Stellar Bancorp Inc.

10/24/2025 | Press release | Distributed by Public on 10/24/2025 14:46

Quarterly Report for Quarter Ending SEPTEMBER 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except where the context otherwise requires or where otherwise indicated in this Quarterly Report on Form 10-Q, the term "Stellar" refers to Stellar Bancorp, Inc., the terms "we," "us," "our," "Company" and "our business" refer to Stellar Bancorp, Inc. and our wholly owned banking subsidiary, Stellar Bank, a Texas banking association.
Cautionary Notice Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect the Company's current views with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company's control. Accordingly, the Company cautions that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
There are or will be important factors that could cause the Company's actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the risks described in "Part I- Item 1A.-Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 and the following:
•disruptions to the economy and the U.S. banking system caused by recent bank failures;
•risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in our deposit insurance assessments and other actions of the Board of Governors of the Federal Reserve System, FDIC and Texas Department of Banking, legislative and regulatory actions and reforms and executive orders;
•the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board and the imposition of tariffs and retaliatory tariffs;
•inflation, interest rate, capital and securities markets and monetary fluctuations;
•changes in the interest rate environment, the value of the Company's assets and obligations and the availability of capital and liquidity;
•general competitive, economic, political and market conditions and other factors that may affect future results of the Company including changes in asset quality and credit risk;
•local, regional, national and international economic conditions and the impact they may have on the Company and our customers and the Company's assessment of that impact;
•the inability to sustain revenue and earnings growth;
•impairment of the Company's goodwill or other intangible assets;
•the composition of the Company's loan portfolio and the concentration of loans in commercial real estate and commercial real estate construction;
•the geographic concentration of the Company's market;
•the accuracy and sufficiency of the assumptions and estimates the Company makes in establishing reserves for potential loan losses and other estimates;
•the amount of nonperforming and classified assets that the Company holds and the time and effort necessary to resolve nonperforming assets;
•deterioration of asset quality;
•customer borrowing, repayment, investment and deposit practices;
•the ability to maintain important deposit customer relationships;
•changes in the value of collateral securing the Company's loans;
•natural disasters and adverse weather in the Company's market area;
•the potential impact of climate change;
•the impact of pandemics, epidemics or any other health-related crisis;
•acts of terrorism, an outbreak of hostilities, such as the conflicts in Ukraine or the Middle East, or other international or domestic calamities;
•the ability to maintain effective internal control over financial reporting;
•the cost and effects of cyber incidents or other failures, interruptions or security breaches of the Company's systems or those of the Company's customers or third-party providers;
•the failure of certain third or fourth-party vendors to perform;
•the impact, extent and timing of technological changes;
•the institution and outcome of litigation and other legal proceedings against the Company or to which it may become subject;
•the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals or meet conditions associated with the same;
•changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;
•the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; and
•other risks, uncertainties, and factors that are discussed from time to time in the Company's reports and documents filed with the SEC.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. This discussion and analysis includes forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that the Company believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth above may cause actual results to differ materially from projected results discussed in the forward-looking statements appearing in this discussion and analysis.
The Company disclaims any obligation and does not intend to update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.
Overview
A majority of our income is generated from interest income on loans, interest income from investments in securities and service charges on customer accounts. We incur interest expense on deposits and other borrowed funds and noninterest expenses such as salaries and employee benefits and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings that are used to fund those assets. Net interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the interest expenses of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders' equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.
Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change." Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in our market, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our market and throughout the state of Texas.
Our net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and borrowed funds, referred to as a "rate change." Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.
Critical Accounting Policies
Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that determining the allowance for credit losses is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1- Nature of Operations and Summary of Significant Accounting and Reporting Policies in our Annual Report on Form 10-K for the year ended December 31, 2024.
Allowance for Credit Losses
The allowance for credit losses is a valuation account which represents management's best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The Company bases its estimates of credit losses on three primary components: (1) estimates of expected losses that exist in various segments of performing loans over the remaining life of the loan portfolio using a reasonable and supportable economic forecast, (2) specifically identified losses in individually analyzed credits which are collateral-dependent, which generally include nonaccrual loans and purchased credit deteriorated ("PCD") loans and (3) qualitative factors related to economic conditions, portfolio concentrations, regulatory policy updates, and other relevant factors that address estimates of expected losses. Estimating the timing and amounts of future losses is subject to management's judgment as these projected cash flows rely upon the estimates discussed above and factors that are reflective of current or future expected conditions using analytical and forecasting models and tools. Volatility in certain credit metrics and differences between expected and actual outcomes are to be expected. For example, customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance.
Loans with similar risk characteristics are aggregated into homogenous pools and are collectively evaluated by applying reserve factors, such as historical lifetime loss, concentration risk, volume, growth and composition of the loan portfolio, current and forecasted economic conditions to amortized cost balances over the remaining contractual life of the collectively evaluated portfolio. Historical lifetime loss is determined by utilizing an open-pool ("cumulative loss rate") methodology, adjusted for credit risk characteristics and current and forecasted economic conditions. Losses are predicted over a reasonable and supportable period of one year for all loan pools, followed by an immediate reversion to long-term historical averages. The reasonable and supportable period and reversion period are re-evaluated as needed by the Company and are dependent on the current economic environment among other factors.
Loans that no longer share risk characteristics with the collectively evaluated loan pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. To assess which loans are to be individually evaluated, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Individual credit loss estimates are typically performed for nonaccrual loans and all other loans identified by management. All loans deemed as being individually evaluated are reviewed on a quarterly basis to determine whether a specific reserve is required. The Company considers certain loans to be collateral dependent if the borrower is experiencing financial difficulty and management expects repayment for the loan to be substantially through the operation or sale of the collateral. For collateral dependent loans, loss estimates are based on the fair value of collateral, less estimated cost to sell (if applicable). Collateral values supporting individually evaluated loans are assessed quarterly and appraisals are typically obtained at least annually. The Company allocates a specific loan loss reserve on an individual loan basis primarily based on the value of the collateral securing the individually evaluated loan. Through this loan review process, the Company assesses the overall quality of the loan portfolio and the adequacy of the allowance for credit losses on loans while considering risk elements attributable to particular loan types in assessing the quality of individual loans. In addition, for each category of loans, the Company considers secondary sources of income and the financial strength and credit history of the borrower and any guarantors.
A change in the allowance for credit losses on loans can be attributable to several factors, most notably historical lifetime loss, specific reserves for individually evaluated loans, changes in qualitative factors and growth within the loan portfolio. The estimated loan losses for all loan pools are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully accounted for, including adjustments for foresight risk, input imprecision and model imprecision. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These
adjustments are based upon quarterly trend assessments in portfolio concentrations, changes in lending policies and procedures, policy exceptions, independent loan review results, internal risk ratings and peer group credit quality trends. Additional qualitative considerations are made for any identified risk which did not exist within our portfolio historically and therefore may not be adequately addressed through evaluation of such risk factors based on historical portfolio trends. Qualitative adjustments also include current and forecasted economic conditions primarily measured by local and national economic metrics, such as GDP, unemployment rates, interest rates and oil and gas prices based on historical and forecasted economic research scenarios provided by industry-leading financial intelligence and analytical solutions, which the Company has subscribed to. The qualitative allowance allocation is increased or decreased for each loan pool based on the assessment of these various qualitative factors. Management recognizes the sensitivity of various assumptions made in the quantitative modeling of expected losses and may adjust reserves depending upon the level of uncertainty that currently exists in one or more assumptions.
