10-K: Stellar Bancorp Reports 2025 Decline Amidst Prosperity Merger

Stellar Bancorp, Inc. reported a decrease in net income and diluted EPS for 2025, while progressing towards a merger with Prosperity Bancshares, Inc. expected in Q2 2026.

Summary

• Net income for the year ended December 31, 2025, decreased by 10.5% to $102.9 million, or $1.99 per diluted common share, compared to $115.0 million, or $2.15 per diluted common share, in 2024.
• Net interest income before the provision for credit losses decreased by 1.6% to $401.6 million in 2025 from $408.0 million in 2024.
• The provision for credit losses increased significantly to $10.2 million in 2025, compared to a reversal of $2.9 million in 2024, primarily due to increased specific reserves on individually evaluated loans and higher loss rates on originations.
• Noninterest income decreased by 5.4% to $21.8 million in 2025, mainly due to losses on sales and write-downs of foreclosed assets.
• Noninterest expense decreased by 1.2% to $285.5 million in 2025, driven by lower professional fees, amortization of intangibles, and regulatory assessments, partially offset by increased salaries and employee benefits.
• The efficiency ratio worsened to 62.28% in 2025 from 61.53% in 2024.
• Total assets decreased to $10.81 billion at December 31, 2025, from $10.91 billion at December 31, 2024.
• Total loans decreased by 1.9% to $7.30 billion at December 31, 2025, with commercial real estate and construction loans seeing notable declines, while commercial and industrial loans increased.
• Total deposits decreased by 1.2% to $9.02 billion at December 31, 2025, with noninterest-bearing deposits decreasing by 4.7% and interest-bearing deposits increasing by 1.1%.
• Nonperforming assets increased to $60.0 million (0.56% of total assets) at December 31, 2025, from $38.9 million (0.36% of total assets) at December 31, 2024.
• The allowance for credit losses on loans increased to $83.6 million, or 1.15% of total loans, at December 31, 2025, from $81.1 million, or 1.09% of total loans, at December 31, 2024.
• The company's capital ratios remain strong, with CET1 capital at 14.18% and Tier 1 leverage at 11.52% at December 31, 2025, both well above regulatory minimums.
• A merger agreement with Prosperity Bancshares, Inc. was entered into on January 27, 2026, where Stellar Bancorp, Inc. will merge into Prosperity, with each Stellar share converting into 0.3803 shares of Prosperity common stock and $11.36 in cash.
• Equity awards, including performance-based restricted stock units (PRSUs) and restricted stock awards, will vest or be converted into cash/shares upon the merger, with 2024 PRSU grants vesting at 200% of target and 2025/2026 PRSU grants vesting at 100% of target.
• The company repurchased 299,347 shares at a weighted-average price of $30.44 per share during the fourth quarter of 2025 under its $65 million share repurchase program.
• The employee engagement index increased to 88% in 2025 from 82% in 2024, reflecting positive workforce engagement initiatives.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this filing with mixed sentiment. While the company maintains strong capital ratios and is progressing with a strategic merger, the decline in key profitability metrics (net income, EPS, net interest income, efficiency ratio) and the increase in nonperforming assets indicate operational challenges in 2025. The merger introduces both potential benefits and significant execution risks.

Positives

• Net charge-offs decreased to $3.8 million in 2025 from $6.7 million in 2024, indicating improved loan loss realization.
• Total shareholders' equity increased by $60.8 million to $1.67 billion at December 31, 2025, primarily due to net income.
• Capital ratios for both Stellar Bancorp, Inc. and Stellar Bank remain strong and well above regulatory well-capitalized thresholds, indicating financial stability.
• The company's employee engagement index improved to 88% in 2025 from 82% in 2024, suggesting effective human capital management.
• A share repurchase program of up to $65 million is authorized through May 31, 2026, with 299,347 shares repurchased in Q4 2025, demonstrating commitment to shareholder returns.
• The cost of average interest-bearing liabilities decreased to 3.06% in 2025 from 3.46% in 2024, reflecting lower funding costs.

