STEL Stellar Bancorp Inc

Stellar Bancorp, Inc. (the “Company” or “Stellar”) (NASDAQ: STEL) today reported net income of $37.1 million and diluted earnings per share of $0.70 for the first quarter 2023 as compared to net income of $2.1 million and diluted earnings per share of $0.04 for the fourth quarter 2022. The results for the first quarter of 2023 and the fourth quarter of 2022 for Stellar reflect significant nonrecurring items related to the merger of equals (the “Merger”) between Allegiance Bancshares, Inc. (“Allegiance”) and CBTX, Inc. (“CBTX”), which became effective on October 1, 2022.

“We are pleased to present our results to start the year in what was a tumultuous quarter for the banking industry. We believe the resilience of our local and relationship-driven business model, combined with Stellar’s ongoing focus on capital, liquidity and credit, positions us well to manage through the challenges of the current environment and drive long-term value to our shareholders,” said Robert R. Franklin, Jr., Stellar’s Chief Executive Officer.

“During the first quarter we completed a number of strategic initiatives, including the conversion of technology systems in February and launching the Stellar Bank brand. We are so grateful for our team’s efforts and their shared commitment to serving our customers and supporting the communities where we live and work,” continued Mr. Franklin.

“Stellar is ready for the challenges and opportunities that lie ahead. Although the economy in our markets remain strong, we remain vigilant to changes impacting the economy and financing conditions. We are focused on maintaining strong credit, liquidity and capital while providing outstanding service to the markets that we serve. Our balance sheet is strong, and as the largest, locally-focused community bank in one of the best markets in the country, the long-term future is bright for Stellar,” concluded Mr. Franklin.

First Quarter 2023 Financial Highlights

• First quarter 2023 net income of $37.1 million and diluted earnings per share of $0.70 translated into an annualized return on average assets of 1.38% and an annualized return on average tangible equity of 19.32%(1).
• Pre-tax, pre-provision income for the first quarter 2023 was $50.7 million(1), representing an annualized pre-tax, pre-provision return on average assets of 1.89%(1) and an adjusted pre-tax, pre-provision income of $53.5 million(1), representing an annualized adjusted pre-tax, pre-provision return on average assets of 1.99%(1).
• Tax equivalent net interest margin was 4.80% for the first quarter of 2023 as compared to 4.71% in the fourth quarter of 2022. The tax equivalent net interest margin, excluding purchase accounting accretion, was 4.38%(1) for the first quarter of 2023 and the fourth quarter of 2022.
• Book value per share was $27.14 for the first quarter 2023 compared to $26.12 for the fourth quarter 2022. Tangible book value per share increased to $15.24(1) for the first quarter 2023 from $14.02(1) for the fourth quarter 2022. Equity to assets and tangible equity to tangible assets increased to 13.64% and 8.15%(1) for the first quarter 2023 from 12.69% and 7.24%(1) for the fourth quarter 2022, respectively.

(1) Refer to page 9 for the calculation of this non-GAAP financial measure.

Merger of Equals

The Merger 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 quarter of 2023 and the fourth quarter 2022 and stand-alone Allegiance for all periods prior.

First Quarter 2023 Results

Stellar’s net interest income in the first quarter 2023 increased $213 thousand, or 0.2%, from $115.6 million for the fourth quarter 2022. The net interest margin on a tax equivalent basis increased 9 basis points to 4.80% for the first quarter 2023 from 4.71% for the fourth quarter 2022. The increase in the margin over the prior quarter was primarily due to higher purchase accounting adjustments (“PAA”) relating to the Merger and increases in interest rates. Net interest income for the first quarter of 2023 benefited from $10.1 million of income from purchase accounting adjustments compared to $8.2 million in the fourth quarter of 2022. Excluding purchase accounting adjustments, a non-GAAP measure on page 9, net interest income for the first quarter 2023 would have been $105.7 million and the tax equivalent net interest margin would have been 4.38%.

Noninterest income for the first quarter 2023 was $7.5 million, a decrease of $3.1 million, or 29.5%, compared to $10.6 million for the fourth quarter 2022. Noninterest income decreased in the first quarter of 2023 compared to the fourth quarter of 2022 primarily due to nonrecurring gains and losses on the sale of assets totaling $4.0 million recorded in the fourth quarter of 2022.

