SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

(Exact name of registrant as specified in its charter)

Houston,, Texas77046

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ SNo ☐£

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

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

Act:

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

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

As of ~~October 24, 2022, there were 52,297,690~~May 1, 2023, the registrant had 53,302,130 shares ~~of the registrant’s~~ common stock, $0.01 par value ~~$0.01~~ per share, ~~outstanding~~outstanding.

Table of ~~Contents~~Contents

~~Stellar Bancorp, Inc.~~

STELLAR BANCORP, INC.

PART I. I—FINANCIAL INFORMATION

~~Item~~

ITEM 1. ~~Financial Statements~~

~~Stellar Bancorp, Inc. and Subsidiary~~

~~Condensed Consolidated Balance Sheets~~ INTERIM CONSOLIDATED FINANCIAL STATEMENTS

STELLAR BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

~~(Dollars in thousands, except par value and share amounts)~~

September 30, 2022

December 31, 2021
Assets:




Cash and due from banks

$
41,219

$
27,689
Interest-bearing deposits at other financial institutions

329,229

922,457
Total cash and cash equivalents

370,448

950,146
Securities

511,282

425,046
Equity investments

17,835

17,727
Loans held for sale

—

164
Loans, net of allowance for credit losses of $32,577 and $31,345 at September 30, 2022 and December 31, 2021, respectively

3,093,844

2,836,179
Premises and equipment, net of accumulated depreciation of $40,493 and $39,196 at September 30, 2022 and December 31, 2021, respectively

55,594

58,417
Goodwill

80,950

80,950
Other intangible assets, net of accumulated amortization of $17,863 and $17,345 at September 30, 2022 and December 31, 2021, respectively

3,188

3,658
Bank-owned life insurance

74,274

73,156
Operating lease right-to-use assets

10,992

11,191
Deferred tax assets, net

29,581

9,973
Other assets

23,843

19,394
Total assets

$
4,271,831

$
4,486,001

Liabilities:




Noninterest-bearing deposits

$
1,780,473

$
1,784,981
Interest-bearing deposits

1,943,301

2,046,303
Total deposits

3,723,774

3,831,284
Federal Home Loan Bank advances

—

50,000
Operating lease liabilities

13,748

14,142
Other liabilities

32,884

28,450
Total liabilities

3,770,406

3,923,876
Commitments and contingencies (Note 16)




Shareholders’ equity:




Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued

—

—
Common stock, $0.01 par value, 90,000,000 shares authorized, 24,015,272 and 25,323,558 shares issued at September 30, 2022 and December 31, 2021, respectively; 24,015,272 and 24,487,730 shares outstanding at September 30, 2022 and December 31, 2021, respectively

240

253
Additional paid-in capital

308,197

335,846
Retained earnings

262,804

237,165
Treasury stock, at cost, 835,828 shares held at December 31, 2021

—

(14,196)
Accumulated other comprehensive income (loss), net of tax of $(18,559) and $813 at September 30, 2022 and December 31, 2021, respectively

(69,816)

3,057
Total shareholders’ equity

501,425

562,125
Total liabilities and shareholders’ equity

$
4,271,831

$
4,486,001

Table of ~~Contents~~Contents

~~Stellar Bancorp, Inc. and Subsidiary~~

~~Condensed Consolidated Statements of Income~~

STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

~~(Dollars in thousands, except per share amounts)~~

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021

2022

2021
Interest income:





Interest and fees on loans

$
39,058

$
30,765

$
102,047

$
94,723
Securities

3,046

1,435

8,275

3,940
Interest-bearing deposits at other financial institutions

2,408

340

3,994

740
Equity investments

161

157

473

461
Total interest income

44,673

32,697

114,789

99,864
Interest expense:





Deposits

1,661

1,227

4,003

3,844
Federal Home Loan Bank advances

—

221

272

663
Total interest expense

1,661

1,448

4,275

4,507
Net interest income

43,012

31,249

110,514

95,357
Provision (recapture) for credit losses:

Provision (recapture) for credit losses for loans

523

(5,057)

1,022

(8,961)
Provision (recapture) for credit losses for unfunded commitments

489

162

551

(605)
Total provision (recapture) for credit losses

1,012

(4,895)

1,573

(9,566)
Net interest income after provision (recapture) for credit losses

42,000

36,144

108,941

104,923
Noninterest income:





Deposit account service charges

1,320

1,352

4,076

3,712
Card interchange fees

1,056

1,048

3,228

3,119
Earnings on bank-owned life insurance

376

2,323

1,118

3,103
Net gain on sales of assets

85

360

673

918
Other

612

479

3,229

1,312
Total noninterest income

3,449

5,562

12,324

12,164
Noninterest expense:





Salaries and employee benefits

16,453

15,000

46,405

43,922
Occupancy expense

2,595

2,660

7,362

7,778
Professional and director fees

942

1,567

2,963

5,711
Data processing and software

1,502

1,629

4,723

4,866
Regulatory fees

599

478

2,016

1,535
Advertising, marketing and business development

350

493

965

1,288
Telephone and communications

348

516

1,151

1,529
Security and protection expense

386

425

880

1,352
Amortization of intangibles

165

182

518

559
Other expenses

5,981

1,422

10,748

4,314
Total noninterest expense

29,321

24,372

77,731

72,854
Net income before income tax expense

16,128

17,334

43,534

44,233
Income tax expense

3,381

2,913

8,485

8,090
Net income

$
12,747

$
14,421

$
35,049

$
36,143
Earnings per common share





Basic

$
0.52

$
0.59

$
1.43

$
1.48
Diluted

$
0.52

$
0.59

$
1.43

$
1.47


	Three Months Ended March 31,
	2023		2022
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	125,729	$	52,370
Securities:
Taxable	9,653		5,068
Tax-exempt	1,262		2,525
Deposits in other financial institutions	3,771		340
Total interest income	140,415		60,303
INTEREST EXPENSE:
Demand, money market and savings deposits	18,037		1,347
Certificates and other time deposits	3,307		2,156
Borrowed funds	1,317		186
Subordinated debt	1,927		1,442
Total interest expense	24,588		5,131
NET INTEREST INCOME	115,827		55,172
Provision for credit losses	3,666		1,814
Net interest income after provision for credit losses	112,161		53,358
NONINTEREST INCOME:
Nonsufficient funds fees	406		116
Service charges on deposit accounts	943		527
Gain on sale of assets	198		—
Bank owned life insurance income	522		133
Debit card and ATM card income	1,698		819
Other	3,731		2,423
Total noninterest income	7,498		4,018
NONINTEREST EXPENSE:
Salaries and employee benefits	39,775		22,728
Net occupancy and equipment	4,088		2,205
Depreciation	1,836		1,033
Data processing and software amortization	5,054		2,498
Professional fees	1,527		138
Regulatory assessments and FDIC insurance	1,294		1,261
Amortization of intangibles	6,879		751
Communications	701		341
Advertising	839		462
Other real estate expense	272		59
Acquisition and merger-related expenses	6,165		451
Other	4,168		2,590
Total noninterest expense	72,598		34,517
INCOME BEFORE INCOME TAXES	47,061		22,859
Provision for income taxes	9,913		4,202
NET INCOME	$	37,148	$	18,657
EARNINGS PER SHARE:
Basic	$	0.70	$	0.65
Diluted	$	0.70	$	0.64
DIVIDENDS PER SHARE	$	0.13	$	0.10

Table of ~~Contents~~Contents

~~Stellar Bancorp, Inc. and Subsidiary~~

~~Condensed Consolidated Statements of Comprehensive Income~~

STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

~~(Dollars in thousands)~~

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021

2022

2021
Net income

$
12,747

$
14,421

$
35,049

$
36,143

Change in unrealized gains (losses) on securities available for sale arising during the period

(29,119)

(3,446)

(92,244)

(5,493)
Change in related deferred income tax

6,115

723

19,371

1,154
Other comprehensive loss, net of tax

(23,004)

(2,723)

(72,873)

(4,339)
Total comprehensive income (loss)

$
(10,257)

$
11,698

$
(37,824)

$
31,804


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Net income	$	37,148	$	18,657
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Change in unrealized holding gain (loss) on available for sale securities during the period	37,965		(103,621)
Reclassification of gain realized on securities	(234)		—



Total other comprehensive income (loss)	37,731		(103,621)
Deferred tax (expense) benefit related to other comprehensive loss	(7,751)		21,761
Other comprehensive income (loss), net of tax	29,980		(81,860)
Comprehensive income (loss)	$	67,128	$	(63,203)

See ~~accompanying~~condensed notes to ~~condensed~~interim consolidated financial statements.

Table of ~~Contents~~Contents

~~Stellar Bancorp, Inc. and Subsidiary~~

~~Condensed Consolidated Statements of Changes in Shareholders’ Equity~~

STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

~~(Dollars in thousands, except share amounts)~~

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Treasury Stock

Comprehensive


Shares

Amount

Capital

Earnings

Shares

Amount

Income (Loss)

Total
Nine Months Ended September 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

—

—

—

36,143

—

—

—

36,143
Dividends on common stock, $0.39 per share

—

—

—

(9,587)

—

—

—

(9,587)
Stock-based compensation expense

—

—

1,813

—

—

—

—

1,813
Vesting of restricted stock, net of shares withheld for employee tax liabilities

18,997

—

(87)

—

—

—

—

(87)
Exercise of stock options, net of shares withheld for employee tax liabilities

—

—

(11)

—

2,032

35

—

24
Shares repurchased

(214,219)

(2)

(5,823)

—

—

—

—

(5,825)
Other comprehensive loss, net of tax

—

—

—

—

—

—

(4,339)

(4,339)
Balance at September 30, 2021

25,263,594

$
253

$
335,226

$
241,012

(843,956)

$
(14,334)

$
2,436

$
564,593

Nine Months Ended September 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

—

—

—

35,049

—

—

—

35,049
Dividends on common stock, $0.39 per share

—

—

—

(9,410)

—

—

—

(9,410)
Stock-based compensation expense

—

—

1,537

—

—

—

—

1,537
Vesting of restricted stock, net of shares withheld for employee tax liabilities

22,463

—

(135)

—

—

—

—

(135)
Exercise of stock options, net of shares withheld for employee tax liabilities

6,407

—

23

—

8,833

150

—

173
Shares repurchased

(510,161)

(5)

(15,036)

—

—

—

—

(15,041)
Retirement of Treasury Stock

(826,995)

(8)

(14,038)

—

826,995

14,046

—

—
Other comprehensive loss, net of tax

—

—

—

—

—

—

(72,873)

(72,873)
Balance at September 30, 2022

24,015,272

$
240

$
308,197

$
262,804

—

$
—

$
(69,816)

$
501,425


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

Stock based compensation expense				959						959
BALANCE AT MARCH 31, 2022	28,903,910	$	290	$	532,372	$	282,896	$	(63,618)	$	751,940

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

Stock based compensation expense				2,581						2,581
BALANCE AT MARCH 31, 2023	53,296,038	$	533	$	1,225,596	$	333,368	$	(113,281)	$	1,446,216

See ~~accompanying~~condensed notes to ~~condensed~~interim consolidated financial statements.

Table of ~~Contents~~Contents

~~Stellar Bancorp, Inc. and Subsidiary~~

~~Condensed Consolidated Statements of Quarterly Changes in Shareholders’ Equity~~

STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

~~(Dollars in thousands, except share amounts)~~

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Treasury Stock

Comprehensive


Shares

Amount

Capital

Earnings

Shares

Amount

Income

Total
Three Months Ended September 30, 2021:

Balance at June 30, 2021

25,296,385

$
253

$
335,399

$
229,785

(845,988)

$
(14,369)

$
5,159

$
556,227
Net income

—

—

—

14,421

—

—

—

14,421
Dividends on common stock, $0.13 per share

—

—

—

(3,194)

—

—

—

(3,194)
Stock-based compensation expense

—

—

698

—

—

—

—

698
Vesting of restricted stock, net of shares withheld for employee tax liabilities

339

—

(3)

—

—

—

—

(3)
Exercise of stock options, net of shares withheld for employee tax liabilities

—

—

(11)

—

2,032

35

—

24
Shares repurchased

(33,130)

—

(857)

—

—

—

—

(857)
Other comprehensive income, net of tax

—

—

—

—

—

—

(2,723)

(2,723)
Balance at September 30, 2021

25,263,594

$
253

$
335,226

$
241,012

(843,956)

$
(14,334)

$
2,436

$
564,593

Three Months Ended September 30, 2022:

Balance at June 30, 2022

25,252,256

$
253

$
334,104

$
253,180

(826,995)

$
(14,046)

$
(46,812)

$
526,679
Net income

—

—

—

12,747

—

—

—

12,747
Dividends on common stock, $0.13 per share

—

—

—

(3,123)

—

—

—

(3,123)
Stock-based compensation expense

—

—

515

—

—

—

—

515
Vesting of restricted stock, net of shares withheld for employee tax liabilities

350

—

(4)

—

—

—

—

(4)
Exercise of stock options, net of shares withheld for employee tax liabilities

6,407

—

73

—

—

—

—

73
Shares repurchased

(416,746)

(5)

(12,453)

—

—

—

—

(12,458)
Retirement of Treasury Stock

(826,995)

(8)

(14,038)

—

826,995

14,046

—

—
Other comprehensive loss, net of tax

—

—

—

—

—

—

(23,004)

(23,004)
Balance at September 30, 2022

24,015,272

$
240

$
308,197

$
262,804

—

$
—

$
(69,816)

$
501,425


	Three Months Ended March 31,
	2023		2022
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	37,148	$	18,657
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization	8,715		1,784
Provision for credit losses	3,666		1,814
Deferred income tax benefit	453		47
Net amortization of (discount) premium on investments	(110)		2,797
Excess tax benefit from stock based compensation	(47)		(149)
Bank owned life insurance income	(522)		(133)
Net accretion of discount on loans	(10,093)		(77)
Net amortization of discount on subordinated debt	29		29
Net accretion of discount on certificates of deposit	(11)		(16)


Net gain on sale of assets	(198)		—
Federal Home Loan Bank stock dividends	(207)		(18)
Stock based compensation expense	2,581		959
Net change in operating leases	981		767
Decrease (increase) in accrued interest receivable and other assets	12,129		(26,190)
(Decrease) increase in accrued interest payable and other liabilities	(5,497)		15,785
Net cash provided by operating activities	49,017		16,056
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of available for sale securities	27,997		640,437
Proceeds from sales and calls of available for sale securities	320,691		—
Purchase of available for sale securities	(22,218)		(763,586)
Net change in total loans	(121,392)		(63,268)
Purchase of bank premises and equipment	(1,238)		(184)
Proceeds from sale of bank premises, equipment and other real estate	3,597		—
Net purchases of Federal Home Loan Bank stock	(4,411)		—
Net cash provided by (used in) investing activities	203,026		(186,601)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing deposits	(352,310)		110,519
Net (decrease) increase in interest-bearing deposits	(176,436)		4,185
Net change in short-term other borrowed funds	175,000		—

Dividends paid to common shareholders	(6,926)		(2,853)
Proceeds from the issuance of common stock and stock option exercises	257		569

Net cash (used in) provided by financing activities	(360,415)		112,420
NET CHANGE IN CASH AND CASH EQUIVALENTS	(108,372)		(58,125)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	371,705		757,509
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	263,333	$	699,384
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid	$	—	$	—
Interest paid	22,811		3,798
Cash paid for operating lease liabilities	1,100		892
SUPPLEMENTAL NONCASH DISCLOSURE:
Lease right-of-use asset obtained in exchange for lessee operating lease liabilities	$	—	$	76

Table of ~~Contents~~Contents

~~Stellar Bancorp, Inc. and Subsidiary~~

~~Condensed Consolidated Statements of Cash Flows (Unaudited)~~

~~(Dollars in thousands)~~

Nine Months Ended September 30,


2022

2021
Cash flows from operating activities:



Net income

$
35,049

$
36,143
Adjustments to reconcile consolidated net income to net cash provided by operating activities:



Provision (recapture) for credit losses

1,573

(9,566)
Depreciation expense

2,520

2,602
Amortization of intangibles

518

559
Amortization of premiums on securities

480

1,181
Amortization of lease right-to-use assets

1,008

1,141
Accretion of lease liabilities

260

294
Earnings on bank-owned life insurance

(1,118)

(3,103)
Stock-based compensation expense

1,537

1,813
Deferred income tax (benefit) provision

(76)

2,094
Net gain on sales of assets

(673)

(918)
Net loss on securities

128

12
Change in operating assets and liabilities:

Loans held for sale

539

3,191
Other assets

(4,451)

8,061
Other liabilities

2,429

11,476
Total adjustments

4,674

18,837
Net cash provided by operating activities

39,723

54,980
Cash flows from investing activities:



Purchases of securities

(662,554)

(630,233)
Proceeds from sales, calls and maturities of securities

451,400

453,260
Principal repayments of securities

32,066

48,029
Net (increase) decrease in loans

(204,893)

312,736
Net (purchases) sales of loan participations

(56,596)

(208)
Proceeds from sales of Small Business Administration loans

2,802

3,719
Net return of capital from equity investments

1,302

1,303
Redemptions of bank-owned life insurance

—

2,670
Net purchases of premises and equipment

(857)

(710)
Proceeds from sales of repossessed real estate and other assets

—

112
Net cash (used in) provided by investing activities

(437,330)

190,678
Cash flows from financing activities:



Net (decrease) increase in noninterest-bearing deposits

(4,508)

151,719
Net (decrease) increase in interest-bearing deposits

(103,002)

78,122
Repayment of Federal Home Loan advances

(50,000)

—
Dividends paid on common stock

(9,578)

(8,833)
Payments to tax authorities for stock-based compensation

(135)

(87)
Proceeds from exercise of stock options

173

24
Repurchase of common stock

(15,041)

(5,825)
Net cash (used in) provided by financing activities

(182,091)

215,120
Net increase (decrease) in cash, cash equivalents and restricted cash

(579,698)

460,778
Cash, cash equivalents and restricted cash, beginning

950,146

538,007
Cash, cash equivalents and restricted cash, ending

$
370,448

$
998,785

~~See accompanying notes to condensed consolidated financial statements.~~

STELLAR BANCORP, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

~~Table of Contents~~

~~Stellar Bancorp, Inc. and Subsidiary~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

~~NOTE 1:~~1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Nature of Operations—~~Stellar~~-Stellar Bancorp, Inc.~~, formerly known as CBTX, Inc., or the Company, operated 34 branches, 18 in the Houston market area, 15 in the Beaumont/East Texas market area and one in Dallas,~~ (“Stellar”) through its wholly-owned subsidiary, ~~CommunityBank~~Stellar Bank, (the “Bank”, and together with Stellar, collectively referred to herein as “we,” “us”, “our” and the “Company”), provides a diversified range of ~~Texas, N.A.~~commercial banking services primarily to small- to medium-sized businesses. The Company derives substantially all of its revenues and income from the operation of the Bank.

