Stellar Bancorp(STEL) - 2022 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements – (Unaudited) This section presents the unaudited condensed consolidated financial statements of Stellar Bancorp, Inc. and its subsidiary for the three and nine months ended September 30, 2022 and 2021, and as of September 30, 2022 and December 31, 2021 - The financial statements are unaudited and prepared in accordance with GAAP, but do not include all information and footnotes required for complete consolidated financial statements[28] - Interim accounting measurements rely more on estimates and are not necessarily indicative of full-year results due to global economic conditions, interest rates, liquidity, and market competition[29] Condensed Consolidated Balance Sheets | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Assets | $4,271,831 | $4,486,001 | $(214,170) | (4.8%) | | Total Liabilities | $3,770,406 | $3,923,876 | $(153,470) | (3.9%) | | Total Shareholders' Equity | $501,425 | $562,125 | $(60,700) | (10.8%) | | Cash and due from banks | $41,219 | $27,689 | $13,530 | 48.9% | | Interest-bearing deposits | $329,229 | $922,457 | $(593,228) | (64.3%) | | Total cash and cash equivalents | $370,448 | $950,146 | $(579,698) | (61.0%) | | Loans, net | $3,093,844 | $2,836,179 | $257,665 | 9.1% | | Securities | $511,282 | $425,046 | $86,236 | 20.3% | | Total Deposits | $3,723,774 | $3,831,284 | $(107,510) | (2.8%) | Condensed Consolidated Statements of Income | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change | % Change | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------- | :-------------------------- | :-------------------------- | :----- | :------- | | Total Interest Income | $44,673 | $32,697 | $11,976 | 36.6% | $114,789 | $99,864 | $14,925 | 14.9% | | Total Interest Expense| $1,661 | $1,448 | $213 | 14.7% | $4,275 | $4,507 | $(232) | (5.1%) | | Net Interest Income | $43,012 | $31,249 | $11,763 | 37.6% | $110,514 | $95,357 | $15,157 | 15.9% | | Provision (recapture) for credit losses | $1,012 | $(4,895) | $5,907 | 120.7% | $1,573 | $(9,566) | $11,139 | 116.4% | | Total Noninterest Income | $3,449 | $5,562 | $(2,113)| (38.0%) | $12,324 | $12,164 | $160 | 1.3% | | Total Noninterest Expense | $29,321 | $24,372 | $4,949 | 20.3% | $77,731 | $72,854 | $4,877 | 6.7% | | Net Income | $12,747 | $14,421 | $(1,674)| (11.6%) | $35,049 | $36,143 | $(1,094)| (3.0%) | | Basic EPS | $0.52 | $0.59 | | | $1.43 | $1.48 | | | | Diluted EPS | $0.52 | $0.59 | | | $1.43 | $1.47 | | | Condensed Consolidated Statements of Comprehensive Income | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :-------------------------- | :-------------------------- | :----- | | Net income | $12,747 | $14,421 | $(1,674)| $35,049 | $36,143 | $(1,094)| | Change in unrealized gains (losses) on securities available for sale | $(29,119) | $(3,446) | $(25,673)| $(92,244) | $(5,493) | $(86,751)| | Other comprehensive loss, net of tax | $(23,004) | $(2,723) | $(20,281)| $(72,873) | $(4,339) | $(68,534)| | Total comprehensive income (loss) | $(10,257) | $11,698 | $(21,955)| $(37,824) | $31,804 | $(69,628)| Condensed Consolidated Statements of Changes in Shareholders' Equity | Metric (in thousands) | Dec 31, 2021 Balance | Sep 30, 2022 Balance | Change | | :-------------------- | :------------------- | :------------------- | :----- | | Common Stock | $253 | $240 | $(13) | | Additional Paid-In Capital | $335,846 | $308,197 | $(27,649)| | Retained Earnings | $237,165 | $262,804 | $25,639 | | Treasury Stock | $(14,196) | $0 | $14,196 | | Accumulated Other Comprehensive Income (Loss) | $3,057 | $(69,816) | $(72,873)| | Total Shareholders' Equity | $562,125 | $501,425 | $(60,700)| - During the nine months ended September 30, 2022, the Company retired 826,995 treasury shares with a cost basis of $14.0 million and repurchased 510,161 shares at an average price of $29.48[30][31] Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Net cash provided by operating activities | $39,723 | $54,980 | $(15,257)| | Net cash (used in) provided by investing activities | $(437,330) | $190,678 | $(628,008)| | Net cash (used in) provided by financing activities | $(182,091) | $215,120 | $(397,211)| | Net increase (decrease) in cash, cash equivalents and restricted cash | $(579,698) | $460,778 | $(1,040,476)| | Cash, cash equivalents and restricted cash, ending | $370,448 | $998,785 | $(628,337)| - Purchases of securities increased