Stellar Bancorp, Inc. Reports Third Quarter 2023 Results

Rhea-AI Summary

Stellar Bancorp reports net income of $30.9 million for Q3 2023. CEO emphasizes commitment to shareholder value. Third quarter financial highlights include strong profitability, continued regulatory capital build, solid margin, and advantageous funding profile. Merger of equals with Allegiance Bancshares and CBTX had significant impact on financial statements. Net interest income and noninterest income decreased, while noninterest expense increased. Total loans and deposits decreased. Asset quality improved. Management uses certain non-GAAP financial measures. Conference call scheduled to discuss Q3 2023 results.

Positive

• Stellar Bancorp reports strong profitability with net income of $30.9 million for Q3 2023, translating into an annualized return on average assets of 1.14% and an annualized return on average tangible equity of 14.47%. Total risk-based capital ratio increased to 13.42% at September 30, 2023. Noninterest-bearing deposit balances remained significant at 42.1% of deposit funding base. Asset quality improved with nonperforming assets at 0.36% of total assets. CEO emphasizes commitment to shareholder value and protecting long-term shareholder value.

Negative

• Net interest income and noninterest income decreased for Stellar Bancorp in Q3 2023. Noninterest expense increased. Total loans and deposits decreased. Net charge-offs increased due to a single commercial and industrial loan relationship. The merger of equals with Allegiance Bancshares and CBTX had a significant impact on financial statements. The historical financial statements prior to the merger are not comparable to post-merger results.

HOUSTON, Oct. 27, 2023 (GLOBE NEWSWIRE) -- Stellar Bancorp, Inc. (the “Company” or “Stellar”) (NYSE: STEL) today reported net income of $30.9 million and diluted earnings per share of $0.58 for the third quarter 2023 compared to net income of $35.2 million and diluted earnings per share of $0.66 for the second quarter 2023.

“We are pleased with our results for the third quarter 2023 given the uncertainty of the economic environment. We remain steadfast in our commitment to provide and protect the qualities we think drive shareholder value; balance sheet strength; sound quality; and stable core deposits,” said Robert R. Franklin, Jr., Stellar’s Chief Executive Officer.

“We continue our strategy of not fighting the actions of the Federal Reserve as it attempts to slow the economy to tamp down inflation. Raising interest rates is a blunt tool and there are consequences to the velocity at which rates have increased. We must remain vigilant as customers adjust to higher prices, the higher cost of capital and potential adjustments to asset prices,” continued Mr. Franklin.

“We will continue to build our capital base, be mindful of our liquidity position and be watchful of our credit quality. We believe that Stellar remains well positioned to have optionality as we move through this economic cycle while protecting and increasing long-term shareholder value,” concluded Mr. Franklin.

Third Quarter 2023 Financial Highlights

• Strong Profitability: Third quarter 2023 net income of $30.9 million and diluted earnings per share of $0.58 translated into an annualized return on average assets of 1.14% and an annualized return on average tangible equity of 14.47%⁽¹⁾_.

• Continued Regulatory Capital Build: Total risk-based capital ratio increased to 13.42% at September 30, 2023 from 12.39% at December 31, 2022 and Tier 1 leverage ratio increased to 9.82% at September 30, 2023 from 8.55% at December 31, 2022.

• Solid Margin: Tax equivalent net interest margin was 4.37% for the third quarter of 2023 as compared to 4.49% in the second quarter of 2023. The tax equivalent net interest margin, excluding purchase accounting accretion (“PAA”), was 3.87%⁽¹⁾ for the third quarter of 2023 and 3.97%⁽¹⁾ for the second quarter of 2023.

• Advantageous Funding Profile: Noninterest-bearing deposit balances decreased from the second quarter but remained a significant portion of our deposit funding base at 42.1% at the end of the third quarter 2023 compared to 42.4% at the end of the second 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 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, second and third 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.