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

region”) and the Beaumont-Port Arthur MSA, as ~~of September 30, 2022.~~

~~Effective October 1, 2022,~~ the Beaumont region (“Beaumont region”). The Company ~~completed its previously announced merger~~is focused on delivering a

wide variety of ~~equals, or the Merger, with Allegiance Bancshares, Inc. or Allegiance and changed its name to Stellar Bancorp, Inc. See Note: 22. Subsequent Events for further discussion regarding the Merger.~~

~~The Bank provides~~ relationship-driven commercial banking products and community-oriented services ~~primarily~~tailored to ~~small and~~meet the needs of small-to medium-sized businesses, professionals and ~~professionals~~individuals through its 55 banking centers with ~~operations within~~38 banking centers in the ~~Bank’s~~ Houston

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

markets.

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

~~The~~

In the opinion of management, the accompanying unaudited condensed consolidated financial statements ~~have been prepared in accordance with generally accepted accounting principles in~~reflect all adjustments considered necessary for a fair presentation of the ~~United States, or GAAP, but do not include~~financial position, results of operations and cash flows of the Company on a consolidated basis, and all ~~the information and footnotes required for complete consolidated financial statements. In management’s opinion, these interim unaudited condensed consolidated financial statements include all~~such adjustments are of a normal recurring ~~nature necessary for a fair statement of~~nature. Transactions between the Company’s consolidated financial position at September 30, 2022 and December 31, 2021 and consolidated results of operations and consolidated shareholders’ equity for the three and nine months ended September 30, 2022 and 2021 and consolidated cash flows for the nine months ended September 30, 2022 and 2021.

~~Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end~~Company and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These interim unauditedBank have been eliminated. The condensed consolidated financial statements should be read in conjunction with the ~~Company’s~~ audited consolidated financial statements and ~~notes~~footnotes thereto ~~for the year ended December 31, 2021~~ included ~~within~~in the Company’s Annual Report on Form ~~10-K.~~

~~Treasury Stock~~ ~~– During~~10-K for the fiscal year ended December 31, 2022. Operating results for the three months ended ~~September 30,~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Merger of Equals-On October 1, 2022, Allegiance Bancshares, Inc. (“Allegiance”) and CBTX, Inc. (“CBTX”) merged, (the “Merger”), with CBTX, as the surviving corporation that was renamed Stellar Bancorp, Inc. At the effective time of the Merger, each outstanding share of Allegiance common stock, par value of $1.00 per share, was converted into the right to receive 1.4184 shares of common stock of the Company. Immediately following the Merger, CommunityBank of Texas, N.A. (“CommunityBank”), a national banking association and a wholly-owned subsidiary of CBTX, merged with and into Allegiance Bank, a wholly owned subsidiary of Allegiance (the “Bank Merger”), with Allegiance Bank as the surviving bank. In connection with the operational conversion during the first quarter of 2023, Allegiance Bank changed its name to Stellar Bank on February 18, 2023.

The Merger constituted a business combination and was accounted for as a reverse merger using the acquisition method of accounting. As a result, Allegiance was the accounting acquirer and CBTX was the legal acquirer and the accounting acquiree. Accordingly, the historical financial statements of Allegiance became the historical financial statements of the combined company for all periods prior to October 1, 2022 (the “Merger Date”). In addition, the assets and liabilities of CBTX have been recorded at their estimated fair values and added to those of Allegiance as of October 1, 2022. The determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events that are subjective and subject to change.

The Company’s results of operations for the three months ended March 31, 2022 reflect Allegiance's historical results and do not include the historical results of CBTX. The Company has substantially completed its valuations of CBTX’s assets and liabilities. The Merger had a significant impact on all aspects of the Company’s financial statements, and financial results for periods after the Merger are not comparable to financial results for periods prior to the Merger. The number of shares issued and outstanding, earnings per share, capital surplus, dividends paid and all references to share quantities of the Company ~~retired 826,995 treasury~~have been retrospectively adjusted to

Table of Contents

reflect the equivalent number of shares ~~with a cost basis~~issued to holders of ~~$14.0 million. These shares were returned~~Allegiance common stock in the Merger. See Note 2 – Acquisitions in the accompanying notes to the ~~status~~consolidated financial statements for the impact of ~~authorized but unissued shares.~~

~~Share Repurchase Program~~—the Merger.

Significant Accounting and Reporting Policies

The ~~Company repurchased 510,161 shares under~~Company’s significant accounting and reporting policies can be found in Note 1 of the Company’s ~~share repurchase program during~~annual financial statements included in the ~~nine months~~Company’s Annual Report on Form 10-K for the fiscal year ended ~~September 30, 2022 at an average price~~December 31, 2022.

Adoption of ~~$29.48. During the nine months ended September 30, 2021,~~New Accounting Standards

ASU 2022-02, "Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." became effective for the Company ~~repurchased 214,219 shares at an average price~~for the first quarter of ~~$27.19. Shares repurchased were retired~~2023 and ~~returned to~~did not have a significant impact on the ~~status of authorized but unissued shares.~~

~~Accounting Standards Not Yet Adopted—Accounting Standards Update, or~~Company’s financial statements. ASU 2022-02 eliminates the troubled debt ~~receivable, or TDR,~~restructuring ("TDR") accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss ~~or CECL~~ model. The FASB’s decision to eliminate the TDR accounting model is in response to feedback that the allowance under CECL already incorporates credit losses from loans modified as TDRs and, consequently, the related accounting and disclosures, which preparers often find onerous to apply, no longer provide the same level of benefit to users.

In lieu of the TDR accounting model, ~~creditors will apply~~the Company applies the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial ~~difficulty.~~difficulty on a prospective basis. Under the general loan modification guidance, a modification is treated as a new loan only if the following two conditions are met:

~~Table of Contents~~

~~(i)~~ (1) the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks; and ~~(ii)~~(2) modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate.

2. ACQUISITIONS

Merger of Equals

As described in Note 1

~~This update will become~~– Nature of Operations and Summary of Significant Accounting and Reporting Policies, the Merger was completed on October 1, 2022.

Allegiance merged with and into CBTX with the surviving corporation renamed Stellar Bancorp, Inc. At the effective ~~for~~date of the Merger, each outstanding share of Allegiance common stock was converted into the right to receive 1.4184 shares of common stock of the Company.

The Company issued 28.1 million shares of its common stock to Allegiance shareholders in connection with the Merger, which represented 54.0% of the voting interests in the Company ~~for fiscal years beginning after December 31, 2022, including interim periods within those fiscal years, and~~upon completion of the Merger. In accordance with FASB ASC 805-40-30-2, the purchase price in a reverse acquisition is ~~not expected to have a significant impact~~determined based on the ~~Company’s financial statements.~~

~~Cash Flow Reporting—As~~number of ~~December 31, 2021,~~equity interests the ~~Company~~legal acquiree would have had ~~$1.8 million~~to issue to give the owners of the legal acquirer the same percentage equity interest in ~~cash held as collateral on deposit with other financial institution counterparties related to interest rate swap transactions~~the combined entity that ~~are considered restricted cash. As~~results from the reverse acquisition.

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


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

The Merger was accounted for as a reverse merger using the ~~Company had no cash held as collateral related~~acquisition method of accounting, which means that for accounting and financial reporting purposes, Allegiance was deemed to ~~interest rate swap transactions.~~

~~Supplemental disclosures~~have acquired CBTX in the Merger, even though CBTX was the legal acquirer. Accordingly, Allegiance's historical financial statements are the historical financial statements of ~~cash flow information were as follows~~the combined company for all periods prior to October 1, 2022 (the “Merger Date”).

Total acquisition and merger-related expenses recognized for the ~~periods indicated below:~~

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021
Supplemental disclosures of cash flow information:

Cash paid for taxes

$
6,750

$
4,559
Cash paid for interest

4,171

4,694
Supplemental disclosures of non-cash flow information:

Operating lease right-to-use asset increased (decreased) in exchange for lease liabilities

809

(617)
Change in liability for dividends accrued

167

(755)

~~NOTE 2: SECURITIES~~

~~The amortized cost, related gross unrealized gains~~three months ended March 31, 2023 and ~~losses~~2022 were $6.2 million and ~~fair values~~$451 thousand, respectively.

Table of ~~investments~~Contents

3. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in ~~securities as~~the carrying amount of the ~~dates indicated below~~Company’s goodwill and core deposit intangible assets were as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

(Dollars in thousands)

Cost

Gains

Losses

Fair Value
September 30, 2022








Debt securities available for sale:








State and municipal securities

$
175,763

$
—

$
(40,665)

$
135,098
U.S. Treasury securities

111,045

—

(3,786)

107,259
U.S. agency securities:


Callable debentures

3,000

—

(436)

2,564
Collateralized mortgage obligations

97,307

—

(12,909)

84,398
Mortgage-backed securities

211,497

—

(30,579)

180,918
Equity securities

1,201

—

(156)

1,045
Total

$
599,813

$
—

$
(88,531)

$
511,282
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


	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	—		(6,860)		(19)
Decrease due to payoff of serviced loans	—		—		(11)
Balance as of March 31, 2023	$	497,260	$	136,665	$	279

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

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

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


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

~~Table of Contents~~

4. SECURITIES

The amortized cost and ~~estimated~~ fair value of investment securities ~~by contractual maturities, as of the dates indicated below~~ were 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
September 30, 2022










Amortized cost:

Debt securities available for sale:










State and municipal securities

$
—

$
506

$
21,400

$
153,857

$
175,763
U.S. Treasury securities

69,486

38,655

2,904

—

111,045
U.S. agency securities:

Callable debentures

—

—

3,000

—

3,000
Collateralized mortgage obligations

—

—

2,487

94,820

97,307
Mortgage-backed securities

2

593

24,013

186,889

211,497
Equity securities

1,201

—

—

—

1,201
Total

$
70,689

$
39,754

$
53,804

$
435,566

$
599,813
Fair value:

Debt securities available for sale:










State and municipal securities

$
—

$
484

$
19,797

$
114,817

$
135,098
U.S. Treasury securities

68,069

36,672

2,518

—

107,259
U.S. agency securities:

Callable debentures

—

—

2,564

—

2,564
Collateralized mortgage obligations

—

—

2,408

81,990

84,398
Mortgage-backed securities

2

575

22,280

158,061

180,918
Equity securities

1,045

—

—

—

1,045
Total

$
69,116

$
37,731

$
49,567

$
354,868

$
511,282

(Dollars in thousands)

1 Year or Less

After 1 Year to 5 Years

After 5 Years to 10 Years

After 10 Years

Total
December 31, 2021










Amortized cost:

Debt securities available for sale:










State and municipal securities

$
881

$
—

$
12,339

$
155,321

$
168,541
U.S. Treasury securities

—

6,138

5,750

—

11,888
U.S. agency securities:

Callable debentures

—

—

3,000

—

3,000
Collateralized mortgage obligations

—

—

4,528

58,601

63,129
Mortgage-backed securities

—

953

4,056

168,437

173,446
Equity securities

1,189

—

—

—

1,189
Total

$
2,070

$
7,091

$
29,673

$
382,359

$
421,193
Fair value:

Debt securities available for sale:










State and municipal securities

$
883

$
—

$
12,905

$
158,812

$
172,600
U.S. Treasury securities

—

6,072

5,725

—

11,797
U.S. agency securities:

Callable debentures

—

—

2,973

—

2,973
Collateralized mortgage obligations

—

—

4,591

57,791

62,382
Mortgage-backed securities

—

994

4,166

168,961

174,121
Equity securities

1,173

—

—

—

1,173
Total

$
2,056

$
7,066

$
30,360

$
385,564

$
425,046

~~Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.~~


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Available for Sale
U.S. government and agency securities	$	426,544	$	570	$	(13,417)	$	413,697
Municipal securities	259,944		2,658		(30,403)		232,199
Agency mortgage-backed pass-through securities	382,495		879		(34,962)		348,412
Agency collateralized mortgage obligations	466,160		231		(58,203)		408,188
Corporate bonds and other	127,396		85		(10,802)		116,679
Total	$	1,662,539	$	4,423	$	(147,787)	$	1,519,175

Table of ~~Contents~~Contents

~~No securities were sold in the nine months ended September 30, 2022 and 2021. At September 30, 2022 and December~~


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

As of March 31, ~~2021, securities with a carrying amount of $25.4 million and $25.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.~~

~~Management did not believe that any of the securities the Company held at September 30, 2022 or December 31, 2021 were impaired due to credit quality. Accordingly,~~2023, no allowance for credit losses ~~or ACL, was recorded~~has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the ~~Company’s condensed consolidated balance sheets at September 30, 2022 or during 2021.~~securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

~~Accrued interest receivable for securities was $1.7 million~~

The amortized cost and ~~$2.0 million at September 30, 2022 and December 31, 2021, respectively, and is included in other assets in the condensed consolidated balance sheets.~~

~~The Company held 472 and 115~~fair value of investment securities at ~~September 30, 2022 and December~~March 31, ~~2021, respectively, that were in a gross unrealized loss position.~~

2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations at any time with or without call or prepayment penalties.


	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	77,513	$	75,609
Due after one year through five years	180,413		170,388
Due after five years through ten years	133,301		125,079
Due after ten years	422,657		391,499
Subtotal	813,884		762,575
Agency mortgage-backed pass-through securities and collateralized mortgage obligations	848,655		756,600
Total	$	1,662,539	$	1,519,175

Table of Contents

Securities with unrealized losses ~~as of the dates indicated below, aggregated~~segregated by ~~category and the~~ length of time ~~were~~such securities have been in a continuous loss position are as follows:

Less than Twelve Months

Twelve Months or More

Gross

Gross

Fair

Unrealized

Fair

Unrealized
(Dollars in thousands)

Value

Losses

Value

Losses
September 30, 2022








Debt securities available for sale:








State and municipal securities

$
110,933

$
(28,504)

$
24,165

$
(12,161)
U.S. Treasury securities

104,544

(3,427)

2,715

(359)
U.S. agency securities:






Callable debentures

2,564

(436)

—

—
Collateralized mortgage obligations

62,830

(8,187)

21,568

(4,722)
Mortgage-backed securities

138,312

(20,371)

42,529

(10,208)
Equity securities

—

—

1,045

(156)

$
419,183

$
(60,925)

$
92,022

$
(27,606)
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)


	March 31, 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	$	111,992	$	(1,309)	$	262,152	$	(12,108)	$	374,144	$	(13,417)
Municipal securities	4,453		(41)		176,032		(30,362)		180,485		(30,403)
Agency mortgage-backed pass-through securities	45,150		(1,345)		254,713		(33,617)		299,863		(34,962)
Agency collateralized mortgage obligations	4,180		(13)		392,427		(58,190)		396,607		(58,203)
Corporate bonds and other	38,378		(1,774)		60,404		(9,028)		98,782		(10,802)
Total	$	204,153	$	(4,482)	$	1,145,728	$	(143,305)	$	1,349,881	$	(147,787)


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

~~Table~~During the three months ended March 31, 2023, the Company sold $320.4 million of ~~Contents~~

~~NOTE 3: EQUITY INVESTMENTS~~

~~The Company’s unconsolidated investments that are considered equity~~ securities ~~as they represent ownership interests, such as common or preferred stock as~~recording gross gains of $234 thousand. There were no securities sold during the ~~dates indicated below were as follows:~~

(Dollars in thousands)

September 30, 2022

December 31, 2021
Federal Reserve Bank stock

$
9,271

$
9,271
Federal Home Loan Bank stock

3,991

3,967
The Independent Bankers Financial Corporation stock

141

141
Community Reinvestment Act investments

4,432

4,348

$
17,835

$
17,727

Banks that are members of the Federal Home Loan Bank are required to maintain a stock investment in the Federal Home Loan Bank calculated as a percentage of aggregate outstanding mortgages, outstanding Federal Home Loan Bank advances and other financial instruments. As a member of the Federal Reserve, the Bank is required to annually subscribe to Federal Reserve Bank stock in specific ratios to the Bank’s equity. Although Federal Home Loan Bank and Federal Reserve Bank stock are considered equity securities, they do not have readily determinable fair values because ownership is restricted, and they lack a readily-available market. These investments can be sold back only at their par value of $100 per share and can only be sold to the Federal Home Loan Banks or the Federal ~~Reserve~~ Banks or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company because of the oversight role exercised by regulators in the process of budgeting and approving dividends. As a result, these investments are carried at cost and evaluated for impairment.

The Company also holds an investment in the stock of The Independent Bankers Financial Corporation, which has limited marketability. As a result, this investment is carried at cost and evaluated for impairment.

The Company has investments in investment funds and limited partnerships that are qualified Community Reinvestment Act, or CRA, investments and investments under the Small Business Investment Company program of the Small Business Administration, or SBA. There are limited to no observable price changes in orderly transactions for identical investments or similar investments from the same issuers that are actively traded and, as a result, these investments are stated at cost.three months ended March 31, 2022. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company ~~had $7.9~~did not own securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of consolidated shareholders’ equity at such respective dates.

The carrying value of pledged securities was $1.11 billion at March 31, 2023 and $978.9 million ~~and $6.3 million, respectively, in outstanding unfunded commitments to these funds, which are subject to call.~~

~~During the nine months ended September 30,~~at December 31, 2022, two of these investment funds sold underlying investments for more than their book value and the Company recorded a total gain of $1.4 million, which is included in net gains on sales of assets in the condensed consolidated income statement.

respectively. The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators, which include, but are not limited to: (i) a significant deterioration in the earnings, performance, credit rating, asset quality or business prospectsmajority of the investee; (ii) a significant adverse change in the regulatory, economic or technological environment of the investee; (iii) a significant adverse change in the general market conditions of either the geographical area or the industry in which the investee operates; and (iv) a bona fide offersecurities were pledged to purchase, an offer by the investee to sell, or completed auction process for the same or similar investment for an amount less than the carrying amount of the investment. There were no such qualitative indicators as of September 30, 2022.

collateralize public fund deposits.

