Stellar Bancorp, Inc. Reports Second Quarter 2023 Results

HOUSTON, July 28, 2023 (GLOBE NEWSWIRE) -- Stellar Bancorp, Inc. (the “Company” or “Stellar”) (NYSE: STEL) today reported net income of $35.2 million and diluted earnings per share of $0.66 for the second quarter 2023 compared to net income of $37.1 million and diluted earnings per share of $0.70 for the first quarter 2023.

“We are pleased to announce our second quarter operating results. We remain focused on capital, credit and liquidity and that focus is reflected in our results for the quarter that include our continued capital build, good credit quality and growth of loans in a measured way,” said Robert R. Franklin, Jr., Stellar’s Chief Executive Officer.

“The Federal Reserve continues to increase interest rates which has put pressure on deposit rates and net interest margin across the industry and the deposit rate environment remains very competitive. However, we’ve been able to maintain our high percentage of noninterest-bearing deposits while staying competitive with our interest-bearing deposit rates. Our relationship driven model continued to provide us with a very healthy margin. We are working to remain disciplined to position Stellar for long-term success as we manage through the current economic environment, thankful to be operating in what we believe to be the best commercial banking region in the country. The long-term future for Stellar remains bright,” concluded Mr. Franklin.

Second Quarter 2023 Financial Highlights

• Strong Profitability: Second quarter 2023 net income of $35.2 million and diluted earnings per share of $0.66 translated into an annualized return on average assets of 1.31% and an annualized return on average tangible equity of 17.05%⁽¹⁾_.

• Continued Regulatory Capital Build: Total risk-based capital ratio increased to 13.03% at June 30, 2023 from 12.39% at December 31, 2022 and Tier 1 leverage ratio increased to 9.51% at June 30, 2023 from 8.55% at December 31, 2022.

• Excellent Credit Performance: Net charge-offs of $428 thousand, or 0.01%, for the year-to-date 2023, while nonperforming assets remained stable.

• Solid Margin: Tax equivalent net interest margin was 4.49% for the second quarter of 2023 as compared to 4.80% in the first quarter of 2023. The tax equivalent net interest margin, excluding purchase accounting accretion (“PAA”), was 3.97%⁽¹⁾ for the second quarter of 2023 and 4.38%⁽¹⁾ for the first quarter of 2023.

• Advantageous Funding Profile: Noninterest-bearing deposit balances decreased from the first quarter but remained a significant portion of our deposit funding base at 42.4% at the end of the second quarter 2023 compared to 44.4% at the end of the first quarter 2023.

Merger of Equals

The merger of equals (the “Merger”) between Allegiance Bancshares, Inc. (“Allegiance”) and CBTX, Inc. (“CBTX”), which became effective on October 1, 2022, was accounted for as a reverse acquisition using the acquisition method of accounting, with CBTX treated as the legal acquirer and Allegiance treated as the accounting acquirer for financial reporting purposes. Therefore, the historical financial statements of the Company prior to the Merger reflect the historical financial statement balances of Allegiance. In addition, the assets and liabilities of CBTX as of the date of the Merger were recorded at estimated fair value and added to those of Allegiance. The Company’s valuations of CBTX’s assets and liabilities are preliminary and may be refined for up to a year from the date of the Merger. The Merger had a significant impact on all aspects of the Company's financial statements and, as a result, financial results after the Merger are not comparable
to financial results prior to the Merger. Results of operations reflect the combined operations following the Merger for the first and second quarters of 2023 and the fourth quarter 2022 and stand-alone Allegiance for all periods prior to October 1, 2022.
_____________________
⁽¹⁾ Refer to page 10 of this earnings release for the calculation of this non-GAAP financial measure.

Second Quarter 2023 Results

Stellar’s net interest income in the second quarter 2023 decreased $7.5 million, or 6.5%, from $115.8 million for the first quarter 2023. The net interest margin on a tax equivalent basis decreased 31 basis points to 4.49% for the second quarter 2023 from 4.80% for the first quarter 2023. The decrease in the net interest margin from the prior quarter was primarily due to the impact of increased interest rates on our cost of funding only partially offset by increased income on interest earning assets. Net interest income for the second quarter of 2023 benefited from $12.6 million of income from purchase accounting adjustments compared to $10.1 million in the first quarter of 2023. Excluding purchase accounting adjustments, a non-GAAP measure that is reconciled on page 10 of this earnings release, net interest income for the second quarter 2023 would have been $95.9 million and the tax equivalent net interest margin would have been 3.97%.