As of September 30, 2025, based on sensitivity analyses across all segments of the performing loan portfolio, a 5% increase in historical loss rates would have increased funded reserves by $1.0 million. On the other hand, a 5% increase in each qualitative risk factor across all segments (where assigned) would have increased funded reserves by $2.8 million. Increasing estimated loss rates by 5 basis points (i.e., quantitative and qualitative) would have a $3.4 million impact.
The allowance for credit losses could be affected by significant downturns in circumstances relating to loan quality and economic conditions and as such may not be sufficient to cover expected losses in the loan portfolio which could necessitate additional provisions or a reduction in the allowance for credit losses if our assumption prove to be incorrect. Unanticipated changes and events could have a significant impact on the financial performance of borrowers and their ability to perform as agreed. We may experience significant credit losses if borrowers experience financial difficulties, which could have a material adverse effect on our operating results.
Goodwill
Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired in a business combination. During the measurement period, the Company may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.
Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment at least annually as of October 1st, or on an interim basis if an event triggering an impairment assessment is determined to have occurred. Various factors, such as the Company's results of operations, the trading price of the Company's common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. The impairment test compares the estimated fair value of each reporting unit with its net book value. If the unit's fair value is less than its carrying value, an impairment loss is recognized in our results of operations in the periods in which they become known in an amount equal to this excess.
See Note 2 - Goodwill and Other Intangible Assets to the consolidated financial statements for additional information on the Company's goodwill and intangibles.
Recently Issued Accounting Pronouncements
We have evaluated new accounting pronouncements that have recently been issued. Refer to Note 1 - Nature of Operations and Summary of Significant Accounting and Reporting Policies in the accompanying notes to the consolidated financial statements for a discussion of recent accounting pronouncements that have been adopted by the Company or that will require enhanced disclosures in the Company's financial statements in future periods.
Results of Operations
Net income was $25.7 million, or $0.50 per diluted share, for the three months ended September 30, 2025 compared to $33.9 million, or $0.63 per diluted share, for the three months ended September 30, 2024. The decrease in net income was primarily due to a $6.3 million increase in the provision for credit losses, a $1.3 million decrease in noninterest income and a $2.1 million increase in noninterest expense, partially offset by a $2.3 million decrease in the provision for income taxes.
Annualized return on average assets, return on average equity and efficiency ratios were 0.97%, 6.30% and 63.69% for the three months ended September 30, 2025, respectively, compared to 1.27%, 8.49% and 60.40% for the three months ended September 30, 2024, respectively. The efficiency ratio is calculated by dividing total noninterest expense, excluding amortization of core deposit intangibles, by the sum of net interest income plus noninterest income, excluding net gains and losses on the sale/write-
down of assets. Additionally, taxes and provisions for credit losses are not part of the efficiency ratio calculation. The calculation of the efficiency ratio was revised to exclude the amortization of core deposit intangibles during 2025. Prior periods were recalculated and disclosed under the revised calculation.
Net income was $76.7 million, or $1.47 per diluted share, for the nine months ended September 30, 2025 compared to $89.8 million, or $1.68 per diluted share, for the nine months ended September 30, 2024. The decrease in net income was primarily due to an $8.8 million increase in the provision for credit losses, a $6.8 million decrease in net interest income and a $1.7 million decrease in noninterest income partially offset by a $3.9 million decrease in the provision for income taxes.
Annualized returns on average assets, returns on average equity and efficiency ratios were 0.97%, 6.37% and 62.50% for the nine months ended September 30, 2025, respectively, compared to 1.13%, 7.73% and 60.54% for the nine months ended September 30, 2024, respectively. The calculation of the efficiency ratio was revised to exclude the amortization of core deposit intangibles during 2025. Prior periods were recalculated and disclosed under the revised calculation.
Net Interest Income
Three months ended September 30, 2025 compared with three months ended September 30, 2024.Net interest income before the provision for credit losses for the three months ended September 30, 2025 was $100.6 million compared with $101.5 million for the three months ended September 30, 2024, a decrease of $863 thousand, or 0.9%, primarily due to the decrease in average loans and lower purchase accounting accretion which more than offset the decrease in interest expense due to lower rates on interest-bearing liabilities.
Interest income was $145.4 million for the three months ended September 30, 2025, a decrease of $6.4 million, or 4.2%, compared with $151.8 million for the three months ended September 30, 2024, primarily due to the decrease in average loans and loan yields, due in part to lower purchase accounting accretion and changes in earning asset mix, partially offset by an increase in average securities, securities yields and deposits in other financial institutions. The yield on the securities portfolio increased to 3.79% for the three months ended September 30, 2025 from 3.49% for the same period in 2024. Average interest-earning assets decreased $118.6 million, or 1.2%, for the three months ended September 30, 2025 compared with the three months ended September 30, 2024, primarily due the decrease in average loans partially offset by increases in securities and deposits in other financial institutions. Average loans to average interest earning assets decreased to 75.9% for the three months ended September 30, 2025 compared to 79.1% for the same period in the prior year. Additionally, interest income from purchase accounting adjustments was $4.8 million for the three months ended September 30, 2025 compared to $6.8 million for the three months ended September 30, 2024.
Interest expense was $44.8 million for the three months ended September 30, 2025, a decrease of $5.5 million, or 10.9%, compared with $50.3 million for the three months ended September 30, 2024. This decrease was primarily due to lower interest rates, a decrease in higher rate certificates and time deposits and a decrease in average borrowed funds. The cost of average interest-bearing liabilities decreased to 3.15% for the three months ended September 30, 2025 from 3.54% for the same period in 2024. Average interest-bearing liabilities increased $4.8 million for the three months ended September 30, 2025 compared to the three months ended September 30, 2024 primarily due to a increase in average interest-bearing demand deposits and money market and savings deposits, partially offset by decreases in certificates of deposits and borrowed funds.
Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets for the three months ended September 30, 2025 was 4.20%, an increase of 1 basis point compared to 4.19% for the three months ended September 30, 2024. The increase in the net interest margin on a tax equivalent basis was primarily due to lower interest-earning assets, largely driven by lower purchase accounting accretion and changes in the earning asset mix, partially offset by decreased funding costs. The average rate paid on interest-bearing liabilities of 3.15% and the average yield on interest-earning assets of 6.06% for the three months ended September 30, 2025 decreased by 39 basis points and 20 basis points, respectively, over the same period in 2024. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the three months ended September 30, 2025 and 2024, thus making tax-exempt yields comparable to taxable asset yields.
The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Average loans include loans on nonaccrual status carrying a zero yield.
