10-Q: Stellar Bancorp Q3 Earnings Decline Amid Higher Credit Provisions

Stellar Bancorp, Inc. reported a decrease in net income and diluted earnings per share for the third quarter and first nine months of 2025, primarily driven by increased credit loss provisions and lower noninterest income.

Summary

• Net income for the three months ended September 30, 2025, was $25.7 million, a 24.2% decrease from $33.9 million in the same period of 2024.
• Diluted earnings per share for Q3 2025 was $0.50, down from $0.63 in Q3 2024.
• Net income for the nine months ended September 30, 2025, was $76.7 million, a 14.5% decrease from $89.8 million in the same period of 2024.
• Diluted earnings per share for 9M 2025 was $1.47, down from $1.68 in 9M 2024.
• A provision for credit losses of $305 thousand was recorded in Q3 2025, compared to a reversal of $6.0 million in Q3 2024.
• A provision for credit losses of $5.0 million was recorded in 9M 2025, compared to a reversal of $3.8 million in 9M 2024.
• Net interest income decreased by 0.9% to $100.6 million in Q3 2025 and by 2.2% to $298.2 million in 9M 2025.
• Noninterest income decreased by 20.9% to $5.0 million in Q3 2025 and by 9.6% to $16.3 million in 9M 2025.
• Noninterest expense increased by 2.9% to $73.1 million in Q3 2025, primarily due to higher salaries and employee benefits and advertising.
• The efficiency ratio worsened to 63.69% in Q3 2025 from 60.40% in Q3 2024, and to 62.50% in 9M 2025 from 60.54% in 9M 2024.
• Total loans held for investment decreased by 3.7% to $7.17 billion at September 30, 2025, from $7.44 billion at December 31, 2024.
• Total deposits decreased by 3.4% to $8.82 billion at September 30, 2025, from $9.13 billion at December 31, 2024.
• Noninterest-bearing deposits decreased by 10.2% to $3.21 billion, representing 36.4% of total deposits at September 30, 2025, down from 39.2% at December 31, 2024.
• Nonperforming assets increased to $54.2 million, or 0.51% of total assets, at September 30, 2025, from $38.9 million, or 0.36% of total assets, at December 31, 2024.
• The allowance for credit losses on loans was $78.9 million, or 1.10% of total loans, at September 30, 2025.
• Stellar Bancorp's Common Equity Tier 1 Capital ratio was 14.43% and Tier 1 Leverage ratio was 11.60% at September 30, 2025, both exceeding regulatory minimums.

Sentiment

Score: 4

Explanation: While Stellar Bancorp maintains strong capital ratios and has taken steps to manage its debt, the notable decline in profitability, increased credit loss provisions, and worsening efficiency ratio signal headwinds. The decrease in both loans and deposits suggests a challenging operating environment. The increase in nonperforming assets warrants caution.

Positives

• Shareholders' equity increased to $1.65 billion at September 30, 2025, from $1.61 billion at December 31, 2024.
• Accumulated other comprehensive loss improved to $(77.872) million at September 30, 2025, from $(125.364) million at December 31, 2024, indicating a recovery in the fair value of available-for-sale securities.
• The yield on the securities portfolio increased to 3.79% in Q3 2025 (from 3.49% in Q3 2024) and 3.77% in 9M 2025 (from 3.22% in 9M 2024).
• The cost of average interest-bearing liabilities decreased to 3.15% in Q3 2025 (from 3.54% in Q3 2024) and 3.15% in 9M 2025 (from 3.50% in 9M 2024).
• The tax equivalent net interest margin slightly increased to 4.20% in Q3 2025 from 4.19% in Q3 2024.
• Regulatory capital ratios for both Stellar Bancorp and Stellar Bank remain strong and exceed 'well-capitalized' minimums.
• The Company redeemed $30.0 million of its subordinated notes on October 1, 2025, reducing outstanding debt.
• The balance of troubled loan modifications not already presented as nonperforming decreased significantly to $3.61 million at September 30, 2025, from $13.457 million at September 30, 2024.
• The Company believes it was in compliance with all debt covenants as of September 30, 2025.