Third Quarter 2023 Results

Stellar’s net interest income in the third quarter 2023 decreased $1.6 million, or 1.4%, from $108.3 million for the second quarter 2023. The net interest margin on a tax equivalent basis decreased 12 basis points to 4.37% for the third quarter 2023 from 4.49% for the second 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 third quarter of 2023 benefited from $12.4 million of income from purchase accounting adjustments compared to $12.6 million in the second 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 third quarter 2023 would have been $94.5 million and the tax equivalent net interest margin would have been 3.87%.

Noninterest income for the third quarter 2023 was $4.7 million, a decrease of $788 thousand, or 14.4%, compared to $5.5 million for the second quarter 2023. Noninterest income decreased in the third quarter of 2023 compared to the second quarter of 2023 primarily due to a decrease in debit card and ATM income due to the impact of the Durbin Amendment and change in the Company’s policy on charging nonsufficient funds fees.

Noninterest expense for the third quarter 2023 increased $1.5 million, or 2.2%, to $70.7 million compared to $69.2 million for the second quarter of 2023. The increase in noninterest expense in the third quarter of 2023 compared to the second quarter of 2023 was primarily due to an increase in salaries and employee benefits and acquisition and merger-related expenses which totaled $3.4 million for the third quarter of 2023 compared to $2.9 million in the second quarter of 2023.

Stellar’s efficiency ratio was 63.50% for the third quarter 2023 compared to 60.83% for the second quarter 2023. Third quarter 2023 annualized returns on average assets, average equity and average tangible equity were 1.14%, 8.34% and 14.47%, respectively, compared to 1.31%, 9.67% and 17.05%, respectively, for the second 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 September 30, 2023 decreased $64.2 million to $8.00 billion compared to $8.07 billion at June 30, 2023. At September 30, 2023, the remaining balance of the purchase accounting adjustments on loans was $118.8 million.

Total deposits at September 30, 2023 decreased $79.7 million to $8.69 billion compared to $8.77 billion at June 30, 2023, due to decreases in noninterest-bearing demand, interest-bearing demand, money market and savings balances, partially offset by increases in certificates and other time deposits. 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 $4.73 billion and estimated uninsured deposits net of collateralized deposits of $865.7 million were $3.86 billion, or 44.5%, of total deposits at September 30, 2023.

Total assets at September 30, 2023 were $10.67 billion, a decrease of $112.9 million, compared to $10.78 billion at June 30, 2023.

Asset Quality

Nonperforming assets totaled $38.3 million, or 0.36% of total assets, at September 30, 2023, compared to $43.3 million, or 0.40%, of total assets, at June 30, 2023. The allowance for credit losses on loans as a percentage of total loans was 1.17% at September 30, 2023 and 1.24% at June 30, 2023.

The provision for credit losses for the third quarter 2023 was $2.3 million compared to $1.9 million for the second quarter 2023. Third quarter 2023 net charge-offs were $8.1 million, or 0.40% (annualized) of average loans, compared to net charge-offs of $236 thousand, or 0.01% (annualized) of average loans, for the second quarter 2023. Net charge-offs increased this quarter primarily due to a single commercial and industrial loan relationship that was placed on nonaccrual status at December 31, 2022 and had an allowance for credit losses of $5.1 million at June 30, 2023. During the third quarter 2023, the borrower’s financial condition further deteriorated, which prompted the charge-off of $8.0 million on the loan relationship.

