UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


S			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~MARCH 31,~~JUNE 30, 2023


£			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-38280

Stellar Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Texas			20-8339782
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

9 Greenway Plaza, Suite 110

Houston, Texas 77046

(Address of principal executive offices, including zip code)

(713) 210-7600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value, $0.01 per share

STEL

~~The Nasdaq~~ New York Stock ~~Market LLC~~Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes S No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

As of ~~May 1,~~July 26, 2023, the registrant had ~~53,302,130~~53,308,244 shares common stock, $0.01 par value per share, outstanding.

Table of Contents

STELLAR BANCORP, INC.

INDEX TO FORM 10-Q

~~March 31,~~June 30, 2023


PART I—FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements	3
	Consolidated Balance Sheets (unaudited)	3
	Consolidated Statements of Income (unaudited)	4
	Consolidated Statements of Comprehensive Income (unaudited)	5
	Consolidated Statements of Changes in Shareholders' Equity (unaudited)	6
	Consolidated Statements of Cash Flows (unaudited)	7
	Condensed Notes to Interim Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3334
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5257
Item 4.	Controls and Procedures	5358

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	5358
Item 1A.	Risk Factors	5358
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5459
Item 3.	Defaults upon Senior Securities	5459
Item 4.	Mine Safety Disclosures	5459
Item 5.	Other Information	5459
Item 6.	Exhibits	5560
Signatures		5661

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

STELLAR BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)


		March 31, 2023		December 31, 2022			June 30, 2023		December 31, 2022
		(Dollars in thousands, except par value)					(In thousands, except shares and par value)
ASSETS	ASSETS					ASSETS
Cash and due from banks	Cash and due from banks	$	99,231	$	67,063	Cash and due from banks	$	105,913	$	67,063
Interest-bearing deposits at other financial institutions	Interest-bearing deposits at other financial institutions	164,102		304,642		Interest-bearing deposits at other financial institutions	198,176		304,642
Total cash and cash equivalents	Total cash and cash equivalents	263,333		371,705		Total cash and cash equivalents	304,089		371,705
Available for sale securities, at fair value	Available for sale securities, at fair value	1,519,175		1,807,586		Available for sale securities, at fair value	1,478,222		1,807,586
Loans held for investment	Loans held for investment	7,886,044		7,754,751		Loans held for investment	8,068,718		7,754,751
Less: allowance for credit losses on loans	Less: allowance for credit losses on loans	(96,188)		(93,180)		Less: allowance for credit losses on loans	(100,195)		(93,180)
Loans, net	Loans, net	7,789,856		7,661,571		Loans, net	7,968,523		7,661,571
Accrued interest receivable	Accrued interest receivable	42,405		44,743		Accrued interest receivable	42,051		44,743
Premises and equipment, net	Premises and equipment, net	124,723		126,803		Premises and equipment, net	119,142		126,803
Federal Home Loan Bank stock	Federal Home Loan Bank stock	19,676		15,058		Federal Home Loan Bank stock	24,478		15,058
Bank owned life insurance		103,616		103,094
Bank-owned life insurance						Bank-owned life insurance	104,148		103,094
Goodwill	Goodwill	497,260		497,260		Goodwill	497,260		497,260
Core deposit intangibles, net	Core deposit intangibles, net	136,665		143,525		Core deposit intangibles, net	129,805		143,525
Other assets	Other assets	108,009		129,092		Other assets	110,633		129,092
TOTAL ASSETS	TOTAL ASSETS	$	10,604,718	$	10,900,437	TOTAL ASSETS	$	10,778,351	$	10,900,437
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:	LIABILITIES:					LIABILITIES:
Deposits:	Deposits:					Deposits:
Noninterest-bearing	Noninterest-bearing	$	3,877,859	$	4,230,169	Noninterest-bearing	$	3,713,536	$	4,230,169
Interest-bearing	Interest-bearing					Interest-bearing
Demand	Demand	1,394,244		1,591,828		Demand	1,437,509		1,591,828
Money market and savings	Money market and savings	2,401,840		2,575,923		Money market and savings	2,174,073		2,575,923
Certificates and other time	Certificates and other time	1,064,932		869,712		Certificates and other time	1,441,251		869,712
Total interest-bearing deposits	Total interest-bearing deposits	4,861,016		5,037,463		Total interest-bearing deposits	5,052,833		5,037,463
Total deposits	Total deposits	8,738,875		9,267,632		Total deposits	8,766,369		9,267,632
Accrued interest payable	Accrued interest payable	3,875		2,098		Accrued interest payable	4,555		2,098
Borrowed funds	Borrowed funds	238,944		63,925		Borrowed funds	369,963		63,925
Subordinated debt	Subordinated debt	109,420		109,367		Subordinated debt	109,566		109,367
Other liabilities	Other liabilities	67,388		74,239		Other liabilities	69,218		74,239
Total liabilities	Total liabilities	9,158,502		9,517,261		Total liabilities	9,319,671		9,517,261
COMMITMENTS AND CONTINGENCIES (See Note 14)	COMMITMENTS AND CONTINGENCIES (See Note 14)					COMMITMENTS AND CONTINGENCIES (See Note 14)
SHAREHOLDERS’ EQUITY:	SHAREHOLDERS’ EQUITY:					SHAREHOLDERS’ EQUITY:
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2023 and December 31, 2022		—		—
Common stock, $0.01 par value; 140,000,000 shares authorized 53,296,038 shares issued and outstanding at March 31, 2023 and 52,954,985 shares issued and outstanding at December 31, 2022		533		530
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2023 and December 31, 2022						Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2023 and December 31, 2022	—		—
Common stock, $0.01 par value; 140,000,000 shares authorized; 53,302,734 shares issued and outstanding at June 30, 2023 and 52,954,985 shares issued and outstanding at December 31, 2022						Common stock, $0.01 par value; 140,000,000 shares authorized; 53,302,734 shares issued and outstanding at June 30, 2023 and 52,954,985 shares issued and outstanding at December 31, 2022	533		530
Capital surplus	Capital surplus	1,225,596		1,222,761		Capital surplus	1,228,532		1,222,761
Retained earnings	Retained earnings	333,368		303,146		Retained earnings	361,619		303,146
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(113,281)		(143,261)		Accumulated other comprehensive loss	(132,004)		(143,261)
Total shareholders’ equity	Total shareholders’ equity	1,446,216		1,383,176		Total shareholders’ equity	1,458,680		1,383,176
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,604,718	$	10,900,437	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,778,351	$	10,900,437

See condensed notes to interim consolidated financial statements.

Table of Contents

STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


		Three Months Ended March 31,					Three Months Ended June 30,				Six Months Ended June 30,
		2023		2022					2023		2022		2023		2022
		(Dollars in thousands, except per share data)				(Dollars in thousands, except per share data)
INTEREST INCOME:	INTEREST INCOME:							INTEREST INCOME:
Loans, including fees	Loans, including fees	$	125,729	$	52,370			Loans, including fees	$	133,931	$	53,835	$	259,660	$	106,205
Securities:	Securities:							Securities:
Taxable	Taxable	9,653		5,068				Taxable	9,726		5,571		19,379		10,639
Tax-exempt	Tax-exempt	1,262		2,525				Tax-exempt	436		2,557		1,698		5,082
Deposits in other financial institutions	Deposits in other financial institutions	3,771		340				Deposits in other financial institutions	2,865		877		6,636		1,217
Total interest income	Total interest income	140,415		60,303				Total interest income	146,958		62,840		287,373		123,143
INTEREST EXPENSE:	INTEREST EXPENSE:							INTEREST EXPENSE:
Demand, money market and savings deposits	Demand, money market and savings deposits	18,037		1,347				Demand, money market and savings deposits	20,708		1,859		38,745		3,206
Certificates and other time deposits	Certificates and other time deposits	3,307		2,156				Certificates and other time deposits	9,622		1,922		12,929		4,078
Borrowed funds	Borrowed funds	1,317		186				Borrowed funds	6,535		114		7,852		300
Subordinated debt	Subordinated debt	1,927		1,442				Subordinated debt	1,812		1,463		3,739		2,905
Total interest expense	Total interest expense	24,588		5,131				Total interest expense	38,677		5,358		63,265		10,489
NET INTEREST INCOME	NET INTEREST INCOME	115,827		55,172				NET INTEREST INCOME	108,281		57,482		224,108		112,654
Provision for credit losses	Provision for credit losses	3,666		1,814				Provision for credit losses	1,915		2,143		5,581		3,957
Net interest income after provision for credit losses	Net interest income after provision for credit losses	112,161		53,358				Net interest income after provision for credit losses	106,366		55,339		218,527		108,697
NONINTEREST INCOME:	NONINTEREST INCOME:							NONINTEREST INCOME:
Nonsufficient funds fees	Nonsufficient funds fees	406		116				Nonsufficient funds fees	418		126		824		242
Service charges on deposit accounts	Service charges on deposit accounts	943		527				Service charges on deposit accounts	1,157		560		2,100		1,087
Gain on sale of assets		198		—
Bank owned life insurance income		522		133
(Loss) gain on sale of assets								(Loss) gain on sale of assets	(6)		(17)		192		(17)
Bank-owned life insurance income								Bank-owned life insurance income	532		342		1,054		475
Debit card and ATM card income	Debit card and ATM card income	1,698		819				Debit card and ATM card income	1,821		880		3,519		1,699
Other	Other	3,731		2,423				Other	1,561		813		5,292		3,236
Total noninterest income	Total noninterest income	7,498		4,018				Total noninterest income	5,483		2,704		12,981		6,722
NONINTEREST EXPENSE:	NONINTEREST EXPENSE:							NONINTEREST EXPENSE:
Salaries and employee benefits	Salaries and employee benefits	39,775		22,728				Salaries and employee benefits	37,300		21,864		77,075		44,592
Net occupancy and equipment	Net occupancy and equipment	4,088		2,205				Net occupancy and equipment	3,817		2,220		7,905		4,425
Depreciation	Depreciation	1,836		1,033				Depreciation	1,841		1,012		3,677		2,045
Data processing and software amortization	Data processing and software amortization	5,054		2,498				Data processing and software amortization	4,674		2,522		9,728		5,020
Professional fees	Professional fees	1,527		138				Professional fees	1,564		662		3,091		800
Regulatory assessments and FDIC insurance	Regulatory assessments and FDIC insurance	1,294		1,261				Regulatory assessments and FDIC insurance	2,755		1,256		4,049		2,517
Amortization of intangibles	Amortization of intangibles	6,879		751				Amortization of intangibles	6,881		751		13,760		1,502
Communications	Communications	701		341				Communications	689		363		1,390		704
Advertising	Advertising	839		462				Advertising	907		483		1,746		945
Other real estate expense		272		59
Acquisition and merger-related expenses	Acquisition and merger-related expenses	6,165		451				Acquisition and merger-related expenses	2,897		1,667		9,062		2,118
Other	Other	4,168		2,590				Other	5,882		5,104		10,322		7,753
Total noninterest expense	Total noninterest expense	72,598		34,517				Total noninterest expense	69,207		37,904		141,805		72,421
INCOME BEFORE INCOME TAXES	INCOME BEFORE INCOME TAXES	47,061		22,859				INCOME BEFORE INCOME TAXES	42,642		20,139		89,703		42,998
Provision for income taxes	Provision for income taxes	9,913		4,202				Provision for income taxes	7,467		3,702		17,380		7,904
NET INCOME	NET INCOME	$	37,148	$	18,657			NET INCOME	$	35,175	$	16,437	$	72,323	$	35,094
EARNINGS PER SHARE:	EARNINGS PER SHARE:							EARNINGS PER SHARE:
Basic	Basic	$	0.70	$	0.65			Basic	$	0.66	$	0.57	$	1.36	$	1.22
Diluted	Diluted	$	0.70	$	0.64			Diluted	$	0.66	$	0.56	$	1.36	$	1.21
DIVIDENDS PER SHARE	DIVIDENDS PER SHARE	$	0.13	$	0.10			DIVIDENDS PER SHARE	$	0.13	$	0.10	$	0.26	$	0.20

See condensed notes to interim consolidated financial statements.

Table of Contents

STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended March 31,
2023 2022
(In thousands)
Net income $ 37,148 $ 18,657
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Change in unrealized holding gain (loss) on available for sale securities during the period 37,965 (103,621)
Reclassification of gain realized on securities (234) —
Total other comprehensive income (loss) 37,731 (103,621)
Deferred tax (expense) benefit related to other comprehensive loss (7,751) 21,761
Other comprehensive income (loss), net of tax 29,980 (81,860)
Comprehensive income (loss) $ 67,128 $ (63,203)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(In thousands)
Net income	$	35,175	$	16,437	$	72,323	$	35,094
Other comprehensive (loss) income:
Unrealized gain (loss) on securities:
Change in unrealized holding (loss) gain on available for sale securities during the period	(23,717)		(65,648)		14,249		(169,269)
Reclassification of loss (gain) realized on securities	—		17		(234)		17



Total other comprehensive (loss) income	(23,717)		(65,631)		14,015		(169,252)
Deferred tax benefit (expense) related to other comprehensive loss	4,994		13,782		(2,758)		35,543
Other comprehensive (loss) income, net of tax	(18,723)		(51,849)		11,257		(133,709)
Comprehensive income (loss)	$	16,452	$	(35,412)	$	83,580	$	(98,615)

See condensed notes to interim consolidated financial statements.

Table of Contents

STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


		Common Stock			Capital Surplus				Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity				Common Stock						Capital Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
		Shares	Amount								Shares								Amount
		(Dollars in thousands, except per share data)																		(Dollars in thousands, except per share data)
BALANCE AT MARCH 31, 2022																			BALANCE AT MARCH 31, 2022	28,903,910			$	290			$	532,372			$	282,896			$	(63,618)			$	751,940
Net income																			Net income	—			—			—				16,437				—				16,437
Other comprehensive loss																			Other comprehensive loss	—			—			—				—				(51,849)				(51,849)
Cash dividends declared, $0.10 per share																			Cash dividends declared, $0.10 per share	—			—			—				(2,856)				—				(2,856)
Common stock issued in connection with the exercise of stock options and restricted stock awards																			Common stock issued in connection with the exercise of stock options and restricted stock awards	32,789			—			416				—				—				416
Repurchase of common stock																			Repurchase of common stock	(350,273)			(4)			(9,686)				—				—				(9,690)
Stock-based compensation expense																			Stock-based compensation expense	—			—			931				—				—				931
BALANCE AT JUNE 30, 2022																			BALANCE AT JUNE 30, 2022	28,586,426			$	286		$	524,033			$	296,477			$	(115,467)			$	705,329

BALANCE AT MARCH 31, 2023																			BALANCE AT MARCH 31, 2023	53,296,038			$	533		$	1,225,596			$	333,368			$	(113,281)			$	1,446,216
Net income																			Net income	—			—			—				35,175				—				35,175
Other comprehensive loss																			Other comprehensive loss	—			—			—				—				(18,723)				(18,723)
Cash dividends declared, $0.13 per share																			Cash dividends declared, $0.13 per share	—			—			—				(6,924)				—				(6,924)
Common stock issued in connection with the exercise of stock options and restricted stock awards																			Common stock issued in connection with the exercise of stock options and restricted stock awards	6,696			—			94				—				—				94

Stock-based compensation expense																			Stock-based compensation expense	—			—			2,842				—				—				2,842
BALANCE AT JUNE 30, 2023																			BALANCE AT JUNE 30, 2023	53,302,734			$	533		$	1,228,532			$	361,619			$	(132,004)			$	1,458,680

BALANCE AT DECEMBER 31, 2021	BALANCE AT DECEMBER 31, 2021	28,845,903	$	289			$	530,845						$	267,092			$	18,242		$	816,468	BALANCE AT DECEMBER 31, 2021		28,845,903			$	289			$	530,845			$	267,092			$	18,242	$	816,468
Net income	Net income								18,657							18,657			Net income	—			—			—				35,094				—				35,094
Other comprehensive loss	Other comprehensive loss											(81,860)				(81,860)			Other comprehensive loss	—			—			—				—				(133,709)				(133,709)
Cash dividends declared $0.10, per share									(2,853)							(2,853)
Cash dividends declared $0.20 per share																			Cash dividends declared $0.20 per share	—			—			—				(5,709)				—				(5,709)
Common stock issued in connection with the exercise of stock options and restricted stock awards	Common stock issued in connection with the exercise of stock options and restricted stock awards	58,007	1		568											569			Common stock issued in connection with the exercise of stock options and restricted stock awards	90,796			1			984				—				—				985

Stock based compensation expense					959											959
BALANCE AT MARCH 31, 2022		28,903,910	$	290	$	532,372			$	282,896		$	(63,618)			$	751,940
Repurchase of common stock																			Repurchase of common stock	(350,273)			(4)			(9,686)				—				—				(9,690)
Stock-based compensation expense																			Stock-based compensation expense	—			—			1,890				—				—				1,890
BALANCE AT JUNE 30, 2022																			BALANCE AT JUNE 30, 2022	28,586,426			$	286		$	524,033			$	296,477			$	(115,467)			$	705,329

BALANCE AT DECEMBER 31, 2022	BALANCE AT DECEMBER 31, 2022	52,954,985	$	530	$	1,222,761			$	303,146		$	(143,261)			$	1,383,176		BALANCE AT DECEMBER 31, 2022	52,954,985			$	530		$	1,222,761			$	303,146			$	(143,261)			$	1,383,176
Net income	Net income								37,148							37,148			Net income	—			—			—				72,323				—				72,323
Other comprehensive income	Other comprehensive income											29,980				29,980			Other comprehensive income	—			—			—				—				11,257				11,257
Cash dividends declared $0.13 per share									(6,926)							(6,926)
Cash dividends declared $0.26 per share																			Cash dividends declared $0.26 per share	—			—			—				(13,850)				—				(13,850)
Common stock issued in connection with the exercise of stock options and restricted stock awards	Common stock issued in connection with the exercise of stock options and restricted stock awards	341,053	3		254											257			Common stock issued in connection with the exercise of stock options and restricted stock awards	347,749			3			348				—				—				351

Stock based compensation expense					2,581											2,581
BALANCE AT MARCH 31, 2023		53,296,038	$	533	$	1,225,596			$	333,368		$	(113,281)			$	1,446,216
Stock-based compensation expense																			Stock-based compensation expense	—			—			5,423				—				—				5,423
BALANCE AT JUNE 30, 2023																			BALANCE AT JUNE 30, 2023	53,302,734			$	533		$	1,228,532			$	361,619			$	(132,004)			$	1,458,680

See condensed notes to interim consolidated financial statements.

Table of Contents

STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Three Months Ended March 31,					Six Months Ended June 30,
		2023		2022			2023		2022
		(In thousands)					(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:	CASH FLOWS FROM OPERATING ACTIVITIES:					CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	Net income	$	37,148	$	18,657	Net income	$	72,323	$	35,094
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization	Depreciation and core deposit intangibles amortization	8,715		1,784		Depreciation and core deposit intangibles amortization	17,437		3,547
Provision for credit losses	Provision for credit losses	3,666		1,814		Provision for credit losses	5,581		3,957
Deferred income tax benefit	Deferred income tax benefit	453		47		Deferred income tax benefit	11,961		(97)
Net amortization of (discount) premium on investments		(110)		2,797
Excess tax benefit from stock based compensation		(47)		(149)
Bank owned life insurance income		(522)		(133)
Net amortization of premium on investments						Net amortization of premium on investments	1,564		5,558
Excess tax benefit from stock-based compensation						Excess tax benefit from stock-based compensation	(47)		(154)
Bank-owned life insurance income						Bank-owned life insurance income	(1,054)		(475)
Net accretion of discount on loans	Net accretion of discount on loans	(10,093)		(77)		Net accretion of discount on loans	(22,665)		(139)
Net amortization of discount on subordinated debt	Net amortization of discount on subordinated debt	29		29		Net amortization of discount on subordinated debt	59		58
Net accretion of discount on certificates of deposit	Net accretion of discount on certificates of deposit	(11)		(16)		Net accretion of discount on certificates of deposit	(19)		(31)

Net gain on sale of assets		(198)		—
Net (gain) loss on sale of assets						Net (gain) loss on sale of assets	(192)		17
Federal Home Loan Bank stock dividends	Federal Home Loan Bank stock dividends	(207)		(18)		Federal Home Loan Bank stock dividends	(400)		(35)
Stock based compensation expense		2,581		959
Stock-based compensation expense						Stock-based compensation expense	5,423		1,890
Net change in operating leases	Net change in operating leases	981		767		Net change in operating leases	2,088		1,515
Decrease (increase) in accrued interest receivable and other assets	Decrease (increase) in accrued interest receivable and other assets	12,129		(26,190)		Decrease (increase) in accrued interest receivable and other assets	6,453		(4,153)
(Decrease) increase in accrued interest payable and other liabilities		(5,497)		15,785
Decrease in accrued interest payable and other liabilities						Decrease in accrued interest payable and other liabilities	(524)		(5,694)
Net cash provided by operating activities	Net cash provided by operating activities	49,017		16,056		Net cash provided by operating activities	97,988		40,858
CASH FLOWS FROM INVESTING ACTIVITIES:	CASH FLOWS FROM INVESTING ACTIVITIES:					CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of available for sale securities	Proceeds from maturities and principal paydowns of available for sale securities	27,997		640,437		Proceeds from maturities and principal paydowns of available for sale securities	55,312		2,283,396
Proceeds from sales and calls of available for sale securities	Proceeds from sales and calls of available for sale securities	320,691		—		Proceeds from sales and calls of available for sale securities	320,691		5,056
Purchase of available for sale securities	Purchase of available for sale securities	(22,218)		(763,586)		Purchase of available for sale securities	(33,287)		(2,398,416)
Net change in total loans	Net change in total loans	(121,392)		(63,268)		Net change in total loans	(291,730)		(129,096)
Purchase of bank premises and equipment	Purchase of bank premises and equipment	(1,238)		(184)		Purchase of bank premises and equipment	(2,479)		(395)
Proceeds from sale of bank premises, equipment and other real estate	Proceeds from sale of bank premises, equipment and other real estate	3,597		—		Proceeds from sale of bank premises, equipment and other real estate	3,652		—
Net purchases of Federal Home Loan Bank stock		(4,411)		—
Net (purchase) redemption of Federal Home Loan Bank stock						Net (purchase) redemption of Federal Home Loan Bank stock	(9,020)		5,315
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	203,026		(186,601)		Net cash provided by (used in) investing activities	43,139		(234,140)
CASH FLOWS FROM FINANCING ACTIVITIES:	CASH FLOWS FROM FINANCING ACTIVITIES:					CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing deposits	Net (decrease) increase in noninterest-bearing deposits	(352,310)		110,519		Net (decrease) increase in noninterest-bearing deposits	(516,633)		151,634
Net (decrease) increase in interest-bearing deposits		(176,436)		4,185
Net increase (decrease) in interest-bearing deposits						Net increase (decrease) in interest-bearing deposits	15,389		(318,610)
Net change in short-term other borrowed funds	Net change in short-term other borrowed funds	175,000		—		Net change in short-term other borrowed funds	306,000		(90,000)

Dividends paid to common shareholders	Dividends paid to common shareholders	(6,926)		(2,853)		Dividends paid to common shareholders	(13,850)		(5,709)
Proceeds from the issuance of common stock and stock option exercises	Proceeds from the issuance of common stock and stock option exercises	257		569		Proceeds from the issuance of common stock and stock option exercises	351		985

Net cash (used in) provided by financing activities		(360,415)		112,420
Repurchase of common stock						Repurchase of common stock	—		(9,690)
Net cash used in financing activities						Net cash used in financing activities	(208,743)		(271,390)
NET CHANGE IN CASH AND CASH EQUIVALENTS	NET CHANGE IN CASH AND CASH EQUIVALENTS	(108,372)		(58,125)		NET CHANGE IN CASH AND CASH EQUIVALENTS	(67,616)		(464,672)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	371,705		757,509		CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	371,705		757,509
CASH AND CASH EQUIVALENTS, END OF PERIOD	CASH AND CASH EQUIVALENTS, END OF PERIOD	$	263,333	$	699,384	CASH AND CASH EQUIVALENTS, END OF PERIOD	$	304,089	$	292,837
SUPPLEMENTAL CASH FLOW INFORMATION:	SUPPLEMENTAL CASH FLOW INFORMATION:					SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid	Income taxes paid	$	—	$	—	Income taxes paid	$	—	$	6,900
Interest paid	Interest paid	22,811		3,798		Interest paid	60,808		10,742
Cash paid for operating lease liabilities	Cash paid for operating lease liabilities	1,100		892		Cash paid for operating lease liabilities	2,230		1,723
SUPPLEMENTAL NONCASH DISCLOSURE:	SUPPLEMENTAL NONCASH DISCLOSURE:					SUPPLEMENTAL NONCASH DISCLOSURE:
Lease right-of-use asset obtained in exchange for lessee operating lease liabilities	Lease right-of-use asset obtained in exchange for lessee operating lease liabilities	$	—	$	76	Lease right-of-use asset obtained in exchange for lessee operating lease liabilities	$	—	$	76

Branch assets transferred to assets held for sale						Branch assets transferred to assets held for sale	3,819		2,137

See condensed notes to interim consolidated financial statements.

