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What changed in Stellar Bancorp, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Stellar Bancorp, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+437 added−451 removedSource: 10-K (2024-02-29) vs 10-K (2023-03-15)

Top changes in Stellar Bancorp, Inc.'s 2023 10-K

437 paragraphs added · 451 removed · 309 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

159 edited+58 added−69 removed335 unchanged
Biggest changeThese risks are discussed more fully in the section following this summary and include, but are not limited to, the following: Risks Related to the Merger of CBTX and Allegiance • cost savings, revenue synergies and other anticipated benefits of the Merger may not be fully realized or may take longer to realize than expected; • reputational risk and the reaction of our customers, suppliers and employees or other business partners to the Merger; • ability to effectively manage our expanded operations following the Merger; and • substantial costs related to the Merger may be incurred.
Biggest changeRisks Related to the Merger • the Company’s ability to successfully consolidate operations, management teams, corporate cultures, systems and procedures and to eliminate redundancies and costs further integration of systems, operations and personnel; • cost savings, revenue synergies and other anticipated benefits of the Merger may not be fully realized or may take longer to realize than expected; • and the risk that the anticipated benefits from the Merger may not be fully realized or may take longer than anticipated to be realized; and • the amount of costs, fees, expenses and charges related to the Merger and the integration.
Certain loans, including interest only loans and negative amortization loans, cannot be qualified mortgages. The Community Reinvestment Act The Community Reinvestment Act (the “CRA”) and related regulations are intended to encourage banks to help meet the credit needs of their service areas, including low- and moderate-income neighborhoods, consistent with safe and sound operations.
Certain loans, including interest only loans and negative amortization loans, cannot be qualified mortgages. The Community Reinvestment Act The Community Reinvestment Act (“CRA”) and related regulations are intended to encourage banks to help meet the credit needs of their service areas, including low- and moderate-income neighborhoods, consistent with safe and sound operations.
Any such misrepresented information could adversely impact the Company’s business, financial condition and results of operations. The Company may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real estate assets securing our loan portfolio.
Any such misrepresented information could adversely impact the Company’s business, financial condition and results of operations. The Company may be subject to environmental liabilities in connection with the properties we own and the foreclosure on real estate assets securing our loan portfolio.
These laws and regulations, among other matters, prescribe minimum capital requirements, 30 Table of Contents impose limitations on the business activities in which the Company can engage, limit the dividend or distributions that the Bank can pay to the Company, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on the Company that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP would require.
These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which the Company can engage, limit the dividend or distributions that the Bank can pay to the Company, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on the Company that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than 30 Table of Contents GAAP would require.
The Company’s access to funding sources, such as through its line of credit, capital markets offerings, borrowing from the Federal Reserve Bank of Dallas and the Federal Home Loan Bank of Dallas, or from other third-parties, in amounts adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
The Company’s access to funding sources, such as through its line of credit, capital markets offerings, borrowing from the Federal Reserve Bank of Dallas and the Federal Home Loan Bank of Dallas (“FHLB”), or from other third-parties, in amounts adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Liquidity Risks • lack of liquidity could impair our ability to fund operations; • loss of government banking deposits lost within a short period of time could negatively impact liquidity and earnings; and • additional capital and funding may not be available when needed or at all.
Liquidity Risks • lack of liquidity could impair our ability to fund operations; • loss of government banking deposits within a short period of time could negatively impact liquidity and earnings; and • additional capital and funding may not be available when needed or at all.
The market price of the Company’s common stock could fluctuate substantially due to a variety of factors, many of which are beyond our control, including, but not limited to: • general economic conditions and overall market fluctuations; • actual or anticipated fluctuations in our quarterly or annual financial results; • operating and stock price performance of other companies that investors deem comparable to ours; • the perception that investment in Texas is unattractive or less attractive during periods of low or unstable oil prices; • publication of research reports about the Company, its competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of the Company’s financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; 33 Table of Contents • other news, announcements or disclosures (whether by the Company or others) related to the Company, its competitors, its primary markets or the financial services industry or the trading volume of the Company’s common stock; • c hanges in dividends and capital returns; • changes in governmental trade, monetary policies and fiscal policies, including the interest rate policies of the Federal Reserve; • changes in economic, competitive, regulatory conditions and technical factors , or other developments affecting participants in our industry, and publicity regarding our business or any of our significant customers or competitors; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or the Company’s competitors; and • additional or anticipated sales of the Company’s common stock or other securities by the Company or existing shareholders.
The market price of the Company’s common stock could fluctuate substantially due to a variety of factors, many of which are beyond our control, including, but not limited to: • general economic conditions and overall market fluctuations; • actual or anticipated fluctuations in our quarterly or annual financial results; • operating and stock price performance of other companies that investors deem comparable to ours; • the perception that investment in Texas is unattractive or less attractive during periods of low or unstable oil prices; • publication of research reports about the Company, its competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of the Company’s financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; • other news, announcements or disclosures (whether by the Company or others) related to the Company, its competitors, its market or the financial services industry or the trading volume of the Company’s common stock; • c hanges in dividends and capital returns; • changes in governmental trade, monetary policies and fiscal policies, including the interest rate policies of the Federal Reserve; • changes in economic, competitive, regulatory conditions and technical factors , or other developments affecting participants in our industry, and publicity regarding our business or any of our significant customers or competitors; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or the Company’s competitors; and • additional or anticipated sales of the Company’s common stock or other securities by the Company or existing shareholders.
Another national economic recession or continued deterioration of conditions in our market could drive losses beyond that which is provided for in our allowance for credit losses and result in the following consequences, any of which could have a material adverse effect on our business: (1) loan delinquencies may rise, (2) nonperforming assets and foreclosures may increase, (3) demand for our products and services may decline and (4) collateral securing our loans, especially real estate, may decline in value, which could reduce customers’ borrowing power and repayment ability.
Another national economic recession or continued deterioration of conditions in our market could drive losses beyond that which is provided for in our allowance for credit losses and result in the following consequences, any of which could have a material adverse effect on our business: (1) loan delinquencies may rise, (2) nonperforming assets and foreclosures 18 Table of Contents may increase, (3) demand for our products and services may decline and (4) collateral securing our loans, especially real estate, may decline in value, which could reduce customers’ borrowing power and repayment ability.
The Company also faces competition from many other types of financial institutions, including savings banks, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders, financial technology ( “ fintech”) competitors and certain other non-financial entities, such as retail stores that may maintain their own credit programs and certain governmental organizations that may offer more favorable financing or deposit terms than the Company can.
The Company also faces competition from many other types of financial institutions, including savings banks, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders, financial technology ( “ fintech”) competitors and certain other non-financial entities, such as retail stores that 19 Table of Contents may maintain their own credit programs and certain governmental organizations that may offer more favorable financing or deposit terms than the Company can.
Interchange Fees Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions.
Interchange Fees Under the Durbin Amendment to the Dodd-Frank Act (“Durbin Amendment”), the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions.
A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.
A deterioration in economic conditions in the United States and our market could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.
Strategic acquisitions. We intend to continue to expand our presence through organic growth and a disciplined acquisition strategy. We generally focus on like-minded community banks with similar strategies to our own when evaluating acquisition opportunities and will also consider strategic non-bank acquisition opportunities that complement our growth strategy.
Strategic Acquisitions We intend to continue to expand our presence through organic growth and a disciplined acquisition strategy. We generally focus on like-minded community banks in Texas with similar strategies to our own when evaluating acquisition opportunities and will also consider strategic non-bank acquisition opportunities that complement our growth strategy.
If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios, and our business, financial condition and results of operations could be adversely affected. The Company could be adversely impacted by geopolitical events, war, natural disasters, pandemics and other catastrophes.
If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios, and our business, financial condition and results of operations could be adversely affected. The Company could be adversely impacted by geopolitical events, wars, natural disasters, pandemics and other catastrophes.
Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction.
Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction plus 5 basis points multiplied by the value of the transaction.
Actions by the Organization of Petroleum Exporting Countries ( “ OPEC”) or OPEC plus Russia ( “ OPEC Plus” ) , including various Russian sanctions, have impacted global crude oil production levels and led to significant volatility in global oil supplies and oil prices.
Actions by the Organization of Petroleum Exporting Countries ( “ OPEC”) or OPEC plus Russia ( “ OPEC Plus” ) , including various Russian sanctions and other global conflicts, have impacted global crude oil production levels and prices and have led to significant volatility in global oil supplies and oil prices.
Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.
Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. 28 Table of Contents Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.
Successful implementation of our business strategy is also dependent in part on the continued service of our banking center presidents. The community involvement and diverse and extensive local business relationships and experience in our markets of our officers are important to our success.
Successful implementation of our business strategy is also dependent in part on the continued service of our banking center presidents. The community involvement and diverse and extensive local business relationships and experience in our market of our officers are important to our success.
By empowering our personnel to make certain business decisions at a local level in order to respond quickly to customers’ needs, we are able to establish and foster strong relationships with customers through superior service.
By empowering our personnel to make certain business decisions at a local level to respond quickly to customers’ needs, we are able to establish and foster strong relationships with customers through superior service.
The allowance for credit losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us, such as past loan loss experience, the nature and volume of the portfolio, information about 24 Table of Contents specific borrower situations and estimated collateral values, economic conditions and other factors.
The allowance for credit losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us, such as past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors.
In addition, the FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions. 11 Table of Contents On June 22, 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in the Paycheck Protection Program ( “ PPP”), the Paycheck Protection Program Liquidity Facility (“PPPLF”) and the Money Market Mutual Fund Liquidity Facility (“MMLF”).
In addition, the FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions. On June 22, 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in the Paycheck Protection Program ( “ PPP”), the Paycheck Protection Program Liquidity Facility (“PPPLF”) and the Money Market Mutual Fund Liquidity Facility (“MMLF”).
Risks Related to Cybersecurity, Third-Parties and Technology • we are dependent on information technology and telecommunications provided by third-parties; • fraudulent activity, breaches of information security and cybersecurity attacks could have an adverse effect on our business; and • continuing need for technological change, challenges resources to effectively implement new technology or operational challenges when implementing new technology.
Risks Related to Cybersecurity, Third-Parties and Technology • we are dependent on information technology and telecommunications provided by third-parties; 16 Table of Contents • fraudulent activity, breaches of information security and cybersecurity attacks could have an adverse effect on our business; and • continuing need for technological change, challenges resources to effectively implement new technology or operational challenges when implementing new technology.
Risks Related to Legal, Reputational and Compliance Matters • failure to comply with laws regarding the privacy, information security and protection of personal information; • employee errors and customer or employee fraud; • the accuracy and completeness of information provided by the Company’s borrowers and counterparties; • potential environmental liabilities in connection to our properties or real estate we foreclose on; • potential claims and litigation pertaining to intellectual properties; • regulatory requirements as total assets exceed $10 billion; and • failure to maintain the Company’s reputation.
Risks Related to Legal, Reputational and Compliance Matters • failure to comply with laws regarding the privacy, information security and protection of personal information; • employee errors and customer or employee fraud; • the accuracy and completeness of information provided by the Company’s borrowers and counterparties; • potential environmental liabilities in connection to our properties or real estate we foreclose on; • potential claims and litigation pertaining to intellectual properties; • additional regulatory requirements in connection with exceeding $10 billion in total assets; and • failure to maintain the Company’s reputation.
