Stellar Bancorp: Forging Growth in a Resilient Texas Market (NYSE:STEL) - STEL Stock Research Report

## Executive Summary / Key Takeaways * Strategic Pivot to Growth: Following a successful post-merger de-risking and infrastructure build-out, Stellar Bancorp is now firmly focused on organic loan growth, evidenced by a near doubling of originations in Q2 2025, signaling a return to momentum in the latter half of the year. * Robust Financial Foundation: The company maintains a strong balance sheet with ample capital and liquidity, supporting a top-tier net interest margin (NIM) profile and providing significant financial flexibility for strategic initiatives. * Disciplined Expense Management: Stellar has demonstrated effective cost control, with non-interest expenses remaining largely flat, enabling positive operating leverage as revenue growth is expected to outpace expense dynamics. * Core Funding Advantage: A commitment to relationship-driven, low-cost core deposits, coupled with reduced reliance on wholesale funding, underpins the company's stable funding base and contributes to its resilient margin. * Texas Home-Field Advantage: Operating in dynamic and resilient Texas markets, Stellar benefits from favorable economic tailwinds and aims to leverage its local focus to capture market share against larger, less localized competitors. ## The Texas Horizon: Building a Relationship-Driven Bank Stellar Bancorp, Inc., founded in 2007 and headquartered in Houston, Texas, has steadily built its presence as a commercial banking provider for small and medium-sized businesses, professionals, and individuals. A pivotal moment in its history occurred in 2022 with a significant merger, which substantially expanded its asset base and was instrumental in crossing the $10 billion asset threshold. This strategic move necessitated a comprehensive infrastructure build-out and a deliberate de-risking of the balance sheet, including a focus on increasing liquidity, reducing commercial real estate (CRE) concentrations, and fortifying capital. The company successfully lowered its loan-to-deposit ratio from approximately 92% to about 86% by Q3 2024, while strategically reconfiguring its loan portfolio to resemble that of a larger, more diversified institution.

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The company's overarching strategy is clear: to become the bank of choice for small business leaders in its markets, driven by a deep commitment to relationship banking. This approach is particularly potent in the vibrant and resilient Texas marketplace, which offers significant opportunities for growth. Stellar Bancorp operates through 54 banking centers, strategically located with 37 in the Houston metropolitan statistical area (MSA), 16 in the Beaumont MSA, and one in Dallas, Texas. This localized footprint is a cornerstone of its competitive positioning. While Stellar Bancorp does not highlight proprietary technological differentiators in the same vein as a specialized tech firm, its operational model leverages standard banking technologies to enhance efficiency and customer experience. The company invests in data processing and software, as evidenced by increased amortization expenses in this area. Its competitive edge, however, is primarily rooted in its relationship-driven approach and operational efficiency, rather than unique, patented technology. This contrasts with some larger competitors who are noted for more advanced digital tools, such as AI-driven fraud detection. Stellar's focus on streamlined local operations can lead to lower per-unit costs for certain services, such as money market accounts, where it achieves approximately 10% lower per-unit costs compared to some peers. This operational efficiency, combined with its localized network effects, fosters higher customer loyalty, contributing to recurring revenue and potentially better margins. ## Competitive Landscape and Strategic Positioning The Texas banking market is intensely competitive, with a multitude of financial institutions, from large national players to agile regional banks. Stellar Bancorp faces formidable direct competition from established regional players like Prosperity Bancshares (TICKER:PB), Independent Bank Group (TICKER:IBTX), Texas Capital Bancshares (TICKER:TCBI), and Comerica (TICKER:CMA). These competitors offer similar commercial banking services, but Stellar differentiates itself through its hyper-local focus and personalized service. Prosperity Bancshares, for instance, boasts a broader network and higher revenue growth, with net margins around 25-30% and a return on equity (ROE) of 10-12% in 2024, compared to Stellar's net profit margin of 18.25% and ROE of 7% (TTM). This scale allows PB to potentially price more aggressively. Independent Bank Group, while agile in market entry and strong in digital tools, faces higher operational costs due to recent expansions. Texas Capital Bancshares emphasizes advanced technology and entrepreneurial lending, with platforms that can offer faster processing and lower operating costs per unit compared to Stellar's legacy systems, potentially eroding Stellar's market share in tech-savvy segments. Comerica, with its national scale, offers broader reach but a less localized focus. Stellar's competitive response is to lean into its "home-field advantage" as the largest locally focused bank in its markets. This strategy has yielded positive results, with new account originations showing strong momentum and a significant portion of new loan originations coming from new customers. The company's emphasis on relationship banking and its ability to attract core deposits without "buying" its deposit base are crucial differentiators. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Stellar's strong performance in customer acquisition suggests incremental inroads against larger institutions. The company's Officer Development Program (ODP) is also a key initiative, providing a pipeline of young, trained lenders who can effectively penetrate the market and build new business relationships. ## Financial Performance and Operational Discipline Stellar Bancorp's financial performance in the second quarter of 2025 reflects a disciplined approach amidst a dynamic economic backdrop. Net income for Q2 2025 was $26.352 million, an increase from $24.7 million in Q1 2025, driven by effective non-interest expense management and low credit costs. For the six months ended June 30, 2025, net income was $51.054 million. The company's annualized return on average assets (ROAA) stood at 1.01% in Q2 2025, with an annualized return on average tangible common equity (ROATCE) of 12.16%.