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, October 27, 2023 at 8:00 a.m. Central Time (9:00 a.m. Eastern Time) to discuss third quarter 2023 results. Individuals and investment professionals may register for the conference call at https://register.vevent.com/register/BI6cc171f27f424552a720c74008bfa355 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
	September 30				June 30				March 31				December 31				September 30
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	94,970			$	105,913			$	99,231			$	67,063			$	16,449
Interest-bearing deposits at other financial institutions		207,302				198,176				164,102				304,642				102,118
Total cash and cash equivalents		302,272				304,089				263,333				371,705				118,567
Available for sale securities, at fair value		1,414,952				1,478,222				1,519,175				1,807,586				1,618,995
Loans held for investment		8,004,528				8,068,718				7,886,044				7,754,751				4,591,912
Less: allowance for credit losses on loans		(93,575	)			(100,195	)			(96,188	)			(93,180	)			(52,147	)
Loans, net		7,910,953				7,968,523				7,789,856				7,661,571				4,539,765
Accrued interest receivable		43,536				42,051				42,405				44,743				29,697
Premises and equipment, net		119,332				119,142				124,723				126,803				57,837
Federal Home Loan Bank stock		29,022				24,478				19,676				15,058				16,843
Bank-owned life insurance		104,699				104,148				103,616				103,094				28,305
Goodwill		497,318				497,260				497,260				497,260				223,642
Core deposit intangibles, net		122,944				129,805				136,665				143,525				12,406
Other assets		120,432				110,633				108,009				129,092				84,285
Total assets	$	10,665,460			$	10,778,351			$	10,604,718			$	10,900,437			$	6,730,342
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	3,656,288			$	3,713,536			$	3,877,859			$	4,230,169			$	2,465,839
Interest-bearing
Demand		1,397,492				1,437,509				1,394,244				1,591,828				956,920
Money market and savings		2,128,950				2,174,073				2,401,840				2,575,923				1,471,690
Certificates and other time		1,503,891				1,441,251				1,064,932				869,712				766,270
Total interest-bearing deposits		5,030,333				5,052,833				4,861,016				5,037,463				3,194,880
Total deposits		8,686,621				8,766,369				8,738,875				9,267,632				5,660,719
Accrued interest payable		7,612				4,555				3,875				2,098				2,673
Borrowed funds		323,981				369,963				238,944				63,925				257,000
Subordinated debt		109,665				109,566				109,420				109,367				109,241
Other liabilities		76,735				69,218				67,388				74,239				44,407
Total liabilities		9,204,614				9,319,671				9,158,502				9,517,261				6,074,040
SHAREHOLDERS’ EQUITY:
Common stock		533				533				533				530				281
Capital surplus		1,231,686				1,228,532				1,225,596				1,222,761				511,434
Retained earnings		385,600				361,619				333,368				303,146				307,975
Accumulated other comprehensive loss		(156,973	)			(132,004	)			(113,281	)			(143,261	)			(163,388	)
Total shareholders’ equity		1,460,846				1,458,680				1,446,216				1,383,176				656,302
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,665,460			$	10,778,351			$	10,604,718			$	10,900,437			$	6,730,342

