Stellar Bancorp (STEL)

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.

Company Overview

Created through strategic mergers to serve the growing Texas business community, Stellar Bancorp (NYSE:STEL) is a Texas bank holding company that provides commercial banking services primarily to small and medium-sized businesses and professionals.

Regional banks, financial institutions operating within specific geographic areas, serve as intermediaries between local depositors and borrowers. They benefit from rising interest rates that improve net interest margins (the difference between loan yields and deposit costs), digital transformation reducing operational expenses, and local economic growth driving loan demand. However, these banks face headwinds from fintech competition, deposit outflows to higher-yielding alternatives, credit deterioration (increasing loan defaults) during economic slowdowns, and regulatory compliance costs. Recent concerns about regional bank stability following high-profile failures and significant commercial real estate exposure present additional challenges.

Stellar Bancorp competes with other Texas-based regional banks such as Prosperity Bancshares (NYSE:PB), Texas Capital Bancshares (NASDAQ:TCBI), and Cullen/Frost Bankers (NYSE:CFR), as well as with national banks operating in its markets including JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC).

From lending activities to service fees, most banks build their revenue model around two income sources. Interest rate spreads between loans and deposits create the first stream, with the second coming from charges on everything from basic bank accounts to complex investment banking transactions. Over the last five years, Stellar Bancorp grew its revenue at an incredible 19.2% compounded annual growth rate. Its growth beat the average banking company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. Stellar Bancorp’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 5.7% over the last two years. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Stellar Bancorp reported a rather uninspiring 2% year-on-year revenue decline to $105.6 million of revenue, in line with Wall Street’s estimates.

Net interest income made up 96.8% of the company’s total revenue during the last five years, meaning Stellar Bancorp lives and dies by its lending activities because non-interest income barely moves the needle.

While banks generate revenue from multiple sources, investors view net interest income as the cornerstone - its predictable, recurring characteristics stand in sharp contrast to the volatility of non-interest income.

The underlying profitability of top-line growth determines the actual bottom-line impact. Banking institutions measure this dynamic using the efficiency ratio, which is calculated by dividing non-interest expenses like personnel, facilities, technology, and marketing by total revenue.

Markets emphasize efficiency ratio trends over static measurements, recognizing that revenue compositions drive different expense bases. Lower efficiency ratios signal superior performance by indicating that banks are controlling costs effectively relative to their income.

Over the last five years, Stellar Bancorp’s efficiency ratio couldn’t build momentum, hanging around 62.5%.

Stellar Bancorp’s efficiency ratio came in at 63.7% this quarter, beating analysts’ expectations by 323.5 basis points (100 basis points = 1 percentage point). This result was 2.5 percentage points better than the same quarter last year.

For the next 12 months, Wall Street expects Stellar Bancorp to become less profitable as it anticipates an efficiency ratio of 67.9%.

Banks profit by intermediating between depositors and borrowers, making them fundamentally balance sheet-driven enterprises. Market participants emphasize balance sheet quality and sustained book value growth when evaluating these institutions.

Because of this, tangible book value per share (TBVPS) emerges as the critical performance benchmark. By excluding intangible assets with uncertain liquidation values, this metric captures real, liquid net worth per share. On the other hand, EPS is often distorted by mergers and flexible loan loss accounting. TBVPS provides clearer performance insights.

Stellar Bancorp’s TBVPS declined at a 3.3% annual clip over the last five years. However, TBVPS growth has accelerated recently, growing by 15.6% annually over the last two years from $15.76 to $21.08 per share.

Over the next 12 months, Consensus estimates call for Stellar Bancorp’s TBVPS to grow by 3.9% to $21.91, paltry growth rate.

Leverage is core to a financial firm’s business model (loans funded by deposits). To ensure economic stability and avoid a repeat of the 2008 GFC, regulators require certain levels of capital and liquidity, focusing on the Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a firm holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all firms must maintain a Tier 1 capital ratio greater than 4.5%. On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, firms generally must maintain a 7-10% ratio at minimum.

Over the last two years, Stellar Bancorp has averaged a Tier 1 capital ratio of 13.4%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity, or ROE, tells us how much profit a company generates for each dollar of shareholder equity, a key funding source for banks. Over a long period, banks with high ROE tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.

Over the last five years, Stellar Bancorp has averaged an ROE of 8.1%, respectable for a company operating in a sector where the average shakes out around 7.5% and those putting up 15%+ are greatly admired.

We enjoyed seeing Stellar Bancorp beat analysts’ tangible book value per share expectations this quarter. On the other hand, its EPS was in line and its revenue was in line with Wall Street’s estimates. Overall, this was a quarter without too many surprises. The stock remained flat at $29.65 immediately after reporting.

Updated: December 4, 2025 at 11:42 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Stellar Bancorp, you should also grasp the company’s longer-term business quality and valuation.

Stellar Bancorp doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its TBVPS has declined over the last five years. And while the company’s net interest margin a strong starting point for the overall profitability of the business, the downside is its declining EPS over the last two years makes it a less attractive asset to the public markets.

Stellar Bancorp’s P/B ratio based on the next 12 months is 1x. This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $31.80 on the company (compared to the current share price of $31.97).