Department of the Treasury, issued the priorities for anti-money laundering and countering the financing of terrorism policy required under the AMLA. The priorities include corruption, cybercrime, terrorist financing, fraud, transnational crime, drug trafficking, human trafficking and proliferation financing. 12 Table of Contents Consumer Laws and Regulations Banking organizations are subject to numerous laws and regulations intended to protect consumers.
Department of the Treasury, issued the priorities for anti-money laundering and countering the financing of terrorism policy required under the AMLA. The priorities include corruption, cybercrime, terrorist financing, fraud, transnational crime, drug trafficking, human trafficking and proliferation financing. Consumer Laws and Regulations Banking organizations are subject to numerous laws and regulations intended to protect consumers.
In general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions. Branching Texas law provides that a Texas-chartered bank can establish a branch anywhere in Texas provided that the branch is approved in advance by the TDB. The branch must also be approved by the FDIC.
In general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions. 7 Table of Contents Branching Texas law provides that a Texas-chartered bank can establish a branch anywhere in Texas provided that the branch is approved in advance by the TDB. The branch must also be approved by the FDIC.
The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. Banking regulators take into account compliance with consumer protection laws when considering approval of a proposed transaction. 13 Table of Contents Mortgage loan origination.
The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. Banking regulators take into account compliance with consumer protection laws when considering approval of a proposed transaction. Mortgage loan origination.
Future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect our business, financial condition and results of operations. In addition, we are no longer eligible to utilize credits to reduce our FDIC insurance premiums as a result of our exceeding $10 billion in assets.
Future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect our business, financial condition and results of 32 Table of Contents operations. In addition, we are no longer eligible to utilize credits to reduce our FDIC insurance premiums as a result of our exceeding $10 billion in assets.
The Company’s bylaws provide that unless the Company consents in writing to the selection of an alternative forum for the following purposes, any state or federal court located in Harris County in the State of Texas (the county in which Houston, Texas is located) shall be the sole and exclusive forum for (1) any actual or purported derivative action or proceeding brought on behalf of the Company, (2) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, or other employee or agent of the Company to the Company or the Company’s shareholders or creditors, including a claim alleging the aiding and abetting of such a breach of fiduciary duty, (3) any action asserting a claim against the Company or any current or former director, officer, or other employee or agent of the Company arising pursuant to any provision of the TBOC, the certificate of formation, or the bylaws of the Company (as any of the foregoing may be amended from time to time), or (4) any action asserting a claim against the Company or any current or former director, officer, or other employee or agent of the Company as governed by the internal affairs doctrine, including any action to interpret, apply, enforce or determine the validity of any provision of the TBOC, the certificate of formation, or the bylaws of the Company (as any of the foregoing may be amended from time to time).
The Company’s bylaws provide that unless the Company consents in writing to the selection of an alternative forum for the following purposes, any state or federal court located in Harris County in the State of Texas (the county in which Houston, Texas is located) shall be the sole and exclusive forum for (1) any actual or purported derivative action or proceeding brought on behalf of the Company, (2) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, or other employee or agent of the Company to the Company or the Company’s shareholders or creditors, including a claim alleging the aiding 35 Table of Contents and abetting of such a breach of fiduciary duty, (3) any action asserting a claim against the Company or any current or former director, officer, or other employee or agent of the Company arising pursuant to any provision of the Texas Business Organization Code (“TBOC”), the certificate of formation, or the bylaws of the Company (as any of the foregoing may be amended from time to time), or (4) any action asserting a claim against the Company or any current or former director, officer, or other employee or agent of the Company as governed by the internal affairs doctrine, including any action to interpret, apply, enforce or determine the validity of any provision of the TBOC, the certificate of formation, or the bylaws of the Company (as any of the foregoing may be amended from time to time).
The Company’s results of operations for the year ended December 31, 2022 reflect Allegiance results for the first nine months of 2022, while the results for the fourth quarter of 2022, after the Merger on October 1, 2022, set forth the results of operations for Stellar.
The Company’s results of operations for the year ended December 31, 2022 reflect Allegiance’s results for the first nine months of 2022, while the results for the fourth quarter of 2022, after the Merger on October 1, 2022, set forth the results of operations for Stellar.
Examination and Examination Fees The FDIC periodically examines and evaluates state non-member banks. Based on such an evaluation, the Bank, among other things, may be required to revalue its assets and establish specific reserves to compensate for the difference between the Bank’s assessment and that of the FDIC.
Examination and Examination Fees The FDIC periodically examines and evaluates state non-member banks. Based on such an evaluation, the Bank, among other things, may be required to revalue its assets and establish specific reserves to compensate for the difference between the Bank’s 10 Table of Contents assessment and that of the FDIC.
Acquisitions of financial institutions involve operational risks and uncertainties, such as unknown 22 Table of Contents or contingent liabilities with no available manner of recourse, exposure to unexpected problems such as asset quality, the retention of key employees and customers and other issues that could negatively affect our business.
Acquisitions of financial institutions involve operational risks and uncertainties, such as unknown or contingent liabilities with no available manner of recourse, exposure to unexpected problems such as asset quality, the retention of key employees and customers and other issues that could negatively affect our business.
In addition, to access our network, products and services, our customers and other third-parties may use personal mobile devices or computing devices that are outside of 27 Table of Contents our network environment and are subject to their own cybersecurity risks. All of these factors increase our risks related to cyber-threats and electronic disruptions.
In addition, to access our network, products and services, our customers and other third-parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks. All of these factors increase our risks related to cyber-threats and electronic disruptions.
However, deposits are subject to fluctuations in availability or price due to factors that may be outside of the Company’s control, including increasing competitive pressure from other financial services firms for consumer or corporate customer deposits, changes in interest 25 Table of Contents rates, returns on other investment classes and systemic risk of the financial system, the actions of regulatory agencies, the reputation of the Company among others.
However, deposits are subject to fluctuations in availability or price due to factors that may be outside of the Company’s control, including increasing competitive pressure from other financial services firms for consumer or corporate customer deposits, changes in interest rates, returns on other investment classes, systemic risk of the financial system, the actions of regulatory agencies, the reputation of the Company among others.
ITEM 1. BUSINESS The disclosures set forth in this item are qualified by Item 1A. “Risk Factors,” and; the section captioned “Cautionary Notice Regarding Forward-Looking Statements” in the forepart of this report, Item 7. “Cautionary Notice Regarding Forward-Looking Statements” and other cautionary statements set forth elsewhere in this Annual Report on Form 10-K.
ITEM 1. BUSINESS The disclosures set forth in this item are qualified by “Item 1A. Risk Factors,” and; the section captioned “Cautionary Notice Regarding Forward-Looking Statements” in the forepart of this report, Item 7. “Cautionary Notice Regarding Forward-Looking Statements” and other cautionary statements set forth elsewhere in this Annual Report on Form 10-K.
As a bank holding company of a Texas state chartered bank, the Company is also subject to supervision, regulation, examination and enforcement by the Texas Department of Banking (“TDB”) and the FDIC. The Bank is a Texas-chartered banking association, the deposits of which are insured by the FDIC’s Deposit Insurance Fund. up to applicable legal limits.
As a bank holding company of a Texas state chartered bank, the Company is also subject to supervision, regulation, examination and enforcement by the Texas Department of Banking (“TDB”) and the FDIC. 5 Table of Contents The Bank is a Texas-chartered banking association, the deposits of which are insured by the FDIC’s Deposit Insurance Fund, up to applicable legal limits.
These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices.
These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability 12 Table of Contents Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices.
If the U.S. economy weakens, enters a recession or there is a lack of growth in population, income levels, deposits and business investment in our local markets, our growth and profitability from our lending, deposit and asset management services could be constrained or negatively impacted.
If the U.S. economy weakens, enters a recession or there is a lack of growth in population, income levels, deposits and business investment in our market, our growth and profitability from our lending, deposit and asset management services could be constrained or negatively impacted.
Banking statutes, regulations and policies are continually under review by federal and state legislatures and regulatory agencies, and a change in them, including changes in how they are interpreted or implemented, could have a material adverse effect on our business. 5 Table of Contents The material statutory and regulatory requirements that are applicable to us and our subsidiaries are summarized below.
Banking statutes, regulations and policies are continually under review by federal and state legislatures and regulatory agencies, and a change in them, including changes in how they are interpreted or implemented, could have a material adverse effect on our business. The material statutory and regulatory requirements that are applicable to us and our subsidiaries are summarized below.
As of December 31, 2022, the Bank met the requirements to be “well capitalized” under the prompt corrective action regulations. The prompt corrective action regulations do not apply to bank holding companies.
As of December 31, 2023, the Bank met the requirements to be “well capitalized” under the prompt corrective action regulations. The prompt corrective action regulations do not apply to bank holding companies.
Due to the Company’s geographic concentration, it may be less able than other larger regional or national financial institutions to diversify the Company’s credit risks. We may be adversely impacted by sustained volatility in oil prices and instability in the energy industry. The economic conditions in our markets are dependent on the energy sector generally and oil and gas specifically.
Due to the Company’s geographic concentration, it may be less able than other larger regional or national financial institutions to diversify the Company’s credit risks. We may be adversely impacted by sustained volatility in oil prices and instability in the energy industry. The economic conditions in our market is dependent on the energy sector generally and oil and gas specifically.
An upward adjustment of no more than 1 cent to an issuer's debit card interchange fee is allowed if the card issuer develops and implements 6 Table of Contents policies and procedures reasonably designed to achieve certain fraud-prevention standards.
An upward adjustment of no more than 1 cent to an issuer's debit card interchange fee is allowed if the card issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards.
A weakening of the real estate market in our primary market area could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the loans and the value of our business.
A weakening of the real estate market in our primary market area could have an adverse 23 Table of Contents effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the loans and the value of our business.
Acquisitions of financial institutions are also subject to regulatory approvals that can result in delays, which in some cases could be for a lengthy period of time or may not be received.
Acquisitions of financial institutions are also subject to regulatory approvals that can result in delays, which in some cases could be for a lengthy period of time or may not be 22 Table of Contents received.
The Company’s historical operating results as of and for the years ended December 31, 2021 and 2020, as presented and discussed in this Annual Report on Form 10-K, do not include the historical results of CBTX.
The Company’s historical operating results as of and for the year ended December 31, 2021, as presented and discussed in this Annual Report on Form 10-K, do not include the historical results of CBTX.
Under these requirements, in the future, the Company could be required to provide financial assistance to the Bank if it experiences financial distress. 32 Table of Contents A capital injection may be required at times when our resources are limited and we may be required to borrow the funds to make the required capital injection.
Under these requirements, in the future, the Company could be required to provide financial assistance to the Bank if it experiences financial distress. A capital injection may be required at times when our resources are limited and we may be required to borrow the funds to make the required capital injection.
Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.
Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities 26 Table of Contents may react differently, and at different times, to market interest rate changes.
Risks Related to the Company ’ s Common Stock • fluctuations in the market price of the Company’s common stock; • priority of the holders of the Company’s debt obligations over its common stock with respect to payment; • additional dilution of the percentage ownership of the Company’s shareholders from future sales and issuances of its capital stock or rights to purchase common stock; • potential future issuance of shares of preferred stock; • dependence upon the Bank for cash flow and restrictions on the Bank’s ability to make cash distributions; • anti-takeover effect of certain provisions of the Company’s corporate organizational documents and provisions of federal and state law; and 17 Table of Contents • bylaws could limit a shareholder’s ability to obtain a favorable forum for disputes with the Company.