Three Months Ended September 30,
2025 2024
Average
Balance 		Interest
Earned/
Interest Paid 		Average
Yield/ Rate 		Average
Balance 		Interest
Earned/
Interest Paid 		Average
Yield/ Rate
(Dollars in thousands)
Assets
Interest-earning assets:
Loans $ 7,228,778 $ 122,557 6.73 % $ 7,627,522 $ 132,372 6.90 %
Securities 1,790,897 17,086 3.79 % 1,676,614 14,712 3.49 %
Deposits in other financial institutions 505,342 5,770 4.53 % 339,493 4,692 5.50 %
Total interest-earning assets 9,525,017 $ 145,413 6.06 % 9,643,629 $ 151,776 6.26 %
Allowance for credit losses on loans (82,983) (94,785)
Noninterest-earning assets 1,076,831 1,077,422
Total assets $ 10,518,865 $ 10,626,266
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 1,935,203 $ 14,356 2.94 % $ 1,606,736 $ 12,458 3.08 %
Money market and savings deposits 2,475,306 18,020 2.89 % 2,254,767 16,982 3.00 %
Certificates and other time deposits 1,162,461 10,920 3.73 % 1,620,908 18,073 4.44 %
Borrowed funds 3,156 56 7.04 % 49,077 840 6.81 %
Subordinated debt 70,181 1,417 8.01 % 110,007 1,916 6.93 %
Total interest-bearing liabilities 5,646,307 $ 44,769 3.15 % 5,641,495 $ 50,269 3.54 %
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 3,172,054 3,303,726
Other liabilities 82,993 93,127
Total liabilities 8,901,354 9,038,348
Shareholders' equity
1,617,511 1,587,918
Total liabilities and shareholders' equity $ 10,518,865 $ 10,626,266
Net interest rate spread 2.91 % 2.72 %
Net interest income and margin(1)
$ 100,644 4.19 % $ 101,507 4.19 %
Net interest income and margin (tax equivalent)(2)
$ 100,739 4.20 % $ 101,578 4.19 %
Cost of funds 2.01 % 2.24 %
Cost of deposits 1.96 % 2.15 %
(1)The net interest margin is equal to annualized net interest income divided by average interest-earning assets.
(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the three months ended September 30, 2025 and 2024.
Nine months ended September 30, 2025 compared with nine months ended September 30, 2024.Net interest income before the provision for credit losses for the nine months ended September 30, 2025 was $298.2 million compared with $305.0 million for the nine months ended September 30, 2024, a decrease of $6.8 million, or 2.2%, primarily due to the decrease in average loans along with lower purchase accounting accretion and rates on loans which more than offset the decrease in interest expense due to lower rates on interest-bearing liabilities.
Interest income was $430.4 million for the nine months ended September 30, 2025 a decrease of $21.9 million, or 4.9%, compared with $452.4 million for the nine months ended September 30, 2024, primarily due to a decrease in average loans and loan yields due in part to lower purchase accounting accretion, partially offset by an increase in average securities, yields on securities and deposits in other financial institutions. The yield on the securities portfolio increased to 3.77% for the nine months ended September 30, 2025 from 3.22% for the same period in 2024. Average interest-earning assets decreased $113.7 million, or 1.2%, for the nine months ended September 30, 2025 compared with the nine months ended September 30, 2024, primarily due to the decrease in average loans partially offset by increases in securities and deposits in other financial institutions. Average loans to average interest earning assets decreased to 76.5% for the nine months ended September 30, 2025 compared to 80.9% for the same period in the prior year. Additionally, interest income from purchase accounting adjustments was $15.5 million for the nine months ended September 30, 2025 down from $25.4 million for the nine months ended September 30, 2024.
Interest expense was $132.2 million for the nine months ended September 30, 2025 a decrease of $15.1 million, or 10.3%, compared with $147.3 million for the nine months ended September 30, 2024. This decrease was primarily due to lower interest rates, a decrease in higher rate certificates and time deposits and a decrease in average borrowed funds. The cost of average interest-bearing liabilities decreased to 3.15% for the nine months ended September 30, 2025 from 3.50% for the same period in 2024. Average interest-bearing liabilities decreased $10.3 million for the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024 primarily due to a decrease in average certificates of deposits, borrowed funds and subordinated debt partially offset by an increase in average interest-bearing demand deposits and money market and savings deposits.
Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets for the nine months ended September 30, 2025 was 4.19%, a decrease of 4 basis points compared to 4.23% for the nine months ended September 30, 2024. The decrease in the net interest margin on a tax equivalent basis was primarily due to lower rates on interest-earning assets, largely driven by lower purchase accounting accretion, partially offset by decreased funding costs. The average rate paid on interest-bearing liabilities of 3.15% and the average yield on interest-earning assets of 6.04% for the nine months ended September 30, 2025 decreased by 35 basis points and 23 basis points, respectively, over the same period in 2024. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the nine months ended September 30, 2025 and 2024, thus making tax-exempt yields comparable to taxable asset yields.
The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Average loans include loans on nonaccrual status carrying a zero yield.
Nine Months Ended September 30,
2025 2024
Average
Balance 		Interest
Earned/
Interest Paid 		Average
Yield/ Rate 		Average
Balance 		Interest
Earned/
Interest Paid 		Average
Yield/ Rate
(Dollars in thousands)
Assets
Interest-earning assets:
Loans $ 7,284,805 $ 365,011 6.70 % $ 7,790,957 $ 402,942 6.91 %
Securities 1,779,093 50,149 3.77 % 1,556,462 37,562 3.22 %
Deposits in other financial institutions 457,794 15,272 4.46 % 287,960 11,874 5.51 %
Total interest-earning assets 9,521,692 $ 430,432 6.04 % 9,635,379 $ 452,378 6.27 %
Allowance for credit losses on loans (82,623) (94,236)
Noninterest-earning assets 1,092,163 1,104,426
Total assets $ 10,531,232 $ 10,645,569
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 1,933,030 $ 41,148 2.85 % $ 1,616,313 $ 36,949 3.05 %
Money market and savings deposits 2,361,247 49,899 2.83 % 2,211,148 48,420 2.93 %
Certificates and other time deposits 1,219,953 35,906 3.94 % 1,586,623 51,915 4.37 %
Borrowed funds 27,687 980 4.73 % 98,374 4,314 5.86 %
Subordinated debt 70,151 4,262 8.12 % 109,909 5,745 6.98 %
Total interest-bearing liabilities 5,612,068 $ 132,195 3.15 % 5,622,367 $ 147,343 3.50 %
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 3,225,666 3,379,096
Other liabilities 84,388 92,527
Total liabilities 8,922,122 9,093,990
Shareholders' equity
1,609,110 1,551,579
Total liabilities and shareholders' equity $ 10,531,232 $ 10,645,569
Net interest rate spread 2.89 % 2.77 %
Net interest income and margin(1)
$ 298,237 4.19 % $ 305,035 4.23 %
Net interest income and margin (tax equivalent)(2)
$ 298,519 4.19 % $ 305,266 4.23 %
Cost of funds 2.00 % 2.19 %
Cost of deposits 1.94 % 2.09 %
(1)The net interest margin is equal to annualized net interest income divided by average interest-earning assets.
(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the nine months ended September 30, 2025 and 2024.
