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

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 June 30, ~~2022 and December 31, 2021,~~2023, management determined there was 0no such deterioration.

At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had 1315 and 1914 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 June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had ~~two and one~~three credit risk participation agreements with another financial institution ~~respectively,~~ 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.

Table of Contents

Derivative instruments not designated as hedges outstanding as of ~~the dates indicated below~~June 30, 2023 were as ~~follows:~~

Weighted

Average

Notional

Fair

Maturity
(Dollars in thousands)

Classification

Amounts

Value

Fixed Rate

Floating Rate

(Years)
June 30, 2022








Interest rate swaps with financial institutions

Other assets

$
88,449

$
5,827

3.25% - 5.58%

LIBOR 1M + 2.50% - 3.00%

4.83
Interest rate swaps with customers

Other assets

6,725

67

5.35%

SOFR CME 1M+ 2.50%

9.90
Interest rate swaps with financial institutions

Other assets

5,085

219

4.99%

U.S. Prime

5.46
Interest rate swaps with customers

Other liabilities

5,085

(219)

4.99%

U.S. Prime

5.46
Interest rate swaps with financial institutions

Other liabilities

6,725

(67)

5.35%

SOFR CME 1M+ 2.50%

9.90
Interest rate swaps with customers

Other liabilities

88,449

(5,827)

3.25% - 5.58%

LIBOR 1M + 2.50% - 3.00%

4.83
Credit risk participation agreement with financial institution

Other assets

13,298

4

3.50%

LIBOR 1M + 2.50%

7.75
Credit risk participation agreement with financial institution

Other assets

2,522

11

5.35%

SOFR CME 1M+ 2.50%

9.90
Total derivatives

$
127,889

$
15

December 31, 2021










Interest rate swaps with customers

Other assets

$
56,440

$
2,474

4.00% - 5.60%

LIBOR 1M + 2.50% - 3.00%

5.10
Interest rate swaps with financial institutions

Other assets

66,650

875

3.25% - 3.50%

LIBOR 1M + 2.50%

5.59
Interest rate swaps with customers

Other assets

5,141

194

4.99%

U.S. Prime

5.96
Interest rate swaps with financial institutions

Other liabilities

5,141

(194)

4.99%

U.S. Prime

5.96
Interest rate swaps with financial institutions

Other liabilities

56,440

(2,474)

4.00% - 5.60%

LIBOR 1M + 2.50% - 3.00%

5.10
Interest rate swaps with customers

Other liabilities

66,650

(875)

3.25% - 3.50%

LIBOR 1M + 2.50%

5.59
Credit risk participation agreement with financial institution

Other assets

13,563

15

3.50%

LIBOR 1M + 2.50%

8.24
Total derivatives

$
270,025

$
15

follows (dollars in thousands):


								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:
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 June 30, 2023, the Company had a total borrowing capacity with the FHLB of $4.10 billion, of which $2.90 billion was available and $1.20 billion was outstanding in/through FHLB advances and letters of credit. There were $370.0 million of FHLB short-term advances outstanding at June 30, 2023 at a weighted-average rate of 5.45%. Letters of credit were $831.3 million at June 30, 2023, of which $91.0 million will expire during the remaining months of 2023, $45.0 million will expire in 2024, $148.0 million will expire in 2025, $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.

Table of ~~Contents~~Contents

~~NOTE 15: OPERATING LEASES~~

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.

The Company ~~leases~~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 ~~office space, stand-alone buildings~~additional debt. As of June 30, 2023, the Company believes it was in compliance with all such debt covenants and ~~land,~~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 ~~recognized as operating lease right-of-use~~the only assets of each trust, are subordinate and junior in ~~the consolidated balance sheets and operating lease liabilities in the consolidated balance sheets represent~~right of payment to all of the Company’s ~~liability to make lease payments under these operating leases, on a discounted basis.~~present and future senior indebtedness. The Company ~~excludes short-term leases, defined as lease terms~~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 ~~12 months~~each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or ~~less~~ from ~~its operating lease right-of-use assets~~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 ~~operating lease liabilities.~~

~~Lease costs for the periods indicated below were as follows:~~

common securities will also be deferred.

Six Months Ended June 30,
(Dollars in thousands)

2022

2021
Operating lease cost

$
824

$
970
Short-term lease cost

10

9
Sublease income

(266)

(314)
Total lease cost

$
568

$
665

~~Other~~A summary of pertinent information related to ~~operating leases~~the Company’s issues of junior subordinated debentures outstanding at 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 June 30, 2023 was 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 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 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 2 capital treatment at 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 ~~periods indicated below was as follows:~~

Six Months Ended June 30,
(Dollars in thousands)

2022

2021
Amortization of lease right-to-use assets

$
676

$
771
Accretion of lease liabilities

173

199
Cash paid for amounts included in the measurement of lease liabilities

953

1,055
Weighted-average remaining lease term in years

10.2

10.7
Weighted-average discount rate

2.62%

2.64%

~~A maturity analysis~~Company Notes), payable quarterly in arrears on January 1, April 1, July 1 and October 1 of ~~operating lease liabilities as~~each year. Any redemption will be at a redemption price equal to 100% of the ~~date indicated below was as follows:~~

(Dollars in thousands)

June 30, 2022
1 year or less

$
1,780
Over 1 year through 2 years

1,919
Over 2 years through 3 years

1,955
Over 3 years through 4 years

1,948
Over 4 years through 5 years

1,840
Thereafter

7,295
Total undiscounted lease liability

16,737
Less:

Discount on cash flows

(2,568)
Total operating lease liability

$
14,169

~~During~~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.


	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 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 June 30, 2023 were issued under the 2022 Plan. At 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 $2.8 million and $931 thousand for the three months ended 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 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 these compensation plans.

No options to purchase Company terminated a land lease at the request of the lessor. The Company received a payment of $1.5 million from the lessor for the early termination of the lease, which is reflected in other noninterest income in the condensed consolidated income statements.

~~During~~stock were granted during the six months ended June 30, ~~2022,~~2023. Options are exercisable for up to 10 years from the ~~operating lease right-of-use asset~~date of the grant and, dependent on the terms of the applicable award agreement generally vest ~~liabilities~~three ~~were both increased $809,000 due~~ to ~~a lease modification to extend~~four years after the ~~term~~date of ~~a lease.~~

grant. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model.

Table of Contents

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


	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(Shares in thousands)			(In years)	(Dollars in thousands)
Options outstanding, January 1, 2023	368	$	17.89	2.72	$	4,256
Options granted	—	—
Options exercised	(25)	13.95
Options forfeited	(33)	20.49
Options outstanding, June 30, 2023	310	$	17.94	2.31	$	1,656
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 six months ended June 30, 2023 is as follows:


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

As of June 30, 2023, there was $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 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 six months ended 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 June 30, 2023, there was $1.2 million of unrecognized compensation expense related to the PSAs, which is expected to be recognized over a weighted-average period of 2.1 years.

~~Table of Contents~~

~~NOTE 16:~~14. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES ~~AND FINANCIAL INSTRUMENTS WITH OFF~~-~~BALANCE~~-~~SHEET RISK~~

~~Financial Instruments with Off-Balance-Sheet Risk~~

~~The~~

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

Table of Contents

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 ~~meet customer financing needs~~varying degrees elements of credit risk and interest rate risk in ~~accordance with GAAP, these commitments are not reflected as liabilities~~excess of the amounts recognized in the consolidated balance sheets. ~~Due to~~The Company uses the ~~nature~~same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

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


	June 30, 2023				December 31, 2022
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(In thousands)
Commitments to extend credit(1)	$	513,423	$	1,403,262	$	673,098	$	1,686,627
Standby letters of credit	14,818		23,670		10,310		25,190
Total	$	528,241	$	1,426,932	$	683,408	$	1,711,817

1) At June 30, 2023 and December 31, 2022, the ~~amounts disclosed~~Company had FHLB Letters of Credit in the ~~tables below do not necessarily represent future cash requirements.~~amount of $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 and standby letters of credit as of the dates indicated below were as follows:~~

(Dollars in thousands)

June 30, 2022

December 31, 2021
Commitments to extend credit, variable interest rate

$
761,869

$
714,084
Commitments to extend credit, fixed interest rate

140,943

60,876
Total commitments

$
902,812

$
774,960
Standby letters of credit

$
9,836

$
18,109

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,~~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.~~

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 June 30, 2023, the fixed rate loan commitments had interest rates ranging from 1.40% to 13.25% with a weighted average maturity and rate of 2.50 years and 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.~~third party. In the event of nonperformance by the customer, the Company has the rights to the underlying collateral. The credit risk ~~involved~~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 ~~Company’s customers.~~

nature of such collateral, is 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.

~~NOTE 17: EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION ARRANGEMENTS~~

~~Employee Benefit Plans~~

15. REGULATORY CAPITAL MATTERS

The Company ~~maintains a 401(k) employee benefit plan~~ and substantially all employees that complete three months of service may participate. The Company matches a portion of each employee’s contribution and may, at its discretion, make additional contributions. During the six months ended June 30, 2022 and 2021, the Company contributed $1.3 million and $1.2 million to the plan, respectively.

~~Executive Deferred Compensation Arrangements~~

~~The Company established an executive incentive compensation arrangement with several officers of~~ the Bank ~~in which these officers are eligible for performance-based incentive bonus compensation. As part of this compensation arrangement, the Company contributes~~ ~~one-fourth~~ of the incentive bonus amount into a deferred compensation account. The deferred amounts accrue at a market rate of interest and are payable to the employees upon separation from the Bank provided vesting arrangements have been met. At June 30, 2022 and December 31, 2021, the amount payable, including interest, for this deferred plan was approximately $1.4 million and $1.7 million, respectively, which is included in other liabilities in the condensed consolidated balance sheets.

~~Table of Contents~~

~~Salary Continuation Agreements~~

The Company entered into a salary continuation arrangement in 2008 with the Company’s then President and Chief Executive Officer, or CEO, that calls for payments of $100,000 per year for a period of 10 years commencing at age 65. Payments under the plan began during 2014. The Company’s liability was $106,000 and $153,000 at June 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets and equals the present value of the benefits expected to be provided.

In October 2017, the Company entered into a salary continuation arrangement with the Company’s President and CEO that calls for payments of $200,000 per year payable for a period of 10 years commencing at age 70. Payments under the plan will begin in 2024. The Company’s liability was $1.0 million and $900,000 at June 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets. The liability will continue to accrue over the remaining period until payments commence such that the accrued amount at the eligibility date will equal the present value of all the future benefits expected to be paid.

~~NOTE 18: STOCK-BASED COMPENSATION~~

The Company acquired a stock option plan which originated under VB Texas, Inc. as a part of a merger of the two companies, or the 2006 Plan. At the merger date, all outstanding options under this plan became fully vested and exercisable. The plan expired in 2016 and no additional options may be granted under its terms. As of June 30, 2022, there were options outstanding to acquire 16,567 shares of the Company’s common stock under the 2006 Plan, all of which will expire in 2022 if not exercised.

In 2014, the Company adopted the 2014 Stock Option Plan, or the 2014 Plan, which was approved by the Company’s shareholders and limits the number of shares that may be optioned to 1,127,200. The 2014 Plan provides that 0 options may be granted after May 20, 2024. Options granted under the 2014 Plan expire 10 years from the date of grant and become exercisable in installments over a period of ~~one~~ to five years, beginning on the first anniversary of the date of grant. As of June 30, 2022, 963,200 shares were available for future grant. NaN options have been issued under the 2014 Plan since 2017.

In 2017, the Company adopted the 2017 Omnibus Incentive Plan, or the 2017 Plan. The 2017 Plan authorizes the Company to grant options, performance-based and non-performance based restricted stock awards as well as various other types of stock-based awards and other awards that are not stock-based to eligible employees, consultants and non-employee directors up to an aggregate of 600,000 shares of common stock. As of June 30, 2022, 243,895 shares were available for future grant under the 2017 Plan.

~~Stock option activity for the periods indicated below was as follows:~~

Six Months Ended June 30,

2022

2021

Number of

Weighted

Number of

Weighted

Shares

Average

Shares

Average

Underlying

Exercise

Underlying

Exercise

Options

Price

Options

Price
Outstanding at beginning of period

191,560

$
17.53

201,720

$
17.22
Granted

—

—

—

—
Exercised

(8,833)

11.32

0

0
Forfeited/expired

(10,160)

11.32

—

—
Outstanding at end of period

172,567

$
18.22

201,720

$
17.22

~~Table of Contents~~

~~A summary of stock options as of the date indicated below was as follows:~~

June 30, 2022
Stock Options

Exercisable

Unvested

Outstanding
Number of shares underlying options

166,568

5,999

172,567
Weighted-average exercise price per share

$
18.12

$
21.00

$
18.22
Aggregate intrinsic value (in thousands)

$
1,411

$
34

$
1,445
Weighted-average remaining contractual term (years)

3.5

5.1

3.6

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. Restricted stock shares are considered fully issued at the time of the grant and the grantee becomes the record owner of the restricted stock and has voting, dividend and other shareholder rights. The shares of restricted stock are non-transferable and subject to forfeiture until the restricted stock vests and any dividends with respect to the restricted stock are subject to the same restrictions, including the risk of forfeiture.

~~Non-performance based restricted stock grants vest over the service period in equal increments over a period of~~ ~~two~~ ~~to five years, beginning on the first anniversary of the date of grant.~~

The number of shares earned under the Company’s performance-based restricted stock award agreements is based on the achievement of certain branch production goals. Compensation expense for performance-based restricted stock is recognized for the probable award level over the period estimated to achieve the performance conditions and other goals, on a straight-line basis. If the probable award level and/or the period estimated to be achieved change, compensation expense will be adjusted via a cumulative catch-up adjustment to reflect these changes. The performance conditions and goals must be achieved within five years or the awards expire. The number of performance-based shares granted presented in the table.

~~Restricted stock activity for the periods indicated below was as follows:~~

Non-performance Based

Performance-based

Weighted

Weighted

Average

Average

Number of

Grant Date

Number of

Grant Date

Shares

Fair Value

Shares

Fair Value
Outstanding at December 31, 2020

129,667

$
28.22

2,250

$
34.40
Granted

33,285

26.32

—

—
Vested

(21,749)

30.71

—

—
Forfeited

(493)

28.80

—

—
Outstanding at June 30, 2021

140,710

27.39

2,250

34.40

Outstanding at December 31, 2021

83,563

27.85

2,250

34.40
Granted

38,457

29.42

—

—
Vested

(26,622)

29.80

—

—
Forfeited

(1,843)

33.30

—

—
Outstanding at June 30, 2022

93,555

27.84

2,250

34.40

~~A summary of restricted stock as of the date indicated below was as follows:~~

June 30, 2022
Restricted Stock

Non-performance Based

Performance-based
Number of shares underlying restricted stock

93,555

2,250
Weighted-average grant date fair value per share

$
27.84

$
34.40
Aggregate fair value (in thousands)

$
2,488

$
60
Weighted-average remaining vesting period (years)

1.4

1.3

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options. The shares of

~~Table of Contents~~

~~stock subject to options exercised, restricted stock vested, shares withheld and shares issued for the periods indicated below were as follows:~~

Exercised/Vested

Shares Withheld

Shares Issued
Six Months Ended June 30, 2022

Non-performance based restricted stock

26,622

(4,509)

22,113
Six Months Ended June 30, 2021

Non-performance based restricted stock

21,749

(3,091)

18,658

For the six months ended June 30, 2022 and 2021, stock compensation expense was $1.0 million and $1.1 million, respectively, and for the three months ended June 30, 2022 and 2021, stock compensation expense was $539,000 and $574,000, respectively. As of June 30, 2022, there was approximately $1.5 million of total unrecognized compensation expense related to the unvested stock options, non-performance based restricted stock and performance-based restricted stock, which is expected to be recognized in the Company’s consolidated statements of income over a weighted-average period of 1.4 years.

~~NOTE 19: REGULATORY MATTERS~~

~~Banks and bank holding companies~~ are subject to various regulatory capital requirements administered by ~~state and~~the federal banking agencies. Capital adequacy guidelines, and ~~additionally~~ for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain ~~off-balance-sheet~~off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk ~~weighting~~weightings and other factors.

The Company and the Bank’s Common Equity Tier 1 capital includes common stock and related capital surplus, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, the Company and the Bank elected Failure to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.

The Basel III Capital Rules require the Company and the Bank to maintain: (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company and the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

In November 2019, the federal bank regulatory agencies published a final rule, the Community Bank Leverage Ratio Framework, or the Framework, to simplify capital calculations for community banks. The Framework provides for a simple measure of capital adequacy for certain community banking organizations. The Framework is optional and is designed to reduce burden by removing requirements for calculating and reporting risk-based capital ratios. Depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9.0%, are considered qualifying community banking organizations and are eligible to opt into the Framework. A qualifying community banking organization that elects to use the Framework and that maintains a Tier 1 capital-to-adjusted total assets ratio, or leverage capital ratio, of greater

~~Table of Contents~~

than 9.0% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III Capital Rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules. The final rule became effective January 1, 2020, and organizations that opt into the Framework and meet the criteria established by the rule can use the Framework for regulatory reports for the year ended December 31, 2020. In April 2020, the federal bank regulatory agencies announced two interim final rules to provide relief associated with Section 4012 of the Coronavirus Aid Relief and Economic Security Act, or CARES Act. For institutions that elect the Framework, the interim rules temporarily lowered the leverage ratio requirement to 8.0% for the second quarter of 2020 through the end of calendar year 2020 and to 8.5% for the 2021 calendar year and greater than 9.0% thereafter. The Company determined not to opt into the Framework and will continue to compute regulatory capital ratios based on the Basel III Capital Rules discussed above.

In September 2020, the federal bank regulatory agencies finalized an interim final rule that allows banking organizations to mitigate the effects of CECL on their regulatory capital computations. The rule permitted banking organizations that were required to adopt CECL for purposes of GAAP (as in effect January 1, 2021) for a fiscal year beginning during the calendar year 2020, the option to delay for up to two years an estimate of CECL’s effect on regulatory capital, followed by a three-year transition period (i.e., a transition period of five years in total). The Company determined not to use the transition provision and has reported the full effect of CECL upon adoption and for each reporting period thereafter in its regulatory capital calculation and ratios.

