Stellar Bancorp(STEL) - 2025 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Presents Stellar Bancorp, Inc.'s unaudited interim financial information for the period ended June 30, 2025 ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS Presents Stellar Bancorp, Inc.'s unaudited interim consolidated financial statements and condensed notes for June 30, 2025 Consolidated Balance Sheets (unaudited) Summarizes Stellar Bancorp, Inc.'s financial position at June 30, 2025, detailing assets, liabilities, and equity | Metric | June 30, 2025 (In thousands) | December 31, 2024 (In thousands) | | :----------------------------------- | :----------------------------- | :------------------------------- | | ASSETS | | | | Total cash and cash equivalents | $578,104 | $911,216 | | Available for sale securities | $1,729,684 | $1,673,016 | | Loans, net | $7,204,182 | $7,358,796 | | TOTAL ASSETS | $10,493,010 | $10,905,790 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total deposits | $8,673,614 | $9,128,384 | | Total liabilities | $8,889,176 | $9,297,930 | | Total shareholders' equity | $1,603,834 | $1,607,860 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $10,493,010 | $10,905,790 | - Total assets decreased by $412.78 million (3.78%) from December 31, 2024, to June 30, 2025, primarily driven by a decrease in cash and cash equivalents and net loans[8] - Total deposits decreased by $454.77 million (4.98%) over the six-month period, with noninterest-bearing deposits seeing a larger proportional decrease[8] Consolidated Statements of Income (unaudited) Reports Stellar Bancorp, Inc.'s unaudited income and expenses for the periods ended June 30, 2025 and 2024 | Metric | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total interest income | $142,699 | $152,179 | $285,019 | $300,602 | | Total interest expense | $44,364 | $50,769 | $87,426 | $97,074 | | NET INTEREST INCOME | $98,335 | $101,410 | $197,593 | $203,528 | | Provision for (reversal of) credit losses | $1,090 | $(1,935) | $4,722 | $2,163 | | Total noninterest income | $5,791 | $5,416 | $11,296 | $11,712 | | Total noninterest expense | $70,004 | $71,216 | $140,170 | $142,626 | | NET INCOME | $26,352 | $29,753 | $51,054 | $55,900 | | Basic EPS | $0.51 | $0.56 | $0.98 | $1.05 | | Diluted EPS | $0.51 | $0.56 | $0.97 | $1.04 | | DIVIDENDS PER SHARE | $0.14 | $0.13 | $0.28 | $0.26 | - Net income decreased by $3.4 million (11.43%) for the three months ended June 30, 2025, and by $4.846 million (8.67%) for the six months ended June 30, 2025, compared to the same periods in 2024[10] - The provision for credit losses increased significantly, from a reversal of $1.935 million in Q2 2024 to a provision of $1.090 million in Q2 2025, and from $2.163 million to $4.722 million for the six-month period[10] Consolidated Statements of Comprehensive Income (unaudited) Details Stellar Bancorp, Inc.'s unaudited comprehensive income, including net income and other comprehensive items | Metric | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income | $26,352 | $29,753 | $51,054 | $55,900 | | Other comprehensive (loss) income, net of tax | $(8,555) | $9,023 | $14,420 | $(3,079) | | Comprehensive income | $17,797 | $38,776 | $65,474 | $52,821 | - Other comprehensive income shifted from a gain of $9.023 million in Q2 2024 to a loss of $8.555 million in Q2 2025, primarily due to changes in unrealized gains/losses on available-for-sale securities[12] - Comprehensive income decreased significantly by $20.979 million (54.11%) for the three months ended June 30, 2025, compared to the same period in 2024, but increased by $12.653 million (23.95%) for the six-month period[12] Consolidated Statements of Changes in Shareholders' Equity (unaudited) Outlines changes in Stellar Bancorp, Inc.'s shareholders' equity from December 31, 2024, to June 30, 2025 | Metric | Balance at December 31, 2024 (In thousands) | Balance at June 30, 2025 (In thousands) | | :----------------------------------- | :------------------------------------------ | :-------------------------------------- | | Common Stock (Amount) | $534 | $514 | | Capital Surplus | $1,240,050 | $1,185,048 | | Retained Earnings | $492,640 | $529,216 | | Accumulated Other Comprehensive Loss | $(125,364) | $(110,944) | | Total Shareholders' Equity | $1,607,860 | $1,603,834 | - Total shareholders' equity slightly decreased by $4.026 million from December 31, 2024, to June 30, 2025, primarily due to common stock repurchases and cash dividends, partially offset by net income and a decrease in accumulated other comprehensive loss[8][14] - The company repurchased 2,170,359 shares of common stock for $59.244 million during the six months ended June 30, 2025[14] Consolidated Statements of Cash Flows (unaudited) Presents Stellar Bancorp, Inc.'s unaudited cash flow activities for the six months ended June 30, 2025 and 2024 | Cash Flow Activity | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $20,078 | $69,213 | | Net cash provided by (used in) investing activities | $105,605 | $(6,362) | | Net cash (used in) provided by financing activities | $(458,795) | $28,162 | | NET CHANGE IN CASH AND CASH EQUIVALENTS | $(333,112) | $91,013 | | CASH AND CASH EQUIVALENTS, END OF PERIOD | $578,104 | $490,250 | - Net cash provided by operating activities decreased significantly by $49.135 million (71.0%) for the six months ended June 30, 2025, compared to the same period in 2024[16] - Investing activities shifted from a net cash outflow of $6.362 million in 2024 to a net cash inflow of $105.605 million in 2025, primarily due to changes