Noninterest expense for the first quarter 2023 decreased $7.0 million, or 8.8%, to $72.6 million compared to $79.6 million for the fourth quarter of 2022. The decrease in noninterest expense in the first quarter of 2023 compared to the fourth quarter of 2022 was primarily due to a decrease in acquisition and merger-related expenses which totaled $6.2 million for the first quarter of 2023 compared to $11.5 million in the fourth quarter of 2022.

Stellar’s efficiency ratio decreased to 58.96% for the first quarter 2023 from 65.14% for the fourth quarter 2022. First quarter 2023 annualized returns on average assets, average equity and average tangible equity were 1.38%, 10.62% and 19.32%, respectively, compared to 0.07%, 0.60% and 1.16%, respectively, for the fourth quarter 2022. Return on average tangible equity is a non-GAAP measure. Please refer to the non-GAAP reconciliation on page 9.

Financial Condition

Total loans at March 31, 2023 increased $131.3 million to $7.89 billion compared to $7.75 billion at December 31, 2022. At March 31, 2023, the remaining balance of the purchase accounting adjustments on loans was $144.0 million. Core loans, which exclude Paycheck Protection Program (PPP) loans, increased $133.4 million to $7.87 billion at March 31, 2023 from $7.74 billion at December 31, 2022.

Total deposits at March 31, 2023 decreased $528.8 million to $8.74 billion compared to $9.27 billion at December 31, 2022. The linked quarter change was primarily driven by seasonality, industry-wide pressures and the maintenance of pricing discipline in an intensely competitive market for deposits. Estimated uninsured deposits, excluding collateralized deposits, totaled $4.06 billion, or 46.4% of total deposits as of March 31, 2023.

Total assets at March 31, 2023 were $10.60 billion, a decrease of $295.7 million, compared to $10.90 billion at December 31, 2022.

Asset Quality

Nonperforming assets totaled $43.5 million, or 0.41% of total assets, at March 31, 2023 compared to $45.0 million, or 0.41% of total assets, at December 31, 2022. The allowance for credit losses on loans as a percentage of total loans was 1.22% at March 31, 2023 and 1.20% at December 31, 2022.

The provision for credit losses for the first quarter 2023 was $3.7 million compared to $44.8 million for the fourth quarter 2022. The fourth quarter 2022 provision included a $28.2 million provision for credit losses on loans and a $5.0 million provision for unfunded commitments related to the Merger, along with a $7.6 million allowance for credit losses on purchased credit deteriorated loans acquired. First quarter 2023 net charge-offs were $192 thousand, or 0.01% (annualized) of average loans, compared to net charge-offs of $5.7 million, or 0.30% (annualized) of average loans, for the fourth quarter 2022. Fourth quarter net charge-offs included $4.6 million of charge-offs on loans sold during the fourth quarter 2022.

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 9 of this earnings release for a reconciliation of these non-GAAP financial measures.

