STEL Q1 Deep Dive: Margin Management and Cautious Growth Outlook Amid Economic Uncertainty

Texas-based commercial bank Stellar Bancorp (NYSE:STEL) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 3.4% year on year to $104.8 million. Its non-GAAP profit of $0.46 per share was 4.1% 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 first quarter was met with a negative market reaction, reflecting investor concerns about both the company’s revenue miss and management’s cautious outlook. CEO Robert Franklin, Jr. attributed the quarter’s results to continued uncertainty from recent tariff policies and a competitive deposit environment, which contributed to slower loan growth and higher-than-expected commercial real estate paydowns. Management highlighted a disciplined approach to credit and operating expenses, with CFO Paul Egge noting, “We really like where we sit, both financially and strategically,” despite headwinds in loan demand and asset shrinkage during the quarter.

Looking ahead, Stellar Bancorp’s leadership expects growth to materialize in the second half of the year, as loan pipelines strengthen and economic conditions stabilize. Management emphasized a continued focus on capital optimization, including selective share repurchases and maintaining strong regulatory ratios. However, Franklin cautioned that ongoing trade policy changes and competitive pressures could delay growth, stating, “Given the economic uncertainty of the first quarter, we believe that growth will be pushed to the third and fourth quarters of the year.” The company remains committed to prudent lending and expense management as it navigates a challenging operating environment.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to a combination of disciplined expense control, a measured approach to lending, and active capital management, all amid external economic pressures.

• Expense discipline: Noninterest expenses declined from the previous quarter, driven by timing-related factors and a focus on operational efficiency. Management warned that some of these savings were temporary, with certain costs expected to return later in the year.
• Loan portfolio repositioning: The company continued to adjust its loan book, reducing exposure to smaller real estate loans common in its legacy community bank roots. This strategic shift has led to elevated paydowns and slower new loan growth as Stellar aligns its portfolio with that of a larger regional bank.
• Competitive deposit environment: Intense competition for deposits has shaped Stellar’s funding strategy. Despite not being a market leader on pricing, the bank achieved growth in new account openings, with nearly 40% of new accounts coming from first-time customers.
• Share repurchase activity: Stellar repurchased nearly 4% of its outstanding shares during the quarter and authorized a new buyback program, reflecting a preference for capital return while M&A opportunities remain limited.
• Stable credit quality: While management noted some migration in nonaccrual loans—mainly in owner-occupied commercial real estate—credit standards have remained conservative, and reserve levels were increased as a precaution against economic uncertainties, including potential fallout from new tariffs.

Drivers of Future Performance

Management expects revenue and profitability trends to hinge on loan growth recovery, continued cost control, and stable funding costs, with macroeconomic uncertainty remaining a key variable.

• Loan growth timing: Leadership anticipates that meaningful loan growth will resume in the second half of the year, contingent on converting a growing pipeline and offsetting ongoing commercial real estate paydowns. This timing is critical to achieving the company’s targeted scale and operating leverage.
• Margin management: The company aims to maintain or modestly improve its core net interest margin, supported by a favorable deposit mix and incremental improvements in funding costs. However, management cautioned that further margin gains will be incremental given the current competitive landscape.
• Expense outlook: While cost controls contributed to first quarter outperformance, management signaled that some costs were deferred rather than eliminated. Investments in growth and compliance are expected to increase expenses later in the year, which could pressure operating margins if revenue growth lags.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will be watching (1) the pace of loan pipeline conversion into funded balances as economic uncertainty persists, (2) the ability to sustain core net interest margin improvements despite competitive funding pressures, and (3) any changes in credit quality stemming from evolving trade policy and macroeconomic shifts. Execution on capital deployment, including the timing and impact of share repurchases or potential M&A activity, will also be closely monitored.

Stellar Bancorp currently trades at $27.45, up from $26.97 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free).

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