift in cost in the kind of funding base during the second quarter relative to the first quarter. We feel awesome about where we stand currently in terms of at our low relative low points on usage of wholesale funds at the end of the second quarter. Funding composition is what's going to drive our ability to drive improvements to margin. If it stays more consistent as it currently stands, we'll be able to probably improve basis, improve margin kind of on a basis point by basis point, night-price basis.

If we're able to continue to decrease our usage of wholesale funds, you may be able to drive a little better dynamic. Really focusing on staying core is what's going to help us drive what we think is a structurally strong core margin in our business. To the extent we backslide, we like our ability to still defend where we're at.

Speaker 6

Yeah, that was great. I appreciate that thoughtful response. I know you've talked in the past about your desire to see securities balances grow a little bit. As I look this quarter, they at least, you know, leveled out on an average basis here. Do you feel like you've done all you need to do in terms of building up that bond portfolio?

Speaker 2

Yes, absolutely. I mean, we're still incrementally satisfied with the size of it, and we'd incrementally grow to a degree, but we're focused on growing loans. We feel like we have a great and a good balance sheet. I'd say when you track the average balances in the second quarter versus the first quarter, the first quarter we had benefited from the seasonality of our government banking business. We did incrementally invest in some securities in the latter such that you had higher average balances in the first quarter. That is a seasonal anomaly. Where we were in the second quarter is pretty much where we want to be. I would say more on a percentage of asset basis. If we're able to grow assets, we'll try to maintain around the same percentage of assets dynamics that we currently hold.

Speaker 6

Yeah, okay. Great. Thanks, Paul. You know, excess capital that you guys have, I mean, it's a high-class problem, and you're deploying that somewhat through buybacks. What valuations have also moved a little bit from where you bought back in the first and second quarter. Does that still play a role, you know, near-term, or do you really lean more into the organic growth, as you see that opportunity picking up? Thanks, you know.

Speaker 2

Organic growth is the number one use of capital that we want to engage in. Secondarily, there's other strategic uses of capital for which we feel like we benefit from optimal flexibility on that front. Last, share repurchases are an awesome tool for us. We were very active in the first half of the year. Our demand for share repurchases has really graduated based on price. We're going to be, as you guys might have seen in the first half of the year, able and willing to be pretty aggressive when we feel like that dynamic is merited.

Speaker 6

Yeah, understood. All right, guys. That's all for me. Thanks.

Thanks, Will.

Speaker 5

Ladies and gentlemen, if you would like to ask a question, press star followed by the number one on your telephone keypad. At this time, your next question comes from Matthew Olney with Stephens.

Hey, thanks. Good morning, everybody.

Speaker 6

Morning, Matt.

I want to go back to the loan growth discussion and dig in more to the originations that really improved this quarter that Bob noted. Any color on the mix of originations? I know you guys have been working hard building out kind of a C&I more of a middle market strategy over the last year. Just any color on that progress and the overall origination mix?

Sure, Matt. As you mentioned, we've got a good mix of C&I in there. We got down to really low levels on our concentrations on GRE and CNB, so there's a little backfill in those areas as well. We continue to push and look at opportunities on the C&I side, and we're pleased with where that's been, not only in the second quarter, but just over the past few quarters of our mix in the C&I front. It's kind of all across the board. It looks similar to how we've originated, it's just that they're higher absolute dollar amounts.

Okay. Appreciate that. I want to go back on to the expense discussion. Paul, you mentioned the banks are nice about kind of holding the line so far this year, and it looks like expenses are pretty flat year over year through the first half of the year. Based on where we're at today, you think it's reasonable to assume expenses just continue to remain flat for the remainder of the year in 2025 as compared to 2024, absent any of those investments that you'll be operating as looking for?

Speaker 2

Yeah, absent opportunistic investment, that's a goal. As we hold the line right here, we're really pleased with the fact that we've been able to outperform where we initially budgeted and where we initially kind of positioned the expense story. We're really pleased with us actually kind of meeting last year's guidance and beating this year's guidance. That's a goal. Part and parcel to that is having that flexibility to be opportunistic.

Yep. Okay. Makes sense. On the discussion on the core margin, I think we've talked about kind of an intermediate-term goal is getting back to that 4% margin. We talked on the call about the deposit cost competition, a little bit more of a headwind now than before. Is that 4% core margin still a reasonable goal? Do you see any kind of potential Fed cut that we could see later on this year and the next year? Do you see that benefiting the margin as you stand it there, or is that potentially more of a headwind if that were to happen?

It'll benefit the market. I mean, when you get the right cuts, you find yourself, you have a little bit of initial adjustment noise that's hard to parse out, but by and large, the normalization of the yield curve is going to benefit, I mean, the industry. We really like where we sit, and we still have point-to-point inversions, especially where we kind of play in the yield curve. With the front end coming down, if and when you have the rate cuts, that opens up more structural opportunity for our margins to continue to improve in the medium term. Immediately, there could be a little bit of noise, but we like where we sit, and we like, and we were, if it was our intention, to scratch and claw back up to a core handle on margins.

Okay. Appreciate the commentary, Paul. On the capital front, you mentioned the buyback on a previous question. What about, I think you also talked about earlier this year, you paid down some debt. It seems like there's maybe another tranche or two of debt that could be redeemed. Just any update on the debt at this point?

We're looking at that kind of in conjunction. It's in the playbook with share repurchases and how we think about the usage of our excess here. We are evaluating that really in line with the other options out there. It's certainly there for us to consider.

Okay. I guess just on M&A, you know, we've seen a flurry of deals in your backyard over the last few weeks, which is great to see. I'm just curious about the bank's M&A discussions and talking with potential partners. Just any update on maybe the pace of those conversations more recently?

Speaker 6

Yeah, Matt. I think the pace of the conversations has apparently kicked up a bit. I think one of the things for us is just to make sure we're mindful to stay disciplined around pricing. I think some of the exuberance sometimes causes some disruption around pricing for some of these things. I think we always make sure that we want to not do any damage to the franchise that we already have. We're still seeking partners to help build the balance sheet, build the bank. There are still some opportunities out there for us, and we're going to continue those discussions.

Okay, thanks for the update, guys.

Thanks, man.

Speaker 5

Your next question comes from the line of John Radis with Warner.

Hey, good morning, guys.

Speaker 6

Hey, John.

Yeah, I guess most of my questions have been asked and answered. Paul, maybe this one on the other income line item you highlighted, the Fed dividend. All things equal, all things going forward in the second half, does the other income line probably trend back more towards sort of the first quarter level?

Speaker 2

There are some lumpy pieces that fall into other income. One of them is our FDIC income, which sometimes can have some lumpiness to it. The key and ongoing components to other income are going to be, and it's a new entrant, these dividends as a byproduct of holding Fed stock and being a Fed member. That's going to go on in perpetuity. You know, some of the other dynamics, I can't promise that there won't be volatility in that line. Net, net, what drove most of the difference between the first quarter and the second quarter is ongoing benefits.

Okay. Sounds good. Thank you.

Speaker 5

I will now turn the call back over to Bob for closing remarks.

Speaker 6

Thank you, operator. Thank you to all of you that have joined the call this morning. We are adjourned.

Speaker 5

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