Risks Related to the Company ’ s Common Stock • fluctuations in the market price of the Company’s common stock; • priority of the holders of the Company’s debt obligations over its common stock with respect to payment; • additional dilution of the percentage ownership of the Company’s shareholders from future sales and issuances of its capital stock or rights to purchase common stock; • potential future issuance of shares of preferred stock; • dependence upon the Bank for cash flow and restrictions on the Bank’s ability to make cash distributions; • anti-takeover effect of certain provisions of the Company’s corporate organizational documents and provisions of federal and state law; and • bylaws could limit a shareholder’s ability to obtain a favorable forum for disputes with the Company. 17 Table of Contents Risk Factors An investment in the Company's common stock is subject to risks inherent to our business.
If general economic conditions negatively impact our markets and small- to medium-sized businesses are adversely affected, or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be negatively affected. If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings may be affected.
If general economic conditions negatively impact our market and small- to medium-sized businesses are adversely affected, or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be negatively affected. 24 Table of Contents If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings may be affected.
Our business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks and in the computer and data management systems and networks of third-parties.
Our business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems 27 Table of Contents and networks and in the computer and data management systems and networks of third-parties.
If the Company or the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the Company or the Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities.
If the Company or the Bank finds a name on any transaction, account 11 Table of Contents or wire transfer that is on an OFAC list, the Company or the Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities.
Our SBA lending program is dependent upon the federal government and our status as a participant in the SBA’s Preferred Lenders Program and a failure to originate SBA loans in compliance with SBA guidelines could result in losses on the guaranteed portion of our SBA loans. We participate in the SBA Preferred Lenders Program.
Our SBA lending program is dependent upon the federal government and a failure to originate SBA loans in compliance with SBA guidelines could result in losses on the guaranteed portion of our SBA loans. We participate in the SBA Preferred Lenders Program.
Our total assets were approximately $10.9 billion as of December 31, 2022. The Dodd-Frank Act and its implementing regulations impose various additional requirements on banks and bank holding companies with $10 billion or more in total assets, including a more frequent and enhanced regulatory examination regime.
Our total assets were $10.65 billion as of December 31, 2023. The Dodd-Frank Act and its implementing regulations impose various additional requirements on banks and bank holding companies with $10 billion or more in total assets, including a more frequent and enhanced regulatory examination regime.
Risks Related to Business and Operations External and Market Related Risks Challenging market conditions and economic trends have adversely affected the banking industry. We operate in the challenging and uncertain financial services industry. The success of our business and operations is sensitive to general business and economic conditions in the U.S., our industry and our markets.
Challenging market conditions and economic trends have adversely affected the banking industry. We operate in the challenging and uncertain financial services industry. The success of our business and operations is sensitive to general business and economic conditions in the U.S., our industry and our market.
The Company may grant registration rights covering shares of its common stock or other securities in connection with acquisitions and investments.
The 34 Table of Contents Company may grant registration rights covering shares of its common stock or other securities in connection with acquisitions and investments.
When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce 26 Table of Contents net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income.
When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income.
Adverse economic conditions that impact the Company’s markets could reduce its growth rate, the ability of customers to repay their loans, the value of collateral underlying loans, the Company’s ability to attract deposits and generally impact 19 Table of Contents its business, financial condition, results of operations and future prospects.
Adverse economic conditions that impact the Company’s market could reduce its growth rate, the ability of customers to repay their loans, the value of collateral underlying loans, the Company’s ability to attract deposits and generally impact its business, financial condition, results of operations and future prospects.
Under the Dodd-Frank Act, bank holding companies and their subsidiaries must be well-capitalized and well-managed in order for the bank holding company and its nonbank affiliates to engage in the expanded financial activities permissible only for a financial holding company.
Under the Dodd-Frank Act, bank holding companies and their subsidiaries must be well-capitalized and well-managed in order for the bank holding company and its nonbank affiliates to engage in the expanded financial activities permissible only for a financial holding company. The Company has not elected to pursue financial holding company status.
The Company cannot predict the nature of future monetary policies and the effect of such policies on its business and earnings. ITEM 1A.
The Company cannot predict the nature of future monetary policies and the effect of such policies on its business and earnings. 15 Table of Contents ITEM 1A.
Labor costs are a material component of operating our business. A number of factors may adversely affect the labor force available to us or increase labor costs, a shift towards remote work, wage inflation, higher unemployment subsidies, other government regulations and general macroeconomic factors.
A number of factors may adversely affect the labor force available to us or increase labor costs, a shift towards remote work, wage inflation, higher unemployment subsidies, other government regulations and general macroeconomic factors.
As of December 31, 2022, $1.46 billion, or 18.8%, of our total loans were comprised of commercial and industrial loans that are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses.
As of December 31, 2023, $1.41 billion, or 17.8%, of our total loans were comprised of commercial and industrial loans that are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses.
As of December 31, 2022, the fair value of our securities portfolio was $1.81 billion, which represented 16.6% of total assets. Factors beyond our control, including interest rate increases, can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.
As of December 31, 2023, the fair value of our securities portfolio was $1.40 billion, which represented 13.1% of total assets. Factors beyond our control, including interest rate increases, can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate.
The BSA, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S.
Further, any new laws, rules or regulations could make compliance more difficult or expensive. State and federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which the Company is or becomes subject as a result of such examinations may adversely affect the Company.
State and federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which the Company is or becomes subject as a result of such examinations may adversely affect the Company.
(“CBTX”) merged (the “Merger”) with CBTX as the surviving corporation that was renamed Stellar Bancorp, Inc. and the ticker symbol changed to “STEL.” At the effective time of the Merger, each outstanding share of Allegiance common stock, par value of $1.00 per share, was converted into the right to receive 1.4184 shares of common stock of the Company.
(“CBTX”) merged (the “Merger”) with CBTX as the surviving corporation that was renamed Stellar Bancorp, Inc. and the ticker symbol changed to “STEL.” At the effective time of the Merger, each outstanding share of Allegiance common stock was converted into the right to receive 1.4184 shares of common stock of the Company. Immediately following the Merger, CommunityBank of Texas, N.A.
As of December 31, 2021, our allowance for credit losses on loans was $47.9 million, which represented 1.14% of our total loans and 198.7% of our total nonperforming loans as of the same date. Additional loan losses may occur in the future and may occur at a rate greater than the Company has previously experienced.
As of December 31, 2023, our allowance for credit losses on loans was $91.7 million, which represented 1.16% of our total loans and 233.94% of our total nonperforming loans as of the same date. Additional loan losses may occur in the future and may occur at a rate greater than the Company has previously experienced.
If we are unable to attract and retain successful loan officers and other personnel, or if our loan officers and other personnel fail to meet our expectations in terms of customer relationships and profitability, we may be unable to execute our business strategy and our business, financial condition, results of operations and growth prospects may be negatively affected. 21 Table of Contents Our results of operations may be adversely affected by labor shortages, turnover and labor cost increases .
If we are unable to attract and retain successful loan officers and other personnel, or if our loan officers and other personnel fail to meet our expectations in terms of customer relationships and profitability, we may be unable to execute our business strategy and our business, financial condition, results of operations and growth prospects may be negatively affected.
Risks Related to Business and Operations External and Market Related Risks • challenging market conditions and economic trends; • inflationary pressures and rising prices; • concentration of our business in our markets and largely dependent upon the growth and welfare of those markets; • impact of sustained volatility in oil prices and instability in the energy industry; • strong competition to attract and retain customers; • adverse impact of geopolitical events, war, natural disasters, pandemics and other catastrophes; • climate change and related legislative and regulatory initiatives; • ability to retain bankers and recruit additional successful bankers; • operations may be adversely affected by labor shortages, turnover and labor cost increases; and • the ability of our executive officers and other key individuals to continue the implementation of our long-term business strategy.
These risks are discussed more fully in the section following this summary and include, but are not limited to, the following: Risks Related to Business and Operations External and Market Related Risks • adverse developments affecting the financial services industry; • challenging market conditions and economic trends; • inflationary pressures and rising prices; • concentration of our business in our market and largely dependent upon the growth and welfare of our market; • impact of sustained volatility in oil prices and instability in the energy industry; • strong competition to attract and retain customers; • adverse impact of geopolitical events, wars, natural disasters, pandemics and other catastrophes; • climate change and related legislative and regulatory initiatives; • ability to retain bankers and recruit additional successful bankers; • operations may be adversely affected by labor shortages, turnover and labor cost increases; and • the ability of our executive officers and other key individuals to continue the implementation of our long-term business strategy.
Like most financial institutions, the Company’s earnings and cash flows are significantly dependent on its net interest income and are subject to “gaps” in the interest rate sensitivities of assets and liabilities that may negatively impact earnings.
A majority of banking assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, the Company’s earnings and cash flows are significantly dependent on its net interest income and are subject to “gaps” in the interest rate sensitivities of assets and liabilities that may negatively impact earnings.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third-parties with whom we contract to provide data services.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third-parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations.
Acts of terrorism, cyber-terrorism, political unrest, war (including the Russian invasion of Ukraine and its consequences), civil disturbance, armed regional and international hostilities and international responses to these hostilities, natural disasters, global health risks or pandemics or the threat of or perceived potential for these events could have a negative impact on us.
Acts of terrorism, cyber-terrorism, political unrest, war (including conflicts in Ukraine and the Middle East), civil disturbance, armed regional and international hostilities and international responses to these hostilities, natural disasters, global health risks or pandemics (such as Covid-19) or the threat of or perceived potential for these events could have a negative impact on us.
When we or the Bank applies for regulatory approval to engage in certain transactions, the regulators will consider the CRA record of target institutions and our depository institution subsidiaries. An unsatisfactory CRA record could substantially delay approval or result in denial of an application. The regulatory agency’s assessment of the institution’s record is made available to the public.
When we or the Bank apply for regulatory approval to engage in certain transactions, the regulators will consider the CRA record of target institutions and our depository institution subsidiaries. An unsatisfactory CRA record could substantially delay approval or result in a withdrawal or denial of an application.
We conduct our operations almost exclusively in the Houston and Beaumont regions. Many of our competitors offer the same, or a wider variety of, banking services within this market area. These competitors include banks with nationwide operations, regional banks and other community banks.
Many of our competitors offer the same, or a wider variety of, banking services within our market area. These competitors include banks with nationwide operations, regional banks and other community banks.
The ability of the Bank to pay dividends to us is restricted by federal and state laws, regulations and policies. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank.
Substantially all of our income, and a principal source of our liquidity, are dividends from the Bank. The ability of the Bank to pay dividends to us is restricted by federal and state laws, regulations and policies. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank.
If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties. In November 2021, the federal banking agencies adopted a final rule related to computer-security incident reporting.
Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties. In November 2021, the federal banking agencies adopted a final rule related to computer-security incident reporting.
Growth Strategy Risks • risks of pursuing additional acquisitions; • risk that local teams may not follow internal policies or are negligent in their decision-making for business decisions that are made at the banking center level; and • goodwill and other intangibles recorded in connection with a business acquisition may become impaired. 16 Table of Contents Credit and Lending Risks • a significant percentage of our loan portfolio is comprised of real estate loans, including commercial real estate and construction, land development and other land loan portfolios, which expose us to credit risks that may be greater than the risks related to other types of loans; • a large portion of our loan portfolio is comprised of commercial and industrial loans secured by receivables, inventory, equipment or other commercial collateral; • we focus our business development and marketing strategy primarily on lending to small- to medium-sized businesses who may have fewer resources to weather adverse business developments; • our allowance for credit losses may not be sufficient to cover actual losses; and • failure to originate SBA loans in compliance with SBA guidelines could result in losses on the guaranteed portion of our SBA loans.