The Company is subject to the regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and, for the Bank, those administered by the Office of Comptroller of Currency, or OCC. Regulatory authorities can initiate certain mandatory actions if the Company or the Bank fail to meet the minimum capital requirements ~~which~~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.

Table of Contents

Banks (Basel III Rules) were fully phased in when the capital conservation buffer reached 2.5%. Management believes as of June 30, ~~2022~~2023 and December 31, ~~2021, that~~2022, the Company and the Bank met all capital adequacy requirements to which they were then subject.

~~On June 18, 2021,~~

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 ~~Bank~~Company’s and the OCC entered into a formal agreement, or the Formal Agreement, with regard to Bank Secrecy Act, or BSA, and anti-money laundering, or AML, compliance matters. On September 7, 2021, the OCC terminated the Formal Agreement, dated June 18, 2021 between the Bank and the OCC relating to the Bank’s ~~BSA/AML compliance program.~~

~~To resolve the BSA/AML compliance matters, on December 16, 2021, the Bank, entered into an OCC Consent Order. Under the OCC Consent Order, the Bank paid a civil money penalty of $1.0 million.~~

On December 15, 2021, the Bank entered into a FinCEN Consent Order. Under the terms of the FinCEN Consent Order, the Bank paid a civil money penalty of $8.0 million; provided, however, that FinCEN agreed to credit the Bank the $1.0 million civil money penalty imposed by the OCC described above. As a result, the Bank paid an aggregate sum of $8.0 million under the OCC Consent Order and the FinCEN Consent Order. The OCC Consent Order and the FinCEN Consent Order each settled the civil money proceedings against the Bank initiated by the OCC and FinCEN.

~~Table of Contents~~

~~At June 30, 2022 and December 31, 2021, the Company and the Bank were “well capitalized” based on the ratios presented below. Actual~~actual and required capital ratios ~~for the Company~~as of June 30, 2023 and ~~the Bank were as follows for the dates presented:~~

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 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	%

Minimum

Required to be

Capital Required

Considered Well

Actual

Basel III

Capitalized
(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio
June 30, 2022












Common Equity Tier 1 to Risk-Weighted Assets:












Consolidated

$ 489,832

14.49%

$ 236,705

7.00%

N/A

N/A
Bank Only

$ 465,539

13.77%

$ 236,663

7.00%

$ 219,759

6.50%
Tier 1 Capital to Risk-Weighted Assets:






Consolidated

$ 489,832

14.49%

$ 287,428

8.50%

N/A

N/A
Bank Only

$ 465,539

13.77%

$ 287,377

8.50%

$ 270,472

8.00%
Total Capital to Risk-Weighted Assets:




Consolidated

$ 525,247

15.53%

$ 355,058

10.50%

N/A

N/A
Bank Only

$ 500,954

14.82%

$ 354,995

10.50%

$ 338,090

10.00%
Tier 1 Leverage Capital to Average Assets:




Consolidated

$ 489,832

11.48%

$ 170,675

4.00%

N/A

N/A
Bank Only

$ 465,539

10.91%

$ 170,628

4.00%

$ 213,285

5.00%

December 31, 2021












Common Equity Tier 1 to Risk-Weighted Assets:












Consolidated

$ 475,154

15.31%

$ 217,300

7.00%

N/A

N/A
Bank Only

$ 447,819

14.43%

$ 217,270

7.00%

$ 201,757

6.50%
Tier 1 Capital to Risk-Weighted Assets:






Consolidated

$ 475,154

15.31%

$ 263,864

8.50%

N/A

N/A
Bank Only

$ 447,819

14.43%

$ 263,836

8.50%

$ 248,316

8.00%
Total Capital to Risk-Weighted Assets:




Consolidated

$ 509,766

16.42%

$ 325,950

10.50%

N/A

N/A
Bank Only

$ 482,431

15.54%

$ 325,915

10.50%

$ 310,395

10.00%
Tier 1 Leverage Capital to Average Assets:




Consolidated

$ 475,154

11.22%

$ 169,470

4.00%

N/A

N/A
Bank Only

$ 447,819

10.58%

$ 169,381

4.00%

$ 211,726

5.00%

~~Dividend Restrictions~~

In the ordinary course of business, the Company may be dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.

Table of ~~Contents~~Contents

~~NOTE 20: INCOME TAXES~~

~~The provision for income tax expense and effective tax rates~~

16. EARNINGS PER COMMON SHARE

Diluted earnings per common share is computed using the weighted-average number of common shares determined for the ~~periods indicated below~~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 ~~follows:~~

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in thousands)

2022

2021

2022

2021
Income tax expense

$ 2,827

$ 2,692

$ 5,104

$ 5,177
Effective tax rate

19.45%

18.70%

18.62%

19.25%

~~The differences between the federal statutory rate of 21%~~participating securities and ~~the effective tax rates presented~~included in ~~the table above were largely attributable to permanent differences primarily related to tax exempt interest income, bank-owned life insurance related earnings and merger-related costs.~~

~~NOTE 21: EARNINGS PER SHARE~~

~~The computation of~~ basic and diluted weighted average common shares outstanding.


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

There were 30,074 and 22,411 antidilutive shares as of June 30, 2023 and 2022, respectively.

The basic and diluted weighted average number of shares issued and earnings per share ~~for~~have been retrospectively adjusted to reflect the ~~periods indicated below was as follows:~~

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in thousands, except per share data)

2022

2021

2022

2021
Net income for common shareholders

$
11,707

$
11,703

$
22,302

$
21,722
Weighted-average shares (thousands)

Basic weighted-average shares outstanding

24,493

24,447

24,495

24,477
Dilutive effect of outstanding stock options and unvested restricted stock awards

100

124

118

114
Diluted weighted-average shares outstanding

24,593

24,571

24,613

24,591
Earnings per share:

Basic

$
0.48

$
0.48

$
0.91

$
0.89
Diluted

$
0.48

$
0.48

$
0.91

$
0.88

~~For~~equivalent number of shares issued to holders of Allegiance common stock in the six months ended June 30, 2022 and 2021, the Company excluded the impact of 394 and 1,800 shares of unvested restricted stock, respectively, from diluted weighted-average shares as they were anti-dilutive. The Company also excluded the impact of 2,250 shares of performance based restricted stock awards for the three and six months ended June 30, 2022 and 2021 as they are contingently issuable and the performance conditions for these awards have not been met.

Merger.

Table of ~~Contents~~Contents

~~Item~~

ITEM 2. ~~Management’s Discussion~~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 ~~Analysis of Financial Condition~~“our business” refer to Stellar Bancorp, Inc. and ~~Results of Operations~~

our wholly owned banking subsidiary, Stellar Bank, a Texas banking association.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains ~~forward-looking~~forward‑looking statements. These ~~forward-looking~~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~~forward‑looking nature. These ~~forward-looking~~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~~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~~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~~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~~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 ~~this Quarterly Report on Form 10-Q~~for the year ended December 31, 2022 and the following:

●

natural disasters and adverse weather on the Company’s market area, acts of terrorism, pandemics, an outbreak of hostilities, such as the conflict in Ukraine, or other international or domestic calamities and other matters beyond the Company’s control;

●

the Company’s ability to manage the economic risks related to the ongoing impact of the COVID-19 pandemic (including risks related to its customers’ credit quality, deferrals and modifications to loans);

●

~~the geographic concentration of the Company’s markets in Houston and Beaumont, Texas;~~

●

~~the Company’s ability to manage changes and the continued health or availability of management personnel;~~

●

~~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;~~

●

~~interest rate risk associated with the Company’s business;~~

●

~~national business and economic conditions in general, in the financial services industry and within the Company’s primary markets;~~

●

~~sustained instability of the oil and gas industry in general and within Texas;~~

●

~~the composition of the Company’s loan portfolio, including the identity of the Company’s borrowers and the concentration of loans in specialized industries;~~

●

~~changes in the value of collateral securing the Company’s loans;~~

●

~~the Company’s ability to maintain important deposit customer relationships and its reputation;~~

●

~~the Company’s ability to maintain effective internal control over financial reporting;~~

●

~~volatility and direction of market interest rates;~~

●

~~liquidity risks associated with the Company’s business;~~

●

~~systems failures, interruptions or breaches involving the Company’s information technology and telecommunications systems or third- or fourth-party servicers;~~

●

~~the failure of certain third- or fourth-party vendors to perform;~~

●

~~the institution and outcome of litigation and other legal proceedings against the Company or to which it may become subject;~~

●

~~the operational risks associated with the Company’s business;~~

●

~~the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals;~~

~~Table of Contents~~•

●

~~changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;~~

●

~~further government intervention in the U.S. financial system that may impact how the Company achieves its performance goals;~~

●

~~the possible substantial costs related to the pending merger and integration;~~

●

~~the risk that the cost savings and any revenue synergies from the pending merger may not be fully realized or may take longer than anticipated to be realized;~~

●

~~the possibility that the pending merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;~~

●

~~the ability to retain personnel of the Company or Allegiance Bancshares, Inc., or Allegiance, after the pending merger is completed;~~

●

the ability by each of Allegiance and the Company to obtain required governmental approvals of the pending merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);

●

~~the occurrence of any event, change or other circumstances that could give rise to the right of us and/or Allegiance to terminate the merger agreement with respect to the pending merger;~~

●

~~disruption to the parties’ businesses as a result of the announcement and pendency of the pending merger;~~

●

~~the risks related to the Company’s assumption of certain of Allegiance’s outstanding debt obligations and the combined company’s level of indebtedness following the completion of the merger;~~

●

~~the dilution caused by the Company’s issuance of additional shares of its common stock in the merger;~~

●

~~the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the pending merger;~~

●

~~reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the pending merger;~~

●

~~and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.~~

~~Pending Merger~~

~~On November 8, 2021, Allegiance~~disruptions to the economy and the ~~Company jointly announced that they entered into a definitive merger agreement pursuant to which the companies will combine~~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 ~~an all-stock merger~~our deposit insurance assessments and other actions of equals. Under the terms of the definitive merger agreement, Allegiance shareholders will receive 1.4184 shares of the Company’s common stock for each share of Allegiance common stock they own. Based on the number of outstanding shares of Allegiance and the Company as of November 5, 2021, Allegiance shareholders will own approximately 54% and the Company’s shareholders will own approximately 46% of the combined company. Both companies have received requisite shareholder approval of the merger agreement. The companies have also received regulatory approvals from the Federal Deposit Insurance Corporation and the Texas Department of Banking. The merger remains subject to the receipt of regulatory approval from the Board of Governors of the Federal Reserve ~~System. Subject to satisfaction~~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 ~~closing conditions, the parties anticipate closing~~Federal Reserve Board;

•inflation, interest rate, capital and securities markets and monetary fluctuations;

•changes in the ~~third quarter~~interest rate environment, the value of ~~2022.~~

Stellar’s assets and obligations and the availability of capital and liquidity;

•

~~There are or will be important~~general competitive, economic, political and market conditions; and other factors that ~~could cause the actual~~may affect future results of the ~~merger~~Company including changes in asset quality and credit risk; the inability to ~~differ materially~~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 ~~those indicated in these forward-looking statements, including, but~~the Merger may not ~~limited~~be fully realized or may take longer than anticipated to be realized;

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

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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, ~~described in “Part I.—Item 1A. —Risk Factors”~~uncertainties, and factors that are discussed from time to time in the Company’s ~~Annual Report on Form 10-K.~~

●

~~the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized;~~reports and documents filed with the SEC.

●

~~disruption to the parties’ businesses as a result of the announcement and pendency of the merger;~~

●

~~the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement;~~

●

the risk that the integration of each party’s operations will be materially delayed or will be more costly or difficult than expected or that the parties are otherwise unable to successfully integrate each party’s businesses into the other’s businesses;

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●

the amount of the costs, fees, expenses and charges related to the merger; the ability by each of Allegiance and the Company to obtain required governmental approvals of the merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);

●

reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the merger; the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the merger;

●

~~the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;~~

●

~~the dilution caused by the Company’s issuance of additional shares of its common stock in the merger; general competitive, economic, political and market conditions;~~

●

~~and other factors that may affect future results of the Company and Allegiance, including changes in asset quality and credit risk;~~

●

~~the inability to sustain revenue and earnings growth;~~

●

~~changes in interest rates and capital markets;~~

●

~~inflation; customer borrowing, repayment, investment and deposit practices;~~

●

~~the impact, extent and timing of technological changes;~~

●

capital management activities; and other actions of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and OCC and legislative and regulatory actions and reforms;

●

~~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~~forward‑looking statements. Any ~~forward-looking~~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~~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~~forward‑looking statements.

Overview

~~The Company operates through one segment. The Company’s primary source~~

We generate most of ~~funds is deposits and its primary use of funds is loans. Most of the Company’s revenue is generated~~our income from interest income on loans, interest income from investments in securities and ~~investments. The Company incurs~~service charges on customer accounts. We incur interest expense on deposits and other borrowed funds ~~as well as~~and noninterest ~~expense,~~expenses such as salaries and employee benefits and occupancy expenses.

~~The Company’s operating results depend primarily on net~~ Net interest income ~~calculated as~~is the difference between interest income on ~~interest-earning~~earning assets such as loans and securities and interest expense on ~~interest-bearing~~ liabilities such as deposits and ~~borrowings. Changes in market~~borrowings that are used to fund those assets. Net interest ~~rates~~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 orand 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 ~~well 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 ~~liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin~~deposits and ~~net interest income.~~borrowed funds, referred to as a “rate change.” Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.

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Completion of Merger of Equals

Allegiance Bancshares, Inc. (“Allegiance”) merged with and into CBTX, Inc. (“CBTX”) with the surviving corporation renamed Stellar Bancorp, Inc. and at the effective 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, 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 June 30, 2022 reflect Allegiance results, while the results for the three and six months ended 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 ~~volume~~performance of the economy and ~~types of loans~~changes in the ~~Company’s loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting~~financial condition of borrowers. Management believes that determining the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within the Company’s target markets and throughout the state of Texas. The Company maintains diversity in its loan portfolio as a means of managing risk associated with fluctuations in economic conditions. The Company’s focus on lending to small to medium-sized businesses and professionals in its market areas has resulted in a diverse loan portfolio comprised primarily of core relationships. The

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~~Company carefully monitors exposure to certain asset classes to minimize the impact of a downturn in the value of such assets.~~

The Company seeks to remain competitive with respect to interest rates on loans and deposits, as well as prices on fee-based services, which are typically significant competitive factors within the banking and financial services industry. Many of the Company’s competitors are much larger financial institutions that have greater financial resources and compete aggressively for market share. Through the Company’s relationship-driven, community banking strategy, a significant portion of its growth has been through referral business from its existing customers and professionals in the Company’s markets including attorneys, accountants and other professional service providers.

~~Uncertain Economic Outlook~~

Although national and local economies and economic forecasts improved during 2021 and 2022, geopolitical instabilities, inflation, rising interest rates, supply disruptions and other uncertainties continue and these factors are considered in the forecasts and qualitative factors used to determine the Company’s ACL. If the national and/or local economies and economic forecasts and loan performance indicators worsen in the future, increases in the ACL through additional provisionsallowance for credit losses ~~may occur which would negatively impact net income. The future impact~~is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1 – Nature of ~~these items is uncertain but could materially affect the Company’s future financial~~Operations and ~~operational results. See “Part I—Item 1A.—Risk Factors”~~Summary of Significant Accounting and Reporting Policies in ~~the Company’s~~our Annual Report on Form ~~10-K.~~

10-K for the year ended December 31, 2022.

Allowance for Credit Losses

The ~~table below shows~~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 ~~trend~~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 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

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 ~~grades~~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 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 ~~loan portfolio, past due loans, loans individually evaluated and nonperforming loans,~~consolidated financial statements for a discussion of recent accounting pronouncements that have been adopted by the Company or ~~loan performance indicators as of~~that will require enhanced disclosures in the ~~dates indicated.~~

June 30,

March 31,

December 31,

September 30,

June 30,
(Dollars in thousands)

2022

2021

2021

2021

2021
Risk grades:

Pass

$
2,972,739

$
2,804,237

$
2,783,385

$
2,526,395

$
2,645,811
Special mention

468

4,281

12,807

4,661

14,276
Substandard

68,768

80,460

80,235

86,501

80,535
Total gross loans

$
3,041,975

$
2,888,978

$
2,876,427

$
2,617,557

$
2,740,622
Past due loans:

30 to 59 days past due

$
537

$
13,603

$
905

$
2,755

$
39
60 to 89 days past due

4,611

2,032

34

143

—
90 days or greater past due

10,276

140

197

104

217
Total past due loans

$
15,424

$
15,775

$
1,136

$
3,002

$
256
Loans individually evaluated:

Accruing troubled debt restructurings

$
26,117

$
28,428

$
30,709

$
31,656

$
31,789
Non-accrual troubled debt restructurings

22,761

21,720

20,019

17,834

18,196
Total troubled debt restructurings

48,878

50,148

50,728

49,490

49,985
Other non-accrual

5,512

363

2,549

2,751

2,777
Other accruing

1,152

3,494

5,995

5,260

836
Total loans individually evaluated

$
55,542

$
54,005

$
59,272

$
57,501

$
53,598
Nonperforming assets:

Nonaccrual loans

$
28,273

$
22,083

$
22,568

$
20,585

$
20,973
Accruing loans 90 or more days past due

—

—

—

—

—
Total nonperforming loans

28,273

22,083

22,568

20,585

20,973
Foreclosed assets

—

—

—

—

—
Total nonperforming assets

$
28,273

$
22,083

$
22,568

$
20,585

$
20,973

Company’s financial statements in future periods.

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Results of Operations

Net income was $35.2 million, or $0.66 per diluted share, for the second quarter 2023 compared to $16.4 million, or $0.56 per diluted share, for the second quarter 2022. The increase in net income ~~during~~was primarily due to a $50.8 million increase in net interest income and a $2.8 million increase in noninterest income, partially offset by a $31.3 million increase in noninterest expense and a $3.8 million increase in the provision for income taxes, all primarily resulting from the Merger. Acquisition and merger-related expenses totaled $2.9 million for the second quarter of 2023 compared $1.7 million for the second quarter of 2022.