to $662.6 million in 2022 from $630.2 million in 2021[24] - Net increase in loans was $204.9 million in 2022, a significant shift from a net decrease of $312.7 million in 2021[24] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and practices applied in preparing the financial statements, including details on the recent merger and new accounting standards - Stellar Bancorp, Inc. (formerly CBTX, Inc.) operates 34 branches in Texas and completed a merger of equals with Allegiance Bancshares, Inc. on October 1, 2022[25][26] - The Company retired 826,995 treasury shares ($14.0 million cost basis) and repurchased 510,161 shares ($29.48 average price) during the nine months ended September 30, 2022[30][31] - ASU 2022-02, effective after December 31, 2022, eliminates the troubled debt receivable (TDR) accounting model for CECL adopters and is not expected to significantly impact the Company's financial statements[32][36] NOTE 2: SECURITIES This note details the Company's securities portfolio, including amortized cost, fair value, and unrealized gains and losses | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Amortized Cost | $599,813 | $421,193 | $178,620 | | Total Fair Value | $511,282 | $425,046 | $86,236 | | Gross Unrealized Gains| $0 | $6,371 | $(6,371) | | Gross Unrealized Losses| $(88,531) | $(2,518) | $(86,013)| - The shift to net unrealized losses of $88.5 million at September 30, 2022, from net unrealized gains of $3.9 million at December 31, 2021, is primarily due to increases in market interest rates[42][252] - Management does not believe any securities were impaired due to credit quality, as issuers continue timely payments and unrealized losses are expected to recover as securities approach maturity or repricing[42] NOTE 3: EQUITY INVESTMENTS This note provides information on the Company's equity investments, including Federal Reserve Bank stock, Federal Home Loan Bank stock, and CRA investments | Investment (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------ | :----------- | :----------- | | Federal Reserve Bank stock| $9,271 | $9,271 | | Federal Home Loan Bank stock| $3,991 | $3,967 | | CRA investments | $4,432 | $4,348 | | Total Equity Investments | $17,835 | $17,727 | - Unfunded commitments to investment funds increased from $6.3 million at December 31, 2021, to $7.9 million at September 30, 2022[48] - A total gain of $1.4 million from the sale of underlying investments by two funds was recorded during the nine months ended September 30, 2022[49] NOTE 4: LOANS This note details the composition of the Company's loan portfolio by class, including changes in commercial, real estate, and multi-family residential loans | Loan Class (in thousands) | Sep 30, 2022 | % of Total | Dec 31, 2021 | % of Total | Change | % Change | | :------------------------ | :----------- | :--------- | :----------- | :--------- | :----- | :------- | | Commercial and industrial | $568,071 | 18.1% | $634,384 | 22.0% | $(66,313)| (10.5%) | | Commercial real estate | $1,242,118 | 39.6% | $1,091,969 | 38.0% | $150,149 | 13.8% | | Construction and development | $507,570 | 16.2% | $460,719 | 16.0% | $46,851 | 10.2% | | Multi-family residential | $370,391 | 11.8% | $286,396 | 10.0% | $83,995 | 29.3% | | Total gross loans | $3,135,891 | 100.0% | $2,876,427 | 100.0% | $259,464 | 9.0% | - PPP loans decreased significantly from $54.3 million at December 31, 2021, to $2.3 million at September 30, 2022[234] - Loan participations purchased increased to $59.9 million in the nine months ended September 30, 2022, from $1.9 million in the same period of 2021[52] NOTE 5: LOAN PERFORMANCE This note provides an overview of loan performance, including past due loans, nonaccrual loans, and troubled debt restructurings | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Past Due Loans | $22,153 | $1,136 | $21,017| | Nonaccrual Loans | $22,410 | $22,568 | $(158) | | Total Nonaccrual Loans| $22,410 | $22,568 | $(158) | | Total Troubled Debt Restructurings | $50,609 | $50,728 | $(119) | - Interest income that would have been earned on nonaccrual loans increased from $568,000 in 2021 to $809,000 in 2022 for the nine-month period[53] - The number of troubled debt restructurings increased from 6 loans in 2021 to 12 loans in 2022 for the nine-month period, with a post-modification recorded investment of $6.6 million in 2022[55] NOTE 6: ALLOWANCE FOR CREDIT LOSSES This note details the allowance for