in purchases and proceeds from available-for-sale securities[16] - Financing activities resulted in a net cash outflow of $458.795 million in 2025, a substantial change from the $28.162 million inflow in 2024, driven by decreases in deposits and common stock repurchases[16] Condensed Notes to Interim Consolidated Financial Statements (unaudited) 1. Nature of Operations and Summary of Significant Accounting and Reporting Policies Describes Stellar Bancorp, Inc.'s business operations and key accounting and reporting policies - Stellar Bancorp, Inc. (Stellar) operates primarily through its wholly-owned subsidiary, Stellar Bank, providing commercial banking services to small-to medium-sized businesses, professionals, and individuals[17] - The Company operates 54 banking centers, with 37 in the Houston MSA, 16 in the Beaumont MSA, and one in Dallas, Texas[18] - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and SEC guidance, with management's estimates and assumptions[19] - The Company is evaluating ASU 2024-03, 'Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures,' effective for annual periods beginning after December 15, 2026, but does not anticipate a significant impact[23] 2. Goodwill and Other Intangible Assets Details Stellar Bancorp, Inc.'s goodwill and other intangible assets, including amortization schedules | Asset Type | Balance as of December 31, 2024 (In thousands) | Amortization (In thousands) | Decrease due to payoff of serviced loans (In thousands) | Balance as of June 30, 2025 (In thousands) | | :-------------------------- | :------------------------------------------- | :-------------------------- | :----------------------------------------------------- | :---------------------------------------- | | Goodwill | $497,318 | — | — | $497,318 | | Core Deposit Intangibles | $92,546 | $(11,078) | — | $81,468 | | Servicing Assets | $146 | $(18) | $(4) | $124 | - Goodwill remained unchanged at $497.318 million as of June 30, 2025, and December 31, 2024[24] - Core deposit intangibles, net, decreased by $11.078 million due to amortization during the six months ended June 30, 2025[24] | Remaining Amortization Period | Estimated Aggregate Future Amortization Expense (In thousands) | | :---------------------------- | :----------------------------------------------------------- | | Remaining 2025 | $10,450 | | 2026 | $18,896 | | 2027 | $16,272 | | 2028 | $13,244 | | Thereafter | $22,606 | | Total | $81,468 | 3. Securities Provides an overview of Stellar Bancorp, Inc.'s securities portfolio, including fair values and unrealized gains/losses | Security Type | Amortized Cost (June 30, 2025, In thousands) | Fair Value (June 30, 2025, In thousands) | Amortized Cost (December 31, 2024, In thousands) | Fair Value (December 31, 2024, In thousands) | | :------------------------------------------ | :------------------------------------------- | :--------------------------------------- | :----------------------------------------------- | :--------------------------------------------- | | U.S. government and agency securities | $183,978 | $180,245 | $198,962 | $193,603 | | Municipal securities | $219,119 | $188,359 | $219,545 | $191,453 | | Agency mortgage-backed pass-through securities | $664,597 | $624,802 | $566,719 | $521,376 | | Agency collateralized mortgage obligations | $702,301 | $642,354 | $730,861 | $660,363 | | Corporate bonds and other | $100,086 | $93,924 | $115,601 | $106,221 | | Total Available for Sale Securities | $1,870,081 | $1,729,684 | $1,831,688 | $1,673,016 | - Total available-for-sale securities increased in fair value by $56.668 million (3.39%) from December 31, 2024, to June 30, 2025[26][27] - Unrealized losses on available-for-sale securities decreased from $160.401 million at December 31, 2024, to $143.306 million at June 30, 2025, primarily due to increases in market interest rates[26][27] - The Company had sales and calls of securities totaling $115.2 million with a loss of $3 thousand during the six months ended June 30, 2025[30] 4. Loans and Allowance for Credit Losses Analyzes Stellar Bancorp, Inc.'s loan portfolio composition and the allowance for credit losses | Loan Type | June 30, 2025 (In thousands) | December 31, 2024 (In thousands) | | :------------------------------------------ | :----------------------------- | :------------------------------- | | Commercial and industrial | $1,346,744 | $1,362,260 | | Commercial real estate (including multi-family residential) | $3,840,981 | $3,868,218 | | Commercial real estate construction and land development | $762,911 | $845,494 | | 1-4 family residential (including home equity) | $1,126,523 | $1,115,484 | | Residential construction | $137,855 | $157,977 | | Consumer and other | $72,333 | $90,421 | | Total loans | $7,287,347 | $7,439,854 | | Allowance for credit losses on loans | $(83,165) | $(81,058) | | Loans, net | $7,204,182 | $7,358,796 | - Total loans decreased by $152.507 million (2.05%) from December 31, 2024, to June 30, 2025[33] - Nonaccrual loans increased to $50.505 million at June 30, 2025, from $37.212 million at December 31, 2024, an increase of $13.293 million (35.72%)[35][36][50] | Metric | June 30, 2025 (In thousands) | December 31, 2024 (In thousands) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Total Past Due Loans (30-89 Days) | $30,428 | $34,755 | | Total Nonaccrual Loans | $50,505 | $37,212 | | Allowance for credit losses on loans | $83,165 | $81,058 | | Allowance for credit losses on unfunded commitments | $14,600 | $12,400 | | Collateral dependent loans allowance | $7,300 | $2,000 | - The allowance for credit losses on loans increased by $2.107 million (2.60%) from December 31, 2024, to June 30, 2025[33][45] - Loan modifications due to financial difficulty totaled $5.821 million for the six months ended June 30, 2025, compared to $12.585 million for the same period in 2024[51][52] 5. Leases Details Stellar Bancorp, Inc.'s operating lease assets, liabilities, and associated costs | Metric | June 30, 2025 (In thousands) | December 31, 2024 (In thousands) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Operating lease right-of-use asset | $16,126 | $17,279 | | Operating lease liability | $17,134 | $18,273 | | Weighted average lease term (years) | 6.99 | 7.24 | | Weighted average discount rate | 4.32% | 4.28% | | Lease Cost Type | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total operating lease costs | $1,646 | $2,101 | $3,414 | $4,049 | - Total operating lease costs decreased by $455 thousand (21.66%) for the three months ended June 30, 2025, and by $635 thousand (15.68%) for the six months ended June 30, 2025, compared to the same periods in 2024[56] 6. Fair Value Explains Stellar Bancorp, Inc.'s fair value measurements for financial assets and liabilities using a three-level hierarchy | Financial Asset/Liability | Carrying Amount (June 30, 2025, In thousands) | Estimated Fair Value (June 30, 2025, In thousands) | | :----------------------------------- | :-------------------------------------------- | :----------------------------------------------- | | Cash and cash equivalents | $578,104 | $578,104 | | Available for sale securities | $1,729,684 | $1,729,684 | | Loans held for investment, net of allowance | $7,204,182 | $7,152,306 | | Deposits | $8,673,614 | $8,669,475 | | Subordinated debt | $70,165 | $69,635 | - The Company uses a three-level fair value hierarchy based on the observability of inputs, with Level 1 for quoted prices in active markets, Level 2 for significant other observable inputs, and Level 3 for significant unobservable inputs[59] | Financial Asset (Recurring) | Level 1 (June 30, 2025, In thousands) | Level 2 (June 30, 2025, In thousands) | Level 3 (June 30, 2025, In thousands) | Total (June 30, 2025, In thousands) | | :----------------------------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Available for sale securities | $0 | $1,729,684 | $0 | $1,729,684 | | Interest rate swaps (assets) | $0 | $4,251 | $0 | $4,251 | | Credit risk participation agreements | $0 | $0 | $11 | $11 | | Total fair value of financial assets | $0 | $1,733,935 | $11 | $1,733,946 | | Financial Asset (Nonrecurring) | Level 3 (June 30, 2025, In thousands) | | :----------------------------------- | :------------------------------------ | | Commercial and industrial loans | $11,377 | | Commercial real estate loans | $7,232 | | 1-4 family residential loans | $5,585 | | Foreclosed assets | $7,652 | | Total | $31,846 | 7. Deposits Provides a breakdown of Stellar Bancorp, Inc.'s deposit types and changes over the period | Deposit Type | June 30, 2025 (In thousands) | December 31, 2024 (In thousands) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Noninterest-bearing deposits | $3,183,693 | $3,576,206 | | Interest-bearing deposits | $5,489,921 | $5,552,178 | | Total deposits | $8,673,614 | $9,128,384 | | Brokered deposits | $163,200 | $481,800 | | Public funds | $1,120,000 | $1,560,000 | - Total deposits decreased by $454.77 million (4.98%) from December 31, 2024, to June 30, 2025, primarily due to seasonality, industry-wide pressures, and pricing discipline[8][66] - Brokered deposits significantly decreased by $318.6 million (66.13%) from December 31, 2024, to June 30, 2025[66] - Public funds decreased by $440 million (28.21%) over the same period[66] 8. Derivative Instruments Describes Stellar Bancorp, Inc.'s use of interest rate swaps and credit risk participation agreements - The Company uses interest rate swap contracts as an intermediary for customers to convert variable-rate loans to fixed rates, with offsetting swaps with financial institutions to mitigate risk[67][68] - As of June 30, 2025, and December 31, 2024, the Company had nine interest rate swap agreements outstanding[69] - The Company also had three credit risk participation agreements with a financial institution, providing credit protection related to interest rate swaps[70] | Derivative Type | Notional Amounts (June 30, 2025, In thousands) | Fair Value (June 30, 2025, In thousands) | | :----------------------------------- | :------------------------------------------- | :--------------------------------------- | | Interest rate swaps (financial institutions, assets) | $62,226 | $4,012 | | Interest rate swaps (financial institutions, assets) | $4,722 | $168 | | Interest rate swaps (customers, assets) | $8,459 | $71 | | Interest rate swaps (customers, liabilities) | $8,459 | $(71) | | Interest rate swaps (customers, liabilities) | $4,722 | $(168) | | Interest rate swaps (customers, liabilities) | $62,226 | $(4,012) | | Credit risk participation agreements (financial institutions, assets) | $19,501 | $11 | 9. Borrowings and Borrowing Capacity Outlines Stellar Bancorp, Inc.'s borrowing capacity and outstanding borrowings, primarily with the FHLB - As of June 30, 2025, the Company had a total borrowing capacity of $3.19 billion with the FHLB, of which $1.97 billion was available[73] - Outstanding FHLB short-term advances were $70.0 million at a weighted-average rate of 4.75% as of June 30, 2025[73] - FHLB letters of credit pledged as collateral for public and other deposits totaled $1.14 billion at