Annualized returns on average assets, returns on average equity and efficiency ratios were 1.31%, 9.67% and 60.83%, for the three months ended June 30, 2023, compared to 0.94%, 8.86% and 62.96%, for the three months ended 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 June 30, 2023 compared with three months ended June 30, 2022. Net interest income before the provision for credit losses for the three months ended June 30, 2023 was $108.3 million compared with $57.5 million for the three months ended June 30, 2022, an increase of $50.8 million, or 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 $147.0 million for the three months ended June 30, 2023, an increase of $84.1 million, or 133.9%, compared with $62.8 million for the three months ended June 30, 2022, primarily due to the Merger as average interest-earning assets balances increased along with increased rates, higher-yielding loans and purchase accounting adjustments. Average interest-earning assets increased $3.08 billion, or 46.5%, for the three months ended June 30, 2023 compared with the three months ended June 30, 2022, primarily due to the increase in loans as a result of the Merger. 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 June 30, 2023.

Interest expense was $38.7 million for the three months ended 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 2.86% for the three months ended June 30, 2023 compared to 0.56% for the same period in 2022. Average interest-bearing liabilities increased $1.56 billion for the three months ended June 30, 2023 compared to the three 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 three months ended June 30, 2023 was 4.49%, an increase of 96 basis points compared to 3.53% for the three 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 6.08% and the average rate paid on interest-bearing liabilities of 2.86% for the second quarter of 2023 increased by 227 basis points and 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 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 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
Interest-earning Assets:
Loans	$	7,980,856	$	133,931	6.73	%	$	4,303,714	$	53,835	5.02	%
Securities	1,502,949		10,162		2.71	%	1,778,745		8,128		1.83	%
Deposits in other financial institutions	209,722		2,865		5.48	%	535,546		877		0.66	%
Total interest-earning assets	9,693,527		$	146,958	6.08	%	6,618,005		$	62,840	3.81	%
Allowance for credit losses on loans	(96,414)						(49,290)
Noninterest-earning assets	1,143,025						450,584
Total assets	$	10,740,138					$	7,019,299

Liabilities and Shareholders' Equity
Interest-bearing Liabilities:
Interest-bearing demand deposits	$	1,387,604	$	9,343	2.70	%	$	1,044,493	$	927	0.36	%
Money market and savings deposits	2,220,827		11,365		2.05	%	1,566,376		932		0.24	%
Certificates and other time deposits	1,225,834		9,622		3.15	%	1,088,664		1,922		0.71	%
Borrowed funds	479,896		6,535		5.46	%	50,116		114		0.91	%
Subordinated debt	109,499		1,812		6.64	%	109,045		1,463		5.38	%
Total interest-bearing liabilities	5,423,660		$	38,677	2.86	%	3,858,694		$	5,358	0.56	%

Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits	3,779,594						2,382,230
Other liabilities	78,411						34,249
Total liabilities	9,281,665						6,275,173
Shareholders' equity	1,458,473						744,126
Total liabilities and shareholders' equity	$	10,740,138					$	7,019,299

Net interest rate spread					3.22	%					3.25	%

Net interest income and margin(1)			$	108,281	4.48	%			$	57,482	3.48	%

Net interest income and margin (tax equivalent)(2)			$	108,509	4.49	%			$	58,238	3.53	%

Cost of funds					1.69	%					0.34	%
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 June 30, 2023 and 2022.

Table of Contents

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, ~~2021, was~~2022 primarily due to ~~an increase in~~the Merger.

Tax equivalent net interest margin, defined as net interest income ~~and noninterest~~adjusted for tax-free income ~~partially offset~~divided by an increase in the provision (recapture) for credit losses. The increase in net income during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was primarily due to an increase in net interest income and a decrease in noninterest expense, partially offset by an increase in the provision (recapture) for credit losses. See further analysis of the material fluctuations in the related discussions that follow.

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in thousands)

2022

2021

Increase (Decrease)

2022

2021

Increase (Decrease)
Interest income

$
36,101

$
32,506

$
3,595

11.1%

$
70,116

$
67,167

$
2,949

4.4%
Interest expense

1,229

1,488

(259)

(17.4%)

2,614

3,059

(445)

(14.5%)
Net interest income

34,872

31,018

3,854

12.4%

67,502

64,108

3,394

5.3%
Provision (recapture) for credit losses

126

(5,083)

5,209

(102.5%)

561

(4,671)

5,232

(112.0%)
Noninterest income

3,546

3,491

55

1.6%

8,875

6,602

2,273

34.4%
Noninterest expense

23,758

25,197

(1,439)

(5.7%)

48,410

48,482

(72)

(0.1%)
Income before income taxes

14,534

14,395

139

1.0%

27,406

26,899

507

1.9%
Income tax expense

2,827

2,692

135

5.0%

5,104

5,177

(73)

(1.4%)
Net income

$
11,707

$
11,703

$
4

0.0%

$
22,302

$
21,722

$
580

2.7%
Earnings per share - basic

$
0.48

$
0.48

$
0.91

$
0.89

Earnings per share - diluted

0.48

0.48

0.91

0.88

Dividends per share

0.13

0.13

0.26

0.26

~~Net Interest Income for the Six Months Ended June 30, 2022, Compared to the Six Months Ended June 30, 2021~~

~~Net interest income increased $3.4 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due higher~~ average rates on interest-bearing deposits at other financial institutions and securities, higher average securities and loans and lower rates on interest-bearing deposits, partially offset by lower rates on loans.

~~The yield on~~ interest-earning assets, ~~was 3.44%~~ for the six months ended June 30, ~~2022,~~2023 was 4.64%, an increase of 123 basis points compared to ~~3.62%~~3.41% for the six months ended June 30, ~~2021.~~2022. The ~~cost of interest-bearing liabilities was 0.26% for~~increase in the six months ended June 30, 2022 and 0.33% for the six months ended June 30, 2021. Yields on interest-earning assets decreased and the costs of interest-bearing liabilities remained at about the same level, which caused compression of the Company’s net interest margin on a tax equivalent basis was primarily due to ~~3.35%~~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, ~~compared~~thus making tax-exempt yields comparable to ~~3.49% for the six months ended June 30, 2021.~~

taxable asset yields.

Table of ~~Contents~~Contents

The following table presents, for the periods indicated, the total dollar amount of average ~~outstanding~~ balances, ~~for each major category of~~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.


	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 ~~or interest expense and the~~divided by average ~~yield or~~interest-earning assets.

(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the ~~periods indicated.~~

Six Months Ended June 30,

2022

2021

Average

Interest

Average

Average

Interest

Average

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/
(Dollars in thousands)

Balance

Interest Paid

Rate⁽¹⁾

Balance

Interest Paid

Rate⁽¹⁾
Assets

Interest-earning assets:










Total loans⁽¹⁾

$
2,892,079

$
62,989

4.39%

$
2,868,463

$
63,958

4.50%
Securities

530,259

5,229

1.99%

281,196

2,505

1.80%
Interest-bearing deposits at other financial institutions

680,477

1,586

0.47%

573,433

400

0.14%
Equity investments

13,383

312

4.70%

15,346

304

3.99%
Total interest-earning assets

4,116,198

$
70,116

3.44%

3,738,438

$
67,167

3.62%
Allowance for credit losses for loans

(31,340)





(40,941)




Noninterest-earning assets

311,482





318,520




Total assets

$
4,396,340





$
4,016,017




Liabilities and Shareholders’ Equity












Interest-bearing liabilities:












Interest-bearing deposits

$
1,979,578

$
2,342

0.24%

$
1,821,098

$
2,617

0.29%
Federal Home Loan Bank advances

27,624

272

1.99%

50,000

442

1.78%
Total interest-bearing liabilities

2,007,202

$
2,614

0.26%

1,871,098

$
3,059

0.33%
Noninterest-bearing liabilities:












Noninterest-bearing deposits

1,794,239





1,545,242




Other liabilities

46,406





48,503




Total noninterest-bearing liabilities

1,840,645





1,593,745




Shareholders’ equity

548,493





551,174




Total liabilities and shareholders’ equity

$
4,396,340





$
4,016,017




Net interest income



$
67,502





$
64,108


Net interest spread⁽³⁾





3.18%





3.29%
Net interest margin⁽⁴⁾





3.31%





3.46%
Net interest margin - tax equivalent⁽⁵⁾





3.35%





3.49%

~~(1)~~

~~Annualized.~~six months ended June 30, 2023 and 2022.

~~(2)~~

~~Includes average outstanding balances related to loans held for sale.~~

~~(3)~~

~~Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.~~

~~(4)~~

~~Net interest margin is equal to net interest income divided by average interest-earning assets.~~

~~(5)~~

~~Tax equivalent adjustments of $941,000 and $621,000 for the six months ended June 30, 2022 and 2021, respectively, were computed using a federal income tax rate of 21%.~~

Table of ~~Contents~~Contents

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of ~~interest-earning~~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.

Six Months Ended June 30, 2022,

Compared to Six Months Ended June 30, 2021


Increase (Decrease) due to

(Dollars in thousands)

Rate

Volume

Total
Interest-earning assets:

Total loans

$
(1,496)

$
527

$
(969)
Securities

501

2,223

2,724
Interest-bearing deposits at other financial institutions

1,112

74

1,186
Equity investments

47

(39)

8
Total increase in interest income

164

2,785

2,949
Interest-bearing liabilities:






Interest-bearing deposits

(503)

228

(275)
Federal Home Loan Bank advances

28

(198)

(170)
Total increase (decrease) in interest expense

(475)

30

(445)
Increase in net interest income

$
639

$
2,755

$
3,394

~~Net Interest Income~~


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

Interest-bearing Liabilities:
Interest-bearing demand deposits	308		8,108		8,416		639		15,610		16,249
Money market and savings deposits	392		10,041		10,433		851		18,439		19,290
Certificates and other time deposits	243		7,457		7,700		(423)		9,274		8,851
Borrowed funds	975		5,446		6,421		965		6,587		7,552
Subordinated debt	6		343		349		13		821		834
Total increase in interest expense	1,924		31,395		33,319		2,045		50,731		52,776
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 ~~Three Months Ended June 30, 2022, Compared~~form of the provision in order to ~~the Three Months Ended June 30, 2021~~

Net interest income increased $3.9 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to higher rates on interest-earning assets, higher averagebring our allowance for credit losses for various types of financial instruments including loans, unfunded commitments and securities ~~lower rates on deposits~~to a level deemed appropriate by management. We recorded a provision for credit losses of $1.9 million and ~~lower average Federal Home Loan Bank advances.~~

~~The yield on interest-earning assets was 3.56%~~$2.1 million for the three months ended June 30, ~~2022, compared to 3.41% for the three months ended June 30, 2021. The cost of interest-bearing liabilities was 0.25% for the three months ended June 30, 2022~~2023 and 0.32% for the three months ended June 30, 2021. The Company’s net interest margin on a tax equivalent basis was 3.49% for the three months ended June 30, 2022, compared to 3.29% for the three months ended June 30, 2021.

~~Table of Contents~~

The following table presents for the periods indicated, average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest income or interest expense and the average yield or rate for the periods indicated.

Three Months Ended June 30,

2022

2021

Average

Interest

Average

Average

Interest

Average

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/
(Dollars in thousands)

Balance

Interest Paid

Rate⁽¹⁾

Balance

Interest Paid

Rate⁽¹⁾
Assets

Interest-earning assets:












Total loans⁽²⁾

$
2,897,335

$
31,768

4.40%

$
2,835,995

$
30,793

4.36%
Securities

562,518

2,937

2.09%

302,808

1,332

1.76%
Interest-bearing deposits at other financial institutions

593,255

1,238

0.84%

670,508

223

0.13%
Equity investments

13,386

158

4.73%

15,338

158

4.13%
Total interest-earning assets

4,066,494

$
36,101

3.56%

3,824,649

$
32,506

3.41%
Allowance for credit losses for loans

(31,081)





(40,806)




Noninterest-earning assets

315,133





317,115




Total assets

$
4,350,546





$
4,100,958




Liabilities and Shareholders’ Equity












Interest-bearing liabilities:












Interest-bearing deposits

$
1,939,990

$
1,178

0.24%

$
1,839,812

$
1,267

0.28%
Federal Home Loan Bank advances

5,495

51

3.72%

50,000

221

1.77%
Total interest-bearing liabilities

1,945,485

$
1,229

0.25%

1,889,812

$
1,488

0.32%
Noninterest-bearing liabilities:












Noninterest-bearing deposits

1,825,400





1,611,565




Other liabilities

42,861





46,774




Total noninterest-bearing liabilities

1,868,261





1,658,339




Shareholders’ equity

536,800





552,807




Total liabilities and shareholders’ equity

$
4,350,546





$
4,100,958




Net interest income



$
34,872





$
31,018


Net interest spread⁽³⁾





3.31%





3.09%
Net interest margin⁽⁴⁾





3.44%





3.25%
Net interest margin - tax equivalent⁽⁵⁾





3.49%





3.29%

~~(1)~~

~~Annualized.~~

~~(2)~~

~~Includes average outstanding balances related to loans held for sale.~~

~~(3)~~

~~Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.~~

~~(4)~~

~~Net interest margin is equal to net interest income divided by average interest-earning assets.~~

~~(5)~~

~~Tax equivalent adjustments of $478,000 and $321,000 for the three months ended June 30, 2022 and 2021, respectively, were computed using a federal income tax rate of 21%.~~

~~Table of Contents~~

The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

Three Months Ended June 30, 2022,

Compared to Three Months Ended June 30, 2021


Increase (Decrease) due to

(Dollars in thousands)

Rate

Volume

Total
Interest-earning assets:

Total loans

$
308

$
667

$
975
Securities

465

1,140

1,605
Interest-bearing deposits at other financial institutions

1,040

(25)

1,015
Equity investments

20

(20)

—
Total increase in interest income

1,833

1,762

3,595
Interest-bearing liabilities:






Interest-bearing deposits

(159)

70

(89)
Federal Home Loan Bank advances

26

(196)

(170)
Total decrease in interest expense

(133)

(126)

(259)
Increase in net interest income

$
1,966

$
1,888

$
3,854

~~Provision for Credit Losses~~

~~The provision for credit losses was $126,000 and $561,000 for the three and six months ended June 30,~~ 2022, respectively, ~~compared to~~and a ~~recapture of $5.1~~$5.6 million and ~~$4.7~~$4.0 million ~~for the three and six months ended June 30, 2021, respectively.~~

~~The~~ provision for credit losses for the ~~three months and~~ six months ended June 30, 2023 and 2022, ~~was comprised of a $479,000 and $499,000~~respectively. The provision for credit losses for loans, respectively, due to increases in the loan portfolio and a $353,000 recapture and a $62,000 provision for credit losses, respectively, due to fluctuations in available unfunded commitments.

~~The recapture of~~ credit losses for the three and six months ended June 30, ~~2021 were the result of certain qualitative factor adjustments made on the ACL. Due to improvements~~2023 and 2022, primarily resulted from an increase in ~~the national economy, economic forecasts and improved loan quality~~loans during those periods, ~~the Company adjusted its economic forecasts and certain loan quality~~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 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 June 30, 2023 compared with three months ended June 30, 2022. Noninterest income totaled $5.5 million for the three months ended June 30, 2023 compared with $2.7 million for the same period in 2022, an increase of $2.8 million, or 102.8%, primarily due to increased debt card and ATM income and service charges due to increased scale as a result of the Merger.

Six months ended June 30, 2023 compared with six months ended June 30, 2022. Noninterest income totaled $13.0 million for the six months ended 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 ATM income and service charges due to increased scale as a result of the Merger.

Table of Contents

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


	For the Three Months Ended June 30,				Increase (Decrease)		For the Six Months Ended June 30,				Increase (Decrease)
	2023		2022				2023		2022
	(In thousands)
Nonsufficient funds fees	$	418	$	126	$	292	$	824	$	242	$	582
Service charges on deposit accounts	1,157		560		597		2,100		1,087		1,013
(Loss) gain on sale of assets	(6)		(17)		11		192		(17)		209
Bank-owned life insurance income	532		342		190		1,054		475		579
Debit card and ATM card income	1,821		880		941		3,519		1,699		1,820
Other(1)	1,561		813		748		5,292		3,236		2,056
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 June 30, 2023 compared with three months ended June 30, 2022. Noninterest expense was $69.2 million for the three months ended June 30, 2023 compared to $37.9 million for the three months ended June 30, 2022, an increase of $31.3 million, or 82.6%, 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.

Six months ended June 30, 2023 compared with six months ended June 30, 2022. Noninterest expense was $141.8 million for the 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 June 30,				Increase (Decrease)		For the Six Months Ended June 30,				Increase (Decrease)
	2023		2022				2023		2022
	(In thousands)
Salaries and employee benefits(1)	$	37,300	$	21,864	$	15,436	$	77,075	$	44,592	$	32,483
Net occupancy and equipment	3,817		2,220		1,597		7,905		4,425		3,480
Depreciation	1,841		1,012		829		3,677		2,045		1,632
Data processing and software amortization	4,674		2,522		2,152		9,728		5,020		4,708
Professional fees	1,564		662		902		3,091		800		2,291
Regulatory assessments and FDIC insurance	2,755		1,256		1,499		4,049		2,517		1,532
Amortization of intangibles	6,881		751		6,130		13,760		1,502		12,258
Communications	689		363		326		1,390		704		686
Advertising	907		483		424		1,746		945		801
Acquisition and merger-related expenses	2,897		1,667		1,230		9,062		2,118		6,944
Other	5,882		5,104		778		10,322		7,753		2,569
Total noninterest expense	$	69,207	$	37,904	$	31,303	$	141,805	$	72,421	$	69,384

(1)Total salaries and employee benefits includes $2.8 million and $931 thousand for the three months ended 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.

Table of Contents

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

Acquisition and merger-related expenses. Acquisition and merger-related expenses of $2.9 million and $9.1 million incurred during the three and six months ended June 30, ~~2022~~2023, respectively, were primarily related to compensation and ~~2021~~legal and advisory fees associated with the ~~period-over-period changes in~~Merger.