Conference Call

As previously announced, Stellar’s management team will host a conference call and webcast on Friday, April 28, 2023 at 8:00 a.m. Central Time (9:00 a.m. Eastern Time) to discuss first quarter 2023 results. Individuals and investment professionals may register for the conference call at https://register.vevent.com/register/BId04d2f9fb05141c3b5efe6b285a38874 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 relationsIR@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 our operations following the Merger 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
	March 31				December 31				September 30				June 30				March 31
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	99,231			$	67,063			$	16,449			$	17,547			$	26,629
Interest-bearing deposits at other financial institutions		164,102				304,642				102,118				275,290				672,755
Total cash and cash equivalents		263,333				371,705				118,567				292,837				699,384
Available for sale securities, at fair value		1,519,175				1,807,586				1,618,995				1,709,321				1,790,707
Loans held for investment		7,886,044				7,754,751				4,591,912				4,348,833				4,283,514
Less: allowance for credit losses on loans		(96,188	)			(93,180	)			(52,147	)			(50,242	)			(49,215	)
Loans, net		7,789,856				7,661,571				4,539,765				4,298,591				4,234,299
Accrued interest receivable		42,405				44,743				29,697				29,882				31,505
Premises and equipment, net		124,723				126,803				57,837				58,482				62,168
Federal Home Loan Bank stock		19,676				15,058				16,843				4,078				9,376
Bank owned life insurance		103,616				103,094				28,305				28,170				28,374
Goodwill		497,260				497,260				223,642				223,642				223,642
Core deposit intangibles, net		136,665				143,525				12,406				13,156				13,907
Other assets		108,009				129,092				84,285				73,605				56,001
Total assets	$	10,604,718			$	10,900,437			$	6,730,342			$	6,731,764			$	7,149,363
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	3,877,859			$	4,230,169			$	2,465,839			$	2,394,719			$	2,353,604
Interest-bearing
Demand		1,394,244				1,591,828				956,920				1,016,381				1,070,855
Money market and savings		2,401,840				2,575,923				1,471,690				1,510,008				1,552,853
Certificates and other time		1,064,932				869,712				766,270				959,524				1,185,015
Total interest-bearing deposits		4,861,016				5,037,463				3,194,880				3,485,913				3,808,723
Total deposits		8,738,875				9,267,632				5,660,719				5,880,632				6,162,327
Accrued interest payable		3,875				2,098				2,673				1,500				3,086
Borrowed funds		238,944				63,925				257,000				—				89,959
Subordinated debt		109,420				109,367				109,241				109,109				108,978
Other liabilities		67,388				74,239				44,407				35,194				33,073
Total liabilities		9,158,502				9,517,261				6,074,040				6,026,435				6,397,423
SHAREHOLDERS’ EQUITY:
Common stock		533				530				281				286				290
Capital surplus		1,225,596				1,222,761				511,434				524,033				532,372
Retained earnings		333,368				303,146				307,975				296,477				282,896
Accumulated other comprehensive loss		(113,281	)			(143,261	)			(163,388	)			(115,467	)			(63,618	)
Total shareholders’ equity		1,446,216				1,383,176				656,302				705,329				751,940
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,604,718			$	10,900,437			$	6,730,342			$	6,731,764			$	7,149,363

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
	Three Months Ended
	2023			2022
	March 31			December 31				September 30			June 30				March 31
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	125,729		$	116,145			$	58,025		$	53,835			$	52,370
Securities:
Taxable		9,653			9,834				6,655			5,571				5,068
Tax-exempt		1,262			3,057				2,594			2,557				2,525
Deposits in other financial institutions		3,771			2,933				608			877				340
Total interest income		140,415			131,969				67,882			62,840				60,303
INTEREST EXPENSE:
Demand, money market and savings deposits		18,037			12,406				3,527			1,859				1,347
Certificates and other time deposits		3,307			2,083				1,664			1,922				2,156
Borrowed funds		1,317			417				499			114				186
Subordinated debt		1,927			1,449				1,502			1,463				1,442
Total interest expense		24,588			16,355				7,192			5,358				5,131
NET INTEREST INCOME		115,827			115,614				60,690			57,482				55,172
Provision for credit losses		3,666			44,793				1,962			2,143				1,814
Net interest income after provision for credit losses		112,161			70,821				58,728			55,339				53,358
NONINTEREST INCOME:
Nonsufficient funds fees		406			447				145			126				116
Service charges on deposit accounts		943			1,242				527			560				527
Gain (loss) on sale of assets		198			4,025				42			(17	)			—
Bank owned life insurance		522			515				135			342				133
Debit card and ATM card income		1,698			1,897				869			880				819
Other		3,731			2,511				1,277			813				2,423
Total noninterest income		7,498			10,637				2,995			2,704				4,018
NONINTEREST EXPENSE:
Salaries and employee benefits		39,775			40,949				22,013			21,864				22,728
Net occupancy and equipment		4,088			3,781				2,129			2,220				2,205
Depreciation		1,836			1,903				1,003			1,012				1,033
Data processing and software amortization		5,054			3,776				2,541			2,522				2,498
Professional fees		1,527			2,298				485			662				138
Regulatory assessments and FDIC insurance		1,294			1,263				1,134			1,256				1,261
Amortization of intangibles		6,879			7,051				750			751				751
Communications		701			737				359			363				341
Advertising		839			1,130				385			483				462
Other real estate expense		272			152				93			65				59
Acquisition and merger-related expenses		6,165			11,469				10,551			1,667				451
Other		4,168			5,115				2,588			5,039				2,590
Total noninterest expense		72,598			79,624				44,031			37,904				34,517
INCOME BEFORE INCOME TAXES		47,061			1,834				17,692			20,139				22,859
Provision for income taxes		9,913			(218	)			3,406			3,702				4,202
NET INCOME	$	37,148		$	2,052			$	14,286		$	16,437			$	18,657
EARNINGS PER SHARE
Basic	$	0.70		$	0.04			$	0.51		$	0.57			$	0.65
Diluted	$	0.70		$	0.04			$	0.50		$	0.56			$	0.64