June 30, 2025[73][74] - The Company renewed a $75.0 million revolving line of credit on December 13, 2024, with no outstanding borrowings as of June 30, 2025[75] 10. Subordinated Debt Details Stellar Bancorp, Inc.'s outstanding subordinated debt, including debentures and notes - The Company assumed Junior Subordinated Debentures from Farmers & Merchants Capital Trust II and III, totaling $11.341 million outstanding at June 30, 2025[77][78] - These debentures are callable and bear a floating interest rate equal to 3-Month SOFR plus a spread adjustment[77][78] - The Bank redeemed $40.0 million of Fixed-to-Floating Rate Subordinated Notes in December 2024[79] - The Company has $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes outstanding, due October 1, 2029, bearing interest at 3-Month SOFR plus 3.13%[80] 11. Income Taxes Reports Stellar Bancorp, Inc.'s income tax expense and effective tax rates for the periods presented | Metric | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :-------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Income tax expense | $6,680 | $7,792 | $12,943 | $14,551 | | Effective income tax rate | 20.2% | 20.8% | 20.2% | 20.7% | - Income tax expense decreased by $1.112 million (14.27%) for the three months ended June 30, 2025, and by $1.608 million (11.05%) for the six months ended June 30, 2025, compared to the same periods in 2024, primarily due to changes in pre-tax net income[82] - The effective income tax rate decreased slightly from 20.8% to 20.2% for the three-month period and from 20.7% to 20.2% for the six-month period[82] 12. Stock-Based Compensation Summarizes Stellar Bancorp, Inc.'s stock-based compensation expense and equity award details | Metric | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total stock-based compensation expense | $2,600 | $2,800 | $4,500 | $5,600 | - The Company recognized $2.6 million in stock-based compensation expense for Q2 2025, a decrease from $2.8 million in Q2 2024[84] - The 2022 Omnibus Incentive Plan's authorized shares increased to 3,100,000, with 1,684,456 shares reserved for issuance at June 30, 2025[83] - Unrecognized compensation expense for restricted stock awards was $10.7 million, expected to be recognized over 2.05 years, and $3.8 million for PSUs/PSAs, expected over 2.35 years[87][88] 13. Off-Balance Sheet Arrangements, Commitments and Contingencies Details Stellar Bancorp, Inc.'s off-balance sheet commitments, including credit extensions and letters of credit | Off-Balance Sheet Item | June 30, 2025 (In thousands) | December 31, 2024 (In thousands) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Commitments to extend credit | $1,930,315 | $1,701,923 | | Standby letters of credit | $42,230 | $43,639 | | Total | $1,972,545 | $1,745,562 | - Commitments to extend credit increased by $228.392 million (13.42%) from December 31, 2024, to June 30, 2025[90] - The Company had FHLB letters of credit totaling $1.14 billion pledged as collateral for public and other deposits at June 30, 2025[90] - The Company is subject to claims and litigation in the ordinary course of business, with legal fees expensed as incurred and liabilities accrued when estimable and probable[94] 14. Regulatory Capital Matters Presents Stellar Bancorp, Inc.'s and Stellar Bank's regulatory capital ratios and compliance status | Capital Ratio (Stellar Bancorp, Inc. Consolidated) | Actual Ratio (June 30, 2025) | Minimum Required for Adequacy Purposes | Minimum Required Plus Capital Conservation Buffer | | :------------------------------------------------- | :--------------------------- | :------------------------------------- | :---------------------------------------------- | | Total Capital (to risk-weighted assets) | 15.98% | 8.00% | 10.50% | | Common Equity Tier 1 Capital (to risk-weighted assets) | 14.06% | 4.50% | 7.00% | | Tier 1 Capital (to risk-weighted assets) | 14.18% | 6.00% | 8.50% | | Tier 1 Leverage (to average tangible assets) | 11.44% | 4.00% | 4.00% | | Capital Ratio (Stellar Bank) | Actual Ratio (June 30, 2025) | Minimum Required for Adequacy Purposes | Minimum Required Plus Capital Conservation Buffer | To Be Categorized As Well-Capitalized Under Prompt Corrective Action Provisions | | :----------------------------------------- | :--------------------------- | :------------------------------------- | :---------------------------------------------- | :---------------------------------------------------------------------------- | | Total Capital (to risk-weighted assets) | 15.39% | 8.00% | 10.50% | 10.00% | | Common Equity Tier 1 Capital (to risk-weighted assets) | 14.18% | 4.50% | 7.00% | 6.50% | | Tier 1 Capital (to risk-weighted assets) | 14.18% | 6.00% | 8.50% | 8.00% | | Tier 1 Leverage (to average tangible assets) | 11.44% | 4.00% | 4.00% | 5.00% | - Both Stellar Bancorp, Inc. and Stellar Bank exceeded all minimum capital adequacy requirements and were considered 'well-capitalized' as of June 30, 2025[95][97][213] 15. Earnings Per Common Share Provides Stellar Bancorp, Inc.'s basic and diluted earnings per common share calculations | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic EPS | $0.51 | $0.56 | $0.98 | $1.05 | | Diluted EPS | $0.51 | $0.56 | $0.97 | $1.04 | | Weighted average shares outstanding (Basic, in thousands) | 51,529 | 53,572 | 52,333 | 53,457 | | Weighted average shares outstanding (Diluted, in thousands) | 51,569 | 53,608 | 52,376 | 53,506 | - Basic and diluted EPS decreased for both the three-month and six-month periods ended June 30, 2025, compared to the prior year, reflecting lower