Credit and Lending Risks • a significant percentage of our loan portfolio is comprised of real estate loans, including commercial real estate and construction, land development and other land loan portfolios, which expose us to credit risks that may be greater than the risks related to other types of loans; • a large portion of our loan portfolio is comprised of commercial and industrial loans secured by receivables, inventory, equipment or other commercial collateral; • we focus our business development and marketing strategy primarily on lending to small- to medium-sized businesses who may have fewer resources to weather adverse business developments; • our allowance for credit losses may not be sufficient to cover actual losses; and • failure to originate SBA loans in compliance with SBA guidelines could result in losses on the guaranteed portion of our SBA loans.
As of December 31, 2022, $6.24 billion, or 80.4%, of our total loans was comprised of loans with real estate as a primary or secondary component of collateral.
As of December 31, 2023, $6.45 billion, or 81.3%, of our total loans was comprised of loans with real estate as a primary or secondary component of collateral.
Recent acquisitions of many local financial institutions in our markets by larger, more regionally focused competitors have led to a reduced number of locally-based competitors, and we believe this has created an underserved base of small- to medium-sized businesses, professionals and individuals that are interested in banking with a company headquartered in, and with decision-making authority based in our markets.
We actively solicit the deposit business of our consumer and commercial loan customers and seek to deepen these relationships with additional products and services. 2 Table of Contents • Local decision making authority —Acquisitions of many local financial institutions in our markets by larger, more regionally focused competitors have led to a reduced number of locally-based competitors, and we believe this has created an underserved base of small- to medium-sized businesses, professionals and individuals that are interested in banking with a company headquartered in, and with decision-making authority based in our markets.
As of December 31, 2022, our average funded core loan size was approximately $452 thousand.
As of December 31, 2023, our average funded loan size was approximately $467 thousand.
The Merger had a significant impact on all aspects of the Company’s financial statements, and financial results for periods after the Merger are not comparable to financial results for periods prior to the Merger.
The Merger had a significant impact on all aspects of the Company’s financial statements and, as a result, financial results for periods after the Merger are not comparable to financial results for periods prior to the Merger. See Note 2 – Acquisitions in the accompanying notes to the consolidated financial statements for the impact of the Merger.
With compliance required by May 1, 2022, the final rule requires banking organizations to notify their primary banking regulator within 36 hours of determining that a “computer-security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of its customer base, its businesses and operations that would result in material loss, or its operations that would impact the stability of the United States. 15 Table of Contents Changes in Laws, Regulations or Policies Federal, state and local legislators and regulators regularly introduce measures or take actions that would modify the regulatory requirements applicable to banks, their holding companies and other financial institutions.
With compliance required by May 1, 2022, the final rule requires banking organizations to notify their primary banking regulator within 36 hours of determining that a “computer-security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of its customer base, its businesses and operations that would result in material loss, or its operations that would impact the stability of the United States.
We may experience operational challenges as we implement these new technology enhancements or products, which could result in our not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.
We may experience operational challenges as we implement new products and technology enhancements ,such as artificial intelligence, automation and algorithms in our business processes, which could result in unintended consequences due to their limitations or our failure to use them effectively, not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeItem 1A. — Risk Factors” and the following: • the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; ◦ inflation, interest rate, securities market and monetary fluctuations; ◦ local, regional, national and international economic conditions and the impact they may have on the Company and our customers and the Company’s assessment of that impact; ◦ sustained instability of the oil and gas industry in general and within Texas; ◦ liquidity risks associated with the Company’s business, including lack of access to liquidity; ◦ the composition of the Company’s loan portfolio and the concentration of loans in commercial real estate and commercial real estate construction; ◦ the geographic concentration of the Company’s markets; ◦ the accuracy and sufficiency of the assumptions and estimates the Company makes in establishing reserves for potential loan losses and other estimates; ◦ the amount of nonperforming and classified assets that the Company holds and the time and effort necessary to resolve nonperforming assets; ◦ deterioration of asset quality; ◦ changes in the value of collateral securing the Company’s loans; ◦ the risk that the expected cost savings and any revenue synergies from the Merger may not be fully realized or may take longer than anticipated to be realized; ◦ the ability to retain personnel after the completion of the Merger; ◦ natural disasters and adverse weather on the Company’s market area, acts of terrorism, pandemics, an outbreak of hostilities, such as the conflict in Ukraine, or other international or domestic calamities and other matters beyond the Company’s control; ◦ the potential impact of climate change; ◦ the impact of pandemics, epidemics or any other health-related crisis; 40 Table of Contents ◦ the Company’s ability to maintain important deposit customer relationships and its reputation; ◦ the Company’s ability to maintain effective internal control over financial reporting; ◦ the cost and effects of cyber incidents or other failures, interruptions or security breaches of the Company's systems or those of the Company's customers or third-party providers; ◦ the failure of certain third- or fourth-party vendors to perform; ◦ the institution and outcome of litigation and other legal proceedings against the Company or to which it may become subject; ◦ the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals or meet conditions associated with the same; ◦ changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters; ◦ the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; and ◦ other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.
Biggest changeItem 1A. — Risk Factors” and the following: • 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 our deposit insurance assessments and other actions of the Board of Governors of the Federal Reserve System, FDIC and Texas Department of Banking and legislative and regulatory actions and reforms; • the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; • inflation, interest rate, capital and securities markets and monetary fluctuations; • changes in the interest rate environment, the value of the Company’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 the Company including changes in asset quality and credit risk; • local, regional, national and international economic conditions and the impact they may have on the Company and our customers and the Company’s assessment of that impact; • the inability to sustain revenue and earnings growth; • impairment of the Company’s goodwill or other intangible assets; • the composition of the Company’s loan portfolio and the concentration of loans in commercial real estate and commercial real estate construction; • the geographic concentration of the Company’s market; • the accuracy and sufficiency of the assumptions and estimates the Company makes in establishing reserves for potential loan losses and other estimates; • the amount of nonperforming and classified assets that the Company holds and the time and effort necessary to resolve nonperforming assets; • deterioration of asset quality; • customer borrowing, repayment, investment and deposit practices; • the ability to maintain important deposit customer relationships; • changes in the value of collateral securing the Company’s loans; 42 Table of Contents • the risk that the anticipated benefits from the Merger may not be fully realized or may take longer than anticipated to be realized; • the amount of the costs, fees, expenses and charges related to the Merger and the integration; • natural disasters and adverse weather in the Company’s market area; • the potential impact of climate change; • the impact of pandemics, epidemics or any other health-related crisis; • acts of terrorism, an outbreak of hostilities, such as the conflicts in Ukraine or the Middle East, or other international or domestic calamities; • the ability to maintain effective internal control over financial reporting; • the cost and effects of cyber incidents or other failures, interruptions or security breaches of the Company's systems or those of the Company’s customers or third-party providers; • the failure of certain third- or fourth-party vendors to perform; • the impact, extent and timing of technological changes; • the institution and outcome of litigation and other legal proceedings against the Company or to which it may become subject; • the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals or meet conditions associated with the same; • changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters; • the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; and • other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.
During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security.
During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of the security.
The entire outstanding balance and unpaid interest is payable in full on December 13, 2024. The Company may prepay the principal amount of the line of credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a pledge of all of the issued and outstanding shares of capital stock of Stellar Bank.
The entire outstanding balance and unpaid interest is payable in full on December 13, 2024. The Company may prepay the principal amount of the line of credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a pledge of all the issued and outstanding shares of capital stock of Stellar Bank.
Covenants made under the Loan Agreement include, among other things, while there any obligations outstanding under Loan Agreement, the Company shall maintain a cash flow to debt service (as defined in the Loan Agreement) of not less than 1.25, the Bank's Texas Ratio (as defined in the Loan Agreement) shall not exceed 25.0%, the Bank shall maintain a Tier 1 Leverage Ratio (as defined under the Loan Agreement) of at least 7.0% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt.
Covenants made under the Loan Agreement include, among other things, while there any obligations outstanding under Loan Agreement, the Company shall maintain a cash flow to debt service (as defined in the Loan Agreement) of not less than 1.25, the Bank’s Texas Ratio (as defined in the Loan Agreement) not to exceed 25.0% and the Bank shall maintain a Tier 1 Leverage Ratio (as defined under the Loan Agreement) of at least 7.0% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt.
The Company’s historical operating results as of and for the years ended December 31, 2021 and 2020, as presented and discussed in this Annual Report on Form 10-K, do not include the historical results of CBTX.
The Company’s historical operating results as of and for the years ended December 31, 2021, as presented and discussed in this Annual Report on Form 10-K, do not include the historical results of CBTX.
As of December 31, 2022 and 2021, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which the aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity.
As of December 31, 2023 and 2022, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which the aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity.
The following table summarizes the simulated change in net interest income and the economic value of equity over a 12-month horizon as of the dates indicated: Change in Interest Rates (Basis Points) Percent Change in Net Interest Income Percent Change in Economic Value of Equity As of December 31, 2022 As of December 31, 2021 As of December 31, 2022 As of December 31, 2021 +300 0.5% (0.1)% (2.9)% (1.0)% +200 0.5% (0.7)% (0.7)% 1.1% +100 0.4% (0.7)% 0.6% 1.6% Base 0.0% 0.0% 0.0% 0.0% -100 (2.0)% (3.5)% (3.2)% (3.3)% -200 (7.5)% (7.4)% (9.4)% (17.3)% These results are primarily due to the size of our cash position, the size and duration of our loan and securities portfolio, the duration of our borrowings and the expected behavior of demand, money market and savings deposits during such rate fluctuations.
The following table summarizes the simulated change in the economic value of equity and net interest income over a 12-month horizon as of the dates indicated: Change in Interest Rates (Basis Points) Percent Change in Net Interest Income Percent Change in Economic Value of Equity December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 +300 (0.9)% 0.5% (0.9)% (2.9)% +200 (0.6)% 0.5% 1.8% (0.7)% +100 0.1% 0.4% 3.4% 0.6% Base 0.0% 0.0% 0.0% 0.0% -100 0.5% (2.0)% 1.0% (3.2)% -200 0.2% (7.5)% (3.6)% (9.4)% These results are primarily due to the size of our cash position, the size and duration of our loan and securities portfolio, the duration of our borrowings and the expected behavior of demand, money market and savings deposits during such rate fluctuations.
T he provision for credit losses for the year ended December 31, 2022 included an initial provision for credit losses recorded on acquired non-PCD loans of $28.2 million along with a provision for acquired unfunded commitments of $5.0 million as a result of the Merger.
T he provision for credit losses for the year ended December 31, 2022 included an initial provision for credit losses recorded on acquired non-PCD loans of $28.2 million a long with a provision for acquired unfunded commitments of $5.0 million as a result of the Merger.
We calculate the Company’s efficiency ratio by dividing total noninterest expense by the sum of net interest income and 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.
We calculate our efficiency ratio by dividing total noninterest expense by the sum of net interest income and 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.
FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans and certain securities. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.
FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.
The BSRC meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings.
The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings.
In addition, the assets and liabilities of CBTX have been recorded at their estimated fair values and added to those of Allegiance as of October 1, 2022. The determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events that are subjective and subject to change.