The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earnings assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
Three Months Ended September 30, Nine Months Ended September 30,
2025 vs. 2024 2025 vs. 2024
Increase (Decrease)
Due to Change in 		Increase (Decrease)
Due to Change in
Volume Rate Total Volume Rate Total
(In thousands)
Interest-earning assets:
Loans $ (6,939) $ (2,876) $ (9,815) $ (34,967) $ (2,964) $ (37,931)
Securities 1,006 1,368 2,374 7,177 5,410 12,587
Deposits in other financial institutions 2,298 (1,220) 1,078 9,354 (5,956) 3,398
Total decrease in interest income (3,635) (2,728) (6,363) (18,436) (3,510) (21,946)
Interest-bearing liabilities:
Interest-bearing demand deposits 2,554 (656) 1,898 9,671 (5,472) 4,199
Money market and savings deposits 1,666 (628) 1,038 4,390 (2,911) 1,479
Certificates and other time deposits (5,126) (2,027) (7,153) (16,026) 17 (16,009)
Borrowed funds (788) 4 (784) (4,141) 807 (3,334)
Subordinated debt (696) 197 (499) (2,776) 1,293 (1,483)
Total decrease in interest expense (2,390) (3,110) (5,500) (8,882) (6,266) (15,148)
(Decrease) increase in net interest income $ (1,245) $ 382 $ (863) $ (9,554) $ 2,756 $ (6,798)
Provision for Credit Losses
Our allowance for credit losses is established through charges to income in the form of the provision to bring our allowance for credit losses for various types of financial instruments including loans, unfunded commitments and securities to a level deemed appropriate by management. We recorded a provision for credit losses of $305 thousand and a reversal of provision for credit losses of $6.0 million for the three months ended September 30, 2025 and 2024, respectively. The provision for credit losses for the three months ended September 30, 2025 was primarily due to the increase in unfunded commitments within the allowance for credit losses model partially offset by decreases in specific reserves and loan balances compared to the same period in the prior year. For the nine months ended September 30, 2025 and 2024, we recorded a provision for credit losses of $5.0 million and a reversal of provision of $3.8 million, respectively. The provision for credit losses for the nine months ended September 30, 2025 was primarily due to changes in the specific reserves within the allowance for credit losses model primarily due to the increase in nonperforming loans partially offset by decreases in loan balances.
Noninterest Income
Our primary sources of noninterest income are service charges on deposit accounts, bank-owned life insurance income and debit card and interchange income. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method.
Three months ended September 30, 2025 compared with three months ended September 30, 2024. Noninterest income totaled $5.0 million for the three months ended September 30, 2025 compared with $6.3 million for the same period in 2024, a decrease of $1.3 million, or 20.9%, primarily due to $491 thousand in losses on the sale of assets/write-downs in the third quarter of 2025, compared to a $432 thousand gain on the sale of assets/write-downs in the third quarter of 2024 and a $1.0 million decrease in small business investment income compared to the third quarter of 2024. These decreases were partially offset by $593 thousand of Federal Reserve Bank ("FRB") dividends included in other noninterest income earned as a result of Stellar Bank becoming a member of the Federal Reserve System effective April 2025.
Nine months ended September 30, 2025 compared with nine months ended September 30, 2024. Noninterest income totaled $16.3 million for the nine months ended September 30, 2025 compared with $18.0 million for the same period in 2024, a decrease of $1.7 million, or 9.6%, primarily due to losses on the sales/write downs of assets of $131 thousand recorded in the nine months ended September 30, 2025 compared to a gain of $881 thousand in recorded in the nine months ended September 30, 2024 and a $1.0 million decrease in small business investment income included in other noninterest income compared to the prior year. These decreased were partially offset by $1.1 million of FRB dividends for the nine months ended September 30, 2025.
The following table presents, for the periods indicated, the major categories of noninterest income:
Three Months Ended September 30, Increase
(Decrease) 		Nine Months Ended September 30, Increase
(Decrease)
2025 2024 2025 2024
(In thousands)
Service charges on deposit accounts $ 1,545 $ 1,594 $ (49) $ 4,690 $ 4,840 $ (150)
(Loss) gain on sale/write-down of assets (491) 432 (923) (131) 881 (1,012)
Bank-owned life insurance income 632 614 18 1,860 1,792 68
Debit card and interchange income 572 551 21 1,658 1,621 37
Other(1)
2,728 3,111 (383) 8,205 8,880 (675)
Total noninterest income $ 4,986 $ 6,302 $ (1,316) $ 16,282 $ 18,014 $ (1,732)
(1)Other includes small business investment company income, FHLB dividends, FRB dividends and wire transfer fees among other items.
Noninterest Expense
Three months ended September 30, 2025 compared with three months ended September 30, 2024. Noninterest expense was $73.1 million for the three months ended September 30, 2025 compared to $71.1 million for the three months ended September 30, 2024 an increase of $2.1 million, or 2.9%, primarily due to a $2.1 million increase in salaries and employee benefits and a $547 thousand increase in advertising partially offset by a $658 thousand decrease in amortization of intangibles.
Nine months ended September 30, 2025 compared with nine months ended September 30, 2024. Noninterest expense was $213.3 million for the nine months ended September 30, 2025 compared to $213.7 million for the nine months ended September 30, 2024, a decrease of $380 thousand, or 0.2%, primarily due to decreases of $2.0 million in amortization of intangibles, $1.3 million in professional fees, $620 thousand in net occupancy and equipment and $1.9 million in other noninterest expense partially offset by an increase of $4.3 million in salaries and employee benefits and $1.1 million in data processing and software amortization.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Three Months Ended September 30, Increase
(Decrease) 		Nine Months Ended September 30, Increase
(Decrease)
2025 2024 2025 2024
(In thousands)
Salaries and employee benefits(1)
$ 43,175 $ 41,123 $ 2,052 $ 125,894 $ 121,560 $ 4,334
Net occupancy and equipment 4,518 4,570 (52) 12,843 13,463 (620)
Depreciation 2,015 1,911 104 6,002 5,823 179
Data processing and software amortization 5,882 5,706 176 17,184 16,101 1,083
Professional fees 1,601 1,714 (113) 4,674 5,996 (1,322)
Regulatory assessments and FDIC insurance
1,688 1,779 (91) 4,982 5,932 (950)
Amortization of intangibles
5,554 6,212 (658) 16,650 18,639 (1,989)
Communications 855 827 28 2,563 2,611 (48)
Advertising 1,425 878 547 3,374 2,534 840
Other 6,429 6,346 83 19,146 21,033 (1,887)
Total noninterest expense $ 73,142 $ 71,066 $ 2,076 $ 213,312 $ 213,692 $ (380)
(1)Total salaries and employee benefits includes $2.6 million and $3.0 million for the three months ended September 30, 2025 and 2024 and $7.1 million and $8.6 million for the nine months ended September 30, 2025 and 2024, respectively, of stock-based compensation expense.
Amortization of intangibles. Amortization of intangibles decreased $658 thousand during the three months ended September 30, 2025 and $2.0 million during the nine months ended September 30, 2025 compared to the same periods in 2024.
Professional fees.Professional fees decreased $113 thousand during the three months ended September 30, 2025 and $1.3 million during the nine months ended September 30, 2025compared to the same periods in 2024 primarily due to consulting fees incurred related to various projects in 2024.
Salaries and employee benefits.Salaries and benefits increased $2.1 million during the three months ended September 30, 2025 and $4.3 million during the nine months ended September 30, 2025 compared to the same periods in 2024 primarily due to annual salary increases and the increase in full-time equivalent employees. Salaries and benefits during the third quarter of 2025 included $464 thousand in severance expense related to planned upcoming branch closures.
Data processing and software amortization.Data processing and software amortization increased $176 thousand during the three months ended September 30, 2025and $1.1 million during the nine months ended September 30, 2025 compared to the same periods in 2024 primarily due to increased software expense.
Regulatory assessments and FDIC insurance. Regulatory assessments and FDIC insurance decreased primarily due to the additional special assessment recorded in 2024 for future payments to the FDIC pursuant to the final FDIC rule implementing a special insurance assessment to recover losses to the Deposit Insurance Fund associated with protecting uninsured depositors following several bank failures in 2023.
