Earnings call transcript: Stellar Bancorp Q2 2025 beats EPS expectations

Stellar Bancorp Inc. (market cap: $1.61B) reported better-than-expected earnings per share (EPS) for the second quarter of 2025, surpassing analyst forecasts by 13.33%. The company posted an EPS of $0.51, compared to the forecasted $0.45. However, revenue fell short of expectations, coming in at $104.13 million against a forecast of $104.92 million, a slight miss of 0.75%. Despite the mixed results, Stellar Bancorp’s stock showed resilience, with minimal movement in aftermarket trading, closing at $31.53, down 0.44% from the previous day. According to InvestingPro data, the company maintains a solid financial health score of 2.86 (Good), with particularly strong momentum metrics.

Key Takeaways

• Stellar Bancorp’s EPS exceeded expectations by 13.33% in Q2 2025.
• Revenue fell short of forecasts by 0.75%.
• The stock experienced a minor decline of 0.44% in aftermarket trading.
• The company is focusing on relationship banking and loan origination.
• A strong capital position and low credit costs were highlighted.

Company Performance

Stellar Bancorp demonstrated solid performance in Q2 2025, with net income rising to $26.4 million, up from $24.7 million in the previous quarter. The bank’s strategic focus on relationship banking for small business leaders contributed to a significant increase in new loan originations. Despite a slight decrease in net interest income, the bank maintained a competitive edge in the Texas market, characterized by increased M&A activity and competitive dynamics in regions like Dallas and Houston.

Financial Highlights

• Revenue: $104.13 million, slightly below the forecast of $104.92 million.
• Earnings per share: $0.51, exceeding the forecast of $0.45.
• Net Interest Income: $98.3 million, a slight decrease from Q1’s $99.3 million.
• Net Interest Margin: 4.18%, down from 4.2% in Q1.
• Annualized Return on Average Assets: 1.01%.
• Annualized Return on Tangible Common Equity: 12.16%.

Earnings vs. Forecast

Stellar Bancorp’s Q2 2025 EPS of $0.51 represented a 13.33% surprise over the forecasted $0.45. This positive outcome contrasts with the company’s revenue, which fell short by 0.75%, amounting to $104.13 million against expectations of $104.92 million. The EPS beat reflects the company’s effective cost management and strategic focus on expanding customer relationships.

Market Reaction

Following the earnings announcement, Stellar Bancorp’s stock showed minimal movement in aftermarket trading, closing at $31.53, a decrease of 0.44% from the previous close. The stock trades near its 52-week high of $32.38, with a strong year-to-date return of 11.87%. InvestingPro analysis indicates the stock is currently overvalued relative to its Fair Value, though it maintains an impressive track record of nine consecutive years of dividend payments. For deeper insights into valuation trends, investors can explore more overvalued stocks at Investing.com’s Most Overvalued Stocks.

Outlook & Guidance

Stellar Bancorp anticipates continued loan growth in the upcoming quarters, with a focus on organic growth and potential talent acquisition. The bank aims to maintain current expense levels and improve margins through reduced reliance on wholesale funding. Trading at a P/E ratio of 12.22 and maintaining a dividend yield of 1.78%, the company demonstrates strong fundamentals despite InvestingPro analysis indicating expected net income challenges this year. Future EPS projections for FY2025 and FY2026 are $1.83 and $1.91, respectively, indicating a positive outlook. For comprehensive analysis of Stellar Bancorp’s growth prospects and peer comparison, investors can access the detailed Pro Research Report, available exclusively to InvestingPro subscribers.

Executive Commentary

CEO Bob Franklin emphasized the bank’s strategy to become the preferred choice for small business leaders, stating, "Our strategy is clear, continue to build Stellar into the bank of choice in our markets for small business leaders." CFO Paul Ecky highlighted the bank’s low dependence on wholesale funds, expressing confidence in its financial position.

Risks and Challenges

• Potential fluctuations in interest rates could impact net interest margins.
• Competitive pressures in key markets may affect growth.
• Economic conditions in Texas could influence loan demand and credit quality.
• Regulatory changes could pose compliance challenges.
• The reliance on relationship banking requires sustained customer engagement.