Noninterest income for the second quarter 2023 was $5.5 million, a decrease of $2.0 million, or 26.9%, compared to $7.5 million for the first quarter 2023. Noninterest income decreased in the second quarter of 2023 compared to the first quarter of 2023 primarily due to Small Business Investment Company income recognized in the first quarter of 2023.

Noninterest expense for the second quarter 2023 decreased $3.4 million, or 4.7%, to $69.2 million compared to $72.6 million for the first quarter of 2023. The decrease in noninterest expense in the second quarter of 2023 compared to the first quarter of 2023 was primarily due to a decrease in acquisition and merger-related expenses which totaled $2.9 million for the second quarter of 2023 compared to $6.2 million in the first quarter of 2023.

Stellar’s efficiency ratio was 60.83% for the second quarter 2023 compared to 58.96% for the first quarter 2023. Second quarter 2023 annualized returns on average assets, average equity and average tangible equity were 1.31%, 9.67% and 17.05%, respectively, compared to 1.38%, 10.62% and 19.32%, respectively, for the first quarter 2023. Return on average tangible equity is a non-GAAP measure. Please refer to the non-GAAP reconciliation on page 10 of this earnings release.

Financial Condition

Total loans at June 30, 2023 increased $182.7 million to $8.07 billion compared to $7.89 billion at March 31, 2023. At June 30, 2023, the remaining balance of the purchase accounting adjustments on loans was $131.4 million.

Total deposits at June 30, 2023 increased $27.5 million to $8.77 billion compared to $8.74 billion at March 31, 2023, driven in part by increased CDs more than offsetting decreases in noninterest-bearing and money market balances. Shifts in the deposit mix were primarily driven by the current interest rate environment and an intensely competitive market for deposits. Estimated uninsured deposits totaled $4.75 billion and estimated uninsured deposits net of collateralized deposits of $936 million were $3.82 billion, or 43.5%, of total deposits at June 30, 2023.

Total assets at June 30, 2023 were $10.78 billion, an increase of $173.6 million, compared to $10.60 billion at March 31, 2023.

Asset Quality

Nonperforming assets totaled $43.3 million, or 0.40% of total assets, at June 30, 2023 compared to $43.5 million, or 0.41% of total assets, at March 31, 2023. The allowance for credit losses on loans as a percentage of total loans was 1.24% at June 30, 2023 and 1.22% at March 31, 2023.

The provision for credit losses for the second quarter 2023 was $1.9 million compared to $3.7 million for the first quarter 2023. Second quarter 2023 net charge-offs were $236 thousand, or 0.01% (annualized) of average loans, compared to net charge-offs of $192 thousand, or 0.01% (annualized) of average loans, for the first quarter 2023.

GAAP Reconciliation of Non-GAAP Financial Measures

Stellar’s management uses certain non-GAAP financial measures. Please refer to the GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures on page 10 of this earnings release for a reconciliation of these non-GAAP financial measures.

Conference Call

Stellar’s management team will host a conference call and webcast on Friday, July 28, 2023 at 8:00 a.m. Central Time (9:00 a.m. Eastern Time) to discuss second quarter 2023 results. Individuals and investment professionals may register for the conference call at https://register.vevent.com/register/BI2481d74e1f5a4577b2eff534eef7c8b7 to receive the dial-in numbers and unique PIN to access the call. If you need assistance in obtaining a dial-in number, please contact IR@stellarbancorpinc.com. A simultaneous audio-only webcast may be accessed via the Investor Relations section of Stellar’s website at https://ir.stellarbancorpinc.com/news-and-events/webcast-and-presentations. If you are unable to participate during the live webcast, the webcast will be accessible via the Investor Relations section of Stellar’s website at ir.stellarbancorpinc.com.

About Stellar Bancorp, Inc.

Stellar Bancorp, Inc. is a bank holding company headquartered in Houston, Texas. Stellar’s principal banking subsidiary, Stellar Bank, provides a diversified range of commercial banking services primarily to small- to medium-sized businesses and individual customers across the Houston, Dallas, Beaumont and surrounding communities in Texas.

Investor relations
IR@stellarbancorpinc.com

Forward-Looking Statements

Certain statements in this press release which are not historical in nature are intended to be, and are hereby identified as, “forward-looking statements” for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, but are not limited to, statements about the benefits of the Merger, including future financial performance and operating results, the Company’s plans, business and growth strategies, objectives, expectations and intentions, and other statements that are not historical facts, including projections of macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Forward-looking statements may be identified by terminology such as “may,” “will,” “should,” “could,” “scheduled,” “plans,” “intends,” “projects,” “anticipates,” “expects,” “believes,” “estimates,” “potential,” “would,” or “continue” or negatives of such terms or other comparable terminology.

All forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Stellar to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, among others: the risk that the cost savings and any revenue synergies from the Merger may not be fully realized or may take longer than anticipated to be realized; disruption to our business as a result of the Merger; the risk that the integration of operations will be materially delayed or will be more costly or difficult than we expected or that we are otherwise unable to successfully integrate our legacy businesses; the amount of the costs, fees, expenses and charges related to the Merger; reputational risk and the reaction of our customers, suppliers, employees or other business partners to the Merger; changes in the interest rate environment, the value of Stellar’s assets and obligations and the availability of capital and liquidity; general competitive, economic, political and market conditions; and other factors that may affect future results of Stellar including changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; the impact, extent and timing of technological changes; capital management activities; disruptions to the economy and the U.S. banking system caused by recent bank failures, risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in the cost of our deposit insurance assessments and other actions of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Texas Department of Banking and legislative and regulatory actions and reforms.

Additional factors which could affect the Company’s future results can be found in the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, in each case filed with the SEC and available on the SEC’s website at https://www.sec.gov. We disclaim any obligation and do not intend to update or revise any forward-looking statements contained in this communication, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
		2023								2022
	June 30				March 31				December 31				September 30				June 30
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	105,913			$	99,231			$	67,063			$	16,449			$	17,547
Interest-bearing deposits at other financial institutions		198,176				164,102				304,642				102,118				275,290
Total cash and cash equivalents		304,089				263,333				371,705				118,567				292,837
Available for sale securities, at fair value		1,478,222				1,519,175				1,807,586				1,618,995				1,709,321
Loans held for investment		8,068,718				7,886,044				7,754,751				4,591,912				4,348,833
Less: allowance for credit losses on loans		(100,195	)			(96,188	)			(93,180	)			(52,147	)			(50,242	)
Loans, net		7,968,523				7,789,856				7,661,571				4,539,765				4,298,591
Accrued interest receivable		42,051				42,405				44,743				29,697				29,882
Premises and equipment, net		119,142				124,723				126,803				57,837				58,482
Federal Home Loan Bank stock		24,478				19,676				15,058				16,843				4,078
Bank-owned life insurance		104,148				103,616				103,094				28,305				28,170
Goodwill		497,260				497,260				497,260				223,642				223,642
Core deposit intangibles, net		129,805				136,665				143,525				12,406				13,156
Other assets		110,633				108,009				129,092				84,285				73,605
Total assets	$	10,778,351			$	10,604,718			$	10,900,437			$	6,730,342			$	6,731,764
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	3,713,536			$	3,877,859			$	4,230,169			$	2,465,839			$	2,394,719
Interest-bearing
Demand		1,437,509				1,394,244				1,591,828				956,920				1,016,381
Money market and savings		2,174,073				2,401,840				2,575,923				1,471,690				1,510,008
Certificates and other time		1,441,251				1,064,932				869,712				766,270				959,524
Total interest-bearing deposits		5,052,833				4,861,016				5,037,463				3,194,880				3,485,913
Total deposits		8,766,369				8,738,875				9,267,632				5,660,719				5,880,632
Accrued interest payable		4,555				3,875				2,098				2,673				1,500
Borrowed funds		369,963				238,944				63,925				257,000				—
Subordinated debt		109,566				109,420				109,367				109,241				109,109
Other liabilities		69,218				67,388				74,239				44,407				35,194
Total liabilities		9,319,671				9,158,502				9,517,261				6,074,040				6,026,435
SHAREHOLDERS’ EQUITY:
Common stock		533				533				530				281				286
Capital surplus		1,228,532				1,225,596				1,222,761				511,434				524,033
Retained earnings		361,619				333,368				303,146				307,975				296,477
Accumulated other comprehensive loss		(132,004	)			(113,281	)			(143,261	)			(163,388	)			(115,467	)
Total shareholders’ equity		1,458,680				1,446,216				1,383,176				656,302				705,329
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,778,351			$	10,604,718			$	10,900,437			$	6,730,342			$	6,731,764