Stellar Bancorp, Inc. Financial Highlights (Unaudited)
	Three Months Ended																	Nine Months Ended
		2023										2022							2023			2022
	September 30			June 30				March 31			December 31				September 30			September 30			September 30
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	138,948		$	133,931			$	125,729		$	116,145			$	58,025		$	398,608		$	164,230
Securities:
Taxable		9,493			9,726				9,653			9,834				6,655			28,872			17,294
Tax-exempt		437			436				1,262			3,057				2,594			2,135			7,676
Deposits in other financial institutions		2,391			2,865				3,771			2,933				608			9,027			1,825
Total interest income		151,269			146,958				140,415			131,969				67,882			438,642			191,025
INTEREST EXPENSE:
Demand, money market and savings deposits		23,557			20,708				18,037			12,406				3,527			62,302			6,733
Certificates and other time deposits		13,282			9,622				3,307			2,083				1,664			26,211			5,742
Borrowed funds		5,801			6,535				1,317			417				499			13,653			799
Subordinated debt		1,908			1,812				1,927			1,449				1,502			5,647			4,407
Total interest expense		44,548			38,677				24,588			16,355				7,192			107,813			17,681
NET INTEREST INCOME		106,721			108,281				115,827			115,614				60,690			330,829			173,344
Provision for credit losses		2,315			1,915				3,666			44,793				1,962			7,896			5,919
Net interest income after provision for credit losses		104,406			106,366				112,161			70,821				58,728			322,933			167,425
NONINTEREST INCOME:
Nonsufficient funds and overdraft charges		291			418				406			447				145			1,115			387
Service charges on deposit accounts		1,329			1,157				943			1,242				527			3,429			1,614
(Loss) gain on sale of assets		—			(6	)			198			4,025				42			192			25
Bank-owned life insurance		551			532				522			515				135			1,605			610
Debit card and ATM income		935			1,821				1,698			1,897				869			4,454			2,568
Other		1,589			1,561				3,731			2,511				1,277			6,881			4,513
Total noninterest income		4,695			5,483				7,498			10,637				2,995			17,676			9,717
NONINTEREST EXPENSE:
Salaries and employee benefits		39,495			37,300				39,775			40,949				22,013			116,570			66,605
Net occupancy and equipment		4,455			3,817				4,088			3,781				2,129			12,360			6,554
Depreciation		1,952			1,841				1,836			1,903				1,003			5,629			3,048
Data processing and software amortization		4,798			4,674				5,054			3,776				2,541			14,526			7,561
Professional fees		997			1,564				1,527			2,298				485			4,088			1,285
Regulatory assessments and FDIC insurance		1,814			2,755				1,294			1,263				1,134			5,863			3,651
Amortization of intangibles		6,876			6,881				6,879			7,051				750			20,636			2,252
Communications		663			689				701			737				359			2,053			1,063
Advertising		877			907				839			1,130				385			2,623			1,330
Acquisition and merger-related expenses		3,421			2,897				6,165			11,469				10,551			12,483			12,669
Other		5,400			5,882				4,440			5,267				2,681			15,722			10,434
Total noninterest expense		70,748			69,207				72,598			79,624				44,031			212,553			116,452
INCOME BEFORE INCOME TAXES		38,353			42,642				47,061			1,834				17,692			128,056			60,690
Provision for income taxes		7,445			7,467				9,913			(218	)			3,406			24,825			11,310
NET INCOME	$	30,908		$	35,175			$	37,148		$	2,052			$	14,286		$	103,231		$	49,380
EARNINGS PER SHARE
Basic	$	0.58		$	0.66			$	0.70		$	0.04			$	0.51		$	1.94		$	1.72
Diluted	$	0.58		$	0.66			$	0.70		$	0.04			$	0.50		$	1.94		$	1.71