Table of ~~Contents~~Contents

~~NOTE 4:~~

5. LOANS

~~Loans~~ AND ALLOWANCE FOR CREDIT LOSSES

The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily made to borrowers located within Texas and are segregated by ~~loan~~ class ~~or major~~of loan ~~category, as of the dates indicated below were~~ as follows:

(Dollars in thousands)

September 30, 2022

December 31, 2021
Commercial and industrial

$
568,071

18.1%

$
634,384

22.0%
Real estate:

Commercial real estate

1,242,118

39.6%

1,091,969

38.0%
Construction and development

507,570

16.2%

460,719

16.0%
1-4 family residential

288,456

9.2%

277,273

9.6%
Multi-family residential

370,391

11.8%

286,396

10.0%
Consumer

24,509

0.8%

28,090

1.0%
Agriculture

11,185

0.4%

7,941

0.3%
Other

123,591

3.9%

89,655

3.1%
Total gross loans

3,135,891

100.0%

2,876,427

100.0%
Less allowance for credit losses for loans

(32,577)



(31,345)


Less deferred loan fees and unearned discounts

(9,470)



(8,739)


Less loans held for sale

—



(164)


Loans, net

$
3,093,844



$
2,836,179

~~Accrued interest receivable for loans was $9.0 million~~


	March 31, 2023		December 31, 2022
	(In thousands)
Commercial and industrial	$	1,477,340	$	1,455,795
Paycheck Protection Program (PPP)	11,081		13,226
Real estate:
Commercial real estate (including multi-family residential)	4,014,609		3,931,480
Commercial real estate construction and land development	1,034,538		1,037,678
1-4 family residential (including home equity)	1,008,362		1,000,956
Residential construction	292,143		268,150
Consumer and other	47,971		47,466
Total loans	7,886,044		7,754,751
Allowance for credit losses on loans	(96,188)		(93,180)
Loans, net	$	7,789,856	$	7,661,571

Nonaccrual and ~~$9.6 million at September 30, 2022 and December 31, 2021, respectively, and was included in other assets in the condensed consolidated balance sheets.~~

From time to time, the Company will acquire and dispose of interests in loans under participation agreements with other financial institutions. Loan participations purchased and sold during the nine months ending September 30, 2022 and 2021, by loan class, were as follows:

Participations

Participations
(Dollars in thousands)

Purchased

Sold
September 30, 2022

Commercial and industrial

$
24,192

1,943
Commercial real estate

30,455

1,247
Construction and development

—

122
Other

5,261

—

$
59,908

$
3,312
September 30, 2021

Commercial and industrial

$
—

$
1,336
Commercial real estate

—

375
Construction and development

—

22
Other

1,941

—

$
1,941

$
1,733

The Company participates in the SBA loan program. When advantageous, the Company will sell the guaranteed portions of these loans with servicing retained. SBA loans that were sold with servicing retained during the nine months ended September 30, 2022 and 2021, totaled $2.8 million and $3.7 million, respectively. Net gains recognized on sales of SBA loans were $328,000 and $436,000 for the nine months ended September 30, 2022 and 2021, respectively.

Past Due Loans

~~Table of Contents~~

~~NOTE 5: LOAN PERFORMANCE~~

~~The following is an~~An aging analysis of the ~~Company’s~~recorded investment in past due loans, segregated by class of loans, is included below. The Company defines recorded investment as the outstanding loan ~~class,~~balances including net deferred loan fees, and excluding accrued interest receivable of $35.3 million and $34.1 million as of ~~the dates indicated below:~~

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
September 30, 2022














Commercial and industrial

$
4,374

$
3,416

$
281

$
8,071

$
560,000

$
568,071

$
—
Real estate:












Commercial real estate

5,360

4,447

—

9,807

1,232,311

1,242,118

—
Construction and development

1,350

—

—

1,350

506,220

507,570

—
1-4 family residential

—

1,309

1,601

2,910

285,546

288,456

—
Multi-family residential

—

—

—

—

370,391

370,391

—
Consumer

—

—

—

—

24,509

24,509

—
Agriculture

15

—

—

15

11,170

11,185

—
Other

—

—

—

—

123,591

123,591

—
Total gross loans

$
11,099

$
9,172

$
1,882

$
22,153

$
3,113,738

$
3,135,891

$
—
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

$
—

The Company places loans on nonaccrual status because of delinquency or because collection of principal or interest is doubtful. Nonaccrual loans, segregated by loan class, as of the dates indicated below were as follows:

(Dollars in thousands)

September 30, 2022

December 31, 2021
Commercial and industrial

$
7,985

$
9,090
Real estate:

Commercial real estate

11,076

11,512
Construction and development

139

142
1-4 family residential

3,176

1,784
Consumer

34

40
Total nonaccrual loans

$
22,410

$
22,568

~~Interest income that would have been earned under the original terms of the nonaccrual loans was $809,000 and $568,000 for the nine months ended September 30, 2022 and 2021, respectively.~~

~~Table of Contents~~

Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the nine months ended September 30, 2022 and 2021, that remained outstanding as of the end of those periods 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
September 30, 2022

Commercial and industrial

7

$
3,870

$
1,093

$
—

$
—

$
2,777
Real estate:

Commercial real estate

2

2,273

—

—

2,040

245
Construction and development

3

431

—

—

431

—
Total

12

$
6,574

$
1,093

$
—

$
2,471

$
3,022
September 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

—

—

—
Consumer

1

42

—

—

42

—
Total

6

$
6,052

$
6,010

$
—

$
42

$
—

Loan modifications related to a loan refinancing or restructuring other than a troubled debt restructuring are accounted for as a new loan if the terms provided to the borrower are at least as favorable to the Company as terms for comparable loans to other borrowers with similar collection risks that is not a loan refinancing or restructuring. If the loan refinancing or restructuring does not meet this condition or if only minor modifications are made to the original loan contract, it is not considered a new loan and is considered a renewal or modification of the original contract. Restructured or modified loans are not considered past due if they are performing under the terms of the modified or restructured payment schedule.

A troubled debt restructuring is considered in default when a payment in accordance with the terms of the restructuring is more than 30 days past due. All loans restructured in a troubled debt restructuring are individually evaluated based on the underlying collateral for the determination of an ACL.

There were four commercial and industrial loans totaling $1.7 million and one commercial and industrial loan of $1.5 million that were troubled debt restructurings and have payment defaults during the twelve months ended September 30, 2022 and 2021, respectively.

~~At September 30, 2022~~March 31, 2023 and December 31, ~~2021, the Company had an outstanding commitment~~2022, respectively, due to ~~fund $1.1 million and $2.5 million, respectively, for loans that were previously restructured.~~

immateriality.


	March 31, 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	$	5,115	$	—	$	5,115	$	23,152	$	1,449,073	$	1,477,340
Paycheck Protection Program (PPP)	82		—		82		177		10,822		11,081
Real estate:
Commercial real estate (including multi-family residential)	9,917		—		9,917		9,026		3,995,666		4,014,609
Commercial real estate construction and land development	1,937		—		1,937		27		1,032,574		1,034,538
1-4 family residential (including home equity)	5,133		—		5,133		10,586		992,643		1,008,362
Residential construction	867		—		867		195		291,081		292,143
Consumer and other	89		—		89		250		47,632		47,971
Total loans	$	23,140	$	—	$	23,140	$	43,413	$	7,819,491	$	7,886,044

Table of ~~Contents~~Contents

~~Loans individually evaluated for credit losses were as follows for the dates indicated below:~~

Troubled Debt Restructurings

Total Loans
(Dollars in thousands)

Accruing

Non-Accrual

Total

Other Non-Accrual

Other Accruing

Individually Evaluated
September 30, 2022

Commercial and industrial

$
1,870

$
7,934

$
9,804

$
51

$
1,077

$
10,932
Real estate:

Commercial real estate

7,629

10,980

18,609

96

—

18,705
Construction and development

10,325

139

10,464

—

—

10,464
1-4 family residential

26

3,149

3,175

27

—

3,202
Consumer

—

34

34

—

82

116
Other

8,523

—

8,523

—

—

8,523
Total

$
28,373

$
22,236

$
50,609

$
174

$
1,159

$
51,942
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

~~NOTE 6: ALLOWANCE FOR CREDIT LOSSES~~


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

Credit Quality Indicators

The Company ~~primarily manages credit quality and credit~~categorizes loans into risk ~~associated with its loan portfolio~~categories based on relevant information about the ability of borrowers to service their debt. The Company utilizes a risk ~~grading assigned~~rating matrix to assign a risk rating to each individual loan within the loan class. Each loan class is a grouping of loan receivables within the portfolio based on risk characteristics and the method for monitoring and assessing the associated credit risks.

~~Risk Grading~~

~~The methodology used by the Company in the determination~~ of its ~~ACL, which is performed at least~~loans. Loans are rated on a ~~quarterly~~scale of 10 to 90. Risk ratings are updated on an ongoing basis ~~is designed~~and are subject to ~~be responsive to changes in~~change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks certain risk ratings to be used as ~~well as forecasted economic conditions. The~~ credit quality indicators including trends related to (1) the weighted-average risk grade of loans, (2) the level of classified loans, (3) the delinquency status of loans, (4) nonperforming loans and (5) the general economic conditions in the our markets. Individual bankers, under the oversight of credit administration, review updated financial information for all pass grade commercial loans to reassess the risk grade on at least an annual basis. When a loan reaches a set of internally designated criteria, including Substandard (60) or higher, a special assets officer will be involved in the monitoring of the loan portfolio is assessed through different processes. At origination, a risk grade is assigned to each loan based on underwriting procedures and criteria. The risk grades used are described below. The Company monitors the credit quality of the loan portfolio on an on-going ~~basis by performing loan reviews, both internally and through~~basis.

The following is a third-party vendor, on loans meeting certain risk and exposure criteria. Through these reviews, loans that require risk grade changes are approved by executive management. In addition, executive management reviews classified and criticized loans to assess changes in credit qualitygeneral description of the ~~underlying loan, and when determined appropriate, based on individual evaluation, approve specific reserves.~~

risk ratings used:

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

Special Mention—~~Credits in this category contain more than the normal amount of risk and are referred to~~Loans classified as special mention ~~in accordance with regulatory guidelines. These credits possess clearly identifiable temporary~~have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses ~~or trends that, if not corrected or revised,~~ may result in ~~a condition~~deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that ~~exposes~~ the ~~Company to a higher level of risk of loss.~~

institution will sustain some loss if the deficiencies are not corrected.

Substandard—~~Credits in this category are~~Loans classified as substandard ~~in accordance with regulatory guidelines and of unsatisfactory credit quality with~~have well-defined weaknesses ~~or weaknesses that jeopardize the liquidation of the debt. Credits in this category~~on a continuing basis and are inadequately protected by the current ~~sound~~net worth and paying capacity of the ~~obligor~~borrower, declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These loans so classified are characterized by the ~~collateral pledged,~~distinct possibility that the institution will sustain some loss if ~~any. Often,~~ the ~~assets~~deficiencies are not corrected.

Doubtful—Loans classified as doubtful have all the weaknesses inherent in ~~this category will have a valuation allowance representative~~those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of ~~management’s~~

currently existing facts, conditions and values, highly questionable and improbable.

~~Table of Contents~~Loss

~~estimated~~—Loans classified as loss ~~that is probable~~are to be ~~incurred. Loans deemed substandard and on nonaccrual status are individually evaluated for expected credit losses.~~

~~Doubtful~~—Credits in this category are considered doubtful in accordance with regulatory guidelines, are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determinecharged-off or upon some near-term event which lacks certainty. Generally, these credits will have a valuation allowance based upon management’s best estimate of the losses probable to occur in the liquidation of the debt.

~~Loss~~—Credits in this category are considered loss in accordance with regulatory guidelines and are considered uncollectible and of such little value as to question their continued existence as assets on the Company’s financial statements. Such credits are charged off or charged downcharged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. ~~This category does~~“Loss” is not ~~intend~~intended to imply that the ~~debt~~loan or some portion of it will never be paid, nor does it in any way imply that ~~the debt will be forgiven.~~

there has been a forgiveness of debt.

Table of Contents

The ~~Company had no loans graded loss or~~ ~~doubtful~~ ~~at September 30, 2022 or December~~following table presents risk ratings by category of loan as of March 31, ~~2021.~~

~~At September 30, 2022~~2023 and December 31, ~~2021,~~2022:
As of March 31, 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 $ 67,460 $ 364,886 $ 220,941 $ 68,360 $ 48,321 $ 37,100 $ 585,691 $ 33,937 $ 1,426,696 $ 1,400,191
Special Mention 329 671 541 481 694 184 1,919 478 5,297 18,982
Substandard 250 4,610 18,567 1,459 12,794 857 5,862 868 45,267 36,568
Doubtful — 53 27 — — — — — 80 54
Total commercial and industrial
    loans
$ 68,039 $ 370,220 $ 240,076 $ 70,300 $ 61,809 $ 38,141 $ 593,472 $ 35,283 $ 1,477,340 $ 1,455,795
Current-period gross charge-offs $ — $ 95 $ 51 $ — $ (2) $ — $ 264 $ 18 $ 426
Paycheck Protection Program (PPP)
Pass $ — $ — $ 6,262 $ 4,819 $ — $ — $ — $ — $ 11,081 $ 13,226
Special Mention — — — — — — — — — —
Substandard — — — — — — — — — —
Doubtful — — — — — — — — — —
Total PPP loans $ — $ — $ 6,262 $ 4,819 $ — $ — $ — $ — $ 11,081 $ 13,226
Current-period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial real estate
    (including multi-family residential)
Pass $ 101,831 $ 1,332,416 $ 875,519 $ 491,699 $ 370,618 $ 625,176 $ 125,193 $ 18,040 $ 3,940,492 $ 3,844,951
Special Mention — 1,022 2,632 3,679 809 6,799 587 — 15,528 18,183
Substandard 798 14,314 10,477 10,064 5,641 17,295 — — 58,589 68,346
Doubtful — — — — — — — — — —
Total commercial real estate
    (including multi-family
    residential) loans
$ 102,629 $ 1,347,752 $ 888,628 $ 505,442 $ 377,068 $ 649,270 $ 125,780 $ 18,040 $ 4,014,609 $ 3,931,480
Current-period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial real estate construction
    and land development
Pass $ 51,849 $ 496,452 $ 305,671 $ 48,800 $ 36,510 $ 10,103 $ 66,678 $ 826 $ 1,016,889 $ 1,025,141
Special Mention — 1,975 22 145 — 215 — 149 2,506 832
Substandard — 2,837 11,850 91 83 282 — — 15,143 11,705
Doubtful — — — — — — — — — —
Total commercial real estate
    construction and land development
$ 51,849 $ 501,264 $ 317,543 $ 49,036 $ 36,593 $ 10,600 $ 66,678 $ 975 $ 1,034,538 $ 1,037,678
Current-period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Table of Contents


	As of March 31, 2023																		As of December 31, 2022
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted to Term Loans
	2023		2022		2021		2020		2019		Prior						Total		Total
	(In thousands)
1-4 family residential (including home equity)
Pass	$	45,638	$	263,617	$	231,405	$	121,674	$	78,287	$	123,212	$	106,219	$	8,710	$	978,762	$	969,396
Special Mention	—		59		—		1,739		139		198		356		—		2,491		3,714
Substandard	725		1,028		1,981		3,604		3,589		6,699		6,852		2,631		27,109		27,846
Doubtful	—		—		—		—		—		—		—		—		—		—
Total 1-4 family residential (including home equity)	$	46,363	$	264,704	$	233,386	$	127,017	$	82,015	$	130,109	$	113,427	$	11,341	$	1,008,362	$	1,000,956

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

Residential construction
Pass	$	32,476	$	194,880	$	31,895	$	8,806	$	1,293	$	2,515	$	18,627	$	—	$	290,492	$	266,943
Special Mention	—		665		—		—		—		—		—		—		665		421
Substandard	—		305		681		—		—		—		—		—		986		786
Doubtful	—		—		—		—		—		—		—		—		—		—
Total residential construction	$	32,476	$	195,850	$	32,576	$	8,806	$	1,293	$	2,515	$	18,627	$	—	$	292,143	$	268,150

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

Consumer and other
Pass	7,278		12,893		10,595		2,702		891		697		11,696		874		47,626		47,062
Special Mention	—		34		1		—		—		—		—		—		35		43
Substandard	—		74		8		—		104		8		5		111		310		361
Doubtful	—		—		—		—		—		—		—		—		—		—
Total consumer and other	$	7,278	$	13,001	$	10,604	$	2,702	$	995	$	705	$	11,701	$	985	$	47,971	$	47,466

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

Total loans
Pass	306,532		2,665,144		1,682,288		746,860		535,920		798,803		914,104		62,387		7,712,038		7,566,910
Special Mention	329		4,426		3,196		6,044		1,642		7,396		2,862		627		26,522		42,175
Substandard	1,773		23,168		43,564		15,218		22,211		25,141		12,719		3,610		147,404		145,612
Doubtful	—		53		27		—		—		—		—		—		80		54
Total loans	$	308,634	$	2,692,791	$	1,729,075	$	768,122	$	559,773	$	831,340	$	929,685	$	66,624	$	7,886,044	$	7,754,751

Total current-period gross charge-offs	$	—	$	103	$	51	$	—	$	(2)	$	—	$	264	$	18	$	434

Table of Contents

The following table presents the ~~ratio of the ACL for loans to loans excluding loans held for sale was 1.04% and 1.09%, respectively.~~ ~~The ACL increased from $31.3 million at December 31, 2021 to $32.6 million at September 30, 2022,~~ ~~primarily due to growth~~activity in the ~~loan portfolio. Although national~~allowance for credit losses on loans by portfolio type for the three months ended March 31, 2023 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.

2022:


	Commercial and industrial		Paycheck Protection Program (PPP)		Commercial real estate (including multi-family residential)		Commercial real estate construction and land development		1-4 family residential (including home equity)		Residential construction		Consumer and other		Total
	(In thousands)
Allowance for credit losses on loans:
Three 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	(1,502)		—		4,716		(542)		116		293		119		3,200
Charge-offs	(426)		—		—		—		—		—		(8)		(434)
Recoveries	208		—		14		—		7		—		13		242
Net charge-offs	(218)		—		14		—		7		—		5		(192)
Balance March 31, 2023	$	39,516	$	—	$	37,700	$	13,579	$	2,832	$	2,089	$	472	$	96,188







Three Months Ended
Balance December 31, 2021	$	16,629	$	—	$	23,143	$	6,263	$	847	$	975	$	83	$	47,940
Provision for credit losses on loans	(383)		—		1,989		(53)		(95)		118		16		1,592
Charge-offs	(341)		—		(255)		(63)		—		—		(48)		(707)
Recoveries	390		—		—		—		—		—		—		390
Net charge-offs	49		—		(255)		(63)		—		—		(48)		(317)
Balance March 31, 2022	$	16,295	$	—	$	24,877	$	6,147	$	752	$	1,093	$	51	$	49,215

Allowance for Credit Losses on Unfunded Commitments

The total of the Company’s qualitative and quantitative factors ranged from 0.64% to 1.92% and 0.62% to 2.08% at September 30, 2022 and December 31, 2021, respectively. All factors are reassessed at the end of each quarter.