Negatives

• Net income decreased by 24.2% in Q3 2025 and 14.5% in 9M 2025 compared to the prior year.
• Diluted EPS decreased by 20.6% in Q3 2025 and 12.5% in 9M 2025 compared to the prior year.
• The provision for credit losses increased significantly from a reversal of $6.0 million in Q3 2024 to a provision of $305 thousand in Q3 2025, and from a reversal of $3.8 million in 9M 2024 to a provision of $5.0 million in 9M 2025.
• Net interest income decreased for both the three and nine months ended September 30, 2025.
• Noninterest income decreased due to losses on asset sales/write-downs and lower small business investment income.
• Noninterest expense increased in Q3 2025, driven by salaries and employee benefits and advertising, contributing to a worsening efficiency ratio.
• The efficiency ratio worsened (increased) for both periods, indicating less efficient operations.
• Total loans decreased by 3.7% since December 31, 2024, indicating reduced lending activity or higher repayments.
• Total deposits decreased by 3.4% since December 31, 2024, with noninterest-bearing deposits decreasing by 10.2%.
• Noninterest-bearing deposits as a percentage of total deposits decreased from 39.2% to 36.4%, suggesting a shift to higher-cost interest-bearing deposits.
• Nonperforming assets increased to $54.2 million (0.51% of total assets) at September 30, 2025, from $38.9 million (0.36% of total assets) at December 31, 2024.
• The number of nonaccrual loans increased from 101 separate credits at December 31, 2024, to 144 separate credits at September 30, 2025.
• Estimated uninsured deposits net of collateralized deposits increased to 46.0% of total deposits (from 43.4% at December 31, 2024).
• Salaries and benefits included $464 thousand in severance expense related to planned upcoming branch closures.

Risks

• Disruptions to the economy and the U.S. banking system caused by recent bank failures.
• Risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in deposit insurance assessments.
• Effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.
• Inflation, interest rate, capital and securities markets, and monetary fluctuations.
• Changes in the interest rate environment, the value of the Company's assets and obligations, and the availability of capital and liquidity.
• General competitive, economic, political, and market conditions and their impact on the Company and its customers, including changes in asset quality and credit risk.
• The inability to sustain revenue and earnings growth.
• Impairment of the Company's goodwill or other intangible assets.
• The composition of the Company's loan portfolio and the concentration of loans in commercial real estate and commercial real estate construction.
• The geographic concentration of the Company's market (Houston, Beaumont, and Dallas MSAs in Texas).
• The accuracy and sufficiency of the assumptions and estimates made in establishing reserves for potential loan losses.
• The amount of nonperforming and classified assets held and the time and effort necessary to resolve them.
• Deterioration of asset quality.
• Customer borrowing, repayment, investment, and deposit practices.
• The ability to maintain important deposit customer relationships.
• Changes in the value of collateral securing the Company's loans.
• Natural disasters and adverse weather in the Company's market area.
• The potential impact of climate change.
• The impact of pandemics, epidemics, or any other health-related crisis.
• Acts of terrorism, an outbreak of hostilities (e.g., conflicts in Ukraine or the Middle East), or other international or domestic calamities.
• The ability to maintain effective internal control over financial reporting.
• The cost and effects of cyber incidents or other failures, interruptions, or security breaches of the Company's systems or those of its customers or third-party providers.
• The failure of certain third or fourth-party vendors to perform.
• The impact, extent, and timing of technological changes.
• The institution and outcome of litigation and other legal proceedings against the Company.
• The costs, effects, and results of regulatory examinations, investigations, or reviews, or the ability to obtain required regulatory approvals.
• Changes in the laws, rules, regulations, interpretations, or policies relating to financial institution, accounting, tax, trade, monetary, and fiscal matters.
• The effect of changes in accounting policies and practices, as may be adopted by regulatory agencies or accounting standard setters.

Future Outlook

The Company expects to continue benefiting from its scalable operating platform in future periods by monitoring overhead expenses to support growth. It will adopt new accounting standards ASU 2023-09 (Income Taxes) and ASU 2024-03 (Expense Disaggregation) but does not anticipate a significant impact on its financial statements. Operating results for the reported periods are not necessarily indicative of the full year ending December 31, 2025.