Q&A

During the earnings call, analysts focused on Stellar Bancorp’s loan origination strategies and deposit cost management. Questions also addressed the potential impact of Federal Reserve rate cuts on margins and explored opportunities for mergers and acquisitions. CEO Bob Franklin reiterated the bank’s commitment to organic growth as its primary use of capital.

Full transcript - Stellar Bancorp Inc (STEL) Q2 2025:

Rebecca, Conference Operator: 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 Bank Q2 Earnings Release Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. 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 Theriault. Please go ahead.

Courtney Theriault, Investor Relations, Stellar Bank: Thank you, operator, and thank you to all who have joined our call today. Good morning. Our team would like to welcome you to our earnings call for the second quarter of twenty twenty five. This morning’s earnings call will be led by our CEO, Bob Franklin and CFO, Paul Ecky. Also in attendance today are Steve Weitzloff, Executive Chairman of the company Ray Bacouli, President of the company and CEO of the bank and Joe West, 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 forward looking statements contained in the app. Also note that if we give guidance about future results, that guidance is only a reflection of management’s beliefs at the time the statement is made, and such beliefs are subject to change. We disclaim 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.seller.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, Bob Franklin.

Bob Franklin, CEO, Stellar Bank: Good morning, and welcome to the Stellant High Corp 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, giving us 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 seller banks with great opportunities. Our markets have seen m and a activity pick up as many in the country focus on business business friendly states. With this consolidation comes from 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, attribute to our disciplined approach around relationship banking. We continue to focus on expanding existing relationships and building new ones. Our 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, and we understand our that our commitment to relationship banking is what will drive long term value for our shareholders. And with that, I’m gonna turn the call over to Paul Ege for further color on the quarter.

Thanks, Bob, and good morning, everybody. We are pleased to report second quarter two thousand twenty five net income of $26,400,000 or $54.51 cents per diluted share, which is up from net income of $24,700,000 or 46¢ per share in the first quarter. These Q2 results represent an annualized ROAA of one point o 1% and an annualized ROATCE of 12.16. Key highlights of our Q2 performance were noninterest 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 $98,300,000 representing a slight decrease from the $99,300,000 booked in the first quarter of twenty twenty five. This was 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 $5,300,000 which was relatively flat compared to the $5,400,000 in the first quarter. Excluding purchase accounting accretion, tax equivalent net interest income decreased slightly in the quarter to $93,100,000 from $94,000,000 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. You should note that that 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 reflect an incremental improvement from the fourth quarter of two thousand twenty four. So 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 $1,100,000 in the second quarter, which 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 is also driven by minimal this this level of provision was driven by minimal net charge offs. Our allowance for credit losses on loans ended the quarter at $83,200,000 or 1.14 percent 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 noninterest income. We earned $5,800,000 for the 2025 versus $5,500,000 in the first quarter. Here, we must note that our second quarter benefited from additional earnings from Federal Reserve Bank dividends as a result of Stellar becoming a member of the Fed at the beginning of the second quarter.

Next, noninterest expense for the quarter was essentially flat at approximately $70,000,000 This is better than 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 to 19 18 per share to $19.94 per share, and this is after the effect of dividends and some significant share repurchase activity over the last year. On the topic of 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 be opportunistic. Thank you. And I will now turn the call back over to Bob.

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

Rebecca, Conference Operator: Your first question comes from the line of David Fester with Raymond James.

Bob Franklin, CEO, Stellar Bank: Hi. Good morning, everybody. Hi. Good morning, David. I wanted to start first on the growth outlook.

We saw loans stabilize this quarter, which is encouraging. I was just hoping you could maybe touch on on the competitive landscape for loans, you know, kind of origination activity relative to to pay off and pay downs and some of the just, you know, what’s driving the pay offs and pay downs. I when do you think we can start seeing originations offset that headwind and and growth start to accelerate? Hey, David. Yeah.