Amortization of intangibles. Amortization of intangibles increased $6.1 million for the ~~categories of noninterest income:~~

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in thousands)

2022

2021

Increase (Decrease)

2022

2021

Increase (Decrease)
Deposit account service charges

$
1,386

$
1,167

$
219

18.8%

$
2,756

$
2,360

$
396

16.8%
Card interchange fees

1,135

1,095

40

3.7%

2,172

2,071

101

4.9%
Earnings on bank-owned life insurance

371

390

(19)

(4.9%)

742

780

(38)

(4.9%)
Net gain on sales of assets

58

366

(308)

(84.2%)

588

558

30

5.4%
Other

596

473

123

26.0%

2,617

833

1,784

214.2%
Total noninterest income

$
3,546

$
3,491

$
55

1.6%

$
8,875

$
6,602

$
2,273

34.4%

~~The increase in noninterest income of $2.3~~three months ended June 30, 2023 and $12.3 million ~~during~~for the six months ended June 30, ~~2022,~~2023 compared to the 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 60.83% for the three months ended June 30, 2023 compared to 62.96% for the three months ended June 30, 2022 and 59.86% for the six months ended June 30, 2021, was primarily due to payments totaling $1.5 million recognized for early termination of a land lease included in other noninterest income and a gain of $1.2 million for sales of assets underlying a portion of the Company’s equity investments, partially offset by a loss of $1.2 million included in net gain on sale of assets for disposals

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~~of buildings and improvements and furniture and equipment for the land lease that was terminated early. See “Part I—Item 1.—Financial Statements—Note 3”.~~

Noninterest income was $3.5 million for both the second quarter of 2022 and 2021. Deposit account service charge income was $219,000 higher and net gains on sales of assets were $308,000 lower in the second quarter of 2022,2023 compared to ~~the second quarter of 2021.~~

~~Noninterest Expense~~

Generally, noninterest expense is composed of employee expenses and costs associated with operating facilities, obtaining and retaining customer relationships and providing bank services. See further analysis of these changes in the related discussions that follow.

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in thousands)

2022

2021

Increase (Decrease)

2022

2021

Increase (Decrease)
Salaries and employee benefits

$
14,698

$
14,734

$
(36)

(0.2%)

$
29,952

$
28,922

$
1,030

3.6%
Occupancy expense

2,396

2,597

(201)

(7.7%)

4,767

5,118

(351)

(6.9%)
Professional and director fees

1,142

2,441

(1,299)

(53.2%)

2,021

4,144

(2,123)

(51.2%)
Data processing and software

1,458

1,661

(203)

(12.2%)

3,221

3,237

(16)

(0.5%)
Regulatory fees

803

501

302

60.3%

1,417

1,057

360

34.1%
Advertising, marketing and business development

366

510

(144)

(28.2%)

615

795

(180)

(22.6%)
Telephone and communications

349

550

(201)

(36.5%)

803

1,013

(210)

(20.7%)
Security and protection expense

170

537

(367)

(68.3%)

494

927

(433)

(46.7%)
Amortization of intangibles

172

186

(14)

(7.5%)

353

377

(24)

(6.4%)
Other expenses

2,204

1,480

724

48.9%

4,767

2,892

1,875

64.8%
Total noninterest expense

$
23,758

$
25,197

$
(1,439)

(5.7%)

$
48,410

$
48,482

$
(72)

(0.1%)

~~Noninterest expense decreased $1.4 million and $72,000 for the three and six months ended June 30, 2022, respectively, compared to the three and six months ended June 30, 2021.~~

~~The decrease in noninterest expense~~60.66% for the six months ended June 30, 2022, ~~compared~~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 ~~the six months ended June 30, 2021, was primarily due~~continue to ~~a $2.1 million decrease~~benefit from our scalable platform in ~~professional and director fees, primarily related~~future periods as we continue to ~~BSA/AML compliance matters and legal fees, partially offset by higher salaries and employee benefits, primarily due~~monitor overhead expenses necessary to ~~higher health insurance expense and $1.8 million of costs related to the pending merger with Allegiance.~~

The decrease in noninterest expense for the second quarter of 2022, compared to the second quarter of 2021, was primarily due to a $1.3 million decrease in professional and director fees, primarily related to BSA/AML compliance matters and decrease in legal fees, partially offset by $1.0 million of costs related to the pending merger with Allegiance.

support our growth.

Income ~~Tax Expense~~

Taxes

The amount of federal and state income tax expense is ~~impacted~~influenced by the ~~amounts~~amount of pre-tax income, tax-exempt income and other nondeductible expenses. Income tax expense increased $3.8 million for the three months ended June 30, 2023 and $9.5 million for the six months ended June 30, 2023 compared with the same periods in 2022 primarily due to the increase in pre-tax net income. Our effective tax ~~rates~~rate was 17.5% and 18.4% for the ~~periods indicated below~~three months ended 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 June 30, 2023, total loans were $8.07 billion, an increase of $314.0 million, or 4.0%, compared with December 31, 2022, primarily due to organic growth within our loan portfolio during the six months ended June 30, 2023. Total loans as ~~follows:~~

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

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The ~~differences between~~following table summarizes our loan portfolio by type of loan as of the ~~federal statutory rate~~dates indicated:


	June 30, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
Commercial and industrial	$	1,512,476	18.7	%	$	1,455,795	18.8	%
Paycheck Protection Program (PPP)	8,027		0.1	%	13,226		0.2	%
Real estate:
Commercial real estate (including multi-family residential)	4,038,487		50.0	%	3,931,480		50.7	%
Commercial real estate construction and land development	1,136,124		14.1	%	1,037,678		13.4	%
1-4 family residential (including home equity)	1,009,439		12.5	%	1,000,956		12.9	%
Residential construction	311,208		3.9	%	268,150		3.4	%
Consumer and other	52,957		0.7	%	47,466		0.6	%
Total loans	8,068,718		100.0	%	7,754,751		100.0	%
Allowance for credit losses on loans	(100,195)				(93,180)
Loans, net	$	7,968,523			$	7,661,571

Our lending activities originate from the efforts of ~~21%~~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 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 ~~effective tax rates presented~~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 ~~table above were primarily related~~basis of the borrower’s ability to ~~tax exempt interest income, bank-owned life insurance~~service the debt from income. In general, commercial loans involve more credit risk than residential mortgage loans and ~~merger-related costs.~~

~~Table~~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 ~~Contents~~

~~Financial Condition~~

~~Total assets were $4.3~~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 $56.7 million, or 3.9%, to $1.51 billion as of June 30, ~~2022, compared to $4.5~~2023 from $1.46 billion as of December 31, ~~2021.~~2022.

Paycheck Protection Program (PPP). The ~~decrease~~balance of ~~$163.7~~PPP loans decreased $5.2 million to $8.0 million as of 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 June 30, 2023 and December 31, 2022, 45.8% and 45.3%, respectively, of our commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio increased $107.0 million, or ~~3.6%~~2.7%, ~~was~~to $4.04 billion as of June 30, 2023 from $3.93 billion as of December 31, 2022, primarily ~~due~~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 June 30, 2023 decreased to $431.3 million from $471.6 million as of December 31, 2022. We had 233 multi-family loans with an average loan size of $2.0 million as of June 30, 2023.

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

Commercial Real Estate Construction and Land Development. 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 ~~$466.2~~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 June 30, 2023 and December 31, 2022, 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 increased $98.4 million, or 9.5%, to $1.14 billion as of June 30, 2023 compared to $1.04 billion as of December 31, 2022.

As of June 30, 2023, the Company’s commercial relate estate construction and land development portfolio included $161.4 million of construction and development loans to support multifamily community development loans with associated tax credits, which fund Texas-based projects to promote affordable housing, 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 $8.5 million, or 0.8%, to $1.01 billion as of 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 $43.1 million, or 16.1%, to $311.2 million as of June 30, 2023 from $268.2 million as of December 31, 2022.

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 ~~cash~~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 ~~cash equivalents, partially offset~~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 $5.5 million, or 11.6%, to $53.0 million as of 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 $43.3 million, or 0.40% of total assets, at 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.


	June 30, 2023			December 31, 2022
	(Dollars in thousands)
Nonaccrual loans:
Commercial and industrial	$	22,800		$	25,297
Paycheck Protection Program (PPP)	168			105
Real estate:
Commercial real estate (including multi-family residential)	8,221			9,970
Commercial real estate construction and land development	388			—
1-4 family residential (including home equity)	10,880			9,404
Residential construction	665			—
Consumer and other	227			272
Total nonaccrual loans	43,349			45,048
Accruing loans 90 or more days past due	—			—
Total nonperforming loans	43,349			45,048
Other real estate	—			—
Total nonperforming assets	$	43,349		$	45,048
Modified/restructured loans(1)	$	11,291		$	35,425
Nonperforming assets to total assets	0.40		%	0.41		%
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 ~~$125.0~~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 107 separate credits at June 30, 2023 compared to 96 separate credits at December 31, 2022.

Allowance for Credit Losses

The allowance for credit losses is a valuation allowance that is established through charges to earnings in the form of a provision for (or reversal of) credit losses calculated in accordance with ASC 326, that is deducted from the amortized cost basis of certain assets to present the net amount expected to be collected. 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 June 30, 2023, our allowance for credit losses on loans was $100.2 million, or 1.24% of total loans, compared with $93.2 million, or 1.20%, of total loans as of December 31, 2022. The increase in ~~securities and a $165.4 million~~the allowance for credit losses on loans during the first six months of 2023 reflected an increase in loans ~~excluding loans held~~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 Six Months Ended June 30,
	2023			2022
	(Dollars in thousands)
Average loans outstanding	$	7,914,303		$	4,267,810
Gross loans outstanding at end of period	8,068,718			4,348,833
Allowance for credit losses on loans at beginning of period	93,180			47,940
Provision for credit losses on loans	7,443			3,190
Charge-offs:
Commercial and industrial loans	(1,484)			(956)
Real estate:
Commercial real estate (including multi-family residential)	—			(327)
Commercial real estate construction and land development	—			(63)
1-4 family residential (including home equity)	(23)			—
Residential construction	—			—
Consumer and other	(38)			(48)
Total charge-offs for all loan types	(1,545)			(1,394)
Recoveries:
Commercial and industrial loans	1,069			401
Real estate:
Commercial real estate (including multi-family residential)	14			50
Commercial real estate construction and land development	—			55
1-4 family residential (including home equity)	9			—

Consumer and other	25			—
Total recoveries for all loan types	1,117			506
Net charge-offs	(428)			(888)
Allowance for credit losses on loans at end of period	$	100,195		$	50,242
Allowance for credit losses on loans to total loans	1.24		%	1.16		%
Net charge-offs to average loans(1)	0.01		%	0.04		%
Allowance for credit losses on loans to nonperforming loans	231.14		%	178.01		%

(1)Interim periods annualized.

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 June 30, 2023, our allowance for credit losses on unfunded commitments was $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 June 30, 2023, the carrying amount of investment securities totaled $1.48 billion, a decrease of $329.4 million, or 18.2%, compared with $1.81 billion as of December 31, 2022. Securities represented 13.7% and 16.6% of total assets as of June 30, 2023 and December 31, 2022, respectively.

All of the securities in our securities portfolio are classified as available for sale. ~~Total liabilities were $3.8 billion and $3.9 billion~~Securities classified as available for sale are measured at ~~June 30, 2022 and December 31, 2021, respectively. See further analysis~~fair value in the ~~related discussions that follow.~~

(Dollars in thousands)

June 30, 2022

December 31, 2021

Increase (Decrease)
Assets:

Loans excluding loans held for sale

$
3,032,914

$
2,867,524

$
165,390

5.8%
Allowance for credit losses

(32,087)

(31,345)

742

2.4%
Loans, net

3,000,827

2,836,179

164,648

5.8%
Cash and cash equivalents

483,966

950,146

(466,180)

(49.1%)
Securities

550,083

425,046

125,037

29.4%
Premises and equipment

56,010

58,417

(2,407)

(4.1%)
Goodwill

80,950

80,950

—

—
Other intangible assets

3,353

3,658

(305)

(8.3%)
Loans held for sale

—

164

(164)

(100.0%)
Operating lease right-to-use asset

11,324

11,191

133

1.2%
Other assets

135,790

120,250

15,540

12.9%
Total assets

$
4,322,303

$
4,486,001

$
(163,698)

(3.6%)
Liabilities:

Noninterest-bearing deposits

$
1,810,275

$
1,784,981

$
25,294

1.4%
Interest-bearing deposits

1,946,359

2,046,303

(99,944)

(4.9%)
Total deposits

3,756,634

3,831,284

(74,650)

(1.9%)
Federal Home Loan Bank advances

—

50,000

(50,000)

(100.0%)
Operating lease liabilities

14,169

14,142

27

0.2%
Other liabilities

24,821

28,450

(3,629)

(12.8%)
Total liabilities

3,795,624

3,923,876

(128,252)

(3.3%)
Shareholders' equity

526,679

562,125

(35,446)

(6.3%)
Total liabilities and shareholders' equity

$
4,322,303

$
4,486,001

$
(163,698)

(3.6%)

~~Table~~financial statements with unrealized gains and losses reported, net of ~~Contents~~

~~Loan Portfolio~~

tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income. The ~~components~~following table summarizes the amortized cost and fair value of the ~~loan~~securities in our securities portfolio as of the dates ~~indicated was~~shown:


	June 30, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Available for Sale
U.S. government and agency securities	$	420,321	$	156	$	(15,595)	$	404,882
Municipal securities	259,423		2,177		(32,402)		229,198
Agency mortgage-backed pass-through securities	385,780		272		(41,671)		344,381
Agency collateralized mortgage obligations	455,153		1		(66,382)		388,772
Corporate bonds and other	124,626		53		(13,690)		110,989
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 ~~follows:~~

(Dollars in thousands)

June 30, 2022

December 31, 2021

Increase (Decrease)
Commercial and industrial:

Oil and gas
$

114,039

$
135,081

$
(21,042)

(15.6%)
Industrial construction

70,523

67,618

2,905

4.3%
Equipment rental

64,641

60,206

4,435

7.4%
Professional/medical

56,990

57,365

(375)

(0.7%)
Manufacturing

32,364

31,120

1,244

4.0%
PPP loans

9,157

54,262

(45,105)

(83.1%)
Other

233,729

228,732

4,997

2.2%
Total commercial and industrial

581,443

634,384

(52,941)

(8.3%)
Commercial real estate:

Non-owner occupied

628,190

581,229

46,961

8.1%
Owner occupied

486,146

443,853

42,293

9.5%
Oil and gas

67,284

66,887

397

0.6%
Total commercial real estate

1,181,620

1,091,969

89,651

8.2%
Construction and development:

Land and development

206,175

177,506

28,669

16.2%
Commercial

153,914

107,663

46,251

43.0%
Multi-family community development

134,083

119,363

14,720

12.3%
1-4 family - commercial

42,023

39,345

2,678

6.8%
1-4 family - primary

23,254

14,285

8,969

62.8%
Oil and gas

1,454

2,557

(1,103)

(43.1%)
Total construction and development

560,903

460,719

100,184

21.7%
Multi-family residential:

Multi-family community development

249,722

238,913

10,809

4.5%
Other

50,860

47,483

3,377

7.1%
Total multi-family residential

300,582

286,396

14,186

5.0%
Total commercial loans

2,624,548

2,473,468

151,080

6.1%
1-4 family residential

264,428

277,273

(12,845)

(4.6%)
Consumer

26,810

28,090

(1,280)

(4.6%)
Other loans

117,851

89,309

28,542

32.0%
Agriculture

8,036

7,941

95

1.2%
Other oil and gas loans

302

346

(44)

(12.7%)
Total gross loans

3,041,975

2,876,427

165,548

5.8%
Less deferred fees and unearned discount

(9,061)

(8,739)

(322)

3.7%
Less loans held for sale

—

(164)

164

(100.0%)
Loans excluding loans held for sale

3,032,914

2,867,524

165,390

5.8%
Less allowance for credit losses for loans

(32,087)

(31,345)

(742)

2.4%
Loans, net

$
3,000,827

$
2,836,179

$
164,648

5.8%

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 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 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.


	June 30, 2023
	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	$	76,474	0.55	%	$	173,661	0.92	%	$	14,419	4.82	%	$	155,767	4.83	%	$	420,321	2.47	%
Municipal securities	—		—	%	2,895		4.46	%	55,437		2.82	%	201,091		2.79	%	259,423		2.81	%
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	—		—	%	17,251		2.80	%	7,970		2.68	%	429,932		1.55	%	455,153		1.62	%
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	$	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 June 30, 2023 and December 31, 2022, ~~loans excluding loans held~~we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for ~~sale~~which the aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity.

The average yield of our securities portfolio was 2.74% during the six months ended June 30, 2023 compared with 1.75% for the six months ended 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.

Goodwill and Core Deposit Intangibles

Our goodwill was $497.3 million as of both 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 June 30, 2023 was $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 June 30, 2023 were ~~$3.0~~$8.77 billion, a decrease of $501.3 million, or 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 June 30, 2023 were $3.71 billion, a decrease of $516.6 million, or 12.2%, compared with $4.23 billion at December 31, 2022. Interest-bearing deposits at June 30, 2023 were $5.05 billion, an increase of ~~$165.4~~$15.4 million, or ~~5.8%~~0.3%, compared towith $5.04 billion at December 31, ~~2021, primarily due to originations~~2022. Estimated uninsured deposits totaled $4.75 billion and estimated uninsured deposits net of collateralized deposits of $936 million were $3.82 billion, or 43.5%, of total deposits at 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 June 30, 2023
	(In thousands)
Three months or less	$	199,784
Over three months through six months	171,492
Over six months through 12 months	75,055
Over 12 months	55,779
Total	$	502,110

Borrowings

We have an available line of credit ~~drawdowns outpacing paydowns.~~

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 June 30, 2023, we had a total borrowing capacity of $4.10 billion, of which $2.90 billion was available and $1.20 billion was outstanding in/through FHLB advances and letters of credit. There were $370.0 million of FHLB short-term advances outstanding at June 30, 2023 at a weighted-average rate of 5.45%. Letters of credit were $831.3 million at June 30, 2023, of which $91.0 million will expire during the remaining months of 2023, $45.0 million will expire in 2024, $148.0 million will expire in 2025, $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 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 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 June 30, 2023 was 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 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 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 2 capital treatment at June 30, 2023.

