STEL Q3 Deep Dive: Deposit Growth and Margin Resilience Offset Loan Payoff Headwinds

Texas-based commercial bank Stellar Bancorp (NYSE:STEL) met Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 2% year on year to $105.6 million. Its GAAP profit of $0.50 per share was in line with analysts’ consensus estimates.

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

StockStory’s Take

Stellar Bancorp’s third quarter delivered results that were generally in line with Wall Street expectations, with management attributing stable performance to strong deposit growth and disciplined margin management. CEO Bob Franklin highlighted the bank’s emphasis on building full client relationships, which drove balance sheet expansion and contributed to improved net interest income. The quarter also saw a modest uptick in charge-offs, but management emphasized that these were anticipated and well-reserved. CFO Paul Egge described the expense increase as a temporary outlier, citing severance costs linked to upcoming branch closures as a primary factor.

Looking forward, Stellar Bancorp’s outlook centers on sustaining its margin profile and leveraging recent deposit inflows to support future loan growth. Management is focused on prudent asset deployment and maintaining a strong capital position despite a competitive Texas banking landscape. Franklin stated, “We believe that if we continue to be disciplined in building quality assets, protecting margins and focusing on full balance relationships, we will drive long-term value for our shareholders.” The company expects seasonal deposit trends and efforts to optimize expenses to provide additional flexibility as market conditions evolve.

Key Insights from Management’s Remarks

Management pointed to deposit strength, margin discipline, and ongoing portfolio adjustments as key influences on the quarter’s fundamentals and strategic direction.

• Deposit momentum sustained: Management reported that over half of new deposits in the quarter came from first-time customers, reflecting increased brand awareness and effective client acquisition strategies. The remainder stemmed from deepening relationships with existing clients, which management believes positions the bank well against competitors seeking to acquire market share through aggressive pricing.
• Margin improvement focus: CFO Paul Egge highlighted a return to a 4% net interest margin, excluding purchase accounting accretion, thanks to a disciplined focus on core relationship banking. Management indicated that this performance was achieved without being overly aggressive on loan growth or risk, prioritizing sustainable margin protection over market share gains.
• Expense spike labeled temporary: The quarter included a rise in noninterest expense due to higher salaries, severance related to two forthcoming branch closures, and increased advertising costs. Management emphasized that these were one-off items and expects expenses to revert closer to first-half levels going forward, with ongoing efforts to optimize operational costs.
• Loan portfolio mix shift underway: There is a strategic push to increase the proportion of commercial and industrial (C&I) loans, which are viewed as “stickier” and more relationship-driven than real estate loans. Management reported a 62% year-to-date increase in loan originations, with a shift toward this preferred mix, although elevated payoffs and competitive refinancing remain headwinds.
• Credit quality vigilance: Despite industry concerns, management cited strong credit trends and a dynamic Texas market as supportive. The bank’s exposure to shared national credits and non-originated loans remains minimal. Most charge-offs were already identified and reserved for, and management continues to emphasize front-end credit discipline and robust portfolio monitoring.

Drivers of Future Performance

Stellar Bancorp’s forward guidance is shaped by disciplined expense management, margin preservation, and the ability to deploy liquidity into higher-yielding assets.

• Margin defense amid rate shifts: Management intends to capitalize on repricing opportunities, especially as interest rates adjust downward. Egge noted that the bank will focus on reducing deposit costs where possible, particularly in exception and index-priced products, to maintain or improve its net interest margin even as the Federal Reserve eases rates.
• Loan growth tied to origination pipeline: The bank’s outlook for loan growth is tied to the continued health of its origination pipeline. While payoffs remain elevated, management expects that as new loan fundings begin to outpace paydowns, net loan balances will increase. The team acknowledged this inflection may still be a few quarters away but remains optimistic about delivering on the current pipeline.
• Expense optimization and strategic flexibility: Cost containment remains a central priority, with management targeting expense levels closer to the first half of the year. The bank’s strong capital and liquidity positions provide flexibility to pursue opportunities, including potential additions to the securities portfolio or selective participation in M&A, should attractive scenarios arise.

Catalysts in Upcoming Quarters

In the coming quarters, our analyst team will be watching (1) whether the origination pipeline translates into net loan growth as paydowns ease, (2) how effectively management contains expenses following the Q3 spike, and (3) the pace and quality of deposit growth as competitive dynamics shift in Texas. Execution on these fronts, as well as selective deployment of excess liquidity, will be important in determining the bank’s ability to drive sustainable profitability.

Stellar Bancorp currently trades at $29.81, up from $29.46 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 for active Edge members).

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