In addition, the assets and liabilities of CBTX were recorded at their estimated fair values and added to those of Allegiance as of October 1, 2022. The determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events that are subjective and subject to change.
See “Item 7 – Management Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of 2021 versus 2020 results.
See “Item 7 – Management Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of 2022 versus 2021 results.
At least half of total capital must be composed of tier 1 capital, which includes common shareholders’ equity (including retained earnings), less goodwill, other disallowed intangibles and disallowed deferred tax assets, among other items.
At least half of total capital must be composed of Tier 1 capital, which includes common shareholders’ equity (including retained earnings), less goodwill, other disallowed intangible assets and disallowed deferred tax assets, among other items.
Our residential real estate loans include the origination of 1-4 family residential mortgage loans (including home equity and home improvement loans and home equity lines of credit) collateralized by owner-occupied residential properties located in our market area.
Our residential real estate loans include the origination of 1-4 family residential mortgage loans (including home equity and home improvement loans and home equity lines of credit) collateralized by owner-occupied residential properties located in our market areas.
Our net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and borrowed funds, referred to as a “rate change.” Fluctuations in market interest rates are driven by many factors, 41 Table of Contents including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.
Our net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and borrowed funds, referred to as a “rate change.” Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.
Our loans are primarily secured by real estate, including commercial and residential construction, owner-occupied and nonowner-occupied and multi-family commercial real estate, raw land and other real estate based loans located in the Houston and Beaumont regions.
Our loans are primarily secured by real estate, including commercial and residential construction, owner-occupied and nonowner-occupied and multi-family commercial real estate, raw land and other real estate based loans located in the Houston and Beaumont MSAs.
In determining the appropriate level of interest rate risk, the BSRC considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors.
In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors.
Our policies generally require that standby letter of credit arrangements be backed by promissory notes that contain security and debt covenants similar to those contained in loan agreements. 62 Table of Contents Capital Resources Capital management consists of providing equity to support our current and future operations.
Our policies generally require that standby letter of credit arrangements be backed by promissory notes that contain security and debt covenants similar to those contained in loan agreements. Capital Resources Capital management consists of providing equity to support our current and future operations.
We are subject to capital adequacy requirements imposed by the Federal Reserve and the Bank is subject to capital adequacy requirements imposed by the FDIC. Both the Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding companies and bank capital adequacy.
We are subject to capital adequacy requirements imposed by the Federal Reserve and the Bank is subject to capital adequacy requirements imposed by the FDIC. Both the Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy.
We expect to continue to benefit from our scalable platform in future periods as we continue to monitor fixed and variable expenses necessary to support our growth. Income Taxes The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses.
We expect to continue to benefit from our scalable platform in future periods as we continue to monitor overhead expenses necessary to support our growth. Income Taxes The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and other nondeductible expenses.
Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in our markets, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and throughout the state of Texas.
Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other 43 Table of Contents factors, economic and competitive conditions in Texas and specifically in our market, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our market and throughout the state of Texas.
The Company’s results of operations for the year ended December 31, 2022 reflect Allegiance’s activity for the first nine months of 2022 while the results for the fourth quarter of 2022, after the Merger on October 1, 2022, set forth the results of operations for Stellar.
The results of operations for the year ended December 31, 2022 reflect Allegiance’s activity for the first nine months of 2022 while the results for the fourth quarter of 2022, after the Merger on October 1, 2022, set forth the results of operations for the Company.
Immediately following the Merger, CommunityBank merged with and into Allegiance Bank with Allegiance Bank as the surviving bank. In connection with the operational conversion during the first quarter of 2023, Allegiance Bank changed its name to Stellar Bank on February 18, 2023. After the merger, Stellar became one of the largest banks based in Houston.
Immediately following the Merger, CommunityBank merged with and into Allegiance Bank with Allegiance Bank as the surviving bank. Allegiance Bank changed its name to Stellar Bank on February 18, 2023 in connection with the operational conversion. After the merger, Stellar became one of the largest banks based in Houston, Texas.
Refer to the accompanying notes to accompanying consolidated financial statements for the expected timing of such payments as of December 31, 2022.
Refer to the accompanying notes to accompanying consolidated financial statements for the expected timing of such payments as of December 31, 2023.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with Item 15.—Exhibits and Financial Statement Schedules and the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with “Item 15.—Exhibits and Financial Statement Schedules” and the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.
The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. Available for sale securities are shown at amortized cost. For purposes of the table below, municipal securities are calculated on a tax equivalent basis.
The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. Available for sale securities are shown at amortized cost. For purposes of the tables below, the yields on municipal securities were calculated on a tax equivalent basis.
Any redemption will be at a redemption price 60 Table of Contents equal to 100% of the principal amount of Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Notes are not subject to redemption at the option of the holders.
Any redemption will be at a redemption price equal to 100% of the principal amount of Bank Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Bank Notes are not subject to redemption at the option of the holders.
For additional information regarding critical accounting estimates and policies, refer to “Critical Accounting Estimates” in this section, Note 1 – Nature of Operations and Summary of Significant Accounting and Reporting Policies and Note 6 – Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statements.
For additional information regarding critical accounting estimates and policies, refer to “Critical Accounting Estimates” in this 55 Table of Contents section, Note 1 – Nature of Operations and Summary of Significant Accounting and Reporting Policies and Note 5 – Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statements.
Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the year ended December 31, 2022 was 3.94%, an increase of 4 basis points compared to 3.90% for the year ended December 31, 2021.
Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the year ended December 31, 2023 was 4.51%, an increase of 57 basis points compared to 3.94% for the year ended December 31, 2022.
Additionally, the BSRC reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. 64 Table of Contents We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively.
Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively.
At December 31, 2022 and 2021, the Company had FHLB letters of credit in the amount of $1.08 billion and $1.36 billion, respectively, pledged as collateral for public and other deposits of state and local government agencies. See Note 12 – Borrowings and Borrowing Capacity to the accompanying consolidated financial statements.
At December 31, 2023 and 2022, the Company had FHLB letters of credit in the amount of $1.82 billion and $1.08 billion, respectively, pledged as collateral for public and other deposits of state and local government agencies. See Note 10 – Borrowings and Borrowing Capacity to the accompanying consolidated financial statements.
Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method. Noninterest income totaled $20.4 million for the year ended December 31, 2022 compared to $8.6 million for the year ended December 31, 2021, an increase of $11.8 million, or 137.7%.
Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method. Noninterest income totaled $24.6 million for the year ended December 31, 2023 compared to $20.4 million for the year ended December 31, 2022, an increase of $4.2 million, or 20.7%.
Net Interest Income Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue, representing 93.4% of total revenue during 2022.
Net Interest Income Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue, representing 94.7% of total revenue during 2023.
Goodwill is assessed annually for impairment and on an interim basis if an event occurs or circumstances change that would indicate that the carrying amount of the asset may not be recoverable. Our core deposit intangibles, net, as of December 31, 2022 was $143.5 million compared to $14.7 million as of December 31, 2021.
Goodwill is assessed annually for 58 Table of Contents impairment and on an interim basis if an event occurs or circumstances change that would indicate that the carrying amount of the asset may not be recoverable. Core deposit intangibles, net, as of December 31, 2023 was $116.7 million compared to $143.5 million as of December 31, 2022.
Allowance for Credit Losses The allowance for credit losses is a valuation allowance that is established through charges to earnings in the form of a provision for (or reversal of) credit losses calculated in accordance with ASC 326, that is deducted from the amortized cost basis of certain assets to present the net amount expected to be collected.
Allowance for Credit Losses The allowance for credit losses is a valuation allowance that is established through charges to earnings in the form of a provision for (or reversal of) credit losses calculated in accordance with ASC Topic 326- Measurement of Credit Losses on Financial Instruments (“ASC 326”), that is deducted from the amortized cost basis of certain assets to present the net amount expected to be collected.
Our ratio of noninterest-bearing deposits to total deposits was 45.6% and 59.0% for the years ended December 31, 2022, and 2021, respectively.
Our ratio of noninterest-bearing deposits to total deposits was 40.0% and 45.6% for the years ended December 31, 2023, and 2022, respectively.
Completion of Merger of Equals On October 1, 2022, Allegiance and CBTX merged with CBTX as the surviving corporation that was renamed Stellar Bancorp, Inc. At the effective time of the Merger, each outstanding share of Allegiance common stock, par value of $1.00 per share, was converted into the right to receive 1.4184 shares of common stock of the Company.
Merger of Equals On October 1, 2022, Allegiance and CBTX merged with and into CBTX and the surviving corporation was renamed Stellar Bancorp, Inc. At the effective time of the Merger, each outstanding share of Allegiance common stock was converted into the right to receive 1.4184 shares of common stock of the Company.
The Company bases its estimates of credit losses on three primary components: (1) estimates of expected losses that exist in various segments of performing loans over the remaining life of the loan portfolio using a reasonable and supportable economic forecast, (2) specifically identified losses in individually analyzed credits which are collateral-dependent, which generally include loans internally graded as impaired and purchased credit deteriorated (“PCD”) loans and (3) qualitative factors related to economic conditions, portfolio concentrations, regulatory policy updates, and other relevant factors that address estimates of expected losses not fully addressed based upon management’s judgment of portfolio conditions.
The Company bases its estimates of credit losses on three primary components: (1) estimates of expected losses that exist in various segments of performing loans over the remaining life of the loan portfolio using a reasonable and supportable economic forecast, (2) specifically identified losses in individually analyzed credits which are collateral-dependent, which generally include nonaccrual loans and purchased credit deteriorated (“PCD”) loans and (3) qualitative factors related to economic conditions, portfolio concentrations, regulatory policy updates, and other relevant factors that address estimates of expected losses.
As of December 31, 2022 and 2021, commercial real estate and commercial construction loans represented 64.1% and 60.3%, respectively, of our total loans. 52 Table of Contents Asset Quality We have procedures in place to assist us in maintaining the overall quality of our loan portfolio.
As of December 31, 2023 and 2022, 54 Table of Contents commercial real estate and commercial construction loans represented 64.7% and 64.1%, respectively, of our total loans. Asset Quality We have procedures in place to assist us in maintaining the overall quality of our loan portfolio.
As of December 31, 2022, the Company’s loan portfolio included $79.7 million of construction and development loans to support multifamily community development loans with associated tax credits, which fund Texas based projects to promote affordable housing. 1-4 Family Residential (Including Home Equity).
As of December 31, 2023, the Company’s commercial real estate construction and land development loan portfolio included $80.5 million of construction and development loans to support multi-family community development loans with associated tax credits, which fund Texas based projects to promote affordable housing, compared to $79.7 million as of December 31, 2022. 1-4 Family Residential (Including Home Equity).
(2) The tax-equivalent adjustment has been computed using a federal income tax rate of 21% for the years ended December 31, 2022, 2021 and 2020 and other applicable effective tax rates. 46 Table of Contents The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates.
(2) The tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the years ended December 31, 2023, 2022 and 2021. 48 Table of Contents The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earnings assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates.
Interest income was $323.0 million for the year ended December 31, 2022, an increase of $69.8 million, or 27.6%, compared with $253.2 million for the year ended December 31, 2021 primarily due to the Merger as average interest-earning asset balances increased along with increased interest rates and an increase in higher-yielding loans during the year.
Interest income was $590.8 million for the year ended December 31, 2023, an increase of $267.8 million, or 82.9%, compared with $323.0 million for the year ended December 31, 2022 primarily due to the Merger as average interest-earning asset balances increased along with increased interest rates and an increase in higher-yielding loans during the year.
