Stellar Bancorp(STEL) - 2023 Q4 - Annual Report

Part I Business Stellar Bancorp, Inc. is a Houston-based bank holding company providing commercial banking services to small- to medium-sized businesses, operating 54 centers with $10.65 billion in assets as of December 31, 2023 - On October 1, 2022, Allegiance Bancshares, Inc. and CBTX, Inc. completed a merger of equals, with CBTX as the legal survivor, renamed Stellar Bancorp, Inc. (STEL), and Allegiance Bank as the surviving bank entity, later renamed Stellar Bank[13][14] - The merger was accounted for as a reverse merger, with Allegiance as the accounting acquirer, making financial results after October 1, 2022, not directly comparable to prior periods which only reflect Allegiance's historical results[15][261] - The company operates 54 full-service banking centers, primarily concentrated in the Houston MSA (37 centers) and the Beaumont MSA (16 centers), with one in Dallas[16] - The business strategy is centered on a community banking model that emphasizes local decision-making and strong customer relationships, combined with a disciplined approach to strategic acquisitions to expand its presence in Texas[19][20][21] Key Financial Metrics as of December 31, 2023 | Metric | Value (Billions) | | :--- | :--- | | Total Assets | $10.65 | | Total Loans | $7.93 | | Total Deposits | $8.87 | | Total Shareholders' Equity | $1.52 | Human Capital The company employed 980 individuals as of December 31, 2023, emphasizing diversity and inclusion through development programs and competitive compensation Workforce Demographics (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Total Employees | 980 | | Non-White Employees | 48% | | Women Employees | 71% | - The company launched "The Stellar Odyssey," a cultural foundation program, and a revised Officer Development Program in 2023 to support employee engagement and career development[39] Regulation and Supervision Operating in a highly regulated environment, the company and its bank subsidiary met all regulatory capital requirements as of December 31, 2023, with the bank classified as "well capitalized" - Stellar Bancorp, Inc. is regulated as a bank holding company by the Federal Reserve, while Stellar Bank is supervised by the Texas Department of Banking (TDB) and the FDIC[47][48] - As of December 31, 2023, Stellar Bank met the requirements to be classified as "well capitalized" under prompt corrective action regulations[69] - The company is subject to the Durbin Amendment, which limits interchange fees, as its assets exceed the $10 billion threshold[52] Regulatory Capital Ratios as of December 31, 2023 (Company) | Ratio | Actual | Minimum Required (with Buffer) | | :--- | :--- | :--- | | CET1 to risk-weighted assets | 11.77% | 7.00% | | Tier 1 capital to risk-weighted assets | 11.89% | 8.50% | | Total capital to risk-weighted assets | 14.02% | 10.50% | | Tier 1 capital to average tangible assets | 10.18% | 4.00% | Risk Factors The company faces diverse risks including financial industry instability, economic downturns, geographic concentration, merger integration challenges, credit quality, liquidity, interest rate fluctuations, cybersecurity, and regulatory compliance - Market & Economic Risks: The company is exposed to risks from financial industry instability (e.g., 2023 bank failures), economic downturns, inflation, and its geographic concentration in the Houston and Beaumont MSAs, which are influenced by the energy sector[116][119][125] - Merger & Growth Risks: There are risks that the anticipated benefits and cost savings from the merger with CBTX may not be fully realized, and future growth through acquisitions also carries risks related to integration, due diligence, and potential goodwill impairment[136][139][143] - Credit & Lending Risks: A significant portion of the loan portfolio consists of real estate loans (81.3% of total loans), including commercial real estate and construction loans, which carry greater credit risk, and the focus on small- to medium-sized businesses also presents risk as these borrowers may be more vulnerable to economic downturns[149][151][155] - Liquidity & Interest Rate Risks: The company is subject to liquidity risk, with a notable concentration of deposits from municipalities ($1.17 billion) that can be more volatile, and fluctuations in interest rates can significantly impact net interest income and the value of its securities portfolio[160][164][166] - Cybersecurity & Regulatory Risks: The company depends on third-party technology and faces threats from cybersecurity attacks, and as a bank with over $10 billion in assets, it is subject to heightened regulatory scrutiny, including supervision by the CFPB and increased FDIC insurance premiums[169][170][187] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[221] Cybersecurity The company's cybersecurity program, overseen by the Board and led by the CISO, integrates into ERM, focusing on safeguards, incident response, and training, with no material threats identified - Cybersecurity risk management is overseen by the Board, the Risk Committee, and the Technology Committee, which receive regular reports from the Chief Risk Officer (CRO) and CISO[223][227] - The company's strategy includes technical safeguards, a comprehensive incident response plan, engagement with outside experts, robust third-party risk management, and mandatory employee training[223] - The company has recently enhanced its cybersecurity leadership by adding a Director of Information Security Officer (DISO) with over seven years of experience as a regulator in information security[228] - During the fiscal year, the company has not identified any cybersecurity risks or incidents that have materially affected or are reasonably expected to materially affect the business[226] Properties The company operates 54 banking centers, 34 owned and 20 leased, primarily in the Houston and Beaumont MSAs, with its principal executive office in Houston - As of December 31, 2023, the company operated 54 banking centers: 37 in the Houston MSA, 16 in the Beaumont MSA, and one in Dallas[231] - The