Efficiency Ratio
The efficiency ratio is a supplemental financial measure utilized in management's internal evaluation of our performance. We calculate our efficiency ratio by dividing total noninterest expense, excluding the amortization of core deposits intangibles, by the sum of net interest income and noninterest income, excluding net gains and losses on the sale/write-down of assets. Additionally, taxes and provision for credit losses are not part of this calculation. The calculation of the efficiency ratio was revised to exclude the amortization of core deposit intangibles in 2025. Prior periods were recalculated and are disclosed under the revised calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio was 63.69% for the three months ended September 30, 2025 compared to 60.40% for the three months ended September 30, 2024 and 62.50% for the nine months ended September 30, 2025 compared to 60.54% for the nine months ended September 30, 2024.
We monitor the efficiency ratio in comparison with changes in our total assets and loans, and we believe that maintaining or reducing the efficiency ratio during periods of growth demonstrates the scalability of our operating platform. We expect to continue to benefit from our scalable platform in future periods as we continue to monitor overhead expenses necessary to support our growth.
Income Taxes
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, tax-exempt income and other non-deductible expenses. Income tax expense decreased $2.3 million for the three months ended September 30, 2025 and $3.9 million for the nine months ended September 30, 2025 compared with the same periods in 2024 primarily due to the changes in pre-tax net income. Our effective tax rate was 20.2% for the three months ended September 30, 2025 compared to 20.7% for the three months ended September 30, 2024 and 20.2% for the nine months ended September 30, 2025 compared to 20.7% for the nine months ended September 30, 2024.
Financial Condition
Loan Portfolio
At September 30, 2025, total loans were $7.17 billion, a decrease of $272.0 million, or 3.7%, compared with December 31, 2024. Total loans as a percentage of deposits were 81.3% and 81.5% as of September 30, 2025 and December 31, 2024, respectively. Total loans as a percentage of assets were 67.4% and 68.2% as of September 30, 2025 and December 31, 2024, respectively.
The following table summarizes our loan portfolio by type of loan as of the dates indicated:
September 30, 2025 December 31, 2024
Amount Percent Amount Percent
(Dollars in thousands)
Commercial and industrial $ 1,332,795 18.6 % $ 1,362,260 18.3 %
Real estate:
Commercial real estate (including multi-family residential) 3,733,293 52.1 % 3,868,218 52.0 %
Commercial real estate construction and land development 753,381 10.5 % 845,494 11.4 %
1-4 family residential (including home equity) 1,142,614 15.9 % 1,115,484 15.0 %
Residential construction 121,197 1.7 % 157,977 2.1 %
Consumer and other 84,577 1.2 % 90,421 1.2 %
Total loans 7,167,857 100.0 % 7,439,854 100.0 %
Allowance for credit losses on loans (78,924) (81,058)
Loans, net $ 7,088,933 $ 7,358,796
Our lending activities originate from the efforts of our bankers with an emphasis on lending to individuals, professionals, small- to medium-sized businesses and commercial companies generally located in our market. Our strategy for credit risk management generally includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for credit exposures. The strategy generally emphasizes regular credit examinations and management reviews of loans. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. We maintain an independent loan review department which includes third-party loan review services to review the credit risk on a periodic basis. The internal loan review department focuses on credits not reviewed by the third-party loan reviewer to ensure more complete coverage of credit risk. Results of these reviews are presented to management and the risk committee of the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by bankers and credit personnel and contained in our policies and procedures. The principal categories of our loan portfolio are discussed below:
Commercial and Industrial.We make commercial and industrial loans in our market area that are underwritten based on the borrower's ability to service the debt from income. The increased risk in these loans derives from the expectation that commercial and industrial loans generally are serviced principally from the operations of the business, which may not be successful and from the type of collateral securing these loans. Commercial and industrial loans are typically collateralized by general business assets including, among other things, accounts receivable, inventory and equipment and are generally backed by a personal guaranty of the borrower or principal. This collateral may decline in value more rapidly than we anticipate, exposing us to increased credit risk. As a result,
commercial and industrial loans require more extensive underwriting and servicing than other types of loans. Our commercial and industrial loan portfolio was $1.33 billion as of September 30, 2025 and $1.36 billion as of December 31, 2024.
Commercial Real Estate (Including Multi-Family Residential). We make loans to finance the purchase or ownership of commercial real estate. As of September 30, 2025, our commercial real estate loans comprised 52.1% of our loan portfolio. Repayment is generally dependent on the successful operations of the property and may be impacted by general economic conditions, including fluctuations in the value of real estate, vacancy rates and unemployment trends. The collateral securing these loans is typically more difficult to liquidate due to the fluctuation of real estate values. As of September 30, 2025 and December 31, 2024, 47.5% and 47.4%, respectively, of our commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio decreased $134.9 million, or 3.5%, to $3.73 billion as of September 30, 2025 from $3.87 billion as of December 31, 2024.
The following table summarizes our commercial real estate loan portfolio by type of property securing the loans at September 30, 2025.
Property Type Amount Average Loan Size Percent of Total
(Dollars in thousands)
Retail $ 586,164 $ 1,266 15.7 %
Warehouse 582,559 797 15.6 %
Multi-family 437,550 2,145 11.7 %
Convenience store 388,543 1,340 10.4 %
Office 382,291 798 10.3 %
Industrial 184,939 1,796 5.0 %
Restaurant / bar 149,352 1,059 4.0 %
Church 131,713 948 3.5 %
Auto sales / repair 119,922 674 3.2 %
Healthcare 105,093 1,106 2.8 %
Hotel / motel 94,704 3,266 2.5 %
Other 570,463 1,199 15.3 %
Total $ 3,733,293 1,122 100.0 %
As of September 30, 2025, our commercial real estate loan portfolio included $275.0 million of multi-family community development loans with associated tax credits, which fund Texas based projects to promote affordable housing compared to $233.3 million as of December 31, 2024.
Commercial Real Estate Construction and Land Development.We make commercial real estate construction and land development loans to fund commercial construction, land acquisition and real estate development construction. Construction loans involve additional risks as they often involve the disbursement of funds with the repayment dependent on the ultimate success of the project's completion. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed property. The loans in this portfolio are monitored closely by management. Due to uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often includes the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. As of September 30, 2025 and December 31, 2024, 16.8% and 13.1%, respectively, of our commercial real estate construction and land development loans were owner-occupied. Our commercial real estate construction and land development loans decreased $92.1 million, or 10.9%, to $753.4 million as of September 30, 2025 compared to $845.5 million as of December 31, 2024.
As of September 30, 2025, our commercial real estate construction and land development loan portfolio included $134.2 million of construction and development loans to support multi-family community development loans with associated tax credits, which fund Texas based projects to promote affordable housing compared to $137.1 million as of December 31, 2024.
1-4 Family Residential (Including Home Equity).Our residential real estate loans include the origination of 1-4 family residential mortgage loans (including home equity and home improvement loans and home equity lines of credit) collateralized by owner-occupied residential properties located in our market areas. Our residential real estate portfolio (including home equity) increased $27.1 million, or 2.4%, to $1.14 billion as of September 30, 2025 from $1.12 billion as of December 31, 2024.
Residential Construction.We make residential construction loans to home builders and individuals to fund the construction of single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or with the proceeds of a mortgage loan. These loans are secured by the real property being built and are made based on our assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio decreased $36.8 million, or 23.3%, to $121.2 million as of September 30, 2025 from $158.0 million as of December 31, 2024.