credit losses (ACL) for loans, reflecting changes due to loan growth and economic conditions | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total ACL for loans | $32,577 | $31,345 | $1,232 | | ACL for loans to loans excluding loans held for sale | 1.04% | 1.09% | (0.05%)| - The provision for credit losses for loans was $1.0 million for the nine months ended September 30, 2022, compared to a recapture of $8.96 million in the prior year, reflecting loan growth and changes in economic conditions[79] - The Company had no loans graded loss or doubtful at September 30, 2022, or December 31, 2021[67] NOTE 7: PREMISES AND EQUIPMENT This note provides information on the Company's premises and equipment, including net book value, depreciation expense, and losses from disposals | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Premises and equipment, net | $55,594 | $58,417 | $(2,823)| - Depreciation expense was $2.5 million for the nine months ended September 30, 2022, similar to $2.6 million in 2021[88] - A $1.2 million loss was recorded from disposals of buildings and equipment due to an early land lease termination during the nine months ended September 30, 2022[89] NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS This note details the Company's goodwill and other intangible assets, including changes in core deposits, customer relationships, and servicing assets | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Goodwill | $80,950 | $80,950 | $0 | | Total other intangible assets, net | $3,188 | $3,658 | $(470) | - Core deposits intangible assets decreased from $212,000 to $97,000, while customer relationships decreased from $3.09 million to $2.76 million[90] - Servicing assets increased from $190,000 to $328,000 due to loan sales, partially offset by amortization[91] NOTE 9: BANK-OWNED LIFE INSURANCE This note provides information on the Company's bank-owned life insurance (BOLI) policies, including balance and net change in cash surrender value | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Balance at end of period | $74,274 | $72,771 | $1,503 | | Net change in cash surrender value | $1,118 | $3,103 | $(1,985)| - In the nine months ended September 30, 2021, the Company received $2.7 million in proceeds from a bank-owned insurance policy claim, resulting in a $1.9 million gain[92] NOTE 10: DEPOSITS This note details the composition of the Company's deposits, including noninterest-bearing, interest-bearing, and time deposits | Deposit Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------------- | :----------- | :----------- | :----- | :------- | | Noninterest-bearing deposits | $1,780,473 | $1,784,981 | $(4,508)| (0.3%) | | Interest-bearing deposits | $1,943,301 | $2,046,303 | $(103,002)| (5.0%) | | Total deposits | $3,723,774 | $3,831,284 | $(107,510)| (2.8%) | | Certificates and other time deposits, $100,000 or greater | $161,975 | $134,775 | $27,200 | 20.2% | - Uninsured certificates of deposits or other time deposits totaled $101.9 million at September 30, 2022[93] NOTE 11: LINES OF CREDIT This note describes the Company's available lines of credit, including revolving lines and Federal Home Loan Bank advances - The Company has a $30.0 million revolving line of credit with no outstanding borrowings at September 30, 2022[94] - Federal Home Loan Bank advances of $50.0 million outstanding at December 31, 2021, were fully repaid during the nine months ended September 30, 2022[97] - Net capacity available under the Federal Home Loan Bank facility increased to $1.2 billion at September 30, 2022, from $923.3 million at December 31, 2021[97] NOTE 12: RELATED PARTY TRANSACTIONS This note provides details on transactions with related parties, including loans, unfunded commitments, and deposits | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | Loans to related parties | $109,600 | $138,100 | $(28,500)| (20.6%) | | Unfunded loan commitments to related parties | $101,100 | $55,600 | $45,500 | 81.8% | | Related party deposits | $243,400 | $249,900 | $(6,500) | (2.6%) | - No loans to related parties were nonaccrual, past due, restructured, or classified as potential problem loans[101] NOTE 13: FAIR VALUE DISCLOSURES This note explains the fair value hierarchy and provides fair value measurements for financial assets and liabilities - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[105][106][107] | Financial Instrument (in thousands) | Sep 30, 2022 