Stellar Bancorp, Inc. (STEL)·Q3 2025 Earnings Summary

Executive Summary

• Q3 2025 delivered resilient profitability: diluted EPS of $0.50, with a slight EPS beat vs S&P Global consensus ($0.494*) and a modest revenue miss ($105.3M* vs $106.1M*) as NIM ticked up to 4.20% (4.00% ex-PAA) and net interest income rose sequentially . Results were supported by core deposit growth (+$143.8M QoQ) and stronger capital (Total capital ratio 16.33%) .
• Operating costs were elevated (noninterest expense +$3.1M QoQ; efficiency 63.69%), including $.5M severance tied to two planned branch closures; management guided that Q4 expenses should be closer to the 1H run-rate ($70M) .
• Credit remained manageable though net charge-offs rose to $3.3M (0.18% annualized); NPLs/loans eased to 0.65% and NPAs/assets to 0.51% .
• Potential stock reaction catalysts: sustaining ~4% NIM ex-PAA amid rate cuts, visible deposit momentum (51% of new deposits from new-to-bank clients), expense normalization in Q4, and capital actions (Oct 1 redemption of $30M sub debt) .

Note: Estimates marked with an asterisk (*) are values retrieved from S&P Global.

What Went Well and What Went Wrong

• What Went Well

  • NIM and core NIM improved: 4.20% total NIM (tax-equivalent) and 4.00% ex-PAA vs 4.18%/3.95% in Q2; CFO: “We’re really proud to get NIM, excluding purchase accounting accretion, back to a 4% level” .
  • Core funding momentum: deposits +$143.8M QoQ with noninterest-bearing mix ~36.4% and focus on low-cost funding; CEO emphasized priority on low-cost deposits .
  • Capital build/TBVPS accretion: Total capital ratio 16.33% (↑35 bps QoQ); TBVPS rose to $21.08; subsequently redeemed $30M subordinated debt on Oct 1, strengthening flexibility .

• What Went Wrong

  • Loan balances fell $119.5M QoQ (to $7.17B) on elevated payoffs ($330M in Q3, ~$50M higher QoQ) and continued portfolio repositioning .
  • Expenses stepped up: noninterest expense +$3.1M QoQ to $73.1M; efficiency ratio worsened to 63.69% (from 61.87% in Q2); included ~$.5M severance tied to planned branch closures .
  • Credit costs rose: net charge-offs increased to $3.3M (0.18% annualized) vs 0.01% in Q2, though management cited these were spread across >10 relationships and largely reserved for already .

Financial Results

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• CEO strategic stance: “We delivered solid results, including increasing our net interest income and our net interest margin… Credit trends remain favorable and our markets stable… We remain confident in our ability to deepen customer relationships and deliver long-term value” .
• On funding: “Low-cost deposits is something that everyone’s going to be fighting over and something we put a big emphasis on in any relationship that we have” .
• On growth vs discipline: “We’re not going to join [credit light covenants]. If we have to retreat a little bit, we’ll do it… we’ll get our share” .
• CFO on margin: “We’re really proud to get NIM, excluding purchase accounting accretion, back to a 4% level… ability to defend and perhaps incrementally improve” .
• CFO on expenses: Q3 expenses “an outlier”; Q4 expected closer to 1H run-rate .

Q&A Highlights

• Elevated loan payoffs: ~$330M in Q3, ~$50M higher QoQ; 44% tied to collateral/business sales, ~25% refinanced elsewhere. Originations ~$500M (vs $640M in Q2) and pipeline remains healthy; expect future lift as advances exceed paydowns .
• Deposit momentum quality: ~51% of onboarded deposits were from new customers; improved NPS and brand awareness cited; plan to deploy excess liquidity into loans and securities prudently .
• Margin defense into easing: Plan to lower deposit specials/exception pricing; indexed products benefit quickly; repricing dynamics expected to offset drawbacks at each rate cut .
• Opex outlook: Q3 elevated by severance (~$0.5M) and medical; aim to revert closer to 1H run-rate in Q4 and continue optimization beyond 2025 .
• M&A posture: Active dialogues with discipline; protective of deposit base and funding profile; seek aligned partners .
• Purchase accounting accretion remaining: $58.1M loan discount .

Estimates Context

• Q3 EPS modestly beat consensus, while revenue slightly missed; estimate breadth: 5 EPS estimates and 3 revenue estimates [functions.GetEstimates].
• Given management’s Q4 expense normalization and NIM defense commentary, near-term EPS estimates may bias upward even if loan growth remains tempered by payoffs .

Note: Values retrieved from S&P Global.

Key Takeaways for Investors

• Core profitability intact: EPS held at $0.50 with widening NIM and stable core NIM ex-PAA at 4.00%, positioning the bank well for rate cuts .
• Deposit franchise is a differentiator: QoQ deposit growth (+$144M) and 51% of new deposits from new clients indicate continued share gains in Houston/Texas markets .
• Short-term watch: Loan payoffs remain a headwind to balance growth; monitor origination-funded advance trends and payoff cadence into 2026 .
• Expenses likely to normalize in Q4: Q3 outliers (severance/medical) should fade, supporting better operating leverage sequentially .
• Credit manageable: NPLs/loans improved QoQ and reserves remain solid; the Q3 NCO uptick was spread across small, previously reserved relationships .
• Strong capital flexibility: Total capital 16.33%, TBVPS compounding, lighter Q3 buybacks and the post-quarter sub debt redemption leave options for opportunistic growth/capital deployment .
• Trading setup: Near-term narrative hinges on sustaining ~4% core NIM, expense normalization, and deposit-led growth; any confirmation of loan growth inflection could be a positive catalyst, while renewed payoff spikes would be a risk .

Appendix: Additional Q3 Items

• Dividend: $0.14 per share declared Aug 27, 2025 (paid Sept 30, 2025) .
• Sub debt redemption: $30M of $60M outstanding redeemed Oct 1, 2025 .
• Sector/market position: Noninterest-bearing deposits to total deposits ~36.4%; Houston region franchise focus highlighted in the investor presentation .