Stellar Bancorp Shines in Q1—But Can It Keep Up the Momentum?

The banking sector has been a rollercoaster ride lately, but Stellar Bancorp Inc (SBI) just delivered a Q1 earnings report that’s worth celebrating—and scrutinizing. Let’s break down the numbers, because this Texas-based bank isn’t just surviving; it’s positioning itself to thrive in a volatile economy.

First, the headline: $24.7 million in net income, or $0.46 per diluted share, marks a solid quarter. But here’s the kicker: Stellar isn’t just chasing top-line growth. It’s laser-focused on operational discipline, capital returns, and diversifying its loan book—all while navigating the Fed’s rate hikes and geopolitical headwinds.

The Good: A Strong Foundation

Let’s start with the balance sheet. Stellar’s management calls it “smaller but stronger,” and the numbers back that up. Regulatory capital ratios jumped to 15.94%, up from 14.02% a year ago, and tangible book value per share rose 14.3% year-over-year to $19.69. That’s not just a number—it’s a war chest. When banks have fat capital buffers, they can weather storms, buy back shares, or even snap up distressed assets when opportunities arise.

And speaking of share repurchases: Stellar bought back 1.4 million shares in Q1 at an average price of $27.99, plus another 679,000 shares post-quarter at $25.83. The Board just greenlit a $65 million repurchase program through May 2026, which signals confidence. “This is a bank that’s prioritizing shareholders,” said one analyst. But let’s see if the stock can climb higher.

The Net Interest Margin: A Slight Dip, But Trending Up

The net interest margin (NIM) edged down to 4.2% from 4.25% in Q4, but here’s the nuance: when you strip out the impact of purchase accounting accretion, it actually improved to 3.97% from 3.94% in the prior quarter. Translation: The core NIM is stabilizing, and the bank isn’t relying on one-time gains to prop up earnings. That’s a big deal in an era where many banks are battling declining margins.

Loans: Paydowns Loom, But Originations Are Bouncing Back

Loan originations grew compared to Q4 and Q3, which is a positive sign. But paydowns of $275–300 million per quarter are still a drag—especially in commercial real estate (CRE) and construction/development (C&D). Management, though, is pivoting. They’re shifting focus to diversified lending, moving away from CRE-heavy portfolios. By the second half of 2025, they expect growth to pick up as pipelines improve.

Deposits: Building Relationships, Not Just Rates

Deposits are a bright spot. Noninterest-bearing deposits now make up 37% of the total, thanks to strong new account openings (40% from new customers!). The cost of funds dropped 14 basis points, with interest-bearing liabilities falling 21 basis points—all without engaging in price wars. This is relationship banking at its best, and it’s fueling that 14.3% surge in tangible book value.

The Risks: Tariffs, CRE, and One-Time Savings

Now, the red flags. Economic uncertainty—especially from potential tariffs and regulatory shifts—is making credit decisions more cautious. While Stellar’s allowance for loan losses ticked up to 1.15%, charge-offs remain minimal. But if tariffs hit Texas’s key industries (energy, manufacturing), that could bite.

Also, $5.1 million in cost savings in Q1 included some one-time benefits. Management warns that some of those gains might reverse in future quarters. And while CRE nonaccruals rose slightly due to borrower issues, there’s no sign of systemic trouble—yet.

The Bottom Line: Buy the Dip, But Keep an Eye on Texas

Stellar Bancorp is executing a clear strategy: trim the balance sheet where necessary, return capital to shareholders, and bet on Texas’s growth. The $65 million buyback, strong capital ratios, and improving core NIM all point to a bank that’s weathering the storm.

But here’s the catch: If Texas’s economy falters—or if CRE paydowns accelerate—this could get rocky. Still, with a tangible book value up 14.3%, a solid 11.48% return on tangible equity, and a focus on relationship-driven deposits, I’m bullish on SBI at current levels.

Final Take: Stellar Bancorp is a buy for investors who believe in Texas’s resilience and banks that prioritize shareholder returns. Just keep an eye on that loan portfolio—and hope Washington stays out of its way.

Conclusion: Stellar Bancorp’s Q1 results highlight a disciplined operator in a tough environment. With a strengthened balance sheet, shareholder-friendly policies, and a shift toward diversified lending, SBI is well-positioned to capitalize on improving conditions in Texas. While risks remain—particularly around CRE paydowns and macroeconomic uncertainty—the data supports a cautious “buy” stance. The bank’s 14.3% year-over-year increase in tangible book value, robust capital ratios, and aggressive repurchase plans make it a standout in the regional banking space. Let’s see if the second half of 2025 delivers on its promises.