The review of the appropriateness of the ACL, which includes evaluation of historical loss trends, qualitative adjustments and forecasted economic conditions applied to general reserves, is performed by executive management and presented

In addition to the ~~Board of Directors~~allowance for ~~its review~~credit losses on ~~a quarterly basis. The ACL at September 30, 2022, reflects~~loans, the ~~Company’s assessment based~~Company has established an allowance for credit losses on ~~the information available at that time.~~

~~Table of Contents~~

~~Loans by risk grades, loan class and vintage, at September 30, 2022 were as follows:~~

(Dollars in thousands)

2022

2021

2020

2019

2018

Prior

Revolving Loans

Converted Revolving Loans

Total
Commercial and industrial:

Pass

$
97,529

$
131,496

$
29,688

$
41,184

$
15,542

$
5,762

$
210,724

$
23,616

$
555,541
Substandard

—

—

—

2,745

3,585

300

1,540

4,360

12,530
Total commercial and industrial

97,529

131,496

29,688

43,929

19,127

6,062

212,264

27,976

568,071
Commercial real estate:

Pass

409,433

226,016

196,281

159,697

80,581

77,497

42,858

17,631

1,209,994
Special mention

—

—

—

—

2,161

—

—

—

2,161
Substandard

—

47

1,083

8,132

6,746

3,470

—

10,485

29,963
Total commercial real estate

409,433

226,063

197,364

167,829

89,488

80,967

42,858

28,116

1,242,118
Construction and development:

Pass

169,575

183,167

27,542

24,518

5,889

11,691

74,221

82

496,685
Special mention

421

—

—

—

—

—

—

—

421
Substandard

—

—

291

—

2,700

7,473

—

—

10,464
Total construction and development

169,996

183,167

27,833

24,518

8,589

19,164

74,221

82

507,570
1-4 family residential:

Pass

64,430

107,974

19,278

11,647

22,871

48,751

7,289

246

282,486
Substandard

—

1,310

1,548

494

891

226

—

1,501

5,970
Total 1-4 family residential

64,430

109,284

20,826

12,141

23,762

48,977

7,289

1,747

288,456
Multi-family residential:

Pass

50,748

35,442

59,609

17,732

35,974

170,319

567

—

370,391
Total multi-family residential

50,748

35,442

59,609

17,732

35,974

170,319

567

—

370,391
Consumer:

Pass

5,356

3,290

2,485

558

446

48

12,095

—

24,278
Substandard

—

—

34

—

—

—

197

—

231
Total consumer

5,356

3,290

2,519

558

446

48

12,292

—

24,509
Agriculture:

Pass

4,680

722

362

24

26

28

5,284

—

11,126
Substandard

—

—

—

—

—

15

44

—

59
Total agriculture

4,680

722

362

24

26

43

5,328

—

11,185
Other:

Pass

22,473

34,745

1,198

—

1,255

1,149

62,770

—

123,590
Substandard

—

—

—

1

—

—

—

—

1
Total other

22,473

34,745

1,198

1

1,255

1,149

62,770

—

123,591
Total

Pass

824,224

722,852

336,443

255,360

162,584

315,245

415,808

41,575

3,074,091
Special mention

421

—

—

—

2,161

—

—

—

2,582
Substandard

—

1,357

2,956

11,372

13,922

11,484

1,781

16,346

59,218
Total gross loans

$
824,645

$
724,209

$
339,399

$
266,732

$
178,667

$
326,729

$
417,589

$
57,921

$
3,135,891

~~Table of Contents~~

~~Loans by risk grades, loan class and vintage, at December 31, 2021 were as follows:~~

(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

~~Table of Contents~~

~~Loans by risk grades and loan class as of the dates indicated below were as follows:~~

(Dollars in thousands)

Pass

Special Mention

Substandard

Total Loans
September 30, 2022








Commercial and industrial

$
555,541

$
—

$
12,530

$
568,071
Real estate:


Commercial real estate

1,209,994

2,161

29,963

1,242,118
Construction and development

496,685

421

10,464

507,570
1-4 family residential

282,486

—

5,970

288,456
Multi-family residential

370,391

—

—

370,391
Consumer

24,278

—

231

24,509
Agriculture

11,126

—

59

11,185
Other

123,590

—

1

123,591
Total gross loans

$
3,074,091

$
2,582

$
59,218

$
3,135,891
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

~~Loans individually evaluated and collectively evaluated as of the dates indicated below were as follows:~~

September 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

$
10,932

$
557,139

$
568,071

$
16,579

$
617,805

$
634,384
Real estate:








Commercial real estate

18,705

1,223,413

1,242,118

21,057

1,070,912

1,091,969
Construction and development

10,464

497,106

507,570

12,716

448,003

460,719
1-4 family residential

3,202

285,254

288,456

3,355

273,918

277,273
Multi-family residential

—

370,391

370,391

—

286,396

286,396
Consumer

116

24,393

24,509

125

27,965

28,090
Agriculture

—

11,185

11,185

—

7,941

7,941
Other

8,523

115,068

123,591

5,440

84,215

89,655
Total gross loans

$
51,942

$
3,083,949

$
3,135,891

$
59,272

$
2,817,155

$
2,876,427

~~The Company had collateral dependent loans totaling $1.5 million pending foreclosure at both September 30, 2022 and December 31, 2021.~~

~~Table of Contents~~

~~Activity in the ACL for loans, segregated by loan class for the nine months ended September 30, 2022 and 2021, was as follows:~~

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
September 30, 2022
















Beginning balance

$
11,214

$
11,015

$
3,310

$
2,105

$
1,781

$
406

$
88

$
1,426

$
31,345
Provision (recapture)

(2,101)

1,195

654

152

723

22

24

353

1,022
Charge-offs

(44)

(25)

—

(8)

—

(63)

—

—

(140)
Recoveries

328

—

—

6

—

6

10

—

350
Net recoveries

284

(25)

—

(2)

—

(57)

10

—

210
Ending balance

$
9,397

$
12,185

$
3,964

$
2,255

$
2,504

$
371

$
122

$
1,779

$
32,577
Period-end amount allocated to:


















Specific reserve

$
2,517

$
28

$
—

$
—

$
—

$
116

$
—

$
—

$
2,661
General reserve

6,880

12,157

3,964

2,255

2,504

255

122

1,779

29,916
Total

$
9,397

$
12,185

$
3,964

$
2,255

$
2,504

$
371

$
122

$
1,779

$
32,577
September 30, 2021

Beginning balance

$
13,035

$
13,798

$
6,089

$
2,578

$
2,513

$
440

$
137

$
2,047

$
40,637
Provision (recapture)

(2,028)

(2,054)

(2,755)

(875)

(357)

(85)

(75)

(732)

(8,961)
Charge-offs

(495)

—

—

(3)

—

(13)

—

—

(511)
Recoveries

889

—

—

—

—

107

47

—

1,043
Net (charge-offs) recoveries

394

—

—

(3)

—

94

47

—

532
Ending balance

$
11,401

$
11,744

$
3,334

$
1,700

$
2,156

$
449

$
109

$
1,315

$
32,208
Period-end amount allocated to:


















Specific reserve

$
4,343

$
670

$
—

$
—

$
—

$
131

$
—

$
—

$
5,144
General reserve

7,058

11,074

3,334

1,700

2,156

318

109

1,315

27,064
Total

$
11,401

$
11,744

$
3,334

$
1,700

$
2,156

$
449

$
109

$
1,315

$
32,208

~~The ACL for loans by loan class as of the dates indicated was as follows:~~

September 30, 2022

December 31, 2021
(Dollars in thousands)

Amount

Percent

Amount

Percent
Commercial and industrial

$
9,397

28.9
%

$
11,214

35.7
%
Real estate:



Commercial real estate

12,185

37.4
%

11,015

35.1
%
Construction and development

3,964

12.2
%

3,310

10.6
%
1-4 family residential

2,255

6.9
%

2,105

6.7
%
Multi-family residential

2,504

7.7
%

1,781

5.7
%
Consumer

371

1.1
%

406

1.3
%
Agriculture

122

0.4
%

88

0.3
%
Other

1,779

5.4
%

1,426

4.6
%
Total allowance for credit losses for loans

$
32,577

100.0
%

$
31,345

100.0
%
Loans excluding loans held for sale

3,126,421

2,867,524

ACL for loans to loans excluding loans held for sale

1.04%

1.09%

~~Allocation of a portion of the ACL to one class of loans above does not preclude its availability to absorb losses~~unfunded commitments, classified in other ~~classes.~~

~~Nonaccrual loans are included~~liabilities and adjusted as a provision for credit loss expense. The allowance represents estimates of expected credit losses over the contractual period in ~~individually evaluated loans and $15.9 million and $16.0 million of nonaccrual loans had no related ACL at September 30, 2022 and December 31, 2021, respectively.~~

~~Table of Contents~~

~~Charge-offs and recoveries by loan class and vintage for the nine months ended September 30, 2022 were as follows:~~

(Dollars in thousands)

2022

2021

2020

2019

2018

Prior

Revolving Loans

Converted Revolving Loans

Total
Commercial and industrial:

Charge-off

$
(43)

$
—

$
—

$
—

$
—

$
(1)

$
—

$
—

$
(44)
Recovery

1

—

—

—

207

55

65

—

328
Total commercial and industrial

(42)

—

—

—

207

54

65

—

284
Commercial real estate:

Charge-off

—

—

—

(25)

—

—

—

—

(25)
Total commercial real estate loans

—

—

—

(25)

—

—

—

—

(25)
1-4 family residential:

Charge-off

—

—

—

—

(2)

(6)

—

—

(8)
Recovery

—

—

—

—

—

6

—

—

6
Total 1-4 family residential

—

—

—

—

(2)

—

—

—

(2)
Consumer:

Charge-off

—

—

(12)

—

—

—

(1)

(50)

(63)
Recovery

—

—

—

1

—

3

—

2

6
Total consumer

—

—

(12)

1

—

3

(1)

(48)

(57)
Agriculture:

Recovery

—

—

—

—

—

10

—

—

10
Total agriculture

—

—

—

—

—

10

—

—

10
Total:

Charge-off

(43)

—

(12)

(25)

(2)

(7)

(1)

(50)

(140)
Recovery

1

—

—

1

207

74

65

2

350
Total

$
(42)

$
—

$
(12)

$
(24)

$
205

$
67

$
64

$
(48)

$
210

~~Charge-offs and recoveries by loan class and vintage for the nine months ended September 30, 2021 were as follows:~~

(Dollars in thousands)

2021

2020

2019

2018

2017

Prior

Revolving Loans

Converted Revolving Loans

Total
Commercial and industrial:

Charge-off

$
—

$
—

$
(191)

$
(260)

$
—

$
—

$
—

$
(44)

$
(495)
Recovery

—

—

5

39

43

762

40

889
Total commercial and industrial

—

—

(186)

(221)

43

762

—

(4)

394
1-4 family residential:

Charge-off

—

—

—

—

—

(3)

—

—

(3)
Total 1-4 family residential

—

—

—

—

—

(3)

—

—

(3)
Consumer:

Charge-off

(10)

—

(3)

—

—

—

—

—

(13)
Recovery

4

—

4

—

—

99

—

—

107
Total consumer

(6)

—

1

—

—

99

—

—

94
Agriculture:

Recovery

—

—

—

—

—

47

—

—

47
Total agriculture

—

—

—

—

—

47

—

—

47
Total:

Charge-off

(10)

—

(194)

(260)

—

(3)

—

(44)

(511)
Recovery

4

—

9

39

43

908

—

40

1,043
Total

$
(6)

$
—

$
(185)

$
(221)

$
43

$
905

$
—

$
(4)

$
532

~~The Company has unfunded commitments, comprised of letters of~~which there is exposure to credit ~~and commitments~~risk via a contractual obligation to extend credit, unless that ~~are not~~obligation is unconditionally cancellable by the Company. ~~See Note 16: Commitments~~The estimate includes consideration of the likelihood that funding will occur and ~~Contingencies~~an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is informed by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund is informed by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and ~~Financial~~

~~Table~~drivers. The allowance for credit losses on unfunded commitments as of ~~Contents~~

~~Instruments with Off-Balance-Sheet Risk. Unfunded commitments have similar characteristics as loans~~March 31, 2023 and ~~their ACL~~December 31, 2022 was ~~determined using the model~~$12.4 million and ~~methodology for loans noted above as well as historical and expected utilization levels. Activity in the ACL~~$12.0 million, respectively. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The Company recorded a $466 thousand provision for unfunded commitments in the first quarter of 2023.

Table of Contents

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

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


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


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

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


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

Paycheck Protection Program (PPP)	177		—		177
Real estate:
Commercial real estate (including multi-family residential)	6,438		2,588		9,026
Commercial real estate construction and land development	27		—		27
1-4 family residential (including home equity)	4,464		6,122		10,586
Residential construction	195		—		195
Consumer and other	70		180		250
Total loans	$	12,784	$	30,629	43,413

Table of Contents


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

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

Loan Modifications and Troubled Debt Restructurings

Effective January 1, 2023, under ASU 2022-02, loan modifications are reported if concessions have been granted to borrowers that are experiencing financial difficulty. Information on these loan modifications originated after the effective date is presented according to the new accounting guidance. Reporting periods prior to the adoption of ASU 2022-02 present information on troubled debt restructurings ("TDRs") under the previous disclosure requirements. The following tables show the composition of loan modifications made to borrowers experiencing financial difficulty by the loan portfolio and type of concessions granted during the three months ended ~~September 30, 2022 and 2021, was as follows:~~

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021
Beginning balance

$
3,266

$
4,177
Provision (recapture)

551

(605)
Ending balance

$
3,817

$
3,572

~~NOTE 7: PREMISES AND EQUIPMENT~~

~~The components of premises and equipment as~~March 31, 2023. Each of the ~~dates indicated below~~types of concessions granted comprised less than 1% of their respective classes of loan portfolios at March 31, 2023.

The following tables present information regarding loans that were ~~as follows:~~

(Dollars in thousands)

September 30, 2022

December 31, 2021
Land

$
15,484

$
15,484
Buildings and leasehold improvements

62,260

64,298
Furniture and equipment

17,619

17,087
Vehicles

248

248
Construction in progress

476

496

96,087

97,613
Less accumulated depreciation

(40,493)

(39,196)
Premises and equipment, net

$
55,594

$
58,417

~~Depreciation expense was $2.5 million and $2.6 million for~~modified due to the ~~nine~~borrowers experiencing financial difficulty during the three months ended ~~September 30, 2022 and 2021, respectively and $842,000 and $871,000~~March 31, 2023:
Three Months Ended March 31, 2023
Principal Forgiveness Payment Delay Term Extension Interest Rate Reduction Combination Term Extension and Principal Forgiveness Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable
(In thousands)
Commercial and industrial $ — $ — $ 2,251 $ 96 $ — $ — $ 2,347
Real estate:
Commercial real estate (including
multi-family residential)
— — 798 — — — 798
Commercial real estate construction and land development — — — — — — —
1-4 family residential (including
home equity)
— — 725 — — — 725
Residential construction — — — — — — —
Consumer and other — — — — — — —
Total $ — $ — $ 3,774 $ 96 $ — $ — $ 3,870

Table of Contents

The following table summarizes, by loan portfolio, the financial effect of the Company's loan modifications for the three months ended ~~September 30, 2022 and 2021, respectively. Depreciation expense is included in net occupancy expense in the Company’s condensed consolidated statements~~March 31, 2023:


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

(1) There was no financial effect as a result of ~~income.~~

During the nine months ended September 30, 2022, the Company recorded a loss of $1.2 million, which is included in net gains on sales of assets in the condensed consolidated income statement, for disposals of buildings and improvements and furniture and equipment for a land lease that was terminated early at the request of the lessor.

~~NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS~~

Goodwill was $81.0 million at September 30, 2022 and December 31, 2021 and there were no changes in goodwill during the nine months ended September 30, 2022 or the year ended December 31, 2021. Based on the results of the Company’s assessment, management does not believe ~~any~~ ~~impairment of goodwill or~~ ~~other intangible assets~~ ~~existed at September 30, 2022 or December 31, 2021.~~

~~Other intangibles as of the dates indicated below were as follows:~~

Weighted-






Average

Remaining

Gross

Net

Amortization

Intangible

Accumulated

Intangible
(Dollars in thousands)

Period

Assets

Amortization

Assets
September 30, 2022






Core deposits

1.9 years

$
13,750

(13,653)

$
97
Customer relationships

6.3 years

6,629

(3,866)

2,763
Servicing assets

7.3 years

672

(344)

328
Total other intangible assets, net

$
21,051

$
(17,863)

$
3,188
December 31, 2021






Core deposits

2.4 years

$
13,750

$
(13,538)

$
212
Customer relationships

7.0 years

6,629

(3,535)

3,094
Servicing assets

11.5 years

624

(272)

352
Total other intangible assets, net

$
21,003

$
(17,345)

$
3,658

~~Table of Contents~~

~~Servicing Assets~~

~~Changes in servicing assets as of the dates indicated below were as follows:~~

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021
Balance at beginning of year

$
352

$
190
Increase from loan sales

62

92
Decrease from serviced loans paid off or foreclosed

(14)

(2)
Amortization

(72)

(44)
Balance at end of period

$
328

$
236

~~NOTE 9: BANK-OWNED LIFE INSURANCE~~

~~During the nine months ended September 30, 2021, the Company received proceeds in the amount of $2.7 million~~this modification as the ~~owner and beneficiary under a bank-owned insurance policy as the result of claims submitted~~loan was on ~~a covered individual and the Company recorded a gain of $1.9 million.~~

~~Bank-owned life insurance policies and the net change in cash surrender value during the periods indicated below were as follows:~~

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021
Balance at beginning of period

$
73,156

$
72,338
Redemptions

—

(2,670)
Net change in cash surrender value

1,118

3,103
Balance at end of period

$
74,274

$
72,771

~~NOTE 10: DEPOSITS~~

~~Deposits as of the dates indicated below were as follows:~~

(Dollars in thousands)

September 30, 2022

December 31, 2021
Interest-bearing demand accounts

$
415,970

$
468,361
Money market accounts

1,144,969

1,209,659
Savings accounts

128,886

127,031
Certificates and other time deposits, $100,000 or greater

161,975

134,775
Certificates and other time deposits, less than $100,000

91,501

106,477
Total interest-bearing deposits

1,943,301

2,046,303
Noninterest-bearing deposits

1,780,473

1,784,981
Total deposits

$
3,723,774

$
3,831,284

At September 30, 2022 and December 31, 2021, the Company had $37.6 million and $37.3 million in deposits from public entities and brokered deposits of $39.8 million and $52.9 million, respectively. At September 30, 2022 and December 31, 2021, overdrafts of $986,000 and $402,000, respectively, were reclassified to loans. Accrued interest payable for deposits was $306,000 and $128,000 at September 30, 2022 and December 31, 2021, respectively, which was included in other liabilities in the condensed consolidated balance sheets. The Company had no major concentrations of deposits at September 30, 2022 or December 31, 2021 from any single or related groups of depositors. At September 30, 2022 and December 31, 2021, the Company had $101.9 million and $70.5 million, respectively, of certificates of deposits or other time deposits that were uninsured. Securities pledged and the letter of credit issued under the Company’s Federal Home Loan blanket lien arrangement which secure public deposits were not considered in determining the amount of uninsured time deposits.

nonaccrual.