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
	Three Months Ended																		Six Months Ended
		2023							2022										2023				2022
	June 30				March 31			December 31				September 30			June 30				June 30			June 30
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	133,931			$	125,729		$	116,145			$	58,025		$	53,835			$	259,660		$	106,205
Securities:
Taxable		9,726				9,653			9,834				6,655			5,571				19,379			10,639
Tax-exempt		436				1,262			3,057				2,594			2,557				1,698			5,082
Deposits in other financial institutions		2,865				3,771			2,933				608			877				6,636			1,217
Total interest income		146,958				140,415			131,969				67,882			62,840				287,373			123,143
INTEREST EXPENSE:
Demand, money market and savings deposits		20,708				18,037			12,406				3,527			1,859				38,745			3,206
Certificates and other time deposits		9,622				3,307			2,083				1,664			1,922				12,929			4,078
Borrowed funds		6,535				1,317			417				499			114				7,852			300
Subordinated debt		1,812				1,927			1,449				1,502			1,463				3,739			2,905
Total interest expense		38,677				24,588			16,355				7,192			5,358				63,265			10,489
NET INTEREST INCOME		108,281				115,827			115,614				60,690			57,482				224,108			112,654
Provision for credit losses		1,915				3,666			44,793				1,962			2,143				5,581			3,957
Net interest income after provision for credit losses		106,366				112,161			70,821				58,728			55,339				218,527			108,697
NONINTEREST INCOME:
Nonsufficient funds fees		418				406			447				145			126				824			242
Service charges on deposit accounts		1,157				943			1,242				527			560				2,100			1,087
(Loss) gain on sale of assets		(6	)			198			4,025				42			(17	)			192			(17	)
Bank-owned life insurance		532				522			515				135			342				1,054			475
Debit card and ATM card income		1,821				1,698			1,897				869			880				3,519			1,699
Other		1,561				3,731			2,511				1,277			813				5,292			3,236
Total noninterest income		5,483				7,498			10,637				2,995			2,704				12,981			6,722
NONINTEREST EXPENSE:
Salaries and employee benefits		37,300				39,775			40,949				22,013			21,864				77,075			44,592
Net occupancy and equipment		3,817				4,088			3,781				2,129			2,220				7,905			4,425
Depreciation		1,841				1,836			1,903				1,003			1,012				3,677			2,045
Data processing and software amortization		4,674				5,054			3,776				2,541			2,522				9,728			5,020
Professional fees		1,564				1,527			2,298				485			662				3,091			800
Regulatory assessments and FDIC insurance		2,755				1,294			1,263				1,134			1,256				4,049			2,517
Amortization of intangibles		6,881				6,879			7,051				750			751				13,760			1,502
Communications		689				701			737				359			363				1,390			704
Advertising		907				839			1,130				385			483				1,746			945
Acquisition and merger-related expenses		2,897				6,165			11,469				10,551			1,667				9,062			2,118
Other		5,882				4,440			5,267				2,681			5,104				10,322			7,753
Total noninterest expense		69,207				72,598			79,624				44,031			37,904				141,805			72,421
INCOME BEFORE INCOME TAXES		42,642				47,061			1,834				17,692			20,139				89,703			42,998
Provision for income taxes		7,467				9,913			(218	)			3,406			3,702				17,380			7,904
NET INCOME	$	35,175			$	37,148		$	2,052			$	14,286		$	16,437			$	72,323		$	35,094
EARNINGS PER SHARE
Basic	$	0.66			$	0.70		$	0.04			$	0.51		$	0.57			$	1.36		$	1.22
Diluted	$	0.66			$	0.70		$	0.04			$	0.50		$	0.56			$	1.36		$	1.21

