Stellar Bancorp, Inc. Q2 FY2025 earnings call

• Loan originations nearly doubled in Q2 compared to Q1, the highest level since 2022, marking return to organic growth. Pipeline remains healthy to support growth.
• Net interest income decreased slightly in Q2 due to lower earning assets and lower net interest margin. Excluding purchase accounting accretion, net interest income and margin also saw slight decreases but core margin still showed incremental improvement from Q4 2024.
• Provision for credit losses was $1.1 million in Q2, driven by increase in allowance for unfunded commitments due to higher unfunded loan commitments, with minimal net charge-offs.
• Non-interest income increased to $5.8 million in Q2得益于 Federal Reserve Bank dividend as Stellar became a Fed member in Q2.
• Non-interest expense was flat at ~$70 million, reflective of focus on holding line on expenses. Strong bottom line drove internal capital generation and strong balance sheet/capital position. Bought back 791,000 shares at weighted average price of $26.08 per share during the quarter.

In the second quarter of 2025, Stellar Bancorp reported net income of $26.4 million or $0.51 per diluted share, up from $24.7 million or $0.46 per share in the first quarter. Net interest income was $98.3 million in Q2, a slight decrease from $99.3 million in Q1. Non-interest income was $5.8 million in Q2 versus $5.5 million in Q1. Non-interest expense was approximately flat at $70 million. The allowance for credit losses on loans ended the quarter at $83.2 million or 1.14% of loans. Total risk-based capital was 15.98% at the end of Q2, and tangible book value increased 10.8% year-over-year.

• Loan originations doubled in Q2 and pipeline supports continued originations; expect origination level to exceed payoffs for growth. Carry component (advances less payments) from newly booked loans expected to lift in future quarters.
• Focus on core funding to drive structurally strong core margin; aim to defend and incrementally improve top-tier margin profile.
• Intend to continue growing loans and see potential margin improvement with Fed rate cuts in medium term, aiming to scratch and claw back to 4% margin.

• Competitive landscape for funding poses potential headwinds, though strategy of focusing on core funding aims to defend margin.
• M&A activity in markets could bring pricing disruption and impact customer acquisition and talent.
• Potential backsliding in core funding could affect margin if not managed properly.

Q: Could you touch on the competitive landscape for loans, origination activity relative to payoffs and paydowns, and when growth might accelerate?

A: Originations nearly doubled in Q2 compared to Q1, pipelines support continued originations. Payoffs come from property trades. Origination of $640 million in Q2 led to slight growth; origination greater than this bar will result in growth. Also, carried component (advances less payments) from newly booked loans expected to lift in future quarters.

Q: Thoughts on the competitive landscape for funding and ability to drive core deposits going forward, and funding cost stability?

A: On time deposits, competitive landscape is less of an issue; on money market, use measured approach with exception pricing. Net new open loans closed in Q2 was highest in three quarters, 50% to new customers. Strategy is to expand existing customer base and tackle market opportunities.

Q: Implications for margin trend into third and fourth quarters regarding deposit cost competition?

A: Feel good about defending margin. Mix shift in funding base with less reliance on FHLB borrowings and brokered CDs in Q2. Focus on staying core to drive structurally strong core margin; able to defend current margin even if backsliding occurs.

Q: Thoughts on securities balances growth and if bond portfolio build is complete?

A: Satisfied with size of securities balance, will incrementally grow. First quarter had seasonal anomaly with higher average balances due to government banking business seasonality; Q2 balances are where they want to be on average basis.

Q: Update on debt redemption and capital deployment?

A: Evaluating debt redemption in conjunction with share repurchases and other capital uses; it's in the playbook to consider as an option.

Q: Update on M&A discussions?

A: Pace of M&A conversations has ticked up, but stay disciplined around pricing to not damage existing franchise; still seeking partners to build balance sheet and bank.

Q: Outlook for other income line item, especially Fed dividend?

A: Other income has lumpy pieces, but Fed dividend from being a Fed member is an ongoing benefit; other dynamics may have volatility, but net-net, Fed dividend is a continuing component.