Negatives

• Net income decreased by 10.5% to $102.9 million in 2025, and diluted earnings per share fell to $1.99 from $2.15 in 2024.
• Net interest income decreased by 1.6% to $401.6 million in 2025, primarily due to lower yields on interest-earning assets.
• The company recorded a provision for credit losses of $10.2 million in 2025, a significant increase from a reversal of $2.9 million in 2024, indicating a worsening credit outlook.
• Nonperforming assets increased by 54.2% to $60.0 million at December 31, 2025, from $38.9 million at December 31, 2024, leading to higher nonperforming asset ratios.
• The efficiency ratio increased to 62.28% in 2025 from 61.53% in 2024, suggesting a decrease in operational efficiency.
• Total loans decreased by 1.9% to $7.30 billion, and total deposits decreased by 1.2% to $9.02 billion, indicating a contraction in core banking activities.
• The tax equivalent net interest margin decreased by 4 basis points to 4.20% in 2025.
• The yield on average interest-earning assets decreased to 6.00% in 2025 from 6.25% in 2024.

Risks

• Failure to complete the pending merger transaction with Prosperity Bancshares, Inc. within the anticipated timeframe or at all, which could adversely affect business, financial results, operations, and stock price.
• Incurrence of substantial costs in connection with the merger, regardless of its completion.
• Termination of the merger agreement could trigger a $78.0 million termination fee payable to Prosperity Bancshares, Inc.
• Inability to realize the anticipated benefits of the proposed merger.
• Substantial disruptions and uncertainty surrounding the business due to the pendency of the merger, potentially affecting employee retention and relationships with customers, regulators, and partners.
• Restrictions on business activities while the merger agreement is in effect, limiting strategic opportunities and responsiveness to competitive pressures.
• Potential lawsuits challenging the merger, which could delay or prevent its completion and divert management attention.
• Negative developments affecting the financial services industry, contagion effects, and eroded customer confidence in the banking system, potentially impacting liquidity, loan funding capacity, and net interest margin.
• Challenging market conditions and economic trends, including a weakening U.S. economy or recession, could increase loan delinquencies, nonperforming assets, and reduce demand for products and services.
• Inflationary pressures and rising prices could increase costs for customers, making loan repayment more difficult and increasing credit risk.
• Concentration of business in the Houston and Beaumont MSAs, making the company highly dependent on the economic activity and conditions in these regions.
• Strong competition from other commercial banks, savings banks, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based nonbank lenders, and fintech companies.
• Adverse impact of geopolitical events, wars, natural disasters, climate change, pandemics, and other catastrophes on operations and customer creditworthiness.
• Inability to retain bankers and recruit additional successful bankers, which is critical to the business strategy and could impair customer relationships.
• Adverse effects on results of operations due to labor shortages, turnover, and labor cost increases.
• Dependence on executive officers and other key individuals for implementing the long-term business strategy, with the loss of such personnel potentially curtailing growth.
• Risks associated with pursuing additional acquisitions, including integration challenges and failure to achieve anticipated benefits.
• Goodwill and other intangibles recorded in connection with business acquisitions may become impaired, requiring charges to earnings.
• A significant percentage of the loan portfolio is comprised of real estate loans, including commercial real estate and construction, land development, and other land loan portfolios, exposing the company to greater credit risks.
• A large portion of the loan portfolio is comprised of commercial and industrial loans, which may involve greater risk due to reliance on business cash flow and potentially rapidly declining collateral values.
• Focus on lending to smallto medium-sized businesses, which may have fewer resources to weather adverse business developments.
• The allowance for credit losses may not be sufficient to cover actual loan losses, potentially affecting earnings.
• Failure to originate SBA loans in compliance with SBA guidelines could result in losses on the guaranteed portion of SBA loans.
• Liquidity risk, including the potential inability to meet obligations due to an inability to liquidate assets or obtain adequate funding, or significant outflows of deposits.
• Loss of government banking deposits within a short period of time could negatively impact liquidity and earnings.
• Inability to raise additional capital when needed or on acceptable terms.
• Adverse impact of fluctuations in interest rates on net interest income, business, financial condition, and results of operations.
• Potential losses related to the securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
• Dependence on information technology and telecommunications provided by third-parties, with risks of system failures, security breaches, or termination of service agreements.
• Fraudulent activity, breaches of information security, and cybersecurity attacks could result in financial losses, increased costs, disclosure of confidential information, reputational harm, and litigation.
• Continuing need for technological change, challenges in effectively implementing new technology, or operational challenges when implementing new technology, including artificial intelligence.
• Failure to comply with laws regarding the privacy, information security, and protection of personal information, leading to litigation or regulatory sanctions.
• Employee errors and customer or employee fraud could cause financial losses, regulatory sanctions, and harm to reputation.
• Reliance on the accuracy and completeness of information provided by borrowers and counterparties, with risks of misrepresentation.
• Potential environmental liabilities in connection with owned properties or foreclosed real estate assets.
• Potential claims and litigation pertaining to intellectual properties.
• Heightened regulatory requirements as total assets exceed $10 billion, including increased examination by the CFPB.
• Failure to maintain the company's reputation in the communities served could adversely impact business.
• Operating in a highly regulated industry, with risks of non-compliance, fines, and restrictions on business activities.
• Failure to comply with any supervisory actions from banking agencies could negatively impact business, financial condition, and reputation.
• New activities and expansion plans may require regulatory approval, and failure to obtain them may restrict growth.
• Risk of noncompliance and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.
• Failure to comply with economic and trade sanctions or applicable anti-corruption laws could have material adverse impact.
• Subject to numerous federal and state lending laws designed to protect consumers, with failure to comply leading to sanctions and penalties.
• Increases in FDIC deposit insurance premiums could adversely affect earnings.
• The Federal Reserve may require the company to commit capital resources to support Stellar Bank.
• Material adverse effects from the soundness, creditworthiness, and liquidity of other financial institutions due to interrelationships.
• Adverse impact of monetary policies and regulations of the Federal Reserve on business and earnings.
• Risks associated with loans to and deposits from related parties, subject to strict regulations.
• Fluctuations in the market price of the company's common stock due to various factors, including general economic conditions, financial results, and market perception of the merger.
• Priority of debt obligations over common stock in the event of liquidation.
• Additional dilution of percentage ownership from future sales and issuances of common stock or rights to purchase common stock.
• Potential future issuance of preferred stock, which could make it difficult for another company to acquire Stellar or adversely affect common shareholders' rights.
• Dependence upon Stellar Bank for cash flow, with restrictions on the Bank's ability to make cash distributions.
• Anti-takeover effect of certain provisions in corporate organizational documents and federal/state law.
• Bylaws include an exclusive forum provision, which could limit a shareholder's ability to obtain a favorable judicial forum for disputes.