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
	Three Months Ended																				Six Months Ended
		2023								2022												2023				2022
	June 30				March 31				December 31				September 30				June 30				June 30				June 30
	(Dollars and share amounts in thousands, except per share data)
Net income	$	35,175			$	37,148			$	2,052			$	14,286			$	16,437			$	72,323			$	35,094
Earnings per share, basic	$	0.66			$	0.70			$	0.04			$	0.51			$	0.57			$	1.36			$	1.22
Earnings per share, diluted	$	0.66			$	0.70			$	0.04			$	0.50			$	0.56			$	1.36			$	1.21
Dividends per share	$	0.13			$	0.13			$	0.13			$	0.10			$	0.10			$	0.26			$	0.20
Return on average assets(A)		1.31	%			1.38	%			0.07	%			0.84	%			0.94	%			1.35	%			0.99	%
Return on average equity(A)		9.67	%			10.62	%			0.60	%			7.90	%			8.86	%			10.14	%			9.14	%
Return on average tangible equity(A)(B)		17.05	%			19.32	%			1.16	%			11.78	%			13.00	%			18.14	%			13.19	%
Net interest margin (tax equivalent)(A)(C)		4.49	%			4.80	%			4.71	%			3.85	%			3.53	%			4.64	%			3.41	%
Net interest margin (tax equivalent) excluding PAA(A)(B)(C)		3.97	%			4.38	%			4.38	%			3.85	%			3.52	%			4.18	%			3.41	%
Efficiency ratio(D)		60.83	%			58.96	%			65.14	%			69.18	%			62.96	%			59.86	%			60.66	%
Capital Ratios
Stellar Bancorp, Inc. (Consolidated)
Equity to assets		13.53	%			13.64	%			12.69	%			9.75	%			10.48	%			13.53	%			10.48	%
Tangible equity to tangible assets(B)		8.19	%			8.15	%			7.24	%			6.47	%			7.21	%			8.19	%			7.21	%
Total capital ratio (to risk-weighted assets)		13.03	%			12.72	%			12.39	%			14.66	%			15.47	%			13.03	%			15.47	%
Common equity Tier 1 capital (to risk weighted assets)		10.67	%			10.39	%			10.04	%			11.39	%			12.06	%			10.67	%			12.06	%
Tier 1 capital (to risk-weighted assets)		10.78	%			10.50	%			10.15	%			11.58	%			12.26	%			10.78	%			12.26	%
Tier 1 leverage (to average tangible assets)		9.51	%			9.01	%			8.55	%			9.00	%			8.65	%			9.51	%			8.65	%
Stellar Bank
Total capital ratio (to risk-weighted assets)		12.80	%			12.42	%			12.02	%			14.12	%			14.50	%			12.80	%			14.50	%
Common equity Tier 1 capital (to risk-weighted assets)		11.22	%			10.87	%			10.46	%			12.20	%			12.51	%			11.22	%			12.51	%
Tier 1 capital (to risk-weighted assets)		11.22	%			10.87	%			10.46	%			12.20	%			12.51	%			11.22	%			12.51	%
Tier 1 leverage (to average tangible assets)		9.89	%			9.35	%			8.81	%			9.49	%			8.83	%			9.89	%			8.83	%
Other Data
Weighted average shares:
Basic		53,297				53,021				52,715				28,286				28,874				53,160				28,879
Diluted		53,375				53,138				52,973				28,529				29,120				53,261				29,108
Period end shares outstanding		53,303				53,296				52,955				28,137				28,586				53,303				28,586
Book value per share	$	27.37			$	27.14			$	26.12			$	23.33			$	24.67			$	27.37			$	24.67
Tangible book value per share(B)	$	15.60			$	15.24			$	14.02			$	14.94			$	16.39			$	15.60			$	16.39
Employees - full-time equivalents		1,004				1,055				1,025				562				578				1,004				578

(A)     Interim periods annualized.
(B)     Refer to the calculation of these non-GAAP financial measures and a reconciliation to their most directly comparable GAAP financial measures on page 10 of this Earnings Release.
(C)     Net interest margin represents net interest income divided by average interest-earning assets.
(D)     Represents total noninterest expense divided by the sum of net interest income plus noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for credit losses are not part of this calculation.