So the the originations, as Bob mentioned, nearly doubled in the second quarter compared to the first. And our pipelines kind of support that level of continued originations. And when you look at the waterfall of what kind of where that needs to be, you know, we’ve got we’ve got a pretty good feel around where where payoffs are. I mean, a lot of those are coming from just, you know, trades of of properties that they sell. But kind of at that level, we originated 600 and call it 640,000,000 in the second quarter, and that kind of resulted in this slight growth.

So, you know, we know that’s probably the bar where originations greater than that will result in some growth. Yet the other component is what we call our carry, which is our advances less our payments. And 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 for us because of where we sit with unfunded in our in our loans. So kind of the two factors that your question about going forward is continue on the origination path and then see those loans that book have some advances that will exceed the payments to give us a lift there. We like where these loans came where the rates came on for these loans.

They’re healthy as well. And even in, as as you know, the markets we serve are extremely competitive that we have. Our bankers are out in the street. We’ve had some new hires that are starting to get some traction. We’ve had wins in Dallas market and continue to have get get some market share gains here in in the Houston Beaumont Region.

Okay. That’s helpful. And and maybe touching on the other side, the funding side, you know, obviously, there’s 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. And would you expect funding costs to kind of remain relatively stable or maybe increase?

Just just kinda curious your thoughts on the funding side. You know, on on time, we’ve seen a little bit of a of a not so much on the competitive side on time deposits. On the on the money market, there’s absolutely competitive part there. And we’ve we’ve dealt with that through kind of what we call a measured approach with exception pricing where we need it. You know, we’re our the second quarter and our net new, so our in in terms of dollar of open less closed was the highest in three quarters and the second highest in six quarters.

And the mix of that 50% in the second quarter was to new customers that have not been at Seller Bank before. So 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,

Paul Ecky, CFO, Stellar Bank: and we’re well positioned for that. Okay. And and just last one

Bob Franklin, CEO, Stellar Bank: for me. You guys have done a great job managing expenses. I I I’m curious. As you look at expenses going forward, is there more wood to chop on that front?

Paul Ecky, CFO, Stellar Bank: Or just given the disruption around you, whether there could be

Bob Franklin, CEO, Stellar Bank: some opportunities to maybe invest in new talent and and maybe be a bit offensive here? So I characterized our expense management as holding the line where we can, and that is so that we can be opportunistic when the right opportunities come up as opposed to kind of feeling like we’re on a deficit on spend and and more spend would kind of put us in a less optimal place. So the net effect of our strategy of holding the line where we can opens up the possibility to be opportunistic. But it’s still a dynamic where we’re gonna focus on holding the line where we can so that the revenue growth outpaces the expense dynamics. Yeah, David.

I think from that standpoint, we are we are certainly open for new talent. I think we’re we don’t stop looking for additional talent that would help us grow the bank. The the nice part for us, I think, to some extent, is that that the the back office build around the things that we had to do over going over $10,000,000,000 is is pretty well done. So we don’t we don’t expect growth in that area, but, you know, we certainly are looking for additional talent to help help grow the bank in in in the future. So we won’t let that keep us from from acquiring talent.

Okay. That’s helpful. Thanks, everybody. Thanks, David. Thank you.

Rebecca, Conference Operator: Your next question comes from the line of Will Jones with KBW.

Bob Franklin, CEO, Stellar Bank: Yeah. Hey, guys. Good morning. Good morning, Will.

Paul Ecky, CFO, Stellar Bank: Hey. So so, Paul, if I could just just weave together some of the commentary on on just maybe the deposit cost competition landscape and just just mirror that with

Bob Franklin, CEO, Stellar Bank: with your your desire to see some growth in the back half of the year. Could could

Paul Ecky, CFO, Stellar Bank: you just, you know, piece out what what the implications are for for how the margin could trend, you know, as as we move into the third and fourth quarters of this year?