Future Outlook

The company anticipates completing its merger with Prosperity Bancshares, Inc. in the second quarter of 2026, subject to customary shareholder and regulatory approvals. Management expects to continue its strategy of organic growth supplemented by disciplined acquisitions, leveraging its scalable banking platform and community banking model. The company also expects to continue monitoring overhead expenses to support growth and adapt to evolving customer needs through technology adoption.

Management Comments

• Management believes the size, growth, and increasing economic diversity of its market, combined with its community banking strategy, provide excellent opportunities for long-term, sustainable growth.
• Management emphasizes lending to and banking with smallto medium-sized businesses, believing this approach produces a competitive advantage by delivering an extraordinary customer experience.
• Management believes its scalable operating platform will effectively support growth, resulting in greater efficiency and enhanced profitability.
• Management believes its senior management team has a demonstrated track record of managing profitable organic growth, improving operating efficiencies, maintaining a strong risk management culture, and successfully executing and integrating acquisitions.
• Management believes its facilities are in good condition and adequate to meet operating needs for the present and immediately foreseeable future.
• Management believes the allowance for credit losses on loans is adequate to absorb all expected future losses in the loan portfolio at the balance sheet date.

Industry Context

StockSavvy.ai notes that Stellar Bancorp operates in a highly competitive regional banking environment, facing competition from larger national banks, other regional banks, and emerging fintech companies. The announced merger with Prosperity Bancshares, Inc. is a significant strategic move, reflecting a trend of consolidation within the banking sector to achieve greater scale and efficiency. The company's focus on smallto medium-sized businesses and its community banking strategy aim to differentiate it in a market where larger institutions may lack local decision-making agility. The industry continues to grapple with interest rate volatility, regulatory changes, and the increasing importance of cybersecurity and technological adoption.