Management Comments

• Management believes that determining the allowance for credit losses is its most critical accounting estimate.
• Management does not have the intent to sell any available-for-sale securities and believes it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.
• Management believes as of September 30, 2025, and December 31, 2024, the Company and the Bank met all capital adequacy requirements to which they were then subject.
• The Company believes it was in compliance with all debt covenants as of September 30, 2025, and had not been made aware of any noncompliance by the lender.
• In the opinion of management, the Company is not party to any legal proceedings the resolution of which would have a material adverse effect on its business, prospects, financial condition, liquidity, results of operation, cash flows, or capital levels.

Industry Context

The Company's results reflect broader industry trends, including disruptions in the U.S. banking system, risks associated with uninsured deposits, and the impact of Federal Reserve interest rate policies. The decrease in deposits and loans, alongside increased competition for deposits, indicates a challenging operating environment. The increase in the yield on the securities portfolio and the decrease in funding costs suggest adaptation to the current interest rate environment, but overall profitability is pressured by credit quality concerns and operational efficiency.

Comparison to Industry Standards

• The efficiency ratio of 63.69% for Q3 2025 and 62.50% for 9M 2025 indicates a worsening trend compared to the prior year and is generally higher than the targets of top-performing banks (often below 50-55%).
• Nonperforming assets to total assets increased to 0.51% at September 30, 2025, from 0.36% at December 31, 2024, signaling a deteriorating asset quality trend, though still relatively low compared to historical crisis levels.
• Capital ratios, including a Common Equity Tier 1 Capital ratio of 14.43% and a Tier 1 Leverage ratio of 11.60% for Stellar Bancorp, are well above regulatory 'well-capitalized' minimums, demonstrating strong capital health relative to industry benchmarks.
• The increase in estimated uninsured deposits net of collateralized deposits to 46.0% of total deposits is a point of attention in the current banking environment, where deposit stability and funding costs are critical concerns for regional banks.

Corporate Governance

Legal Proceedings

• The Company is subject to potential and asserted claims, inquiries, investigations, and lawsuits arising in the ordinary course of business.
• Management believes no current legal proceedings would have a material adverse effect on the business, prospects, financial condition, liquidity, results of operation, cash flows, or capital levels.
• Unfavorable resolution of such matters could adversely affect the financial position or results of operations.
• Legal matters are costly, divert management's attention, and may adversely affect the Company's reputation, even if resolved favorably.

Stakeholder Impact

• Shareholders: Decreased EPS and net income could negatively impact shareholder returns. The share repurchase program and increased dividends per share (Q3 2025 vs Q3 2024) could provide some support.
• Employees: Severance expense related to planned branch closures indicates potential job reductions. Stock-based compensation plans remain in place.
• Customers: Decreased loan balances suggest reduced lending activity or higher repayment rates. Deposit outflows indicate competitive pressure or customer shifts.
• Creditors: Redemption of subordinated debt reduces overall debt burden. Compliance with debt covenants is positive for creditors.
• Regulators: Strong capital ratios indicate compliance and stability, but increasing nonperforming assets and credit loss provisions will be closely monitored.

Next Steps

• Monitor the impact of new accounting standards ASU 2023-09 (Income Taxes) and ASU 2024-03 (Expense Disaggregation) on future financial statements.
• Continue to monitor overhead expenses to improve the efficiency ratio.
• Manage liquidity by utilizing FHLB advances and customer deposits.
• Defend vigorously against any future legal claims or litigation.
• Continue share repurchases under the 2025-2026 Repurchase Program through May 31, 2026.

Key Dates

Recommendation

While Stellar Bancorp maintains strong capital ratios and has taken steps to manage its debt, the notable decline in profitability, increased credit loss provisions, and worsening efficiency ratio signal headwinds. The decrease in both loans and deposits suggests a challenging operating environment. The increase in nonperforming assets warrants caution. A 'hold' recommendation is appropriate as the company navigates these challenges, with investors advised to monitor asset quality trends and efficiency improvements closely before considering further investment.

Keywords

Banking, Financial Services, Regional Bank, Texas, Commercial Real Estate, Loans, Deposits, Net Interest Income, Credit Quality, SEC Filing, 10-Q, Earnings, Financial Results, Asset Quality, Capital Ratios, Share Repurchase