Bob Franklin, CEO, Stellar Bank: So we feel really good about our position our ability to to defend our margin. There has been a little bit of mix 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’m actually I should say, relied a little less on FHLB borrowings and brokered CDs in the second quarter and instead relied on a lower lower cost alternative to FHLB funding, which was a interest bearing demand brokered, which we’ve lowered our exposure to. But 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.

But, really, we feel awesome about where we stand currently in terms of at a low relative low points on usage of wholesale funds, at the end of the second quarter. And funding composition is what’s gonna drive our ability to drive improvements to margin. If it stays more consistent as it currently stands, you know, we’ll be able to go probably improve basis improve margin kind of on a basis point by basis point, night by night basis, if we’re able to kind of continue to decrease our usage of wholesale funds, we may be able to drive a little better dynamic. So really focusing on staying core is what’s going to help us drive what we think structurally strong core margin in our business. To the extent we backslide, we we like our ability to still defend where we’re

Paul Ecky, CFO, Stellar Bank: Yeah. That’s great. I appreciate that thoughtful response. And I know you’ve talked

Bob Franklin, CEO, Stellar Bank: in the past about your desire to

Paul Ecky, CFO, Stellar Bank: to see securities balances grow a little bit. But as as I look this quarter, they at least, you know, leveled out on an average basis here. Did you feel like you’ve done all you need to do in terms of building up that bond portfolio?

Bob Franklin, CEO, Stellar Bank: Yes. Absolutely. I mean, we’re still incrementally we’re we’re satisfied with the size of it, and we’d incrementally grow grow to a degree, but it’s we’ll focus on growing loans. We feel like we have a great liquid balance sheet. I’d say when you track the average balances in the second quarter versus the first quarter, The first quarter, when 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.

So that that is a seasonal anomaly. But where we were in the second quarter is pretty much where we wanna be, and I would say more on a percentage of assets basis. So if we’re able to grow assets, we’ll try to maintain around the same percentage of asset dynamic that we currently hold.

Paul Ecky, CFO, Stellar Bank: Okay. Great. Thanks, Paul. And then excess capital that you guys have, I mean, it’s a high class problem, and you’re deploying that somewhat through buybacks, but valuations have also moved a little bit from where you bought back in the first

Bob Franklin, CEO, Stellar Bank: and second

Paul Ecky, CFO, Stellar Bank: quarter. Does that still play a role near term? Do you really lean more into the organic growth as you see that opportunity picking up?

Bob Franklin, CEO, Stellar Bank: No. The organic growth is the number one use of capital that we want to engage in. And secondarily, there’s other strategic use of capital for which we feel like we benefit from optimal flexibility. On that front. And then, you know, 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. So we’re gonna be a as you guys might have seen in the first half of the year, we’re able and willing to be pretty aggressive when we feel like that dynamic is merited.

Paul Ecky, CFO, Stellar Bank: Yeah. Understood. Alright. That’s all for me. Thanks.

Bob Franklin, CEO, Stellar Bank: Thanks. You as well.

Rebecca, Conference Operator: 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 Matt Olney with Stephens.

Paul Ecky, CFO, Stellar Bank: Hey. Thanks. Good morning, everybody.

Bob Franklin, CEO, Stellar Bank: Good morning, Matt. Wanna go back to the

Paul Ecky, CFO, Stellar Bank: loan growth discussion and and dig in more to the originations that really improved this quarter that that Bob noted. Any color on the mix of originations? I know you guys have been working hard building out kind of C and I, more of a middle market strategy over the last year or so. Just any color on that progress and just the overall origination mix?

Bob Franklin, CEO, Stellar Bank: Matt, the no, it’s it’s as you as you mentioned, the we’ve had a good mix of C and I in that in there. You know, we got down to really low levels on our concentrations on CRE and C and B. So there’s a little backfill in those areas as well. But we continue to push and look at opportunities on the C and S 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 and I front. So it’s kinda kinda all across the board, not it looks similar to how we’ve originated.

It’s just that it it absolute dollar amount.