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STELLAR BANCORP, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~June 30, 2023

(Unaudited)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Nature of Operations-Stellar Bancorp, Inc. (“Stellar”) through its wholly-owned subsidiary, Stellar Bank, (the “Bank”), and together with Stellar, collectively referred to herein as “we,” ~~“us”,~~“us,” “our” and the “Company”), provides a diversified range of commercial banking services primarily to small- to medium-sized businesses. ~~The Company~~Stellar derives substantially all of its revenues and income from the operation of the Bank.

We refer to the Houston-The Woodlands-Sugar Land metropolitan statistical area (“MSA”), as the Houston region (“Houston

region”) and the Beaumont-Port Arthur MSA, as the Beaumont region (“Beaumont region”). The Company is focused on delivering a

wide variety of relationship-driven commercial banking products and community-oriented services tailored to meet the needs of small-to medium-sized businesses, professionals and individuals through its 55 banking centers with 38 banking centers in the Houston

region, 16 banking centers in the Beaumont region and one banking center in Dallas, Texas, which we collectively refer to as our

markets.

Basis of Presentation-The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles ~~("GAAP"~~(“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission ~~("SEC"~~(“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. Transactions between ~~the Company~~Stellar and the Bank have been eliminated. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Operating results for the three and six months ended ~~March 31,~~June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Merger of Equals~~-On October 1, 2022,~~-The merger of equals (the “Merger”) between Allegiance Bancshares, Inc. (“Allegiance”) and CBTX, Inc. (“CBTX”) ~~merged, (the “Merger”)~~, was effective on October 1, 2022, 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. Immediately following the Merger, CommunityBank of Texas, N.A. (“CommunityBank”), a national banking association and a wholly-owned subsidiary of CBTX, merged with and into Allegiance Bank, a wholly owned subsidiary of Allegiance, ~~(the “Bank Merger”),~~ 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.

The Merger constituted a business combination and was accounted for as a reverse merger using the acquisition method of accounting. As a result, Allegiance was the accounting acquirer and CBTX was the legal acquirer and the accounting acquiree. Accordingly, the historical financial statements of Allegiance became the historical financial statements of the combined company for all periods prior to October 1, 2022 (the “Merger Date”). 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.

The Company’s results of operations for the three and six months ended ~~March 31,~~June 30, 2022 reflect Allegiance's historical results and do not include the historical results of CBTX. The Company has substantially completed its valuations of CBTX’s assets and liabilities. 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 number of shares issued and outstanding, earnings per share, capital surplus, dividends paid and all references to share quantities of the Company have been retrospectively ~~adjusted to~~

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adjusted to reflect the equivalent number of shares issued to holders of Allegiance common stock in the Merger. See Note 2 – Acquisitions in the accompanying notes to the consolidated financial statements for the impact of the Merger.

Significant Accounting and Reporting Policies

The Company’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Adoption of New Accounting Standards

ASU 2022-02, "Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." became effective for the Company for the first quarter of 2023 and did not have a significant impact on the Company’s financial statements. ASU 2022-02 eliminates the troubled debt restructuring ("TDR") accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss model. In lieu of the TDR accounting model, the Company applies the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty on a prospective basis. Under the general loan modification guidance, a modification is treated as a new loan only if the following two conditions are met: (1) the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks; and (2) modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate.

2. ACQUISITIONS

Merger of Equals

As described in Note 1 – Nature of Operations and Summary of Significant Accounting and Reporting Policies, the Merger was completed on October 1, 2022.

Allegiance merged with and into CBTX with the surviving corporation renamed Stellar Bancorp, Inc. At the effective date 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 issued 28.1 million shares of its common stock to Allegiance shareholders in connection with the Merger, which represented 54.0% of the voting interests in the Company upon completion of the Merger. In accordance with FASB ASC 805-40-30-2, the purchase price in a reverse acquisition is determined based on the number of equity interests the legal acquiree would have had to issue to give the owners of the legal acquirer the same percentage equity interest in the combined entity that results from the reverse acquisition.

The table below summarizes the ownership of the combined company following the Merger, for each shareholder group, using shares of CBTX and Allegiance common stock outstanding at September 30, 2022 and Allegiance’s closing price on September 30, 2022 (shares in thousands).


	Stellar Bancorp, Inc. Ownership
	Number of CBTX Outstanding Shares	Percentage Ownership
CBTX shareholders	24,015	46.0	%
Allegiance shareholders	28,137	54.0	%
Total	52,152	100.0	%

The Merger was accounted for as a reverse merger using the acquisition method of accounting, which means that for accounting and financial reporting purposes, Allegiance was deemed to have acquired CBTX in the Merger, even though CBTX was the legal acquirer. Accordingly, Allegiance's historical financial statements are the historical financial statements of the combined company for all periods prior to ~~October 1, 2022 (the “Merger Date”).~~the Merger Date.

Total acquisition and merger-related expenses recognized for the three months ended ~~March 31,~~June 30, 2023 and 2022 were ~~$6.2~~$2.9 million and ~~$451 thousand,~~$1.7 million, respectively, and $9.1 million and $2.1 million for the six months ended June 30, 2023 and 2022, respectively.

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3. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of the Company’s goodwill and core deposit intangible assets were as follows:


		Goodwill		Core Deposit Intangibles		Servicing Assets			Goodwill		Core Deposit Intangibles		Servicing Assets
		(In thousands)							(In thousands)
Balance as of December 31, 2021	Balance as of December 31, 2021	$	223,642	$	14,658	$	—	Balance as of December 31, 2021	$	223,642	$	14,658	$	—
Acquired intangibles	Acquired intangibles	273,618		138,150		329		Acquired intangibles	273,618		138,150		329
Amortization	Amortization	—		(9,283)		(20)		Amortization	—		(9,283)		(20)
Balance as of December 31, 2022	Balance as of December 31, 2022	497,260		143,525		309		Balance as of December 31, 2022	497,260		143,525		309
Amortization	Amortization	—		(6,860)		(19)		Amortization	—		(13,720)		(40)
Decrease due to payoff of serviced loans	Decrease due to payoff of serviced loans	—		—		(11)		Decrease due to payoff of serviced loans	—		—		(18)
Balance as of March 31, 2023		$	497,260	$	136,665	$	279
Balance as of June 30, 2023								Balance as of June 30, 2023	$	497,260	$	129,805	$	251

Goodwill is recorded on the acquisition date of an entity. During the measurement period, the Company may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.

Management performs an impairment evaluation annually, and more frequently if a triggering event occurs, of whether any impairment of the goodwill and other intangible assets has occurred. If any such impairment is determined, a write-down is recorded. As of ~~March 31,~~June 30, 2023, there were no impairments recorded on goodwill and other intangible assets.

The estimated aggregate future amortization expense for core deposit intangible assets remaining as of ~~March 31,~~June 30, 2023 is as follows (in thousands):


Remaining 2023	Remaining 2023	$	19,953	Remaining 2023	$	13,093
2024	2024	24,166		2024	24,166
2025	2025	21,528		2025	21,528
2026	2026	18,896		2026	18,896
Thereafter	Thereafter	52,122		Thereafter	52,122
Total	Total	$	136,665	Total	$	129,805

4. SECURITIES

The amortized cost and fair value of investment securities were as follows:


		March 31, 2023									June 30, 2023
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(In thousands)									(In thousands)
Available for Sale	Available for Sale									Available for Sale
U.S. government and agency securities	U.S. government and agency securities	$	426,544	$	570	$	(13,417)	$	413,697	U.S. government and agency securities	$	420,321	$	156	$	(15,595)	$	404,882
Municipal securities	Municipal securities	259,944		2,658		(30,403)		232,199		Municipal securities	259,423		2,177		(32,402)		229,198
Agency mortgage-backed pass-through securities	Agency mortgage-backed pass-through securities	382,495		879		(34,962)		348,412		Agency mortgage-backed pass-through securities	385,780		272		(41,671)		344,381
Agency collateralized mortgage obligations	Agency collateralized mortgage obligations	466,160		231		(58,203)		408,188		Agency collateralized mortgage obligations	455,153		1		(66,382)		388,772
Corporate bonds and other	Corporate bonds and other	127,396		85		(10,802)		116,679		Corporate bonds and other	124,626		53		(13,690)		110,989
Total	Total	$	1,662,539	$	4,423	$	(147,787)	$	1,519,175	Total	$	1,645,303	$	2,659	$	(169,740)	$	1,478,222

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	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Available for Sale
U.S. government and agency securities	$	433,417	$	90	$	(19,227)	$	414,280
Municipal securities	580,076		4,319		(43,826)		540,569
Agency mortgage-backed pass-through securities	370,471		362		(42,032)		328,801
Agency collateralized mortgage obligations	461,760		—		(67,630)		394,130
Corporate bonds and other	143,192		2		(13,388)		129,806
Total	$	1,988,916	$	4,773	$	(186,103)	$	1,807,586

As of ~~March 31,~~June 30, 2023, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

The amortized cost and fair value of investment securities at ~~March 31,~~June 30, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations at any time with or without call or prepayment penalties.


		Amortized Cost		Fair Value			Amortized Cost		Fair Value
		(In thousands)					(In thousands)
Due in one year or less	Due in one year or less	$	77,513	$	75,609	Due in one year or less	$	77,538	$	76,185
Due after one year through five years	Due after one year through five years	180,413		170,388		Due after one year through five years	179,555		167,715
Due after five years through ten years	Due after five years through ten years	133,301		125,079		Due after five years through ten years	133,247		121,458
Due after ten years	Due after ten years	422,657		391,499		Due after ten years	414,030		379,711
Subtotal	Subtotal	813,884		762,575		Subtotal	804,370		745,069
Agency mortgage-backed pass-through securities and collateralized mortgage obligations	Agency mortgage-backed pass-through securities and collateralized mortgage obligations	848,655		756,600		Agency mortgage-backed pass-through securities and collateralized mortgage obligations	840,933		733,153
Total	Total	$	1,662,539	$	1,519,175	Total	$	1,645,303	$	1,478,222

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Securities with unrealized losses segregated by length of time such securities have been in a continuous loss position are as follows:


		March 31, 2023													June 30, 2023
		Less than 12 Months				More than 12 Months				Total					Less than 12 Months				More than 12 Months				Total
		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
		(In thousands)													(In thousands)
Available for Sale	Available for Sale													Available for Sale
U.S. government and agency securities	U.S. government and agency securities	$	111,992	$	(1,309)	$	262,152	$	(12,108)	$	374,144	$	(13,417)	U.S. government and agency securities	$	114,612	$	(1,871)	$	260,133	$	(13,724)	$	374,745	$	(15,595)
Municipal securities	Municipal securities	4,453		(41)		176,032		(30,362)		180,485		(30,403)		Municipal securities	9,423		(193)		173,602		(32,209)		183,025		(32,402)
Agency mortgage-backed pass-through securities	Agency mortgage-backed pass-through securities	45,150		(1,345)		254,713		(33,617)		299,863		(34,962)		Agency mortgage-backed pass-through securities	73,644		(2,529)		247,615		(39,142)		321,259		(41,671)
Agency collateralized mortgage obligations	Agency collateralized mortgage obligations	4,180		(13)		392,427		(58,190)		396,607		(58,203)		Agency collateralized mortgage obligations	11,239		(36)		374,339		(66,346)		385,578		(66,382)
Corporate bonds and other	Corporate bonds and other	38,378		(1,774)		60,404		(9,028)		98,782		(10,802)		Corporate bonds and other	33,323		(2,830)		60,977		(10,860)		94,300		(13,690)
Total	Total	$	204,153	$	(4,482)	$	1,145,728	$	(143,305)	$	1,349,881	$	(147,787)	Total	$	242,241	$	(7,459)	$	1,116,666	$	(162,281)	$	1,358,907	$	(169,740)


	December 31, 2022
	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
	(In thousands)
Available for Sale
U.S. government and agency securities	$	99,732	$	(1,427)	$	305,256	$	(17,800)	$	404,988	$	(19,227)
Municipal securities	228,192		(14,473)		134,640		(29,353)		362,832		(43,826)
Agency mortgage-backed pass-through securities	95,291		(7,612)		199,836		(34,420)		295,127		(42,032)
Agency collateralized mortgage obligations	117,147		(14,426)		276,925		(53,204)		394,072		(67,630)
Corporate bonds and other	72,913		(5,704)		49,893		(7,684)		122,806		(13,388)
Total	$	613,275	$	(43,642)	$	966,550	$	(142,461)	$	1,579,825	$	(186,103)

During the ~~three~~six months ended ~~March 31,~~June 30, 2023, the Company sold $320.4 million of securities recording gross gains of $234 thousand. There were no securities sold during the ~~three~~six months ended ~~March 31,~~June 30, 2022. At ~~March 31,~~June 30, 2023 and December 31, 2022, the Company did not own securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of consolidated shareholders’ equity at such respective dates.

The carrying value of pledged securities was $~~1.11~~1.07 billion at ~~March 31,~~June 30, 2023 and $978.9 million at December 31, ~~2022, respectively.~~2022. The majority of the securities in each case were pledged to collateralize public fund deposits.

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5. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily made to borrowers located within Texas and are segregated by class of loan as follows:


		March 31, 2023		December 31, 2022			June 30, 2023		December 31, 2022
		(In thousands)					(In thousands)
Commercial and industrial	Commercial and industrial	$	1,477,340	$	1,455,795	Commercial and industrial	$	1,512,476	$	1,455,795
Paycheck Protection Program (PPP)	Paycheck Protection Program (PPP)	11,081		13,226		Paycheck Protection Program (PPP)	8,027		13,226
Real estate:	Real estate:					Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	4,014,609		3,931,480		Commercial real estate (including multi-family residential)	4,038,487		3,931,480
Commercial real estate construction and land development	Commercial real estate construction and land development	1,034,538		1,037,678		Commercial real estate construction and land development	1,136,124		1,037,678
1-4 family residential (including home equity)	1-4 family residential (including home equity)	1,008,362		1,000,956		1-4 family residential (including home equity)	1,009,439		1,000,956
Residential construction	Residential construction	292,143		268,150		Residential construction	311,208		268,150
Consumer and other	Consumer and other	47,971		47,466		Consumer and other	52,957		47,466
Total loans	Total loans	7,886,044		7,754,751		Total loans	8,068,718		7,754,751
Allowance for credit losses on loans	Allowance for credit losses on loans	(96,188)		(93,180)		Allowance for credit losses on loans	(100,195)		(93,180)
Loans, net	Loans, net	$	7,789,856	$	7,661,571	Loans, net	$	7,968,523	$	7,661,571

Nonaccrual and Past Due Loans

An aging analysis of the recorded investment in past due loans, segregated by class of loans, is included below. The Company defines recorded investment as the outstanding loan balances including net deferred loan fees, and excluding accrued interest receivable of ~~$35.3~~$35.1 million and $34.1 million as of ~~March 31,~~June 30, 2023 and December 31, 2022, respectively, due to immateriality.


		March 31, 2023																		June 30, 2023
		Loans Past Due and Still Accruing						Nonaccrual Loans				Current Loans				Total Loans				Loans Past Due and Still Accruing												Nonaccrual Loans		Current Loans		Total Loans
		30-89 Days		90 or More Days		Total Past Due Loans								30-89 Days								90 or More Days				Total Past Due Loans
		(In thousands)																		(In thousands)
Commercial and industrial	Commercial and industrial	$	5,115	$	—	$	5,115			$	23,152			$	1,449,073			$	1,477,340		Commercial and industrial	$	2,210			$	—			$	2,210			$	22,800	$	1,487,466	$	1,512,476
Paycheck Protection Program (PPP)	Paycheck Protection Program (PPP)	82		—		82		177				10,822				11,081		Paycheck Protection Program (PPP)		56				—				56				168		7,803		8,027
Real estate:	Real estate:																	Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	9,917		—		9,917		9,026				3,995,666				4,014,609		Commercial real estate (including multi-family residential)		3,302				—				3,302				8,221		4,026,964		4,038,487
Commercial real estate construction and land development	Commercial real estate construction and land development	1,937		—		1,937		27				1,032,574				1,034,538		Commercial real estate construction and land development		4,573				—				4,573				388		1,131,163		1,136,124
1-4 family residential (including home equity)	1-4 family residential (including home equity)	5,133		—		5,133		10,586				992,643				1,008,362		1-4 family residential (including home equity)		8,332				—				8,332				10,880		990,227		1,009,439
Residential construction	Residential construction	867		—		867		195				291,081				292,143		Residential construction		662				—				662				665		309,881		311,208
Consumer and other	Consumer and other	89		—		89		250				47,632				47,971		Consumer and other		142				—				142				227		52,588		52,957
Total loans	Total loans	$	23,140	$	—	$	23,140	$	43,413			$	7,819,491			$	7,886,044	Total loans		$	19,277			$	—			$	19,277			$	43,349	$	8,006,092	$	8,068,718

Table of Contents


	December 31, 2022
	Loans Past Due and Still Accruing						Nonaccrual Loans		Current Loans		Total Loans
	30-89 Days		90 or More Days		Total Past Due Loans
	(In thousands)
Commercial and industrial	$	1,591	$	—	$	1,591	$	25,297	$	1,428,907	$	1,455,795
Paycheck Protection Program (PPP)	517		—		517		105		12,604		13,226
Real estate:
Commercial real estate (including multi-family residential)	3,222		—		3,222		9,970		3,918,288		3,931,480
Commercial real estate construction and land development	851		—		851		—		1,036,827		1,037,678
1-4 family residential (including home equity)	3,385		—		3,385		9,404		988,167		1,000,956
Residential construction	—		—		—		—		268,150		268,150
Consumer and other	192		—		192		272		47,002		47,466
Total loans	$	9,758	$	—	$	9,758	$	45,048	$	7,699,945	$	7,754,751

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt. The Company utilizes a risk rating matrix to assign a risk rating to each of its loans. Loans are rated on a scale of 10 to 90. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks certain risk ratings to be used as credit quality indicators including trends related to (1) the weighted-average risk grade of loans, (2) the level of classified loans, (3) the delinquency status of loans, (4) nonperforming loans and (5) the general economic conditions in the our markets. Individual bankers, under the oversight of credit administration, review updated financial information for all pass grade commercial loans to reassess the risk grade on at least an annual basis. When a loan reaches a set of internally designated criteria, including Substandard ~~(60)~~ or higher, a special assets officer will be involved in the monitoring of the loan on an on-going basis.

The following is a general description of the risk ratings ~~used:~~used by the Company:

Pass—Credits in this category contain an acceptable amount of risk.

Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Substandard—Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately protected by the current net worth and paying capacity of the borrower, declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These loans so classified are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss—Loans classified as loss are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

Table of Contents

The following table presents risk ratings by category of loan as of ~~March 31,~~June 30, 2023 and December 31, 2022:


		As of March 31, 2023																						As of December 31, 2022								As of June 30, 2023																							As of December 31, 2022
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans				Revolving Loans Converted to Term Loans		Total				Total								Term Loans Amortized Cost Basis by Origination Year													Revolving Loans				Revolving Loans Converted to Term Loans		Total				Total
		2023		2022		2021		2020		2019		Prior																2023		2022		2021		2020			2019		Prior
		(In thousands)																														(In thousands)
Commercial and industrial	Commercial and industrial																														Commercial and industrial
Pass	Pass	$	67,460	$	364,886	$	220,941	$	68,360	$	48,321	$	37,100			$	585,691					$	33,937			$	1,426,696	$	1,400,191							Pass	$	179,607	$	330,548	$	202,720	$	61,221			$	42,300					$	31,586			$	558,826	$	50,630	$	1,457,438	$	1,400,191
Special Mention	Special Mention	329		671		541		481		694		184		1,919				478		5,297				18,982							Special Mention	—		349			492		446		381		2		8,173				836		10,679				18,982
Substandard	Substandard	250		4,610		18,567		1,459		12,794		857		5,862				868		45,267				36,568							Substandard	510		5,279			18,110		1,197		12,511		344		5,263				1,094		44,308				36,568
Doubtful	Doubtful	—		53		27		—		—		—		—				—		80				54							Doubtful	—		51			—		—		—		—		—				—		51				54
Total commercial and industrial loans	Total commercial and industrial loans	$	68,039	$	370,220	$	240,076	$	70,300	$	61,809	$	38,141	$	593,472			$	35,283	$	1,477,340			$	1,455,795						Total commercial and industrial loans	$	180,117	$	336,227		$	221,322	$	62,864	$	55,192	$	31,932	$	572,262			$	52,560	$	1,512,476			$	1,455,795

Current-period gross charge-offs	Current-period gross charge-offs	$	—	$	95	$	51	$	—	$	(2)	$	—	$	264			$	18	$	426										Current-period gross charge-offs	$	—	$	95		$	126	$	456	$	—	$	—	$	373			$	434	$	1,484

Paycheck Protection Program (PPP)	Paycheck Protection Program (PPP)																														Paycheck Protection Program (PPP)
Pass	Pass	$	—	$	—	$	6,262	$	4,819	$	—	$	—	$	—			$	—	$	11,081			$	13,226						Pass	$	—	$	—		$	4,858	$	3,169	$	—	$	—	$	—			$	—	$	8,027			$	13,226
Special Mention	Special Mention	—		—		—		—		—		—		—				—		—				—							Special Mention	—		—			—		—		—		—		—				—		—				—
Substandard	Substandard	—		—		—		—		—		—		—				—		—				—							Substandard	—		—			—		—		—		—		—				—		—				—
Doubtful	Doubtful	—		—		—		—		—		—		—				—		—				—							Doubtful	—		—			—		—		—		—		—				—		—				—
Total PPP loans	Total PPP loans	$	—	$	—	$	6,262	$	4,819	$	—	$	—	$	—			$	—	$	11,081			$	13,226						Total PPP loans	$	—	$	—		$	4,858	$	3,169	$	—	$	—	$	—			$	—	$	8,027			$	13,226

Current-period gross charge-offs	Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—			$	—	$	—										Current-period gross charge-offs	$	—	$	—		$	—	$	—	$	—	$	—	$	—			$	—	$	—

Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)																														Commercial real estate (including multi-family residential)
Pass	Pass	$	101,831	$	1,332,416	$	875,519	$	491,699	$	370,618	$	625,176	$	125,193			$	18,040	$	3,940,492			$	3,844,951						Pass	$	283,360	$	1,304,844		$	844,501	$	473,336	$	356,126	$	549,716	$	131,751			$	20,950	$	3,964,584			$	3,844,951
Special Mention	Special Mention	—		1,022		2,632		3,679		809		6,799		587				—		15,528				18,183							Special Mention	942		135			7,005		7,269		796		12,611		587				—		29,345				18,183
Substandard	Substandard	798		14,314		10,477		10,064		5,641		17,295		—				—		58,589				68,346							Substandard	1,903		4,711			11,580		7,274		5,048		13,855		187				—		44,558				68,346
Doubtful	Doubtful	—		—		—		—		—		—		—				—		—				—							Doubtful	—		—			—		—		—		—		—				—		—				—
Total commercial real estate (including multi-family residential) loans	Total commercial real estate (including multi-family residential) loans	$	102,629	$	1,347,752	$	888,628	$	505,442	$	377,068	$	649,270	$	125,780			$	18,040	$	4,014,609			$	3,931,480						Total commercial real estate (including multi-family residential) loans	$	286,205	$	1,309,690		$	863,086	$	487,879	$	361,970	$	576,182	$	132,525			$	20,950	$	4,038,487			$	3,931,480

Current-period gross charge-offs	Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—			$	—	$	—										Current-period gross charge-offs	$	—	$	—		$	—	$	—	$	—	$	—	$	—			$	—	$	—

Commercial real estate construction and land development	Commercial real estate construction and land development																														Commercial real estate construction and land development
Pass	Pass	$	51,849	$	496,452	$	305,671	$	48,800	$	36,510	$	10,103	$	66,678			$	826	$	1,016,889			$	1,025,141						Pass	$	154,065	$	522,070		$	299,038	$	35,881	$	33,778	$	10,070	$	62,503			$	658	$	1,118,063			$	1,025,141
Special Mention	Special Mention	—		1,975		22		145		—		215		—				149		2,506				832							Special Mention	—		3,814			1,945		142		303		209		—				—		6,413				832
Substandard	Substandard	—		2,837		11,850		91		83		282		—				—		15,143				11,705							Substandard	—		581			10,477		89		82		270		—				149		11,648				11,705
Doubtful	Doubtful	—		—		—		—		—		—		—				—		—				—							Doubtful	—		—			—		—		—		—		—				—		—				—
Total commercial real estate construction and land development	Total commercial real estate construction and land development	$	51,849	$	501,264	$	317,543	$	49,036	$	36,593	$	10,600	$	66,678			$	975	$	1,034,538			$	1,037,678						Total commercial real estate construction and land development	$	154,065	$	526,465		$	311,460	$	36,112	$	34,163	$	10,549	$	62,503			$	807	$	1,136,124			$	1,037,678

Current-period gross charge-offs	Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—			$	—	$	—										Current-period gross charge-offs	$	—	$	—		$	—	$	—	$	—	$	—	$	—			$	—	$	—

Table of Contents


		As of March 31, 2023																								As of December 31, 2022				As of June 30, 2023																															As of December 31, 2022
		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans				Revolving Loans Converted to Term Loans												Term Loans Amortized Cost Basis by Origination Year																								Revolving Loans			Revolving Loans Converted to Term Loans
		2023		2022		2021		2020		2019		Prior								Total				Total		2023						2022				2021				2020				2019				Prior								Total			Total
		(In thousands)																												(In thousands)
1-4 family residential (including home equity)	1-4 family residential (including home equity)																											1-4 family residential (including home equity)
Pass	Pass	$	45,638	$	263,617	$	231,405	$	121,674	$	78,287	$	123,212			$	106,219			$	8,710			$	978,762			$	969,396		Pass	$	85,495			$	245,898			$	227,583			$	119,543			$	75,722			$	109,646				$	107,781	$	8,692	$	980,360	$	969,396
Special Mention	Special Mention	—		59		—		1,739		139		198		356				—				2,491				3,714		Special Mention		—				57				—				1,614				—				196				—			190		2,057		3,714
Substandard	Substandard	725		1,028		1,981		3,604		3,589		6,699		6,852				2,631				27,109				27,846		Substandard		722				2,410				2,526				2,302				4,039				5,289				7,076			2,658		27,022		27,846
Doubtful	Doubtful	—		—		—		—		—		—		—				—				—				—		Doubtful		—				—				—				—				—				—				—			—		—		—
Total 1-4 family residential (including home equity)	Total 1-4 family residential (including home equity)	$	46,363	$	264,704	$	233,386	$	127,017	$	82,015	$	130,109	$	113,427			$	11,341			$	1,008,362			$	1,000,956	Total 1-4 family residential (including home equity)		$	86,217			$	248,365			$	230,109			$	123,459			$	79,761			$	115,131			$	114,857		$	11,540	$	1,009,439	$	1,000,956

Current-period gross charge-offs	Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—			$	—			$	—					Current-period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	23			$	—		$	—	$	23

Residential construction	Residential construction																											Residential construction
Pass	Pass	$	32,476	$	194,880	$	31,895	$	8,806	$	1,293	$	2,515	$	18,627			$	—			$	290,492			$	266,943	Pass		$	75,514			$	177,850			$	16,576			$	7,682			$	661			$	1,378			$	27,385		$	—	$	307,046	$	266,943
Special Mention	Special Mention	—		665		—		—		—		—		—				—				665				421		Special Mention		—				—				—				—				—				—				—			—		—		421
Substandard	Substandard	—		305		681		—		—		—		—				—				986				786		Substandard		868				665				2,629				—				—				—				—			—		4,162		786
Doubtful	Doubtful	—		—		—		—		—		—		—				—				—				—		Doubtful		—				—				—				—				—				—				—			—		—		—
Total residential construction	Total residential construction	$	32,476	$	195,850	$	32,576	$	8,806	$	1,293	$	2,515	$	18,627			$	—			$	292,143			$	268,150	Total residential construction		$	76,382			$	178,515			$	19,205			$	7,682			$	661			$	1,378			$	27,385		$	—	$	311,208	$	268,150

Current-period gross charge-offs	Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—			$	—			$	—					Current-period gross charge-offs		$	—			$	—			$	—			$	—			$	—			$	—			$	—		$	—	$	—

Consumer and other	Consumer and other																											Consumer and other
Pass	Pass	7,278		12,893		10,595		2,702		891		697		11,696				874				47,626				47,062		Pass		$	20,268			$	10,715			$	4,645			$	2,248			$	791			$	619			$	12,716		$	633	$	52,635	$	47,062
Special Mention	Special Mention	—		34		1		—		—		—		—				—				35				43		Special Mention		—				30				1				—				—				—				—			—		31		43
Substandard	Substandard	—		74		8		—		104		8		5				111				310				361		Substandard		—				67				37				—				71				5				4			107		291		361
Doubtful	Doubtful	—		—		—		—		—		—		—				—				—				—		Doubtful		—				—				—				—				—				—				—			—		—		—
Total consumer and other	Total consumer and other	$	7,278	$	13,001	$	10,604	$	2,702	$	995	$	705	$	11,701			$	985			$	47,971			$	47,466	Total consumer and other		$	20,268			$	10,812			$	4,683			$	2,248			$	862			$	624			$	12,720		$	740	$	52,957	$	47,466

Current-period gross charge-offs	Current-period gross charge-offs	$	—	$	8	$	—	$	—	$	—	$	—	$	—			$	—			$	8					Current-period gross charge-offs		$	—			$	38			$	—			$	—			$	—			$	—			$	—		$	—	$	38

Total loans	Total loans																											Total loans
Pass	Pass	306,532		2,665,144		1,682,288		746,860		535,920		798,803		914,104				62,387				7,712,038				7,566,910		Pass		$	798,309			$	2,591,925			$	1,599,921			$	703,080			$	509,378			$	703,015			$	900,962		$	81,563	$	7,888,153	$	7,566,910
Special Mention	Special Mention	329		4,426		3,196		6,044		1,642		7,396		2,862				627				26,522				42,175		Special Mention		942				4,385				9,443				9,471				1,480				13,018				8,760			1,026		48,525		42,175
Substandard	Substandard	1,773		23,168		43,564		15,218		22,211		25,141		12,719				3,610				147,404				145,612		Substandard		4,003				13,713				45,359				10,862				21,751				19,763				12,530			4,008		131,989		145,612
Doubtful	Doubtful	—		53		27		—		—		—		—				—				80				54		Doubtful		—				51				—				—				—				—				—			—		51		54
Total loans	Total loans	$	308,634	$	2,692,791	$	1,729,075	$	768,122	$	559,773	$	831,340	$	929,685			$	66,624			$	7,886,044			$	7,754,751	Total loans		$	803,254			$	2,610,074			$	1,654,723			$	723,413			$	532,609			$	735,796			$	922,252		$	86,597	$	8,068,718	$	7,754,751

Total current-period gross charge-offs	Total current-period gross charge-offs	$	—	$	103	$	51	$	—	$	(2)	$	—	$	264			$	18			$	434					Total current-period gross charge-offs		$	—			$	133			$	126			$	456			$	—			$	23			$	373		$	434	$	1,545

Table of Contents

The following table presents the activity in the allowance for credit losses on loans by portfolio type for the three and six months ended ~~March 31,~~June 30, 2023 and 2022:


		Commercial and industrial		Paycheck Protection Program (PPP)		Commercial real estate (including multi-family residential)		Commercial real estate construction and land development		1-4 family residential (including home equity)		Residential construction		Consumer and other		Total			Commercial and industrial		Paycheck Protection Program (PPP)		Commercial real estate (including multi-family residential)		Commercial real estate construction and land development		1-4 family residential (including home equity)		Residential construction		Consumer and other		Total
		(In thousands)																	(In thousands)
Allowance for credit losses on loans:	Allowance for credit losses on loans:																	Allowance for credit losses on loans:
Three Months Ended	Three Months Ended																	Three Months Ended
Balance March 31, 2023																		Balance March 31, 2023	$	39,516	$	—	$	37,700	$	13,579	$	2,832	$	2,089	$	472	$	96,188
Provision for credit losses on loans																		Provision for credit losses on loans	(814)		—		1,263		921		1,946		991		(64)		4,243
Charge-offs																		Charge-offs	(1,058)		—		—		—		(23)		—		(30)		(1,111)
Recoveries																		Recoveries	861		—		—		—		2		—		12		875
Net charge-offs																		Net charge-offs	(197)		—		—		—		(21)		—		(18)		(236)
Balance June 30, 2023																		Balance June 30, 2023	$	38,505	$	—	$	38,963	$	14,500	$	4,757	$	3,080	$	390	$	100,195
Six Months Ended																		Six Months Ended
Balance December 31, 2022	Balance December 31, 2022	$	41,236	$	—	$	32,970	$	14,121	$	2,709	$	1,796	$	348	$	93,180	Balance December 31, 2022	$	41,236	$	—	$	32,970	$	14,121	$	2,709	$	1,796	$	348	$	93,180
Provision for credit losses on loans	Provision for credit losses on loans	(1,502)		—		4,716		(542)		116		293		119		3,200		Provision for credit losses on loans	(2,316)				5,979		379		2,062		1,284		55		7,443
Charge-offs	Charge-offs	(426)		—		—		—		—		—		(8)		(434)		Charge-offs	(1,484)		—		—		—		(23)		—		(38)		(1,545)
Recoveries	Recoveries	208		—		14		—		7		—		13		242		Recoveries	1,069		—		14		—		9		—		25		1,117
Net charge-offs	Net charge-offs	(218)		—		14		—		7		—		5		(192)		Net charge-offs	(415)		—		14		—		(14)		—		(13)		(428)
Balance March 31, 2023		$	39,516	$	—	$	37,700	$	13,579	$	2,832	$	2,089	$	472	$	96,188

Balance June 30, 2023																		Balance June 30, 2023	$	38,505	$	—	$	38,963	$	14,500	$	4,757	$	3,080	$	390	$	100,195
Three Months Ended	Three Months Ended																	Three Months Ended
Balance March 31, 2022																		Balance March 31, 2022	$	16,295	$	—	$	24,877	$	6,147	$	752	$	1,093	$	51	$	49,215
Provision for credit losses on loans																		Provision for credit losses on loans	1,010		—		(855)		1,197		284		(45)		7		1,598
Charge-offs																		Charge-offs	(615)		—		(72)		—		—		—		—		(687)
Recoveries																		Recoveries	11		—		50		55		—		—		—		116
Net charge-offs																		Net charge-offs	(604)		—		(22)		55		—		—		—		(571)
Balance June 30, 2022																		Balance June 30, 2022	$	16,701	$	—	$	24,000	$	7,399	$	1,036	$	1,048	$	58	$	50,242
Six Months Ended																		Six Months Ended
Balance December 31, 2021	Balance December 31, 2021	$	16,629	$	—	$	23,143	$	6,263	$	847	$	975	$	83	$	47,940	Balance December 31, 2021	$	16,629	$	—	$	23,143	$	6,263	$	847	$	975	$	83	$	47,940
Provision for credit losses on loans	Provision for credit losses on loans	(383)		—		1,989		(53)		(95)		118		16		1,592		Provision for credit losses on loans	627		—		1,134		1,144		189		73		23		3,190
Charge-offs	Charge-offs	(341)		—		(255)		(63)		—		—		(48)		(707)		Charge-offs	(956)		—		(327)		(63)		—		—		(48)		(1,394)
Recoveries	Recoveries	390		—		—		—		—		—		—		390		Recoveries	401		—		50		55		—		—		—		506
Net charge-offs	Net charge-offs	49		—		(255)		(63)		—		—		(48)		(317)		Net charge-offs	(555)		—		(277)		(8)		—		—		(48)		(888)
Balance March 31, 2022		$	16,295	$	—	$	24,877	$	6,147	$	752	$	1,093	$	51	$	49,215

Balance June 30, 2022																		Balance June 30, 2022	$	16,701	$	—	$	24,000	$	7,399	$	1,036	$	1,048	$	58	$	50,242

Allowance for Credit Losses on Unfunded Commitments

In addition to the allowance for credit losses on loans, the Company has established an allowance for credit losses on unfunded commitments, classified in other liabilities and adjusted as a provision for credit loss expense. The allowance represents estimates of expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. 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 estimate of commitments expected to fund is informed by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund is informed by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. The allowance for credit losses on unfunded commitments as of ~~March 31,~~June 30, 2023 and December 31, 2022 was ~~$12.4~~$10.1 million and $12.0 million, respectively. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The Company recorded a ~~$466 thousand~~$2.3 million reversal of provision ~~for~~on unfunded commitments induring the ~~first quarter~~three months ended June 30, 2023 compared to a provision of ~~2023.~~$544 thousand for the three months ended June 30, 2022 and recorded a $1.9 million reversal of provision on unfunded commitments for the six months ended June 30, 2023 compared to a provision of $767 thousand for the six months ended June 30, 2022.

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Collateral dependent loans are secured by real estate assets, accounts receivable, inventory and equipment. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses on loans as a specific allocation.

The following tables present the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of ~~March 31,~~June 30, 2023 and December 31, 2022:


		As of March 31, 2023									As of June 30, 2023
		Real Estate		Business Assets		Other		Total			Real Estate		Business Assets		Other		Total
		(In thousands)									(In thousands)
Commercial and industrial	Commercial and industrial	$	—	$	15,879	$	—	$	15,879	Commercial and industrial	$	—	$	15,718	$	—	$	15,718
Real estate:	Real estate:									Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	4,738		—		—		4,738		Commercial real estate (including multi-family residential)	4,715		—		—		4,715
Commercial real estate construction and land development	Commercial real estate construction and land development	27		—		—		27		Commercial real estate construction and land development	174		—		—		174
1-4 family residential (including home equity)	1-4 family residential (including home equity)	3,432		—		—		3,432		1-4 family residential (including home equity)	2,093		—		—		2,093
Residential construction	Residential construction	—		—		—		—		Residential construction	665		—		—		665
Consumer and other	Consumer and other	—		—		8		8		Consumer and other	—		—		—		—
Total	Total	$	8,197	$	15,879	$	8	$	24,084	Total	$	7,647	$	15,718	$	—	$	23,365


	As of December 31, 2022
	Real Estate		Business Assets		Other		Total
	(In thousands)
Commercial and industrial	$	—	$	18,411	$	30	$	18,441
Real estate:
Commercial real estate (including multi-family residential)	1,612		—		—		1,612
Commercial real estate construction and land development	—		—		—		—
1-4 family residential (including home equity)	3,478		—		—		3,478
Residential construction	—		—		—		—
Consumer and other	—		—		—		—
Total	$	5,090	$	18,411	$	30	$	23,531

The following tables present additional information regarding nonaccrual loans. No interest income was recognized on nonaccrual loans as of ~~March 31,~~June 30, 2023 and December 31, 2022.


		As of March 31, 2023							As of June 30, 2023
		Nonaccrual Loans with No Related Allowance		Nonaccrual Loans with Related Allowance		Total Nonaccrual Loans			Nonaccrual Loans with No Related Allowance		Nonaccrual Loans with Related Allowance		Total Nonaccrual Loans
		(In thousands)							(In thousands)
Commercial and industrial	Commercial and industrial	$	1,413	$	21,739	$	23,152	Commercial and industrial	$	1,487	$	21,313	$	22,800

Paycheck Protection Program (PPP)	Paycheck Protection Program (PPP)	177		—		177		Paycheck Protection Program (PPP)	168		—		168
Real estate:	Real estate:							Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	6,438		2,588		9,026		Commercial real estate (including multi-family residential)	6,983		1,238		8,221
Commercial real estate construction and land development	Commercial real estate construction and land development	27		—		27		Commercial real estate construction and land development	388		—		388
1-4 family residential (including home equity)	1-4 family residential (including home equity)	4,464		6,122		10,586		1-4 family residential (including home equity)	7,300		3,580		10,880
Residential construction	Residential construction	195		—		195		Residential construction	665		—		665
Consumer and other	Consumer and other	70		180		250		Consumer and other	60		167		227
Total loans	Total loans	$	12,784	$	30,629	43,413		Total loans	$	17,051	$	26,298	$	43,349

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		As of December 31, 2022							As of December 31, 2022
		Nonaccrual Loans with No Related Allowance		Nonaccrual Loans with Related Allowance		Total Nonaccrual Loans			Nonaccrual Loans with No Related Allowance		Nonaccrual Loans with Related Allowance		Total Nonaccrual Loans
		(In thousands)							(In thousands)
Commercial and industrial	Commercial and industrial	$	2,776	$	22,521	$	25,297	Commercial and industrial	$	2,776	$	22,521	$	25,297

Paycheck Protection Program (PPP)	Paycheck Protection Program (PPP)	105		—		105		Paycheck Protection Program (PPP)	105		—		105
Real estate:	Real estate:							Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	8,704		1,266		9,970		Commercial real estate (including multi-family residential)	8,704		1,266		9,970
Commercial real estate construction and land development	Commercial real estate construction and land development	—		—		—		Commercial real estate construction and land development	—		—		—
1-4 family residential (including home equity)	1-4 family residential (including home equity)	4,856		4,548		9,404		1-4 family residential (including home equity)	4,856		4,548		9,404
Residential construction	Residential construction	—		—		—		Residential construction	—		—		—
Consumer and other	Consumer and other	94		178		272		Consumer and other	94		178		272
Total loans	Total loans	$	16,535	$	28,513	45,048		Total loans	$	16,535	$	28,513	$	45,048

Loan Modifications and Troubled Debt Restructurings

Effective January 1, 2023, under ASU 2022-02, loan modifications are reported if concessions have been granted to borrowers that are experiencing financial difficulty. Information on these loan modifications originated after the effective date is presented according to the new accounting guidance. Reporting periods prior to the adoption of ASU 2022-02 present information on troubled debt restructurings ("TDRs") under the previous disclosure requirements. The ~~following tables show the composition~~percentage of loan modifications made to borrowers experiencing financial difficulty by the loan portfolio and type of concessions granted during the three months ended March 31, 2023. Each of the types of concessions grantedloans modified comprised less than 1% of their respective classes of loan portfolios at ~~March 31,~~June 30, 2023.

