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 solid earnings performance with an ROA of 0.97% as of 9M25. Earnings are underpinned 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 ($4.8 million or ~0.20% of average earning assets). STEL's above-average NIM is further supported by the lower-cost deposit base at 1.96%, including a robust and durable NIB deposit mix representing 36% of total deposits at 3Q25. That said, noninterest income remains a limited contributor to earnings at 5% of operating revenue. Our view also incorporates the slight uptick in charge-offs during the quarter (0.18% at 3Q25), derived from several small credits, most of which were previously identified with specific reserves previously assigned. We acknowledge that charge-offs remain in line with the rated peer group and are further supported by solid loan loss reserve coverage (covering NPAs by 1.7x) along with above peer regulatory capital ratios and solid earnings power. In an effort to de-risk the balance sheet, management has reduced its exposure to non-relationship CRE loans over the past year to move toward a more balanced loan portfolio of C&I and CRE loans. As such, the company has managed its overall investor CRE and C&D concentrations to levels below regulatory guidance at 229% and 70% of total risk-based capital, respectively. Similar to industry trends, STEL has experienced increased loan payoffs, which, coupled with its de-risking efforts, have led to a 10% decrease in loans since YE23, though the company anticipates a return to mid-single digit loan growth within the next year. The ratings are supported by the leadership team’s disciplined capital management as the CET1 and TCE ratios tracked above similarly rated peers at 14.4% and 10.7%, respectively, as of 3Q25. In part due to its higher C&D levels, Stellar expects to continue to run with higher capital, which KBRA views favorably.

Rating Sensitivities

The Stable Outlook reflects KBRA's view that a change in ratings is unlikely over the medium term. However, demonstrating above average earnings performance with improved fee income and maintaining stable credit quality metrics while consistently managing capital ratios above the peer average would be viewed favorably over the longer term. Conversely, should the company experience meaningful regression in credit quality metrics evidenced by material losses, a negative rating action could occur. In addition, if the company is unable to maintain earnings above similarly rated peers, reflects an increase in utilization of non-core funding sources, or if the company exhibits material capital deterioration, the ratings may become pressured.

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