The loan review process complements and reinforces the risk identification and assessment decisions made by bankers and credit personnel and contained in our policies and procedures. The principal categories of our loan portfolio are discussed below: Commercial and Industrial.
Results of these reviews are presented to management and the risk committee of the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by bankers and credit personnel and contained in our policies and procedures. The principal categories of our loan portfolio are discussed below: Commercial and Industrial.
Net interest income before the provision for credit losses for the year ended December 31, 2022 was $289.0 million compared with $228.6 million for the year ended December 31, 2021, an increase of $60.4 million, or 26.4% primarily due to the increase in average interest-earning assets and liabilities as a result of the Merger.
Net interest income before the provision for credit losses for the year ended December 31, 2023 was $436.8 million compared with $289.0 million for the year ended December 31, 2022, an increase of $147.8 million, or 51.1% primarily due to the increase in average interest-earning assets and liabilities as a result of the Merger.
As of December 31, 2022, the Company’s loan portfolio included $287.3 million of multifamily community development loans with associated tax credits, which fund Texas based projects to promote affordable housing. Commercial Real Estate Construction and Land Development. We make commercial real estate construction and land development loans to fund commercial construction, land acquisition and real estate development construction.
As of December 31, 2023, the Company’s commercial real estate (including multi-family residential) loan portfolio included $298.9 million of multi-family community development loans with associated tax credits, which fund Texas based projects to promote affordable housing, compared to $287.3 million as of December 31, 2022. Commercial Real Estate Construction and Land Development.
Accordingly, the Company’s historical operating results as of and for the years ended December 31, 2021 and 2020, as presented and discussed in this Annual Report on Form 10-K, do not include the historical results of CBTX. The Company has substantially completed its valuations of CBTX’s assets and liabilities.
Accordingly, the Company’s historical operating results as of and for the years ended December 31, 2021, as presented and discussed in this Annual Report on Form 10-K, do not include the historical results of CBTX.
The Merger had a significant impact on all aspects of the Company’s financial statements, and financial results for periods after the Merger are not comparable to financial results for periods prior to the Merger.
The Merger had a significant impact on all aspects of the Company’s financial statements, and financial results for periods after the Merger are not comparable to financial results for periods prior to the Merger. See Note 2 – Acquisitions in the accompanying notes to the consolidated financial statements for the impact of the Merger.
See further analysis of the material fluctuations in the related discussions that follow. Returns on average equity were 5.69% and 10.38%, returns on average assets were 0.64% and 1.24% and efficiency ratios were 64.23% and 58.86% for the years ended December 31, 2022 and 2021, respectively.
See further analysis of the material fluctuations in the related discussions that follow. Returns on average equity were 8.96% and 5.69%, returns on average assets were 1.21% and 0.64% and efficiency ratios were 63.02% and 64.23% for the years ended December 31, 2023 and 2022, respectively.
The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.
Assumptions based on past experience are incorporated into the model for nonmaturity deposit account decay rates. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income.
Consumer and Other. Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes.
Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes and deferred fees and costs on all loan types.
During the years ended December 31, 2022 and 2021, our liquidity needs have been met by deposits, borrowed funds, security and loan maturities and amortizing investment and loan portfolios. The Bank has access to purchased funds from correspondent banks, and advances from the FHLB are available under a security and pledge agreement to take advantage of investment opportunities.
During the years ended December 31, 2023 and 2022, our liquidity needs have primarily been met by deposits, borrowed funds and securities. The Bank has access to purchased funds from correspondent banks, the Federal Reserve discount window and advances from the FHLB, on a collateralized basis, are available under a security and pledge agreement to take advantage of investment opportunities.
Allowance for Credit Losses The allowance for credit losses is a valuation account which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations.
Allowance for Credit Losses The allowance for credit losses is a valuation account which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation.
The Notes will be redeemable by the Bank, in whole or in part, on or after December 15, 2022 or, in whole but not in part, upon the occurrence of certain specified tax events, capital events or investment company events.
The Bank Notes are redeemable by the Bank, in whole or in part, or, in whole but not in part, upon the occurrence of certain specified tax events, capital events or investment company events.
The Company’s results of operations for the year ended December 31, 2022 reflect Allegiance results for the first nine months of 2022, while the results for the fourth quarter of 2022, after the Merger on October 1, 2022, set forth the results of operations for Stellar.
The results of operations for the year ended December 31, 2022 reflect Allegiance results for the first nine months of 2022, while the results for the fourth quarter of 2022 set forth the results of operations for the Company.
The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of December 31, 2022 2021 Amount Percent Amount Percent (Dollars in thousands) Commercial and industrial $ 1,455,795 18.8 % $ 693,559 16.4 % Paycheck Protection Program (PPP) 13,226 0.2 % 145,942 3.5 % Real estate: Commercial real estate (including multi-family residential) 3,931,480 50.7 % 2,104,621 49.9 % Commercial real estate construction and land development 1,037,678 13.4 % 439,125 10.4 % 1-4 family residential (including home equity) 1,000,956 12.9 % 685,071 16.2 % Residential construction 268,150 3.4 % 117,901 2.8 % Consumer and other 47,466 0.6 % 34,267 0.8 % Total loans 7,754,751 100.0 % 4,220,486 100.0 % Allowance for credit losses on loans (93,180) (47,940) Loans, net $ 7,661,571 $ 4,172,546 Our lending activities originate from the efforts of our bankers with an emphasis on lending to individuals, professionals, small- to medium-sized businesses and commercial companies generally located in our markets.
The following table summarizes our loan portfolio by type of loan as of the dates indicated: December 31, 2023 2022 Amount Percent Amount Percent (Dollars in thousands) Commercial and industrial $ 1,409,002 17.8 % $ 1,455,795 18.8 % Paycheck Protection Program (PPP) 5,100 0.1 % 13,226 0.2 % Real estate: Commercial real estate (including multi-family residential) 4,071,807 51.3 % 3,931,480 50.7 % Commercial real estate construction and land development 1,060,406 13.4 % 1,037,678 13.4 % 1-4 family residential (including home equity) 1,047,174 13.2 % 1,000,956 12.9 % Residential construction 267,357 3.4 % 268,150 3.4 % Consumer and other 64,287 0.8 % 47,466 0.6 % Total loans 7,925,133 100.0 % 7,754,751 100.0 % Allowance for credit losses on loans (91,684) (93,180) Loans, net $ 7,833,449 $ 7,661,571 Our lending activities originate from the efforts of our bankers with an emphasis on lending to individuals, professionals, small- to medium-sized businesses and commercial companies generally located in our market.
As of December 31, 2022, we believe we were in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.
As of December 31, 2023, the Company believes it was in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.
Total loans as a percentage of deposits were 83.7% and 69.8% as of December 31, 2022 and December 31, 2021, respectively. Total loans as a percentage of assets were 71.1% and 59.4% as of December 31, 2022 and December 31, 2021, respectively.
Total loans as a percentage of deposits were 89.3% and 83.7% as of December 31, 2023 and December 31, 2022, respectively. Total loans as a percentage of assets were 74.4% and 71.1% as of December 31, 2023 and December 31, 2022, respectively.
All instruments on the balance sheet are modeled at the instrument level, incorporating all relevant attributes such as next reset date, reset frequency and call dates, as well as prepayment assumptions for loans and securities and decay rates for nonmaturity deposits. Assumptions based on past experience are incorporated into the model for nonmaturity deposit account decay rates.
Where applicable, instruments on the balance sheet are modeled at the instrument level, incorporating 64 Table of Contents all relevant attributes such as next reset date, reset frequency and call dates, as well as prepayment assumptions for loans and securities and decay rates for nonmaturity deposits.
The effect of the capital conservation buffer is to increase the minimum common equity Tier 1 capital ratio to 7.0%, the minimum tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5%. 63 Table of Contents The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of December 31, 2022 to the minimum and well-capitalized regulatory standards: Actual Ratio Minimum Required for Capital Adequacy Purposes Minimum Required Plus Capital Conservation Buffer To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions STELLAR BANCORP, INC.
The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of December 31, 2023 to the minimum and well-capitalized regulatory standards, as well as with the capital conservation buffer: Actual Ratio Minimum Required for Capital Adequacy Purposes Minimum Required Plus Capital Conservation Buffer To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions STELLAR BANCORP, INC.
The Company’s efficiency ratio increased to 64.23% for the year ended December 31, 2022 compared to 58.86% for the year ended December 31, 2021 and 60.55% for the year ended December 31, 2020.
The Company’s efficiency ratio decreased to 63.02% for the year ended December 31, 2023 compared to 64.23% for the year ended December 31, 2022 and 58.86% for the year ended December 31, 2021.
Our multi-family loans increased $394.5 million to $471.6 million as of December 31, 2022 from $77.1 million as of December 31, 2021. We had 234 multi-family loans with an average loan size of $2.0 million as of December 31, 2022.
Our multi-family loans increased $17.2 million to $488.8 million as of December 31, 2023 from $471.6 million as of December 31, 2022. We had 236 multi-family loans with an average loan size of $2.1 million as of December 31, 2023.
The average yield on interest-earning assets of 4.36% and the average rate paid on interest-bearing liabilities of 0.81% for the year ended December 31, 2022 increased by 9 basis points and 15 basis points, respectively, over the same period in 2021.
The average yield on interest-earning assets of 6.09% and the average rate paid on interest-bearing liabilities of 2.86% for the year ended December 31, 2023 increased by 173 basis points and 205 basis points, respectively, over the same period in 2022.
We recorded a $50.7 million provision for credit losses for the year ended December 31, 2022 compared to a $2.3 million release of provision for credit losses for the year ended December 31, 2021.
We recorded an $8.9 million provision for credit losses for the year ended December 31, 2023 compared to a $50.7 million provision for credit losses for the year ended December 31, 2022.
Our exposure to interest rate risk is managed by our Balance Sheet Risk Committee of the Bank (“BSRC”). The BSRC formulates strategies based on appropriate levels of interest rate risk.
Our exposure to interest rate risk is managed by our Asset Liability Committee (“ALCO”). The ALCO formulates strategies based on appropriate levels of interest rate risk.
These loans are secured by the real property being built and are made based on our assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio increased $150.2 million, or 127.4%, to $268.2 million as of December 31, 2022 from $117.9 million as of December 31, 2021 primarily due to the Merger.
These loans are secured by the real property being built and are made based on our assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio decreased $793 thousand, or 0.3%, to $267.4 million as of December 31, 2023 from $268.2 million as of December 31, 2022. Consumer and Other.
We have established underwriting guidelines to be followed by our officers and monitor our delinquency levels for any negative or adverse trends. We had $45.0 million and $24.1 million in nonperforming loans as of December 31, 2022 and 2021, respectively.
We have established underwriting guidelines to be followed by our officers and monitor our delinquency levels for any negative or adverse trends. Nonperforming Assets Nonperforming assets totaled $39.2 million, or 0.37% of total assets at December 31, 2023, compared to $45.0 million, or 0.41% of total assets in nonperforming loans at December 31, 2022.
Average assets totaled $7.99 billion and $6.56 billion for the years ended December 31, 2022 and 2021, respectively. The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of our average total assets for the period indicated.
The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of our average total assets for the periods indicated.
The allowance for credit losses on unfunded commitments is a liability account reported as a component of other liabilities in our consolidated balance sheets and is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund.