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Net interest income (NII), the company's primary revenue source, was $98.335 million in Q2 2025, a slight decrease from Q1 2025 due to lower earning assets and a marginally lower net interest margin (NIM). The NIM for Q2 2025 was 4.18%, down from 4.24% in Q2 2024. Excluding purchase accounting accretion, the core NIM was 3.95% in Q2 2025, reflecting a slight dip from 3.97% in Q1 2025, primarily due to higher funding costs. However, management notes that the Q1 margin benefited from deposit seasonality, and the Q2 core margin still represents an incremental improvement from Q4 2024, underscoring the company's ability to defend its margin profile. The loan portfolio saw a slight decrease, totaling $7.29 billion at June 30, 2025, down 2.1% from $7.44 billion at December 31, 2024. This was influenced by elevated payoffs, particularly in commercial real estate. However, new loan originations nearly doubled in Q2 2025 compared to Q1 2025, reaching their highest level since 2022. This signals a strong return to organic growth momentum, with management anticipating acceleration in the latter half of 2025. Loan yields on new originations in Q1 2025 were 7.29%, and renewed loans came on at 7.48%, reflecting healthy pricing. The loan portfolio is approximately 55% fixed-rate and 45% variable-rate, with about 20% of the total being truly floating rate (tied to Prime and SOFR). Deposits, the largest source of funds, decreased by 5.0% to $8.67 billion at June 30, 2025, from $9.13 billion at year-end 2024, primarily due to seasonality and competitive pressures. Noninterest-bearing deposits constituted 36.7% of total deposits. The cost of interest-bearing liabilities decreased to 3.16% in Q2 2025 from 3.59% in Q2 2024, reflecting disciplined deposit pricing and a strategic reduction in higher-cost brokered deposits and FHLB borrowings.

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Non-interest expense remained essentially flat at approximately $70 million in Q2 2025, which was better than planned and reflects management's focus on expense control. The efficiency ratio for Q2 2025 was 61.87%, compared to 60.81% in Q2 2024. While this indicates a slight increase in resources utilized per dollar of income, management views its platform as scalable and aims to maintain or reduce this ratio during periods of growth. Asset quality remains a key focus. The allowance for credit losses on loans stood at $83.165 million, or 1.14% of total loans, at Q2 2025, up from 1.09% at year-end 2024. Nonaccrual loans increased to $50.505 million. The provision for credit losses in Q2 2025 was primarily driven by an increase in the allowance for unfunded commitments, reflecting increased lending activity. Management attributes recent nonaccrual migration in owner-occupied CRE to management issues rather than broader economic or tariff impacts, maintaining a conservative approach to credit assessment. ## Outlook and Strategic Trajectory Stellar Bancorp is poised for a strategic pivot towards accelerated growth in the latter half of 2025. Management's guidance indicates an expectation for loan volume to stabilize in Q2 2025, building momentum for growth in the third and fourth quarters. This is supported by healthy pipelines and the strong Q2 2025 origination figures, which nearly doubled from Q1. The company anticipates achieving mid-single-digit loan growth for the full year 2025, overcoming initial payoffs as new production funds and advances on existing commitments begin to exceed payments. The outlook for the net interest margin remains positive, with management aiming to "scratch and claw back up to a 4 handle on margins" (excluding purchase accounting accretion). They anticipate that a normalization of the yield curve and potential Fed rate cuts will structurally benefit the margin in the medium term, despite potential short-term volatility. The disciplined management of funding costs, including a reduced reliance on wholesale funds, is expected to contribute to this improvement. Non-interest expense is projected to see modest growth in 2025, in line with inflation, targeting approximately $295 million for the full year. This disciplined expense management, coupled with anticipated revenue growth, is expected to deliver positive operating leverage. The "back office build" related to crossing the $10 billion asset threshold is largely complete, freeing up resources for growth-oriented investments, including the strategic acquisition of new talent. Capital management remains a priority. Organic growth is the primary use of capital, followed by other strategic deployments. Share repurchases are viewed as an "awesome tool" for returning capital to shareholders, with the volume of buybacks being graduated based on stock price. The company is also evaluating further debt redemption, having already redeemed $40 million of bank-level subordinated debt in December 2024.

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M&A discussions have reportedly "ticked up," as the company seeks well-balanced franchises with strong funding profiles to enhance scale and mitigate expenses associated with regulatory thresholds, while maintaining a disciplined approach to valuation. From a credit perspective, while 2024 saw strong performance, management prudently anticipates a "little bit more normalization in credit" for 2025, projecting normalized net charge-off rates around the mid-teens (e.g., 16%). This reflects a cautious yet proactive stance on risk management in an extended period of strong credit. ## Conclusion Stellar Bancorp stands at a compelling inflection point, transitioning from a period of post-merger integration and balance sheet de-risking to a renewed focus on organic growth. Its strong capital base, disciplined expense management, and commitment to core funding provide a resilient financial foundation. Operating within the dynamic and growing Texas markets, the company leverages its relationship-driven model and local expertise to gain market share against larger, more diversified competitors. While not a leader in proprietary technological innovation, Stellar's operational efficiency and strategic investments in its platform support its growth ambitions. The anticipated acceleration in loan originations, coupled with a stable to improving net interest margin and controlled expenses, positions Stellar Bancorp to deliver positive operating leverage and enhance shareholder value. Investors should monitor the company's execution on its growth strategy, its ability to maintain core funding in a competitive environment, and its continued prudent management of credit quality as it capitalizes on the favorable economic tailwinds in its core markets.