~~Table of Contents~~

~~NOTE 11: LINES OF CREDIT~~

~~Line of Credit~~

The Company has entered into a loan agreement with another financial institution, or Loan Agreement, which has been periodically amended and provides for a $30.0 million revolving line of credit. At September 30, 2022, there were no outstanding borrowings on this line of credit and the Company did not draw on this line of credit during 2022 or 2021. The Company can make draws on the line of credit for a period of 12 months, which began on December 13, 2021, after which the Company will not be permitted to make further draws and the outstanding balance will amortize over a period of 60 months. Interest accrues on outstanding borrowings at a rate equal to the maximum “Latest” U.S. prime rate of interest per annum and payable quarterly in the first 12 months and thereafter, quarterly principal and interest payments are required over a term of 60 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2027.

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 valid and perfected first priority lien on all of the issued and outstanding shares of capital stock of the Bank.

Covenants made under the Loan Agreement include, among other things, the Company maintaining tangible net worth of not less than $300.0 million, the Company maintaining a free cash flow coverage ratio of not less than 1.25 to 1.00, the Bank Texas Ratio (as defined in the Loan Agreement) not to exceed 15%, the Bank’s Total Capital Ratio (as defined under the Loan Agreement) of not less than 12% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. The Company was in compliance with these covenants at September 30, 2022.

~~Additional Lines of Credit~~

The Federal Home Loan Bank allows the Company to borrow on a blanket floating lien status collateralized by certain loans and the blanket lien amount was $1.2 billion at September 30, 2022 and $999.3 million at December 31, 2021. Federal Home Loan Bank advances outstanding totaled $50.0 million at December 31, 2021. These borrowings were paid in full during the nine months ended September 30, 2022. At September 30, 2022 and December 31, 2021, there were $27.0 million and $26.0 million, respectively, of letters of credit outstanding that were issued under this agreement and used as collateral to secure certain public deposits. After considering the outstanding advances and letters of credit, the net capacity available under the Federal Home Loan Bank facility was $1.2 billion at September 30, 2022 and $923.3 million at December 31, 2021.

The Company has historically borrowed under this agreement on a short-term basis but did not during the nine months ended September 30, 2022 and 2021. The weighted-average interest rate for Federal Home Loan Bank advances for the nine months ended September 30, 2022 and 2021 was 1.99% and 1.77%, respectively.

At September 30, 2022 and December 31, 2021, the Company maintained federal funds lines of credit with commercial banks that provided for the availability to borrow up to an aggregate of $45.0 million and $65.0 million, respectively. There were no ~~funds under these lines of credit outstanding at September 30, 2022 or December~~loans that had payment defaults during the three months ended March 31, ~~2021.~~

~~NOTE 12: RELATED PARTY TRANSACTIONS~~

In the ordinary course of business, the Company, through the Bank, has and expects to continue to conduct routine banking business with related parties, including its executive officers and directors. Related parties also include shareholders and their affiliates who directly or indirectly have 5% or more beneficial ownership in the Company.

~~Loans—In the opinion of management, loans to related parties~~2023 that were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable featuresmodified due to the ~~Company.~~ borrowers experiencing financial difficulty in that period prior to default.

The ~~Company had approximately $109.6 million and $138.1 million in~~following table presents information regarding loans to related parties at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, there were no loans made to related parties deemed nonaccrual, past due, restructuredmodified in a troubled debt restructuring during the three months ended March 31, 2022:


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

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

of March 31, 2022.

6. LEASES

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

~~Unfunded Commitments~~Table of Contents—

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

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

At ~~September 30, 2022 and December~~March 31, ~~2021,~~2023, the Company had ~~approximately $101.1 million~~32 leases consisting of branch locations and ~~$55.6 million~~office space. On the March 31, 2023 balance sheet, the right-of-use asset is classified within premises and equipment and the lease liability is included in ~~unfunded loan commitments~~other liabilities. The Company also owns certain office facilities which it leases to outside parties under operating lessor leases; however, such leases are not significant. All leases were classified as operating leases. Leases with an initial term of 12 or less are not recorded on the balance sheet and the related ~~parties, respectively.~~

lease expense is recognized on a straight-line basis over the lease term.

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

Supplemental lease information at the dates indicated is as follows:


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

Lease costs for the dates indicated is as follows:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Income Statement:
Operating lease cost	$	1,809	$	892
Short-term lease cost	5		—

Total operating lease costs	$	1,814	$	892

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


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

Table of ~~Contents~~Contents

~~Deposits~~
~~—The Company held related party deposits of approximately $243.4 million and $249.9 million at September 30, 2022 and December 31, 2021, respectively.~~

~~NOTE 13:~~

7. FAIR VALUE ~~DISCLOSURES~~

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

Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal ~~market for the asset~~ or ~~liability or, in the absence of a principal market, the~~ most advantageous market for the asset or ~~liability. In estimating~~liability in an orderly transaction between market participants on the measurement date. The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the ~~Company uses valuation techniques that~~markets in which the assets and liabilities are ~~consistent with~~traded and the ~~market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied.~~

~~Inputs to valuation techniques refer to~~reliability of the assumptions used ~~in pricing the asset or liability. Valuation inputs are categorized in a three-level hierarchy, that gives the highest priority~~ to ~~quoted~~determine fair value. These levels are:

•Level 1—Quoted prices ~~in active markets~~ for identical assets or liabilities ~~and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:~~

~~Level 1 Inputs—Unadjusted quoted prices~~ in active markets ~~for identical assets and liabilities~~ that the ~~reporting~~ entity has the ability to access atas of the measurement date.

•Level ~~2 Inputs—Other~~2—Significant other observable inputs ~~that may include~~other than Level 1 prices such as quoted prices for similar assets or ~~liabilities in active markets,~~liabilities; quoted prices ~~for identical or similar assets or liabilities~~ in markets that are not ~~active~~active; or other ~~inputs that are observable for the asset or liability such as interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates or~~ inputs that are observable or can be corroborated by observable market data.

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

The carrying amounts and estimated fair values of financial instruments that are reported on the ~~assets or liabilities.~~

~~During the nine months ended September 30, 2022 and the year ended December 31, 2021, there were no~~ balance sheet are as follows:


	As of March 31, 2023
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets
Cash and cash equivalents	$	263,333	$	263,333	$	—	$	—	$	263,333
Available for sale securities	1,519,175		—		1,519,175		—		1,519,175
Loans held for investment, net of allowance	7,789,856		—		—		7,617,825		7,617,825
Accrued interest receivable	42,405		112		7,018		35,275		42,405
Financial liabilities
Deposits	$	8,738,875	$	—	$	8,723,152	$	—	$	8,723,152
Accrued interest payable	3,875		—		3,875		—		3,875
Borrowed funds	238,944		—		238,999		—		238,999
Subordinated debt	109,420		—		105,773		—		105,773

~~transfers~~Table of Contents

~~assets~~
or~~liabilities~~ ~~within the levels of the~~


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

The following tables present fair ~~value hierarchy.~~

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use observable market-based parameters as inputs. Valuation adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in different estimates of fair value. Fair value estimates are based on judgments regarding current economic conditions, risk characteristics of the various instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

~~Financial Instruments Measured at Fair Value on a Recurring Basis~~

~~The Company’s~~values for assets and liabilities measured at fair value on a recurring ~~basis include the following:~~

~~Debt Securities Available for Sale~~—Debt securities classified as available for sale are recorded at fair value. For those debt securities classified as Level 1 and Level 2, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies for reasonableness.

~~Equity Securities~~—Equity securities are recorded at fair value and the fair value measurements are based on observable data obtained from a third-party pricing service. The Company reviews the prices supplied by the service against publicly available information. The equity securities are mutual funds publicly traded on the National Association of Securities Dealers Automated Quotations and the fair value is determined by using unadjusted quoted market prices which are considered Level 1 inputs.

~~Interest Rate Swaps—The Company obtains fair value measurements for its interest rate swaps from an~~

~~Table of Contents~~

independent pricing service which uses the income approach. The income approach calls for the utilization of valuation techniques to convert future cash flows as due to be exchanged per the terms of the financial instrument, into a single present value amount. Measurement is based on the value indicated by the market expectations about those future amounts as of the measurement date. The proprietary curves of the independent pricing service utilize pricing models derived from industry standard analytic tools, considering both Level 1 and Level 2 inputs. Interest rate swaps are classified as Level 2.

~~Financial assets and financial~~basis. There were no liabilities measured at fair value on a recurring basis as of March 31, 2023.


	March 31, 2023
	Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets
Available for sale securities:
U.S. government and agency securities	$	—	$	413,697	$	—	$	413,697
Municipal securities	—		232,199		—		232,199
Agency mortgage-backed pass-through securities	—		348,412		—		348,412
Agency collateralized mortgage obligations	—		460,986		—		460,986
Corporate bonds and other	—		63,881		—		63,881
Interest rate swaps	—		—		7,463		7,463
Credit risk participation agreements	—		—		33		33
Total fair value of financial assets	$	—	$	1,519,175	$	7,496	$	1,526,671
Financial liabilities
Interest rate swaps	$	—	$	—	$	7,463	$	7,463
Total fair value of financial liabilities	$	—	$	—	$	7,463	$	7,463

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

There were no transfers between levels during the ~~dates indicated below were as follows:~~

(Dollars in thousands)

September 30, 2022

December 31, 2021
Fair value of financial assets:




Level 1 inputs:
Equity securities

$
1,045

$
1,173

Debt securities available for sale - U.S. Treasury securities

107,259

11,797
Level 2 inputs:
Debt securities available for sale:

State and municipal securities

135,098

172,600

U.S. agency securities:





Callable debentures

2,564

2,973

Collateralized mortgage obligations

84,398

62,382

Mortgage-backed securities

180,918

174,121

Interest rate swaps

9,944

3,543
Level 3 inputs:
Credit risk participation agreement

27

15

Total fair value of financial assets

$
521,253

$
428,604
Fair value of financial liabilities:




Level 2 inputs:
Interest rate swaps

$
9,944

$
3,543

Total fair value of financial liabilities

$
9,944

$
3,543

~~Financial Instruments Measured at Fair Value on a Non-recurring Basis~~

~~A portion of financial instruments are~~three months ended March 31, 2023 or 2022.

Assets measured at fair value on a ~~non-recurring~~nonrecurring basis ~~and~~ are ~~subject to fair value adjustments~~summarized in ~~certain circumstances. Financial assets~~the table below. There were no liabilities measured at fair value on a ~~non-recurring~~nonrecurring basis ~~during~~at March 31, 2023 and December 31, 2022.


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

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


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

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

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

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

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8. DEPOSITS

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

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


Within one year	$	925,920
After one but within two years	101,424
Over three years	37,588
Total	$	1,064,932

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

9. DERIVATIVE INSTRUMENTS

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of ~~the underlying collateral if repayment is expected solely from the collateral or~~ a ~~discounted cash flow method if not. Prior to foreclosure, estimated fair values for collateral is estimated based~~derivative depends on ~~Level 3 inputs based on customized discounting criteria.~~

~~The Company’s financial assets measured at fair value on~~whether it has been designated and qualifies as part of a ~~non-recurring basis are certain individually evaluated loans and~~hedging relationship.

Derivatives not designated as ~~of the dates indicated below were as follows:~~

September 30, 2022

December 31, 2021
(Dollars in thousands)

Recorded Investment

Specific ACL

Net

Recorded Investment

Specific ACL

Net
Level 3 inputs:

Loans evaluated individually

Commercial and industrial

$
9,205

$
2,517

$
6,688

$
9,624

$
3,986

$
5,638
Commercial real estate

733

28

705

2,629

609

2,020
Consumer

116

116

—

125

125

—
Total

$
10,054

$
2,661

$
7,393

$
12,378

$
4,720

$
7,658

~~Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value on a Non-recurring Basis~~

The Company’s non-financial assets measured at fair value on a non-recurring basis for the periods reported are foreclosed assets (upon initial recognition or subsequent impairment). The Company’s other non-financial assets whose

hedges

~~Table of Contents~~

~~fair value may be measured on a non-recurring basis when there is evidence of impairment and may be subject to impairment adjustments include goodwill and intangible assets, among other assets.~~

The fair value of foreclosed assets may be estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria less estimated selling costs. There were no write-downs of foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the nine months ended September 30, 2022 or during 2021. There were no outstanding foreclosed assets at September 30, 2022 or December 31, 2021.

~~Financial Instruments Reported at Amortized Cost~~

~~Fair market values and carrying amounts of financial instruments that are reported at cost as of the dates indicated below were as follows:~~

September 30, 2022

December 31, 2021




Carrying


Carrying
(Dollars in thousands)

Fair Value

Amount

Fair Value

Amount
Financial assets:








Level 1 inputs:
Cash and due from banks

$
370,448

$
370,448

$
950,146

$
950,146
Level 2 inputs:
Bank-owned life insurance

74,274

74,274

73,156

73,156

Accrued interest receivable

10,777

10,777

11,616

11,616

Servicing asset

328

328

352

352
Level 3 inputs:
Loans, including held for sale, net

2,906,108

3,093,844

2,864,663

2,836,343

Other investments

17,835

17,835

17,727

17,727
Total financial assets

$
3,379,770

$
3,567,506

$
3,917,660

$
3,889,340
Financial liabilities:








Level 1 inputs:
Noninterest-bearing deposits

$
1,780,473

$
1,780,473

$
1,784,981

$
1,784,981
Level 2 inputs:
Interest-bearing deposits

1,938,023

1,943,301

2,040,794

2,046,303

Federal Home Loan Bank advances

—

—

50,591

50,000

Accrued interest payable

306

306

201

201
Total financial liabilities

$
3,718,802

$
3,724,080

$
3,876,567

$
3,881,485

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value and as such the fair values shown above are not necessarily indicative of the amounts the Company will realize. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

~~NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS~~

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

In connection with each swap transaction, the Company agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agreed to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and do not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At ~~September 30, 2022 and December~~March 31, ~~2021,~~2023, management determined there was no such deterioration.

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had 1415 and 1914 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as

~~Table of Contents~~

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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had three ~~and one~~ 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.

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Derivative instruments not designated as hedges outstanding as of ~~the dates indicated below~~March 31, 2023 were as ~~follows:~~

follows (dollars in thousands):

Weighted

Average

Notional

Fair

Maturity
(Dollars in thousands)

Classification

Amounts

Value

Fixed Rate

Floating Rate

(Years)
September 30, 2022








Interest rate swaps with financial institutions

Other assets

$
87,537

$
8,485

3.25% - 5.58%

LIBOR 1M + 2.50% - 3.00%

4.58
Interest rate swaps with customers

Other assets

22,676

1,021

5.35% - 5.40%

SOFR CME 1M + 2.50%

10.22
Interest rate swaps with financial institutions

Other assets

5,057

438

4.99%

U.S. Prime

5.21
Interest rate swaps with customers

Other liabilities

5,057

(438)

4.99%

U.S. Prime

5.21
Interest rate swaps with financial institutions

Other liabilities

22,676

(1,021)

5.35% - 5.40%

SOFR CME 1M + 2.50%

10.22
Interest rate swaps with customers

Other liabilities

87,537

(8,485)

3.25% - 5.58%

LIBOR 1M + 2.50% - 3.00%

4.58
Credit risk participation agreement with financial institution

Other assets

13,163

2

3.50%

LIBOR 1M + 2.50%

7.49
Credit risk participation agreement with financial institution

Other assets

8,503

25

5.35% - 5.40%

SOFR CME 1M + 2.50%

10.22
Total derivatives

$
252,206

$
27

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


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

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

~~NOTE 15: OPERATING LEASES~~


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

10. BORROWINGS

The Company ~~leases~~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 ~~office space, stand-alone buildings~~loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At March 31, 2023, the Company had a total borrowing capacity with the FHLB of $4.07 billion, of which $2.84 billion was available and ~~land,~~$1.23 billion was outstanding in/through FHLB advances and letters of credit. There were $239.0 million FHLB short-term advances outstanding at March 31, 2023 at a weighted average rate of 5.00%. Letters of credit were $994.7 million at March 31, 2023, of which $333.4 million will expire during the remaining months of 2023, $61.2 million will expire in 2024, $45.0 million will expire in 2025, $60.1 million will expire in 2026, $453.0 million will expire in 2027, $15.0 million will expire in 2028 and $27.0 million will expire in 2029.

On December 13, 2022, the Company entered into a loan agreement with another financial institution, or Loan Agreement, that provides for a $75.0 million revolving line of credit. At March 31, 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 March 31, 2023, the Company believes it was in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.

11. SUBORDINATED DEBT

Junior Subordinated Debentures

In connection with the acquisition of F&M Bancshares, Inc., the Company assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of these trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The debentures, which are ~~recognized as operating lease right-of-use~~the only assets of each trust, are subordinate and junior in ~~the condensed consolidated balance sheets and operating lease liabilities in the condensed 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.

