Stellar Bancorp(US:STEL)2023-05-04 20:06markdown PART I—FINANCIAL INFORMATION [Interim Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Interim%20Consolidated%20Financial%20Statements) The interim consolidated financial statements present the financial position, results of operations, and cash flows of Stellar Bancorp, Inc. for the periods ended March 31, 2023, reflecting the significant impact of the October 1, 2022 merger with CBTX, Inc., with Allegiance Bancshares, Inc. as the accounting acquirer, making post-merger results not directly comparable to prior periods - On October 1, 2022, Allegiance Bancshares, Inc. and CBTX, Inc. completed a merger of equals, with CBTX as the legal acquirer and Allegiance as the accounting acquirer. The combined company was renamed Stellar Bancorp, Inc. Financials for periods after this date are **not comparable** to prior periods[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) As of March 31, 2023, total assets were $10.60 billion, a decrease from $10.90 billion at December 31, 2022, primarily driven by a reduction in deposits from $9.27 billion to $8.74 billion, while total loans, net, increased to $7.79 billion from $7.66 billion, and total shareholders' equity increased to $1.45 billion from $1.38 billion Consolidated Balance Sheets (Unaudited) | (In thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Total Assets** | **$10,604,718** | **$10,900,437** | | Total cash and cash equivalents | $263,333 | $371,705 | | Available for sale securities, at fair value | $1,519,175 | $1,807,586 | | Loans, net | $7,789,856 | $7,661,571 | | Goodwill | $497,260 | $497,260 | | **Total Liabilities** | **$9,158,502** | **$9,517,261** | | Total deposits | $8,738,875 | $9,267,632 | | Borrowed funds | $238,944 | $63,925 | | **Total Shareholders' Equity** | **$1,446,216** | **$1,383,176** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) For the three months ended March 31, 2023, the company reported net income of $37.1 million, a significant increase from $18.7 million in the same period of 2022, driven by a substantial rise in net interest income to $115.8 million from $55.2 million, primarily due to the merger, while diluted EPS was $0.70, up from $0.64 year-over-year Consolidated Statements of Income (Unaudited) | (In thousands, except per share data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Interest Income | $115,827 | $55,172 | | Provision for credit losses | $3,666 | $1,814 | | Total noninterest income | $7,498 | $4,018 | | Total noninterest expense | $72,598 | $34,517 | | Income Before Income Taxes | $47,061 | $22,859 | | **Net Income** | **$37,148** | **$18,657** | | **Diluted EPS** | **$0.70** | **$0.64** | | Dividends Per Share | $0.13 | $0.10 | [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) For the first quarter of 2023, comprehensive income was $67.1 million, a significant turnaround from a comprehensive loss of $63.2 million in Q1 2022, driven by net income of $37.1 million and other comprehensive income (net of tax) of $30.0 million from a favorable change in unrealized gains on available for sale securities Consolidated Statements of Comprehensive Income (Unaudited) | (In thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net income | $37,148 | $18,657 | | Other comprehensive income (loss), net of tax | $29,980 | $(81,860) | | **Comprehensive income (loss)** | **$67,128** | **$(63,203)** | [Consolidated Statements of Changes in Shareholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Shareholders' equity increased from $1.38 billion at year-end 2022 to $1.45 billion at March 31, 2023, primarily due to **$37.1 million** in net income and a **$30.0 million** positive change in other comprehensive income, partially offset by **$6.9 million** in cash dividends declared - Total shareholders' equity increased by **$63.0 million** during Q1 2023, reaching **$1,446.2 million**. Key drivers were net income of **$37.1 million** and other comprehensive income of **$30.0 million**[17](index=17&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the first quarter of 2023, cash and cash equivalents decreased by $108.4 million, with net cash provided by operating activities at $49.0 million, net cash provided by investing activities at $203.0 million largely from securities sales and maturities, and net cash used in financing activities at $360.4 million primarily due to a net decrease in deposits Consolidated Statements of Cash Flows (Unaudited) | (In thousands) | Three Months Ended March 31, 2023 | | :--- | :--- | | Net cash provided by operating activities | $49,017 | | Net cash provided by (used in) investing activities | $203,026 | | Net cash (used in) provided by financing activities | $(360,415) | | **Net Change in Cash and Cash Equivalents** | **$(108,372)** | | Cash and Cash Equivalents, Beginning of Period | $371,705 | | **Cash and Cash Equivalents, End of Period** | **$263,333** | [Condensed Notes to Interim Consolidated Financial Statements](index=8&type=section&id=Condensed%20Notes%20to%20Interim%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of