KBRA Affirms Ratings for Stellar Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Houston, Texas based Stellar Bancorp, Inc. (NYSE: STEL) ("Stellar" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the lead subsidiary, Stellar Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the company’s better than peer earnings performance with an operating ROA of 1.13% during 9M24. Earnings are largely driven by a strong NIM, reinforced by higher loan yields from an underserved and small-scale commercial customer base, comparatively elevated C&D lending, and purchase accounting accretion income. Moreover, the earnings base is supported by lower deposit costs (2.15% for 3Q24), and a resilient NIB deposit mix, representing 38% of total deposits at 3Q24. That said, noninterest income remains a limited contributor to earnings at 6% of operating revenue. Furthermore, the ratings are underpinned by management’s disciplined capital management as the CET1 and TCE ratios track nearly 200 bps above similarly rated peers at 13.6% and 10.3%, respectively, as of 3Q24. The company has managed its overall investor CRE portfolio to levels below regulatory guidance at 253%. Moreover, in an effort to de-risk the balance sheet, management proactively sold CRE loans to further reduce its exposure, which, combined with single digit loan growth, with a focus on C&I, should continue to diversify the portfolio. KBRA expects Stellar to maintain capital metrics near current levels given the elevated C&D levels (15% of total loans). The ratings also consider the slight uptick in charge-offs during the quarter (0.21% at 3Q24), derived from the C&I book, although metrics remain commensurate with peer averages. The rise in NCOs is related to the merger and balance sheet maintenance initiatives and are not considered to be systemic. The company’s loss absorption capacity is reinforced by solid loan loss reserve coverage (covering NPLs by 2.6x) along with above peer regulatory capital ratios and solid earnings power.

Rating Sensitivities

Positive rating movement is unlikely over the medium term. However, demonstration of above average earnings performance with improved fee income streams and maintenance of stable credit quality metrics while consistently managing capital ratios above peer averages could be viewed favorably over the longer term. Should the company experience meaningful regression in credit quality metrics evidenced by material losses impacting profitably, increased utilization of non-core funding sources, or material capital deterioration, the ratings may become pressured.

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