Stellar Bancorp, Inc. Financial Highlights (Unaudited)
	Three Months Ended																				Nine Months Ended
		2023												2022								2023				2022
	September 30				June 30				March 31				December 31				September 30				September 30				September 30
	(Dollars and share amounts in thousands, except per share data)
Net income	$	30,908			$	35,175			$	37,148			$	2,052			$	14,286			$	103,231			$	49,380
Earnings per share, basic	$	0.58			$	0.66			$	0.70			$	0.04			$	0.51			$	1.94			$	1.72
Earnings per share, diluted	$	0.58			$	0.66			$	0.70			$	0.04			$	0.50			$	1.94			$	1.71
Dividends per share	$	0.13			$	0.13			$	0.13			$	0.13			$	0.10			$	0.39			$	0.30
Return on average assets(A)		1.14	%			1.31	%			1.38	%			0.07	%			0.84	%			1.28	%			0.94	%
Return on average equity(A)		8.34	%			9.67	%			10.62	%			0.60	%			7.90	%			9.52	%			8.74	%
Return on average tangible equity(A)(B)		14.47	%			17.05	%			19.32	%			1.16	%			11.78	%			16.86	%			12.75	%
Net interest margin (tax equivalent)(A)(C)		4.37	%			4.49	%			4.80	%			4.71	%			3.85	%			4.55	%			3.55	%
Net interest margin (tax equivalent) excluding PAA(A)(B)(C)		3.87	%			3.97	%			4.38	%			4.38	%			3.85	%			4.07	%			3.55	%
Efficiency ratio(D)		63.50	%			60.83	%			58.96	%			65.14	%			69.18	%			61.02	%			63.62	%
Capital Ratios
Stellar Bancorp, Inc. (Consolidated)
Equity to assets		13.70	%			13.53	%			13.64	%			12.69	%			9.75	%			13.70	%			9.75	%
Tangible equity to tangible assets(B)		8.37	%			8.19	%			8.15	%			7.24	%			6.47	%			8.37	%			6.47	%
Total capital ratio (to risk-weighted assets)		13.42	%			13.03	%			12.72	%			12.39	%			14.66	%			13.44	%			14.66	%
Common equity Tier 1 capital (to risk weighted assets)		11.14	%			10.67	%			10.39	%			10.04	%			11.39	%			11.14	%			11.39	%
Tier 1 capital (to risk-weighted assets)		11.25	%			10.78	%			10.50	%			10.15	%			11.58	%			11.25	%			11.58	%
Tier 1 leverage (to average tangible assets)		9.82	%			9.51	%			9.01	%			8.55	%			9.00	%			9.82	%			9.00	%
Stellar Bank
Total capital ratio (to risk-weighted assets)		13.13	%			12.80	%			12.42	%			12.02	%			14.12	%			13.16	%			14.12	%
Common equity Tier 1 capital (to risk-weighted assets)		11.63	%			11.22	%			10.87	%			10.46	%			12.20	%			11.63	%			12.20	%
Tier 1 capital (to risk-weighted assets)		11.63	%			11.22	%			10.87	%			10.46	%			12.20	%			11.63	%			12.20	%
Tier 1 leverage (to average tangible assets)		10.15	%			9.89	%			9.35	%			8.81	%			9.49	%			10.15	%			9.49	%
Other Data
Weighted average shares:
Basic		53,313				53,297				53,021				52,715				28,286				53,211				28,679
Diluted		53,380				53,375				53,138				52,973				28,530				53,300				28,901
Period end shares outstanding		53,322				53,303				53,296				52,955				28,137				53,322				28,137
Book value per share	$	27.40			$	27.37			$	27.14			$	26.12			$	23.33			$	27.40			$	23.33
Tangible book value per share(B)	$	15.76			$	15.60			$	15.24			$	14.02			$	14.94			$	15.76			$	14.94
Employees - full-time equivalents		1,008				1,004				1,055				1,025				562				1,008				562

(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
	September 30, 2023										June 30, 2023										September 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	$	8,043,706			$	138,948		6.85	%		$	7,980,856			$	133,931		6.73	%		$	4,456,174			$	58,025		5.17	%
Securities		1,471,916				9,930		2.68	%			1,502,949				10,162		2.71	%			1,709,470				9,249		2.15	%
Deposits in other financial institutions		181,931				2,391		5.21	%			209,722				2,865		5.48	%			160,340				608		1.50	%
Total interest-earning assets		9,697,553			$	151,269		6.19	%			9,693,527			$	146,958		6.08	%			6,325,984			$	67,882		4.26	%
Allowance for credit losses on loans		(99,892	)									(96,414	)									(50,609	)
Noninterest-earning assets		1,143,634										1,143,025										442,511
Total assets	$	10,741,295									$	10,740,138									$	6,717,886
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	1,400,508			$	10,415		2.95	%		$	1,387,604			$	9,343		2.70	%		$	978,531			$	2,380		0.96	%
Money market and savings deposits		2,166,610				13,142		2.41	%			2,220,827				11,365		2.05	%			1,500,083				1,147		0.30	%
Certificates and other time deposits		1,400,367				13,282		3.76	%			1,225,834				9,622		3.15	%			877,231				1,664		0.75	%
Borrowed funds		411,212				5,801		5.60	%			479,896				6,535		5.46	%			68,752				499		2.88	%
Subordinated debt		109,608				1,908		6.91	%			109,499				1,812		6.64	%			109,177				1,502		5.46	%
Total interest-bearing liabilities		5,488,305			$	44,548		3.22	%			5,423,660			$	38,677		2.86	%			3,533,774			$	7,192		0.81	%
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		3,695,592										3,779,594										2,424,884
Other liabilities		86,389										78,411										41,792
Total liabilities		9,270,286										9,281,665										6,000,450
Shareholders' equity		1,471,009										1,458,473										717,436
Total liabilities and shareholders' equity	$	10,741,295									$	10,740,138									$	6,717,886
Net interest rate spread								2.97	%									3.22	%									3.45	%
Net interest income and margin					$	106,721		4.37	%						$	108,281		4.48	%						$	60,690		3.81	%
Net interest income and net interest margin (tax equivalent)					$	106,919		4.37	%						$	108,509		4.49	%						$	61,418		3.85	%
Cost of funds								1.92	%									1.69	%									0.48	%
Cost of deposits								1.69	%									1.41	%									0.36	%