Consumer and Other.Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes and deferred fees and costs on all loan types. Generally, consumer loans entail greater risk than residential real estate loans because they may be unsecured or if secured the value of the collateral, such as an automobile or boat, may be more difficult to assess and more likely to decrease in value than real estate. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. Our consumer and other loan portfolio decreased $5.8 million, or 6.5%, to $84.6 million as of September 30, 2025 from $90.4 million as of December 31, 2024.
Concentrations of Credit
The vast majority of our lending activity occurs in the Houston and Beaumont MSAs. Our loans are primarily secured by real estate, including commercial and residential construction, owner-occupied and nonowner-occupied and multi-family commercial real estate, raw land and other real estate based loans located in the Houston and Beaumont MSAs. As of September 30, 2025 and December 31, 2024, commercial real estate and commercial construction loans represented 62.6% and 63.4%, respectively, of our total loans.
Asset Quality
We have procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our officers and monitor our delinquency levels for any negative or adverse trends.
Nonperforming Assets
Nonperforming assets totaled $54.2 million, or 0.51%, of total assets, at September 30, 2025 compared to $38.9 million, or 0.36%, of total assets at December 31, 2024. Nonaccrual loans consisted of 144separate credits at September 30, 2025 compared to 101 separate credits at December 31, 2024.
The following table presents information regarding nonperforming assets as of the dates indicated:
September 30, 2025 December 31, 2024
(Dollars in thousands)
Nonaccrual loans:
Commercial and industrial $ 5,594 $ 8,500
Real estate:
Commercial real estate (including multi-family residential) 25,156 16,459
Commercial real estate construction and land development 2,899 3,061
1-4 family residential (including home equity) 12,083 9,056
Residential construction 457 -
Consumer and other 61 136
Total nonaccrual loans 46,250 37,212
Accruing loans 90 or more days past due - -
Total nonperforming loans 46,250 37,212
Foreclosed assets 7,939 1,708
Total nonperforming assets $ 54,189 $ 38,920
Troubled loan modifications(1)
$ 3,610 $ 13,457
Nonperforming assets to total assets 0.51 % 0.36 %
Nonperforming loans to total loans 0.65 % 0.50 %
(1)Troubled loan modifications in the table above represent the balance at the end of the respective period for those loans that are not already presented as a nonperforming loan.
Allowance for Credit Losses
The allowance for credit losses is a valuation allowance that is established through charges to earnings in the form of a provision for (or reversal of) credit losses calculated in accordance with Accounting Standards Codification ("ASC") Topic 326- Measurement of Credit Losses on Financial Instruments ("ASC 326") that is deducted from the amortized cost basis of certain assets to present the net amount expected to be collected. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting estimates and policies, refer to "Critical Accounting Estimates" in this section, Note 1 - Nature of Operations and Summary of Significant Accounting and Reporting Policies and Note 4 - Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statements.
Allowance for Credit Losses on Loans
The allowance for credit losses on loans represents management's estimates of current expected credit losses in the loan portfolio. Pools of loans with similar risk characteristics are collectively evaluated, while loans that no longer share risk characteristics with loan pools are evaluated individually.
At September 30, 2025, our allowance for credit losses on loans was$78.9 million, or 1.10% of total loans, compared with $81.1 million, or 1.09% of total loans, as of December 31, 2024. The decrease in the allowance for credit losses on loans during 2025 primarily resulted from the decrease in loan balances and changes in the specific reserves within the allowance for credit losses model.
The following table presents an analysis of the allowance for loan losses and other related data as of and for the periods indicated:
Nine Months Ended September 30,
2025 2024
(Dollars in thousands)
Average loans outstanding $ 7,284,805 $ 7,790,957
Gross loans outstanding at end of period 7,167,857 7,551,124
Allowance for credit losses on loans at beginning of period
81,058 91,684
Provision for credit losses on loans 1,558 (2,537)
Charge-offs:
Commercial and industrial loans (2,832) (4,930)
Real estate:
Commercial real estate (including multi-family residential)
(590) (786)
Commercial real estate construction and land development
(334) -
1-4 family residential (including home equity) (374) (2)
Consumer and other (144) (137)
Total charge-offs for all loan types (4,274) (5,855)
Recoveries:
Commercial and industrial loans 559 1,166
Real estate:
Commercial real estate (including multi-family residential)
15 26
1-4 family residential (including home equity) - 6
Consumer and other 8 11
Total recoveries for all loan types 582 1,209
Net charge-offs (3,692) (4,646)
Allowance for credit losses on loans at end of period $ 78,924 $ 84,501
Allowance for credit losses on loans to total loans 1.10 % 1.12 %
Net charge-offs to average loans(1)
0.07 % 0.08 %
Allowance for credit losses on loans to nonperforming loans
170.65 % 262.92 %
(1)Annualized.
See Note 4 - Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statement for additional information regarding how we estimate and evaluate the credit risk in our loan portfolio.
Allowance for Credit Losses on Unfunded Commitments
The allowance for credit losses on unfunded commitments to extend credit estimates current expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by us. The allowance for credit losses on unfunded commitments is a liability account reported as a component of other liabilities in our consolidated balance sheets and is adjusted through a provision for (or reversal of) credit loss charged to expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to be funded. The estimate of commitments expected to fund is affected by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. At September 30, 2025, our allowance for credit losses on unfunded commitments was $15.8 million compared to $12.4 million at December 31, 2024.
See Note 13 - Off-Balance Sheet Arrangements, Commitments and Contingencies in the accompanying notes to the consolidated financial statement for additional information regarding unfunded commitments to extend credit.
Available for Sale Securities
We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and to meet pledging and regulatory capital requirements. As of September 30, 2025, the carrying amount of investment securities totaled $1.84 billion, an increase of $169.3 million, or 10.1%, compared with $1.67 billion as of December 31, 2024. Securities represented 17.3% and 15.3% of total assets as of September 30, 2025 and December 31, 2024, respectively.
All of the securities in our securities portfolio are classified as available for sale. Securities classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income. The following tables summarize the amortized cost and fair value of the securities in our securities portfolio as of the dates shown:
September 30, 2025
Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
(In thousands)
Available for Sale
U.S. government and agency securities $ 177,935 $ 372 $ (3,323) $ 174,984
Municipal securities 218,632 476 (25,201) 193,907
Agency mortgage-backed pass-through securities 734,960 4,937 (29,936) 709,961
Agency collateralized mortgage obligations 712,250 3,534 (44,574) 671,210
Corporate bonds and other 97,014 510 (5,318) 92,206
Total $ 1,940,791 $ 9,829 $ (108,352) $ 1,842,268
December 31, 2024
Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
(In thousands)
Available for Sale
U.S. government and agency securities $ 198,962 $ 348 $ (5,707) $ 193,603
Municipal securities 219,545 367 (28,459) 191,453
Agency mortgage-backed pass-through securities 566,719 3 (45,346) 521,376
Agency collateralized mortgage obligations 730,861 830 (71,328) 660,363
Corporate bonds and other 115,601 181 (9,561) 106,221
Total $ 1,831,688 $ 1,729 $ (160,401) $ 1,673,016
Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under ASC Topic 326. See Note 3 - Securities in the accompanying notes to the consolidated financial statements for additional information. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2025, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore, no losses have been recognized in the Company's consolidated statements of income.