Credit Agreement

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 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 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%, 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 June 30, ~~2022,~~2023, we believe we were in compliance with all such debt covenants and had not been made aware of any noncompliance by the ~~Company had 49 loans outstanding funded~~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 ~~Paycheck Protection Program, or PPP, under~~customer. Management assesses the ~~CARES Act totaling $9.2 million.~~ 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 June 30, 2023 and December 31, ~~2021,~~2022, we had outstanding $1.92 billion and $2.36 billion, respectively, in commitments to extend credit and $38.5 million and $35.5 million in commitments associated with outstanding letters of credit for those same periods. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the ~~Company had 330 PPP loans totaling $54.3 million.~~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 six months ended June 30, ~~2022, payments for PPP loans totaled $45.1 million.~~

~~As of June 30, 2022~~2023 and the year ended December 31, ~~2021,~~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 ~~Company’s loan portfolio included $183.1 million~~Federal Reserve discount window and ~~$204.9 million, respectively,~~advances from the FHLB are available under a security and pledge agreement to take advantage of ~~loans directly or indirectly related~~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 ~~oil~~balance between sources and ~~gas industry. Oil and gas loans are loans with revenue related~~uses of funds as deemed appropriate. We regularly model liquidity stress scenarios to ~~well-head, oil~~assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the ~~ground~~financial markets, unexpected credit events or ~~extracting oil~~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.

Our largest source of funds is deposits and our largest use of funds is loans. Our average deposits increased $2.74 billion, or ~~gas, including any activity, product~~44.6%, and our average loans increased $3.65 billion, or ~~service related to the oil and gas industry, such as exploration and production, drilling, equipment, services, midstream companies, service~~

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~~companies and commercial real estate companies with significant reliance on oil and gas companies.~~

As of June 30, 2022 and December 31, 2021, the Company’s loan portfolio included $383.8 million and $358.3 million, respectively, of community development loans, which fund Texas based projects to promote affordable housing.

~~The contractual maturity ranges of loans in the loan portfolio and the amount of such loans with fixed and variable interest rates in each maturity range as of the date indicated were as follows:~~

1 Year

5 Years

After


(Dollars in thousands)

1 Year or Less

Through 5 Years

Through 15 Years

15 years

Total
June 30, 2022

Commercial and industrial:

Fixed rate

$
71,468

$
160,388

$
2,825

$
—

$
234,681
Variable rate

185,455

121,938

38,883

486

346,762

256,923

282,326

41,708

486

581,443
Real estate:


Commercial real estate:

Fixed rate

70,598

505,985

66,640

—

643,223
Variable rate

22,550

303,267

192,484

20,096

538,397

93,148

809,252

259,124

20,096

1,181,620
Construction and development:

Fixed rate

35,011

100,386

16,454

12,163

164,014
Variable rate

114,965

257,867

6,723

17,334

396,889

149,976

358,253

23,177

29,497

560,903
1-4 family residential:

Fixed rate

3,438

39,276

20,271

103,615

166,600
Variable rate

779

2,674

13,244

81,131

97,828

4,217

41,950

33,515

184,746

264,428
Multi-family residential:

Fixed rate

1,646

12,286

215,890

31,000

260,822
Variable rate

3,323

36,158

279

—

39,760

4,969

48,444

216,169

31,000

300,582
Consumer:

Fixed rate

6,297

8,665

—

—

14,962
Variable rate

10,311

984

553

—

11,848

16,608

9,649

553

—

26,810
Agriculture:

Fixed rate

4,929

1,115

—

—

6,044
Variable rate

1,964

28

—

—

1,992

6,893

1,143

—

—

8,036
Other:

Fixed rate

1,655

778

350

—

2,783
Variable rate

24,074

87,069

4,227

—

115,370

25,729

87,847

4,577

—

118,153
Total:

Fixed rate loans

195,042

828,879

322,430

146,778

1,493,129
Variable rate loans

363,421

809,985

256,393

119,047

1,548,846
Total gross loans

$
558,463

$
1,638,864

$
578,823

$
265,825

$
3,041,975

~~Table of Contents~~

~~Nonperforming Assets~~

Nonperforming assets include nonaccrual loans, loans that are accruing over 90 days past due and foreclosed assets. Generally, loans are placed on nonaccrual status when they become more than 90 days past due and/or the collection of principal or interest is in doubt. The components of nonperforming assets as of the dates indicated were as follows:

(Dollars in thousands)

June 30, 2022

December 31, 2021
Nonaccrual loans

$
28,273

$
22,568
Accruing loans 90 or more days past due

—

—
Total nonperforming loans

28,273

22,568
Foreclosed assets

—

—
Total nonperforming assets

$
28,273

$
22,568
Total assets

$
4,322,303

$
4,486,001
Loans excluding loans held for sale

3,032,914

2,867,524
Allowance for credit losses for loans

32,087

31,345
Allowance for credit losses for loans to nonaccrual loans

113.49%

138.89%
Nonperforming loans to loans excluding loans held for sale

0.93%

0.79%
Nonperforming assets to total assets

0.65%

0.50%

Nonperforming assets were $28.3 million, or 0.65% of total assets, as of June 30, 2022 and $22.6 million, or 0.50% of total assets, as of December 31, 2021. Nonperforming assets increased $5.7 million during85.4%, for the six months ended June 30, ~~2022, primarily due~~2023 compared to ~~two loans that were downgraded to nonaccrual.~~

~~Troubled Debt Restructurings~~

~~Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during~~ the six months ended June 30, ~~2022~~2022. Our estimated uninsured deposits totaled $4.75 billion and ~~2021, which remained outstanding as~~our estimated uninsured deposits net of ~~the end~~collateralized deposits of ~~those periods~~$936 million were ~~as follows:~~

Post-modification Recorded Investment

Extended

Maturity,

Pre-modification

Extended

Restructured

Outstanding

Maturity and

Payments

Number

Recorded

Restructured

Extended

Restructured

and Adjusted
(Dollars in thousands)

of Loans

Investment

Payments

Maturity

Payments

Interest Rate
June 30, 2022

Commercial and industrial

8

$
3,915

$
1,093

$
—

$
—

$
2,822
Real estate:

Commercial real estate

2

2,273

—

—

2,040

245
Construction and development

3

431

—

—

431

—
Total

13

$
6,619

$
1,093

$
—

$
2,471

$
3,067
June 30, 2021

Commercial and industrial

3

$
3,256

$
3,256

$
—

$
—

$
—
Real estate:

Commercial real estate

1

1,206

1,206

—

—

—
1-4 family residential

1

1,548

1,548

—

—

—
Total

5

$
6,010

$
6,010

$
—

$
—

$
—

~~Table~~$3.82 billion, or 43.5%, of ~~Contents~~

~~Risk Gradings~~

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the ACL, management assigns and tracks risk gradings as described below that are used as credit quality indicators.

~~The internal ratings of loans as of the periods indicated were as follows:~~

Special




(Dollars in thousands)

Pass

Mention

Substandard

Total
June 30, 2022

Commercial and industrial

$
565,466

$
—

$
15,977

$
581,443
Real estate:








Commercial real estate

1,142,040

—

39,580

1,181,620
Construction and development

552,467

468

7,968

560,903
1-4 family residential

259,500

—

4,928

264,428
Multi-family residential

300,582

—

—

300,582
Consumer

26,600

—

210

26,810
Agriculture

7,976

—

60

8,036
Other

118,108

—

45

118,153
Total gross loans

$
2,972,739

$
468

$
68,768

$
3,041,975

Special




(Dollars in thousands)

Pass

Mention

Substandard

Total
December 31, 2021

Commercial and industrial

$
613,419

$
3,482

$
17,483

$
634,384
Real estate:








Commercial real estate

1,038,401

8,855

44,713

1,091,969
Construction and development

447,533

470

12,716

460,719
1-4 family residential

272,217

—

5,056

277,273
Multi-family residential

286,396

—

—

286,396
Consumer

27,865

—

225

28,090
Agriculture

7,899

—

42

7,941
Other

89,655

—

—

89,655
Total gross loans

$
2,783,385

$
12,807

$
80,235

$
2,876,427

During the six months of 2022, loans with an internal rating of pass increased $189.4 million primarily due to new originations, loans with an internal rating of special mention decreased $12.3 million primarily due to a loan payoff and several loans upgraded to pass and loans with an internal rating of substandard decreased $11.5 million primarily due to payoffs and a loan upgraded to pass during the same period.

~~Allowance for Credit Losses~~

The Company maintains an ACL that represents management’s best estimate of the expected credit losses and risks inherent in the loan portfolio. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the ACL, the Company estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the ACL is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current and forecasted economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Please refer to “Part I—Item 1.—Financial Statements—Note 6.”

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~~The ACL by loan category as of the dates indicated was as follows:~~

June 30, 2022

December 31, 2021
(Dollars in thousands)

Amount

Percent

Amount

Percent
Commercial and industrial

$
9,730

30.3
%

$
11,214

35.7
%
Real estate:



Commercial real estate

11,708

36.5
%

11,015

35.1
%
Construction and development

4,243

13.2
%

3,310

10.6
%
1-4 family residential

2,071

6.5
%

2,105

6.7
%
Multi-family residential

1,925

6.0
%

1,781

5.7
%
Consumer

391

1.2
%

406

1.3
%
Agriculture

88

0.3
%

88

0.3
%
Other

1,931

6.0
%

1,426

4.6
%
Total allowance for credit losses for loans

$
32,087

100.0
%

$
31,345

100.0
%
Loans excluding loans held for sale

3,032,914

2,867,524

ACL for loans to loans excluding loans held for sale

1.06%

1.09%

~~The ACL for loans was $32.1 million, or 1.06% of loans excluding loans held for sale,~~total deposits at June 30, ~~2022, compared~~2023. Our average deposit account size was $86

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thousand 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 ~~$31.3 million, or 1.09%~~fund loan growth. Our securities portfolio had a weighted average life of ~~loans excluding loans held for sale,~~7.9 years and modified duration of 3.0 years at June 30, 2023 and a weighted average life of 8.3 years and modified duration of 4.8 years at December 31, ~~2021. The increase in the ACL from December 31, 2021 to~~2022.

Total immediate contingent funding sources, including unrestricted cash, available-for-sale securities that are not pledged and total borrowing capacity was $4.53 billion, or 51.6%, of total deposits at June 30, ~~2022 was primarily due~~2023. Including policy-driven capacity for brokered deposits, the Bank would be able to ~~the increase in the loan portfolio.~~

~~Activity in the ACL for loans for the periods indicated was as follows:~~

Six Months Ended June 30,
(Dollars in thousands)

2022

2021
Beginning balance

$
31,345

$
40,637
Provision (recapture):

Commercial and industrial

(1,778)

(1,083)
Real estate:

Commercial real estate

693

(538)

Construction and development

933

(1,636)

1-4 family residential

(31)

(406)

Multi-family residential

144

(131)
Consumer

43

(46)
Agriculture

(10)

(64)
Other

505

—
Total provision (recapture)

499

(3,904)
Net (charge-offs) recoveries:




Commercial and industrial

294

308
Real estate:





1-4 family residential

(3)

—
Consumer

(58)

100
Agriculture

10

42
Total net (charge-offs) recoveries

243

450
Ending balance

$
32,087

$
37,183
Total average loans

2,892,079

2,868,463
Net charge-offs (recoveries) to total average loans

(0.02%)

(0.03%)

~~Table~~its contingent sources of ~~Contents~~

~~Annualized net charge-off (recoveries)~~liquidity, bringing total contingent funding sources to ~~average loans by loan category for the periods indicated below were as follows:~~

Six Months Ended June 30,
(Dollars in thousands)

2022

2021
Commercial and industrial

(0.20%)

(0.09%)
Consumer

0.85%

(0.62%)
Agriculture

(0.56%)

(1.00%)

~~The ACL for unfunded commitments was $3.3 million~~approximately $5.76 billion, or 65.7%, of deposits at ~~both~~ June 30, ~~2022 and December 31, 2021.~~

~~Securities~~

~~The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as of the dates indicated below were as follows:~~

Gross

Gross

Amortized

Unrealized

Unrealized

(Dollars in thousands)

Cost

Gains

Losses

Fair Value
June 30, 2022








Debt securities available for sale:








State and municipal securities

$
175,956

$
36

$
(29,001)

$
146,991
U.S. Treasury securities

110,820

—

(2,617)

108,203
U.S. agency securities:


Callable debentures

3,000

—

(264)

2,736
Collateralized mortgage obligations

100,569

123

(8,339)

92,353
Mortgage-backed securities

217,907

54

(19,248)

198,713
Equity securities

1,197

—

(110)

1,087
Total

$
609,449

$
213

$
(59,579)

$
550,083
December 31, 2021

Debt securities available for sale:








State and municipal securities

$
168,541

$
4,451

$
(392)

$
172,600
U.S. Treasury securities

11,888

—

(91)

11,797
U.S. agency securities:


Callable debentures

3,000

—

(27)

2,973
Collateralized mortgage obligations

63,129

115

(862)

62,382
Mortgage-backed securities

173,446

1,805

(1,130)

174,121
Equity securities

1,189

—

(16)

1,173
Total

$
421,193

$
6,371

$
(2,518)

$
425,046

2023.

As of June 30, 2022, the fair value of the Company’s securities totaled $550.1 million, compared to $425.0 million as of December 31, 2021, an increase of $125.1 million. Amortized cost increased $188.3 million during 2022, primarily as a result of purchases totaling $512.6 million outpacing maturities, calls and paydowns totaling $323.9 million. Net unrealized losses on the securities portfolio were $59.3 million at June 30, 2022, compared to a net unrealized gains of $3.9 million at December 31, 2021. This decrease of $63.2 million was due to a reduction in fair value as a result of interest rate increases and anticipated increases.

~~The Company’s mortgage-backed securities at June 30, 2022~~2023 and December 31, 2021 were agency securities. The Company does not hold any Federal National Mortgage Loan Association, or Fannie Mae, or Federal Home Mortgage Corporation, or Freddie Mac, preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in the securities portfolio.

The weighted-average life of the securities portfolio was 7.4 years with an estimated modified duration of 6.1 years as of June 30, 2022. See “Part I—Item 1.—Financial Statements—Note 2” for securities by contractual maturity.

~~Table of Contents~~

Weighted-average yields by security type and maturity based on estimated annual income divided by the average amortized cost of the Company’s available for sale securities portfolio as of the date indicated was as follows:

(Dollars in thousands)

1 Year or Less

After 1 Year to 5 Years

After 5 Years to 10 Years

After 10 Years

Total
June 30, 2022

Debt securities:

State and municipal securities

—

2.20%

2.58%

2.18%

2.22%
U.S. Treasury securities

1.28%

1.43%

1.25%

—

1.37%
U.S. agency securities:










Callable debentures

—

—

1.37%

—

1.37%
Collateralized mortgage obligations

—

—

2.35%

2.22%

2.22%
Mortgage-backed securities

—

3.50%

2.81%

2.00%

2.10%
Equity securities:

1.25%

—

—

—

1.25%
Total securities

1.28%

1.46%

2.46%

2.11%

2.02%

At June 30, 2022 and December 31, 2021, securities with a carrying amount of approximately $26.2 million and $25.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

~~Deposits~~

Total deposits as of June 30, 2022 were $3.8 billion, a decrease of $74.7 million, or 1.9%, compared to December 31, 2021. Noninterest-bearing deposits as of June 30, 2022 were $1.8 billion, an increase of $25.3 million, or 1.4%, compared to December 31, 2021. Total interest-bearing account balances as of June 30, 2022 were $1.9 billion, a decrease of $99.9 million, or 4.9%, from December 31, 2021, primarily due to decreases in interest-bearing demand deposits and money market accounts, partially offset by increases in certificates and other time deposits and savings accounts.

~~The components of deposits as of the dates indicated below were as follows:~~

(Dollars in thousands)

June 30, 2022

December 31, 2021

Increase (Decrease)
Interest-bearing demand accounts

$
445,149

$
468,361

$
(23,212)

(5.0%)
Money market accounts

1,109,265

1,209,659

(100,394)

(8.3%)
Savings accounts

130,713

127,031

3,682

2.9%
Certificates and other time deposits, $100,000 or greater

169,616

134,775

34,841

25.9%
Certificates and other time deposits, less than $100,000

91,616

106,477

(14,861)

(14.0%)
Total interest-bearing deposits

1,946,359

2,046,303

(99,944)

(4.9%)
Noninterest-bearing deposits

1,810,275

1,784,981

25,294

1.4%
Total deposits

$
3,756,634

$
3,831,284

$
(74,650)

(1.9%)

~~Table of Contents~~

~~The scheduled maturities of uninsured certificates of deposit or other time deposits as of the date indicated were as follows:~~

(Dollars in thousands)

June 30, 2022
Three months or less

$
52,767
Over three months through six months

13,896
Over six months through 12 months

18,354
Over 12 months

24,346
Total

$
109,363

~~Securities pledged which secure certain public deposits were not considered in determining the amount of uninsured deposits.~~

~~Cash and Equivalents~~

Cash and equivalents decreased $466.2 million during the six months ended June 30, 2022, primarily due to increases in loans, purchases of securities, net deposit outflows and repayment of Federal Home Loan Bank advances.

~~Other Assets~~

Other assets increased $15.5 million from December 31, 2021 to June 30, 2022, primarily due to a $12.7 million increase in net deferred tax assets resulting from an increase in the deferred tax asset related to unrealized losses on the Company’s available for sale securities and a $2.6 million increase in the fair value of the Company’s interest rate swap contracts.

~~Liquidity and Capital Resources~~

The Company monitors its liquidity and may seek to obtain additional financing to further support its business if necessary. The Company’s primary source of funds has been customer deposits and the primary use of funds has been funding of loans.

As of June 30, 2022, the Company had $484.0 million in cash and cash equivalents and $550.1 million of securities, which are considered to be liquid assets, compared to $950.1 million in cash and cash equivalents and $425.0 million of securities as of December 31, 2021. This decrease in liquid assets of $341.1 million during the first six months of 2022 was primarily due to a $74.7 million decrease in deposits, an increase of $164.6 million in loans excluding loans held for sale and repayment of $50.0 million of Federal Home Loan Bank advances.