company owns 34 of its banking centers and leases the remaining 20, in addition to its executive office[231] Legal Proceedings The company is subject to ordinary course legal proceedings, none of which are expected to have a material adverse effect on its financial condition or operations - Management does not believe any current legal proceedings will have a material adverse effect on the company's business, financial condition, or results of operation[234] Mine Safety Disclosures This item is not applicable to the company - Not applicable[235] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Stellar Bancorp's common stock trades on the NYSE under 'STEL', with the company paying quarterly dividends and expanding its share repurchase program in 2023 - The company's common stock is listed on the NYSE under the symbol "STEL" and as of February 26, 2024, there were 53,297,191 shares outstanding[237][4] - During 2023, the company paid four quarterly cash dividends of $0.13 per share[238] - The Board of Directors expanded the share repurchase program to $60 million, effective through May 31, 2024[241] Stock Performance Comparison (2018-2023) | Index | 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 | [Reserved]](index=43&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Net income significantly increased to $130.5 million in 2023 due to the full-year impact of the 2022 merger, with strong net interest income growth, stable asset quality, and robust capital ratios Key Performance Metrics | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $130.5 million | $51.4 million | | Diluted EPS | $2.45 | $1.47 | | Return on Average Assets (ROA) | 1.21% | 0.64% | | Return on Average Equity (ROE) | 8.96% | 5.69% | | Efficiency Ratio | 63.02% | 64.23% | - The significant increase in net income for 2023 is primarily attributed to the full-year operational results following the merger with CBTX on October 1, 2022, making year-over-year comparisons less direct[282][283] Results of Operations Net income for 2023 increased to $130.5 million, driven by higher net interest income and a reduced provision for credit losses, while noninterest expenses rose due to merger-related scale Year-Over-Year Changes in Key Income Statement Items (2023 vs 2022) | Item | 2023 ($M) | 2022 ($M) | Change ($M) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | 436.8 | 289.0 | 147.8 | 51.1% | | Provision for Credit Losses | 8.9 | 50.7 | (41.8) | (82.4)% | | Noninterest Income | 24.6 | 20.4 | 4.2 | 20.7% | | Noninterest Expense | 290.5 | 196.1 | 94.4 | 48.2% | | Net Income | 130.5 | 51.4 | 79.1 | 153.7% | - The provision for credit losses decreased significantly in 2023 as the 2022 provision included a one-time $28.2 million provision for acquired non-PCD loans from the merger[296] - The increase in noninterest expense was primarily due to higher salaries and benefits, and amortization of intangibles resulting from the merger, partially offset by an $8.6 million decrease in merger-related expenses[302][307] Financial Condition As of December 31, 2023, total assets were $10.65 billion, with loans growing to $7.93 billion, deposits decreasing to $8.87 billion, and asset quality remaining stable with strong capital Loan Portfolio Composition (December 31, 2023) | Loan Type | Amount ($B) | Percent of Total | | :--- | :--- | :--- | | Commercial real estate | 4.07 | 51.3% | | Commercial and industrial | 1.41 | 17.8% | | Commercial RE construction & land dev. | 1.06 | 13.4% | | 1-4 family residential | 1.05 | 13.2% | | Residential construction | 0.27 | 3.4% | | Other | 0.07 | 0.9% | | Total Loans | 7.93 | 100.0% | - Total deposits decreased by $394.2 million (4.3%) to $8.87 billion at year-end 2023, driven by a $683.4 million (16.2%) decrease in noninterest-bearing deposits[345] Asset Quality Metrics | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Nonperforming Assets / Total Assets | 0.37% | 0.41% | | Nonperforming Loans / Total Loans | 0.49% | 0.58% | | Allowance for Credit Losses / Total Loans | 1.16% | 1.20% | Interest Rate Sensitivity Analysis (as of Dec 31, 2023) | Change in Interest Rates (bps) | % Change in Net Interest Income | % Change in Economic Value of Equity | | :--- | :--- | :--- | | +300 | (0.9)% | (0.9)% | | +200 | (0.6)% | 1.8% | | +100 | 0.1% | 3.4% | | -100 | 0.5% | 1.0% | | -200 | 0.2% | (3.6)% | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate volatility, managed by ALCO and detailed in Item 7 - The company's primary market risk is interest rate volatility, with detailed disclosures provided in Item 7 under "Asset/Liability Management and Interest Rate Risk"[379] Financial Statements and Supplementary Data This section refers to the consolidated financial statements, accompanying notes, and supplementary data beginning on page 72 - This item provides a reference to the location of the company's audited financial statements within the Form 10-K[380] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[381] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes during the year - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[382] - Management determined that the company maintained effective internal control over financial reporting as of December 31, 2023, based on the COSO 2013 framework[386] Other Information The company reports no other information for this item - None[388] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[389] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[392] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[393] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information on security ownership and related shareholder matters is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[394] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[395] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[396] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Annual Report on Form 10-K, including consolidated financial statements and various exhibits - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K[398] Form 10-K Summary The company reports no summary for this item - None[404]