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021
Operating lease cost

$
1,244

$
1,436
Short-term lease cost

15

13
Sublease income

(469)

(472)
Total lease cost

$
790

$
977

~~Table~~A summary of ~~Contents~~

~~Other~~pertinent information related to ~~operating leases~~the Company’s issues of junior subordinated debentures outstanding at March 31, 2023 is set forth in the table below:
Description
Issuance
Date
Trust
Preferred
Securities
Outstanding
Interest Rate(1)
Junior
Subordinated
Debt Owed
to Trusts
Maturity
Date(2)
(Dollars in thousands)
Farmers & Merchants Capital Trust II November 13, 2003 $ 7,500 3 month LIBOR + 3.00% $ 7,732 November 8, 2033
Farmers & Merchants Capital Trust III June 30, 2005 3,500 3 month LIBOR + 1.80% 3,609 July 7, 2035
$ 11,341


(1)			The 3-month LIBOR in effect as of March 31, 2023 was 5.19%. 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. As of 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

Table of Contents

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 March 31, 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:~~

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021
Amortization of lease right-to-use assets

$
1,008

$
1,141
Accretion of lease liabilities

260

294
Cash paid for amounts included in the measurement of lease liabilities

1,461

1,566
Weighted-average remaining lease term in years

10.1

10.7
Weighted-average discount rate

2.63%

2.63%

~~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 principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.

12. INCOME TAXES

The amount of the Company’s federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible items. For the three months ended March 31, 2023, income tax expense was $9.9 million compared with $4.2 million for the three months ended March 31, 2022. The effective income tax rate for the three months ended March 31, 2023 was 21.1%, compared to 18.4% for the three months ended March 31, 2022, respectively.

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 months ended March 31, 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 stock. All restricted stock and performance share awards outstanding at March 31, 2023 were issued under the 2022 Plan. At March 31, 2023, there were 1,103,050 shares reserved for issuance under the 2022 Plan.

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

Stock Options

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

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

Table of Contents

A summary of the activity in the stock option plans during the three months ended March 31, 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	(19)	13.45
Options forfeited	(21)	22.05
Options outstanding, March 31, 2023	328	$	17.89	2.54	$	2,282
Options vested and exercisable, March 31, 2023	328	$	17.89	2.54	$	2,282

Restricted Stock Awards

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

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

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

(Dollars in thousands)

September 30, 2022
1 year or less

$
1,775
Over 1 year through 2 years

1,928
Over 2 years through 3 years

1,966
Over 3 years through 4 years

1,928
Over 4 years through 5 years

1,821
Thereafter

6,836
Total undiscounted lease liability

16,254
Less:

Discount on cash flows

(2,506)
Total operating lease liability

$
13,748

~~During~~


	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	228	25.99
Share awards vested	—	—
Unvested share awards forfeited or cancelled	(26)	32.01
Nonvested share awards outstanding, March 31, 2023	703	$	30.65

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

Performance Share Awards ("PSAs")

PSAs are generally earned subject to certain performance goals being met after the two-year performance period and will be settled in shares of Company common stock following a one-year service period. There were 119,845 PSAs awarded during the three months ended ~~September 30, 2022, the Company terminated a land lease at the request~~March 31, 2023. The grant date fair value of the ~~lessor. The Company received a payment of $1.5 million from~~PSAs is based on the ~~lessor for the early termination~~probable outcome of the ~~lease,~~applicable performance conditions and is calculated at target based on a combination of the closing market price of our common stock on the grant date and a Monte Carlo simulated fair value in accordance with ASC 718. At March 31, 2023, there was $3.0 million of unrecognized compensation expense related to the PSAs, which is ~~reflected in other noninterest income in the condensed consolidated income statements.~~

~~During the nine months ended September 30, 2022, the operating lease right-of-use asset and~~ ~~liabilities~~ ~~were both increased $809,000 due~~expected to be recognized over a ~~lease modification to extend the term~~weighted-average period of ~~a lease.~~

~~NOTE 16:~~2.25 years.

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

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enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve to ~~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 ~~condensed~~ 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:


	March 31, 2023				December 31, 2022
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(Dollars in thousands)
Commitments to extend credit(1)	$	608,717	$	1,726,952	$	673,098	$	1,686,627
Standby letters of credit	12,174		23,348		10,310		25,190
Total	$	620,891	$	1,750,300	$	683,408	$	1,711,817

1) At March 31, 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 $994.7 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)

September 30, 2022

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

$
853,644

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

135,404

60,876
Total commitments

$
989,048

$
774,960
Standby letters of credit

$
11,611

$
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 March 31, 2023, the fixed rate loan commitments had interest rates ranging from 1.10% to 9.75% with a weighted average maturity and rate of 2.62 years and 5.38%, respectively.

Standby Letters of Credit

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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 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 essentially the same as 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 nine months ended September 30, 2022 and 2021, the Company contributed $1.7 million and $1.7 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 September 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.

~~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 $82,000 and $153,000 at September 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 $1.5 million and $900,000 at September 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets. The liability stopped accruing on October 1, 2022 and was paid in full as a result of the Merger.

~~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 September 30, 2022, there were options outstanding to acquire 10,160 shares of the Company’s common stock under the 2006 Plan, 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 no options may be granted after May 20, 2024. Options granted under the 2014 Plan expire 10 years from the date of grant

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~~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 September 30, 2022, 963,200 shares were available for future grant. No 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 September 30, 2022, 244,140 shares were available for future grant under the 2017 Plan.

In connection with the closing of the Merger on October 1, 2022, the 2022 Omnibus Incentive Plan approved by the Company’s shareholders at the special meeting of shareholders on May 23, 2022 became effective and no grants or future awards may be made under the 2014 Plan or the 2017 Plans, or the Prior Plans. In addition, all restricted stock awards outstanding under the Prior Plans as of the effective time of the Merger became fully vested and exercisable, other than certain restricted stock awards granted to the Company’s non-employee directors on February 1, 2022. All outstanding options were fully vested prior to September 30, 2022. See Note 22: Subsequent Events.

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

Nine Months Ended September 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

(15,240)

11.32

(2,032)

11.32
Forfeited/expired

(10,160)

11.32

—

—
Outstanding at end of period

166,160

$
18.48

199,688

$
17.28

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

September 30, 2022
Stock Options

Exercisable

Unvested

Outstanding
Number of shares underlying options

166,160

—

166,160
Weighted-average exercise price per share

$
18.48

$
—

$
18.48
Aggregate intrinsic value (in thousands)

$
1,789

$
—

$
1,789
Weighted-average remaining contractual term (years)

3.5

—

3.5

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 awards are considered legally 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 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.

~~Non-performance based restricted stock awards 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.

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~~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

51,665

26.31

—

—
Vested

(22,210)

30.57

—

—
Forfeited

(1,411)

28.82

—

—
Outstanding at September 30, 2021

157,711

27.26

2,250

34.40

Outstanding at December 31, 2021

83,563

27.85

2,250

34.40
Granted

38,457

29.42

—

—
Vested

(27,083)

29.70

—

—
Forfeited

(1,977)

33.04

—

—
Outstanding at September 30, 2022

92,960

27.86

2,250

34.40

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

September 30, 2022
Restricted Stock

Non-performance Based

Performance-based
Number of shares underlying restricted stock

92,960

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

$
27.86

$
34.40
Aggregate fair value (in thousands)

$
2,719

$
66
Weighted-average remaining vesting period (years)

—

—

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 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
Nine Months Ended September 30, 2022

Stock options

15,240

—

15,240
Non-performance based restricted stock

27,083

(4,620)

22,463
Nine Months Ended September 30, 2021

Stock options

2,032

—

2,032
Non-performance based restricted stock

22,210

(3,213)

18,997

For the nine months ended September 30, 2022 and 2021, stock compensation expense was $1.5 million and $1.8 million, respectively, and for the three months ended September 30, 2022 and 2021, stock compensation expense was $515,000 and $698,000, respectively. As of September 30, 2022, there was approximately $962,000 of total unrecognized compensation expense related to the unvested restricted stock awards.

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~~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 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

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

30 ~~2022~~

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March 31, 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.

~~At September 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 March 31, 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 March 31, 2023
Total Capital (to risk weighted assets)	$	1,133,335	12.72	%	$	712,872	8.00	%	$	935,644	10.50	%	N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)	925,572		10.39	%	400,990		4.50	%	623,763		7.00	%	N/A		N/A
Tier 1 Capital (to risk weighted assets)	935,470		10.50	%	534,654		6.00	%	757,426		8.50	%	N/A		N/A
Tier 1 Capital (to average tangible assets)	935,470		9.01	%	415,184		4.00	%	415,184		4.00	%	N/A		N/A
As of December 31, 2022
Total Capital (to risk weighted assets)	$	1,092,618	12.39	%	$	705,765	8.00	%	$	926,317	10.50	%	N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)	885,652		10.04	%	396,993		4.50	%	617,545		7.00	%	N/A		N/A
Tier 1 Capital (to risk weighted assets)	895,520		10.15	%	529,324		6.00	%	749,876		8.50	%	N/A		N/A
Tier 1 Capital (to average tangible assets)	895,520		8.55	%	418,720		4.00	%	418,720		4.00	%	N/A		N/A
STELLAR BANK
As of March 31, 2023
Total Capital (to risk weighted assets)	$	1,105,514	12.42	%	$	712,191	8.00	%	$	934,750	10.50	%	$	890,238	10.00	%
Common Equity Tier 1 Capital (to risk weighted assets)	967,649		10.87	%	400,607		4.50	%	623,167		7.00	%	578,655		6.50	%
Tier 1 Capital (to risk weighted assets)	967,649		10.87	%	534,143		6.00	%	756,702		8.50	%	712,191		8.00	%
Tier 1 Capital (to average tangible assets)	967,649		9.35	%	413,922		4.00	%	413,922		4.00	%	517,402		5.00	%
As of December 31, 2022
Total Capital (to risk weighted assets)	$	1,059,313	12.02	%	$	705,120	8.00	%	$	925,470	10.50	%	$	881,400	10.00	%
Common Equity Tier 1 Capital (to risk weighted assets)	921,714		10.46	%	396,630		4.50	%	616,980		7.00	%	572,910		6.50	%
Tier 1 Capital (to risk weighted assets)	921,714		10.46	%	528,840		6.00	%	749,190		8.50	%	705,120		8.00	%
Tier 1 Capital (to average tangible assets)	921,714		8.81	%	418,388		4.00	%	418,388		4.00	%	522,984		5.00	%

Minimum

Required to be

Capital Required

Considered Well

Actual

Basel III

Capitalized
(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio
September 30, 2022












Common Equity Tier 1 to Risk-Weighted Assets:












Consolidated

$ 487,717

14.05%

$ 243,053

7.00%

N/A

N/A
Bank Only

$ 479,175

13.81%

$ 242,969

7.00%

$ 225,614

6.50%
Tier 1 Capital to Risk-Weighted Assets:






Consolidated

$ 487,717

14.05%

$ 295,135

8.50%

N/A

N/A
Bank Only

$ 479,175

13.81%

$ 295,034

8.50%

$ 277,679

8.00%
Total Capital to Risk-Weighted Assets:




Consolidated

$ 524,112

15.09%

$ 364,579

10.50%

N/A

N/A
Bank Only

$ 515,570

14.85%

$ 364,454

10.50%

$ 347,099

10.00%
Tier 1 Leverage Capital to Average Assets:




Consolidated

$ 487,717

11.42%

$ 170,891

4.00%

N/A

N/A
Bank Only

$ 479,175

11.22%

$ 170,856

4.00%

$ 213,570

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%

Table of ~~Contents~~Contents

~~Dividend Restrictions~~

16. EARNINGS PER COMMON SHARE

Diluted earnings per common share is computed using the ~~ordinary course~~weighted-average number of ~~business,~~common shares determined for the basic earnings per common share computation plus the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Outstanding stock options issued by the Company ~~may be dependent upon dividends from~~represent the ~~Bank to provide funds~~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 ~~the payment of dividends to shareholders~~as participating securities 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.

~~NOTE 20: INCOME TAXES~~

~~The provision for income tax expense and effective tax rates for the periods indicated below were as follows:~~

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021

2022

2021
Income tax expense

$ 3,381

$ 2,913

$ 8,485

$ 8,090
Effective tax rate

20.96%

16.81%

19.49%

18.29%

~~The differences between the federal statutory rate of 21% 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 costs related to the Merger.~~

~~NOTE 21: EARNINGS PER SHARE~~

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


	Three Months Ended March 31,
	2023				2022
	Amount		Per Share Amount		Amount		Per Share Amount
	(Amounts in thousands, except per share data)
Net income attributable to shareholders	$	37,148			$	18,657
Basic:
Weighted average shares outstanding	53,021		$	0.70	28,883		$	0.65
Diluted:
Add incremental shares for:
Dilutive effect of stock option exercises and performance share units	117				231
Total	53,138		$	0.70	29,114		$	0.64

There were 6,807 and zero antidilutive shares as of March 31, 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 September 30,

Nine Months Ended September 30,
(Dollars in thousands, except per share data)

2022

2021

2022

2021
Net income for common shareholders

$
12,747

$
14,421

$
35,049

$
36,143
Weighted-average shares (thousands)

Basic weighted-average shares outstanding

24,345

24,432

24,445

24,462
Dilutive effect of outstanding stock options and unvested restricted stock awards

119

112

107

110
Diluted weighted-average shares outstanding

24,464

24,544

24,552

24,572
Earnings per share:

Basic

$
0.52

$
0.59

$
1.43

$
1.48
Diluted

$
0.52

$
0.59

$
1.43

$
1.47

~~For~~equivalent number of shares issued to holders of Allegiance common stock in the nine months ended September 30, 2022 and the three and nine months ended September 30, 2021, the impact of 1,802, 5,907 and 14,858, respectively, shares of unvested restricted stock were excluded 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 nine months ended September 30, 2021 as they are contingently issuable and the performance conditions for these awards were not deemed likely to be met at that time.

Merger.

Table of ~~Contents~~Contents

~~NOTE 22: SUBSEQUENT EVENTS~~

~~Effective October 1, 2022,~~

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

Except where the context otherwise requires or where otherwise indicated in this Quarterly Report on Form 10-Q, the ~~Effective Time,~~term “Stellar” refers to Stellar Bancorp, Inc., the ~~Company completed its previously announced merger of equals with Allegiance, a Texas corporation, pursuant to an Agreement~~terms “we,” “us,” “our,” “Company” and Plan of Merger, or the Merger Agreement, dated as of November 5, 2021, by and between the Company and Allegiance. At the Effective Time, Allegiance merged with and into the Company, with the Company as the surviving corporation. At the Effective Time, the Company changed its name from CBTX, Inc.“our business” refer to Stellar Bancorp, Inc. and ~~changed its ticker symbol to “STEL”.~~

~~Immediately after the Merger, the Company’s~~our wholly owned ~~bank~~banking subsidiary, ~~CommunityBank of Texas, N.A., merged with and into Allegiance’s wholly owned bank subsidiary, Allegiance~~Stellar Bank, a Texas ~~state~~ banking association, ~~or Allegiance Bank, with Allegiance Bank as~~and the ~~surviving entity.~~

Pursuant to the Merger Agreement, each share of Allegiance common stock, $1.00 par value per share, or Allegiance common stock, outstanding as of immediately prior to the Effective Time, other than certain shares of Allegiance common stock held by Allegianceterms “Stellar Bank” or the ~~Company, was converted into the right~~“Bank” refer to receive 1.4184 shares, or the Exchange Ratio, of common stock of the Company, $0.01 par value per share, or the Company common stock, with cash to be paid in lieu of fractional shares, or the Merger Consideration. As a result of the Merger, Allegiance shareholders hold shares which represent approximately 53.9% of outstanding Company common stock. Each outstanding share of Company common stock remained outstanding and was unaffected by the Merger

In connection with the closing of the Merger, the Company also amended and restated its certificate of formation, which among other things, increased the number of authorized shares of Company common stock from 90,000,000 to 140,000,000 shares.

At the Effective Time, each outstanding equity award of the Company under the Company’s equity compensation plans fully vested, other than the restricted stock awards granted to the Company’s non-employee directors on February 1, 2022. The vesting of the non-employee director restricted stock awards was prorated based on the number of days that elapsed from January 1, 2022 through September 30, 2022 and the remaining unvested shares of restricted stock were forfeited at the Effective Time.

~~The Merger will be accounted for as a reverse acquisition in accordance with the provisions of Accounting Standards Codification Topic 805-10,~~ ~~Business Combinations~~, or ASC 805. Management is undertaking a comprehensive review and determination of the fair value of the assets and liabilities of the Company to ensure that they conform to the measurement and reporting guidance as set forth for the accounting for business combinations. Determining the fair value of assets and liabilities, especially in the loan portfolio, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair values. Accordingly, the initial accounting for the Merger is not complete. Management is also undertaking a comprehensive review of the classification of certain assets and liabilities to ensure that they conform to the Company’s current policies and reporting practices. As a result of these efforts, the value and classification of certain assets and liabilities may vary in subsequent reporting periods.

Additional disclosures required by ASC 805 have been omitted from this report because the information required for the disclosures, including the purchase price accounting fair value adjustments, are not available due to the close proximity of the closing of the transaction with the date the accompanying condensed consolidated financial statements were issued.

~~Future filings will include the financial statements of~~ Stellar for all periods presented, with recognition of the Company’s activity from the date the Merger was completed. The Company’s financial statements for all periods through the date of the Merger will not be included in future filings.

Bank.