Historically, the cost of the Company’s deposits has been lower than other sources of funds available. Average rates paid for the three and six months ended June 30, 2022 were computed on an annualized basis. Average balances and average rates paid on deposits for the periods indicated were as follows:

Six Months Ended June 30, 2022

Year Ended December 31, 2021
(Dollars in thousands)

Average Balance

Average Rate

Average Balance

Average Rate
Interest-bearing demand accounts

$
445,338

0.05
%

$
391,388

0.05
%
Money market accounts

1,161,747

0.27
%

1,094,042

0.27
%
Savings accounts

129,032

0.03
%

115,972

0.03
%
Certificates and other time deposits, $100,000 or greater

145,851

0.32
%

142,605

0.37
%
Certificates and other time deposits, less than $100,000

97,610

0.84
%

126,141

1.07
%
Total interest-bearing deposits

1,979,578

0.24
%

1,870,148

0.27
%
Noninterest-bearing deposits

1,794,239

—

1,603,006

—

Total deposits

$
3,773,817

0.13
%

$
3,473,154

0.14
%

~~Table of Contents~~

~~The ratio of average noninterest-bearing deposits to average total deposits was 47.5% for the three and six months ended June 30, 2022 and 46.2% for the year ended December 31, 2021.~~

In addition to the liquid assets discussed above, the Company had $1.1 billion and $1.0 billion of available funds under various borrowing arrangements at June 30, 2022 and December 31, 2021, respectively. See “Part I—Item 1.—Financial Statements—Note 11” for additional details of these arrangements. At June 30, 2022, the capacity, amounts outstanding and availability under these arrangements were as follows:

(Dollars in thousands)

Capacity

Outstanding⁽¹⁾

Availability
Federal Home Loan Bank Facility

$
1,086,257

$
(26,000)

$
1,060,257
Loan Agreement

30,000

—

30,000
Federal Funds

45,000

—

45,000
Total

$
1,161,257

$
(26,000)

$
1,135,257

~~(1)~~

~~Outstanding amount for the Federal Home Loan Bank Facility includes $26.0 million of letters of credit pledged to secure public funds’ deposit balances.~~

~~The composition of funding sources and uses as a percentage of average total assets for the periods indicated was as follows:~~

June 30, 2022

December 31, 2021
Sources of funds:





Deposits:





Interest-bearing

45.0
%

45.2
%
Noninterest-bearing

40.8
%

38.8
%
Federal Home Loan Bank advances

0.6
%

1.2
%
Other liabilities

1.1
%

1.3
%
Shareholders’ equity

12.5
%

13.5
%
Total sources

100.0
%

100.0
%
Uses of funds:





Loans

65.8
%

67.4
%
Securities

12.1
%

7.8
%
Interest-bearing deposits at other financial institutions

15.4
%

17.7
%
Equity securities

0.3
%

0.4
%
Other noninterest-earning assets

6.4
%

6.7
%
Total uses

100.0
%

100.0
%
Average loans to average deposits

76.6
%

80.2
%

A portion of the Company’s liquidity capacity will be used for contractual obligations entered into in the normal course of business, such as obligations for operating leases, certificates of deposits and borrowings. Future cash payments associated with the Company’s contractual obligations as of the dates indicated were as follows:

1 Year

Over 1 Year

Greater

(Dollars in thousands)

or Less

to 3 Years

than 3 Years

Total
June 30, 2022

Non-cancellable future operating leases

$
1,780

$
3,874

$
11,083

$
16,737
Certificates of deposit

205,293

44,814

11,125

261,232
Total

$
207,073

$
48,688

$
22,208

$
277,969
December 31, 2021

Federal Home Loan Bank advances

$
10,000

$
40,000

$
—

$
50,000
Non-cancellable future operating leases

1,812

3,823

11,164

16,799
Certificates of deposit

162,153

68,956

10,143

241,252
Total

$
173,965

$
112,779

$
21,307

$
308,051

~~Table of Contents~~

~~As of June 30,~~ 2022, the 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 ~~Company also enters into commitments~~risk-based capital standards currently in effect are designed to ~~extend~~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~~credit) is 8.0%. At least half of total capital must be composed of Tier 1 capital, which includes common shareholders’ equity (including retained earnings), less goodwill, other disallowed intangible assets, and disallowed deferred tax assets, among other items. The Federal Reserve also has adopted a minimum leverage ratio, requiring 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 1 risk-based capital ratio of 8.0% or greater, a common equity 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 ~~customer financing needs~~ and ~~in accordance with GAAP, these commitments are not reflected~~maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as ~~liabilities~~if the institution were in the ~~consolidated balance sheets. Due~~next lower capital category.

Failure to meet capital guidelines could subject the ~~nature of these commitments, the amounts disclosed in the table below do not necessarily represent future cash requirements.~~

~~Commitments to extend credit are agreements to lend~~institution to a ~~customer~~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 ~~long as there is no violation~~conservator or receiver.

As of ~~any condition established~~June 30, 2023 and December 31, 2022, the Bank was well-capitalized. Total shareholders' equity was $1.46 billion at June 30, 2023, compared with $1.38 billion at December 31, 2022, an increase of $75.5 million. This increase was primarily due the decrease in accumulated other comprehensive loss and net income of $72.3 million, partially offset by the ~~contract, generally have fixed expiration dates or other termination clauses~~$0.26 per common share dividend paid for the six months ended June 30, 2023.

Table of Contents

The following table provides a comparison of our leverage and ~~may expire without being fully drawn upon.~~

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to the Company’s customers.

~~Commitments to extend credit and standby letters of credit expiring by period~~risk-weighted capital ratios as of the dates indicated ~~were as follows:~~

1 Year

Over 1 Year

Greater

(Dollars in thousands)

or Less

to 3 Years

than 3 Years

Total
June 30, 2022

Commitments to extend credit

$
463,732

$
384,371

$
54,709

$
902,812
Standby letters of credit

8,983

853

—

9,836
Total

$
472,715

$
385,224

$
54,709

$
912,648
December 31, 2021

Commitments to extend credit

$
400,006

$
293,606

$
81,348

$
774,960
Standby letters of credit

16,532

1,415

162

18,109
Total

$
416,538

$
295,021

$
81,510

$
793,069

~~As a general matter, Federal Deposit Insurance Corporation, or FDIC, insured depository institutions and their holding companies are required to maintain minimum capital relative~~ to the ~~amount~~minimum and ~~types~~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 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	%

Table of ~~assets they hold. The Company~~Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and the Bank are both subject to regulatory capital requirements. At June 30, 2022 and December 31, 2021, the Company and the Bank were in compliance with all applicable regulatory capital requirements at the bank holding company and bank levels, and the Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations. The OCC or the FDIC may require the Bank to maintain capital ratios above the required minimums and the Federal Reserve may require the Company to maintain capital ratios above the required minimums. See “Part I—Item 1.—Financial Statements—Note 19.”

Interest Rate ~~Sensitivity~~Risk

Our asset liability and ~~Market Risk~~

~~Market~~interest rate risk ~~refers to~~policy provides management with the ~~risk of loss arising from adverse changes in~~guidelines for effective balance sheet management. We have established a measurement system for monitoring our net interest ~~rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices.~~ rate sensitivity position. We manage our sensitivity position within our established guidelines.

As a financial institution, ~~the Company’s primary~~a component of the market risk that we face is interest rate ~~risk due to future interest rate changes.~~volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of ~~the Company’s~~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~~short term to ~~maturity period.~~

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 ~~Company manages~~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 ~~its~~our balance sheet in the ordinary course of a community banking business. ~~The Company does not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts to reduce interest rate risk.~~ The Company enters into interest rate swaps as an accommodation to customers. ~~The Company is not subject to foreign exchange or commodity price risk and does not own any trading assets.~~

The Company has asset, liability and funds management policies that provide the guidelines for effective funds management and has established a measurement system for monitoring the net interest rate sensitivity position. The Company’s

Our exposure to interest rate risk is managed by ~~the Funds Management~~our Balance Sheet Risk Committee of the ~~Bank.~~Bank (“BSRC”). The ~~committee~~BSRC formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, ~~with consideration of~~the BSRC considers the impact on earnings and

~~Table of Contents~~

capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ~~committee~~BSRC meets regularly to review, among other things, ~~the relationships between interest-earning assets and interest-bearing liabilities,~~ 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 ~~committee~~BSRC reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.

~~The Company uses~~

We use an interest rate risk simulation ~~models~~model and shock ~~analyses~~analysis to test the interest rate sensitivity of net interest income and ~~fair value of equity~~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 ~~the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model,~~call dates, as ~~are~~well as prepayment assumptions ~~maturity data~~for loans and ~~call options within the investment portfolio. Average life of non-maturity deposit accounts are~~securities and decay rates for nonmaturity deposits. Assumptions based on ~~standard regulatory decay assumptions and~~past experience are incorporated into the ~~model.~~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 ~~may~~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.

~~On a quarterly basis, two simulation models are run, including a~~

We utilize static balance sheet ~~and dynamic growth balance sheet. These models test~~rate shocks to estimate the potential impact on net interest income ~~and fair value~~ of ~~equity from~~ changes in ~~market~~ interest rates under various rate scenarios. ~~The results from these models are impacted by the behavior~~This analysis estimates a percentage of interest-rate sensitive assets and liabilities as well as the mixture of those assets and liabilities. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movementschange in the ~~yield curve compared to~~metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a ~~flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in~~static balance sheet.

The following table summarizes the shape of the yield curve. The Company’s internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 10.0% for a 100-basis point shift, 20.0% for a 200-basis point shift and 30.0% for a 300-basis point shift.

~~Table of Contents~~

~~Simulated~~simulated change in net interest income ~~and fair value of equity~~ over a 12-month horizon and the economic value of equity as of the dates ~~indicated below were as follows:~~

June 30, 2022

December 31, 2021
Change in Interest

Percent Change in

Percent Change

Percent Change in

Percent Change
Rates (Basis Points)

Net Interest Income

Fair Value of Equity

Net Interest Income

Fair Value of Equity
+ 300

13.2
%

(1.6)
%

25.4
%

6.7
%
+ 200

9.2
%

1.7
%

16.9
%

13.0
%
+ 100

5.0
%

2.6
%

7.9
%

8.8
%
Base

—
%

—
%

—
%

—
%
−100

(10.9)
%

(12.7)
%

(2.5)
%

(37.2)
%

indicated:


Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income		Percent Change in Economic Value of Equity
	As of June 30, 2023	As of December 31, 2022	As of June 30, 2023	As of December 31, 2022
+300	(3.7)%	0.5%	(5.1)%	(2.9)%
+200	(2.4)%	0.5%	(2.5)%	(0.7)%
+100	(1.1)%	0.4%	(0.6)%	0.6%
Base	0.0%	0.0%	0.0%	0.0%
-100	0.5%	(2.0)%	(1.7)%	(3.2)%
-200	0.0%	(7.5)%	(6.5)%	(9.4)%

The Company's model simulation as of June 30, 2022 indicates that its projected balance sheet was less asset sensitive in comparison to its balance sheet as of December 31, 2021. The shift to a less asset sensitive position wasThese results are primarily due to the ~~deployment~~size of ~~interest-bearing~~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 ~~(primarily amounts held~~during such rate fluctuations. During the six months ended June 30, 2023, changes in ~~an interest-bearing account at~~our overall interest rate profile were driven by the ~~Federal Reserve) to originate loan growth during the second quarter 2022~~decrease in noninterest bearing deposits and ~~deposit balance run off that resulted~~certain interest bearing deposits, increases in certificates of deposits and borrowed funds, an increase ~~to the economic value~~in loans and decreases in securities and cash and cash equivalents.

Table of ~~equity. This combined with the recent interest rate increases~~Contents

LIBOR Transition

The Company’s transition away from ~~the Fed resulted in less sensitivity to future rate increases and more sensitive to downward rate movements.~~

LIBOR ~~Transition~~

has been substantially completed. As of June 30, 2023, LIBOR was used as an index rate for ~~a majority~~less than 1% of the Company’s interest-rate swaps and approximately 5.1% of the Company’s loans at June 30, 2022. In March 2021, the UK Financial Conduct authority formally confirmed that a number of U.S. dollar LIBOR rates will be available until the end of June 2023 to support the rundown of legacy contracts. The Company’s transition away from LIBOR may span several reporting periods through June 2023.

The Company’s loans that remain indexed to LIBOR are primarily participations and syndications where the Company is not the lead agent bank and the transition away from LIBOR is dependent on the lead agent bank. The Company is in active discussions with the lead agent banks regarding these loans indexed to LIBOR. These lead agent banks have LIBOR transition programs in place to assist in the transition from LIBOR. The Company’s interest-rate swaps are paired swaps and the interest-rate swaps are established by dealers that have many such agreements and have established or will establish fallback language to transition away from LIBOR.

If not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to the Company. One of the major identified risks is inadequate fallback language in various existing instruments’ contracts that may result in issues establishing the alternative index and adjusting the margin as applicable. The Company continues to monitor this activity and evaluate the related risks to its business.

~~Non-GAAP Financial Measures~~

The Company’s accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, the Company also evaluates its performance based on certain additional non-GAAP financial measures. The Company classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are not included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating, other statistical measures or ratios calculated using exclusively financial measures calculated in accordance with GAAP. Non-GAAP financial measures should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the way the Company calculates non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

The Company calculates tangible equity as total shareholders’ equity, less goodwill and other intangible assets, net of accumulated amortization, and tangible book value per share as tangible equity divided by shares of common stock outstanding at the end of the relevant period. The most directly comparable GAAP financial measure for tangible book value per share is book value per share. The Company calculates tangible assets as total assets less goodwill and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible

loans.

~~Table of Contents~~

ITEM 4. CONTROLS AND PROCEDURES

equity to tangible assets is total shareholders’ equity to total assets. The Company believes that tangible book value per share and tangible equity to tangible assets are measures that are important to many investors in the marketplace who are interested in book value per share and total shareholders’ equity to total assets, exclusive of change in intangible assets.

The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible equity, total assets to tangible assets and presents book value per share, tangible book value per share, total shareholders’ equity to total assets and tangible equity to tangible assets:

(Dollars in thousands, except per share data)

June 30, 2022

December 31, 2021
Tangible Equity




Total shareholders’ equity

$
526,679

$
562,125
Adjustments:




Goodwill

(80,950)

(80,950)
Other intangibles

(3,353)

(3,658)
Tangible equity

$
442,376

$
477,517
Tangible Assets




Total assets

$
4,322,303

$
4,486,001
Adjustments:




Goodwill

(80,950)

(80,950)
Other intangibles

(3,353)

(3,658)
Tangible assets

$
4,238,000

$
4,401,393
Common shares outstanding

24,425

24,488
Book value per share

$
21.56

$
22.96
Tangible book value per share

$
18.11

$
19.50
Total shareholders’ equity to total assets

12.19%

12.53%
Tangible equity to tangible assets

10.44%

10.85%

~~Critical Accounting Policies~~

The Company’s accounting policies are described in “Part II—Item 8.—Financial Statements and Supplementary Data—Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The Company’s accounting policies that it considers critical because they involve a higher degree of judgment and complexity are described in “Part II—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

~~Emerging Growth Company~~

The Company qualifies as an “emerging growth company” under the Jump Start Our Business Start-ups, or JOBS Act. As an emerging growth company, the Company has taken advantage of reduced reporting and other requirements that are otherwise generally applicable to public companies. Emerging growth company are:

●

exempt from the requirement to obtain an attestation and report from the Company’s auditors on management’s assessment of internal control over financial reporting under the Sarbanes-Oxley Act of 2002;

●

permitted to have an extended transition period for adopting any new or revised accounting standards that may be issued by the Financial Accounting Standards Board or by the Securities and Exchange Commission;

●

~~permitted to provide less extensive disclosure about the Company’s executive compensation arrangements; and~~

●

~~not required to give shareholders nonbinding advisory votes on executive compensation or golden parachute arrangements.~~

~~The Company will lose its emerging growth status December 31, 2022, which is the end of the fiscal year in which the fifth anniversary of its initial public offering occurs.~~

~~Recently Issued Accounting Pronouncements~~

~~See “Part I—Item 1.—Financial Statements—Note 1.”~~

~~Table of Contents~~

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~

See “Part I—Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” for a discussion of how the Company manages market risk.

~~Item 4. Controls and Procedures~~

Evaluation of disclosure controls and ~~procedures~~—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 ~~any~~ 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 ~~or the Exchange Act)~~(the “Exchange Act”)) were effective as of the end of the period covered by this 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 June 30, ~~2022,~~2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART ~~II.~~ II—OTHER INFORMATION

~~Item~~

ITEM 1. ~~Legal Proceedings~~

~~The Company is not currently subject to any material legal proceedings. The Company is from~~LEGAL PROCEEDINGS

From time to time, we are subject to claims and litigation arising in the ordinary course of business.

~~At this time, in~~ In the opinion of management, we are not party to any legal proceedings the ~~likelihood is remote that the impact~~resolution of ~~such proceedings, either individually or in the aggregate,~~which we believe would have a material adverse effect on ~~the Company’s~~our business, prospects, financial condition, liquidity, results of ~~operations, financial condition~~operation, cash flows or ~~cash flows.~~capital levels. However, one or more unfavorable outcomes in any claim or litigation against ~~the Company~~us could have a material adverse effect for the period in which ~~they are~~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 ~~and~~ adversely affect ~~the Company’s~~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 ~~favor.~~

operations.

Recent events relating to the failures of certain banking entities in the first 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,

Table of Content

~~Item 1A. Risk Factors~~

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 aspreviously disclosed by the Company. Investors should carefully consider the risks described in ~~Part I,~~ “Part I—Item ~~1A of our~~1A.—Risk Factors” in the Company’s Annual ~~Report~~Reports on Form 10-K for the year ended December 31, ~~2021.~~

~~Item~~2022 and the Company’s other SEC filings.