The allowance for credit losses on unfunded commitments is a liability account reported as a component of other 56 Table of Contents liabilities in our consolidated balance sheets and is adjusted as a provision for credit loss expense.
The following table presents, for the periods indicated, the major categories of noninterest expense: For the Years Ended December 31, Increase (Decrease) For the Years Ended December 31, Increase (Decrease) 2022 2021 2021 2020 (In thousands) Salaries and employee benefits (1) $ 107,554 $ 90,177 $ 17,377 $ 90,177 $ 80,152 $ 10,025 Net occupancy and equipment 10,335 9,144 1,191 9,144 7,969 1,175 Depreciation 4,951 4,254 697 4,254 3,716 538 Data processing and software amortization 11,337 8,862 2,475 8,862 7,992 870 Professional fees 3,583 3,025 558 3,025 3,128 (103) Regulatory assessments and FDIC insurance 4,914 3,407 1,507 3,407 2,926 481 Amortization of intangibles 9,303 3,296 6,007 3,296 3,922 (626) Communications 1,800 1,406 394 1,406 1,387 19 Advertising 2,460 1,692 768 1,692 1,565 127 Other real estate expense 369 548 (179) 548 5,162 (4,614) Acquisition and merger-related expenses 24,138 2,011 22,127 2,011 — 2,011 Other 15,332 11,732 3,600 11,732 9,575 2,157 Total noninterest expense $ 196,076 $ 139,554 $ 56,522 $ 139,554 $ 127,494 $ 12,060 (1) Total salaries and employee benefits includes $9.0 million, $4.0 million and $3.4 million in stock based compensation expense for the years ended December 31, 2022, 2021 and 2020, respectively.
The following table presents, for the periods indicated, the major categories of noninterest expense: Years Ended December 31, Increase (Decrease) Years Ended December 31, Increase (Decrease) 2023 2022 2022 2021 (In thousands) Salaries and employee benefits (1) $ 157,034 $ 107,554 $ 49,480 $ 107,554 $ 90,177 $ 17,377 Net occupancy and equipment 16,932 10,335 6,597 10,335 9,144 1,191 Depreciation 7,584 4,951 2,633 4,951 4,254 697 Data processing and software amortization 19,526 11,337 8,189 11,337 8,862 2,475 Professional fees 7,955 3,583 4,372 3,583 3,025 558 Regulatory assessments and FDIC insurance 11,032 4,914 6,118 4,914 3,407 1,507 Amortization of intangibles 26,883 9,303 17,580 9,303 3,296 6,007 Communications 2,796 1,800 996 1,800 1,406 394 Advertising 3,627 2,460 1,167 2,460 1,692 768 Acquisition and merger-related expenses 15,555 24,138 (8,583) 24,138 2,011 22,127 Other 21,570 15,701 5,869 15,701 12,280 3,421 Total noninterest expense $ 290,494 $ 196,076 $ 94,418 $ 196,076 $ 139,554 $ 56,522 (1) Total salaries and employee benefits includes $9.9 million, $9.0 million and $4.0 million in stock based compensation expense for the years ended December 31, 2023, 2022 and 2021, respectively.
For the Years Ended December 31, 2022 2021 2020 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 $ 5,171,944 $ 280,375 5.42% $ 4,422,467 $ 230,713 5.22% $ 4,383,375 $ 225,959 5.15% Securities 1,779,425 37,861 2.13% 1,050,376 21,798 2.08% 588,318 15,538 2.64% Deposits in other financial institutions 462,075 4,758 1.03% 458,190 673 0.15% 36,945 265 0.72% Total interest-earning assets 7,413,444 $ 322,994 4.36% 5,931,033 $ 253,184 4.27% 5,008,638 $ 241,762 4.83% Allowance for credit losses on loans (59,244) (51,513) (46,680) Noninterest-earning assets 634,073 680,191 675,701 Total assets $ 7,988,273 $ 6,559,711 $ 5,637,659 Liabilities and Shareholders' Equity Interest-Bearing Liabilities: Interest-bearing demand deposits $ 1,140,575 $ 9,278 0.81% $ 574,079 $ 1,409 0.25% $ 385,482 $ 2,045 0.53% Money market and savings deposits 1,841,348 9,861 0.54% 1,571,532 3,956 0.25% 1,316,188 7,326 0.56% Certificates and other time deposits 1,034,491 7,825 0.76% 1,349,216 11,628 0.86% 1,268,080 21,675 1.71% Borrowed funds 61,773 1,216 1.97% 144,354 1,878 1.30% 197,525 2,183 1.11% Subordinated debt 109,111 5,856 5.37% 108,588 5,749 5.29% 108,064 5,850 5.41% Total interest-bearing liabilities 4,187,298 $ 34,036 0.81% 3,747,769 $ 24,620 0.66% 3,275,339 $ 39,079 1.19% Noninterest-Bearing Liabilities: Noninterest-bearing demand deposits 2,833,865 1,983,934 1,593,354 Other liabilities 62,581 41,972 37,278 Total liabilities 7,083,744 5,773,675 4,905,971 Shareholders' equity 904,529 786,036 731,688 Total liabilities and shareholders' equity $ 7,988,273 $ 6,559,711 $ 5,637,659 Net interest rate spread 3.55% 3.61% 3.64% Net interest income and margin (1) $ 288,958 3.90% $ 228,564 3.85% $ 202,683 4.05% Net interest income and margin (tax equivalent) (2) $ 292,152 3.94% $ 231,315 3.90% $ 204,416 4.08% (1) The net interest margin is equal to net interest income divided by average interest-earning assets.
Years Ended December 31, 2023 2022 2021 Average Balance Interest Earned/ Interest Paid Average Yield/ Rate Average Balance Interest Earned/ Interest Paid Average Yield/ Rate Average Balance Interest Earned/ Interest Paid Average Yield/ Rate (Dollars in thousands) Assets Interest-Earning Assets: Loans $ 7,961,911 $ 537,722 6.75% $ 5,171,944 $ 280,375 5.42% $ 4,422,467 $ 230,713 5.22% Securities 1,490,588 41,047 2.75% 1,779,425 37,861 2.13% 1,050,376 21,798 2.08% Deposits in other financial institutions 242,803 12,048 4.96% 462,075 4,758 1.03% 458,190 673 0.15% Total interest-earning assets 9,695,302 $ 590,817 6.09% 7,413,444 $ 322,994 4.36% 5,931,033 $ 253,184 4.27% Allowance for credit losses on loans (95,668) (59,244) (51,513) Noninterest-earning assets 1,147,232 634,073 680,191 Total assets $ 10,746,866 $ 7,988,273 $ 6,559,711 Liabilities and Shareholders' Equity Interest-Bearing Liabilities: Interest-bearing demand deposits $ 1,464,015 $ 38,689 2.64% $ 1,140,575 $ 9,278 0.81% $ 574,079 $ 1,409 0.25% Money market and savings deposits 2,259,264 48,646 2.15% 1,841,348 9,861 0.54% 1,571,532 3,956 0.25% Certificates and other time deposits 1,239,345 41,286 3.33% 1,034,491 7,825 0.76% 1,349,216 11,628 0.86% Borrowed funds 318,721 17,807 5.59% 61,773 1,216 1.97% 144,354 1,878 1.30% Subordinated debt 109,560 7,630 6.96% 109,111 5,856 5.37% 108,588 5,749 5.29% Total interest-bearing liabilities 5,390,905 $ 154,058 2.86% 4,187,298 $ 34,036 0.81% 3,747,769 $ 24,620 0.66% Noninterest-Bearing Liabilities: Noninterest-bearing demand deposits 3,814,651 2,833,865 1,983,934 Other liabilities 85,376 62,581 41,972 Total liabilities 9,290,932 7,083,744 5,773,675 Shareholders' equity 1,455,934 904,529 786,036 Total liabilities and shareholders' equity $ 10,746,866 $ 7,988,273 $ 6,559,711 Net interest rate spread 3.23% 3.55% 3.61% Net interest income and margin (1) $ 436,759 4.50% $ 288,958 3.90% $ 228,564 3.85% Net interest income and margin (tax equivalent) (2) $ 437,670 4.51% $ 292,152 3.94% $ 231,315 3.90% Cost of funds 1.67% 0.48% 0.43% Cost of deposits 1.47% 0.39% 0.31% (1) The net interest margin is equal to net interest income divided by average interest-earning assets.
Goodwill and Core Deposit Intangibles Our goodwill was $497.3 million and $223.6 million as of December 31, 2022 and 2021, respectively. The increase during 2022 of $273.6 million was due to the Merger. Goodwill resulting from business combinations represents the excess of the 58 Table of Contents consideration paid over the fair value of the net assets acquired.
Goodwill and Core Deposit Intangibles Goodwill was $497.3 million as of both December 31, 2023 and 2022. Goodwill resulting from business combinations represents the excess of the consideration paid over the fair value of the net assets acquired.
The average yield of our securities portfolio was 2.13% during the year ended December 31, 2022 compared with 2.08% for the year ended December 31, 2021. The increase in average yield during 2022 compared to 2021 was primarily due to the higher interest rate environment over the prior year and the growth in our securities portfolio during the year.
The average yield of our securities portfolio was 2.75% during the year ended December 31, 2023 compared with 2.13% for the year ended December 31, 2022. The increase in average yield during 2023 compared to 2022 was primarily due to reinvestment at higher interest rates during 2023 and changes in the mix of securities within the portfolio .
Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the Company Notes will bear interest at a floating rate equal to the then-current three-month LIBOR, plus 313 basis points (3.13%) for each quarterly interest period (subject to certain provisions set forth under “Description of the Notes—Interest Rates and Interest Payment Dates” included in the Prospectus Supplement for the Company Notes), payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year.
Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the Company Notes will bear interest at a floating rate equal to the then-current 3-Month SOFR, plus 3.13%, which transitioned from LIBOR immediately after June 30, 2023, for each quarterly interest period, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year.
We predominantly invest excess deposits in Federal Reserve Bank of Dallas balances, securities, interest-bearing deposits at other banks or other short-term liquid investments until the funds are needed to fund loan growth.
We predominantly invest excess deposits in Federal Reserve Bank of Dallas balances, securities, interest-bearing deposits at other banks or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio had a weighted average life of 7.6 years and 8.3 years at December 31, 2023 and 2022, respectively.
Management believes that determining the allowance for credit losses is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1 – Nature of Operations and Summary of Significant Accounting and Reporting Policies in the accompanying notes to the consolidated financial statements.
Our accounting policies are discussed in detail in Note 1 – Nature of Operations and Summary of Significant Accounting and Reporting Policies in the accompanying notes to the consolidated financial statements.
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver. As of December 31, 2022 and 2021, the Bank was well-capitalized.
Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. 63 Table of Contents Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver.
Our commercial real estate loan portfolio increased $1.83 billion, or 86.8%, to $3.93 billion as of December 31, 2022 from $2.10 billion as of 50 Table of Contents December 31, 2021 primarily due to the Merger as well as organic loan growth. Included in our commercial real estate portfolio are multi-family residential loans.
Our commercial real estate loan portfolio increased $140.3 million, or 3.6%, to $4.07 billion as of December 31, 2023 from $3.93 billion as of December 31, 2022 primarily due to organic loan growth. Included in our commercial real estate portfolio are multi-family residential 52 Table of Contents loans.