Stellar Bancorp, Inc. Financial Highlights (Unaudited)
	Nine Months Ended September 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	$	7,957,911			$	398,608		6.70	%		$	4,331,288			$	164,230		5.07	%
Securities		1,525,808				31,007		2.72	%			1,774,149				24,970		1.88	%
Deposits in other financial institutions		251,475				9,027		4.80	%			498,456				1,825		0.49	%
Total interest-earning assets		9,735,194			$	438,642		6.02	%			6,603,893			$	191,025		3.87	%
Allowance for credit losses on loans		(96,570	)									(49,422	)
Noninterest-earning assets		1,148,847										441,767
Total assets	$	10,787,471									$	6,996,238
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	1,478,547			$	28,141		2.54	%		$	1,031,006			$	3,856		0.50	%
Money market and savings deposits		2,291,588				34,161		1.99	%			1,549,969				2,877		0.25	%
Certificates and other time deposits		1,164,572				26,211		3.01	%			1,069,011				5,742		0.72	%
Borrowed funds		333,220				13,653		5.48	%			69,492				799		1.54	%
Subordinated debt		109,508				5,647		6.89	%			109,046				4,407		5.40	%
Total interest-bearing liabilities		5,377,435			$	107,813		2.68	%			3,828,524				17,681		0.62	%
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		3,878,760										2,373,489
Other liabilities		81,894										39,123
Total liabilities		9,338,089										6,241,136
Shareholders' equity		1,449,382										755,102
Total liabilities and shareholders' equity	$	10,787,471									$	6,996,238
Net interest rate spread								3.34	%									3.25	%
Net interest income and margin					$	330,829		4.54	%						$	173,344		3.51	%
Net interest income and net interest margin (tax equivalent)					$	331,549		4.55	%						$	175,578		3.55	%
Cost of funds								1.56	%									0.38	%
Cost of deposits								1.34	%									0.28	%