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
	Three Months Ended
	2023				2022
	March 31				December 31				September 30				June 30				March 31
	(Dollars and share amounts in thousands, except per share data)
Net income	$	37,148			$	2,052			$	14,286			$	16,437			$	18,657
Earnings per share, basic	$	0.70			$	0.04			$	0.51			$	0.57			$	0.65
Earnings per share, diluted	$	0.70			$	0.04			$	0.50			$	0.56			$	0.64
Dividends per share	$	0.13			$	0.13			$	0.10			$	0.10			$	0.10
Return on average assets(A)		1.38	%			0.07	%			0.84	%			0.94	%			1.04	%
Return on average equity(A)		10.62	%			0.60	%			7.90	%			8.86	%			9.40	%
Return on average tangible equity(A)(B)		19.32	%			1.16	%			11.78	%			13.00	%			13.35	%
Net interest margin (tax equivalent)(A)(C)		4.80	%			4.71	%			3.85	%			3.53	%			3.30	%
Net interest margin (tax equivalent) excluding PAA(A)(B)(C)		4.38	%			4.38	%			3.85	%			3.52	%			3.29	%
Efficiency ratio(D)		58.96	%			65.14	%			69.18	%			62.96	%			58.32	%
Capital Ratios
Stellar Bancorp, Inc. (consolidated)
Equity to assets		13.64	%			12.69	%			9.75	%			10.48	%			10.52	%
Tangible equity to tangible assets(B)		8.15	%			7.24	%			6.47	%			7.21	%			7.44	%
Estimated Common equity tier 1 capital		10.39	%			10.04	%			11.39	%			12.06	%			12.28	%
Estimated Tier 1 risk-based capital		10.50	%			10.15	%			11.58	%			12.26	%			12.49	%
Estimated Total risk-based capital		12.72	%			12.39	%			14.66	%			15.47	%			15.76	%
Estimated Tier 1 leverage capital		9.01	%			8.55	%			9.00	%			8.65	%			8.37	%
Stellar Bank
Estimated Common equity tier 1 capital		10.87	%			10.46	%			12.20	%			12.51	%			12.48	%
Estimated Tier 1 risk-based capital		10.87	%			10.46	%			12.20	%			12.51	%			12.48	%
Estimated Total risk-based capital		12.42	%			12.02	%			14.12	%			14.50	%			14.50	%
Estimated Tier 1 leverage capital		9.35	%			8.81	%			9.49	%			8.83	%			8.37	%
Other Data
Weighted average shares:
Basic		53,021				52,715				28,286				28,874				28,883
Diluted		53,138				52,973				28,529				29,120				29,114
Period end shares outstanding		53,296				52,955				28,137				28,586				28,904
Book value per share	$	27.14			$	26.12			$	23.33			$	24.67			$	26.02
Tangible book value per share(B)	$	15.24			$	14.02			$	14.94			$	16.39			$	17.80
Employees - full-time equivalents		1,055				1,025				562				578				586