Comparison to Industry Standards

• Stellar Bancorp's Return on Average Tangible Common Equity (ROATCE) and Total Shareholder Return (TSR) performance are measured against the component companies of the S&P SmallCap US Bank Index for performance-based equity awards, indicating a focus on peer-relative performance.
• The company's capital ratios (CET1 at 14.18%, Tier 1 Leverage at 11.52% consolidated) are robust and significantly exceed the 'well-capitalized' thresholds set by federal banking agencies (e.g., 6.5% CET1, 5.0% Tier 1 Leverage for banks), positioning it favorably compared to many industry peers.
• The efficiency ratio of 62.28% in 2025, while slightly higher than 2024, suggests that the company is operating within a range that is common for regional banks, though continuous improvement is typically sought to compete with larger, more efficient institutions.
• The increase in nonperforming assets to 0.56% of total assets in 2025 from 0.36% in 2024 indicates a potential deterioration in asset quality that warrants close monitoring, especially when compared to industry averages for regional banks which can vary but generally aim for lower percentages.

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 that current legal proceedings will not have a material adverse effect on the company's financial position or results of operations.

Related Party Transactions

• The Bank has made loans to and accepted deposits from certain directors and officers of the Company and the Bank, and their affiliates, in compliance with applicable regulations and written policies.
• Related party loans outstanding at December 31, 2025, were $114.7 million, net of cash collateralized loans of $12.6 million.
• Related party deposits from principal officers, directors, and their affiliates were $138.9 million at December 31, 2025.

Stakeholder Impact

• Shareholders: Will receive a mix of Prosperity Bancshares, Inc. common stock and cash upon merger, subject to market fluctuations and regulatory approvals. The share repurchase program and increased dividends per share indicate a focus on shareholder returns prior to the merger.
• Employees: The merger creates uncertainty regarding roles and retention, although equity awards are structured to vest upon a change of control. The company's focus on employee engagement and development aims to mitigate turnover.
• Customers: The merger will result in Stellar Bank merging into Prosperity Bank, potentially impacting customer relationships and service offerings. The company's community banking strategy emphasizes strong customer relationships.
• Regulators: The merger is subject to multiple regulatory approvals, and the company operates in a highly regulated environment, requiring continuous compliance with federal and state banking laws and capital requirements.
• Creditors: The company's debt obligations, including junior subordinated debentures and a revolving line of credit, are senior to common stock, and the company's strong capital position provides security.

Next Steps

• Completion of the merger with Prosperity Bancshares, Inc. in the second quarter of 2026, subject to shareholder and regulatory approvals.
• Shareholder vote on the Merger Agreement.
• Integration of Stellar Bancorp, Inc. into Prosperity Bancshares, Inc. and Stellar Bank into Prosperity Bank.
• Continued organic growth and disciplined acquisition strategy.
• Ongoing monitoring and management of credit risk, particularly in real estate and commercial loan portfolios.
• Further development and implementation of technology and cybersecurity measures.

Key Dates

Recommendation

The recommendation is 'hold' due to the pending merger with Prosperity Bancshares, Inc. While the company's capital position is strong, the reported decline in net income, diluted EPS, net interest income, and increased nonperforming assets for 2025 introduce uncertainty regarding standalone performance. The merger, if completed, will transform the investment into Prosperity shares and cash, making the current valuation of Stellar Bancorp largely dependent on the merger terms and Prosperity's prospects. Investors should hold to realize the merger consideration, but new investment is speculative given the impending change of control and recent operational headwinds.

Keywords

Banking, Regional Bank, Merger, Financial Results, Texas, Commercial Banking, Credit Quality, Capital Adequacy, SEC Filing, 10-K, Prosperity Bancshares, STEL, Deposits, Loans, Net Interest Income, Nonperforming Assets, Share Repurchase, Corporate Governance, Cybersecurity