The following tables summarize the contractual maturity of securities and their weighted-average yields as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. Available for sale securities are shown at amortized cost. For purposes of the tables below, the yields on municipal securities were calculated on a tax equivalent basis.
September 30, 2025
Within One Year After One Year but Within Five Years After Five Years but Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands)
Available for Sale
U.S. government and agency securities
$ 74,875 1.05 % $ 2,779 5.97 % $ 2,369 3.89 % $ 97,912 4.64 % $ 177,935 3.14 %
Municipal securities - 0.00 % 12,443 2.72 % 74,133 2.39 % 132,056 2.40 % 218,632 2.42 %
Agency mortgage-backed pass-through securities
8 1.86 % 8,785 4.05 % 6,525 4.65 % 719,642 4.26 % 734,960 4.26 %
Agency collateralized mortgage obligations
- 0.00 % 39,429 3.76 % 37,243 4.79 % 635,578 3.35 % 712,250 3.45 %
Corporate bonds and other 1,136 2.30 % 7,600 8.75 % 49,500 5.69 % 38,778 2.72 % 97,014 4.70 %
Total $ 76,019 1.07 % $ 71,036 4.23 % $ 169,770 3.99 % $ 1,623,966 3.74 % $ 1,940,791 3.68 %
December 31, 2024
Within One Year After One Year but Within Five Years After Five Years but Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands)
Available for Sale
U.S. government and agency securities
$ - 0.00 % $ 78,658 1.31 % $ 3,141 3.77 % $ 117,163 4.66 % $ 198,962 3.32 %
Municipal securities - 0.00 % 3,314 4.76 % 74,337 2.44 % 141,894 2.34 % 219,545 2.41 %
Agency mortgage-backed pass-through securities
3,285 2.47 % 4,362 3.71 % 7,936 4.53 % 551,136 3.83 % 566,719 3.83 %
Agency collateralized mortgage obligations
- 0.00 % 30,539 3.44 % 48,589 4.81 % 651,733 3.23 % 730,861 3.34 %
Corporate bonds and other 4,110 4.98 % 3,000 7.99 % 62,000 5.42 % 46,491 2.96 % 115,601 4.48 %
Total $ 7,395 3.87 % $ 119,873 2.20 % $ 196,003 4.07 % $ 1,508,417 3.47 % $ 1,831,688 3.45 %
The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers may have the right to prepay their obligations. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans with varying maturities. The terms of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay and, in particular, monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of the security.
As of September 30, 2025 and December 31, 2024, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which the aggregate adjusted cost exceeded 10% of our consolidated shareholders' equity.
The average yield of our securities portfolio was 3.79% for the three months ended September 30, 2025 compared with 3.49% for the three months ended September 30, 2024 and 3.77% for the nine months ended September 30, 2025 compared with 3.22% for the nine months ended September 30, 2024. The increase in average yield during the three and nine months ended September 30, 2025 compared to the same periods in 2024 was primarily due to security purchases during the quarter increasing the mix of higher-yielding securities within the portfolio.
Goodwill and Core Deposit Intangibles
Goodwill was $497.3 million as of September 30, 2025 and December 31, 2024. Goodwill resulting from business combinations represents the excess of the consideration paid over the fair value of the net assets acquired. Goodwill is assessed annually for impairment and on an interim basis if an event occurs or circumstances change that would indicate that the carrying amount of the asset may not be recoverable.
Core deposit intangibles, net, as of September 30, 2025 was $75.9 million and $92.5 million as of December 31, 2024. Core deposit intangibles are amortized using the straight-line or an accelerated method over the estimated useful life of seven to ten years.
Deposits
Our lending and investing activities are primarily funded by deposits. We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and certificates and other time accounts. We rely primarily on convenient locations, personalized service and our customer relationships to attract and retain these deposits. We seek customers that will engage in both a lending and deposit relationship with us.
Total deposits at September 30, 2025 were $8.82 billion, a decrease of $310.9 million, or 3.4%, compared with $9.13 billion at December 31, 2024 primarily driven by seasonality, industry-wide pressures and the maintenance of pricing discipline in an intensely competitive market for deposits. Noninterest-bearing deposits at September 30, 2025 were $3.21 billion, a decrease of $365.3 million, or 10.2%, compared with $3.58 billion at December 31, 2024. Interest-bearing deposits at September 30, 2025 were $5.61 billion, an increase of $54.3 million, or 1.0%, compared with $5.55 billion at December 31, 2024. Our ratio of noninterest-bearing deposits to total deposits was 36.4% and 39.2% at September 30, 2025 and December 31, 2024, respectively. Deposits include fully collateralized public funds of $960.3 million and $1.44 billion at September 30, 2025 and December 31, 2024, respectively.
The following table sets forth the amount of time deposits that met or exceeded the FDIC insurance limit of $250 thousand by time remaining until maturity at September 30, 2025 (in thousands):
Three months or less $ 234,981
Over three months through six months 317,134
Over six months through 12 months 52,029
Over 12 months 24,355
Total $ 628,499
Borrowings
The Company has an available line of credit with the Federal Home Loan Bank of Dallas ("FHLB"), which allows the Company to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. The advances are secured by blanket liens on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At September 30, 2025, the Company had a total borrowing capacity of $3.16 billion, of which $2.09 billion was available under this agreement and $1.07 billion was outstanding pursuant to FHLB advances and letters of credit.
At September 30, 2025, the Company had FHLB letters of credit pledged as collateral for public and other deposits of state and local government agencies which expire in the following periods (in thousands):
2025 $ 269,500
2026 264,630
2027 366,000
2028 56,000
Thereafter 117,000
Total $ 1,073,130
Subordinated Debt
Junior Subordinated Debentures
In connection with the acquisitionof F&M Bancshares, Inc. in 2015, the Company assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company's junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by Stellar. Each trust's ability to pay amounts due on the trust preferred securities is solely dependent upon Stellar making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company's present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust's obligations under the trust securities issued by each trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The trust preferred securities bear a floating rate of interest equal to 3-Month SOFR plus a spread adjustment. The junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations. Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.
A summary of pertinent information related to the Company's junior subordinated debentures outstanding at September 30, 2025 is set forth in the table below:
Description
Issuance Date
Trust
Preferred
Securities
Outstanding
Junior
Subordinated
Debt Owed
to Trusts
Maturity Date(1)
(Dollars in thousands)
Farmers & Merchants Capital Trust II November 13, 2003 $7,500 $7,732 November 8, 2033
Farmers & Merchants Capital Trust III June 30, 2005 3,500 3,609 July 7, 2035
$11,341
(1) All junior subordinated debentures were callable at September 30, 2025.
Subordinated Notes
In December 2017, the Bank issued $40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Bank Notes") due December 15, 2027 and bore a floating rate of interest equal to 3-Month SOFR plus 3.03%. In December 2024, the Bank redeemed the Bank Notes at a redemption price equal to 100% of the principal amount of Bank Notes plus accrued and unpaid interest.
In September 2019, the Company issued $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Company Notes") due October 1, 2029. The Company Notes bear interest at a floating rate equal to 3-Month SOFR plus 3.13% and a spread adjustment for each quarterly interest period, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.