~~Table of Contents~~

~~The tables below present condensed financial information of Allegiance as of and for the period indicated, which is not included in the accompanying condensed financial statements of the Company.~~

Allegiance Bancshares, Inc.
Condensed Balance Sheet (Unaudited)

(Dollars in thousands)

September 30, 2022
Assets:

Cash and cash equivalents

$
118,567
Securities

1,618,995
Loans held for investment

4,591,912
Allowance for credit losses for loans

(52,147)
Loans, net

4,539,765
Premises and equipment

57,837
Goodwill

223,642
Other assets

171,536
Total assets

$
6,730,342
Liabilities:

Noninterest-bearing deposits

$
2,465,839
Interest-bearing deposits

3,194,880
Total deposits

5,660,719
Borrowed funds

257,000
Subordinated debt

109,241
Other liabilities

47,080
Total liabilities

6,074,040
Total shareholders’ equity

656,302
Total liabilities and shareholders’ equity

$
6,730,342

Allegiance Bancshares, Inc.
Condensed Statements of Income (Unaudited)

Three Months Ended

Nine Months Ended
(Dollars in thousands)

September 30, 2022

September 30, 2022
Net interest income

$
60,690

$
173,344
Provision for credit losses

1,962

5,919
Net interest income after provision for credit losses

58,728

167,425
Noninterest income

2,995

9,717
Noninterest expense

44,031

116,452
Net income before income tax expense

17,692

60,690
Income tax expense

3,406

11,310
Net income

$
14,286

$
49,380
Earnings per common share

Basic

$
0.72

$
2.44
Diluted

$
0.71

$
2.42

~~Table of Contents~~

I~~tem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

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 ~~and Allegiance’s~~ Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 and the following:

•disruptions to the economy and the U.S. banking system caused by recent bank failures;

•risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in our deposit insurance assessments and other actions of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Texas Department of Banking and legislative and regulatory actions and reforms;

•the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;

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

•changes in the interest rate environment, the value of Stellar’s assets and obligations and the availability of capital and liquidity;

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

•local, regional, national and international economic conditions and the impact they may have on the Company and our customers and the Company’s assessment of that impact;

•the inability to sustain revenue and earnings growth;

•impairment of the Company's goodwill or other ~~SEC filings, including~~ intangible assets;

•the ~~Joint/Proxy Statement/Prospectus regarding~~composition of the ~~Merger~~Company’s loan portfolio and the concentration of loans in commercial real estate and commercial real estate construction;

•the geographic concentration of the Company’s markets;

•the accuracy and sufficiency of the assumptions and estimates the Company makes in establishing reserves for potential loan losses and other estimates;

•the amount of nonperforming and classified assets that the Company holds and the time and effort necessary to resolve nonperforming assets;

•deterioration of asset quality;

•customer borrowing, repayment, investment and deposit practices;

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

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

•the risk that the expected cost savings and any revenue synergies from the Merger may not be fully realized or may take longer than anticipated to be realized;

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

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

•natural disasters and adverse weather on the Company’s market area;

•the potential impact of climate change;

•the impact of pandemics, epidemics or any other health-related crisis;

•acts of terrorism, an outbreak of hostilities, such as the conflict in Ukraine, or other international or domestic calamities;

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

•the cost and effects of cyber incidents or other failures, interruptions or security breaches of the Company's systems or those of the Company's customers or third-party providers;

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

•the impact, extent and timing of technological changes

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

•the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals or meet conditions associated with the same;

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

•the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; and

•other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the ~~SEC on April 7, 2022 pursuant to Rule 424(b)(3), this Quarterly Report on Form 10-Q 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;SEC.

●

~~the Company’s ability to manage the economic risks related to the 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, including lack of access to liquidity;~~

●

~~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;~~

~~Table of Contents~~

●

~~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;~~

●

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

●

the risk that the integration of operations resulting from the Merger 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;

●

~~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;~~

●

~~the ability to retain personnel of the Company or Allegiance with the completion of the 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;~~

●

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

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.

~~Merger~~

~~Effective October 1, 2022, or the Effective Time, the Company completed its previously announced merger~~

Overview

We generate most of equals with Allegiance, a Texas corporation, pursuant to the Merger Agreement dated as of November 5, 2021, by and between the Company and Allegiance. At the Effective Time, Allegiance merged with and into the Company, with the Company as the surviving corporation. At the Effective Time, the Company changed its name from CBTX, Inc. to Stellar Bancorp, Inc. and changed its ticker symbol to “STEL”.

Immediately after the Merger, the Company’s wholly owned bank subsidiary, CommunityBank of Texas, N.A., merged with and into Allegiance’s wholly owned bank subsidiary, Allegiance Bank, a Texas state banking association, or Allegiance Bank, with Allegiance Bank as the surviving entity.

Pursuant to the Merger Agreement, each share of Allegiance common stock, $1.00 par value per share, or Allegiance common stock, outstanding as of immediately prior to the Effective Time, other than certain shares of Allegiance common stock held by Allegiance or the Company, was converted into the right to receive 1.4184 shares, or the Exchange Ratio, of common stock of the Company, $0.01 par value per share, or the Company common stock, with cash to be paid in lieu of fractional shares, or the Merger Consideration. As a result of the Merger Allegiance shareholders hold shares which represent approximately 53.9% of outstanding Company common stock. Each outstanding share of Company common stock remained outstanding and was unaffected by the Merger.

~~Table of Contents~~

~~Overview~~

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

Table of Contents

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.

~~Periodic~~

Completion of Merger of Equals

On October 1, 2022, Allegiance and CBTX merged with CBTX as the surviving corporation that was renamed Stellar Bancorp, Inc. At the effective time of the Merger, each outstanding share of Allegiance common stock, par value of $1.00 per share, was converted into the right to receive 1.4184 shares of common stock of the Company.

Immediately following the Merger, CommunityBank 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.

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 months ended March 31, 2022 reflect Allegiance results, while the results for the three months ended March 31, 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 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 allowance for credit losses is a valuation account which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. The Company bases its estimates of credit losses on three primary components: (1) estimates of expected losses that exist in various segments of performing loans over the remaining life of the loan portfolio using a reasonable and supportable economic forecast, (2) specifically identified losses in individually analyzed credits which are collateral-dependent, which generally include loans internally graded as impaired and purchased credit deteriorated (“PCD”) loans and (3) qualitative factors related to economic conditions, portfolio concentrations, regulatory policy updates, and other relevant factors that address estimates of expected losses not fully addressed based upon management’s judgment of portfolio conditions. One of the most significant judgments used in determining the allowance for credit losses is the reasonable and supportable economic forecast. Estimating the timing and amounts of future losses is subject to significant management judgment as these projected cash flows rely upon the estimates discussed above and factors that are reflective of current or future expected conditions. Volatility in certain credit metrics and differences between expected and actual outcomes are to be expected. Customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance.

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

Table of ~~Contents~~Contents

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 ~~table below shows the trend~~total allowance for credit losses includes 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.

Fair value of loans acquired in a business combination

On October 1, 2022, 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 combination accounting. The allowance for credit losses for non-purchased credit deteriorated (“non-PCD”) assets is recognized as

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

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

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

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

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

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

Recently Issued Accounting Pronouncements

We have evaluated new accounting pronouncements that have recently been issued. Refer to Note 1 of the Company’s ~~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.~~

September 30,

June 30,

March 31,

December 31,

September 30,
(Dollars in thousands)

2022

2022

2022

2021

2021
Risk grades:

Pass

$
3,074,091

$
2,972,739

$
2,804,237

$
2,783,385

$
2,526,395
Special mention

2,582

468

4,281

12,807

4,661
Substandard

59,218

68,768

80,460

80,235

86,501
Total gross loans

$
3,135,891

$
3,041,975

$
2,888,978

$
2,876,427

$
2,617,557
Past due loans:

30 to 59 days past due

$
11,099

$
537

$
13,603

$
905

$
2,755
60 to 89 days past due

9,172

4,611

2,032

34

143
90 days or greater past due

1,882

10,276

140

197

104
Total past due loans

$
22,153

$
15,424

$
15,775

$
1,136

$
3,002
Loans individually evaluated:

Accruing troubled debt restructurings

$
28,373

$
26,117

$
28,428

$
30,709

$
31,656
Non-accrual troubled debt restructurings

22,236

22,761

21,720

20,019

17,834
Total troubled debt restructurings

50,609

48,878

50,148

50,728

49,490
Other non-accrual

174

5,512

363

2,549

2,751
Other accruing

1,159

1,152

3,494

5,995

5,260
Total loans individually evaluated

$
51,942

$
55,542

$
54,005

$
59,272

$
57,501
Nonperforming assets:

Nonaccrual loans

$
22,410

$
28,273

$
22,083

$
22,568

$
20,585
Accruing loans 90 or more days past due

—

—

—

—

—
Total nonperforming loans

22,410

28,273

22,083

22,568

20,585
Foreclosed assets

—

—

—

—

—
Total nonperforming assets

$
22,410

$
28,273

$
22,083

$
22,568

$
20,585

Company’s financial statements in future periods.

Results of Operations

Net income was $37.1 million, or $0.70 per diluted share, for the first quarter 2023 compared to $18.7 million, or $0.64 per diluted share, for the first quarter 2022. The ~~decreases~~increase in net income ~~during~~was primarily due to a $60.7 million increase in net interest income and a $3.5 million increase in noninterest income, partially offset by a $38.1 million increase in noninterest expense, a $5.7 million increase in the provision for income taxes and a $1.9 million increase in the provision for credit losses, all primarily resulting from the Merger. Acquisition and merger-related expenses totaled $6.2 million for the first quarter of 2023 compared to $451 thousand for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022.

Annualized returns on average assets, returns on average equity and efficiency ratios were 1.38%, 10.62% and 58.96%, for the three months ended March 31, 2023, compared to 1.04%, 9.40% and 58.32%, for the three months ended March 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 Interest Income

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

Interest income was $140.4 million for the three months ended March 31, 2023, an increase of $80.1 million, or 132.8%, compared with $60.3 million for the three months ended March 31, 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 $2.94 billion, or 42.8%, for the three months ended March 31, 2023 compared with the three months ended March 31, 2022, primarily due to the Merger.

Interest expense was $24.6 million for the three months ended March 31, 2023, an increase of $19.5 million, or 379.2%, compared with $5.1 million for the three months ended March 31, 2022. This increase was primarily due to higher funding costs on interest-bearing deposits due to higher interest rates and an increase in average interest-bearing liabilities. The cost of average interest-bearing liabilities increased to 191 basis points for the three months ended March 31, 2023 compared to 51 basis points for the same period in 2022. Average interest-bearing liabilities increased $1.12 billion for the three months ended March 31, 2023 compared to the three ~~and nine~~ months ended ~~September 30, 2021, were~~March 31, 2022 primarily due to anthe Merger.

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Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the three months ended March 31, 2023 was 4.80%, a decrease of 150 basis points compared to 3.30% for the three months ended March 31, 2022. The increase in the provision (recapture) for credit losses and an increase in noninterest expense, partially offset by an increase in net interest income. See further analysis of the material fluctuations in the related discussions that follow.

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021

Increase (Decrease)

2022

2021

Increase (Decrease)
Interest income

$
44,673

$
32,697

$
11,976

36.6%

$
114,789

$
99,864

$
14,925

14.9%
Interest expense

1,661

1,448

213

14.7%

4,275

4,507

(232)

(5.1%)
Net interest income

43,012

31,249

11,763

37.6%

110,514

95,357

15,157

15.9%
Provision (recapture) for credit losses

1,012

(4,895)

5,907

120.7%

1,573

(9,566)

11,139

116.4%
Noninterest income

3,449

5,562

(2,113)

(38.0%)

12,324

12,164

160

1.3%
Noninterest expense

29,321

24,372

4,949

20.3%

77,731

72,854

4,877

6.7%
Income before income taxes

16,128

17,334

(1,206)

(7.0%)

43,534

44,233

(699)

(1.6%)
Income tax expense

3,381

2,913

468

16.1%

8,485

8,090

395

4.9%
Net income

$
12,747

$
14,421

$
(1,674)

(11.6%)

$
35,049

$
36,143

$
(1,094)

(3.0%)
Earnings per share - basic

$
0.52

$
0.59

$
1.43

$
1.48

Earnings per share - diluted

0.52

0.59

1.43

1.47

Dividends per share

0.13

0.13

0.39

0.39

~~Table of Contents~~

~~Net Interest Income for the Nine Months Ended September 30, 2022, Compared to the Nine Months Ended September 30, 2021~~

Net interest income increased $15.2 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to higher average balances and higher average rates on loans and securities and higher average rates on interest-bearing deposits at other financial institutions.

The yield on interest-earning assets was 3.74% for the nine months ended September 30, 2022, compared to 3.52% for the nine months ended September 30, 2021. The cost of interest-bearing liabilities was 0.29% for the nine months ended September 30, 2022 and 0.32% for the nine months ended September 30, 2021. The Company’s net interest margin on a tax equivalent basis was ~~3.65%~~primarily due to the Merger and an increase in the average yield on interest-earning assets partially offset by increased funding costs. The average yield on interest-earning assets of 5.80% and the average rate paid on interest-bearing liabilities of 1.91% for the ~~nine~~first quarter of 2023 increased by 224 basis points and 140 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 ~~September 30,~~March 31, 2023 and 2022, ~~compared~~thus making tax-exempt yields comparable to ~~3.40% for the nine months ended September 30, 2021.~~

taxable asset yields.

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.


	Three Months Ended March 31,
	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	$	7,847,011	$	125,729	6.50	%	$	4,231,507	$	52,370	5.02	%
Securities	1,604,011		10,915		2.76	%	1,835,618		7,593		1.68	%
Deposits in other financial institutions	364,781		3,771		4.19	%	806,583		340		0.17	%
Total interest-earning assets	9,815,803		$	140,415	5.80	%	6,873,708		$	60,303	3.56	%
Allowance for credit losses on loans	(93,331)						(48,343)
Noninterest-earning assets	1,160,061						432,133
Total assets	$	10,882,533					$	7,257,498

Liabilities and Shareholders' Equity
Interest-bearing Liabilities:
Interest-bearing demand deposits	$	1,650,273	$	8,382	2.06	%	$	1,071,010	$	549	0.21	%
Money market and savings deposits	2,490,889		9,655		1.57	%	1,584,373		798		0.20	%
Certificates and other time deposits	861,595		3,307		1.56	%	1,245,180		2,156		0.70	%
Borrowed funds	105,191		1,317		5.08	%	89,880		186		0.84	%
Subordinated debt	109,415		1,927		7.14	%	108,913		1,442		5.37	%
Total interest-bearing liabilities	5,217,363		$	24,588	1.91	%	4,099,356		$	5,131	0.51	%

Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits	4,166,265						2,312,114
Other liabilities	80,823						41,324
Total liabilities	9,464,451						6,452,794
Shareholders' equity	1,418,082						804,704
Total liabilities and shareholders' equity	$	10,882,533					$	7,257,498

Net interest rate spread					3.89	%					3.05	%

Net interest income and margin(1)			$	115,827	4.79	%			$	55,172	3.26	%

Net interest income and margin (tax equivalent)(2)			$	116,119	4.80	%			$	55,922	3.30	%

(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.~~

Nine Months Ended September 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⁾

$
2,953,607

$
102,047

4.62%

$
2,812,449

$
94,723

4.50%
Securities

537,889

8,275

2.06%

296,958

3,940

1.77%
Interest-bearing deposits at other financial institutions

595,458

3,994

0.90%

668,119

740

0.15%
Equity investments

13,386

473

4.72%

14,679

461

4.20%
Total interest-earning assets

4,100,340

$
114,789

3.74%

3,792,205

$
99,864

3.52%
Allowance for credit losses for loans

(31,599)





(39,594)




Noninterest-earning assets

313,938





318,009




Total assets

$
4,382,679





$
4,070,620




Liabilities and Shareholders’ Equity












Interest-bearing liabilities:












Interest-bearing deposits

$
1,971,247

$
4,003

0.27%

$
1,846,211

$
3,844

0.28%
Federal Home Loan Bank advances

18,315

272

1.99%

50,000

663

1.77%
Total interest-bearing liabilities

1,989,562

$
4,275

0.29%

1,896,211

$
4,507

0.32%
Noninterest-bearing liabilities:












Noninterest-bearing deposits

1,803,702





1,568,071




Other liabilities

44,479





50,966




Total noninterest-bearing liabilities

1,848,181





1,619,037




Shareholders’ equity

544,936





555,372




Total liabilities and shareholders’ equity

$
4,382,679





$
4,070,620




Net interest income



$
110,514





$
95,357


Net interest spread⁽³⁾





3.45%





3.20%
Net interest margin⁽⁴⁾





3.60%





3.36%
Net interest margin - tax equivalent⁽⁵⁾





3.65%





3.40%
three months ended March 31, 2023 and 2022.

~~(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 $1.5 million and $989,000 for the nine months ended September 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.

Nine Months Ended September 30, 2022,

Compared to Nine Months Ended September 30, 2021


Increase (Decrease) due to

(Dollars in thousands)

Rate

Volume

Total
Interest-earning assets:

Total loans

$
2,573

$
4,751

$
7,324
Securities

1,145

3,190

4,335
Interest-bearing deposits at other financial institutions

3,336

(82)

3,254
Equity investments

53

(41)

12
Total increase in interest income

7,107

7,818

14,925
Interest-bearing liabilities:






Interest-bearing deposits

(103)

262

159
Federal Home Loan Bank advances

28

(419)

(391)
Total decrease in interest expense

(75)

(157)

(232)
Increase in net interest income

$
7,182

$
7,975

$
15,157

~~Net Interest Income~~


	For the Three Months Ended March 31,
	2023 vs. 2022
	Increase (Decrease) Due to Change in
	Volume		Rate		Total
	(In thousands)
Interest-earning Assets:
Loans	$	44,753	$	28,606	$	73,359
Securities	(959)		4,281		3,322
Deposits in other financial institutions	(185)		3,616		3,431
Total increase in interest income	43,609		36,503		80,112

Interest-bearing Liabilities:
Interest-bearing demand deposits	300		7,533		7,833
Money market and savings deposits	447		8,410		8,857
Certificates and other time deposits	(662)		1,813		1,151
Borrowed funds	32		1,099		1,131
Subordinated debt	7		478		485
Total increase in interest expense	124		19,333		19,457
Increase in net interest income	$	43,485	$	17,170	60,655

Provision for Credit Losses

Our allowance for credit losses is established through charges to income in the ~~Three Months Ended September 30, 2022, Compared~~form of the provision in order to ~~the Three Months Ended September 30, 2021~~

~~Net interest income increased $11.8~~bring our allowance for credit losses for various types of financial instruments including loans, unfunded commitments and securities to a level deemed appropriate by management. We recorded a $3.7 million ~~during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to higher rates on interest-earning assets~~provision and ~~higher average loans and securities.~~

~~The yield on interest-earning assets was 4.36%~~a $1.8 million provision for credit losses for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~compared to 3.33%~~respectively. The provision for credit losses for the three months ended ~~September 30, 2021. The cost~~March 31, 2023 and 2022, primarily resulted from an increase in loans during those periods, among other factors.

Noninterest Income

Our primary sources of ~~interest-bearing liabilities was 0.34%~~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 March 31, 2023 compared with three months ended March 31, 2022. Noninterest income totaled $7.5 million for the three months ended ~~September 30,~~March 31, 2023 compared with $4.0 million for the same period in 2022, an increase of $3.5 million, or 86.6%, primarily due to increased debt card and ~~0.30%~~ATM income and service charges due to increased scale as a result of the Merger. In addition, other noninterest income for the three months ended ~~September 30, 2021. The Company’s net interest margin on a tax equivalent basis was 4.25% for the three months ended September 30,~~March 31, 2023 and 2022 ~~compared to 3.22% for the three months ended September 30, 2021.~~

includes $1.1 million and $1.3 million, respectively, of income from Small Business Investment Company investments.

Table of ~~Contents~~Contents

The following table presents, for the periods indicated, ~~average outstanding balances for each~~the major ~~category~~categories of ~~interest-earning assets~~noninterest income:


	For the Three Months Ended March 31,				Increase (Decrease)
	2023		2022
	(In thousands)
Nonsufficient funds fees	$	406	$	116	$	290
Service charges on deposit accounts	943		527		416
Gain on sale of assets	198		—		198
Bank owned life insurance income	522		133		389
Debit card and ATM card income	1,698		819		879
Other(1)	3,731		2,423		1,308
Total noninterest income	$	7,498	$	4,018	$	3,480

(1)Other includes wire transfer and ~~interest-bearing liabilities, the interest income or interest~~letter of credit fees, among other items.