The decrease in net income was primarily due to a $56.5 million increase in noninterest expense and a $53.0 million increase in provision for credit losses, partially offset by a $60.4 million increase in net interest income, an $11.8 million increase in noninterest income and a $7.2 million decrease in the provision for income taxes.
The increase in net income was primarily due to a $147.8 million increase in net interest income, a $41.8 million decrease in the provision for credit losses and a $4.2 million increase in noninterest income, partially offset by a $94.4 million increase in noninterest expense and a $20.3 million increase in the provision for income taxes, as a result of the increase in income.
See Note 2 – Acquisitions in the accompanying notes to the consolidated financial statements for the impact of the Merger. Critical Accounting Policies Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain.
Critical Accounting Policies Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeFor the leased locations, the Company either leases the location entirely, owns the building and has a ground lease, or owns the drive through and leases the branch. The Company believes that lease terms for the 22 banking centers that it leases are generally consistent with prevailing market terms.
Biggest changeWe lease 20 of these banking centers, as well as our executive office, and own the remaining 34 banking centers. For the leased locations, the Company either leases the location entirely, owns the building and has a ground lease, or owns the drive through and leases the banking center.
ITEM 2. PROPERTIES The Company ’ s principal executive office is located at 9 Greenway Plaza, Suite 110, Houston, Texas 77046. As of December 31, 2022, we had 60 full-service banking centers, with 43 banking centers located in the Houston region, 16 banking centers in the Beaumont region and one banking center in Dallas, Texas.
ITEM 2. PROPERTIES The Company ’ s principal executive office is located at 9 Greenway Plaza, Suite 110, Houston, Texas 77046. As of December 31, 2023, we had 54 full-service banking centers, with 37 banking centers located in the Houston MSA, 16 banking centers in the Beaumont MSA and one banking center in Dallas, Texas.
The expiration dates of the leases range from 2023 to 2045, without consideration of any renewal periods available. We believe that our facilities are in good condition and adequate to meet our operating needs for the present and immediately foreseeable future.
We believe that our facilities are in good condition and adequate to meet our operating needs for the present and immediately foreseeable future.
Removed
We lease 22 of these banking centers, as well as our executive office, and own the remaining 38 banking centers. On February 18, 2023, we consolidated five of the Houston region banking centers upon conversion of the Allegiance Bank and CommunityBank banking centers to Stellar Bank banking centers.
Added
The Company believes that lease terms for the banking centers that it leases are generally consistent with prevailing market terms. The expiration dates of the leases range from 2024 to 2045, without consideration of any renewal periods available.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWe intend to defend ourselves vigorously against any future claims or litigation. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II.
Biggest changeWe intend to defend ourselves vigorously against any future claims or litigation. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 38 Table of Contents PART II.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

12 edited+2 added−2 removed7 unchanged
Biggest changeDividend reinvestment has been assumed. The Performance Graph assumes $100 invested on December 31, 2017 in the Company’ common stock, in the NASDAQ Composite Index and in the NASDAQ Bank Index. The historical stock price performance for Stellar’s common stock shown on the graph below is not necessarily indicative of future stock performance.
Biggest changeDividend reinvestment has been assumed. The Russell 2000 Index and the S&P 600 Bank Index were added to the performance graph due to the transfer of the Company’s stock listing to the NYSE during 2023. The Performance graph assumes $100 invested on December 31, 2018 in the Company’ common stock and each comparative index shown.
Payments of future dividends, if any, will be at the discretion of the Company’s Board of Directors after taking into account various factors, including its business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on Stellar’s ability to pay dividends.
Payments of future dividends, if any, will be at the discretion of the Company’s Board of Directors after taking into account various factors, including its business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on the Company’s ability to pay dividends.
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of the Company’s common stock during the 37 Table of Contents fourth quarter of 2022.
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of the Company’s common stock during the fourth quarter of 2023.
Securities Authorized for Issuance under Equity Compensation Plans The following table provides information as of December 31, 2022, regarding the equity compensation plans under which the Company’s equity securities are authorized for issuance: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders 942,879 $ 26.16 1,424,973 Equity compensation plans not approved by security holders — — — Total 942,879 1,424,973 Purchases of Equity Securities by the Issuer and Affiliated Purchasers In 2022, the Company’s Board of Directors authorized a share repurchase program, or the 2022 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September 22, 2022 through September 30, 2023.
Securities Authorized for Issuance under Equity Compensation Plans The following table provides information as of December 31, 2023, regarding the equity compensation plans under which the Company’s equity securities are authorized for issuance: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders 917,050 $ 25.24 1,108,690 Equity compensation plans not approved by security holders — — — Total 917,050 1,108,690 39 Table of Contents Purchases of Equity Securities by the Issuer and Affiliated Purchasers In 2022, the Company’s Board of Directors authorized a share repurchase program (“2022 Repurchase Program”), under which the Company could repurchase up to $40.0 million of the Company’s common stock starting September 22, 2022 through September 30, 2023.
(2) Computed based on the closing share price of the Company’s common stock as of the end of each period shown. 38 Table of Contents Performance Graph The performance graph compares the cumulative total shareholder return on CBTX’s common stock for the period beginning at the close of trading on December 31, 2017 to the close of trading on September 30, 2022 and Stellar’s common stock for the period beginning October 1, 2022 to the close of trading on December 31, 2022, with the cumulative total return of the NASDAQ Composite Index and the NASDAQ Bank Index for the same period.
(2) Computed based on the closing price of the Company’s common stock as of the end of each period shown. 40 Table of Contents Performance Graph The performance graph compares the cumulative total shareholder return on CBTX’s common stock for the period beginning at the close of trading on December 31, 2018 to the close of trading on September 30, 2022 and Stellar’s common stock for the period beginning October 1, 2022 to the close of trading on December 31, 2023, with the cumulative total return of the Russell 2000 Index, S&P 600 Banks Index, NASDAQ Composite Index and the NASDAQ Bank Index for the same period.
Period Number of Shares Purchased (1) Average Price Paid Per Share Shares Purchased as Part of Publicly Announced Plan Number of Shares That May Yet be Purchased Under the Plan (2) October 1, 2022 to October 31, 2022 90,247 $ 29.33 — 1,218,027 November 1, 2022 to November 30, 2022 — $ — — 1,183,082 December 1, 2022 to December 31, 2022 — $ — — 1,357,773 Total 90,247 $ 29.33 (1) S hares employees elected to have withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options as allowed under the Company’s stock compensation plans.
Period Number of Shares Purchased (1) Average Price Paid Per Share Shares Purchased as Part of Publicly Announced Plan Number of Shares That May Yet be Purchased Under the Plan (2) October 1, 2023 to October 31, 2023 49,775 $ 21.32 — 2,763,703 November 1, 2023 to November 30, 2023 13 $ 23.89 — 2,514,669 December 1, 2023 to December 31, 2023 — $ — — 2,155,172 Total 49,788 $ 21.32 (1) S hares employees elected to have withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options as allowed under the Company’s stock compensation plans.
(1) Prior to the Merger, the shares were traded under the symbol “CBTX.” * $100 invested on December 31, 2017 in Stellar ’ s common stock or an index, including reinvestment of dividends.
The historical stock price performance for Stellar’s common stock shown on the graph below is not necessarily indicative of future stock performance. (1) Prior to the Merger, the shares were traded under the symbol “CBTX.” * $100 invested on December 31, 2018 in Stellar ’ s common stock or an index, including reinvestment of dividends.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Market Prices The Company’s common stock is listed on the NASDAQ Global Market under the symbol “STEL.” Prior to the Merger, the Company’s stock was listed on the NASDAQ Global Market under the symbol “CBTX.” Quotations of the sales volume and the closing sales prices of the common stock of the Company are listed daily in the NASDAQ Global Market’s listings.
Prior to the Merger, the Company’s stock was listed on the Nasdaq under the symbol “CBTX.” Quotations of the sales volume and the closing sales prices of the common stock of the Company are listed daily in the New York Stock Exchange’s listings.
Stellar declared a quarterly dividend of $0.13 per share to be paid in the first quarter of 2023. See Note 21 — Subsequent Events. The dividends paid per share of the Company have been retrospectively adjusted to reflect the effect of the Merger.
Dividends During 2023, the Company paid four quarterly cash dividends of $0.13 per share on its common stock and declared a quarterly dividend of $0.13 per share to be paid in the first quarter of 2024. See Note 19 — Subsequent Events.
The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to the Company. See Item 1.
The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to the Company. See “Item 1. — Business—Regulation and Supervision—Regulatory Limits on Dividends, Distributions and Repurchases.” The Company’s junior subordinated debentures allow it to defer interest payments thereunder for a period of time.
As of March 10, 2023, there were 52,974,885 shares outstanding and 1,285 shareholders of record of the Company’s common stock.
As of February 26, 2024, there were 53,297,191 shares outstanding and 1,209 shareholders of record of the Company’s common stock. The closing price per share of common stock on December 29, 2023, the last trading day of the year, was $27.84.
Fiscal year ending De cember 31. 2017 2018 2019 2020 2021 2022 Stellar Bancorp, Inc. 100.00 99.75 107.01 89.53 103.66 107.19 NASDAQ Composite 100.00 97.16 132.81 192.47 235.15 158.65 NASDAQ Bank 100.00 75.78 89.41 81.19 114.69 96.14 (Source: Refinitiv) ITEM 6. [RESERVED] 39 Table of Contents
Fiscal year ending De cember 31. 2018 2019 2020 2021 2022 2023 Stellar Bancorp, Inc. 100.00 107.28 89.75 103.92 107.46 103.67 Russell 2000 100.00 125.52 150.58 172.90 137.56 160.85 S&P 600 Banks 100.00 120.57 106.04 143.94 132.60 130.34 NASDAQ Composite 100.00 136.69 198.10 242.03 163.28 236.17 NASDAQ Bank 100.00 117.98 107.14 151.35 126.88 135.67 (Source: Refinitiv) ITEM 6. [RESERVED] 41 Table of Contents
Removed
The closing price per share of common stock on December 31, 2022, the last trading day of the year, was $29.46. 36 Table of Contents Dividends During 2022, the Company paid three quarterly cash dividends of $0.10 per share and one quarterly dividend of $0.13 per share on its common stock during 2022.
Added
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Market Prices The Company’s common stock is listed on the New York Stock Exchange under the symbol “STEL.” On June 12, 2023, the Company transferred listing of its common stock from the Nasdaq Stock Market LLC (“Nasdaq”) to the New York Stock Exchange.
Removed
“Business—Regulation and Supervision—Regulatory Limits on Dividends, Distributions and Repurchases.” In connection with the F&M Bancshares, Inc. acquisition, Allegiance assumed junior subordinated debentures that allow it to defer interest payments thereunder for a period of time.
Added
During the second quarter of 2023, the Company's Board of Directors authorized the expansion of its existing share repurchase program to provide that the Company may repurchase up to $60 million of the Company’s common stock through May 31, 2024.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements, the reports thereon, the notes thereto and supplementary data commence at page 72 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 65 Table of contents
Biggest changeFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements, the reports thereon, the notes thereto and supplementary data commence at page 72 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the market risk of the Company’s financial instruments, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Financial Condition—Asset/Liability Management and Interest Rate Risk.” Our principal market risk exposure is to changes in interest rates. ITEM 8.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the market risk of the Company’s financial instruments, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Financial Condition—Asset/Liability Management and Interest Rate Risk.” Our principal market risk exposure is to changes in interest rates. ITEM 8.

Other STEL 10-K year-over-year comparisons