Stellar Bancorp, Inc. (the “Company” or “Stellar”) (NYSE: STEL) today reported net income of $27.3 million, or diluted earnings per share of $0.51, for the fourth quarter 2023 and net income of $130.5 million, or diluted earnings per share of $2.45, for the year ended December 31, 2023. During the fourth quarter, the Company recorded certain nonrecurring noninterest expense items, including the FDIC special insurance assessment expense of $2.4 million.

“We are pleased to announce our full-year and fourth quarter results, capping a successful year despite industry challenges and economic uncertainty,” said Robert R. Franklin, Jr., Stellar’s Chief Executive Officer. “We maintained our focus on capital, liquidity, and credit to protect shareholder value in a year of rapidly rising interest rates and large bank failures, all while setting the foundation of a new organization following our combination in late 2022. Our staff has done a great job in combining two banks and we are poised to refine what we have built. The success of our team’s efforts during the year is reflected by our maintaining a solid net interest margin, a strong deposit base, our credit quality and ability to build capital,” he continued.

“While we expect a somewhat slower economy in 2024, our focus will be on continuing to optimize and reduce our noninterest expenses as we manage the organization’s needs and requirements from crossing the $10 billion asset threshold. We believe that we are well positioned to take advantage of the opportunities that may be presented in 2024 and that our strategy provides us with optionality,” said Mr. Franklin.

“We operate in some of the best banking markets in the country and we look forward to the possibility of additional clarity around the direction of interest rates and a more reasonably priced market for deposits and funding in the new year. Thank you to our shareholders for their support and we look forward to continuing to build shareholder value in 2024,” concluded Mr. Franklin.

2023 Financial Highlights

• Strong Earnings: Stellar recorded 2023 net income of $130.5 million, or diluted earnings per share of $2.45, representing a return on average assets of 1.21%, return on average equity of 8.96% and return on average tangible equity of 15.75%⁽¹⁾.

• Meaningful Regulatory Capital Build: Total risk-based capital ratio increased to 14.02% at December 31, 2023 from 12.39% at December 31, 2022 and Tier 1 leverage ratio increased to 10.18% at December 31, 2023 from 8.55% at December 31, 2022.

• Book Value Growth: During 2023, book value per share increased to $28.54 at December 31, 2023 compared to $26.12 at December 31, 2022 while tangible book value per share increased by $3.00, or 21.4%, from $14.02 at December 31, 2022 to $17.02 at December 31, 2023.

• Advantageous Funding Profile: Noninterest-bearing deposit balances remained a significant portion of our deposit funding base, ending the year at 40.0% of total deposits.

Fourth Quarter 2023 Financial Highlights

• Strong Net Interest Margin: Tax equivalent net interest margin was 4.40% for fourth quarter of 2023 up from 4.37% in the third quarter of 2023. The tax equivalent net interest margin, excluding purchase accounting accretion (“PAA”), was 3.91%⁽¹⁾ for the fourth quarter of 2023 up from 3.87%⁽¹⁾ for the third quarter of 2023.

• Solid Profitability: Fourth quarter 2023 net income of $27.3 million, or diluted earnings per share of $0.51, translated into an annualized return on average assets of 1.02%, an annualized return on average equity of 7.33% and an annualized return on average tangible equity of 12.61%⁽¹⁾.

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⁽¹⁾ Refer to page 10 of this earnings release for the calculation of this non-GAAP financial measure.

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 for 2023 and the fourth quarter 2022 reflect the combined operations following the Merger. The full year 2022 results of operations reflect the combined operations for the fourth quarter 2022 and the stand-alone Allegiance results for all periods prior to October 1, 2022.

Fourth Quarter 2023 Results

Net interest income in the fourth quarter 2023 decreased $791 thousand, or 0.7%, to $105.9 million from $106.7 million for the third quarter 2023. The net interest margin on a tax equivalent basis increased three basis points to 4.40% for the fourth quarter 2023 from 4.37% for the third quarter 2023. The increase in the net interest margin from the prior quarter was primarily due to the increased yield on interest earning assets partially offset by increased rates on our cost of funding. Net interest income for the fourth quarter of 2023 benefited from $11.7 million of income from purchase accounting adjustments compared to $12.4 million in the third quarter of 2023. Excluding purchase accounting adjustments, a non-GAAP measure that is reconciled on page 10 of this earnings release, net interest income (tax equivalent) for the fourth quarter 2023 would have been $94.4 million and the tax equivalent net interest margin would have been 3.91%.

Noninterest income for the fourth quarter 2023 was $6.9 million, an increase of $2.2 million, or 46.7%, compared to $4.7 million for the third quarter 2023. Noninterest income increased in the fourth quarter of 2023 compared to the third quarter of 2023 primarily due to Small Business Investment Company income recognized partially offset by 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 fourth quarter 2023 increased $7.2 million, or 10.2%, to $77.9 million compared to $70.7 million for the third quarter 2023. The increase in noninterest expense in the fourth quarter of 2023 compared to the third quarter of 2023 was primarily due to nonrecurring items including higher professional fees associated with various projects during the quarter some of which related to crossing the $10 billion asset threshold, a $2.4 million accrual for future payments to the FDIC pursuant to the special insurance assessment associated with two bank failures during 2023 and $1.9 million of severance expense.