The following tables present information regarding loans that were modified due to the borrowers experiencing financial difficulty during the three and six months ended ~~March 31,~~June 30, 2023:
Three Months Ended March 31, 2023
Principal Forgiveness Payment Delay Term Extension Interest Rate Reduction Combination Term Extension and Principal Forgiveness Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable
(In thousands)
Commercial and industrial $ — $ — $ 2,251 $ 96 $ — $ — $ 2,347
Real estate:
Commercial real estate (including
multi-family residential)
— — 798 — — — 798
Commercial real estate construction and land development — — — — — — —
1-4 family residential (including
home equity)
— — 725 — — — 725
Residential construction — — — — — — —
Consumer and other — — — — — — —
Total $ — $ — $ 3,774 $ 96 $ — $ — $ 3,870


		Three Months Ended June 30, 2023
		Interest Rate Reduction		Term Extension		Payment Delay		Principal forgiveness		Combination Term Extension and Principal Forgiveness		Combination Term Extension and Payment Delay		Total
	(In thousands)
Commercial and industrial		$	—	$	—	$	—	$	—	$	—	$	260	$	260
Real estate:
Commercial real estate (including multi-family residential)		—		—		—		—		—		1,710		1,710
Commercial real estate construction and land development		—		6,950		—		—		—		—		6,950
1-4 family residential (including home equity)		—		—		—		—		—		—		—
Residential construction		—		—		—		—		—		—		—
Consumer and other		—		96		—		—		—		—		96
Total		$	—	$	7,046	$	—	$	—	$	—	$	1,970	$	9,016

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		Six Months Ended June 30, 2023
		Interest Rate Reduction		Term Extension		Payment Delay		Principal forgiveness		Combination Term Extension and Principal Forgiveness		Combination Term Extension and Payment Delay		Total
	(In thousands)
Commercial and industrial		$	92	$	2,251	$	—	$	—	$	—	$	260	$	2,603
Real estate:
Commercial real estate (including multi-family residential)		—		—		790		—		—		1,710		2,500
Commercial real estate construction and land development		—		6,950		—		—		—		—		6,950
1-4 family residential (including home equity)		—		721		—		—		—		—		721
Residential construction		—		—		—		—		—		—		—
Consumer and other		—		96		—		—		—		—		96
Total		$	92	$	10,018	$	790	$	—	$	—	$	1,970	$	12,870

The following table summarizes, by loan portfolio, the financial effect of the Company's loan modifications for the three and six months ended ~~March 31,~~June 30, 2023:


	~~Weighted-~~
	~~Average~~		~~Weighted~~
	~~Interest~~		~~Average~~
	~~Rate~~		~~Term~~
	~~Reduction~~		~~Extension~~
			~~(months)~~
~~Commercial and industrial(1)~~	—	%	29
~~Real estate:~~
~~Commercial real estate (including multi-family residential)~~	—	%	6
~~Commercial real estate construction and land development~~	—	%	—
~~1-4 family residential (including home equity)~~	—	%	12
~~Residential construction~~	—	%	—
~~Consumer and other~~	—	%	—


	Three Months Ended June 30, 2023			Six Months Ended June 30, 2023
	Weighted Average Interest Rate Reduction		Weighted Average Term Extension	Weighted Average Interest Rate Reduction		Weighted Average Term Extension
			(months)			(months)
Commercial and industrial(1)	—	%	12	2.0	%	12
Real estate:
Commercial real estate (including multi-family residential)	—	%	12	—	%	12
Commercial real estate construction and land development	—	%	12	—	%	12
1-4 family residential (including home equity)	—	%	—	—	%	12
Residential construction	—	%	—	—	%	—
Consumer and other	—	%	4	—	%	4

(1) ~~There was no~~No financial effect as a result of ~~this~~the loan modification reducing the interest rate as the loan was on nonaccrual.

~~There were no~~

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The following table summarizes loans that had a payment ~~defaults during~~default within the ~~three~~past twelve months ~~ended March 31, 2023~~ that were modified due to the borrowers experiencing financial difficulty ~~in that period prior to default.~~during the three and six months ended June 30, 2023:


	Interest Rate Reduction		Term Extension		Payment Delay		Principal forgiveness
	(In thousands)

Commercial and industrial	$	92	$	670	$	—	$	—
Real estate:
Commercial real estate (including multi-family residential)	—		—		—		—
Commercial real estate construction and land development	—		—		—		—
1-4 family residential (including home equity)	—		721		—		—
Residential construction	—		—		—		—
Consumer and other	—		—		—		—
	$	92	$	1,391	$	—	$	—

The following table presents information regarding loans modified in a troubled debt restructuring during the three and six months ended ~~March 31,~~June 30, 2022:


			Pre-modification		Post Modification
		Number of	of Outstanding		of Outstanding			Three Months Ended June 30, 2022					Six Months Ended June 30, 2022
		Contracts	Recorded Investment		Recorded Investment			Number of Contracts	Pre-modifications of Outstanding Recorded Investment		Post-modifications of Outstanding Recorded Investment		Number of Contracts	Pre-modifications of Outstanding Recorded Investment		Post-modifications of Outstanding Recorded Investment
		(Dollars in thousands)						(Dollars in thousands)
Troubled Debt Restructurings	Troubled Debt Restructurings						Troubled Debt Restructurings
Commercial and industrial	Commercial and industrial	—	$	—	$	—	Commercial and industrial	3	$	544	$	544	3	$	544	$	544
Real estate:	Real estate:						Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	4	1,207		1,207		Commercial real estate (including multi-family residential)	—	—		—		4	1,207		1,207
Commercial real estate construction and land development		—	—		—
1-4 family residential (including home equity)		—	—		—
Residential construction		—	—		—
Consumer and other		—	—		—

Total	Total	4	$	1,207	$	1,207	Total	3	$	544	$	544	7	$	1,751	$	1,751

Troubled debt restructurings resulted in no charge-offs during the ~~three~~six months ended ~~March 31,~~June 30, 2022. There were no loans modified under a trouble debt restructuring during the previous twelve-month period that subsequently defaulted during the ~~three months~~six-month ended ~~March 31,~~June 30, 2022. Default is determined to at 90 or more days past due. The trouble debt restructurings related to extending the amortization periods of the loans. The Company did not grant principal reductions on any restructured loans during the ~~three~~six months ended ~~March 31,~~June 30, 2022. There were no commitments to lend additional amounts to trouble debt restructured loans ~~as of March 31,~~for the three and six months ended June 30, 2022.

6. LEASES

Lease payments over the expected term are discounted using the Company’s incremental borrowing rate for borrowings of similar terms. Generally, the Company cannot be reasonably certain about whether or not it will renew a lease until such time as the lease is within the last two years of the existing lease term. When the Company is reasonably certain that a renewal option will be exercised, it measures/remeasures the right-of-use asset and related lease liability using the lease payments specified for the renewal

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period or, if such amounts are unspecified, the Company generally assumes an increase (evaluated on a case-by-case basis in light of prevailing market conditions) in the lease payment over the final period of the existing lease term.

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022.

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At ~~March 31,~~June 30, 2023, the Company had 32 leases consisting of branch locations and office space. On the ~~March 31,~~June 30, 2023 balance sheet, the right-of-use asset is classified within premises and equipment and the lease liability is included in other liabilities. The Company also owns certain office facilities which it leases to outside parties under operating lessor leases; however, such leases are not significant. All leases were classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

Certain leases include options to renew, with renewal terms that can extend the lease term from one to five years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The depreciable life of leased assets are limited by the expected lease term.

Supplemental lease information at the dates indicated is as follows:


		March 31, 2023			December 31, 2022				June 30, 2023			December 31, 2022
		(Dollars in thousands)							(Dollars in thousands)
Balance Sheet:	Balance Sheet:							Balance Sheet:
Operating lease right of use asset classified as premises and equipment	Operating lease right of use asset classified as premises and equipment	$	22,557		$	23,538		Operating lease right of use asset classified as premises and equipment	$	21,451		$	23,538
Operating lease liability classified as other liabilities	Operating lease liability classified as other liabilities	$	22,249		$	23,136		Operating lease liability classified as other liabilities	$	21,098		$	23,136
Weighted average lease term, in years	Weighted average lease term, in years	8.09			8.18			Weighted average lease term, in years	7.99			8.18
Weighted average discount rate	Weighted average discount rate	4.03		%	4.00		%	Weighted average discount rate	4.10		%	4.00		%

Lease costs for the dates indicated is as follows:


		Three Months Ended March 31,					Three Months Ended June 30,					Six Months Ended June 30,
		2023		2022				2023			2022			2023			2022
		(In thousands)				(In thousands)
Income Statement:	Income Statement:
Operating lease cost	Operating lease cost	$	1,809	$	892			Operating lease cost	$	1,579		$	831		$	3,393		$	1,723
Short-term lease cost	Short-term lease cost	5		—				Short-term lease cost	10			—			15			—

Total operating lease costs	Total operating lease costs	$	1,814	$	892			Total operating lease costs	$	1,589		$	831		$	3,408		$	1,723

A maturity analysis of the Company’s lease liabilities is as follows:


		March 31, 2023		December 31, 2022			June 30, 2023		December 31, 2022
		(In thousands)					(In thousands)
Lease payments due:	Lease payments due:					Lease payments due:
Within one year	Within one year	$	3,372	$	4,634	Within one year	$	2,296	$	4,634
After one but within two years	After one but within two years	4,121		4,121		After one but within two years	4,121		4,121
After two but within three years	After two but within three years	3,684		3,684		After two but within three years	3,684		3,684
After three but within four years	After three but within four years	3,132		3,132		After three but within four years	3,130		3,132
After four but within five years	After four but within five years	2,918		2,918		After four but within five years	2,918		2,918
After five years	After five years	9,303		9,303		After five years	9,303		9,303
Total lease payments	Total lease payments	26,530		27,792		Total lease payments	25,452		27,792
Less: discount on cash flows	Less: discount on cash flows	4,281		4,656		Less: discount on cash flows	4,354		4,656
Total lease liability	Total lease liability	$	22,249	$	23,136	Total lease liability	$	21,098	$	23,136

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7. FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value represents the exchange price that would be received from selling an asset or paid to transfer a liability, otherwise known as an “exit price,” in the principal or most advantageous market available to the entity in an orderly transaction between market participants on the measurement date.

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

•Level 1—Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3—Significant unobservable inputs that reflect management’s judgment and assumptions that market participants would use in pricing an asset or liability that are supported by little or no market activity.

The carrying amounts and estimated fair values of financial instruments that are reported on the balance sheet are as follows:


		As of March 31, 2023											As of June 30, 2023
				Estimated Fair Value											Estimated Fair Value
		Carrying Amount		Level 1		Level 2		Level 3		Total			Carrying Amount		Level 1		Level 2		Level 3		Total
		(In thousands)											(In thousands)
Financial assets	Financial assets											Financial assets
Cash and cash equivalents	Cash and cash equivalents	$	263,333	$	263,333	$	—	$	—	$	263,333	Cash and cash equivalents	$	304,089	$	304,089	$	—	$	—	$	304,089
Available for sale securities	Available for sale securities	1,519,175		—		1,519,175		—		1,519,175		Available for sale securities	1,478,222		—		1,478,222		—		1,478,222
Loans held for investment, net of allowance	Loans held for investment, net of allowance	7,789,856		—		—		7,617,825		7,617,825		Loans held for investment, net of allowance	7,968,523		—		—		7,713,018		7,713,018
Accrued interest receivable	Accrued interest receivable	42,405		112		7,018		35,275		42,405		Accrued interest receivable	42,051		163		6,745		35,143		42,051
Financial liabilities	Financial liabilities											Financial liabilities
Deposits	Deposits	$	8,738,875	$	—	$	8,723,152	$	—	$	8,723,152	Deposits	$	8,766,369	$	—	$	8,754,102	$	—	$	8,754,102
Accrued interest payable	Accrued interest payable	3,875		—		3,875		—		3,875		Accrued interest payable	4,555		—		4,555		—		4,555
Borrowed funds	Borrowed funds	238,944		—		238,999		—		238,999		Borrowed funds	369,963		—		369,990		—		369,990
Subordinated debt	Subordinated debt	109,420		—		105,773		—		105,773		Subordinated debt	109,566		—		108,029		—		108,029

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	As of December 31, 2022
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets
Cash and cash equivalents	$	371,705	$	371,705	$	—	$	—	$	371,705
Available for sale securities	1,807,586		—		1,807,586		—		1,807,586
Loans held for investment, net of allowance	7,661,571		—		—		7,555,602		7,555,602
Accrued interest receivable	44,743		25		10,585		34,133		44,743
Financial liabilities
Deposits	$	9,267,632	$	—	$	9,256,141	$	—	$	9,256,141
Accrued interest payable	2,098		—		2,098		—		2,098
Borrowed funds	63,925		—		63,999		—		63,999
Subordinated debt	109,367		—		107,910		—		107,910

The following tables present fair values for assets and liabilities measured at fair value on a recurring basis. There were no liabilities measured at fair value on a recurring basis as of ~~March 31,~~June 30, 2023.


		March 31, 2023									June 30, 2023
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
		(In thousands)									(In thousands)
Financial assets	Financial assets									Financial assets
Available for sale securities:	Available for sale securities:									Available for sale securities:
U.S. government and agency securities	U.S. government and agency securities	$	—	$	413,697	$	—	$	413,697	U.S. government and agency securities	$	—	$	404,882	$	—	$	404,882
Municipal securities	Municipal securities	—		232,199		—		232,199		Municipal securities	—		229,198		—		229,198
Agency mortgage-backed pass-through securities	Agency mortgage-backed pass-through securities	—		348,412		—		348,412		Agency mortgage-backed pass-through securities	—		344,381		—		344,381
Agency collateralized mortgage obligations	Agency collateralized mortgage obligations	—		460,986		—		460,986		Agency collateralized mortgage obligations	—		388,772		—		388,772
Corporate bonds and other	Corporate bonds and other	—		63,881		—		63,881		Corporate bonds and other	—		110,989		—		110,989
Interest rate swaps	Interest rate swaps	—		—		7,463		7,463		Interest rate swaps	—		—		8,841		8,841
Credit risk participation agreements	Credit risk participation agreements	—		—		33		33		Credit risk participation agreements	—		—		23		23
Total fair value of financial assets	Total fair value of financial assets	$	—	$	1,519,175	$	7,496	$	1,526,671	Total fair value of financial assets	$	—	$	1,478,222	$	8,864	$	1,487,086
Financial liabilities	Financial liabilities									Financial liabilities
Interest rate swaps	Interest rate swaps	$	—	$	—	$	7,463	$	7,463	Interest rate swaps	$	—	$	—	$	8,841	$	8,841
Total fair value of financial liabilities	Total fair value of financial liabilities	$	—	$	—	$	7,463	$	7,463	Total fair value of financial liabilities	$	—	$	—	$	8,841	$	8,841

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	December 31, 2022
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets
Available for sale securities:
U.S. government and agency securities	$	—	$	414,280	$	—	$	414,280
Municipal securities	—		540,569		—		540,569
Agency mortgage-backed pass-through securities	—		328,801		—		328,801
Agency collateralized mortgage obligations	—		394,130		—		394,130
Corporate bonds and other	—		129,806		—		129,806
Interest rate swaps	—		—		9,263		9,263
Credit risk participation agreements	—		—		27		27
Total fair value of financial assets	$	—	$	1,807,586	$	9,290	$	1,816,876
Financial liabilities
Interest rate swaps	$	—	$	—	$	9,263	$	9,263
Total fair value of financial liabilities	$	—	$	—	$	9,263	$	9,263

There were no transfers between levels during the ~~three~~six months ended ~~March 31,~~June 30, 2023 or 2022.

Assets measured at fair value on a nonrecurring basis are summarized in the table below. There were no liabilities measured at fair value on a nonrecurring basis at ~~March 31,~~June 30, 2023 and December 31, 2022.


		March 31, 2023							June 30, 2023
		Level 1		Level 2		Level 3			Level 1		Level 2		Level 3
		(In thousands)							(In thousands)
Loans:	Loans:							Loans:
Commercial and industrial	Commercial and industrial	$	—	$	—	$	12,236	Commercial and industrial	$	—	$	—	$	11,991
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	—		—		2,832		Commercial real estate (including multi-family residential)	—		—		2,752
Commercial real estate construction and land development	Commercial real estate construction and land development	—		—		9,420		Commercial real estate construction and land development	—		—		6,751
1-4 family residential (including home equity)	1-4 family residential (including home equity)	—		—		2,820		1-4 family residential (including home equity)	—		—		2,045

Branch assets held for sale	Branch assets held for sale	2,033		—		—		Branch assets held for sale	5,852		—		—
Other repossessed assets		124		—		—
		$	2,157	$	—	$	27,308		$	5,852	$	—	$	23,539


	December 31, 2022
	Level 1		Level 2		Level 3
	(In thousands)
Loans:
Commercial and industrial	$	—	$	—	$	21,948
Commercial real estate (including multi-family residential)	—		—		11,566

1-4 family residential (including home equity)	—		—		2,883

Branch assets held for sale	5,165		—		—
	$	5,165	$	—	$	36,397

Branch assets held for sale include banking centers that have closed and are for sale.

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8. DEPOSITS

Time deposits that met or exceeded the Federal Deposit Insurance Corporation ("FDIC") insurance limit of $250 thousand at ~~March 31,~~June 30, 2023 and December 31, 2022 were ~~$498.1~~$502.1 million and $432.9 million, respectively.

Scheduled maturities of time deposits for the next five years are as follows (in thousands):


Within one year	$	~~925,920~~1,325,868
After one but within two years	~~101,424~~88,265
Over three years	~~37,588~~27,118
Total	$	~~1,064,932~~1,441,251

The Company had ~~$203.4~~$537.8 million and $72.5 million of brokered deposits as of ~~March 31,~~June 30, 2023 and December 31, 2022, respectively. There were no concentrations of deposits with any one depositor at ~~March 31,~~June 30, 2023 and December 31, 2022.

9. DERIVATIVE INSTRUMENTS

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship.

Derivatives not designated as hedges

The Company has outstanding interest rate swap contracts with certain customers and equal and offsetting interest rate swaps with other financial institutions entered into at the same time. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk. The objective of the transactions is to allow customers to effectively convert a variable rate loan to a fixed rate.

In connection with each swap transaction, the Company agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agreed to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and do not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At ~~March 31,~~June 30, 2023, management determined there was no such deterioration.

At ~~March 31,~~June 30, 2023 and December 31, 2022, the Company had 15 and 14 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in other noninterest income. Fair value amounts are included in other assets and other liabilities.

At ~~March 31,~~June 30, 2023 and December 31, 2022, the Company had three credit risk participation agreements with another financial institution that are associated with interest rate swaps related to loans for which the Company is the lead agent bank and the other financial institution provides credit protection to the Company should the borrower fail to perform under the terms of the interest rate swap agreements. The fair value of the agreements is determined based on the market value of the underlying interest rate swaps adjusted for credit spreads and recovery rates.

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Derivative instruments not designated as hedges outstanding as of ~~March 31,~~June 30, 2023 were as follows (dollars in thousands):

Weighted
Average
Notional Fair Maturity
Classification Amounts Value Fixed Rate Floating Rate (Years)
Interest rate swaps with financial institutions Other assets $ 108,266 $ 7,062 3.25% - 5.58% SOFR CME 1M + 2.50% - 3.00% 5.25
Interest rate swaps with customers Other assets 4,936 77 6.25% SOFR CME 1M + 2.50% 4.80
Interest rate swaps with financial institutions Other assets 4,999 323 4.99% U.S. Prime 4.71
Interest rate swaps with customers Other liabilities 4,999 (323) 4.99% U.S. Prime 4.71
Interest rate swaps with financial institutions Other liabilities 4,936 (77) 6.25% SOFR CME 1M + 2.50% 4.80
Interest rate swaps with customers Other liabilities 108,266 (7,062) 3.25% - 5.58% SOFR CME 1M + 2.50% - 3.00% 5.25
Credit risk participation agreement with financial institution Other assets 21,359 33 3.50% - 5.40% SOFR CME 1M + 2.50% 8.08


								Weighted
								Average
		Notional		Fair				Maturity
	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
Interest rate swaps:
Financial institutions	Other assets	$	112,077	$	8,425	3.25% - 5.58%	SOFR CME 1M + 2.50% - 3.00%	4.99
Financial institutions	Other assets	4,970		416		4.99%	U.S. Prime	4.46
Customers	Other liabilities	4,970		(416)		4.99%	U.S. Prime	4.46
Customers	Other liabilities	112,077		(8,425)		3.25% - 5.58%	SOFR CME 1M + 2.50% - 3.00%	4.99
Credit risk participations:
Financial institutions	Other assets	21,159		23		3.50% - 5.40%	SOFR CME 1M + 2.50%	7.86

Derivative instruments not designated as hedges outstanding as of December 31, 2022 were as follows (dollars in thousands):

Weighted
Average
Notional Fair Maturity
Classification Amounts Value Fixed Rate Floating Rate (Years)
Interest rate swaps with financial institutions Other assets $ 109,242 $ 8,856 3.25% - 5.58% SOFR CME 1M + 2.50% - 3.00% 5.49
Interest rate swaps with financial institutions Other assets 5,029 407 4.99% U.S. Prime 4.96
Interest rate swaps with customers Other liabilities 5,029 (407) 4.99% U.S. Prime 4.96
Interest rate swaps with customers Other liabilities 109,242 (8,856) 3.25% - 5.58% SOFR CME 1M + 2.50% - 3.00% 5.49
Credit risk participation agreement with financial institution Other assets 13,028 2 3.50% LIBOR 1M + 2.50% 7.24
Credit risk participation agreement with financial institution Other assets 8,485 25 5.35% - 5.40% SOFR CME 1M + 2.50% 9.97


								Weighted
								Average
		Notional		Fair				Maturity
	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
Interest rate swaps:
Financial institutions	Other assets	$	109,242	$	8,856	3.25% - 5.58%	SOFR CME 1M + 2.50% - 3.00%	5.49
Financial institutions	Other assets	5,029		407		4.99%	U.S. Prime	4.96
Customers	Other liabilities	5,029		(407)		4.99%	U.S. Prime	4.96
Customers	Other liabilities	109,242		(8,856)		3.25% - 5.58%	SOFR CME 1M + 2.50%	5.49
Credit risk participations:
Financial institutions	Other assets	13,028		2		3.50%	LIBOR 1M + 2.50%	7.24
Financial institutions	Other assets	8,485		25		5.35% - 5.40%	SOFR CME 1M + 2.50%	9.97

10. BORROWINGS AND BORROWING CAPACITY

The Company has an available line of credit with the Federal Home Loan Bank (“FHLB”) of Dallas, which allows the Company to borrow on a collateralized basis. 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. At ~~March 31,~~June 30, 2023, the Company had a total borrowing capacity with the FHLB of ~~$4.07~~$4.10 billion, of which ~~$2.84~~$2.90 billion was available and ~~$1.23~~$1.20 billion was outstanding in/through FHLB advances and letters of credit. There were ~~$239.0~~$370.0 million of FHLB short-term advances outstanding at ~~March 31,~~June 30, 2023 at a ~~weighted average~~weighted-average rate of ~~5.00%~~5.45%. Letters of credit were ~~$994.7~~$831.3 million at ~~March 31,~~June 30, 2023, of which ~~$333.4~~$91.0 million will expire during the remaining months of 2023, ~~$61.2~~$45.0 million will expire in 2024, ~~$45.0~~$148.0 million will expire in 2025, ~~$60.1~~$52.3 million will expire in 2026, $453.0 million will expire in 2027, $15.0 million will expire in 2028 and $27.0 million will expire in 2029.

On December 13, 2022, the Company entered into a loan agreement with another financial institution, or the Loan Agreement, that provides for a $75.0 million revolving line of credit. At ~~March 31,~~June 30, 2023, there were no outstanding borrowings on this line of credit and the Company did not draw on this line of credit during 2023 or 2022. The Company can make draws on the line of

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credit for a period of 24 months, which began on December 13, 2022, after which the Company will not be permitted to make further draws. Interest accrues on outstanding borrowings at a per annum rate equal to the prime rate quoted by The Wall Street Journal and with a floor rate of 3.50% calculated in accordance with the terms of the revolving promissory note and payable quarterly through the first 24 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2024.