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
	Three Months Ended
	June 30, 2023										March 31, 2023										June 30, 2022
	Average Balance				Interest Earned/ Interest Paid			Average Yield/Rate			Average Balance				Interest Earned/ Interest Paid			Average Yield/Rate			Average Balance				Interest Earned/ Interest Paid			Average Yield/Rate
	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans	$	7,980,856			$	133,931		6.73	%		$	7,847,011			$	125,729		6.50	%		$	4,303,714			$	53,835		5.02	%
Securities		1,502,949				10,162		2.71	%			1,604,011				10,915		2.76	%			1,778,745				8,128		1.83	%
Deposits in other financial institutions		209,722				2,865		5.48	%			364,781				3,771		4.19	%			535,546				877		0.66	%
Total interest-earning assets		9,693,527			$	146,958		6.08	%			9,815,803			$	140,415		5.80	%			6,618,005			$	62,840		3.81	%
Allowance for credit losses on loans		(96,414	)									(93,331	)									(49,290	)
Noninterest-earning assets		1,143,025										1,160,061										450,584
Total assets	$	10,740,138									$	10,882,533									$	7,019,299
Liabilities and     Shareholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	1,387,604			$	9,343		2.70	%		$	1,650,273			$	8,382		2.06	%		$	1,044,493			$	927		0.36	%
Money market and savings deposits		2,220,827				11,365		2.05	%			2,490,889				9,655		1.57	%			1,566,376				932		0.24	%
Certificates and other time deposits		1,225,834				9,622		3.15	%			861,595				3,307		1.56	%			1,088,664				1,922		0.71	%
Borrowed funds		479,896				6,535		5.46	%			105,191				1,317		5.08	%			50,116				114		0.91	%
Subordinated debt		109,499				1,812		6.64	%			109,415				1,927		7.14	%			109,045				1,463		5.38	%
Total interest-bearing liabilities		5,423,660			$	38,677		2.86	%			5,217,363			$	24,588		1.91	%			3,858,694			$	5,358		0.56	%
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		3,779,594										4,166,265										2,382,230
Other liabilities		78,411										80,823										34,249
Total liabilities		9,281,665										9,464,451										6,275,173
Shareholders' equity		1,458,473										1,418,082										744,126
Total liabilities and shareholders' equity	$	10,740,138									$	10,882,533									$	7,019,299
Net interest rate spread								3.22	%									3.89	%									3.25	%
Net interest income and margin					$	108,281		4.48	%						$	115,827		4.79	%						$	57,482		3.48	%
Net interest income and net interest margin (tax equivalent)					$	108,509		4.49	%						$	116,119		4.80	%						$	58,238		3.53	%
Cost of funds								1.69	%									1.06	%									0.34	%
Cost of deposits								1.41	%									0.94	%									0.25	%

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
	Six Months Ended June 30,
		2023										2022
	Average Balance				Interest Earned/ Interest Paid			Average Yield/Rate			Average Balance				Interest Earned/ Interest Paid			Average Yield/Rate
	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans	$	7,914,303			$	259,660		6.62	%		$	4,267,810			$	106,205		5.02	%
Securities		1,553,200				21,077		2.74	%			1,807,024				15,721		1.75	%
Deposits in other financial institutions		286,823				6,636		4.67	%			670,316				1,217		0.37	%
Total interest-earning assets		9,754,326			$	287,373		5.94	%			6,745,150			$	123,143		3.68	%
Allowance for credit losses on loans		(94,881	)									(48,819	)
Noninterest-earning assets		1,151,497										441,390
Total assets	$	10,810,942									$	7,137,721
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	1,518,213			$	17,725		2.35	%		$	1,057,678			$	1,476		0.28	%
Money market and savings deposits		2,355,112				21,020		1.80	%			1,575,325				1,730		0.22	%
Certificates and other time deposits		1,044,721				12,929		2.50	%			1,166,490				4,078		0.70	%
Borrowed funds		293,578				7,852		5.39	%			69,868				300		0.87	%
Subordinated debt		109,458				3,739		6.89	%			108,979				2,905		5.38	%
Total interest-bearing liabilities		5,321,082			$	63,265		2.40	%			3,978,340				10,489		0.53	%
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		3,971,862										2,347,366
Other liabilities		79,609										37,767
Total liabilities		9,372,553										6,363,473
Shareholders' equity		1,438,389										774,248
Total liabilities and shareholders' equity	$	10,810,942									$	7,137,721
Net interest rate spread								3.54	%									3.15	%
Net interest income and margin					$	224,108		4.63	%						$	112,654		3.37	%
Net interest income and net interest margin (tax equivalent)					$	224,628		4.64	%						$	114,160		3.41	%
Cost of funds								1.37	%									0.33	%
Cost of deposits								1.17	%									0.24	%