Stellar Bancorp, Inc. Financial Highlights (Unaudited)
	Three Months Ended
		2023												2022
	September 30				June 30				March 31				December 31				September 30
	(Dollars in thousands)
Period-end Loan Portfolio:
Commercial and industrial	$	1,474,600			$	1,512,476			$	1,477,340			$	1,455,795			$	732,636
Paycheck Protection Program (PPP)		5,968				8,027				11,081				13,226				17,827
Real estate:
Commercial real estate (including multi-family residential)		4,076,606				4,038,487				4,014,609				3,931,480				2,407,039
Commercial real estate construction and land development		1,078,265				1,136,124				1,034,538				1,037,678				513,248
1-4 family residential (including home equity)		1,024,945				1,009,439				1,008,362				1,000,956				699,636
Residential construction		289,553				311,208				292,143				268,150				183,563
Consumer and other		54,591				52,957				47,971				47,466				37,963
Total loans held for investment	$	8,004,528			$	8,068,718			$	7,886,044			$	7,754,751			$	4,591,912
Deposits:
Noninterest-bearing	$	3,656,288			$	3,713,536			$	3,877,859			$	4,230,169			$	2,465,839
Interest-bearing
Demand		1,397,492				1,437,509				1,394,244				1,591,828				956,920
Money market and savings		2,128,950				2,174,073				2,401,840				2,575,923				1,471,690
Certificates and other time		1,503,891				1,441,251				1,064,932				869,712				766,270
Total interest-bearing deposits		5,030,333				5,052,833				4,861,016				5,037,463				3,194,880
Total deposits	$	8,686,621			$	8,766,369			$	8,738,875			$	9,267,632			$	5,660,719
Asset Quality:
Nonaccrual loans	$	38,291			$	43,349			$	43,413			$	45,048			$	21,551
Accruing loans 90 or more days past due		—				—				—				—				—
Total nonperforming loans		38,291				43,349				43,413				45,048				21,551
Other repossessed assets		—				—				124				—				—
Total nonperforming assets	$	38,291			$	43,349			$	43,537			$	45,048			$	21,551
Net charge-offs (recoveries)	$	8,116			$	236			$	192			$	5,707			$	(245	)
Nonaccrual loans:
Commercial and industrial	$	14,991			$	22,968			$	23,329			$	25,402			$	6,916
Real estate:
Commercial real estate (including multi-family residential)		13,563				8,221				9,026				9,970				10,392
Commercial real estate construction and land development		170				388				27				—				241
1-4 family residential (including home equity)		8,442				10,880				10,586				9,404				3,854
Residential construction		635				665				195				—				—
Consumer and other		490				227				250				272				148
Total nonaccrual loans	$	38,291			$	43,349			$	43,413			$	45,048			$	21,551
Asset Quality Ratios:
Nonperforming assets to total assets		0.36	%			0.40	%			0.41	%			0.41	%			0.32	%
Nonperforming loans to total loans		0.48	%			0.54	%			0.55	%			0.58	%			0.47	%
Allowance for credit losses on loans to nonperforming loans		244.38	%			231.14	%			221.56	%			206.85	%			241.97	%
Allowance for credit losses on loans to total loans		1.17	%			1.24	%			1.22	%			1.20	%			1.14	%
Net charge-offs (recoveries) to average loans (annualized)		0.40	%			0.01	%			0.01	%			0.30	%			(0.02	%)