accounting policies and financial data, covering reverse merger accounting for the CBTX transaction, loan and securities portfolio composition, allowance for credit losses, fair value measurements, derivative instruments, borrowings, regulatory capital, and stock-based compensation [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the Q1 2023 financial results, highlighting the significant impact of the CBTX merger, which led to net income rising to $37.1 million driven by a 109.9% increase in net interest income, covering loan portfolio growth, deposit decreases, asset quality, and the company's strong liquidity and capital positions, with an efficiency ratio of 58.96% [Overview and Merger Impact](index=35&type=section&id=Overview%20and%20Merger%20Impact) The report details the October 1, 2022 merger of equals between Allegiance Bancshares, Inc. and CBTX, Inc., forming Stellar Bancorp, Inc., accounted for as a reverse merger with Allegiance as the accounting acquirer, resulting in historical financial statements prior to the merger reflecting only Allegiance's results and making direct period-over-period comparisons challenging - The merger was accounted for as a reverse merger, with Allegiance as the accounting acquirer and CBTX as the legal acquirer. Consequently, historical financial statements of Allegiance became the historical statements of the combined company for all periods prior to **October 1, 2022**[146](index=146&type=chunk) - Financial results for periods after the merger are **not comparable** to periods prior to the merger due to the significant impact on all aspects of the company's financial statements[147](index=147&type=chunk) [Results of Operations](index=37&type=section&id=Results%20of%20Operations) For Q1 2023, net income increased to $37.1 million from $18.7 million in Q1 2022, primarily due to the merger, with net interest income growing **109.9%** to **$115.8 million** driven by higher asset balances and yields, expanding the tax-equivalent net interest margin to **4.80%** from **3.30%**, while noninterest expense increased **110.3%** to **$72.6 million** including **$6.2 million** in merger-related costs, resulting in an efficiency ratio of **58.96%** Key Performance Metrics (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Income | $37.1M | $18.7M | | Diluted EPS | $0.70 | $0.64 | | Net Interest Income | $115.8M | $55.2M | | Annualized ROA | 1.38% | 1.04% | | Annualized ROE | 10.62% | 9.40% | | Efficiency Ratio | 58.96% | 58.32% | Net Interest Margin Analysis (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Average Yield on Interest-Earning Assets | 5.80% | 3.56% | | Average Rate on Interest-Bearing Liabilities | 1.91% | 0.51% | | Net Interest Rate Spread | 3.89% | 3.05% | | Net Interest Margin (Tax Equivalent) | 4.80% | 3.30% | - Noninterest expense increased by **$38.1 million** YoY, primarily due to a **$17.0 million** increase in salaries, a **$6.1 million** increase in amortization of intangibles, and **$5.7 million** in additional acquisition and merger-related expenses[183](index=183&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) [Financial Condition](index=41&type=section&id=Financial%20Condition) As of March 31, 2023, total assets stood at $10.6 billion, with total loans growing by **1.7%** during the quarter to **$7.89 billion**, commercial real estate comprising **51.0%** of the portfolio, while total deposits decreased by **5.7%** to **$8.74 billion** due to seasonality and market pressures, and nonperforming assets remained stable at **0.41%** of total assets Loan Portfolio Composition (March 31, 2023) | Loan Type | Amount (in thousands) | Percent | | :--- | :--- | :--- | | Commercial real estate (including multi-family) | $4,014,609 | 51.0% | | Commercial and industrial | $1,477,340 | 18.7% | | Commercial real estate construction and land dev. | $1,034,538 | 13.1% | | 1-4 family residential (including home equity) | $1,008,362 | 12.8% | | Other | $351,195 | 4.4% | | **Total loans** | **$7,886,044** | **100.0%** | Asset Quality Metrics | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Nonperforming Assets (NPA) | $43.5M | $45.0M | | NPA to Total Assets | 0.41% | 0.41% | | Nonperforming Loans to Total Loans | 0.55% | 0.58% | | Allowance for Credit Losses to Total Loans | 1.22% | 1.20% | - Total deposits decreased by **$528.8 million** (**5.7%**) to **$8.74 billion** at March 31, 2023, from **$9.27 billion** at December 31, 2022. Noninterest-bearing deposits decreased by **$352.3 million** (**8.3%**)[226](index=226&type=chunk) - Estimated uninsured deposits, excluding collateralized deposits, totaled **$4.06 billion**, or **46.4%** of total deposits at March 31, 2023[226](index=226&type=chunk) [Liquidity and Capital Resources](index=49&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a strong liquidity position, with primary sources being deposits, borrowed funds, and asset maturities, with total immediate contingent funding sources at **$4.46 billion**, or **51.1%** of total deposits at March 31, 2023, and capital levels remaining robust