ITEM 2. ~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~Unregistered Sales of Equity Securities~~

~~None.~~

~~Purchases of Equity Securities by the Issuer and Affiliated Purchasers~~

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In ~~2021,~~2022, the Company’s Board of Directors authorized a share repurchase program, or the ~~2021~~2022 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September ~~16, 2021~~22, 2022 through September 30, ~~2022.~~

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 ~~2021 Repurchase Program~~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

~~Table of Contents~~

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.

~~The following table provides information with respect to purchases of shares of~~

There were no repurchases by the ~~Company’s common stock~~Company during the three months ended June 30, ~~2022~~2023. The number of shares that may be repurchased under the ~~Company made or were made~~plan was 2,575,107, which was computed based on ~~behalf~~the closing share price of the ~~Company or any “affiliated purchaser,”~~Company's common stock as ~~defined in Rule 10b-18(a)(3) under the Exchange Act.~~

Shares Purchased

Number of Shares That

Total Number of

Average Price

as Part of Publicly

May Yet be Purchased
Period

Shares Purchased

Paid per Share

Announced Plan⁽²⁾

Under the Plan⁽³⁾
April 1, 2022 - April 30, 2022

89
⁽¹⁾

$ 28.00

—

1,402,525
May 1, 2022 -May 31, 2022

528
⁽¹⁾

$ 26.83

—

1,407,460
June 1, 2022 - June 30, 2022

93,415
⁽²⁾

$ 27.66

93,415

1,407,057
Total

94,032

$ 27.65

93,415

of June 30, 2023.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

Table of Contents

ITEM 6. EXHIBITS

~~(1)~~

Represents shares employees have elected to have withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options as allowed under the Company’s stock compensation plans. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock.

~~(2)~~

~~Purchased under the 2021 Repurchase Program described above.~~

~~(3)~~

~~Computed based on the closing share price of the Company’s common stock as of the end of each period shown.~~

~~Item 3. Defaults Upon Senior Securities~~

~~None.~~

~~Item 4. Mine Safety Disclosures~~

~~Not Applicable.~~

~~Item 5. Other Information~~

~~None.~~

~~Table of Contents~~

~~Item 6. Exhibits~~


Exhibit Number			Description
~~Number~~			~~Description of Exhibit~~
3.1
~~3.1~~	~~First~~Second Amended and Restated Certificate of Formation of ~~CBTX,~~Stellar Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form ~~S-1~~8-K filed ~~with the Commission~~ on October ~~13, 2017, File No. 333-220930)~~3, 2022)

3.2			~~Second Amended and Restated~~ Bylaws of ~~CBTX,~~Stellar Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form ~~S-1~~8-K filed ~~with the Commission~~ on October ~~13, 2017, File No. 333-220930)~~3, 2022)

~~4.1~~ 31.1*			~~Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)~~

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

31.2*			Certification of ~~Principal~~the Chief Financial Officer pursuant to Rule 13a-14(a) ~~under~~of the Securities ~~and~~ 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* 101.INS*			~~The following materials from CBTX’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in~~ Inline XBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of ChangesInstance Document – the instance document does not appear in ~~Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.~~ the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

104* 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 ~~(formatted as~~(embedded within the Inline XBRL ~~and contained in Exhibit 101)~~ document)

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

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

†	~~Indicates a management contract or compensatory plan.~~

Table of ~~Contents~~Contents

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)
				~~CBTX, INC.~~
			~~(Registrant)~~



Date: July 28, ~~2022~~ 2023			/s/ Robert R. Franklin, Jr.
				Robert R. Franklin, Jr.
				~~Chairman, President and~~ Chief Executive Officer
				~~(Principal Executive Officer)~~



Date: July 28, ~~2022~~ 2023			/s/ ~~Robert T. Pigott, Jr.~~Paul P. Egge
		Paul P. Egge
		~~Senior Executive Vice President and~~ Chief Financial Officer
	~~(Principal Financial and Accounting Officer)~~


	June 30, 2023		December 31, 2022
	(In thousands, except shares and par value)
ASSETS
Cash and due from banks	$	105,913	$	67,063
Interest-bearing deposits at other financial institutions	198,176		304,642
Total cash and cash equivalents	304,089		371,705
Available for sale securities, at fair value	1,478,222		1,807,586
Loans held for investment	8,068,718		7,754,751
Less: allowance for credit losses on loans	(100,195)		(93,180)
Loans, net	7,968,523		7,661,571
Accrued interest receivable	42,051		44,743
Premises and equipment, net	119,142		126,803
Federal Home Loan Bank stock	24,478		15,058
Bank-owned life insurance	104,148		103,094
Goodwill	497,260		497,260
Core deposit intangibles, net	129,805		143,525
Other assets	110,633		129,092
TOTAL ASSETS	$	10,778,351	$	10,900,437
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	3,713,536	$	4,230,169
Interest-bearing
Demand	1,437,509		1,591,828
Money market and savings	2,174,073		2,575,923
Certificates and other time	1,441,251		869,712
Total interest-bearing deposits	5,052,833		5,037,463
Total deposits	8,766,369		9,267,632
Accrued interest payable	4,555		2,098
Borrowed funds	369,963		63,925
Subordinated debt	109,566		109,367
Other liabilities	69,218		74,239
Total liabilities	9,319,671		9,517,261
COMMITMENTS AND CONTINGENCIES (See Note 14)
SHAREHOLDERS’ EQUITY:
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	533		530
Capital surplus	1,228,532		1,222,761
Retained earnings	361,619		303,146
Accumulated other comprehensive loss	(132,004)		(143,261)
Total shareholders’ equity	1,458,680		1,383,176
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,778,351	$	10,900,437


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income	$	11,707	$	11,703	$	22,302	$	21,722

Change in unrealized gains (losses) on securities available for sale arising during the period		(24,800)		2,292		(63,125)		(2,047)
Change in related deferred income tax		5,208		(480)		13,256		431
Other comprehensive income (loss), net of tax		(19,592)		1,812		(49,869)		(1,616)
Total comprehensive income (loss)	$	(7,885)	$	13,515	$	(27,567)	$	20,106


	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)


	Six Months Ended June 30,
	2023		2022
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	72,323	$	35,094
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization	17,437		3,547
Provision for credit losses	5,581		3,957
Deferred income tax benefit	11,961		(97)
Net amortization of premium on investments	1,564		5,558
Excess tax benefit from stock-based compensation	(47)		(154)
Bank-owned life insurance income	(1,054)		(475)
Net accretion of discount on loans	(22,665)		(139)
Net amortization of discount on subordinated debt	59		58
Net accretion of discount on certificates of deposit	(19)		(31)


Net (gain) loss on sale of assets	(192)		17
Federal Home Loan Bank stock dividends	(400)		(35)
Stock-based compensation expense	5,423		1,890
Net change in operating leases	2,088		1,515
Decrease (increase) in accrued interest receivable and other assets	6,453		(4,153)
Decrease in accrued interest payable and other liabilities	(524)		(5,694)
Net cash provided by operating activities	97,988		40,858
CASH FLOWS FROM INVESTING ACTIVITIES:
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	320,691		5,056
Purchase of available for sale securities	(33,287)		(2,398,416)
Net change in total loans	(291,730)		(129,096)
Purchase of bank premises and equipment	(2,479)		(395)
Proceeds from sale of bank premises, equipment and other real estate	3,652		—
Net (purchase) redemption of Federal Home Loan Bank stock	(9,020)		5,315
Net cash provided by (used in) investing activities	43,139		(234,140)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing deposits	(516,633)		151,634
Net increase (decrease) in interest-bearing deposits	15,389		(318,610)
Net change in short-term other borrowed funds	306,000		(90,000)

Dividends paid to common shareholders	(13,850)		(5,709)
Proceeds from the issuance of common stock and stock option exercises	351		985
Repurchase of common stock	—		(9,690)
Net cash used in financing activities	(208,743)		(271,390)
NET CHANGE IN CASH AND CASH EQUIVALENTS	(67,616)		(464,672)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	371,705		757,509
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	304,089	$	292,837
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid	$	—	$	6,900
Interest paid	60,808		10,742
Cash paid for operating lease liabilities	2,230		1,723
SUPPLEMENTAL NONCASH DISCLOSURE:
Lease right-of-use asset obtained in exchange for lessee operating lease liabilities	$	—	$	76
Branch assets transferred to assets held for sale	3,819		2,137


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


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

		~~Page~~
PART ~~I —~~ I—FINANCIAL INFORMATION

Item 1.			Interim Consolidated Financial Statements ~~– (Unaudited)~~		1 3
			~~Condensed~~ Consolidated Balance Sheets ~~as of June 30, 2022 and December 31, 2021~~(unaudited)		1 3
			~~Condensed~~ Consolidated Statements of Income ~~for the Three Months Ended June 30, 2022 and 2021~~(unaudited)		2 4
			~~Condensed~~ Consolidated Statements of Comprehensive Income ~~for the Three and Six Months Ended June 30, 2022 and 2021~~(unaudited)		3 5
			~~Condensed~~ Consolidated Statements of Changes in ~~Shareholders’~~Shareholders' Equity ~~for the Three and Six Months Ended June 30, 2022 and 2021~~(unaudited)		4 6
			~~Condensed~~ Consolidated Statements of Cash Flows ~~for the Six Months Ended June 30, 2022 and 2021~~(unaudited)		6 7
			Condensed Notes to ~~Condensed~~Interim Consolidated Financial Statements (unaudited)		7 8
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations		37 34
			~~Cautionary Note Regarding Forward-Looking Statements~~	37
	~~Overview~~	39
	~~Impact and Uncertain Economic Outlook~~	40
	~~Results of Operations~~	41
	~~Financial Condition~~	47
	~~Liquidity and Capital Resources~~	55
	~~Interest Rate Sensitivity and Market Risk~~	57
	~~Non-GAAP Financial Measures~~	59
	~~Critical Accounting Policies~~	60
	~~Recently Issued Accounting Pronouncements~~	60
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			61 57
Item 4.			Controls and Procedures		61 58

PART ~~II —~~ II—OTHER INFORMATION
~~Item 1.~~			~~Legal Proceedings~~		61
Item ~~1A.~~1.			~~Risk Factors~~Legal Proceedings		61 58
Item 1A.			Risk Factors		58
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		61 59
Item 3.			Defaults ~~Upon~~upon Senior Securities		62 59
Item 4.			Mine Safety Disclosures		62 59
Item 5.			Other Information		62 59
Item 6.			Exhibits		63 60
Signatures ~~SIGNATURES~~			64		61



	June 30, 2022		December 31, 2021
Assets:
Cash and due from banks	$	41,951	$	27,689
Interest-bearing deposits at other financial institutions		442,015		922,457
Total cash and cash equivalents		483,966		950,146
Securities		550,083		425,046
Equity investments		18,073		17,727
Loans held for sale		—		164
Loans, net of allowance for credit losses of $32,087 and $31,345 at June 30, 2022 and December 31, 2021, respectively		3,000,827		2,836,179
Premises and equipment, net of accumulated depreciation of $39,656 and $39,196 at June 30, 2022 and December 31, 2021, respectively		56,010		58,417
Goodwill		80,950		80,950
Other intangible assets, net of accumulated amortization of $17,698 and $17,345 at June 30, 2022 and December 31, 2021, respectively		3,353		3,658
Bank-owned life insurance		73,898		73,156
Operating lease right-to-use assets		11,324		11,191
Deferred tax assets, net		22,699		9,973
Other assets		21,120		19,394
Total assets	$	4,322,303	$	4,486,001

Liabilities:
Noninterest-bearing deposits	$	1,810,275	$	1,784,981
Interest-bearing deposits		1,946,359		2,046,303
Total deposits		3,756,634		3,831,284
Federal Home Loan Bank advances		—		50,000
Operating lease liabilities		14,169		14,142
Other liabilities		24,821		28,450
Total liabilities		3,795,624		3,923,876
Commitments and contingencies (Note 16)
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 0 shares issued		—		—
Common stock, $0.01 par value, 90,000,000 shares authorized, 25,252,256 and 25,323,558 shares issued at June 30, 2022 and December 31, 2021, respectively; 24,425,261 and 24,487,730 shares outstanding at June 30, 2022 and December 31, 2021, respectively		253		253
Additional paid-in capital		334,104		335,846
Retained earnings		253,180		237,165
Treasury stock, at cost, 826,995 and 835,828 shares held at June 30, 2022 and December 31, 2021, respectively		(14,046)		(14,196)
Accumulated other comprehensive income (loss), net of tax of $(12,444) and $813 at June 30, 2022 and December 31, 2021, respectively		(46,812)		3,057
Total shareholders’ equity		526,679		562,125
Total liabilities and shareholders’ equity	$	4,322,303	$	4,486,001


											Accumulated
				Additional							Other
	Common Stock			Paid-In		Retained		Treasury Stock			Comprehensive
	Shares	Amount		Capital		Earnings		Shares	Amount		Income (Loss)		Total
Six Months Ended June 30, 2021:
Balance at December 31, 2020	25,458,816	$	255	$	339,334	$	214,456	(845,988)	$	(14,369)	$	6,775	$	546,451
Net income	—		—		—		21,722	—		—		—		21,722
Dividends on common stock, $0.26 per share	—		—		—		(6,393)	—		—		—		(6,393)
Stock-based compensation expense	—		—		1,115		—	—		—		—		1,115
Vesting of restricted stock, net of shares withheld for employee tax liabilities	18,658		—		(84)		—	—		—		—		(84)
Shares repurchased	(181,089)		(2)		(4,966)		—	—		—		—		(4,968)
Other comprehensive loss, net of tax	—		—		—		—	—		—		(1,616)		(1,616)
Balance at June 30, 2021	25,296,385	$	253	$	335,399	$	229,785	(845,988)	$	(14,369)	$	5,159	$	556,227

Six Months Ended June 30, 2022:
Balance at December 31, 2021	25,323,558	$	253	$	335,846	$	237,165	(835,828)	$	(14,196)	$	3,057	$	562,125
Net income	—		—		—		22,302	—		—		—		22,302
Dividends on common stock, $0.26 per share	—		—		—		(6,287)	—		—		—		(6,287)
Stock-based compensation expense	—		—		1,022		—	—		—		—		1,022
Vesting of restricted stock, net of shares withheld for employee tax liabilities	22,113		—		(131)		—	—		—		—		(131)
Exercise of stock options, net of shares withheld for employee tax liabilities	—		—		(50)		—	8,833		150		—		100
Shares repurchased	(93,415)		—		(2,583)		—	—		—		—		(2,583)
Other comprehensive loss, net of tax	—		—		—		—	—		—		(49,869)		(49,869)
Balance at June 30, 2022	25,252,256	$	253	$	334,104	$	253,180	(826,995)	$	(14,046)	$	(46,812)	$	526,679


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

BALANCE AT MARCH 31, 2023	53,296,038	$	533	$	1,225,596	$	333,368	$	(113,281)	$	1,446,216
Net income	—	—		—		35,175		—		35,175
Other comprehensive loss	—	—		—		—		(18,723)		(18,723)
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	6,696	—		94		—		—		94

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

BALANCE AT DECEMBER 31, 2021	28,845,903	$	289	$	530,845	$	267,092	$	18,242	$	816,468
Net income	—	—		—		35,094		—		35,094
Other comprehensive loss	—	—		—		—		(133,709)		(133,709)
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	90,796	1		984		—		—		985
Repurchase of common stock	(350,273)	(4)		(9,686)		—		—		(9,690)
Stock-based compensation expense	—	—		1,890		—		—		1,890
BALANCE AT JUNE 30, 2022	28,586,426	$	286	$	524,033	$	296,477	$	(115,467)	$	705,329

BALANCE AT DECEMBER 31, 2022	52,954,985	$	530	$	1,222,761	$	303,146	$	(143,261)	$	1,383,176
Net income	—	—		—		72,323		—		72,323
Other comprehensive income	—	—		—		—		11,257		11,257
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	347,749	3		348		—		—		351

Stock-based compensation expense	—	—		5,423		—		—		5,423
BALANCE AT JUNE 30, 2023	53,302,734	$	533	$	1,228,532	$	361,619	$	(132,004)	$	1,458,680


	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	%


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


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


	Six Months Ended June 30,
(Dollars in thousands)	2022		2021
Supplemental disclosures of cash flow information:
Cash paid for taxes	$	2,450	$	2,059
Cash paid for interest		2,591		3,198
Supplemental disclosures of non-cash flow information:
Operating lease right-to-use asset increased in exchange for lease liabilities		809		—
Change in liability for dividends accrued		113		(739)


			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
June 30, 2022
Debt securities available for sale:
State and municipal securities	$	175,956	$	36	$	(29,001)	$	146,991
U.S. Treasury securities		110,820		—		(2,617)		108,203
U.S. agency securities:
Callable debentures		3,000		—		(264)		2,736
Collateralized mortgage obligations		100,569		123		(8,339)		92,353
Mortgage-backed securities		217,907		54		(19,248)		198,713
Equity securities		1,197		—		(110)		1,087
Total	$	609,449	$	213	$	(59,579)	$	550,083
December 31, 2021
Debt securities available for sale:
State and municipal securities	$	168,541	$	4,451	$	(392)	$	172,600
U.S. Treasury securities		11,888		—		(91)		11,797
U.S. agency securities:
Callable debentures		3,000		—		(27)		2,973
Collateralized mortgage obligations		63,129		115		(862)		62,382
Mortgage-backed securities		173,446		1,805		(1,130)		174,121
Equity securities		1,189		—		(16)		1,173
Total	$	421,193	$	6,371	$	(2,518)	$	425,046


(Dollars in thousands)	1 Year or Less		After 1 Year to 5 Years		After 5 Years to 10 Years		After 10 Years		Total
June 30, 2022
Amortized cost:
Debt securities available for sale:
State and municipal securities	$	—	$	506	$	15,854	$	159,596	$	175,956
U.S. Treasury securities		39,773		65,276		5,771		—		110,820
U.S. agency securities:
Callable debentures		—		—		3,000		—		3,000
Collateralized mortgage obligations		—		—		3,136		97,433		100,569
Mortgage-backed securities		—		721		24,644		192,542		217,907
Equity securities		1,197		—		—		—		1,197
Total	$	40,970	$	66,503	$	52,405	$	449,571	$	609,449
Fair value:
Debt securities available for sale:
State and municipal securities	$	—	$	503	$	15,268	$	131,220	$	146,991
U.S. Treasury securities		39,233		63,710		5,260		—		108,203
U.S. agency securities:
Callable debentures		—		—		2,736		—		2,736
Collateralized mortgage obligations		—		—		3,103		89,250		92,353
Mortgage-backed securities		—		726		24,255		173,732		198,713
Equity securities		1,087		—		—		—		1,087
Total	$	40,320	$	64,939	$	50,622	$	394,202	$	550,083