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																				Nine Months Ended
		2023												2022								2023				2022
	September 30				June 30				March 31				December 31				September 30				September 30				September 30
	(Dollars and share amounts in thousands, except per share data)
Net income	$	30,908			$	35,175			$	37,148			$	2,052			$	14,286			$	103,231			$	49,380
Add: Provision for credit losses		2,315				1,915				3,666				44,793				1,962				7,896				5,919
Add: Provision for income taxes		7,445				7,467				9,913				(218	)			3,406				24,825				11,310
Pre-tax, pre-provision income	$	40,668			$	44,557			$	50,727			$	46,627			$	19,654			$	135,952			$	66,609
Total average assets	$	10,741,295			$	10,740,138			$	10,882,533			$	10,946,009			$	6,717,886			$	10,787,471			$	6,996,238
Pre-tax, pre-provision return on average assets(B)		1.50	%			1.66	%			1.89	%			1.69	%			1.16	%			1.68	%			1.27	%
Pre-tax, pre-provision income	$	40,668			$	44,557			$	50,727			$	46,627			$	19,654			$	135,952			$	66,609
Add: Acquisition and merger-related expenses		3,421				2,897				6,165				11,469				10,551				12,483				12,669
Add: Amortization of intangibles		6,876				6,881				6,879				7,051				750				20,636				2,252
Less: Purchase accounting accretion		12,400				12,572				10,104				8,160				40				35,076				210
Less: (Loss) gain on sale of assets		—				(6	)			198				4,025				42				192				25
Adjusted pre-tax, pre-provision income	$	38,565			$	41,769			$	53,469			$	52,962			$	30,873			$	133,803			$	81,295
Adjusted pre-tax, pre-provision return on average assets(B)		1.42	%			1.56	%			1.99	%			1.92	%			1.82	%			1.66	%			1.55	%
Total noninterest expense	$	70,748			$	69,207			$	72,598			$	79,624			$	44,031			$	212,553			$	116,452
Less: Acquisition and merger-related expenses		3,421				2,897				6,165				11,469				10,551				12,483				12,669
Less: Amortization of intangibles		6,876				6,881				6,879				7,051				750				20,636				2,252
Net interest income		106,721				108,281				115,827				115,614				60,690				330,829				173,344
Less: Purchase accounting accretion		12,400				12,572				10,104				8,160				40				35,076				210
Total noninterest income		4,695				5,483				7,498				10,637				2,995				17,676				9,717
Less: (Loss) gain on sale of assets		—				(6	)			198				4,025				42				192				25
Adjusted efficiency ratio(A)		61.05	%			58.73	%			52.69	%			53.57	%			51.46	%			57.28	%			55.53	%
Total shareholders' equity	$	1,460,846			$	1,458,680			$	1,446,216			$	1,383,176			$	656,302			$	1,460,846			$	656,302
Less: Goodwill and core deposit intangibles, net		620,262				627,065				633,925				640,785				236,048				620,262				236,048
Tangible shareholders’ equity	$	840,584			$	831,615			$	812,291			$	742,391			$	420,254			$	840,584			$	420,254
Shares outstanding at end of period		53,322				53,303				53,296				52,955				28,137				53,322				28,137
Tangible book value per share	$	15.76			$	15.60			$	15.24			$	14.02			$	14.94			$	15.76			$	14.94
Average shareholders' equity	$	1,471,009			$	1,458,473			$	1,418,082			$	1,347,938			$	717,436			$	1,449,382			$	755,102
Less: Average goodwill and core deposit intangibles, net		623,864				630,854				638,110				658,107				236,399				630,890				237,153
Average tangible shareholders’ equity	$	847,145			$	827,619			$	779,972			$	689,831			$	481,037			$	818,492			$	517,949
Return on average tangible equity(B)		14.47	%			17.05	%			19.32	%			1.18	%			11.78	%			16.86	%			12.75	%
Total assets	$	10,665,460			$	10,778,351			$	10,604,718			$	10,900,437			$	6,730,342			$	10,665,460			$	6,730,342
Less: Goodwill and core deposit intangibles, net		620,262				627,065				633,925				640,785				236,048				620,262				236,048
Tangible assets	$	10,045,198			$	10,151,286			$	9,970,793			$	10,259,652			$	6,494,294			$	10,045,198			$	6,494,294
Tangible equity to tangible assets		8.37	%			8.19	%			8.15	%			7.24	%			6.47	%			8.37	%			6.47	%
Net interest income (tax equivalent)	$	106,919			$	108,509			$	116,119			$	116,574			$	61,418			$	331,549			$	175,578
Less: Purchase accounting accretion		12,400				12,572				10,104				8,160				40				35,076				210
Adjusted net interest income (tax equivalent)	$	94,519			$	95,937			$	106,015			$	108,414			$	61,378			$	296,473			$	175,368
Average earning assets	$	9,697,553			$	9,693,527			$	9,815,803			$	9,815,701			$	6,325,984			$	9,735,194			$	6,603,893
Net interest margin (tax equivalent) excluding PAA		3.87	%			3.97	%			4.38	%			4.38	%			3.85	%			4.07	%			3.55	%

(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.

FAQ

What were Stellar Bancorp's financial highlights for Q3 2023?

Stellar Bancorp reported strong profitability with net income of $30.9 million, translating into an annualized return on average assets of 1.14% and an annualized return on average tangible equity of 14.47%. Total risk-based capital ratio increased to 13.42% at September 30, 2023. Noninterest-bearing deposit balances remained significant at 42.1% of deposit funding base. Asset quality improved with nonperforming assets at 0.36% of total assets.

What were the negative factors affecting Stellar Bancorp's financial performance in Q3 2023?

Net interest income and noninterest income decreased. Noninterest expense increased. Total loans and deposits decreased. Net charge-offs increased due to a single commercial and industrial loan relationship. The merger of equals with Allegiance Bancshares and CBTX had a significant impact on financial statements. The historical financial statements prior to the merger are not comparable to post-merger results.