and well above regulatory requirements, categorizing Stellar Bank as '**well-capitalized**' - Total immediate contingent funding sources, including unrestricted cash, unpledged securities, and total borrowing capacity, amounted to **$4.46 billion**, representing **51.1%** of total deposits at March 31, 2023[247](index=247&type=chunk) Consolidated Capital Ratios (March 31, 2023) | Ratio | Actual | Minimum Required + Buffer | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 10.39% | 7.00% | | Tier 1 Capital | 10.50% | 8.50% | | Total Capital | 12.72% | 10.50% | | Tier 1 Leverage | 9.01% | 4.00% | - As of March 31, 2023, Stellar Bank was categorized as '**well-capitalized**' under all regulatory measures[253](index=253&type=chunk)[255](index=255&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=52&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is interest rate volatility, managed by the Balance Sheet Risk Committee (BSRC) using simulation models to test the sensitivity of net interest income (NII) and economic value of equity (EVE) to interest rate shocks, with the balance sheet positioned to be slightly liability-sensitive in the short term, and the transition away from LIBOR substantially complete Interest Rate Sensitivity Analysis (As of March 31, 2023) | Change in Interest Rates (Basis Points) | Percent Change in Net Interest Income | Percent Change in Economic Value of Equity | | :--- | :--- | :--- | | +300 | (3.6)% | 0.0% | | +200 | (2.7)% | 2.7% | | +100 | (1.8)% | 4.4% | | -100 | (0.9)% | 0.0% | | -200 | (2.8)% | (7.5)% | - The company's transition away from LIBOR is **substantially complete**, with less than **1%** of loans indexed to LIBOR as of March 31, 2023[264](index=264&type=chunk) [Controls and Procedures](index=53&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2023, concluding that these controls were **effective** at a reasonable assurance level, with **no material changes** to the company's internal control over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were **effective** as of the end of the period covered by the report[265](index=265&type=chunk) - **No changes** in internal control over financial reporting occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[266](index=266&type=chunk) PART II—OTHER INFORMATION [Legal Proceedings](index=53&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to claims and litigation arising in the ordinary course of business, but management believes that the resolution of these matters will **not have a material adverse effect** on the company's financial condition or results of operations - The company is **not party to any legal proceedings** that management believes would have a material adverse effect on its business, financial condition, or results of operation[267](index=267&type=chunk) [Risk Factors](index=53&type=section&id=Item%201A.%20Risk%20Factors) The company highlights adverse developments affecting the financial services industry, specifically citing recent bank failures in Q1 and Q2 2023, which have caused market volatility and concern over liquidity and soundness, posing potential risks including reputational damage, deposit outflows, increased FDIC assessment costs from special assessments, and heightened credit risk with counterparties - Recent bank failures (Silicon Valley Bank, Signature Bank, First Republic Bank) have caused significant market volatility and uncertainty, which could adversely affect the company's financial condition and stock price[268](index=268&type=chunk)[269](index=269&type=chunk) - Potential losses to the FDIC's Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, which could increase the company's FDIC insurance costs and adversely affect earnings[272](index=272&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=54&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company has a share repurchase program authorized in 2022, allowing for the repurchase of up to **$40.0 million** of its common stock through September 30, 2023, with **no shares repurchased** under this program during the three months ended March 31, 2023 - The company has a **$40.0 million** share repurchase program, which is effective through **September 30, 2023**[274](index=274&type=chunk) - There were **no stock repurchases** made by the company during the three months ended March 31, 2023[276](index=276&type=chunk) [Defaults upon Senior Securities](index=54&type=section&id=Item%203.%20Defaults%20upon%20Senior%20Securities) There were **no defaults** upon senior securities during the reporting period - **None**[277](index=277&type=chunk) [Mine Safety Disclosures](index=54&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is **not applicable** to the company - **Not applicable**[278](index=278&type=chunk) [Other Information](index=54&type=section&id=Item%205.%20Other%20Information) There was **no other information** to report for the period - **None**[279](index=279&type=chunk) [Exhibits](index=55&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act, as well as Inline XBRL documents[281](index=281&type=chunk)