(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 9 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
	March 31, 2023										December 31, 2022										March 31, 2022
	AverageBalance				Interest Earned/Interest Paid			Average Yield/Rate			AverageBalance				Interest Earned/Interest Paid			Average Yield/Rate			Average Balance				Interest Earned/Interest Paid			Average Yield/Rate
	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans	$	7,847,011			$	125,729		6.50	%		$	7,666,502			$	116,145		6.01	%		$	4,231,507			$	52,370		5.02	%
Securities		1,604,011				10,915		2.76	%			1,795,082				12,891		2.85	%			1,835,618				7,593		1.68	%
Deposits in other financial institutions		364,781				3,771		4.19	%			354,117				2,933		3.29	%			806,583				340		0.17	%
Total interest-earning assets		9,815,803			$	140,415		5.80	%			9,815,701			$	131,969		5.33	%			6,873,708			$	60,303		3.56	%
Allowance for credit losses on loans		(93,331	)									(88,150	)									(48,343	)
Noninterest-earning assets		1,160,061										1,218,458										432,133
Total assets	$	10,882,533									$	10,946,009									$	7,257,498
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	1,650,273			$	8,382		2.06	%		$	1,465,711			$	5,422		1.47	%		$	1,071,010			$	549		0.21	%
Money market and savings deposits		2,490,889				9,655		1.57	%			2,705,984				6,984		1.02	%			1,584,373				798		0.20	%
Certificates and other time deposits		861,595				3,307		1.56	%			932,058				2,083		0.89	%			1,245,180				2,156		0.70	%
Borrowed funds		105,191				1,317		5.08	%			37,824				417		4.37	%			89,880				186		0.84	%
Subordinated debt		109,415				1,927		7.14	%			109,307				1,449		5.26	%			108,913				1,442		5.37	%
Total interest-bearing liabilities		5,217,363			$	24,588		1.91	%			5,250,884			$	16,355		1.24	%			4,099,356			$	5,131		0.51	%
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		4,166,265										4,199,982										2,312,114
Other liabilities		80,823										147,205										41,324
Total liabilities		9,464,451										9,598,071										6,452,794
Shareholders' equity		1,418,082										1,347,938										804,704
Total liabilities and shareholders' equity	$	10,882,533									$	10,946,009									$	7,257,498
Net interest rate spread								3.89	%									4.09	%									3.05	%
Net interest income and margin					$	115,827		4.79	%						$	115,614		4.67	%						$	55,172		3.26	%
Net interest income and net interest margin (tax equivalent)					$	116,119		4.80	%						$	116,574		4.71	%						$	55,922		3.30	%

Stellar Bancorp, Inc.
Financial Highlights
(Unaudited)
	Three Months Ended
	2023				2022
	March 31				December 31				September 30				June 30				March 31
	(Dollars in thousands)
Period-end Loan Portfolio:
Commercial and industrial	$	1,477,340			$	1,455,795			$	732,636			$	727,068			$	714,450
Paycheck Protection Program (PPP)		11,081				13,226				17,827				31,855				78,624
Real estate:
Commercial real estate (including multi-family residential)		4,014,609				3,931,480				2,407,039				2,265,155				2,197,502
Commercial real estate construction and land development		1,034,538				1,037,678				513,248				450,694				453,473
1-4 family residential (including home equity)		1,008,362				1,000,956				699,636				682,066				669,306
Residential construction		292,143				268,150				183,563				155,017				136,760
Consumer and other		47,971				47,466				37,963				36,978				33,399
Total loans held for investment	$	7,886,044			$	7,754,751			$	4,591,912			$	4,348,833			$	4,283,514
Deposits:
Interest-bearing demand	$	1,394,244			$	1,591,828			$	956,920			$	1,016,381			$	1,070,855
Money market and savings		2,401,840				2,575,923				1,471,690				1,510,008				1,552,853
Certificates and other time		1,064,932				869,712				766,270				959,524				1,185,015
Total interest-bearing deposits		4,861,016				5,037,463				3,194,880				3,485,913				3,808,723
Noninterest-bearing deposits		3,877,859				4,230,169				2,465,839				2,394,719				2,353,604
Total deposits	$	8,738,875			$	9,267,632			$	5,660,719			$	5,880,632			$	6,162,327
Asset Quality:
Nonaccrual loans	$	43,413			$	45,048			$	21,551			$	28,225			$	26,275
Accruing loans 90 or more days past due		—				—				—				—				—
Total nonperforming loans		43,413				45,048				21,551				28,225				26,275
Other repossessed assets		124				—				—				—				—
Total nonperforming assets	$	43,537			$	45,048			$	21,551			$	28,225			$	26,275
Net charge-offs (recoveries)	$	192			$	5,707			$	(245	)		$	571			$	317
Nonaccrual loans:
Commercial and industrial	$	23,329			$	25,402			$	6,916			$	9,145			$	7,809
Real estate:
Commercial real estate (including multi-family residential)		9,026				9,970				10,392				14,409				15,259
Commercial real estate construction and land development		27				—				241				1,511				—
1-4 family residential (including home equity)		10,586				9,404				3,854				3,040				3,065
Residential construction		195				—				—				—				—
Consumer and other		250				272				148				120				142
Total nonaccrual loans	$	43,413			$	45,048			$	21,551			$	28,225			$	26,275
Asset Quality Ratios:
Nonperforming assets to total assets		0.41	%			0.41	%			0.32	%			0.42	%			0.37	%
Nonperforming loans to total loans		0.55	%			0.58	%			0.47	%			0.65	%			0.61	%
Allowance for credit losses on loans to nonperforming loans		221.56	%			206.85	%			241.97	%			178.01	%			187.31	%
Allowance for credit losses on loans to total loans		1.22	%			1.20	%			1.14	%			1.16	%			1.15	%
Net charge-offs (recoveries) to average loans (annualized)		0.01	%			0.30	%			(0.02	%)			0.05	%			0.03	%

Stellar Bancorp, Inc.GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures(Unaudited)

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.