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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) 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. As of ~~March 31,~~June 30, 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.

11. SUBORDINATED DEBT

Junior Subordinated Debentures

In connection with the acquisition of F&M Bancshares, Inc., the Company assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of these trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations. Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.

A summary of pertinent information related to the Company’s issues of junior subordinated debentures outstanding at ~~March 31,~~June 30, 2023 is set forth in the table below:

Description

Issuance

Date

Trust

Preferred

Securities

Outstanding

Interest Rate(1)

Junior

Subordinated

Debt Owed

to Trusts

Maturity

Date(2)

(Dollars in thousands)

Farmers & Merchants Capital Trust II

November 13, 2003

7,500

3 month LIBOR + 3.00%

7,732

November 8, 2033

Farmers & Merchants Capital Trust III

June 30, 2005

3,500

3 month LIBOR + 1.80%

3,609

July 7, 2035

11,341


(1)			The 3-month LIBOR in effect as of ~~March 31,~~June 30, 2023 was ~~5.19%~~5.07%. Transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 30-day LIBOR is no longer published on a future adjustment date.
(2)			All debentures are currently callable.

Subordinated Notes

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events, capital events or investment company events. 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. The Bank Notes are eligible for ~~tier~~Tier 2 capital treatment, however, during the last five years of the instrument, the amount eligible must be reduced by 20% of the original amount annually and that no amount of the instrument is eligible for inclusion in ~~tier~~Tier 2 capital when the remaining maturity of the instrument is less than

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one year. As the Bank Notes were within five years of maturity, only 80% of the notes are eligible for ~~tier~~Tier 2 capital treatment at ~~March 31,~~June 30, 2023.

In September 2019, the Company completed the issuance of $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Company Notes") due October 1, 2029. The Company Notes bear a fixed interest rate of 4.70% per annum until (but excluding) October 1, 2024, payable semi-annually in arrears on April 1 and October 1, commencing on April 1, 2020. 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%), which transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 30-day LIBOR is no longer published on a future adjustment date, 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. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.

12. INCOME TAXES

The amount of the Company’s 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 items. For the three months ended March 31, 2023, income tax expense was $9.9 million compared with $4.2 million for the three months ended March 31, 2022. The effective income tax rate for the three months ended March 31, 2023 was 21.1%, compared to 18.4% for the three months ended March 31, 2022, respectively.


	Three Months Ended						Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Income tax expense	$	7,467		$	3,702		$	17,380		$	7,904
Effective income tax rate	17.5		%	18.4		%	19.4		%	18.4		%

Interest and penalties related to tax positions are recognized in the period in which they begin accruing or when the entity claims the position that does not meet the minimum statutory thresholds. The Company does not have any uncertain tax positions and does not have any interest or penalties recorded in the income statement for the three or six months ended ~~March 31,~~June 30, 2023.

13. STOCK BASED COMPENSATION

In connection with the closing of the Merger on October 1, 2022, the 2022 Omnibus Incentive Plan (the “2022 Plan”) approved by the Company’s shareholders at the special meeting of shareholders on May 23, 2022 became effective. Under the 2022 Plan, the Company is authorized to issue a maximum aggregate of 2,000,000 shares of common stock. All restricted stock and performance share awards outstanding at ~~March 31,~~June 30, 2023 were issued under the 2022 Plan. At ~~March 31,~~June 30, 2023, there were 1,103,050 shares reserved for issuance under the 2022 Plan.

The Company accounts for stock based employee compensation plans using the fair value-based method of accounting. The Company recognized total stock based compensation expense of ~~$2.6~~$2.8 million and ~~$959~~$931 thousand for the three months ended ~~March 31,~~June 30, 2023 and 2022, respectively, and $5.4 million and $1.9 million for the six months ended June 30, 2023 and 2022, respectively.

Stock Options

Stock options outstanding at ~~March 31,~~June 30, 2023, were issued prior to the Merger under three equity compensation plans with awards outstanding (1) the Allegiance 2015 Stock Awards and Incentive Plan, (2) the Allegiance 2019 Amended and Restated Stock Awards and Incentive Plan and (3) the CBTX 2014 Stock Option Plan. No additional shares may be issued under ~~either of~~ these compensation plans.

No options to purchase Company stock were granted during the ~~first three~~six months ofended June 30, 2023. Options are exercisable for up to 10 years from the date of the grant and, dependent on the terms of the applicable award agreement generally vest three to four years after the date of grant. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model.

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A summary of the activity in the stock option plans during the ~~three~~six months ended ~~March 31,~~June 30, 2023 is set forth below:


		Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value			Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
		(Shares in thousands)			(In years)	(Dollars in thousands)			(Shares in thousands)			(In years)	(Dollars in thousands)
Options outstanding, January 1, 2023	Options outstanding, January 1, 2023	368	$	17.89	2.72	$	4,256	Options outstanding, January 1, 2023	368	$	17.89	2.72	$	4,256
Options granted	Options granted	—	—					Options granted	—	—
Options exercised	Options exercised	(19)	13.45					Options exercised	(25)	13.95
Options forfeited	Options forfeited	(21)	22.05					Options forfeited	(33)	20.49
Options outstanding, March 31, 2023		328	$	17.89	2.54	$	2,282
Options vested and exercisable, March 31, 2023		328	$	17.89	2.54	$	2,282
Options outstanding, June 30, 2023								Options outstanding, June 30, 2023	310	$	17.94	2.31	$	1,656
Options vested and exercisable, June 30, 2023								Options vested and exercisable, June 30, 2023	310	$	17.94	2.31	$	1,656

Restricted Stock Awards

The fair value of the Company’s restricted stock awards is estimated based on the market value of the Company’s common stock at the date of grant, which is the closing price of the Company’s common stock on the day before the grant date. The shares of restricted stock granted during 2023 generally vest over a period of two or three years and the Company accounts for shares of restricted stock by recording the fair value of the grant on the award date as compensation expense over the vesting period.

Shares of restricted stock are considered outstanding at the date of issuance as the grantee becomes the record owner of the restricted stock and has voting, dividend and other shareholder rights. The shares of restricted stock awards are non-transferable and subject to forfeiture until the restricted stock awards vest and any dividends with respect to the restricted stock awards are subject to the same restrictions, including the risk of forfeiture.

A summary of the activity of the nonvested shares of restricted stock during the ~~three~~six months ended ~~March 31,~~June 30, 2023 is as follows:


		Number of Shares	Weighted Average Grant Date Fair Value			Number of Shares	Weighted Average Grant Date Fair Value
		(Shares in thousands)				(Shares in thousands)
Nonvested share awards outstanding, January 1, 2023	Nonvested share awards outstanding, January 1, 2023	501	$	32.84	Nonvested share awards outstanding, January 1, 2023	501	$	32.84
Share awards granted	Share awards granted	228	25.99		Share awards granted	253	25.71
Share awards vested	Share awards vested	—	—		Share awards vested	(14)	25.99
Unvested share awards forfeited or cancelled	Unvested share awards forfeited or cancelled	(26)	32.01		Unvested share awards forfeited or cancelled	(50)	31.11
Nonvested share awards outstanding, March 31, 2023		703	$	30.65
Nonvested share awards outstanding, June 30, 2023					Nonvested share awards outstanding, June 30, 2023	690	30.49

As of ~~March 31,~~June 30, 2023, there was ~~$18.1~~$5.8 million of total unrecognized compensation cost related to the restricted stock awards which is expected to be recognized over a weighted-average period of ~~2.12~~1.89 years.

Performance Share Awards ("PSAs")

PSAs are generally earned subject to certain performance goals being met after the two-year performance period and will be settled in shares of Company common stock following a one-year service period. There were 119,845 PSAs awarded during the ~~three~~six months ended ~~March 31,~~June 30, 2023. The grant date fair value of the PSAs is based on the probable outcome of the applicable performance conditions and is calculated at target based on a combination of the closing market price of our common stock on the grant date and a Monte Carlo simulated fair value in accordance with ASC 718. At ~~March 31,~~June 30, 2023, there was ~~$3.0~~$1.2 million of unrecognized compensation expense related to the PSAs, which is expected to be recognized over a weighted-average period of ~~2.25~~2.1 years.

14. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in the Company’s consolidated balance sheets. The Company

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enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve to varying degrees elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

The contractual amounts of financial instruments with off-balance sheet risk are as follows:


		March 31, 2023				December 31, 2022					June 30, 2023				December 31, 2022
		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate			Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
		(Dollars in thousands)									(In thousands)
Commitments to extend credit(1)	Commitments to extend credit(1)	$	608,717	$	1,726,952	$	673,098	$	1,686,627	Commitments to extend credit(1)	$	513,423	$	1,403,262	$	673,098	$	1,686,627
Standby letters of credit	Standby letters of credit	12,174		23,348		10,310		25,190		Standby letters of credit	14,818		23,670		10,310		25,190
Total	Total	$	620,891	$	1,750,300	$	683,408	$	1,711,817	Total	$	528,241	$	1,426,932	$	683,408	$	1,711,817

1) At ~~March 31,~~June 30, 2023 and December 31, 2022, the Company had FHLB Letters of Credit in the amount of ~~$994.7~~$831.3 million and $1.08 billion, respectively, pledged as collateral for public and other deposits of state and local government agencies. For more information on FHLB borrowings, see Note 10 – Borrowings and Borrowing Capacity.

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed do not necessarily represent future cash funding requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses. The amount and type of collateral, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.

Commitments to make loans are generally made for an approval period of 120 days or fewer. As of ~~March 31,~~June 30, 2023, the fixed rate loan commitments had interest rates ranging from ~~1.10%~~1.40% to ~~9.75%~~13.25% with a weighted average maturity and rate of ~~2.62~~2.50 years and ~~5.38%~~5.89%, respectively.

Standby Letters of Credit

Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, the Company has the rights to the underlying collateral. The credit risk to the Company in issuing letters of credit is ~~essentially the same as~~substantially similar to that involved in extending loan facilities to its customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is ~~essentially the same as~~substantially similar to that involved in making commitments to extend credit.

Litigation

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Company, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position or results of operations of the Company.

15. REGULATORY CAPITAL MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines, and for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can cause regulators to initiate actions that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The final rules implementing Basel Committee on Banking Supervision's capital guideline for U.S.

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Banks (Basel III Rules) were fully phased in when the capital conservation buffer reached 2.5%. Management believes as of

June 30,

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~~March 31,~~ 2023 and December 31, 2022, the Company and the Bank met all capital adequacy requirements to which they were then subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If less than well capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

The following is a summary of the Company’s and the Bank’s actual and required capital ratios as of ~~March 31,~~June 30, 2023 and December 31, 2022:

Actual
Minimum Required for Capital
Adequacy Purposes
Minimum Required Plus
Capital Conservation Buffer
To Be Categorized As Well-Capitalized Under
Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
STELLAR BANCORP, INC.
(Consolidated)
As of March 31, 2023
Total Capital (to risk weighted
    assets)
$ 1,133,335 12.72 % $ 712,872 8.00 % $ 935,644 10.50 % N/A N/A
Common Equity Tier 1 Capital (to
    risk weighted assets)
925,572 10.39 % 400,990 4.50 % 623,763 7.00 % N/A N/A
Tier 1 Capital (to risk weighted
    assets)
935,470 10.50 % 534,654 6.00 % 757,426 8.50 % N/A N/A
Tier 1 Capital (to average tangible
    assets)
935,470 9.01 % 415,184 4.00 % 415,184 4.00 % N/A N/A
As of December 31, 2022
Total Capital (to risk weighted
    assets)
$ 1,092,618 12.39 % $ 705,765 8.00 % $ 926,317 10.50 % N/A N/A
Common Equity Tier 1 Capital (to
    risk weighted assets)
885,652 10.04 % 396,993 4.50 % 617,545 7.00 % N/A N/A
Tier 1 Capital (to risk weighted
    assets)
895,520 10.15 % 529,324 6.00 % 749,876 8.50 % N/A N/A
Tier 1 Capital (to average tangible
    assets)
895,520 8.55 % 418,720 4.00 % 418,720 4.00 % N/A N/A
STELLAR BANK
As of March 31, 2023
Total Capital (to risk weighted
    assets)
$ 1,105,514 12.42 % $ 712,191 8.00 % $ 934,750 10.50 % $ 890,238 10.00 %
Common Equity Tier 1 Capital (to
    risk weighted assets)
967,649 10.87 % 400,607 4.50 % 623,167 7.00 % 578,655 6.50 %
Tier 1 Capital (to risk weighted
    assets)
967,649 10.87 % 534,143 6.00 % 756,702 8.50 % 712,191 8.00 %
Tier 1 Capital (to average tangible
    assets)
967,649 9.35 % 413,922 4.00 % 413,922 4.00 % 517,402 5.00 %
As of December 31, 2022
Total Capital (to risk weighted
    assets)
$ 1,059,313 12.02 % $ 705,120 8.00 % $ 925,470 10.50 % $ 881,400 10.00 %
Common Equity Tier 1 Capital (to
    risk weighted assets)
921,714 10.46 % 396,630 4.50 % 616,980 7.00 % 572,910 6.50 %
Tier 1 Capital (to risk weighted
    assets)
921,714 10.46 % 528,840 6.00 % 749,190 8.50 % 705,120 8.00 %
Tier 1 Capital (to average tangible
    assets)
921,714 8.81 % 418,388 4.00 % 418,388 4.00 % 522,984 5.00 %


	Actual				Minimum Required for Capital Adequacy Purposes				Minimum Required Plus Capital Conservation Buffer				To Be Categorized As Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
STELLAR BANCORP, INC.
(Consolidated)
As of June 30, 2023
Total Capital (to risk-weighted assets)	$	1,175,829	13.03	%	$	722,193	8.00	%	$	947,878	10.50	%	N/A		N/A
Common Equity Tier 1 Capital (to risk-weighted assets)	963,620		10.67	%	406,234		4.50	%	631,919		7.00	%	N/A		N/A
Tier 1 Capital (to risk-weighted assets)	973,518		10.78	%	541,645		6.00	%	767,330		8.50	%	N/A		N/A
Tier 1 Leverage (to average tangible assets)	973,518		9.51	%	409,420		4.00	%	409,420		4.00	%	N/A		N/A
As of December 31, 2022
Total Capital (to risk-weighted assets)	$	1,092,618	12.39	%	$	705,765	8.00	%	$	926,317	10.50	%	N/A		N/A
Common Equity Tier 1 Capital (to risk-weighted assets)	885,652		10.04	%	396,993		4.50	%	617,545		7.00	%	N/A		N/A
Tier 1 Capital (to risk-weighted assets)	895,520		10.15	%	529,324		6.00	%	749,876		8.50	%	N/A		N/A
Tier 1 Leverage (to average tangible assets)	895,520		8.55	%	418,720		4.00	%	418,720		4.00	%	N/A		N/A
STELLAR BANK
As of June 30, 2023
Total Capital (to risk-weighted assets)	$	1,153,970	12.80	%	$	721,471	8.00	%	$	946,931	10.50	%	$	901,839	10.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)	1,011,659		11.22	%	405,827		4.50	%	631,287		7.00	%	586,195		6.50	%
Tier 1 Capital (to risk-weighted assets)	1,011,659		11.22	%	541,103		6.00	%	766,563		8.50	%	721,471		8.00	%
Tier 1 Leverage (to average tangible assets)	1,011,659		9.89	%	409,051		4.00	%	409,051		4.00	%	511,313		5.00	%
As of December 31, 2022
Total Capital (to risk-weighted assets)	$	1,059,313	12.02	%	$	705,120	8.00	%	$	925,470	10.50	%	$	881,400	10.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)	921,714		10.46	%	396,630		4.50	%	616,980		7.00	%	572,910		6.50	%
Tier 1 Capital (to risk-weighted assets)	921,714		10.46	%	528,840		6.00	%	749,190		8.50	%	705,120		8.00	%
Tier 1 Leverage (to average tangible assets)	921,714		8.81	%	418,388		4.00	%	418,388		4.00	%	522,984		5.00	%

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16. EARNINGS PER COMMON SHARE

Diluted earnings per common share is computed using the weighted-average number of common shares determined for the basic earnings per common share computation plus the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. Restricted shares and performance share awards are considered outstanding at the date of grant, accounted for as participating securities and included in basic and diluted weighted average common shares outstanding.


		Three Months Ended March 31,									Three Months Ended June 30,								Six Months Ended June 30,
		2023				2022					2023				2022				2023				2022
		Amount		Per Share Amount		Amount		Per Share Amount			Amount		Per Share Amount		Amount		Per Share Amount		Amount		Per Share Amount		Amount		Per Share Amount
		(Amounts in thousands, except per share data)									(Amounts in thousands, except per share data)
Net income attributable to shareholders	Net income attributable to shareholders	$	37,148			$	18,657			Net income attributable to shareholders	$	35,175			$	16,437			$	72,323			$	35,094
Basic:	Basic:									Basic:
Weighted average shares outstanding	Weighted average shares outstanding	53,021		$	0.70	28,883		$	0.65	Weighted average shares outstanding	53,297		$	0.66	28,874		$	0.57	53,160		$	1.36	28,879		$	1.22
Diluted:	Diluted:									Diluted:
Add incremental shares for:	Add incremental shares for:									Add incremental shares for:
Dilutive effect of stock option exercises and performance share units	Dilutive effect of stock option exercises and performance share units	117				231				Dilutive effect of stock option exercises and performance share units	78				246				101				229
Total	Total	53,138		$	0.70	29,114		$	0.64	Total	53,375		$	0.66	29,120		$	0.56	53,261		$	1.36	29,108		$	1.21

There were ~~6,807~~30,074 and ~~zero~~22,411 antidilutive shares as of ~~March 31,~~June 30, 2023 and 2022, respectively.

The basic and diluted weighted average number of shares issued and earnings per share have been retrospectively adjusted to reflect the equivalent number of shares issued to holders of Allegiance common stock in the Merger.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except where the context otherwise requires or where otherwise indicated in this Quarterly Report on Form 10-Q, the term “Stellar” refers to Stellar Bancorp, Inc., the terms “we,” “us,” “our,” “Company” and “our business” refer to Stellar Bancorp, Inc. and our wholly owned banking subsidiary, Stellar Bank, a Texas banking ~~association, and the terms “Stellar Bank” or the “Bank” refer to Stellar Bank.~~association.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward‑looking statements. These forward‑looking statements reflect the Company’s current views with respect to, among other things, future events and the Company’s financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward‑looking nature. These forward‑looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Accordingly, the Company cautions that any such forward‑looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward‑looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward‑looking statements.

There are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these forward‑looking statements, including, but not limited to, the risks described in “Part I— Item 1A.—Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 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, Federal Deposit Insurance Corporation 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 Stellar’s assets and obligations and the availability of capital and liquidity;

•general competitive, economic, political and market conditions; and other factors that may affect future results of the Company including changes in asset quality and credit risk; the inability to sustain revenue and earnings growth;

•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 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;

•customer borrowing, repayment, investment and deposit practices;

•the Company’s ability to maintain important deposit customer relationships;

•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;

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•the amount of the costs, fees, expenses and charges related to the Merger;

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•reputational risk and the reaction of our customers, suppliers, employees or other business partners to the Merger;

•natural disasters and adverse weather on 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 conflict in Ukraine, or other international or domestic calamities;

•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 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.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from what is anticipated. Undue reliance should not be placed on any such forward‑looking statements. Any forward‑looking statement speaks only as of the date made, and the Company does not undertake any obligation to publicly update or review any forward‑looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible to predict which will arise. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward‑looking statements.

Overview

We generate most of our income from interest income on loans, interest income from investments in securities and service charges on customer accounts. We incur interest expense on deposits and other borrowed funds and noninterest expenses such as salaries and employee benefits and occupancy expenses. 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 that are used to fund those assets. Net interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the interest expenses of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

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 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,

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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.

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Completion of Merger of Equals

~~On October 1, 2022,~~ Allegiance ~~and CBTX~~Bancshares, Inc. (“Allegiance”) merged with and into CBTX, asInc. (“CBTX”) with the surviving corporation ~~that was~~ renamed Stellar Bancorp, Inc. Atand at the effective ~~time~~date 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.

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.~~Houston, Texas.

The Merger constituted a business combination and was accounted for as a reverse merger using the acquisition method of accounting. As a result, Allegiance was the accounting acquirer and CBTX was the legal acquirer and the accounting acquiree. Accordingly, the historical financial statements of Allegiance became the historical financial statements of the combined company. 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.

The Company’s results of operations for the three and six months ended ~~March 31,~~June 30, 2022 reflect Allegiance results, while the results for the three and six months ended ~~March 31,~~June 30, 2023 set forth the results of operations for Stellar. The Company has substantially completed its valuations of CBTX’s assets and liabilities but may refine those valuations for up to a year from the date of 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. The number of shares issued and outstanding, earnings per share, additional paid-in capital, dividends paid and all references to share quantities of the Company prior to the Merger have been retrospectively adjusted to reflect the equivalent number of shares issued to holders of Allegiance common stock in the Merger. 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. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. 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 our Annual Report on Form 10-K for the year ended December 31, 2022.

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. 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. One of the most significant judgments used in determining the allowance for credit losses is the reasonable and supportable economic forecast. Estimating the timing and amounts of future losses is subject to significant management judgment as these projected cash flows rely upon the estimates discussed above and factors that are reflective of current or future expected conditions. Volatility in certain credit metrics and differences between expected and actual outcomes are to be expected. Customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance.

The allowance for credit losses includes the allowance for credit losses on loans, which is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans, and the allowance for credit losses on unfunded commitments reported in other liabilities. The amount of the allowance for credit losses is affected by the following: (1) charge-offs of loans that

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decrease the allowance, (2) subsequent recoveries on loans previously charged off that increase the allowance and (3) provisions for (or reversal of) credit losses charged to income that increase or decrease the allowance. Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes

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activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326 – Measurement of Credit Losses on Financial Instruments.

In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for credit losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

The allowance for credit losses could be affected by significant downturns in circumstances relating to loan quality and economic conditions and as such may not be sufficient to cover expected losses in the loan portfolio which could necessitate additional provisions or a reduction in the allowance for credit losses if our assumption prove to be incorrect. Unanticipated changes and events could have a significant impact on the financial performance of borrowers and their ability to perform as agreed. We may experience significant credit losses if borrowers experience financial difficulties, which could have a material adverse effect on our operating results.

The provision for credit losses for the three and six months ended June 30, 2023 and 2022, primarily resulted from considerations of a less favorable outlook in the current and forecasted macroeconomic variables such as interest rates, GDP and unemployment as a result of the potential slowdown of economic activity by the FED’s tightening policy to control inflation, along with an increase in loans during those periods, among other factors.

Fair value of loans acquired in a business combination

~~On October 1, 2022,~~In conjunction with the Merger, the Company recorded $273.6 million of goodwill, based on the fair value of acquired assets and liabilities of CBTX. The fair value often involved third-party estimates utilizing input assumptions by management which may be complex or uncertain. The fair value of acquired loans is based on a discounted cash flow methodology that considers factors such as type of loan and related collateral, and requires management’s judgement on estimates about discount rates, expected future cash flows, market conditions and other future events.