Fair Value | Dec 31, 2021 Fair Value | Change | | :---------------------------------- | :---------------------- | :---------------------- | :----- | | Total fair value of financial assets | $521,253 | $428,604 | $92,649| | Total fair value of financial liabilities | $9,944 | $3,543 | $6,401 | - Individually evaluated loans measured at fair value on a non-recurring basis decreased from $12.4 million to $10.1 million, with specific ACL decreasing from $4.7 million to $2.7 million[116] NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS This note describes the Company's use of derivative financial instruments, primarily interest rate swaps, and their notional amounts and fair values - The Company had 14 interest rate swap agreements outstanding at September 30, 2022, compared to 19 at December 31, 2021[123] | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Notional Amounts| $252,206 | $270,025 | $(17,819)| | Total Derivatives Fair Value | $27 | $15 | $12 | - The Company also had three credit risk participation agreements at September 30, 2022, providing credit protection for interest rate swaps[125] NOTE 15: OPERATING LEASES This note provides information on the Company's operating leases, including total lease cost and details on lease terms and discount rates | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Total lease cost | $790 | $977 | $(187) | - The Company received a $1.5 million payment for early termination of a land lease, recorded as other noninterest income[131] - The weighted-average remaining lease term was 10.1 years with a weighted-average discount rate of 2.63% at September 30, 2022[131] NOTE 16: COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK This note outlines the Company's commitments, contingencies, and off-balance-sheet risks, including credit extensions and standby letters of credit | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | Total commitments to extend credit | $989,048 | $774,960 | $214,088 | 27.6% | | Standby letters of credit | $11,611 | $18,109 | $(6,498) | (35.9%) | - Management believes the disposition of claims and lawsuits will not have a material adverse effect on the Company's financial position or results of operations[137] NOTE 17: EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION ARRANGEMENTS This note describes the Company's employee benefit plans, including 401(k) contributions and deferred compensation liabilities - Company contributions to the 401(k) plan were $1.7 million for both the nine months ended September 30, 2022 and 2021[138] | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Executive deferred compensation payable | $1,400 | $1,700 | $(300) | | Salary continuation liability (2008 plan) | $82 | $153 | $(71) | | Salary continuation liability (2017 plan) | $1,500 | $900 | $600 | - The liability for the 2017 salary continuation arrangement was paid in full as a result of the Merger[141] NOTE 18: STOCK-BASED COMPENSATION This note provides information on the Company's stock-based compensation plans, including the impact of the merger on equity awards and compensation expense - Upon the October 1, 2022 merger, all outstanding equity awards under prior plans fully vested, except for certain non-employee director restricted stock awards which were prorated[146][171][190] | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Stock compensation expense | $1,500 | $1,800 | $(300) | - As of September 30, 2022, there was approximately $962,000 of total unrecognized compensation expense related to unvested restricted stock awards[151] NOTE 19: REGULATORY MATTERS This note discusses the Company's compliance with regulatory capital requirements and other regulatory actions - The Company and the Bank were 'well capitalized' at September 30, 2022, and December 31, 2021, exceeding all minimum Basel III capital requirements[161][163] | Capital Ratio | Sep 30, 2022 (Consolidated) | Dec 31, 2021 (Consolidated) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Common Equity Tier 1 to Risk Weighted Assets | 14.05% | 15.31% | | Tier 1 Capital to Risk-Weighted Assets | 14.05% | 15.31% | | Total Capital to Risk-Weighted Assets | 15.09% | 16.42% | | Tier 1 Leverage Capital to Average Assets | 11.42% | 11.22% | - In December 2021, the Bank paid an aggregate civil money penalty of $8.0 million to resolve BSA/AML compliance matters with the OCC and FinCEN[162] NOTE 20: INCOME TAXES This note provides details