STEL Q2 Deep Dive: Organic Loan Origination, Margin Defense, and Strategic Discipline

Texas-based commercial bank Stellar Bancorp (NYSE:STEL) fell short of the market’s revenue expectations in Q2 CY2025, with sales falling 2.5% year on year to $104.1 million. Its non-GAAP profit of $0.51 per share was 14.3% above analysts’ consensus estimates.

Is now the time to buy STEL? Find out in our full research report (it’s free).

StockStory’s Take

Stellar Bancorp's second quarter was shaped by stable loan volumes, disciplined expense management, and a continued focus on core funding in a competitive Texas banking landscape. While the company’s revenue fell short of Wall Street’s expectations, management pointed to a near doubling of loan originations and careful control of non-interest expenses as key contributors to improved non-GAAP profitability. CEO Bob Franklin acknowledged that heightened competition for both loans and deposits created headwinds, but emphasized the bank’s “healthy pipeline” and the resilience of the Texas market as bright spots during the quarter.

Looking ahead, Stellar Bancorp’s management remains focused on organic growth through continued expansion of loan originations and core deposit gathering, while maintaining a cautious stance on expense growth. CFO Paul Egge highlighted the bank’s intention to “hold the line” on expenses, allowing for flexibility to invest in growth opportunities as they arise. Management’s outlook for margin improvement is tied to maintaining a strong core funding base and potential benefits from a more normalized interest rate environment, with Egge stating, “the normalization of the yield curve is going to benefit us in the industry.”

Key Insights from Management’s Remarks

Management attributed second quarter results to a significant rise in new loan originations, stable expenses, and a disciplined approach to funding amid intense competition for deposits.

• Loan origination momentum: New loan originations nearly doubled quarter-over-quarter, reaching the highest level since 2022. Management credited business development efforts and recent hires for gains in both the Dallas and Houston-Beaumont markets, positioning the bank for future organic growth.
• Funding and deposit competition: The competitive landscape for deposits, especially in money market accounts, prompted a measured approach to pricing. Management highlighted efforts to expand both the existing customer base and attract new clients, with 50% of new loan customers being new to Stellar Bank in the quarter.
• Expense discipline maintained: Non-interest expenses remained essentially flat, reflecting management’s ongoing focus on cost control. This discipline allowed the bank to outperform internal expense targets and maintain operational flexibility for potential strategic investments or talent acquisition.
• Margin and funding mix: The net interest margin was defended through strategic shifts in the funding mix, with reduced reliance on higher-cost wholesale funds and an emphasis on core deposits. Management indicated that a more consistent funding composition could enable incremental improvements in margin going forward.
• Capital deployment priorities: While organic growth remains the primary use of capital, management reiterated flexibility in capital deployment, including opportunistic share repurchases and ongoing evaluation of debt redemption options. The bank’s strong capital position allows it to pursue growth while maintaining balance sheet strength.

Drivers of Future Performance

Stellar Bancorp’s outlook hinges on sustaining loan origination momentum, defending margins through core funding, and maintaining disciplined expense management amid ongoing competition.

• Sustained loan growth focus: Management sees ongoing loan origination and advances as the foundation for future growth, supported by a robust pipeline and recent market share gains. Expanding commercial and industrial (C&I) lending, while backfilling in real estate segments, is expected to diversify and strengthen the loan portfolio.
• Margin resilience and rate environment: The company expects margin improvement if the funding mix remains stable and core deposits continue to expand. Management also anticipates that potential Federal Reserve rate cuts and yield curve normalization will benefit margins, despite some short-term volatility in funding costs.
• Opportunistic expense and capital strategy: While expense growth is expected to remain flat absent new investments, management is prepared to invest in talent or strategic opportunities if market disruptions create openings. Share repurchases and debt redemption remain in the playbook, but organic growth is the top capital priority.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be monitoring (1) whether loan origination and advances continue at elevated levels to drive organic growth, (2) management’s ability to defend or improve net interest margin despite ongoing deposit competition and changing rate dynamics, and (3) the effectiveness of expense discipline as the bank invests in new talent or pursues M&A opportunities. Updates on the competitive landscape in core Texas markets will also be key.

Stellar Bancorp currently trades at $29.29, down from $31.59 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).

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