For purchased financial loans with credit deterioration, PCD loans, an estimate of expected credit losses was made for loans with similar risk characteristics and was added to the purchase price to establish the initial amortized cost basis of the PCD loans. Any difference between the unpaid principal balance and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans.

Management relied on economic forecasts, internal valuations, or other relevant factors which were available at the time of the Merger in the determination of the assumptions used to calculate the fair value of the acquired loans. The estimates about discount rates, expected future cash flows, market conditions and other future events are subjective and may differ from estimates.

The estimate of fair values on acquired loans contributed to the recorded goodwill from the Merger. In future income statement periods, interest income on loans will include the amortization and accretion of any premiums and discounts resulting from the fair value of acquired loans. Additionally, the provision for credit losses on acquired individually analyzed PCD loans may be impacted due to changes in the assumptions used to calculated expected cash flows.

Merger and goodwill

The acquisition method of accounting requires that assets acquired and liabilities assumed in business combinations are recorded at their fair values. This often involves estimates based on third-party or internal valuations based on discounted cash flow analyses or other valuation techniques, which are inherently subjective. Business combinations also typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the goodwill relates. The amortization of intangible assets with definite useful lives is based upon the estimated economic benefits to be received, which is also subjective. Provisional estimates of fair values may be adjusted for a period of up to one year from the acquisition date if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period.

Management uses various valuation methodologies to estimate the fair value of these assets and liabilities, and often involves a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples of such items include loans, deposits, identifiable intangible assets and certain other assets and liabilities. Management uses significant estimates and assumptions to value such items, including projected cash flows, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses on PCD loans is recognized within business

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combination accounting. The allowance for credit losses for non-purchased credit deteriorated (“non-PCD”) assets is recognized as

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provision expense in the same reporting period as the business combination. The valuation of other identifiable intangible assets, including core deposit intangibles and other intangibles, requires assumptions such as projected attrition rates, expected revenue and costs, discount rates and other forward-looking factors. The purchase date valuations and any subsequent adjustments also determine the amount of goodwill recognized in connection with the business combination. Our estimates of the fair value of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms.

Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired in a business

combination. The Company assesses goodwill for impairment at the reporting unit level on an annual basis, or more often if an

event occurs or circumstances change which indicate there may be impairment. The impairment test compares the estimated fair

value of each reporting unit with its net book value. The fair value of the reporting unit is estimated using valuation techniques that market participants would use in an acquisition of the whole reporting unit, such as estimated discounted cash flows, the quoted market price of our common stock adjusted for a control premium, and observable average price-to forward-earnings and price-to-tangible book multiples of observed transactions. If the unit’s fair value is less than its carrying value, an estimate of the implied fair value of the goodwill is compared to the goodwill’s carrying value and any impairment recognized.

See Note 3 – Goodwill and Other Intangible Assets to the consolidated financial statements for additional information on the Company’s goodwill balances and Note 2 – Acquisitions to the consolidated financial statements for goodwill and intangibles recorded in related to the Merger.

Recently Issued Accounting Pronouncements

We have evaluated new accounting pronouncements that have recently been issued. Refer to Note 1 of the Company’s consolidated financial statements for a discussion of recent accounting pronouncements that have been adopted by the Company or that will require enhanced disclosures in the Company’s financial statements in future periods.

Results of Operations

Net income was ~~$37.1~~$35.2 million, or ~~$0.70~~$0.66 per diluted share, for the ~~first~~second quarter 2023 compared to ~~$18.7~~$16.4 million, or ~~$0.64~~$0.56 per diluted share, for the ~~first~~second quarter 2022. The increase in net income was primarily due to a ~~$60.7~~$50.8 million increase in net interest income and a ~~$3.5~~$2.8 million increase in noninterest income, partially offset by a ~~$38.1~~$31.3 million increase in noninterest expense and a ~~$5.7~~$3.8 million increase in the provision for income taxes, ~~and a $1.9 million increase in the provision for credit losses,~~ all primarily resulting from the Merger. Acquisition and merger-related expenses totaled ~~$6.2~~$2.9 million for the ~~first~~second quarter of 2023 compared ~~to $451 thousand~~$1.7 million for the ~~three months ended March 31,~~second quarter of 2022.

Annualized returns on average assets, returns on average equity and efficiency ratios were ~~1.38%~~1.31%, ~~10.62%~~9.67% and ~~58.96%~~60.83%, for the three months ended ~~March 31,~~June 30, 2023, compared to ~~1.04%~~0.94%, ~~9.40%~~8.86% and ~~58.32%~~62.96%, for the three months ended ~~March~~June 30, 2022. The efficiency ratio is calculated by dividing total noninterest expense by the sum of net interest income plus noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for loan losses are not part of the efficiency ratio calculation.

Net income was $72.3 million, or $1.36 per diluted share, for the six months ended June 30, 2023 compared to $35.1 million, or $1.21 per diluted share, for the six months ended June 30, 2022. The increase in net income was primarily due to a $111.5 million increase in net interest income and a $6.3 million increase in noninterest income, partially offset by a $69.4 million increase in noninterest expense, a $1.6 million increase in the provision for credit losses and a $9.5 million increase in the provision for income taxes, all primarily resulting from the Merger. Acquisition and merger-related expenses totaled $9.1 million for the six months ended June 30, 2023 compared to $2.1 million for the six months ended June 30, 2022.

Annualized returns on average assets, returns on average equity and efficiency ratios were 1.35%, 10.14% and 59.86%, for the six months ended June 30, 2023, compared to 0.99%, 9.14% and 60.66%, for the six months ended June 30, 2022.

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Net Interest Income

Three months ended ~~March 31,~~June 30, 2023 compared with three months ended ~~March 31,~~June 30, 2022. Net interest income before the provision for credit losses for the three months ended ~~March 31,~~June 30, 2023 was ~~$115.8~~$108.3 million compared with ~~$55.2~~$57.5 million for the three months ended ~~March 31,~~June 30, 2022, an increase of ~~$60.7~~$50.8 million, or ~~109.9%~~88.4%, primarily due to the increase in average interest-earning assets and interest-bearing liabilities as a result of the Merger.

Interest income was ~~$140.4~~$147.0 million for the three months ended ~~March 31,~~June 30, 2023, an increase of ~~$80.1~~$84.1 million, or ~~132.8%~~133.9%, compared with ~~$60.3~~$62.8 million for the three months ended ~~March 31,~~June 30, 2022, primarily due to the Merger as average interest-earning assets balances increased along with increased rates, higher-yielding loans and ~~an increase in higher-yielding loans.~~purchase accounting adjustments. Average interest-earning assets increased ~~$2.94~~$3.08 billion, or ~~42.8%~~46.5%, for the three months ended ~~March 31,~~June 30, 2023 compared with the three months ended ~~March 31,~~June 30, 2022, primarily due to the increase in loans as a result of the Merger.

~~Interest expense was $24.6~~ Average loans to average interest earning assets increased to 82.3% for the three months ended June 30, 2023 compared to 65.0% for the same period in the prior year. Additionally, we recorded interest income from purchase accounting adjustments of $12.6 million for the three months ended ~~March 31, 2023, an increase of $19.5 million, or 379.2%, compared with $5.1~~June 30, 2023.

Interest expense was $38.7 million for the three months ended ~~March 31,~~June 30, 2023, an increase of $33.3 million, or 621.9%, compared with $5.4 million for the three months ended June 30, 2022. This increase was primarily due to higher funding costs on interest-bearing deposits due to higher interest rates and an increase in average interest-bearing liabilities. The cost of average interest-bearing liabilities increased to ~~191 basis points~~2.86% for the three months ended ~~March 31,~~June 30, 2023 compared to ~~51 basis points~~0.56% for the same period in 2022. Average interest-bearing liabilities increased ~~$1.12~~$1.56 billion for the three months ended ~~March 31,~~June 30, 2023 compared to the three months ended ~~March 31,~~June 30, 2022, primarily due to the Merger.

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Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the three months ended ~~March 31,~~June 30, 2023 was ~~4.80%~~4.49%, ~~a decrease~~an increase of ~~150~~96 basis points compared to ~~3.30%~~3.53% for the three months ended ~~March 31,~~June 30, 2022. The increase in the net interest margin on a tax equivalent basis was primarily due to the Merger and an increase in the average yield on interest-earning assets partially offset by increased funding costs. The average yield on interest-earning assets of ~~5.80%~~6.08% and the average rate paid on interest-bearing liabilities of ~~1.91%~~2.86% for the ~~first~~second quarter of 2023 increased by ~~224~~227 basis points and ~~140~~230 basis points, respectively, over the same period in 2022. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the three months ended ~~March 31,~~June 30, 2023 and 2022, thus making tax-exempt yields comparable to taxable asset yields.

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The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Any nonaccruing loans have been included in the table as loans carrying a zero yield.


		Three Months Ended March 31,													Three Months Ended June 30,
		2023						2022							2023						2022
		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		Average Balance		Interest Earned/ Interest Paid		Average Yield/ Rate
		(Dollars in thousands)													(Dollars in thousands)
Assets	Assets													Assets
Interest-earning Assets:	Interest-earning Assets:													Interest-earning Assets:
Loans	Loans	$	7,847,011	$	125,729	6.50	%	$	4,231,507	$	52,370	5.02	%	Loans	$	7,980,856	$	133,931	6.73	%	$	4,303,714	$	53,835	5.02	%
Securities	Securities	1,604,011		10,915		2.76	%	1,835,618		7,593		1.68	%	Securities	1,502,949		10,162		2.71	%	1,778,745		8,128		1.83	%
Deposits in other financial institutions	Deposits in other financial institutions	364,781		3,771		4.19	%	806,583		340		0.17	%	Deposits in other financial institutions	209,722		2,865		5.48	%	535,546		877		0.66	%
Total interest-earning assets	Total interest-earning assets	9,815,803		$	140,415	5.80	%	6,873,708		$	60,303	3.56	%	Total interest-earning assets	9,693,527		$	146,958	6.08	%	6,618,005		$	62,840	3.81	%
Allowance for credit losses on loans	Allowance for credit losses on loans	(93,331)						(48,343)						Allowance for credit losses on loans	(96,414)						(49,290)
Noninterest-earning assets	Noninterest-earning assets	1,160,061						432,133						Noninterest-earning assets	1,143,025						450,584
Total assets	Total assets	$	10,882,533					$	7,257,498					Total assets	$	10,740,138					$	7,019,299

Liabilities and Shareholders' Equity	Liabilities and Shareholders' Equity													Liabilities and Shareholders' Equity
Interest-bearing Liabilities:	Interest-bearing Liabilities:													Interest-bearing Liabilities:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	1,650,273	$	8,382	2.06	%	$	1,071,010	$	549	0.21	%	Interest-bearing demand deposits	$	1,387,604	$	9,343	2.70	%	$	1,044,493	$	927	0.36	%
Money market and savings deposits	Money market and savings deposits	2,490,889		9,655		1.57	%	1,584,373		798		0.20	%	Money market and savings deposits	2,220,827		11,365		2.05	%	1,566,376		932		0.24	%
Certificates and other time deposits	Certificates and other time deposits	861,595		3,307		1.56	%	1,245,180		2,156		0.70	%	Certificates and other time deposits	1,225,834		9,622		3.15	%	1,088,664		1,922		0.71	%
Borrowed funds	Borrowed funds	105,191		1,317		5.08	%	89,880		186		0.84	%	Borrowed funds	479,896		6,535		5.46	%	50,116		114		0.91	%
Subordinated debt	Subordinated debt	109,415		1,927		7.14	%	108,913		1,442		5.37	%	Subordinated debt	109,499		1,812		6.64	%	109,045		1,463		5.38	%
Total interest-bearing liabilities	Total interest-bearing liabilities	5,217,363		$	24,588	1.91	%	4,099,356		$	5,131	0.51	%	Total interest-bearing liabilities	5,423,660		$	38,677	2.86	%	3,858,694		$	5,358	0.56	%

Noninterest-Bearing Liabilities:	Noninterest-Bearing Liabilities:													Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	4,166,265						2,312,114						Noninterest-bearing demand deposits	3,779,594						2,382,230
Other liabilities	Other liabilities	80,823						41,324						Other liabilities	78,411						34,249
Total liabilities	Total liabilities	9,464,451						6,452,794						Total liabilities	9,281,665						6,275,173
Shareholders' equity	Shareholders' equity	1,418,082						804,704						Shareholders' equity	1,458,473						744,126
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	10,882,533					$	7,257,498					Total liabilities and shareholders' equity	$	10,740,138					$	7,019,299

Net interest rate spread	Net interest rate spread					3.89	%					3.05	%	Net interest rate spread					3.22	%					3.25	%

Net interest income and margin(1)	Net interest income and margin(1)			$	115,827	4.79	%			$	55,172	3.26	%	Net interest income and margin(1)			$	108,281	4.48	%			$	57,482	3.48	%

Net interest income and margin (tax equivalent)(2)	Net interest income and margin (tax equivalent)(2)			$	116,119	4.80	%			$	55,922	3.30	%	Net interest income and margin (tax equivalent)(2)			$	108,509	4.49	%			$	58,238	3.53	%

Cost of funds														Cost of funds					1.69	%					0.34	%
Cost of deposits														Cost of deposits					1.41	%					0.25	%

(1)The net interest margin is equal to annualized net interest income divided by average interest-earning assets.

(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the three months ended ~~March 31,~~June 30, 2023 and 2022.

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Six months ended June 30, 2023 compared with six months ended June 30, 2022. Net interest income before the provision for credit losses for the six months ended June 30, 2023 was $224.1 million, compared with $112.7 million for the six months ended June 30, 2022, an increase of $111.5 million, or 98.9%, primarily due to the increase in average interest-earning assets and interest-bearing liabilities as a result of the Merger.

Interest income was $287.4 million for the six months ended June 30, 2023, an increase of $164.2 million, or 133.4%, compared with $123.1 million for the six months ended June 30, 2022, primarily due to the Merger as average interest-earning assets balances increased along with increased rates and an increase in higher-yielding loans. Average interest-earning assets increased $3.01 billion, or 44.6%, for the six months ended June 30, 2023 compared with the six months ended June 30, 2022, primarily due to the Merger. Average loans to average interest earning assets increased to 81.1% for the six months ended June 30, 2023 compared to 63.2% for the same period in the prior year. Additionally, we recorded interest income from purchase accounting adjustments of $22.7 million for the six months ended June 30, 2023.

Interest expense was $63.3 million for the six months ended June 30, 2023, an increase of $52.8 million, or 503.2%, compared with $10.5 million for the six months ended June 30, 2022. This increase was primarily due to higher funding costs on interest-bearing deposits due to higher interest rates and an increase in average interest-bearing liabilities. The cost of average interest-bearing liabilities increased to 240 basis points for the six months ended June 30, 2023 compared to 53 basis points for the same period in 2022. Average interest-bearing liabilities increased $1.34 billion, or 33.8%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily due to the Merger.

Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the six months ended June 30, 2023 was 4.64%, an increase of 123 basis points compared to 3.41% for the six months ended June 30, 2022. The increase in the net interest margin on a tax equivalent basis was primarily due to the Merger and an increase in the average yield on interest-earning assets partially offset by increased funding costs. The average yield on interest-earning assets of 5.94% and the average rate paid on interest-bearing liabilities of 2.40% for the second quarter of 2023 increased by 226 basis points and 187 basis points, respectively, over the same period in 2022. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the six months ended June 30, 2023 and 2022, thus making tax-exempt yields comparable to taxable asset yields.

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	Six Months Ended June 30,
	2023						2022
	Average Balance		Interest Earned/ Interest Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Interest Paid		Average Yield/ Rate
	(Dollars in thousands)
Assets
Loans	$	7,914,303	$	259,660	6.62	%	$	4,267,810	$	106,205	5.02	%
Securities	1,553,200		21,077		2.74	%	1,807,024		15,721		1.75	%
Deposits in other financial institutions	286,823		6,636		4.67	%	670,316		1,217		0.37	%
Total interest-earning assets	9,754,326		$	287,373	5.94	%	6,745,150		$	123,143	3.68	%
Allowance for credit losses on loans	(94,881)						(48,819)
Noninterest-earning assets	1,151,497						441,390
Total assets	$	10,810,942					$	7,137,721

Liabilities and Shareholders' Equity
Interest-bearing Liabilities:
Interest-bearing demand deposits	$	1,518,213	$	17,725	2.35	%	$	1,057,678	$	1,476	0.28	%
Money market and savings deposits	2,355,112		21,020		1.80	%	1,575,325		1,730		0.22	%
Certificates and other time deposits	1,044,721		12,929		2.50	%	1,166,490		4,078		0.70	%
Borrowed funds	293,578		7,852		5.39	%	69,868		300		0.87	%
Subordinated debt	109,458		3,739		6.89	%	108,979		2,905		5.38	%
Total interest-bearing liabilities	5,321,082		$	63,265	2.40	%	3,978,340		$	10,489	0.53	%

Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits	3,971,862						2,347,366
Other liabilities	79,609						37,767
Total liabilities	9,372,553						6,363,473
Shareholders' equity	1,438,389						774,248
Total liabilities and shareholders' equity	$	10,810,942					$	7,137,721

Net interest rate spread					3.54	%					3.15	%

Net interest income and margin(1)			$	224,108	4.63	%			$	112,654	3.37	%

Net interest income and margin (tax equivalent)(2)			$	224,628	4.64	%			$	114,160	3.41	%

Cost of funds					1.37	%					0.33	%
Cost of deposits					1.17	%					0.24	%

(1)The net interest margin is equal to annualized net interest income divided by average interest-earning assets.

(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the six months ended June 30, 2023 and 2022.

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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. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.


		For the Three Months Ended March 31,							For the Three Months Ended June 30,					For the Six Months Ended June 30,
		2023 vs. 2022							2023 vs. 2022					2023 vs. 2022
		Increase (Decrease) Due to Change in								Increase (Decrease) Due to Change in						Increase (Decrease) Due to Change in
		Volume		Rate		Total						Volume		Rate		Total		Volume		Rate		Total
		(In thousands)						(In thousands)
Interest-earning Assets:	Interest-earning Assets:										Interest-earning Assets:
Loans	Loans	$	44,753	$	28,606	$	73,359				Loans	$	46,022	$	34,074	$	80,096	$	90,914	$	62,541	$	153,455
Securities	Securities	(959)		4,281		3,322					Securities	(1,258)		3,292		2,034		(2,203)		7,559		5,356
Deposits in other financial institutions	Deposits in other financial institutions	(185)		3,616		3,431					Deposits in other financial institutions	(536)		2,524		1,988		(704)		6,123		5,419
Total increase in interest income	Total increase in interest income	43,609		36,503		80,112					Total increase in interest income	44,228		39,890		84,118		88,007		76,223		164,230

Interest-bearing Liabilities:	Interest-bearing Liabilities:										Interest-bearing Liabilities:
Interest-bearing demand deposits	Interest-bearing demand deposits	300		7,533		7,833					Interest-bearing demand deposits	308		8,108		8,416		639		15,610		16,249
Money market and savings deposits	Money market and savings deposits	447		8,410		8,857					Money market and savings deposits	392		10,041		10,433		851		18,439		19,290
Certificates and other time deposits	Certificates and other time deposits	(662)		1,813		1,151					Certificates and other time deposits	243		7,457		7,700		(423)		9,274		8,851
Borrowed funds	Borrowed funds	32		1,099		1,131					Borrowed funds	975		5,446		6,421		965		6,587		7,552
Subordinated debt	Subordinated debt	7		478		485					Subordinated debt	6		343		349		13		821		834
Total increase in interest expense	Total increase in interest expense	124		19,333		19,457					Total increase in interest expense	1,924		31,395		33,319		2,045		50,731		52,776
Increase in net interest income	Increase in net interest income	$	43,485	$	17,170	60,655					Increase in net interest income	$	42,304	$	8,495	$	50,799	$	85,962	$	25,492	$	111,454

Provision for Credit Losses

Our allowance for credit losses is established through charges to income in the form of the provision in order to bring our allowance for credit losses for various types of financial instruments including loans, unfunded commitments and securities to a level deemed appropriate by management. We recorded a ~~$3.7~~provision for credit losses of $1.9 million ~~provision~~and $2.1 million for the three months ended June 30, 2023 and 2022, respectively, and a ~~$1.8~~$5.6 million and $4.0 million provision for credit losses for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022, respectively. The provision for credit losses for the three and six months ended ~~March 31,~~June 30, 2023 and 2022, primarily resulted from an increase in loans during those periods, among other factors.

Noninterest Income

Our primary sources of noninterest income are debit card and ATM card income, service charges on deposit accounts, income earned on ~~bank owned~~bank-owned life insurance and nonsufficient funds fees. 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.

Three months ended ~~March 31,~~June 30, 2023 compared with three months ended ~~March 31,~~June 30, 2022. Noninterest income totaled ~~$7.5~~$5.5 million for the three months ended ~~March 31,~~June 30, 2023 compared with ~~$4.0~~$2.7 million for the same period in 2022, an increase of ~~$3.5~~$2.8 million, or ~~86.6%~~102.8%, primarily due to increased debt card and ATM income and service charges due to increased scale as a result of the Merger. ~~In addition, other noninterest~~

Six months ended June 30, 2023 compared with six months ended June 30, 2022. Noninterest income totaled $13.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2023 compared with $6.7 million for the same period in 2022, an increase of $6.3 million, or 93.1%, primarily due to increased debt card and ~~2022 includes $1.1 million~~ATM income and ~~$1.3 million, respectively,~~service charges due to increased scale as a result of ~~income from Small Business Investment Company investments.~~the Merger.

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The following table presents, for the periods indicated, the major categories of noninterest income:


		For the Three Months Ended March 31,				Increase (Decrease)			For the Three Months Ended June 30,						Increase (Decrease)			For the Six Months Ended June 30,								Increase (Decrease)
		2023		2022						2023				2022			Increase (Decrease)			2023				2022				Increase (Decrease)
		(In thousands)						(In thousands)
Nonsufficient funds fees	Nonsufficient funds fees	$	406	$	116	$	290				Nonsufficient funds fees	$	418		$	126				$	292			$	824			$	242			$	582
Service charges on deposit accounts	Service charges on deposit accounts	943		527		416					Service charges on deposit accounts	1,157			560			597				2,100				1,087				1,013
Gain on sale of assets		198		—		198
Bank owned life insurance income		522		133		389
(Loss) gain on sale of assets											(Loss) gain on sale of assets	(6)			(17)			11				192				(17)				209
Bank-owned life insurance income											Bank-owned life insurance income	532			342			190				1,054				475				579
Debit card and ATM card income	Debit card and ATM card income	1,698		819		879					Debit card and ATM card income	1,821			880			941				3,519				1,699				1,820
Other(1)	Other(1)	3,731		2,423		1,308					Other(1)	1,561			813			748				5,292				3,236				2,056
Total noninterest income	Total noninterest income	$	7,498	$	4,018	$	3,480				Total noninterest income	$	5,483		$	2,704		$	2,779			$	12,981			$	6,722			$	6,259

(1)Other includes wire transfer and letter of credit fees, among other items.