on income tax expense and the effective tax rate, explaining differences from the federal statutory rate | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $3,381 | $2,913 | $8,485 | $8,090 | | Effective tax rate | 20.96% | 16.81% | 19.49% | 18.29% | - Differences from the federal statutory rate of 21% were mainly due to tax-exempt interest income, bank-owned life insurance earnings, and merger-related costs[166] NOTE 21: EARNINGS PER SHARE This note presents basic and diluted earnings per share (EPS) and the dilutive effect of outstanding equity awards | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.52 | $0.59 | $1.43 | $1.48 | | Diluted EPS | $0.52 | $0.59 | $1.43 | $1.47 | - Dilutive effect of outstanding stock options and unvested restricted stock awards was 119 thousand shares for the three months and 107 thousand shares for the nine months ended September 30, 2022[167] NOTE 22: SUBSEQUENT EVENTS This note discloses significant events occurring after the reporting period, primarily the completion of the merger of equals with Allegiance Bancshares, Inc - The merger of equals with Allegiance Bancshares, Inc. was completed on October 1, 2022, with Stellar Bancorp, Inc. as the surviving entity[168] - Allegiance shareholders now hold approximately 53.9% of outstanding Company common stock[170] - The merger is accounted for as a reverse acquisition, and the fair value determination of assets and liabilities is ongoing, meaning initial accounting is incomplete[172] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, including an overview of its business, the impact of the recent merger, and an uncertain economic outlook - The Company's operating results depend primarily on net interest income, influenced by market interest rates and the volume/types of interest-earning assets and liabilities[193] - The Company completed its merger of equals with Allegiance Bancshares, Inc. on October 1, 2022, changing its name to Stellar Bancorp, Inc.[184] - Geopolitical instabilities, inflation, rising interest rates, and supply disruptions continue to create an uncertain economic outlook, which could negatively impact net income through increased provisions for credit losses[196] Cautionary Note Regarding Forward-Looking Statements This note advises that forward-looking statements are subject to risks and uncertainties, including those related to economic conditions and the recent merger - Forward-looking statements are not guarantees of future performance and are subject to difficult-to-predict risks, assumptions, and uncertainties[179] - Key risk factors include natural disasters, COVID-19 impact, geographic concentration, management personnel changes, asset quality deterioration, interest rate risk, and regulatory changes[180] - Risks related to the merger include integration delays, higher costs, unrealized synergies, personnel retention, increased indebtedness, and stock dilution[188] Merger This section details the merger of equals with Allegiance Bancshares, Inc., including the name change and share exchange ratio - The merger of equals with Allegiance Bancshares, Inc. was effective October 1, 2022, with CBTX, Inc. changing its name to Stellar Bancorp, Inc.[184] - Allegiance Bank merged into CommunityBank of Texas, N.A., with Allegiance Bank as the surviving entity[185] - Allegiance shareholders received 1.4184 shares of Company common stock for each Allegiance share, now holding approximately 53.9% of the combined company[186] Overview This section provides a general overview of the Company's business model, focusing on deposits as a primary fund source and loans as a primary fund use - The Company's primary source of funds is deposits, and its primary use of funds is loans[192] - Net interest income is the largest driver of periodic changes in net interest spread, net interest margin, and net interest income[193] - The Company focuses on relationship-driven commercial banking for small to medium-sized businesses and professionals in its Texas markets[26] Uncertain Economic Outlook This section discusses the current economic environment, highlighting geopolitical instabilities, inflation, and rising interest rates as factors influencing the Company's financial outlook - Geopolitical instabilities, inflation, rising interest rates, and supply disruptions continue to create an uncertain economic outlook[196] - These factors are considered in the forecasts and qualitative