Paul Ecky, CFO, Stellar Bank: Okay. Appreciate that. And then I wanna go back on to the expense discussion. And and and, Paul, you mentioned the banks did a nice job kinda 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 you think it’s reasonable to assume expenses just continue to remain flat for the remainder of the year in ’25 as compared to to ’24, absent any of those investments that you’ll be, you know, opportunistic looking for?

Bob Franklin, CEO, Stellar Bank: Yeah. Absent opportunistic investment, that’s the goal. It’s it’s it’s hold the line right here. We’re really pleased with the fact that we’ve been able to outperform our 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.

So that that’s the goal. But part and parcel to that is having that flexibility to be opportunistic. Yep. Okay. Makes sense.

Paul Ecky, CFO, Stellar Bank: And then on the discussion on the core margin, I think we’ve talked about kind of a intermediate term goal is getting back to that 4% margin. And 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, is that still a reasonable goal? And do you see any kind of potential Fed cut that we could see later on this year and next year? Do you see that, you know, benefiting the margin as you stand today?

Or is that potentially more of a a headwind if that would happen?

Bob Franklin, CEO, Stellar Bank: It’ll benefit the margin. I mean, when you get the right check, you find that that we have a little bit of kind of initial adjustment noise that’s hard to parse out. But by and large, the normalization of the yield curve is going to benefit 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. So with the front end coming down, if and when you have the rate cuts, that has opens up more kind of structural opportunity for our margin to continue to improve in the medium term.

You know, immediately, there could be a little bit of noise. But we like where we sit, and we do we like and we were it is our intention to scratch and claw back up to a four handle on margin.

Paul Ecky, CFO, Stellar Bank: Okay. Appreciate the commentary, Paul. And then on the capital front, you you mentioned the buyback on a previous question. What about I think you also talked about earlier this year, 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?

Bob Franklin, CEO, Stellar Bank: We’re looking at that kind of in conjunction. It’s in the playbook with share repurchases and and how we think about kind of the uses of our excess here. So we are we are evaluating that really in line with the other options out there. So it’s it’s certainly there for us to consider. Okay.

Paul Ecky, CFO, Stellar Bank: And then I guess just on on M and A, you know, we’ve seen a flurry of of deals in in in your backyard over the last few weeks, which is which is great to see. I’m just curious about the the bank’s M and A discussions and and talking with potential partners. Just any update on maybe maybe the pace of those conversations more recently.

Bob Franklin, CEO, Stellar Bank: Yeah, Matt. I think the the the pace of the conversations have been, you know, fairly kicked up a kicked kicked up a bit. And I think, you know, one of the things for us is just to make sure we’re mindful to stay disciplined around pricing. And, you know, I think some of this exuberance sometimes causes some some disruption around price around pricing for some of these things. But I I think, you know, we always make sure that we wanna not do any damage to the franchise that we already have.

And but we’re still we’re we are still seeking partners to help build the balance sheet, build the build the bank, and there’s still some opportunities out there for us. And and so we’re gonna continue those discussions. Okay. Thanks for the update, guys. Thanks, Ed.

Rebecca, Conference Operator: Your next question comes from the line of John Radiss with Janney.

Bob Franklin, CEO, Stellar Bank: Guess most of my questions have been asked and answered. But Paul, maybe just one on the other income line item, you highlighted the Fed dividend. So all things equal going forward in the second half, does the other income line probably trend back more towards sort of the first quarter level? Yeah. There there is some lumpy pieces that fall into other income.

One of them is is our FDIC income, which sometimes can add some lumpiness to it. But the the key in ongoing components to other income is going to be the new entrants of these dividends as a byproduct of holding Fed stock in the a Fed number. So that that’s gonna go on in perpetuity. The some of the other dynamics, I I can’t promise that there won’t be volatility in that line. But net net, what drove most of the difference between the first quarter and the second quarter is a ongoing benefit.

Okay. Okay. Sounds good. Thank you. I

Rebecca, Conference Operator: will now turn the call back over to Bob for closing remarks.

Bob Franklin, CEO, Stellar Bank: Thank you, operator, and thank you to all of you that have joined the call this morning, and we are adjourned. Thank you.

Rebecca, Conference Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.

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