Noninterest Expense

Three months ended ~~March 31,~~June 30, 2023 compared with three months ended ~~March 31,~~June 30, 2022. Noninterest expense was ~~$72.6~~$69.2 million for the three months ended ~~March 31,~~June 30, 2023 compared to ~~$34.5~~$37.9 million for the three months ended ~~March 31,~~June 30, 2022, an increase of ~~$38.1~~$31.3 million, or ~~110.3%~~82.6%, primarily due increased salaries and employee benefits, ~~core deposit intangible~~ amortization of intangibles, data processing and software amortization, net occupancy and equipment and acquisition and merger-related ~~costs associated~~costs.

Six months ended June 30, 2023 compared with six months ended June 30, 2022. Noninterest expense was $141.8 million for the ~~Merger.~~six months ended June 30, 2023 compared to $72.4 million for the six months ended June 30, 2022, an increase of $69.4 million, or 95.8%, primarily due increased salaries and employee benefits, amortization of intangibles, data processing and software amortization, net occupancy and equipment and acquisition and merger-related costs.

The following table presents, for the periods indicated, the major categories of noninterest expense:


		For the Three Months Ended March 31,				Increase (Decrease)			For the Three Months Ended June 30,						Increase (Decrease)			For the Six Months Ended June 30,								Increase (Decrease)
		2023		2022						2023				2022			Increase (Decrease)			2023				2022				Increase (Decrease)
		(In thousands)						(In thousands)
Salaries and employee benefits(1)	Salaries and employee benefits(1)	$	39,775	$	22,728	$	17,047				Salaries and employee benefits(1)	$	37,300		$	21,864				$	15,436			$	77,075			$	44,592			$	32,483
Net occupancy and equipment	Net occupancy and equipment	4,088		2,205		1,883					Net occupancy and equipment	3,817			2,220			1,597				7,905				4,425				3,480
Depreciation	Depreciation	1,836		1,033		803					Depreciation	1,841			1,012			829				3,677				2,045				1,632
Data processing and software amortization	Data processing and software amortization	5,054		2,498		2,556					Data processing and software amortization	4,674			2,522			2,152				9,728				5,020				4,708
Professional fees	Professional fees	1,527		138		1,389					Professional fees	1,564			662			902				3,091				800				2,291
Regulatory assessments and FDIC insurance	Regulatory assessments and FDIC insurance	1,294		1,261		33					Regulatory assessments and FDIC insurance	2,755			1,256			1,499				4,049				2,517				1,532
Amortization of intangibles	Amortization of intangibles	6,879		751		6,128					Amortization of intangibles	6,881			751			6,130				13,760				1,502				12,258
Communications	Communications	701		341		360					Communications	689			363			326				1,390				704				686
Advertising	Advertising	839		462		377					Advertising	907			483			424				1,746				945				801
Other real estate expense		272		59		213
Acquisition and merger-related expenses	Acquisition and merger-related expenses	6,165		451		5,714					Acquisition and merger-related expenses	2,897			1,667			1,230				9,062				2,118				6,944
Other	Other	4,168		2,590		1,578					Other	5,882			5,104			778				10,322				7,753				2,569
Total noninterest expense	Total noninterest expense	$	72,598	$	34,517	$	38,081				Total noninterest expense	$	69,207		$	37,904		$	31,303			$	141,805			$	72,421			$	69,384

(1)Total salaries and employee benefits includes ~~$2.6~~$2.8 million and ~~$959~~$931 thousand for the three months ended ~~March 31,~~June 30, 2023 and 2022 and $5.4 million and $1.9 million for the six months ended June 30, 2023 and 2022, respectively, of stock based compensation expense.

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Salaries and employee benefits. Salaries and benefits increased ~~$17.0~~$15.4 million, or ~~75.0%~~70.6%, for the three months ended ~~March 31,~~June 30, 2023 and $32.5 million or 72.8% for the six months ended June 30, 2023, compared to the same ~~period~~periods in 2022 primarily due to the Merger.

Acquisition and merger-related expenses. Acquisition and merger-related expenses of ~~$6.2~~$2.9 million and $9.1 million incurred during the three and six months ended ~~March 31,~~June 30, 2023, respectively, were primarily related to compensation and legal and advisory fees associated with the Merger.

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Amortization of intangibles. Amortization of intangibles increased $6.1 million for the three months ended ~~March 31,~~June 30, 2023 and $12.3 million for the six months ended June 30, 2023 compared to the ~~three months ended March 31,~~same periods in 2022 due the $138.2 million core deposit intangible created as a result of the Merger.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of our performance. 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. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio was ~~58.96%~~60.83% for the three months ended ~~March 31,~~June 30, 2023 compared to ~~58.32%~~62.96% for the three months ended ~~March 31,~~June 30, 2022 and 59.86% for the six months ended June 30, 2023 compared to 60.66% for the six months ended June 30, 2022, respectively.

We monitor the efficiency ratio in comparison with changes in our total assets and loans, and we believe that maintaining or reducing the efficiency ratio during periods of growth demonstrates the scalability of our operating platform. 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, tax-exempt income and other nondeductible expenses. Income tax expense increased ~~$5.7 million to $9.9~~$3.8 million for the three months ended ~~March 31,~~June 30, 2023 and $9.5 million for the six months ended June 30, 2023 compared with ~~$4.2 million for~~ the same ~~period~~periods in 2022 primarily due to the increase in pre-tax net income. Our effective tax rate was ~~21.1% for the three months ended March 31, 2023 compared to~~17.5% and 18.4% for the three months ended ~~March 31, 2022.~~June 30, 2023 and 2022 and 19.4% and 18.4% for the six months ended June 30, 2023 and 2022, respectively.

Financial Condition

Loan Portfolio

At ~~March 31,~~June 30, 2023, total loans were ~~$7.89~~$8.07 billion, an increase of ~~$131.3~~$314.0 million, or ~~1.7%~~4.0%, compared with December 31, 2022, primarily due to organic growth within our loan portfolio during the ~~three~~six months ended ~~March 31,~~June 30, 2023.

Total loans as a percentage of deposits were ~~90.2%~~92.0% and 83.7% as of ~~March 31,~~June 30, 2023 and December 31, 2022, respectively. Total loans as a percentage of assets were ~~74.4%~~74.9% and 71.1% as of ~~March 31,~~June 30, 2023 and December 31, 2022, respectively.

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The following table summarizes our loan portfolio by type of loan as of the dates indicated:


		March 31, 2023				December 31, 2022					June 30, 2023				December 31, 2022
		Amount		Percent		Amount		Percent					Amount		Percent		Amount		Percent
		(Dollars in thousands)								(Dollars in thousands)
Commercial and industrial	Commercial and industrial	$	1,477,340	18.7	%	$	1,455,795	18.8	%			Commercial and industrial	$	1,512,476	18.7	%	$	1,455,795	18.8	%
Paycheck Protection Program (PPP)	Paycheck Protection Program (PPP)	11,081		0.1	%	13,226		0.2	%			Paycheck Protection Program (PPP)	8,027		0.1	%	13,226		0.2	%
Real estate:	Real estate:											Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	4,014,609		51.0	%	3,931,480		50.7	%			Commercial real estate (including multi-family residential)	4,038,487		50.0	%	3,931,480		50.7	%
Commercial real estate construction and land development	Commercial real estate construction and land development	1,034,538		13.1	%	1,037,678		13.4	%			Commercial real estate construction and land development	1,136,124		14.1	%	1,037,678		13.4	%
1-4 family residential (including home equity)	1-4 family residential (including home equity)	1,008,362		12.8	%	1,000,956		12.9	%			1-4 family residential (including home equity)	1,009,439		12.5	%	1,000,956		12.9	%
Residential construction	Residential construction	292,143		3.7	%	268,150		3.4	%			Residential construction	311,208		3.9	%	268,150		3.4	%
Consumer and other	Consumer and other	47,971		0.6	%	47,466		0.6	%			Consumer and other	52,957		0.7	%	47,466		0.6	%
Total loans	Total loans	7,886,044		100.0	%	7,754,751		100.0	%			Total loans	8,068,718		100.0	%	7,754,751		100.0	%
Allowance for credit losses on loans	Allowance for credit losses on loans	(96,188)				(93,180)						Allowance for credit losses on loans	(100,195)				(93,180)
Loans, net	Loans, net	$	7,789,856			$	7,661,571					Loans, net	$	7,968,523			$	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 markets. Our strategy for credit risk management generally includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for credit exposures. The strategy generally emphasizes regular credit examinations and management reviews of

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loans. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. In addition, an independent third-party loan review is performed on a periodic basis during the year. 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. We make commercial and industrial loans in our market area that are underwritten on the basis of the borrower’s ability to service the debt from income. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and therefore typically yield a higher return. The increased risk in commercial loans derives from the expectation that commercial and industrial loans generally are serviced principally from the operations of the business, which may not be successful and from the type of collateral securing these loans. As a result, commercial and industrial loans require more extensive underwriting and servicing than other types of loans. Our commercial and industrial loan portfolio increased by ~~$21.5~~$56.7 million, or ~~1.5%~~3.9%, to ~~$1.48~~$1.51 billion as of ~~March 31,~~June 30, 2023 from $1.46 billion as of December 31, 2022.

Paycheck Protection Program (PPP). The balance of PPP loans decreased ~~$2.1~~$5.2 million to ~~$11.1~~$8.0 million as of ~~March 31,~~June 30, 2023 from $13.2 million as of December 31, 2022 due to loan forgiveness.

Commercial Real Estate (Including Multi-Family Residential). We make loans collateralized by owner-occupied, nonowner-occupied and multi-family real estate to finance the purchase or ownership of real estate. As of ~~March 31,~~June 30, 2023 and December 31, 2022, ~~45.9%~~45.8% and 45.3%, respectively, of our commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio increased ~~$83.1~~$107.0 million, or ~~2.1%~~2.7%, to ~~$4.01~~$4.04 billion as of ~~March 31,~~June 30, 2023 from $3.93 billion as of December 31, 2022, primarily as a result of organic loan growth. Included in our commercial real estate portfolio are multi-family residential loans. Our multi-family loans as of ~~March 31,~~June 30, 2023 decreased to ~~$435.3~~$431.3 million from $471.6 million as of December 31, 2022. We had ~~232~~233 multi-family loans with an average loan size of $2.0 million as of ~~March 31,~~June 30, 2023.

As of ~~March 31,~~June 30, 2023, the Company’s commercial relate estate (including multi-family residential) loan portfolio included ~~$278.7~~$272.5 million of multifamily community development loans with associated tax credits, which fund ~~Texas based~~Texas-based projects to promote affordable ~~housing.~~housing, compared to $287.3 million as of December 31, 2022.

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. Construction loans involve additional risks as they often involve the disbursement of funds with the repayment dependent on the ultimate success of the project’s completion. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed

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property. The loans in this portfolio are monitored closely by management. Due to uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often includes the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. As of ~~March 31,~~June 30, 2023 and December 31, 2022, ~~25.3%~~17.3% and 18.2%, respectively, of our commercial real estate construction and land development loans were owner-occupied. Commercial real estate construction and land development loans ~~decreased $3.1~~increased $98.4 million, or ~~0.3%~~9.5%, to ~~$1.03~~$1.14 billion as of ~~March 31,~~June 30, 2023 compared to $1.04 billion as of December 31, 2022.

As of ~~March 31,~~June 30, 2023, the Company’s commercial relate estate construction and land development portfolio included ~~$84.6~~$161.4 million of construction and development loans to support multifamily community development loans with associated tax credits, which fund ~~Texas based~~Texas-based projects to promote affordable ~~housing.~~housing, compared to $79.7 million as of December 31, 2022.

1-4 Family Residential (Including Home Equity). 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 portfolio (including home equity) increased ~~$7.4~~$8.5 million, or ~~0.7%~~0.8%, to $1.01 billion as of ~~March 31,~~June 30, 2023 from $1.00 billion as of December 31, 2022.

Residential Construction. We make residential construction loans to home builders and individuals to fund the construction of single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or with the proceeds of a mortgage loan. 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 ~~$24.0~~$43.1 million, or ~~8.9%~~16.1%, to ~~$292.1~~$311.2 million as of ~~March 31,~~June 30, 2023 from $268.2 million as of December 31, 2022.

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Consumer and Other. 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. Generally, consumer loans entail greater risk than residential real estate loans because they may be unsecured or if secured the value of the collateral, such as an automobile or boat, may be more difficult to assess and more likely to decrease in value than real estate. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. Our consumer and other loan portfolio increased ~~$505 thousand,~~$5.5 million, or ~~1.06%~~11.6%, to ~~$48.0~~$53.0 million as of ~~March 31,~~June 30, 2023 from $47.5 million as of December 31, 2022.

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Asset Quality

We have procedures in place to assist us in maintaining the overall quality of our loan portfolio. 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 ~~$43.5~~$43.3 million, or ~~0.41%~~0.40% of total assets, at ~~March 31,~~June 30, 2023 compared to $45.0 million, or 0.41% of total assets, at December 31, 2022.

The following table presents information regarding nonperforming assets as of the dates indicated.


		March 31, 2023			December 31, 2022				June 30, 2023			December 31, 2022
		(Dollars in thousands)							(Dollars in thousands)
Nonaccrual loans:	Nonaccrual loans:							Nonaccrual loans:
Commercial and industrial	Commercial and industrial	$	23,152		$	25,297		Commercial and industrial	$	22,800		$	25,297
Paycheck Protection Program (PPP)	Paycheck Protection Program (PPP)	177			105			Paycheck Protection Program (PPP)	168			105
Real estate:	Real estate:							Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	9,026			9,970			Commercial real estate (including multi-family residential)	8,221			9,970
Commercial real estate construction and land development	Commercial real estate construction and land development	27			—			Commercial real estate construction and land development	388			—
1-4 family residential (including home equity)	1-4 family residential (including home equity)	10,586			9,404			1-4 family residential (including home equity)	10,880			9,404
Residential construction	Residential construction	195			—			Residential construction	665			—
Consumer and other	Consumer and other	250			272			Consumer and other	227			272
Total nonaccrual loans	Total nonaccrual loans	43,413			45,048			Total nonaccrual loans	43,349			45,048
Accruing loans 90 or more days past due	Accruing loans 90 or more days past due	—			—			Accruing loans 90 or more days past due	—			—
Total nonperforming loans	Total nonperforming loans	43,413			45,048			Total nonperforming loans	43,349			45,048
Other real estate	Other real estate	124			—			Other real estate	—			—
Total nonperforming assets	Total nonperforming assets	$	43,537		$	45,048		Total nonperforming assets	$	43,349		$	45,048
Modified/restructured loans(1)	Modified/restructured loans(1)	$	3,049		$	35,425		Modified/restructured loans(1)	$	11,291		$	35,425
Nonperforming assets to total assets	Nonperforming assets to total assets	0.41		%	0.41		%	Nonperforming assets to total assets	0.40		%	0.41		%
Nonperforming loans to total loans	Nonperforming loans to total loans	0.55		%	0.58		%	Nonperforming loans to total loans	0.54		%	0.58		%

(1)On January 1, 2023, the Company adopted ASU 2022-02, which replaced the troubled debt restructuring classification with a modified loan classification that is assessed in a different manner. Modified/restructured loans represent the balance at the end of the respective period for those loans that are not already presented as a nonperforming loan.

Nonaccrual loans consisted of 94107 separate credits at ~~March 31,~~June 30, 2023 compared to 96 separate credits at December 31, 2022. ~~Nonperforming assets were~~ ~~0.55%~~ ~~of total loans at March 31, 2023 compared to 0.58% at December 31, 2022.~~

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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. The amount of each allowance account represents management’s best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. 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 5 – Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statements.

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Allowance for Credit Losses on Loans

The allowance for credit losses on loans represents management’s estimates of current expected credit losses in the Company’s loan portfolio. Pools of loans with similar risk characteristics are collectively evaluated, while loans that no longer share risk characteristics with loan pools are evaluated individually.

At ~~March 31,~~June 30, 2023, our allowance for credit losses on loans ~~amounted~~was ~~to $96.2~~$100.2 million, or ~~1.22%~~1.24% of total loans, compared with $93.2 million, or 1.20%, of total loans as of December 31, 2022. The increase in the allowance for credit losses on loans during the first ~~quarter~~six months of 2023 reflected an increase in loans among other factors. The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:


		As of and for the Three Months Ended March 31,							As of and for the Six Months Ended June 30,
		2023			2022				2023			2022
		(Dollars in thousands)							(Dollars in thousands)
Average loans outstanding	Average loans outstanding	$	7,847,011		$	4,231,507		Average loans outstanding	$	7,914,303		$	4,267,810
Gross loans outstanding at end of period	Gross loans outstanding at end of period	7,886,044			4,283,514			Gross loans outstanding at end of period	8,068,718			4,348,833
Allowance for credit losses on loans at beginning of period	Allowance for credit losses on loans at beginning of period	93,180			47,940			Allowance for credit losses on loans at beginning of period	93,180			47,940
Provision for credit losses on loans	Provision for credit losses on loans	3,200			1,592			Provision for credit losses on loans	7,443			3,190
Charge-offs:	Charge-offs:							Charge-offs:
Commercial and industrial loans	Commercial and industrial loans	(426)			(341)			Commercial and industrial loans	(1,484)			(956)
Real estate:	Real estate:							Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	—			(255)			Commercial real estate (including multi-family residential)	—			(327)
Commercial real estate construction and land development	Commercial real estate construction and land development	—			(63)			Commercial real estate construction and land development	—			(63)

1-4 family residential (including home equity)								1-4 family residential (including home equity)	(23)			—
Residential construction								Residential construction	—			—
Consumer and other	Consumer and other	(8)			(48)			Consumer and other	(38)			(48)
Total charge-offs for all loan types	Total charge-offs for all loan types	(434)			(707)			Total charge-offs for all loan types	(1,545)			(1,394)
Recoveries:	Recoveries:							Recoveries:
Commercial and industrial loans	Commercial and industrial loans	208			390			Commercial and industrial loans	1,069			401
Real estate:	Real estate:							Real estate:
Commercial real estate (including multi-family residential)	Commercial real estate (including multi-family residential)	14			—			Commercial real estate (including multi-family residential)	14			50

Commercial real estate construction and land development								Commercial real estate construction and land development	—			55
1-4 family residential (including home equity)	1-4 family residential (including home equity)	7			—			1-4 family residential (including home equity)	9			—

Consumer and other	Consumer and other	13			—			Consumer and other	25			—
Total recoveries for all loan types	Total recoveries for all loan types	242			390			Total recoveries for all loan types	1,117			506
Net charge-offs	Net charge-offs	(192)			(317)			Net charge-offs	(428)			(888)
Allowance for credit losses on loans at end of period	Allowance for credit losses on loans at end of period	$	96,188		$	49,215		Allowance for credit losses on loans at end of period	$	100,195		$	50,242
Allowance for credit losses on loans to total loans	Allowance for credit losses on loans to total loans	1.22		%	1.15		%	Allowance for credit losses on loans to total loans	1.24		%	1.16		%
Net charge-offs to average loans(1)	Net charge-offs to average loans(1)	0.01		%	0.03		%	Net charge-offs to average loans(1)	0.01		%	0.04		%
Allowance for credit losses on loans to nonperforming loans	Allowance for credit losses on loans to nonperforming loans	221.56		%	187.31		%	Allowance for credit losses on loans to nonperforming loans	231.14		%	178.01		%

(1)Interim periods annualized.

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Allowance for Credit Losses on Unfunded Commitments

The allowance for credit losses on unfunded commitments estimates current expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. 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 estimate of commitments expected to fund is affected by historical analysis looking at utilization rates. The expected credit loss rates applied to

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the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. At ~~March 31,~~June 30, 2023, our allowance for credit losses on unfunded commitments was ~~$12.4~~$10.1 million compared to $12.0 million at December 31, 2022.

Available for Sale Securities

We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and to meet pledging and regulatory capital requirements. As of ~~March 31,~~June 30, 2023, the carrying amount of investment securities totaled ~~$1.52~~$1.48 billion, a decrease of ~~$288.4~~$329.4 million, or ~~16.0%~~18.2%, compared with $1.81 billion as of December 31, 2022. Securities represented ~~14.3%~~13.7% and 16.6% of total assets as of ~~March 31,~~June 30, 2023 and December 31, 2022, respectively.

All of the securities in our securities portfolio are classified as available for sale. Securities classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income.

The following table summarizes the amortized cost and fair value of the securities in our securities portfolio as of the dates shown:


		March 31, 2023									June 30, 2023
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
		(In thousands)									(In thousands)
Available for Sale	Available for Sale									Available for Sale
U.S. government and agency securities	U.S. government and agency securities	$	426,544	$	570	$	(13,417)	$	413,697	U.S. government and agency securities	$	420,321	$	156	$	(15,595)	$	404,882
Municipal securities	Municipal securities	259,944		2,658		(30,403)		232,199		Municipal securities	259,423		2,177		(32,402)		229,198
Agency mortgage-backed pass-through securities	Agency mortgage-backed pass-through securities	382,495		879		(34,962)		348,412		Agency mortgage-backed pass-through securities	385,780		272		(41,671)		344,381
Agency collateralized mortgage obligations	Agency collateralized mortgage obligations	466,160		231		(58,203)		408,188		Agency collateralized mortgage obligations	455,153		1		(66,382)		388,772
Corporate bonds and other	Corporate bonds and other	127,396		85		(10,802)		116,679		Corporate bonds and other	124,626		53		(13,690)		110,989
Total	Total	$	1,662,539	$	4,423	$	(147,787)	$	1,519,175	Total	$	1,645,303	$	2,659	$	(169,740)	$	1,478,222


	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Available for Sale
U.S. government and agency securities	$	433,417	$	90	$	(19,227)	$	414,280
Municipal securities	580,076		4,319		(43,826)		540,569
Agency mortgage-backed pass-through securities	370,471		362		(42,032)		328,801
Agency collateralized mortgage obligations	461,760		—		(67,630)		394,130
Corporate bonds and other	143,192		2		(13,388)		129,806
Total	$	1,988,916	$	4,773	$	(186,103)	$	1,807,586

Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under ASC Topic 326, “Financial Instruments – Credit Losses.” See Note 4 – Securities in the accompanying notes to the consolidated financial statements for additional information. Management does not have the intent to sell any of these securities and believes that it is more

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likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of ~~March 31,~~June 30, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company’s consolidated statements of income

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The following table summarizes the contractual maturity of securities and their weighted average yields as of the dates indicated. 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.