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
	Three Months Ended
		2023								2022
	June 30				March 31				December 31				September 30				June 30
	(Dollars in thousands)
Period-end Loan Portfolio:
Commercial and industrial	$	1,512,476			$	1,477,340			$	1,455,795			$	732,636			$	727,068
Paycheck Protection Program (PPP)		8,027				11,081				13,226				17,827				31,855
Real estate:
Commercial real estate (including multi-family residential)		4,038,487				4,014,609				3,931,480				2,407,039				2,265,155
Commercial real estate construction and land development		1,136,124				1,034,538				1,037,678				513,248				450,694
1-4 family residential (including home equity)		1,009,439				1,008,362				1,000,956				699,636				682,066
Residential construction		311,208				292,143				268,150				183,563				155,017
Consumer and other		52,957				47,971				47,466				37,963				36,978
Total loans held for investment	$	8,068,718			$	7,886,044			$	7,754,751			$	4,591,912			$	4,348,833
Deposits:
Noninterest-bearing	$	3,713,536			$	3,877,859			$	4,230,169			$	2,465,839			$	2,394,719
Interest-bearing
Demand		1,437,509				1,394,244				1,591,828				956,920				1,016,381
Money market and savings		2,174,073				2,401,840				2,575,923				1,471,690				1,510,008
Certificates and other time		1,441,251				1,064,932				869,712				766,270				959,524
Total interest-bearing deposits		5,052,833				4,861,016				5,037,463				3,194,880				3,485,913
Total deposits	$	8,766,369			$	8,738,875			$	9,267,632			$	5,660,719			$	5,880,632
Asset Quality:
Nonaccrual loans	$	43,349			$	43,413			$	45,048			$	21,551			$	28,225
Accruing loans 90 or more days past due		—				—				—				—				—
Total nonperforming loans		43,349				43,413				45,048				21,551				28,225
Other repossessed assets		—				124				—				—				—
Total nonperforming assets	$	43,349			$	43,537			$	45,048			$	21,551			$	28,225
Net charge-offs (recoveries)	$	236			$	192			$	5,707			$	(245	)		$	571
Nonaccrual loans:
Commercial and industrial	$	22,968			$	23,329			$	25,402			$	6,916			$	9,145
Real estate:
Commercial real estate (including multi-family residential)		8,221				9,026				9,970				10,392				14,409
Commercial real estate construction and land development		388				27				—				241				1,511
1-4 family residential (including home equity)		10,880				10,586				9,404				3,854				3,040
Residential construction		665				195				—				—				—
Consumer and other		227				250				272				148				120
Total nonaccrual loans	$	43,349			$	43,413			$	45,048			$	21,551			$	28,225
Asset Quality Ratios:
Nonperforming assets to total assets		0.40	%			0.41	%			0.41	%			0.32	%			0.42	%
Nonperforming loans to total loans		0.54	%			0.55	%			0.58	%			0.47	%			0.65	%
Allowance for credit losses on loans to nonperforming loans		231.14	%			221.56	%			206.85	%			241.97	%			178.01	%
Allowance for credit losses on loans to total loans		1.24	%			1.22	%			1.20	%			1.14	%			1.16	%
Net charge-offs (recoveries) to average loans (annualized)		0.01	%			0.01	%			0.30	%			(0.02	%)			0.05	%

Stellar’s management uses certain non-GAAP (generally accepted accounting principles) financial measures to evaluate its performance. Stellar believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance and that management and investors benefit from referring to these non-GAAP financial measures in assessing Stellar’s performance and when planning, forecasting, analyzing and comparing past, present and future periods. Specifically, Stellar reviews pre-tax, pre-provision income, pre-tax pre-provision ROAA, adjusted pre-tax, pre-provision income, adjusted pre-tax, pre-provision ROAA, adjusted efficiency ratio, tangible book value per share, return on average tangible equity, tangible equity to tangible assets and net interest margin (tax equivalent) excluding PAA for internal planning and forecasting purposes. Stellar has included in this earnings release information relating to these non-GAAP financial measures for the applicable periods presented. These non-GAAP measures should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which Stellar calculates the non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