net income and a reduction in weighted-average shares outstanding[101] - 99,011 shares were not considered in computing diluted EPS as of June 30, 2025, due to their antidilutive effect[101] 16. Segment Information Identifies Stellar Bancorp, Inc.'s single reportable operating segment and management's performance evaluation - The Company operates as a single reportable operating segment, primarily banking operations, as determined by the Chief Financial Officer[102] - The chief operating decision maker evaluates consolidated net income, significant expenses, and budget-to-actual results to assess financial performance and allocate resources[102] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provides management's analysis of Stellar Bancorp, Inc.'s financial condition, operations, and key performance drivers Overview Provides an overview of Stellar Bancorp, Inc.'s primary income sources, expenses, and factors affecting net interest income - Stellar generates most of its income from interest on loans and investments, and service charges, while incurring interest expense on deposits and borrowings, and noninterest expenses[108] - Net interest income, the largest revenue source, is evaluated by monitoring yields on assets, rates on liabilities, net interest spread, and net interest margin[108] - Net interest income is affected by changes in the volume and mix of interest-earning assets and liabilities, as well as fluctuations in market interest rates driven by monetary policies and macroeconomic factors[109][111] Critical Accounting Policies Highlights Stellar Bancorp, Inc.'s most critical accounting estimates, including allowance for credit losses and goodwill - Management considers the allowance for credit losses as its most critical accounting estimate, representing the best estimate of lifetime expected losses based on forecasts, historical data, and qualitative factors[112][113] - Goodwill, representing the excess of acquisition cost over net assets acquired, is tested for impairment annually or upon a triggering event, comparing the reporting unit's fair value to its net book value[120][121] - A 5% increase in historical loss rates would increase funded reserves by $1.6 million, while a 5% increase in each qualitative risk factor would increase funded reserves by $2.9 million[118] Recently Issued Accounting Pronouncements Refers to Note 1 for a discussion of recently issued accounting pronouncements relevant to Stellar Bancorp, Inc. - The Company has evaluated new accounting pronouncements and refers to Note 1 for a discussion of those adopted or requiring enhanced disclosures[123] Results of Operations Summarizes Stellar Bancorp, Inc.'s financial performance, including net income, EPS, and efficiency ratio trends | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (in millions) | $26.4 | $29.8 | $51.1 | $55.9 | | Diluted EPS | $0.51 | $0.56 | $0.97 | $1.04 | | Annualized ROAA | 1.01% | 1.13% | 0.98% | 1.06% | | Annualized ROAE | 6.62% | 7.78% | 6.42% | 7.33% | | Efficiency Ratio | 61.87% | 60.81% | 61.90% | 60.62% | - Net income decreased for both the three-month and six-month periods ended June 30, 2025, primarily due to lower net interest income and increased provision for credit losses[124][126] - The efficiency ratio increased for both periods, indicating a less efficient allocation of resources compared to the prior year[125][127] Net Interest Income Analyzes Stellar Bancorp, Inc.'s net interest income, interest income, and interest expense trends | Metric | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net interest income | $98,335 | $101,410 | $197,593 | $203,528 | | Total interest income | $142,699 | $152,179 | $285,019 | $300,602 | | Total interest expense | $44,364 | $50,769 | $87,426 | $97,074 | | Tax equivalent net interest margin | 4.18% | 4.24% | 4.19% | 4.25% | | Average yield on interest-earning assets | 6.06% | 6.36% | 6.04% | 6.28% | | Average rate paid on interest-bearing liabilities | 3.16% | 3.59% | 3.15% | 3.48% | - Net interest income decreased by $3.1 million (3.0%) for the three months and $5.9 million (2.9%) for the six months ended June 30, 2025, primarily due to lower average loans and reduced purchase accounting accretion[128][136] - Interest income decreased due to lower average loans and loan yields, partially offset by increased securities and deposits in other financial institutions[129][137] - Interest expense decreased due to lower interest rates, a reduction in higher-rate certificates and time deposits, and decreased average borrowed funds[130][138] Provision for Credit Losses Details Stellar Bancorp, Inc.'s provision for credit losses and changes compared to prior periods | Metric | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Provision for credit losses | $1,100 | $(1,900) | $4,700 | $2,200 | - The Company recorded a provision for credit losses of $1.1 million for the three months ended June 30, 2025, compared to a reversal of $1.9 million for the same period in 2024[146] - For the six months ended June 30, 2025, the provision for credit losses was $4.7 million, up from $2.2 million in the prior year, driven by increased unfunded commitments and nonperforming loans[146] Noninterest Income Reviews Stellar Bancorp, Inc.'s noninterest income sources and their changes over the reporting periods | Noninterest Income Category | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Service charges on deposit accounts | $1,561 | $1,648 | $3,145 | $3,246 | | Bank-owned life insurance income | $618 | $591 | $1,228 | $1,178 | | Debit card and