	Three Months Ended
	2023				2022
	March 31				December 31				September 30				June 30				March 31
	(Dollars and share amounts in thousands, except per share data)
Net income	$	37,148			$	2,052			$	14,286			$	16,437			$	18,657
Add: Provision for credit losses		3,666				44,793				1,962				2,143				1,814
Add: Provision for income taxes		9,913				(218	)			3,406				3,702				4,202
Pre-tax, pre-provision income	$	50,727			$	46,627			$	19,654			$	22,282			$	24,673
Total average assets	$	10,882,533			$	10,946,009			$	6,717,886			$	7,019,299			$	7,257,498
Pre-tax, pre-provision return on average assets(B)		1.89	%			1.69	%			1.16	%			1.27	%			1.38	%
Pre-tax, pre-provision income	$	50,727			$	46,627			$	19,654			$	22,282			$	24,673
Add: Acquisition and merger-related expenses		6,165				11,469				10,551				1,667				451
Add: Amortization of intangibles		6,879				7,051				750				751				751
Less: Purchase accounting accretion		10,104				8,160				40				77				93
Less: Gain (loss) on sale of assets		198				4,025				42				(17	)			—
Adjusted pre-tax, pre-provision income	$	53,469			$	52,962			$	30,873			$	24,640			$	25,782
Adjusted pre-tax, pre-provision return on average assets(B)		1.99	%			1.92	%			1.82	%			1.41	%			1.44	%
Total noninterest expense	$	72,598			$	79,624			$	44,031			$	37,904			$	34,517
Less: Acquisition and merger-related expenses		6,165				11,469				10,551				1,667				451
Less: Amortization of intangibles		6,879				7,051				750				751				751
Net interest income		115,827				115,614				60,690				57,482				55,172
Less: Purchase accounting accretion		10,104				8,160				40				77				93
Total noninterest income		7,498				10,637				2,995				2,704				4,018
Less: Gain (loss) on sale of assets		198				4,025				42				(17	)			—
Adjusted efficiency ratio(A)		52.69	%			53.57	%			51.46	%			59.02	%			56.37	%
Total shareholders' equity	$	1,446,216			$	1,383,176			$	656,302			$	705,329			$	751,940
Less: Goodwill and core deposit intangibles, net		633,925				640,785				236,048				236,798				237,549
Tangible shareholders’ equity	$	812,291			$	742,391			$	420,254			$	468,531			$	514,391
Shares outstanding at end of period		53,296				52,955				28,137				28,586				28,904
Tangible book value per share	$	15.24			$	14.02			$	14.94			$	16.39			$	17.80
Average shareholders' equity	$	1,418,082			$	1,347,938			$	717,436			$	744,126			$	804,704
Less: Average goodwill and core deposit intangibles, net		638,110				658,107				236,399				237,153				237,925
Average tangible shareholders’ equity	$	779,972			$	689,831			$	481,037			$	506,973			$	566,779
Return on average tangible equity(B)		19.32	%			1.18	%			11.78	%			13.00	%			13.35	%
Total assets	$	10,604,718			$	10,900,437			$	6,730,342			$	6,731,764			$	7,149,363
Less: Goodwill and core deposit intangibles, net		633,925				640,785				236,048				236,798				237,549
Tangible assets	$	9,970,793			$	10,259,652			$	6,494,294			$	6,494,966			$	6,911,814
Tangible equity to tangible assets		8.15	%			7.24	%			6.47	%			7.21	%			7.44	%
Net interest income (tax equivalent)	$	116,119			$	116,574			$	61,418			$	58,238			$	55,922
Less: Purchase accounting accretion		10,104				8,160				40				77				93
Adjusted net interest income (tax equivalent)	$	106,015			$	108,414			$	61,378			$	58,161			$	55,829
Average earning assets	$	9,815,803			$	9,815,701			$	6,325,984			$	6,618,005			$	6,873,708
Net interest margin (tax equivalent) excluding PAA		4.38	%			4.38	%			3.85	%			3.52	%			3.29	%

(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.