Stellar Bancorp, Inc.
GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures
(Unaudited)
	Three Months Ended																				Six Months Ended
		2023								2022												2023				2022
	June 30				March 31				December 31				September 30				June 30				June 30				June 30
	(Dollars and share amounts in thousands, except per share data)
Net income	$	35,175			$	37,148			$	2,052			$	14,286			$	16,437			$	72,323			$	35,094
Add: Provision for credit losses		1,915				3,666				44,793				1,962				2,143				5,581				3,957
Add: Provision for income taxes		7,467				9,913				(218	)			3,406				3,702				17,380				7,904
Pre-tax, pre-provision income	$	44,557			$	50,727			$	46,627			$	19,654			$	22,282			$	95,284			$	46,955
Total average assets	$	10,740,138			$	10,882,533			$	10,946,009			$	6,717,886			$	7,019,299			$	10,810,942			$	7,137,721
Pre-tax, pre-provision return on average assets(B)		1.66	%			1.89	%			1.69	%			1.16	%			1.27	%			1.78	%			1.33	%
Pre-tax, pre-provision income	$	44,557			$	50,727			$	46,627			$	19,654			$	22,282			$	95,284			$	46,955
Add: Acquisition and merger-related expenses		2,897				6,165				11,469				10,551				1,667				9,062				2,118
Add: Amortization of intangibles		6,881				6,879				7,051				750				751				13,760				1,502
Less: Purchase accounting accretion		12,572				10,104				8,160				40				77				22,676				170
Less: (Loss) gain on sale of assets		(6	)			198				4,025				42				(17	)			192				(17	)
Adjusted pre-tax, pre-provision income	$	41,769			$	53,469			$	52,962			$	30,873			$	24,640			$	95,238			$	50,422
Adjusted pre-tax, pre-provision return on average assets(B)		1.56	%			1.99	%			1.92	%			1.82	%			1.41	%			1.78	%			1.42	%
Total noninterest expense	$	69,207			$	72,598			$	79,624			$	44,031			$	37,904			$	141,805			$	72,421
Less: Acquisition and merger-related expenses		2,897				6,165				11,469				10,551				1,667				9,062				2,118
Less: Amortization of intangibles		6,881				6,879				7,051				750				751				13,760				1,502
Net interest income		108,281				115,827				115,614				60,690				57,482				224,108				112,654
Less: Purchase accounting accretion		12,572				10,104				8,160				40				77				22,676				170
Total noninterest income		5,483				7,498				10,637				2,995				2,704				12,981				6,722
Less: (Loss) gain on sale of assets		(6	)			198				4,025				42				(17	)			192				(17	)
Adjusted efficiency ratio(A)		58.73	%			52.69	%			53.57	%			51.46	%			59.02	%			55.54	%			57.71	%
Total shareholders' equity	$	1,458,680			$	1,446,216			$	1,383,176			$	656,302			$	705,329			$	1,458,680			$	705,329
Less: Goodwill and core deposit intangibles, net		627,065				633,925				640,785				236,048				236,798				627,065				236,798
Tangible shareholders’ equity	$	831,615			$	812,291			$	742,391			$	420,254			$	468,531			$	831,615			$	468,531
Shares outstanding at end of period		53,303				53,296				52,955				28,137				28,586				53,303				28,586
Tangible book value per share	$	15.60			$	15.24			$	14.02			$	14.94			$	16.39			$	15.60			$	16.39
Average shareholders' equity	$	1,458,473			$	1,418,082			$	1,347,938			$	717,436			$	744,126			$	1,438,389			$	774,248
Less: Average goodwill and core deposit intangibles, net		630,854				638,110				658,107				236,399				237,153				634,462				237,537
Average tangible shareholders’ equity	$	827,619			$	779,972			$	689,831			$	481,037			$	506,973			$	803,927			$	536,711
Return on average tangible equity(B)		17.05	%			19.32	%			1.18	%			11.78	%			13.00	%			18.14	%			13.19	%
Total assets	$	10,778,351			$	10,604,718			$	10,900,437			$	6,730,342			$	6,731,764			$	10,778,351			$	6,731,764
Less: Goodwill and core deposit intangibles, net		627,065				633,925				640,785				236,048				236,798				627,065				236,798
Tangible assets	$	10,151,286			$	9,970,793			$	10,259,652			$	6,494,294			$	6,494,966			$	10,151,286			$	6,494,966
Tangible equity to tangible assets		8.19	%			8.15	%			7.24	%			6.47	%			7.21	%			8.19	%			7.21	%
Net interest income (tax equivalent)	$	108,509			$	116,119			$	116,574			$	61,418			$	58,238			$	224,628			$	114,160
Less: Purchase accounting accretion		12,572				10,104				8,160				40				77				22,676				170
Adjusted net interest income (tax equivalent)	$	95,937			$	106,015			$	108,414			$	61,378			$	58,161			$	201,952			$	113,990
Average earning assets	$	9,693,527			$	9,815,803			$	9,815,701			$	6,325,984			$	6,618,005			$	9,754,326			$	6,745,150
Net interest margin (tax equivalent) excluding PAA		3.97	%			4.38	%			4.38	%			3.85	%			3.52	%			4.18	%			3.41	%

(A)     Represents total noninterest expense, excluding acquisition and merger-related expenses, core deposit intangibles amortization and write-downs on assets moved to held for sale, divided by the sum of net interest income, excluding purchase accounting adjustments plus noninterest income, excluding gains and losses on the sale of assets. Additionally, taxes and provision for credit losses are not part of this calculation.
(B)     Interim periods annualized.