interchange income | $566 | $543 | $1,086 | $1,070 | | Other | $3,103 | $2,698 | $5,477 | $5,769 | | Total noninterest income | $5,791 | $5,416 | $11,296 | $11,712 | - Total noninterest income increased by $375 thousand (6.9%) for the three months ended June 30, 2025, primarily due to $490 thousand in Federal Reserve Bank dividends[148] - For the six months ended June 30, 2025, total noninterest income decreased by $416 thousand (3.6%), mainly due to a decrease in other noninterest income and service charges on deposit accounts[149] Noninterest Expense Examines Stellar Bancorp, Inc.'s noninterest expenses, including salaries, regulatory assessments, and amortization | Noninterest Expense Category | Three Months Ended June 30, 2025 (In thousands) | Three Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2025 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | | :----------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Salaries and employee benefits | $40,927 | $39,061 | $82,719 | $80,437 | | Regulatory assessments and FDIC insurance | $1,561 | $2,299 | $3,294 | $4,153 | | Amortization of intangibles | $5,548 | $6,215 | $11,096 | $12,427 | | Professional fees | $1,287 | $1,620 | $3,073 | $4,282 | | Data processing and software amortization | $5,620 | $5,501 | $11,302 | $10,395 | | Total noninterest expense | $70,004 | $71,216 | $140,170 | $142,626 | - Total noninterest expense decreased by $1.2 million (1.7%) for the three months and $2.5 million (1.7%) for the six months ended June 30, 2025, compared to the prior year[152][153] - Salaries and employee benefits increased by $1.9 million (4.79%) for the three months and $2.3 million (2.84%) for the six months, driven by increased full-time equivalent employees and annual salary increases[154][158] - Regulatory assessments and FDIC insurance decreased due to a special assessment recorded in 2024[156] Efficiency Ratio Reports Stellar Bancorp, Inc.'s efficiency ratio, indicating operational efficiency trends | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Efficiency ratio | 61.87% | 60.81% | 61.90% | 60.62% | - The efficiency ratio increased to 61.87% for the three months and 61.90% for the six months ended June 30, 2025, from 60.81% and 60.62% respectively in the prior year, indicating a slight decrease in operational efficiency[159] - The efficiency ratio calculation was revised in 2025 to exclude the amortization of core deposit intangibles, with prior periods recalculated for comparability[159] Income Taxes Details Stellar Bancorp, Inc.'s income tax expense and effective tax rates for the reporting periods | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense (in millions) | $1.1 | $1.6 | $12.9 | $14.6 | | Effective tax rate | 20.2% | 20.8% | 20.2% | 20.7% | - Income tax expense decreased by $1.1 million for the three months and $1.6 million for the six months ended June 30, 2025, compared to the same periods in 2024, primarily due to changes in pre-tax net income[161] - The effective tax rate for both periods in 2025 was 20.2%, a slight decrease from 20.8% and 20.7% in 2024, respectively[161] Financial Condition Analyzes Stellar Bancorp, Inc.'s financial position, including loan portfolio, asset quality, and deposits Loan Portfolio Details the composition and changes in Stellar Bancorp, Inc.'s loan portfolio by type | Loan Type | June 30, 2025 (In thousands) | Percent of Total (June 30, 2025) | December 31, 2024 (In thousands) | Percent of Total (December 31, 2024) | | :------------------------------------------ | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------------- | | Commercial and industrial | $1,346,744 | 18.5% | $1,362,260 | 18.3% | | Commercial real estate (including multi-family residential) | $3,840,981 | 52.7% | $3,868,218 | 52.0% | | Commercial real estate construction and land development | $762,911 | 10.5% | $845,494 | 11.4% | | 1-4 family residential (including home equity) | $1,126,523 | 15.5% | $1,115,484 | 15.0% | | Residential construction | $137,855 | 1.9% | $157,977 | 2.1% | | Consumer and other | $72,333 | 0.9% | $90,421 | 1.2% | | Total loans | $7,287,347 | 100.0% | $7,439,854 | 100.0% | - Total loans decreased by $152.5 million (2.1%) to $7.3 billion at June 30, 2025, compared to December 31, 2024[162] - Commercial real estate and commercial construction loans represented 63.2% of total loans at June 30, 2025, indicating a significant concentration in these segments[173] - The residential construction loan portfolio decreased by $20.1 million (12.7%) to $137.9 million[170] Asset Quality Analyzes Stellar Bancorp, Inc.'s asset quality metrics, including nonperforming assets and credit loss allowance | Metric | June 30, 2025 (In thousands) | December 31, 2024 (In thousands) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Total nonaccrual loans | $50,505 | $37,212 | | Foreclosed assets | $7,652 | $1,708 | | Total nonperforming assets | $58,157 | $38,920 | | Nonperforming assets to total assets | 0.55% | 0.36% | | Nonperforming loans to total loans | 0.69% | 0.50% | | Allowance for credit losses on loans | $83,165 | $81,058 | | Allowance for credit losses on unfunded commitments | $14,600 | $12,400 | - Nonperforming assets increased by $19.237 million (49.43%) to $58.2 million at June 30, 2025, from $38.9 million at December 31, 2024[175] - Nonaccrual loans increased by $13.293 million (35.72%) to $50.5 million, and foreclosed assets increased by $5.944 million (347.9%) to $7.652 million[175] - The allowance for credit losses on loans increased to $83.2 million (1.14% of total loans) at June 30, 