On October 1, 2025, the Company redeemed $30.0 million of its $60.0 million aggregate principal amount 4.70% Fixed-to-Floating Rate Subordinated Notes due 2029 (the "Company Notes"). The redemption price for the Company Notes was equal to 100% of the principal amount of the Company Notes redeemed, plus $1.2 million for accrued and unpaid interest to, but excluding, the redemption date.
Credit Agreement
On December 13, 2024, the Company renewed a loan agreement with another financial institution (the "Loan Agreement") that provides for a $75.0 million revolving line of credit. At September 30, 2025, there were no outstanding borrowings on this line of credit and no draws were taken on this line of credit during the three or nine months ended September 30, 2025. Interest accrues on outstanding borrowings at a per annum rate equal to 3-month SOFR plus 2.75%, calculated in accordance with the terms of the
revolving promissory note and payable quarterly through the first 24 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2033, the maturity date. The Company may prepay the principal of the line of credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a pledge of all of the issued and outstanding shares of capital stock of the Bank.
Covenants made under the Loan Agreement include, among other things, while there are obligations outstanding under Loan Agreement, the Company shall maintain a cash flow to debt service (as defined in the Loan Agreement) of not less than 1.25, the Bank's Texas Ratio (as defined in the Loan Agreement) not to exceed 20.0%, the Bank shall maintain a Tier 1 Leverage Ratio (as defined under the Loan Agreement) of at least 8.0% and includes restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. As of September 30, 2025, the Company believes it was in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.
Liquidity and Capital Resources
Liquidity
Liquidity is the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and manage unexpected events, all at a reasonable cost. During the nine months ended September 30, 2025 and the year ended December 31, 2024, our liquidity needs have primarily been met by deposits, borrowed funds and securities. The Bank has access to purchased funds from correspondent banks, the Federal Reserve discount window and advances from the FHLB, on a collateralized basis, are available under a security and pledge agreement to take advantage of investment opportunities.
Liquidity risk management is an important element in our asset/liability management process. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. Liquidity stress scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.
Our largest source of funds is deposits and our largest use of funds is loans. Average total deposits decreased $53.3 million, or 0.6%, and average loans decreased $506.2 million, or 6.5%, during the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024.
We predominantly invest excess deposits in Federal Reserve Bank of Dallas balances, securities, interest-bearing deposits at other banks or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio had a weighted-average life of 6.8 years and 7.2 years at September 30, 2025 and December 31, 2024, respectively.
Total immediate contingent funding sources, including unrestricted cash, available-for-sale securities that are not pledged and total available borrowing capacity was $5.23 billion, or 59.3%, of total deposits at September 30, 2025. As of September 30, 2025, estimated uninsured deposits net of collateralized deposits were 46.0% of total deposits compared to 43.4% at December 31, 2024. Including policy-driven capacity for brokered deposits, the Bank would have been able to add approximately $2.07 billion to its contingent sources of liquidity, bringing total contingent funding sources to approximately $7.3 billion, or 82.8%, of deposits at September 30, 2025.
As of September 30, 2025 and December 31, 2024, we had outstanding commitments to extend credit of $2.03 billion and $1.70 billion, respectively, and commitments associated with outstanding letters of credit of $48.9 million and $43.6 million, respectively. Since commitments associated with commitments to extend credit and outstanding letters of credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. Commitments to make loans are generally made for an approval period of 120 days or less. Variable rate loan commitments were $1.70 billion at September 30, 2025 and $1.26 billion at December 31, 2024. Fixed rate loan commitments were $335.2 million at September 30, 2025 and $440.4 million at December 31, 2024. At September 30, 2025, the fixed rate loan commitments had interest rates ranging from 2.50% to 13.00% with a weighted-average maturity of 1.99 years and a weighted-average rate of 7.08%.
At September 30, 2025 and December 31, 2024, we had FHLB letters of credit in the amount of $1.07 billion and $2.10 billion, respectively, pledged as collateral for public and other deposits of state and local government agencies. See Note 9 -Borrowings and Borrowing Capacity to the accompanying consolidated financial statements.
As of September 30, 2025 and December 31, 2024, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
In the ordinary course of business, we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to accompanying consolidated financial statements for the expected timing of such payments as of September 30, 2025. These include payments related to (1) operating leases (Note 5 - Leases), (2) time deposits with stated maturity dates (Note 7 - Deposits), (3) borrowings (Note 9 - Borrowings and Borrowing Capacity) and (4) commitments to extend credit and standby letters of credit (Note 13 - Off-Balance Sheet Arrangements, Commitments and Contingencies).
Capital Resources
Capital management consists of providing equity to support our current and future operations. We are subject to capital adequacy requirements imposed by the Federal Reserve and the Bank is subject to capital adequacy requirements imposed by the FDIC. Both the Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
Under current guidelines, the minimum ratio of total capital to risk-weighted assets (which are primarily the credit risk equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is 8.0%. At least half of total capital must be composed of Tier 1 capital, which includes common shareholders' equity (including retained earnings), less goodwill, other disallowed intangible assets and disallowed deferred tax assets, among other items. The Federal Reserve also has adopted a minimum leverage ratio, requiring Tier 1 capital of at least 4.0% of average quarterly total consolidated assets, net of goodwill and certain other intangible assets, for all but the most highly rated bank holding companies. The federal banking agencies have also established risk-based and leverage capital guidelines that FDIC-insured depository institutions are required to meet. These regulations are generally similar to those established by the Federal Reserve for bank holding companies.
Under the Federal Deposit Insurance Act, the federal bank regulatory agencies must take "prompt corrective action" against undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: "well- capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized," and are subjected to different regulation corresponding to the capital category within which the institution falls. A depository institution is deemed to be "well capitalized" if the banking institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category.
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver. As of September 30, 2025 and December 31, 2024, the Bank was well-capitalized under regulatory capital guidelines. Total shareholders' equity was $1.65 billion at September 30, 2025 and $1.61 billion at December 31, 2024. Shareholders' equity increased during the nine months ended September 30, 2025 due to net income of $76.7 million and a decrease of $47.5 million of other comprehensive loss, partially offset by $64.2 million paid to repurchase common stock at a weighted-average price per share of $27.41 and dividends paid of $21.6 million, or $0.42 per common share.
The following is a summary of the Company's and the Bank's actual and required capital ratios as of September 30, 2025:
Actual
Ratio 		Minimum
Required
For Capital
Adequacy
Purposes 		Minimum
Required
Plus Capital
Conservation
Buffer 		To Be
Categorized As
Well-Capitalized
Under Prompt
Corrective
Action Provisions
Stellar Bancorp, Inc. (Consolidated)
Total Capital (to risk-weighted assets) 16.33% 8.00% 10.50% N/A
Common Equity Tier 1 Capital (to risk-weighted assets) 14.43% 4.50% 7.00% N/A
Tier 1 Capital (to risk-weighted assets) 14.55% 6.00% 8.50% N/A
Tier 1 Leverage (to average tangible assets) 11.60% 4.00% 4.00% N/A
Stellar Bank
Total Capital (to risk-weighted assets) 15.45% 8.00% 10.50% 10.00%
Common Equity Tier 1 Capital (to risk-weighted assets) 14.27% 4.50% 7.00% 6.50%
Tier 1 Capital (to risk-weighted assets) 14.27% 6.00% 8.50% 8.00%
Tier 1 Leverage (to average tangible assets) 11.37% 4.00% 4.00% 5.00%
Stellar Bancorp Inc. published this content on October 24, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on October 24, 2025 at 20:48 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]