Stellar Bancorp's Q2 2025 Earnings: Can Revenue Declines Be Reversed Amid a Resilient Regional Banking Sector?

The regional banking sector has demonstrated remarkable resilience in 2025, with firms like Popular and City Holding Co. (CITY) reporting year-on-year revenue growth of 8.9% and 6.3%, respectively. This backdrop of sector-wide strength raises a critical question for Stellar Bancorp (STEL): Can it reverse its recent revenue declines while sustaining its historically robust earnings growth? As the Houston-based lender prepares to report Q2 results on July 25, investors must weigh its strategic execution against the broader industry's momentum.

A Mixed Track Record: Revenue Pressures and Earnings Stability

Stellar Bancorp's revenue has faced headwinds in recent quarters. In Q1 2025, revenue declined 3.4% year-on-year to $104.8 million, with analysts projecting a marginal improvement to a 1.8% decline in Q2 2025, totaling $104.9 million. While this represents progress compared to the 6.1% drop in Q2 2024, the trend underscores persistent challenges in a high-interest-rate environment. The company's net income, however, has remained relatively stable, with Q1 2025 earnings of $24.7 million (EPS: $0.46) nearly matching Q4 2024's $25.2 million (EPS: $0.47). This suggests Stellar has managed to offset revenue pressures through cost discipline and asset yield optimization.

Strategic Levers: Deposit Growth and Loan Pricing Discipline

Stellar's management has emphasized two key strategies to reverse revenue declines: core deposit growth and disciplined loan pricing. In Q1, deposits grew at an 11% annualized rate, driven by noninterest-bearing accounts, which now constitute 27% of total deposits. This shift toward low-cost funding is critical for maintaining net interest margins (NIMs), which have expanded in recent quarters. Meanwhile, loan growth has been tempered by a slowdown in commercial construction activity, but Stellar has maintained pricing discipline, with new originations averaging 7.44% in Q2.

Comparing Stellar's approach to peers, City Holding's 6.3% revenue growth was fueled by aggressive branch expansion and loan repricing. If Stellar can replicate this model while maintaining credit quality, it could reaccelerate revenue growth. However, the bank's focus on relationship-based banking—prioritizing customer retention over rapid loan origination—may moderate near-term gains.

Sector Resilience and Competitive Dynamics

The regional banking sector's resilience in 2025 is underpinned by three factors: margin expansion, deposit growth, and disciplined credit underwriting. For example, Popular's 8.9% revenue growth stemmed from a 4.04% NIM expansion, a metric Stellar has also targeted. Similarly, City Holding's 7.5% stock rally post-earnings highlights investor confidence in banks that balance growth with risk management.

Stellar's dual listing on NYSE Texas—a move aimed at deepening its Texas market presence—could further differentiate it. However, the bank must navigate risks such as potential interest rate cuts, which could compress margins and dampen loan demand. Management's recent guidance for 4–6% loan growth assumes a stable rate environment, a bet that hinges on the Federal Reserve's policy trajectory.

Valuation and Investor Sentiment

Stellar's stock has surged 14.8% in the past month, trading at $32.11, well above the average analyst price target of $28.60. This premium reflects optimism about its dividend yield (4.25%) and strategic initiatives but also raises questions about whether the stock is overvalued. A key test will be whether Stellar can meet or exceed its adjusted EPS guidance of $0.45 per share in Q2, particularly as peers like City Holding have consistently outperformed estimates.

Investment Implications

For investors, Stellar Bancorp presents a nuanced case. The company's ability to sustain earnings growth while reversing revenue declines will depend on its capacity to scale deposit growth, manage credit risk, and leverage its Texas-centric footprint. If Stellar can match the margin expansion seen by peers like Popular and demonstrate resilience in a potential rate-cutting cycle, it may justify its current valuation. However, the stock's premium to analyst targets suggests caution is warranted.

A bullish case hinges on Stellar's Q2 results showing:
1. A sharper-than-expected revenue decline (e.g., 1% vs. 1.8%) and in-line EPS.
2. A net interest margin expansion to 4.04%, aligning with sector trends.
3. Strong deposit growth, particularly in noninterest-bearing accounts.

Conversely, a miss on revenue or a widening of credit costs could trigger a reevaluation of the stock. In this scenario, investors might prefer regional peers with more aggressive growth strategies.

Conclusion

Stellar Bancorp's Q2 earnings will be a pivotal moment in its journey to reverse revenue declines and sustain earnings growth. While the regional banking sector's resilience offers a tailwind, Stellar's success will ultimately depend on its execution of deposit and loan strategies, as well as its ability to navigate macroeconomic uncertainties. For now, the stock remains a compelling but cautiously optimistic bet for investors willing to balance its strategic strengths against sector-wide dynamics.