2025, from $81.1 million (1.09% of total loans) at December 31, 2024, primarily due to increased nonperforming loans[179] Available for Sale Securities Reviews Stellar Bancorp, Inc.'s available-for-sale securities portfolio, including fair values and yields | Security Type | Fair Value (June 30, 2025, In thousands) | Fair Value (December 31, 2024, In thousands) | | :------------------------------------------ | :--------------------------------------- | :--------------------------------------------- | | U.S. government and agency securities | $180,245 | $193,603 | | Municipal securities | $188,359 | $191,453 | | Agency mortgage-backed pass-through securities | $624,802 | $521,376 | | Agency collateralized mortgage obligations | $642,354 | $660,363 | | Corporate bonds and other | $93,924 | $106,221 | | Total Available for Sale Securities | $1,729,684 | $1,673,016 | - The carrying amount of investment securities increased by $56.7 million (3.4%) to $1.73 billion at June 30, 2025[182] - Securities represented 16.5% of total assets at June 30, 2025, up from 15.3% at December 31, 2024[182] - The average yield of the securities portfolio increased to 3.73% for Q2 2025 (from 3.31% in Q2 2024) and 3.76% for the six months ended June 30, 2025 (from 3.07% in 2024), due to higher-yielding security purchases[188] Goodwill and Core Deposit Intangibles Reports Stellar Bancorp, Inc.'s goodwill and core deposit intangibles, noting changes due to amortization - Goodwill remained constant at $497.3 million as of both June 30, 2025, and December 31, 2024[189] - Core deposit intangibles, net, decreased to $81.5 million at June 30, 2025, from $92.5 million at December 31, 2024, due to amortization[190] Deposits Examines Stellar Bancorp, Inc.'s deposit trends, including noninterest-bearing and interest-bearing categories | Deposit Type | June 30, 2025 (In thousands) | December 31, 2024 (In thousands) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Total deposits | $8,673,614 | $9,128,384 | | Noninterest-bearing deposits | $3,183,693 | $3,576,206 | | Interest-bearing deposits | $5,489,921 | $5,552,178 | | Noninterest-bearing deposits to total deposits | 36.7% | 39.2% | | Fully collateralized public funds | $1,040,000 | $1,440,000 | - Total deposits decreased by $454.8 million (5.0%) to $8.67 billion at June 30, 2025, driven by seasonality, industry pressures, and pricing discipline[192] - Noninterest-bearing deposits decreased by $392.5 million (11.0%), and interest-bearing deposits decreased by $62.3 million (1.1%)[192] Borrowings Details Stellar Bancorp, Inc.'s borrowing capacity and outstanding advances, primarily from the FHLB - The Company had a total FHLB borrowing capacity of $3.19 billion at June 30, 2025, with $1.97 billion available[194] - Outstanding FHLB short-term advances were $70.0 million at a weighted-average rate of 4.75% at June 30, 2025[194] - FHLB letters of credit pledged as collateral for public and other deposits totaled $1.14 billion at June 30, 2025[194][195] Subordinated Debt Outlines Stellar Bancorp, Inc.'s outstanding subordinated debt instruments and their terms - Junior subordinated debentures outstanding totaled $11.341 million at June 30, 2025, assumed from prior acquisitions[196][197] - The Bank redeemed $40.0 million of Fixed-to-Floating Rate Subordinated Notes in December 2024[198] - The Company has $60.0 million of Fixed-to-Floating Rate Subordinated Notes outstanding, due October 1, 2029, with interest at 3-Month SOFR plus 3.13%[199] Credit Agreement Describes Stellar Bancorp, Inc.'s revolving line of credit and compliance with debt covenants - The Company renewed a $75.0 million revolving line of credit on December 13, 2024, with no outstanding borrowings at June 30, 2025[200] - The line of credit accrues interest at 3-month SOFR plus 2.75% and matures on December 13, 2033[200] - The Company was in compliance with all debt covenants as of June 30, 2025, including maintaining a cash flow to debt service ratio of not less than 1.25 and the Bank's Tier 1 Leverage Ratio of at least 8.0%[201] Liquidity and Capital Resources Liquidity Assesses Stellar Bancorp, Inc.'s liquidity sources, funding strategies, and contingent funding capacity - Liquidity needs are primarily met by deposits, borrowed funds, and securities, with access to correspondent banks, the Federal Reserve discount window, and FHLB advances[202] - Average total deposits decreased by $59.5 million (0.7%) and average loans decreased by $560.3 million (7.1%) during the six months ended June 30, 2025, compared to the prior year[204] - Total immediate contingent funding sources were $5.78 billion (66.7% of total deposits) at June 30, 2025, with estimated uninsured deposits (net of collateralized) at 46.2% of total deposits[206] - Outstanding commitments to extend credit were $1.93 billion and standby letters of credit were $42.2 million at June 30, 2025[207] Capital Resources Reviews Stellar Bancorp, Inc.'s regulatory capital requirements and actual capital ratios - The Company and the Bank are subject to various regulatory capital requirements, including risk-based capital and leverage ratios, and are classified as 'well-capitalized' under prompt corrective action regulations[210][212][213] | Capital Ratio (Stellar Bancorp, Inc. Consolidated) | Actual Ratio (June 30, 2025) | | :------------------------------------------------- | :--------------------------- | | Total Capital (to risk-weighted assets) | 15.98% | | Common Equity Tier 1 capital (to risk-weighted assets) | 14.06% | | Tier 1 Capital (to risk-weighted assets) | 