		March 31, 2023																					June 30, 2023
		Within One Year				After One Year but Within Five Years				After Five Years but Within Ten Years				After Ten Years				Total					Within One Year				After One Year but Within Five Years				After Five Years but Within Ten Years				After Ten Years				Total
		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield			Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
		(Dollars in thousands)																					(Dollars in thousands)
Available for Sale	Available for Sale																					Available for Sale
U.S. government and agency securities	U.S. government and agency securities	$	76,456	0.55	%	$	173,519	0.92	%	$	15,264	4.82	%	$	161,305	4.83	%	$	426,544	2.47	%	U.S. government and agency securities	$	76,474	0.55	%	$	173,661	0.92	%	$	14,419	4.82	%	$	155,767	4.83	%	$	420,321	2.47	%
Municipal securities	Municipal securities	—		—	%	2,895		4.46	%	54,251		2.82	%	202,798		2.79	%	259,944		2.81	%	Municipal securities	—		—	%	2,895		4.46	%	55,437		2.82	%	201,091		2.79	%	259,423		2.81	%
Agency mortgage-backed pass-through securities	Agency mortgage-backed pass-through securities	1		2.35	%	14,340		3.93	%	14,745		4.26	%	353,409		3.04	%	382,495		3.12	%	Agency mortgage-backed pass-through securities	7		2.35	%	14,944		3.93	%	13,682		4.26	%	357,147		3.04	%	385,780		3.12	%
Agency collateralized mortgage obligations	Agency collateralized mortgage obligations	—		—	%	17,271		2.80	%	7,972		2.68	%	440,917		1.55	%	466,160		1.62	%	Agency collateralized mortgage obligations	—		—	%	17,251		2.80	%	7,970		2.68	%	429,932		1.55	%	455,153		1.62	%
Corporate bonds and other	Corporate bonds and other	1,056		2.40	%	4,000		6.20	%	63,786		5.17	%	58,554		4.85	%	127,396		5.03	%	Corporate bonds and other	1,063		4.82	%	3,000		6.20	%	63,391		5.17	%	57,172		2.84	%	124,626		5.05	%
Total	Total	$	77,513	0.57	%	$	212,025	1.42	%	$	156,018	4.11	%	$	1,216,983	2.78	%	$	1,662,539	2.63	%	Total	$	77,544	0.60	%	$	211,751	1.42	%	$	154,899	4.11	%	$	1,201,109	2.78	%	$	1,645,303	2.63	%


	December 31, 2022
	Within One Year				After One Year but Within Five Years				After Five Years but Within Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	76,438	0.54	%	$	173,380	0.92	%	$	16,081	4.96	%	$	167,518	4.92	%	$	433,417	2.55	%
Municipal securities	—		—	%	21,195		3.45	%	93,313		2.93	%	465,568		3.39	%	580,076		3.31	%
Agency mortgage-backed pass-through securities	1		3.21	%	14,112		4.02	%	11,201		4.53	%	345,157		2.94	%	370,471		3.03	%
Agency collateralized mortgage obligations	—		—	%	17,291		2.80	%	8,008		2.70	%	436,461		1.78	%	461,760		1.83	%
Corporate bonds and other	1,050		1.25	%	4,000		6.20	%	64,176		4.64	%	73,966		2.68	%	143,192		3.66	%
Total	$	77,489	0.55	%	$	229,978	1.58	%	$	192,779	3.75	%	$	1,488,670	2.95	%	$	1,988,916	2.78	%

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers may have the right to prepay their obligations. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay and, in particular, monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. 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.

As of ~~March 31,~~June 30, 2023 and December 31, 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 average yield of our securities portfolio was ~~2.76%~~2.74% during the ~~three~~six months ended ~~March 31,~~June 30, 2023 compared with ~~1.68%~~1.75% for the ~~three~~six months ended ~~March 31,~~June 30, 2022. The increase in average yield during 2023 compared to the same period in 2022 was primarily due to the mix of higher-yielding securities within the portfolio.

~~Table of Content~~s

Goodwill and Core Deposit Intangibles

Our goodwill was $497.3 million as of both ~~March 31~~June 30, 2023 and December 31, 2022. Goodwill resulting from business combinations represents the excess of the consideration paid over the fair value of the net assets acquired. Goodwill is assessed

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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 ~~March 31,~~June 30, 2023 was ~~$136.7~~$129.8 million and $143.5 million as of December 31, 2022. Core deposit intangibles are amortized using the straight-line or an accelerated method over the estimated useful life of seven to ten years.

Deposits

Our lending and investing activities are primarily funded by deposits. We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and certificates and other time accounts. We rely primarily on convenient locations, personalized service and our customer relationships to attract and retain these deposits. We seek customers that will engage in both a lending and deposit relationship with us.

Total deposits at ~~March 31,~~June 30, 2023 were ~~$8.74~~$8.77 billion, a decrease of ~~$528.8~~$501.3 million, or ~~5.7%~~5.4%, compared with $9.27 billion at December 31, 2022 primarily driven by seasonality, industry-wide pressures and the maintenance of pricing discipline in an intensely competitive market for deposits. Noninterest-bearing deposits at ~~March 31,~~June 30, 2023 were ~~$3.88~~$3.71 billion, a decrease of ~~$352.3~~$516.6 million, or ~~8.3%~~12.2%, compared with $4.23 billion at December 31, 2022. Interest-bearing deposits at ~~March 31,~~June 30, 2023 were ~~$4.86~~$5.05 billion, ~~a decrease~~an increase of ~~$176.4~~$15.4 million, or ~~3.5%~~0.3%, compared with $5.04 billion at December 31, 2022. Estimated uninsured deposits ~~excluding~~totaled $4.75 billion and estimated uninsured deposits net of collateralized deposits ~~totaled $4.06~~of $936 million were $3.82 billion, or ~~46.4%~~43.5%, of total deposits at ~~March 31,~~June 30, 2023.

The following table sets forth the amount of time deposits that met or exceeded the FDIC insurance limit of $250 thousand by time remaining until maturity:


	As of
	~~March 31,~~ June 30, 2023
	(In thousands)
Three months or less	$	~~118,498~~199,784
Over three months through six months	~~172,620~~171,492
Over six months through 12 months	~~137,954~~75,055
Over 12 months	~~69,024~~55,779
Total	$	~~498,096~~502,110

Borrowings

We have an available line of credit with the Federal Home Loan Bank ("FHLB") of Dallas, which allows us to borrow on a collateralized basis. 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. At ~~March 31,~~June 30, 2023, we had a total borrowing capacity of ~~$4.07~~$4.10 billion, of which ~~$2.84~~$2.90 billion was available and ~~$1.23~~$1.20 billion was outstanding in/through FHLB advances and letters of credit. There were ~~$239.0~~$370.0 million of FHLB short-term advances outstanding at ~~March 31,~~June 30, 2023 at a weighted-average rate of ~~5.00%~~5.45%. Letters of credit were ~~$994.7~~$831.3 million at ~~March 31,~~June 30, 2023, of which ~~$333.4~~$91.0 million will expire during the remaining months of 2023, ~~$61.2~~$45.0 million will expire in 2024, ~~$45.0~~$148.0 million will expire in 2025, ~~$60.1~~$52.3 million will expire in 2026, $453.0 million will expire in 2027, $15.0 million will expire in 2028 and $27.0 million will expire in 2029.

Junior Subordinated Debentures

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payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations. Under the provisions of each issue of the debentures, the Company has the right to defer

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payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.

A summary of pertinent information related to the Company’s issues of junior subordinated debentures outstanding at ~~March 31,~~June 30, 2023 is set forth in the table below:

Description

Issuance

Date

Trust

Preferred

Securities

Outstanding

Interest Rate(1)

Junior

Subordinated

Debt Owed

to Trusts

Maturity

Date(2)

(Dollars in thousands)

Farmers & Merchants Capital Trust II

November 13, 2003

7,500

3 month LIBOR + 3.00%

7,732

November 8, 2033

Farmers & Merchants Capital Trust III

June 30, 2005

3,500

3 month LIBOR + 1.80%

3,609

July 7, 2035

11,341


(1)			The 3-month LIBOR in effect as of ~~March 31,~~June 30, 2023 was ~~5.19%~~5.07%. Transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 30-day LIBOR is no longer published on a future adjustment date
(2)			All debentures are currently callable.

Subordinated Notes

In December 2017, the Bank completed the issuance, through a private placement, of $40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Bank Notes") due December 15, 2027. Since December 15, 2022, the Bank Notes bear a floating rate of interest equal to 3-Month LIBOR + 3.03%, which transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 30-day LIBOR is no longer published on a future adjustment date, until the Bank Notes mature on December 15, 2027, or such earlier redemption date, payable quarterly in arrears. The Bank Notes are 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. 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. The Bank Notes are eligible for ~~tier~~Tier 2 capital treatment, however, during the last five years of the instrument, the amount eligible must be reduced by 20% of the original amount annually and that no amount of the instrument is eligible for inclusion in ~~tier~~Tier 2 capital when the remaining maturity of the instrument is less than one year. As the Bank Notes were within five years of maturity, only 80% of the notes are eligible for ~~tier~~Tier 2 capital treatment at ~~March 31,~~June 30, 2023.

Credit Agreement

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Interest accrues on outstanding borrowings at a per annum rate equal to the prime rate quoted by The Wall Street Journal and with a floor rate of 3.50% calculated in accordance with the terms of the revolving promissory note and payable quarterly through the first 24 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2024.

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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%, 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. As of ~~March 31,~~June 30, 2023, we believe we were in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.

Off-Balance Sheet Items

In the normal course of business, we enter into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

Commitments to Extend Credit. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. The amount and type of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.

Standby Letters of Credit. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. If the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment and we would have the rights to the underlying collateral. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

As of ~~March 31,~~June 30, 2023 and December 31, 2022, we had outstanding ~~$2.34~~$1.92 billion and $2.36 billion, respectively, in commitments to extend credit and $38.5 million and $35.5 million ~~for both periods~~ in commitments associated with outstanding letters of ~~credit.~~credit for those same periods. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

Liquidity and Capital Resources

Liquidity

Liquidity is the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital, strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and manage unexpected events, all at a reasonable cost. During the ~~three~~six months ended ~~March 31,~~June 30, 2023 and the year ended December 31, 2022, our liquidity needs have been primarily 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, the Federal Reserve discount window and advances from the FHLB are available under a security and pledge agreement to take advantage of investment opportunities.

Liquidity risk management is an important element in our asset/liability management process. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.

~~Table of Content~~s

Our largest source of funds is deposits and our largest use of funds is loans. Our average deposits increased ~~$2.96~~$2.74 billion, or ~~47.6%~~44.6%, and our average loans increased ~~$3.62~~$3.65 billion, or 85.4%, for the ~~three~~six months ended ~~March 31,~~June 30, 2023 compared ~~with~~to the ~~three~~six months ended ~~March 31,~~June 30, 2022. Our estimated uninsured deposits ~~are $4.06~~totaled $4.75 billion and our estimated uninsured deposits net of collateralized deposits of $936 million were $3.82 billion, or 43.5%, of total deposits at June 30, 2023. Our average deposit account size ~~is $81~~ was $86

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thousand ~~excluding municipal deposits.~~at June 30, 2023. 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 ~~7.8~~7.9 years and modified duration of ~~3.1~~3.0 years at ~~March 31,~~June 30, 2023 and a weighted average life of 8.3 years and modified duration of 4.8 years at December 31, 2022.

Total immediate contingent funding sources, including unrestricted cash, ~~unpledged~~ available-for-sale securities that are not pledged and total borrowing capacity was ~~$4.46~~$4.53 billion, or ~~51.1%~~51.6%, of total deposits at ~~March 31,~~June 30, 2023. Including policy-driven capacity for brokered deposits, the Bank would be able to add approximately ~~$1.58~~$1.23 billion to its contingent sources of liquidity, bringing total contingent funding sources to approximately ~~$6.04~~$5.76 billion, or ~~69.1%~~65.7%, of deposits at ~~March 31,~~June 30, 2023.

As of ~~March 31,~~June 30, 2023 and December 31, 2022, wethe Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.

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 company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

Under current guidelines, the minimum ratio of total capital to risk-weighted assets (which are primarily the credit risk equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is 8.0%. At least half of total capital must be composed of ~~tier~~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. The Federal Reserve also has adopted a minimum leverage ratio, requiring ~~tier~~Tier 1 capital of at least 4.0% of average quarterly total consolidated assets, net of goodwill and certain other intangible assets, for all but the most highly rated bank holding companies. The federal banking agencies have also established risk-based and leverage capital guidelines that FDIC-insured depository institutions are required to meet. These regulations are generally similar to those established by the Federal Reserve for bank holding companies.

Under the Federal Deposit Insurance Act, the federal bank regulatory agencies must take “prompt corrective action” against undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized,” and are subjected to different regulation corresponding to the capital category within which the institution falls. A depository institution is deemed to be “well-capitalized” if the banking institution has a total risk-based capital ratio of 10.0% or greater, a ~~tier~~Tier 1 risk-based capital ratio of 8.0% or greater, a common equity ~~tier~~Tier 1 capital ratio of 6.5% and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure. 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.

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 ~~March 31,~~June 30, 2023 and December 31, 2022, the Bank was well-capitalized. Total ~~shareholder’s~~shareholders' equity was ~~$1.45~~$1.46 billion at ~~March 31,~~June 30, 2023, compared with $1.38 billion at December 31, 2022, an increase of ~~$63.0~~$75.5 million. This increase was primarily due the decrease in accumulated other comprehensive loss and net income of ~~$37.1~~$72.3 million, partially offset by the ~~$0.13~~$0.26 per common share dividend paid for the ~~three~~six months ended ~~March 31,~~June 30, 2023.

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The following table provides a comparison of our leverage and risk-weighted capital ratios as of the dates indicated 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. (Consolidated)
As of March 31, 2023
Total capital (to risk weighted assets) 12.72 % 8.00 % 10.50 % N/A
Common equity Tier 1 capital (to risk weighted assets) 10.39 % 4.50 % 7.00 % N/A
Tier 1 capital (to risk weighted assets) 10.50 % 6.00 % 8.50 % N/A
Tier 1 capital (to average assets) 9.01 % 4.00 % 4.00 % N/A
As of December 31, 2022
Total capital (to risk weighted assets) 12.39 % 8.00 % 10.50 % N/A
Common equity Tier 1 capital (to risk weighted assets) 10.04 % 4.50 % 7.00 % N/A
Tier 1 capital (to risk weighted assets) 10.15 % 6.00 % 8.50 % N/A
Tier 1 capital (to average tangible assets) 8.55 % 4.00 % 4.00 % N/A
Stellar Bank
As of March 31, 2023
Total capital (to risk weighted assets) 12.42 % 8.00 % 10.50 % 10.00 %
Common equity Tier 1 capital (to risk weighted assets) 10.87 % 4.50 % 7.00 % 6.50 %
Tier 1 capital (to risk weighted assets) 10.87 % 6.00 % 8.50 % 8.00 %
Tier 1 capital (to average tangible assets) 9.35 % 4.00 % 4.00 % 5.00 %
As of December 31, 2022
Total capital (to risk weighted assets) 12.02 % 8.00 % 10.50 % 10.00 %
Common equity Tier 1 capital (to risk weighted assets) 10.46 % 4.50 % 7.00 % 6.50 %
Tier 1 capital (to risk weighted assets) 10.46 % 6.00 % 8.50 % 8.00 %
Tier 1 capital (to average tangible assets) 8.81 % 4.00 % 4.00 % 5.00 %


	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. (Consolidated)
As of June 30, 2023
Total Capital (to risk-weighted assets)	13.03	%	8.00	%	10.50	%	N/A
Common Equity Tier 1 capital (to risk-weighted assets)	10.67	%	4.50	%	7.00	%	N/A
Tier 1 Capital (to risk-weighted assets)	10.78	%	6.00	%	8.50	%	N/A
Tier 1 Leverage (to average assets)	9.51	%	4.00	%	4.00	%	N/A
As of December 31, 2022
Total Capital (to risk-weighted assets)	12.39	%	8.00	%	10.50	%	N/A
Common Equity Tier 1 capital (to risk-weighted assets)	10.04	%	4.50	%	7.00	%	N/A
Tier 1 Capital (to risk-weighted assets)	10.15	%	6.00	%	8.50	%	N/A
Tier 1 Leverage (to average assets)	8.55	%	4.00	%	4.00	%	N/A
Stellar Bank
As of June 30, 2023
Total Capital (to risk-weighted assets)	12.80	%	8.00	%	10.50	%	10.00	%
Common Equity Tier 1 capital (to risk-weighted assets)	11.22	%	4.50	%	7.00	%	6.50	%
Tier 1 Capital (to risk-weighted assets)	11.22	%	6.00	%	8.50	%	8.00	%
Tier 1 Leverage (to average assets)	9.89	%	4.00	%	4.00	%	5.00	%
As of December 31, 2022
Total Capital (to risk-weighted assets)	12.02	%	8.00	%	10.50	%	10.00	%
Common Equity Tier 1 capital (to risk-weighted assets)	10.46	%	4.50	%	7.00	%	6.50	%
Tier 1 Capital (to risk-weighted assets)	10.46	%	6.00	%	8.50	%	8.00	%
Tier 1 Leverage (to average assets)	8.81	%	4.00	%	4.00	%	5.00	%

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and Interest Rate Risk

Our asset liability and interest rate risk policy provides management with the guidelines for effective balance sheet management. We have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.

As a financial institution, a component of the market risk that we face is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

Based upon the nature of our operations, we are not subject to foreign exchange rate or commodity price risk. We do not own any trading assets. We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of a community banking business. The Company enters into interest rate swaps as an accommodation to customers.

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. 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. 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. Additionally, the BSRC 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. 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. 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. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in interest rates under various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet.

The following table summarizes the simulated change in net interest income over a 12-month horizon and the economic value of equity as of the dates indicated:


Change in Interest Rates (Basis Points)	Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income		Percent Change in Economic Value of Equity		Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income		Percent Change in Economic Value of Equity
		As of March 31, 2023	As of December 31, 2022	As of March 31, 2023	As of December 31, 2022		As of June 30, 2023	As of December 31, 2022	As of June 30, 2023	As of December 31, 2022
+300	+300	(3.6)%	0.5%	0.0%	(2.9)%	+300	(3.7)%	0.5%	(5.1)%	(2.9)%
+200	+200	(2.7)%	0.5%	2.7%	(0.7)%	+200	(2.4)%	0.5%	(2.5)%	(0.7)%
+100	+100	(1.8)%	0.4%	4.4%	0.6%	+100	(1.1)%	0.4%	(0.6)%	0.6%
Base	Base	0.0%	0.0%	0.0%	0.0%	Base	0.0%	0.0%	0.0%	0.0%
-100	-100	(0.9)%	(2.0)%	0.0%	(3.2)%	-100	0.5%	(2.0)%	(1.7)%	(3.2)%
-200	-200	(2.8)%	(7.5)%	(7.5)%	(9.4)%	-200	0.0%	(7.5)%	(6.5)%	(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. During the ~~first quarter,~~six months ended June 30, 2023, changes in our overall interest rate profile were driven by the decrease in noninterest bearing deposits ~~during the quarter, an increase~~and certain interest bearing deposits, increases in ~~interest bearing~~certificates of deposits and borrowed funds, an increase in loans and decreases in securities and cash and cash equivalents.

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LIBOR Transition

The Company’s transition away from LIBOR has been substantially completed. As of ~~March 31,~~June 30, 2023, LIBOR was used as an index rate for less than 1% of the Company’s loans.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this ~~report.~~Quarterly Report on Form 10-Q. See Exhibits 31.1 and 31.2 for the Certification statements issued by the Company’s Chief Executive Officer and Chief Financial Officer, respectively.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~March 31,~~June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to claims and litigation arising in the ordinary course of business. In the opinion of management, we are not party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which such claim or litigation is resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor. We intend to defend ourselves vigorously against any future claims or litigation.

ITEM 1A. RISK FACTORS

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, and the soundness of other financial institutions may have a material effect on the Company’s operations.

Recent events relating to the failures of certain banking entities in hethe first ~~and second~~ quarter of 2023, including Silicon Valley Bank, Signature Bank and First Republic Bank have caused significant volatility in the trading prices of stocks of publicly traded bank holding companies and general uncertainty and concern regarding the liquidity and financial strength of the banking sector as a whole. In the future, events such as these bank failures could have an adverse effect on our financial condition and results of operations and cause volatility in our stock price.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. Stellar has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose Stellar to credit risk and losses in the event of a default by a counterparty or client. Any such losses could have a material adverse effect on Stellar’s financial condition and results of operations.

In response to these failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of bridge banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. In addition, the Federal Reserve Bank announced it would make available additional funding to eligible depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors. In an effort to strengthen public confidence in the banking system and protect depositors,

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regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments and may adversely affect our earnings. However, it is uncertain whether these steps by the government will be sufficient to calm the financial markets, reduce the risk of significant depositor withdrawals at other institutions and thereby reduce the risk of additional bank failures. As a result of this uncertainty, we face the potential for reputational risk, deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

There have been no material changes in the risk factors previously disclosed by the Company. Investors should carefully consider the risks described in “Part I—Item 1A.—Risk Factors” in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2022 and the Company’s other SEC filings.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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. 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.

Repurchases under the Company’s share repurchase program may be made from time to time at the Company’s discretion in open market transactions, through block trades, in privately negotiated transactions, and pursuant to any trading plan that may be adopted by the Company’s management in accordance with Rule 10b5-1 of the Exchange Act or otherwise. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be modified, suspended or discontinued at any time.

There were no repurchases by the Company during the three months ended ~~March 31,~~June 30, 2023. The number of shares that may be repurchased under the plan ~~were 1,625,356,~~was 2,575,107, which was computed based on the closing share price of the Company's common stock as of ~~March 31,~~June 30, 2023.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS


Exhibit Number						Description

3.1						Second Amended and Restated Certificate of Formation of Stellar Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 3, 2022)

3.2						Bylaws of Stellar Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 3, 2022)

31.1*						Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended

31.2*						Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended

32.1**						Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**						Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH*						Inline XBRL Taxonomy Extension Schema Document

101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed with this Quarterly Report on Form 10-Q.

** Furnished with this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			Stellar Bancorp, Inc. (Registrant)

Date: ~~May 4,~~July 28, 2023			/s/ Robert R. Franklin, Jr.
			Robert R. Franklin, Jr.
			Chief Executive Officer

Date: ~~May 4,~~July 28, 2023			/s/ Paul P. Egge
			Paul P. Egge
			Chief Financial Officer

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		Three Months Ended March 31, 2023
		Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Principal Forgiveness		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
	(In thousands)
Commercial and industrial		$	—	$	—	$	2,251	$	96	$	—	$	—	$	2,347
Real estate:
Commercial real estate (including multi-family residential)		—		—		798		—		—		—		798
Commercial real estate construction and land development		—		—		—		—		—		—		—
1-4 family residential (including home equity)		—		—		725		—		—		—		725
Residential construction		—		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—		—
Total		$	—	$	—	$	3,774	$	96	$	—	$	—	$	3,870