	Less than Twelve Months				Twelve Months or More
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses
June 30, 2022
Debt securities available for sale:
State and municipal securities	$	135,904	$	(27,542)	$	3,877	$	(1,459)
U.S. Treasury securities		108,203		(2,617)		—		—
U.S. agency securities:
Callable debentures		2,736		(264)		—		—
Collateralized mortgage obligations		71,697		(6,637)		10,398		(1,702)
Mortgage-backed securities		162,307		(15,768)		18,267		(3,480)
Equity securities		1,087		(110)		—		—
	$	481,934	$	(52,938)	$	32,542	$	(6,641)
December 31, 2021
Debt securities available for sale:
State and municipal securities	$	36,962	$	(387)	$	257	$	(5)
U.S. Treasury securities		11,797		(91)		—		—
U.S. agency securities:
Callable debentures		2,973		(27)		—		—
Collateralized mortgage obligations		40,776		(860)		241		(2)
Mortgage-backed securities		87,220		(1,130)		—		—
Equity securities		1,173		(16)		—		—
	$	180,901	$	(2,511)	$	498	$	(7)


	June 30, 2023
	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	$	114,612	$	(1,871)	$	260,133	$	(13,724)	$	374,745	$	(15,595)
Municipal securities	9,423		(193)		173,602		(32,209)		183,025		(32,402)
Agency mortgage-backed pass-through securities	73,644		(2,529)		247,615		(39,142)		321,259		(41,671)
Agency collateralized mortgage obligations	11,239		(36)		374,339		(66,346)		385,578		(66,382)
Corporate bonds and other	33,323		(2,830)		60,977		(10,860)		94,300		(13,690)
Total	$	242,241	$	(7,459)	$	1,116,666	$	(162,281)	$	1,358,907	$	(169,740)


	Participations		Participations
(Dollars in thousands)	Purchased		Sold
June 30, 2022
Commercial and industrial	$	15,844	$	1,943
Commercial real estate		17,955		1,247
Other		4,677		—
	$	38,476	$	3,190
June 30, 2021
Construction and development	$	—	$	22


					90 Days or								90 Days
	30 to 59 Days		60 to 89 Days		Greater		Total		Total				Past Due and
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current Loans		Total Loans		Still Accruing
June 30, 2022
Commercial and industrial	$	524	$	—	$	3,478	$	4,002	$	577,441	$	581,443	$	—
Real estate:
Commercial real estate		—		4,513		5,275		9,788		1,171,832		1,181,620		—
Construction and development		—		—				—		560,903		560,903		—
1-4 family residential		13		98		1,523		1,634		262,794		264,428		—
Multi-family residential		—		—		—		—		300,582		300,582		—
Consumer		—		—		—		—		26,810		26,810		—
Agriculture		—		—		—		—		8,036		8,036		—
Other		—		—		—		—		118,153		118,153		—
Total gross loans	$	537	$	4,611	$	10,276	$	15,424	$	3,026,551	$	3,041,975	$	—
December 31, 2021
Commercial and industrial	$	14	$	—	$	—	$	14	$	634,370	$	634,384	$	—
Real estate:
Commercial real estate		650		—		55		705		1,091,264		1,091,969		—
Construction and development		—		—		142		142		460,577		460,719		—
1-4 family residential		150		34		—		184		277,089		277,273		—
Multi-family residential		—		—		—		—		286,396		286,396		—
Consumer		50		—		—		50		28,040		28,090		—
Agriculture		—		—		—		—		7,941		7,941		—
Other		41		—		—		41		89,614		89,655		—
Total gross loans	$	905	$	34	$	197	$	1,136	$	2,875,291	$	2,876,427	$	—


				Post-modification Recorded Investment
										Extended
										Maturity,
		Pre-modification						Extended		Restructured
		Outstanding						Maturity and		Payments
	Number	Recorded		Restructured		Extended		Restructured		and Adjusted
(Dollars in thousands)	of Loans	Investment		Payments		Maturity		Payments		Interest Rate
June 30, 2022
Commercial and industrial	8	$	3,915	$	1,093	$	—	$	—	$	2,822
Real estate:
Commercial real estate	2		2,273		—		—		2,040		245
Construction and development	3		431		—		—		431		—
Total	13	$	6,619	$	1,093	$	—	$	2,471	$	3,067
June 30, 2021
Commercial and industrial	3	$	3,256	$	3,256	$	—	$	—	$	—
Real estate:						��
Commercial real estate	1		1,206		1,206		—		—		—
1-4 family residential	1		1,548		1,548		—		—		—
Total	5	$	6,010	$	6,010	$	—	$	—	$	—


	June 30, 2021
	Number
(Dollars in thousands)	of Loans	Balance
Commercial and industrial	3	$	5,892
Real estate:
Commercial real estate	1		4,722
Total	4	$	10,614


	June 30, 2023
	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	$	2,210	$	—	$	2,210	$	22,800	$	1,487,466	$	1,512,476
Paycheck Protection Program (PPP)	56		—		56		168		7,803		8,027
Real estate:
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	4,573		—		4,573		388		1,131,163		1,136,124
1-4 family residential (including home equity)	8,332		—		8,332		10,880		990,227		1,009,439
Residential construction	662		—		662		665		309,881		311,208
Consumer and other	142		—		142		227		52,588		52,957
Total loans	$	19,277	$	—	$	19,277	$	43,349	$	8,006,092	$	8,068,718


	Troubled Debt Restructurings										Total Loans
(Dollars in thousands)	Accruing		Non-Accrual		Total		Other Non-Accrual		Other Accruing		Individually Evaluated
June 30, 2022
Commercial and industrial	$	5,148	$	8,255	$	13,403	$	57	$	1,078	$	14,538
Real estate:
Commercial real estate		7,754		11,106		18,860		5,375		—		24,235
Construction and development		7,825		143		7,968		—		—		7,968
1-4 family residential		41		3,222		3,263		80		—		3,343
Consumer		—		35		35		—		74		109
Other		5,349		—		5,349		—		—		5,349
Total	$	26,117	$	22,761	$	48,878	$	5,512	$	1,152	$	55,542
December 31, 2021
Commercial and industrial	$	5,661	$	6,851	$	12,512	$	2,239	$	1,828	$	16,579
Real estate:
Commercial real estate		5,755		11,401		17,156		111		3,790		21,057
Construction and development		12,282		—		12,282		142		292		12,716
1-4 family residential		1,571		1,727		3,298		57		—		3,355
Consumer		—		40		40		—		85		125
Other		5,440		—		5,440		—		—		5,440
Total	$	30,709	$	20,019	$	50,728	$	2,549	$	5,995	$	59,272


	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
	2023		2022		2021		2020		2019		Prior
	(In thousands)
Commercial and industrial
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	—		349		492		446		381		2		8,173		836		10,679		18,982
Substandard	510		5,279		18,110		1,197		12,511		344		5,263		1,094		44,308		36,568
Doubtful	—		51		—		—		—		—		—		—		51		54
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	$	—	$	95	$	126	$	456	$	—	$	—	$	373	$	434	$	1,484

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

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

Commercial real estate (including multi-family residential)
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	942		135		7,005		7,269		796		12,611		587		—		29,345		18,183
Substandard	1,903		4,711		11,580		7,274		5,048		13,855		187		—		44,558		68,346
Doubtful	—		—		—		—		—		—		—		—		—		—
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	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate construction and land development
Pass	$	154,065	$	522,070	$	299,038	$	35,881	$	33,778	$	10,070	$	62,503	$	658	$	1,118,063	$	1,025,141
Special Mention	—		3,814		1,945		142		303		209		—		—		6,413		832
Substandard	—		581		10,477		89		82		270		—		149		11,648		11,705
Doubtful	—		—		—		—		—		—		—		—		—		—
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	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	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)
Allowance for credit losses on loans:
Three Months Ended
Balance March 31, 2023	$	39,516	$	—	$	37,700	$	13,579	$	2,832	$	2,089	$	472	$	96,188
Provision for credit losses on loans	(814)		—		1,263		921		1,946		991		(64)		4,243
Charge-offs	(1,058)		—		—		—		(23)		—		(30)		(1,111)
Recoveries	861		—		—		—		2		—		12		875
Net charge-offs	(197)		—		—		—		(21)		—		(18)		(236)
Balance June 30, 2023	$	38,505	$	—	$	38,963	$	14,500	$	4,757	$	3,080	$	390	$	100,195
Six Months Ended
Balance December 31, 2022	$	41,236	$	—	$	32,970	$	14,121	$	2,709	$	1,796	$	348	$	93,180
Provision for credit losses on loans	(2,316)				5,979		379		2,062		1,284		55		7,443
Charge-offs	(1,484)		—		—		—		(23)		—		(38)		(1,545)
Recoveries	1,069		—		14		—		9		—		25		1,117
Net charge-offs	(415)		—		14		—		(14)		—		(13)		(428)
Balance June 30, 2023	$	38,505	$	—	$	38,963	$	14,500	$	4,757	$	3,080	$	390	$	100,195
Three Months Ended
Balance March 31, 2022	$	16,295	$	—	$	24,877	$	6,147	$	752	$	1,093	$	51	$	49,215
Provision for credit losses on loans	1,010		—		(855)		1,197		284		(45)		7		1,598
Charge-offs	(615)		—		(72)		—		—		—		—		(687)
Recoveries	11		—		50		55		—		—		—		116
Net charge-offs	(604)		—		(22)		55		—		—		—		(571)
Balance June 30, 2022	$	16,701	$	—	$	24,000	$	7,399	$	1,036	$	1,048	$	58	$	50,242
Six Months Ended
Balance December 31, 2021	$	16,629	$	—	$	23,143	$	6,263	$	847	$	975	$	83	$	47,940
Provision for credit losses on loans	627		—		1,134		1,144		189		73		23		3,190
Charge-offs	(956)		—		(327)		(63)		—		—		(48)		(1,394)
Recoveries	401		—		50		55		—		—		—		506
Net charge-offs	(555)		—		(277)		(8)		—		—		(48)		(888)
Balance June 30, 2022	$	16,701	$	—	$	24,000	$	7,399	$	1,036	$	1,048	$	58	$	50,242


(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Converted Revolving Loans		Total
Commercial and industrial:
Pass	$	230,432	$	53,744	$	60,514	$	21,059	$	8,117	$	5,533	$	228,247	$	5,773	$	613,419
Special mention		—		—		290		15		—		—		3,177		—		3,482
Substandard		—		1,014		1,852		7,075		4		391		1,647		5,500		17,483
Total commercial and industrial		230,432		54,758		62,656		28,149		8,121		5,924		233,071		11,273		634,384
Commercial real estate:
Pass		243,666		197,625		232,074		141,591		69,995		84,398		55,253		13,799		1,038,401
Special mention		—		—		859		7,934		—		62		—		—		8,855
Substandard		—		2,953		12,967		14,556		334		3,046		—		10,857		44,713
Total commercial real estate		243,666		200,578		245,900		164,081		70,329		87,506		55,253		24,656		1,091,969
Construction and development:
Pass		197,900		99,420		54,017		7,127		16,133		142		72,698		96		447,533
Special mention		—		470		—		—		—		—		—		—		470
Substandard		—		292		—		1,500		10,207		717		—		—		12,716
Total construction and development		197,900		100,182		54,017		8,627		26,340		859		72,698		96		460,719
1-4 family residential:
Pass		115,451		23,298		20,210		31,416		21,607		53,253		6,516		466		272,217
Substandard		—		1,548		514		902		126		464		1,502		—		5,056
Total 1-4 family residential		115,451		24,846		20,724		32,318		21,733		53,717		8,018		466		277,273
Multi-family residential:
Pass		16,744		18,236		6,473		58,750		9,784		167,033		9,376		—		286,396
Total multi-family residential		16,744		18,236		6,473		58,750		9,784		167,033		9,376		—		286,396
Consumer:
Pass		6,427		3,637		1,199		714		277		11		14,921		679		27,865
Substandard		—		40		—		—		—		—		85		100		225
Total consumer		6,427		3,677		1,199		714		277		11		15,006		779		28,090
Agriculture:
Pass		2,954		423		42		57		35		—		4,198		190		7,899
Substandard		—		—		—		—		—		18		24		—		42
Total agriculture		2,954		423		42		57		35		18		4,222		190		7,941
Other:
Pass		27,656		3,744		630		1,509		10		2,157		53,906		43		89,655
Total other		27,656		3,744		630		1,509		10		2,157		53,906		43		89,655
Total
Pass		841,230		400,127		375,159		262,223		125,958		312,527		445,115		21,046		2,783,385
Special mention		—		470		1,149		7,949		—		62		3,177		—		12,807
Substandard		—		5,847		15,333		24,033		10,671		4,636		3,258		16,457		80,235
Total gross loans	$	841,230	$	406,444	$	391,641	$	294,205	$	136,629	$	317,225	$	451,550	$	37,503	$	2,876,427



(Dollars in thousands)	Pass		Special Mention		Substandard		Total Loans
June 30, 2022
Commercial and industrial	$	565,466	$	—	$	15,977	$	581,443
Real estate:
Commercial real estate		1,142,040		—		39,580		1,181,620
Construction and development		552,467		468		7,968		560,903
1-4 family residential		259,500		—		4,928		264,428
Multi-family residential		300,582		—		—		300,582
Consumer		26,600		—		210		26,810
Agriculture		7,976		—		60		8,036
Other		118,108		—		45		118,153
Total gross loans	$	2,972,739	$	468	$	68,768	$	3,041,975
December 31, 2021
Commercial and industrial	$	613,419	$	3,482	$	17,483	$	634,384
Real estate:
Commercial real estate		1,038,401		8,855		44,713		1,091,969
Construction and development		447,533		470		12,716		460,719
1-4 family residential		272,217		—		5,056		277,273
Multi-family residential		286,396		—		—		286,396
Consumer		27,865		—		225		28,090
Agriculture		7,899		—		42		7,941
Other		89,655		—		—		89,655
Total gross loans	$	2,783,385	$	12,807	$	80,235	$	2,876,427


	June 30, 2022						December 31, 2021
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Total		Evaluated		Evaluated		Total
(Dollars in thousands)	Loans		Loans		Loans		Loans		Loans		Loans
Commercial and industrial	$	14,538	$	566,905	$	581,443	$	16,579	$	617,805	$	634,384
Real estate:
Commercial real estate		24,235		1,157,385		1,181,620		21,057		1,070,912		1,091,969
Construction and development		7,968		552,935		560,903		12,716		448,003		460,719
1-4 family residential		3,343		261,085		264,428		3,355		273,918		277,273
Multi-family residential		—		300,582		300,582		—		286,396		286,396
Consumer		109		26,701		26,810		125		27,965		28,090
Agriculture		—		8,036		8,036		—		7,941		7,941
Other		5,349		112,804		118,153		5,440		84,215		89,655
Total gross loans	$	55,542	$	2,986,433	$	3,041,975	$	59,272	$	2,817,155	$	2,876,427


			Real Estate
	Commercial				Construction
	and		Commercial		and		1-4 Family		Multi-family
(Dollars in thousands)	Industrial		Real Estate		Development		Residential		Residential		Consumer		Agriculture		Other		Total
June 30, 2022
Beginning balance	$	11,214	$	11,015	$	3,310	$	2,105	$	1,781	$	406	$	88	$	1,426	$	31,345
Provision (recapture)		(1,778)		693		933		(31)		144		43		(10)		505		499
Charge-offs		(1)		—		—		(8)		—		(63)		—		—		(72)
Recoveries		295		—		—		5		—		5		10		—		315
Net recoveries		294		—		—		(3)		—		(58)		10		—		243
Ending balance	$	9,730	$	11,708	$	4,243	$	2,071	$	1,925	$	391	$	88	$	1,931	$	32,087
Period-end amount allocated to:
Specific reserve	$	2,776	$	55	$	—	$	—	$	—	$	109	$	—	$	—	$	2,940
General reserve		6,954		11,653		4,243		2,071		1,925		282		88		1,931		29,147
Total	$	9,730	$	11,708	$	4,243	$	2,071	$	1,925	$	391	$	88	$	1,931	$	32,087
June 30, 2021
Beginning balance	$	13,035	$	13,798	$	6,089	$	2,578	$	2,513	$	440	$	137	$	2,047	$	40,637
Provision (recapture)		(1,083)		(538)		(1,636)		(406)		(131)		(46)		(64)		—		(3,904)
Charge-offs		(495)		—		—		—		—		(3)		—		—		(498)
Recoveries		803		—		—		—		—		103		42		—		948
Net (charge-offs) recoveries		308		—		—		—		—		100		42		—		450
Ending balance	$	12,260	$	13,260	$	4,453	$	2,172	$	2,382	$	494	$	115	$	2,047	$	37,183
Period-end amount allocated to:
Specific reserve	$	4,803	$	252	$	—	$	—	$	—	$	90	$	—	$	536	$	5,681
General reserve		7,457		13,008		4,453		2,172		2,382		404		115		1,511		31,502
Total	$	12,260	$	13,260	$	4,453	$	2,172	$	2,382	$	494	$	115	$	2,047	$	37,183


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


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

Paycheck Protection Program (PPP)	168		—		168
Real estate:
Commercial real estate (including multi-family residential)	6,983		1,238		8,221
Commercial real estate construction and land development	388		—		388
1-4 family residential (including home equity)	7,300		3,580		10,880
Residential construction	665		—		665
Consumer and other	60		167		227
Total loans	$	17,051	$	26,298	$	43,349


		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



		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

20-8339782

(State or other jurisdiction
of

~~(I.R.S. employer~~

incorporation or organization)

~~identification no.~~
(I.R.S. Employer
Identification No.)