The efficiency ratio was 69.21% for the fourth quarter 2023 compared to 63.50% for the third quarter 2023. Fourth quarter 2023 annualized returns on average assets, average equity and average tangible equity were 1.02%, 7.33% and 12.61%, respectively, compared to 1.14%, 8.34% and 14.47%, respectively, for the third 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.

Year Ended December 31, 2023 Results

Net interest income for the year ended December 31, 2023 increased $147.8 million, or 51.1%, to $436.8 million from $289.0 million for the year ended December 31, 2022. The net interest margin on a tax equivalent basis increased 57 basis points to 4.51% for the year ended December 31, 2023 from 3.94% for the year ended December 31, 2022. The increase in the net interest margin from the prior quarter was primarily due to the impact of the Merger. Net interest income for the year ended December 31, 2023 benefited from $46.8 million of purchase accounting adjustments compared to $8.4 million for the year ended December 31, 2022. Excluding purchase accounting adjustments, a non-GAAP measure that is reconciled on page 10 of this earnings release, net interest income (tax equivalent) for the year ended December 31, 2023 would have been $390.9 million and the tax equivalent net interest margin would have been 4.03%.

Noninterest income for the year ended December 31, 2023 was $24.6 million, an increase of $4.2 million, or 20.7%, compared to $20.4 million for the year ended December 31, 2022. Noninterest income increased in 2023 compared to 2022 primarily due to increased scale as a result of the Merger along with increased Small Business Investment Company income. The increase in noninterest income was partially offset by the 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 along with the nonrecurring gains on sale of securities, loans and assets during the fourth quarter 2022.

Noninterest expense for the year ended December 31, 2023 increased $94.4 million, or 48.2%, to $290.5 million compared to $196.1 million for the year ended December 31, 2022. The increase in noninterest expense in 2023 compared to 2022 was due to increased scale as a result of the Merger primarily within categories such as salaries and benefits and amortization of intangibles along with higher professional fees associated with various projects some of which related to crossing the $10 billion asset threshold, partially offset by a decrease in acquisition and merger-related expenses to $15.6 million from $24.1 million in 2022.

The efficiency ratio was 63.02% for the year ended December 31, 2023 compared to 64.23% for the year ended December 31, 2022. Annualized returns on average assets, average equity and average tangible equity were 1.21%, 8.96% and 15.75%, respectively, for the year ended December 31, 2023 compared to 0.64%, 5.69% and 9.16%, respectively, for the year ended December 31, 2022. 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 December 31, 2023 decreased $79.4 million to $7.93 billion compared to $8.00 billion at September 30, 2023. At December 31, 2023, the remaining balance of the purchase accounting adjustments on loans was $106.8 million.

Total deposits at December 31, 2023 increased $186.8 million to $8.87 billion compared to $8.69 billion at September 30, 2023, due to increases in interest-bearing demand, money market and certificates and other time deposits, partially offset by a decreases noninterest-bearing 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 $4.95 billion and estimated uninsured deposits net of collateralized deposits of $1.17 billion were $3.78 billion, or 42.6%, of total deposits at December 31, 2023.

Total assets at December 31, 2023 were $10.65 billion, a decrease of $18.3 million, compared to $10.67 billion at September 30, 2023.

Asset Quality

Nonperforming assets totaled $39.2 million, or 0.37% of total assets, at December 31, 2023, compared to $38.3 million, or 0.36%, of total assets, at September 30, 2023. The allowance for credit losses on loans as a percentage of total loans was 1.16% at December 31, 2023 and 1.17% at September 30, 2023.

The provision for credit losses for the fourth quarter 2023 was $1.0 million compared to $2.3 million for the third quarter 2023. Fourth quarter 2023 net charge-offs were $2.6 million, or 0.13% (annualized) of average loans, compared to net charge-offs of $8.1 million, or 0.40% (annualized) of average loans, for the third quarter 2023.

GAAP Reconciliation of Non-GAAP Financial Measures

Stellar’s management uses certain non-GAAP financial measures to evaluate its performance. 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, January 26, 2024 at 8:00 a.m. Central Time (9:00 a.m. Eastern Time) to discuss its fourth quarter 2023 results. Participants may register for the conference call at https://conferencingportals.com/event/FdklYbaS 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@stellar.bank. A simultaneous audio-only webcast may be accessed at https://events.q4inc.com/attendee/844946085. If you are unable to participate during the live webcast, the webcast will be accessible via the Investor Relations section of the Company’s website at ir.stellar.bank.

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.

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.