factors used to determine the Company's ACL[196] - Worsening economic conditions could lead to increases in the ACL through additional provisions for credit losses, negatively impacting net income[196] Results of Operations This section analyzes the Company's financial performance, focusing on net interest income, provision for credit losses, noninterest income, noninterest expense, and net income | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change | % Change | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | :------- | :-------------------------- | :-------------------------- | :----- | :------- | | Net Interest Income | $43,012 | $31,249 | $11,763 | 37.6% | $110,514 | $95,357 | $15,157 | 15.9% | | Provision (recapture) for credit losses | $1,012 | $(4,895) | $5,907 | 120.7% | $1,573 | $(9,566) | $11,139 | 116.4% | | Noninterest Income | $3,449 | $5,562 | $(2,113)| (38.0%) | $12,324 | $12,164 | $160 | 1.3% | | Noninterest Expense | $29,321 | $24,372 | $4,949 | 20.3% | $77,731 | $72,854 | $4,877 | 6.7% | | Net Income | $12,747 | $14,421 | $(1,674)| (11.6%) | $35,049 | $36,143 | $(1,094)| (3.0%) | - Net interest income increased due to higher average balances and rates on loans and securities, and higher rates on interest-bearing deposits at other financial institutions[203] - Noninterest income decreased in Q3 2022 due to lower earnings on bank-owned life insurance, but increased for the nine-month period due to a $1.5 million payment for early land lease termination and a $1.4 million gain on equity investment sales[223][224] Financial Condition This section analyzes the Company's balance sheet, including total assets, loans, cash and cash equivalents, securities, deposits, and nonperforming assets | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------- | :----------- | :----------- | :----- | :------- | | Total Assets | $4,271,831 | $4,486,001 | $(214,170)| (4.8%) | | Loans excluding loans held for sale | $3,126,421 | $2,867,524 | $258,897 | 9.0% | | Cash and cash equivalents | $370,448 | $950,146 | $(579,698)| (61.0%) | | Securities | $511,282 | $425,046 | $86,236 | 20.3% | | Total Deposits | $3,723,774 | $3,831,284 | $(107,510)| (2.8%) | | Federal Home Loan Bank advances | $0 | $50,000 | $(50,000)| (100.0%) | - Nonperforming assets remained stable at $22.4 million (0.52% of total assets) at September 30, 2022, compared to $22.6 million (0.50%) at December 31, 2021[240] - The ACL for loans increased to $32.6 million (1.04% of loans) at September 30, 2022, from $31.3 million (1.09% of loans) at December 31, 2021, primarily due to loan portfolio growth[247] Liquidity and Capital Resources This section discusses the Company's liquidity position and capital adequacy, including liquid assets, borrowing arrangements, and deposit composition - Liquid assets (cash and equivalents, securities) decreased by $493.4 million to $881.7 million at September 30, 2022, from $1.375 billion at December 31, 2021[261] - Available funds under borrowing arrangements increased to $1.3 billion at September 30, 2022, from $1.0 billion at December 31, 2021[265] - The ratio of average noninterest-bearing deposits to average total deposits increased to 47.8% for the nine months ended September 30, 2022, from 46.2% for the year ended December 31, 2021[264] Interest Rate Sensitivity and Market Risk This section describes how the Company manages interest rate risk and its sensitivity to market rate changes, including the transition away from LIBOR - The Company manages interest rate risk by structuring its balance sheet and does not use leveraged derivatives or financial options for this purpose[273] - Simulation models show that at September 30, 2022, the Company's balance sheet was less asset sensitive to future rate increases and more sensitive to downward rate movements compared to December 31, 2021[279] - LIBOR was used as an index rate for a majority of the Company's interest-rate swaps and approximately 4.5% of its loans, with a transition away from LIBOR expected to span through June 2023[280] Non-GAAP Financial Measures This section explains the use of non-GAAP financial measures, such as tangible equity and tangible book value per share, to provide additional financial insights - Non-GAAP financial measures like tangible equity and tangible book value per share are used to provide insights exclusive of intangible assets[285] | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Tangible