14.18% | | Tier 1 Leverage (to average tangible assets) | 11.44% | | Capital Ratio (Stellar Bank) | Actual Ratio (June 30, 2025) | | :----------------------------------------- | :--------------------------- | | Total Capital (to risk-weighted assets) | 15.39% | | Common Equity Tier 1 capital (to risk-weighted assets) | 14.18% | | Tier 1 Capital (to risk-weighted assets) | 14.18% | | Tier 1 Leverage (to average tangible assets) | 11.44% | - Shareholders' equity decreased during the six months ended June 30, 2025, due to $59.2 million in common stock repurchases and $14.5 million in dividends paid, partially offset by net income and a decrease in other comprehensive loss[213] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Outlines Stellar Bancorp, Inc.'s management of market risk, focusing on interest rate risk and simulation models Asset/Liability Management and Interest Rate Risk Describes Stellar Bancorp, Inc.'s approach to managing interest rate risk through ALCO and simulation models - The Company's asset liability and interest rate risk policy guides balance sheet management and monitors net interest rate sensitivity[215] - Interest rate risk, the potential for economic losses from future interest rate changes, is managed by the Asset Liability Committee (ALCO) through strategies considering earnings, capital, and market conditions[216][218] - The Company uses an interest rate risk simulation model and shock analysis to test the sensitivity of net interest income and the balance sheet to interest rate changes[219][220] | Change in Interest Rates (Basis Points) | Percent Change in Net Interest Income (June 30, 2025) | Percent Change in Economic Value of Equity (June 30, 2025) | | :-------------------------------------- | :---------------------------------------------------- | :------------------------------------------------------- | | +300 | 5.2% | (4.2)% | | +200 | 3.9% | (0.7)% | | +100 | 2.2% | 0.5% | | Base | 0.0% | 0.0% | | -100 | (3.3)% | (3.6)% | | -200 | (6.8)% | (10.1)% | | -300 | (9.9)% | (18.9)% | ITEM 4. CONTROLS AND PROCEDURES Confirms the effectiveness of Stellar Bancorp, Inc.'s disclosure controls and procedures as of June 30, 2025 - The Company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of June 30, 2025[222] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[223] PART II—OTHER INFORMATION Presents other required information for Stellar Bancorp, Inc., including legal, risk, and equity matters ITEM 1. LEGAL PROCEEDINGS Details Stellar Bancorp, Inc.'s involvement in legal claims and litigation in the ordinary course of business - The Company is subject to claims and litigation arising in the ordinary course of business[224] - Management believes no current legal proceedings would have a material adverse effect on the Company's business, financial condition, or results of operations[224] - Unfavorable resolutions, regardless of merit, could still adversely affect the Company's financial position, results of operations, and reputation[224] ITEM 1A. RISK FACTORS Highlights that no material changes to Stellar Bancorp, Inc.'s risk factors have occurred since the last annual report - No material changes in risk factors have occurred since the Company's Annual Report on Form 10-K for the year ended December 31, 2024[225] - Investors should carefully consider the risks described in previous SEC filings[225] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Reports Stellar Bancorp, Inc.'s common stock repurchase programs and shares bought back during the quarter - The Company repurchased 679,331 shares at a weighted average price of $25.83 per share under the 2024-2025 Repurchase Program before its termination on April 23, 2025[226] - A new 2025-2026 Repurchase Program was authorized on April 23, 2025, allowing repurchases of up to $65 million of common stock through May 31, 2026[227] - Under the new program, 112,066 shares were repurchased at a weighted average price of $27.61 per share during the second quarter of 2025[227] | Period | Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------- | :------------------------- | :--------------------------- | | April 1, 2025 to April 30, 2025 | 679,331 | $25.83 | | June 1, 2025 to June 30, 2025 | 112,066 | $27.61 | | Total | 791,397 | $26.08 | ITEM 3. DEFAULTS UPON SENIOR SECURITIES Confirms no defaults upon senior securities for Stellar Bancorp, Inc. during the reporting period - There were no defaults upon senior securities during the period[229] ITEM 4. MINE SAFETY DISCLOSURES States that mine safety disclosures are not applicable to Stellar Bancorp, Inc.'s operations - Mine Safety Disclosures are not applicable to the Company[230] ITEM 5. OTHER INFORMATION Confirms no Rule 10b5-1 or non-Rule 10b5-1 trading arrangements by directors or officers - No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025[231] ITEM 6. EXHIBITS Lists all exhibits filed with Stellar Bancorp, Inc.'s Quarterly Report on Form 10-Q - Exhibits include the Second Amended and Restated Certificate of Formation, Amended and Restated Bylaws, and the 2022 Omnibus Incentive Plan[233] - Certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) are included[233] - Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE) and the Cover Page Interactive Data File (104) are part of the exhibits[233] SIGNATURES Confirms the official signing of Stellar Bancorp, Inc.'s Quarterly Report on Form 10-Q by executive officers - The report is signed by Robert R. Franklin, Jr., Chief Executive Officer, and Paul P. Egge, Chief Financial Officer, on July 25, 2025[237]