Stellar Bancorp, Inc. Reports Third Quarter 2023 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.