equity (in thousands) | $417,287 | $477,517 | | Tangible assets (in thousands) | $4,187,693 | $4,401,393 | | Tangible book value per share | $17.38 | $19.50 | | Tangible equity to tangible assets | 9.96% | 10.85% | Critical Accounting Policies This section refers to the Company's Annual Report on Form 10-K for a detailed discussion of critical accounting policies involving significant judgment - Critical accounting policies, involving significant judgment and complexity, are detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[288] Emerging Growth Company This section notes the Company's status as an 'emerging growth company' under the JOBS Act and its impending loss of this status - The Company qualifies as an 'emerging growth company' under the JOBS Act, allowing for reduced reporting and other requirements[289] - The Company will lose its emerging growth status on December 31, 2022[289] Recently Issued Accounting Pronouncements This section directs readers to Note 1 of the financial statements for information on recently issued accounting pronouncements - Information on recently issued accounting pronouncements can be found in Note 1 of the financial statements[290] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to the "Interest Rate Sensitivity and Market Risk" discussion within Management's Discussion and Analysis for details on how the Company manages market risk - The Company's management of market risk is discussed in the "Interest Rate Sensitivity and Market Risk" section of the MD&A[291] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022 - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022[292] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[293] PART II — OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to routine claims and lawsuits but management believes their disposition will not have a material adverse effect on financial position or results of operations - The Company is not currently subject to any material legal proceedings[294] - Management believes the likelihood is remote that current claims and lawsuits would have a material adverse effect on the Company's financial position or results[295] Item 1A. Risk Factors This section states that there have been no material changes to previously disclosed risk factors and directs investors to the Company's Annual Reports on Form 10-K and other SEC filings for a comprehensive list - No material changes in risk factors have occurred since the previous disclosures in the Company's and Allegiance's Annual Reports on Form 10-K for 2021 and the Joint Proxy Statement Prospectus regarding the Merger[296] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company had no unregistered sales of equity securities and continued its share repurchase program, repurchasing 416,746 shares under the 2021 program during the three months ended September 30, 2022 - No unregistered sales of equity securities occurred[297] - The Company repurchased 416,746 shares under the 2021 Repurchase Program during the three months ended September 30, 2022, at an average price of $29.89[303] - A new $40.0 million 2022 Repurchase Program was authorized, effective September 22, 2022, through September 30, 2023, with no shares repurchased under it during Q3 2022[300] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities - There were no defaults upon senior securities[305] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[306] Item 5. Other Information The Company reported no other information for this item - No other information was reported for this item[307] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including merger agreements, organizational documents, employment agreements, incentive plans, and certifications - Key exhibits include the Agreement and Plan of Merger (Exhibit 2.1), Second Amended and Restated Certificate of Formation (Exhibit 3.1), and the Stellar Bancorp, Inc. 2022 Omnibus Incentive Plan (Exhibit 10.5)[308] - Certifications of the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) are included[308] SIGNATURES The report is duly signed by Robert R. Franklin, Jr., Chief Executive Officer, and Paul P. Egge, Senior Executive Vice President and Chief Financial Officer, on behalf of CBTX, Inc - The report was signed by Robert R. Franklin, Jr., Chief Executive Officer, and Paul P. Egge, Senior Executive Vice President and Chief Financial Officer, on October 28, 2022[313]