Noninterest Expense

Three months ended March 31, 2023 compared with three months ended March 31, 2022. Noninterest expense ~~and the average yield or rate~~was $72.6 million for the ~~periods indicated.~~

Three Months Ended September 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⁾

$
3,074,655

$
39,058

5.04%

$
2,702,248

$
30,765

4.52%
Securities

552,901

3,046

2.19%

327,968

1,435

1.74%
Interest-bearing deposits at other financial institutions

428,196

2,408

2.23%

854,406

340

0.16%
Equity investments

13,393

161

4.77%

13,367

157

4.66%
Total interest-earning assets

4,069,145

$
44,673

4.36%

3,897,989

$
32,697

3.33%
Allowance for credit losses for loans

(32,106)



(36,945)




Noninterest-earning assets

318,761





313,901




Total assets

$
4,355,800





$
4,174,945




Liabilities and Shareholders’ Equity












Interest-bearing liabilities:












Interest-bearing deposits

$
1,954,854

$
1,661

0.34%

$
1,895,617

$
1,227

0.26%
Federal Home Loan Bank advances

—

—

—

50,000

221

1.75%
Total interest-bearing liabilities

1,954,854

$
1,661

0.34%

1,945,617

$
1,448

0.30%
Noninterest-bearing liabilities:












Noninterest-bearing deposits

1,822,323





1,612,985




Other liabilities

40,684





52,712




Total noninterest-bearing liabilities

1,863,007





1,665,697




Shareholders’ equity

537,939





563,631




Total liabilities and shareholders’ equity

$
4,355,800





$
4,174,945




Net interest income



$
43,012





$
31,249


Net interest spread⁽³⁾





4.02%





3.03%
Net interest margin⁽⁴⁾





4.19%





3.18%
Net interest margin - tax equivalent⁽⁵⁾





4.25%





3.22%

~~(1)~~

~~Annualized.~~three months ended March 31, 2023 compared to $34.5 million for the three months ended March 31, 2022, an increase of $38.1 million or 110.3%, primarily due increased salaries and employee benefits, core deposit intangible amortization, data processing and software amortization, net occupancy and equipment and acquisition and merger-related costs associated with the Merger.

~~(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 $578,000 and $369,000 for the three months ended September 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~~the major ~~component~~categories of ~~interest-earning assets~~noninterest expense:


	For the Three Months Ended March 31,				Increase (Decrease)
	2023		2022
	(In thousands)
Salaries and employee benefits(1)	$	39,775	$	22,728	$	17,047
Net occupancy and equipment	4,088		2,205		1,883
Depreciation	1,836		1,033		803
Data processing and software amortization	5,054		2,498		2,556
Professional fees	1,527		138		1,389
Regulatory assessments and FDIC insurance	1,294		1,261		33
Amortization of intangibles	6,879		751		6,128
Communications	701		341		360
Advertising	839		462		377
Other real estate expense	272		59		213
Acquisition and merger-related expenses	6,165		451		5,714
Other	4,168		2,590		1,578
Total noninterest expense	$	72,598	$	34,517	$	38,081

(1)Total salaries 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 September 30, 2022,

Compared to Three Months Ended September 30, 2021


Increase (Decrease) due to

(Dollars in thousands)

Rate

Volume

Total
Interest-earning assets:

Total loans

$
4,051

$
4,242

$
8,293
Securities

624

987

1,611
Interest-bearing deposits at other financial institutions

2,239

(171)

2,068
Equity investments

4

—

4
Total increase in interest income

6,918

5,058

11,976
Interest-bearing liabilities:






Interest-bearing deposits

394

40

434
Federal Home Loan Bank advances

—

(221)

(221)
Total decrease in interest expense

394

(181)

213
Increase in net interest income

$
6,524

$
5,239

$
11,763

~~Provision for Credit Losses~~

~~The provision for credit losses was $1.0~~employee benefits includes $2.6 million and ~~$1.6 million~~$959 thousand for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, respectively, ~~compared to recaptures~~ of ~~$4.9~~stock based compensation expense.

Salaries and employee benefits. Salaries and benefits increased $17.0 million, ~~and $9.6 million~~or 75.0%, for the three ~~and nine~~ months ended ~~September 30, 2021, respectively.~~

~~The provision for credit losses for~~March 31, 2023, compared to the ~~three and nine months ended September 30,~~same period in 2022 ~~was comprised of provisions for credit losses for loans of $523,000 and $1.0 million, respectively,~~primarily due to ~~increases in~~ the ~~loan portfolio~~Merger.

Acquisition and ~~provisions for credit losses for unfunded commitments~~merger-related expenses. Acquisition and merger-related expenses of ~~$489,000 and $551,000, respectively, due to fluctuations in available unfunded commitments.~~

The recapture of credit losses for the three and nine months ended September 30, 2021 was the result of certain qualitative factor adjustments made on the ACL. Due to improvements in the national economy, economic forecasts and improved loan quality during those periods, the Company adjusted its economic forecasts and certain loan quality factors.

~~Noninterest Income~~

The following table presents components of noninterest income for the three and nine months ended September 30, 2022 and 2021 and the period-over-period changes in the categories of noninterest income:

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021

Increase (Decrease)

2022

2021

Increase (Decrease)
Deposit account service charges

$
1,320

$
1,352

$
(32)

(2.4%)

$
4,076

$
3,712

$
364

9.8%
Card interchange fees

1,056

1,048

8

0.8%

3,228

3,119

109

3.5%
Earnings on bank-owned life insurance

376

2,323

(1,947)

(83.8%)

1,118

3,103

(1,985)

(64.0%)
Net gain on sales of assets

85

360

(275)

(76.4%)

673

918

(245)

(26.7%)
Other

612

479

133

27.8%

3,229

1,312

1,917

146.1%
Total noninterest income

$
3,449

$
5,562

$
(2,113)

(38.0%)

$
12,324

$
12,164

$
160

1.3%

~~The decrease in noninterest income of $2.1~~$6.2 million incurred during the three months ended ~~September 30, 2022,~~March 31, 2023 were primarily related to compensation and legal and advisory fees associated with the Merger.

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Amortization of intangibles. Amortization of intangibles increased $6.1 million for the three months ended March 31, 2023 compared to the three months ended ~~September 30, 2021, was primarily~~March 31, 2022 due to the ~~impact of earnings on bank-owned life insurance due to related gains of $1.9~~$138.2 million ~~during the third quarter of 2021. As the owner and beneficiary under bank-owned insurance policies~~core deposit intangible created as ~~the~~a result of ~~claims submitted on covered individuals,~~ the ~~Company received proceeds~~Merger.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of ~~$2.7 million during~~our performance. We calculate our efficiency ratio by dividing total noninterest expense by the ~~third quarter~~sum of ~~2021.~~

~~Table of Contents~~

~~Total other~~net interest income and noninterest income, ~~increased $160,000 during~~excluding net gains and losses on the ~~nine~~sale of loans, securities and assets. Additionally, taxes and provision for credit losses are not part of this calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio was 58.96% for the three months ended ~~September 30, 2022,~~March 31, 2023 compared to 58.32% for the ~~nine~~three months ended ~~September 30, 2021. The nine months ended September 30,~~March 31, 2022, ~~includes payments totaling $1.5 million recognized for early termination of a land lease included~~respectively.

We monitor the efficiency ratio in other noninterest income and a gain of $1.4 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 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”. The nine months ended September 30, 2021 was impacted by earnings on bank-owned life insurance noted in the three month period discussion above.

~~Noninterest Expense~~

~~Generally, noninterest expense is composed of employee expenses and costs associated~~comparison with ~~operating facilities, obtaining and retaining customer relationships and providing bank services. See further analysis of these~~ changes in our total assets and loans, and we believe that maintaining or reducing the ~~related discussions that follow.~~

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021

Increase (Decrease)

2022

2021

Increase (Decrease)
Salaries and employee benefits

$
16,453

$
15,000

$
1,453

9.7%

$
46,405

$
43,922

$
2,483

5.7%
Occupancy expense

2,595

2,660

(65)

(2.4%)

7,362

7,778

(416)

(5.3%)
Professional and director fees

942

1,567

(625)

(39.9%)

2,963

5,711

(2,748)

(48.1%)
Data processing and software

1,502

1,629

(127)

(7.8%)

4,723

4,866

(143)

(2.9%)
Regulatory fees

599

478

121

25.3%

2,016

1,535

481

31.3%
Advertising, marketing and business development

350

493

(143)

(29.0%)

965

1,288

(323)

(25.1%)
Telephone and communications

348

516

(168)

(32.6%)

1,151

1,529

(378)

(24.7%)
Security and protection expense

386

425

(39)

(9.2%)

880

1,352

(472)

(34.9%)
Amortization of intangibles

165

182

(17)

(9.3%)

518

559

(41)

(7.3%)
Other expenses

5,981

1,422

4,559

320.6%

10,748

4,314

6,434

149.1%
Total noninterest expense

$
29,321

$
24,372

$
4,949

20.3%

$
77,731

$
72,854

$
4,877

6.7%

~~Total noninterest expense increased $4.9 million for both~~efficiency ratio during periods of growth demonstrates the ~~three and nine months ended September 30, 2022, compared~~scalability of our operating platform. We expect to ~~the three and nine months ended September 30, 2021.~~

~~The increase~~continue to benefit from our scalable platform in ~~noninterest expense for the nine months ended September 30, 2022, compared~~future periods as we continue to ~~the nine months ended September 30, 2021, was primarily due~~monitor overhead expenses necessary to ~~$7.8 million of costs related to the Merger, partially offset by a $2.7 million decrease in professional and director fees, primarily related to BSA/AML compliance matters and legal fees.~~

The increase in noninterest expense for the third quarter of 2022, compared to the third quarter of 2021, was primarily due to $5.9 million of costs related to the Merger, partially offset by a $625,000 decrease in professional and director fees, primarily related to BSA/AML compliance matters and legal fees.

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 ~~and~~increased $5.7 million to $9.9 million for the three months ended March 31, 2023 compared with $4.2 million for the same period in 2022 primarily due to the increase in pre-tax net income. Our effective tax ~~rates~~rate was 21.1% for the ~~periods indicated below~~three months ended March 31, 2023 compared to 18.4% for the three months ended March 31, 2022.

Financial Condition

Loan Portfolio

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

Total loans as ~~follows:~~

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

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


	March 31, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
Commercial and industrial	$	1,477,340	18.7	%	$	1,455,795	18.8	%
Paycheck Protection Program (PPP)	11,081		0.1	%	13,226		0.2	%
Real estate:
Commercial real estate (including multi-family residential)	4,014,609		51.0	%	3,931,480		50.7	%
Commercial real estate construction and land development	1,034,538		13.1	%	1,037,678		13.4	%
1-4 family residential (including home equity)	1,008,362		12.8	%	1,000,956		12.9	%
Residential construction	292,143		3.7	%	268,150		3.4	%
Consumer and other	47,971		0.6	%	47,466		0.6	%
Total loans	7,886,044		100.0	%	7,754,751		100.0	%
Allowance for credit losses on loans	(96,188)				(93,180)
Loans, net	$	7,789,856			$	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

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loans. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. In addition, an independent third-party loan review is performed on a periodic basis during the year. Results of these reviews are presented to management and the ~~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 ~~costs related~~commercial mortgage loans and therefore typically yield a higher return. The increased risk in commercial loans derives from the expectation that commercial and industrial loans generally are serviced principally from the operations of the business, which may not be successful and from the type of collateral securing these loans. As a result, commercial and industrial loans require more extensive underwriting and servicing than other types of loans. Our commercial and industrial loan portfolio increased by $21.5 million, or 1.5%, to ~~the Merger.~~

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~~Financial Condition~~

~~Total assets were $4.3~~$1.48 billion as of ~~September 30, 2022, compared to $4.5~~March 31, 2023 from $1.46 billion as of December 31, ~~2021.~~2022.

Paycheck Protection Program (PPP). The ~~decrease~~balance of ~~$214.2~~PPP loans decreased $2.1 million ~~or 4.8%, was primarily~~to $11.1 million as of March 31, 2023 from $13.2 million as of December 31, 2022 due to ~~a $579.7 million decrease in cash~~loan forgiveness.

Commercial Real Estate (Including Multi-Family Residential). We make loans collateralized by owner-occupied, nonowner-occupied and cash equivalents, partially offset by a $258.9 million increase in loans excluding loans held for sale and a $86.2 million increase in securities. Total liabilities were $3.8 billion and $3.9 billion at September 30, 2022multi-family real estate to finance the purchase or ownership of real estate. As of March 31, 2023 and December 31, ~~2021, respectively. The decrease in liabilities from December 31, 2021 to September 30.~~ 2022, ~~is primarily due to a $107.5 million decrease in deposits~~ 45.9% and ~~the repayment~~45.3%, respectively, of ~~Federal Home Loan Bank advances totaling $50.0 million. See further analysis in the related discussions that follow.~~

(Dollars in thousands)

September 30, 2022

December 31, 2021

Increase (Decrease)
Assets:

Loans excluding loans held for sale

$
3,126,421

$
2,867,524

$
258,897

9.0%
Allowance for credit losses

(32,577)

(31,345)

1,232

3.9%
Loans, net

3,093,844

2,836,179

257,665

9.1%
Cash and cash equivalents

370,448

950,146

(579,698)

(61.0%)
Securities

511,282

425,046

86,236

20.3%
Premises and equipment

55,594

58,417

(2,823)

(4.8%)
Goodwill

80,950

80,950

—

—
Other intangible assets

3,188

3,658

(470)

(12.8%)
Loans held for sale

—

164

(164)

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

10,992

11,191

(199)

(1.8%)
Other assets

145,533

120,250

25,283

21.0%
Total assets

$
4,271,831

$
4,486,001

$
(214,170)

(4.8%)
Liabilities:

Noninterest-bearing deposits

$
1,780,473

$
1,784,981

$
(4,508)

(0.3%)
Interest-bearing deposits

1,943,301

2,046,303

(103,002)

(5.0%)
Total deposits

3,723,774

3,831,284

(107,510)

(2.8%)
Federal Home Loan Bank advances

—

50,000

(50,000)

(100.0%)
Operating lease liabilities

13,748

14,142

(394)

(2.8%)
Other liabilities

32,884

28,450

4,434

15.6%
Total liabilities

3,770,406

3,923,876

(153,470)

(3.9%)
Shareholders' equity

501,425

562,125

(60,700)

(10.8%)
Total liabilities and shareholders' equity

$
4,271,831

$
4,486,001

$
(214,170)

(4.8%)

~~Table of Contents~~

~~Loan Portfolio~~

~~The components of the~~our commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio increased $83.1 million, or 2.1%, to $4.01 billion as of ~~the dates indicated was~~March 31, 2023 from $3.93 billion as ~~follows:~~

(Dollars in thousands)

September 30, 2022

December 31, 2021

Increase (Decrease)
Commercial and industrial:

Oil and gas

$
102,282

$
135,081

$
(32,799)

(24.3%)
Industrial construction

80,512

67,618

12,894

19.1%
Equipment rental

69,900

60,206

9,694

16.1%
Professional/medical

47,828

57,365

(9,537)

(16.6%)
Manufacturing

39,461

31,120

8,341

26.8%
PPP loans

2,302

54,262

(51,960)

(95.8%)
Other

225,786

228,732

(2,946)

(1.3%)
Total commercial and industrial

568,071

634,384

(66,313)

(10.5%)
Commercial real estate:

Non-owner occupied

685,560

581,229

104,331

18.0%
Owner occupied

500,690

443,853

56,837

12.8%
Oil and gas

55,868

66,887

(11,019)

(16.5%)
Total commercial real estate

1,242,118

1,091,969

150,149

13.8%
Construction and development:

Land and development

207,665

177,506

30,159

17.0%
Commercial

154,344

107,663

46,681

43.4%
Multi-family community development

73,343

119,363

(46,020)

(38.6%)
1-4 family - commercial

47,465

39,345

8,120

20.6%
1-4 family - primary

23,343

14,285

9,058

63.4%
Oil and gas

1,410

2,557

(1,147)

(44.9%)
Total construction and development

507,570

460,719

46,851

10.2%
Multi-family residential:

Multi-family community development

305,567

238,913

66,654

27.9%
Other

64,824

47,483

17,341

36.5%
Total multi-family residential

370,391

286,396

83,995

29.3%
Total commercial loans

2,688,150

2,473,468

214,682

8.7%
1-4 family residential

288,456

277,273

11,183

4.0%
Consumer

24,509

28,090

(3,581)

(12.7%)
Other loans

123,293

89,309

33,984

38.1%
Agriculture

11,185

7,941

3,244

40.9%
Other oil and gas loans

298

346

(48)

(13.9%)
Total gross loans

3,135,891

2,876,427

259,464

9.0%
Less deferred fees and unearned discount

(9,470)

(8,739)

(731)

8.4%
Less loans held for sale

—

(164)

164

(100.0%)
Loans excluding loans held for sale

3,126,421

2,867,524

258,897

9.0%
Less allowance for credit losses for loans

(32,577)

(31,345)

(1,232)

3.9%
Loans, net

$
3,093,844

$
2,836,179

$
257,665

9.1%

As of September 30, 2022, loans excluding loans held for sale were $3.1 billion, an increase of $258.9 million, or 9.0%, compared to December 31, 2021, primarily due to originations and line of credit drawdowns outpacing paydowns.

~~As of September 30, 2022, the Company had 11 loans outstanding funded under the Paycheck Protection Program, or PPP, under the CARES Act totaling $2.3 million. As~~ of December 31, ~~2021, the Company~~2022, primarily as a result of organic loan growth. Included in our commercial real estate portfolio are multi-family residential loans. Our multi-family loans as of March 31, 2023 decreased to $435.3 million from $471.6 million as of December 31, 2022. We had ~~330 PPP~~232 multi-family loans ~~totaling $54.3 million.~~

with an average loan size of $2.0 million as of March 31, 2023.

As of ~~September 30, 2022 and December~~March 31, ~~2021,~~2023, the Company’s commercial relate estate (including multi-family residential) loan portfolio included ~~$159.9~~$278.7 million ~~and $204.9 million, respectively,~~ of ~~loans directly or indirectly related to the oil and gas industry. Oil and gas loans are~~multifamily community development loans with revenue related to well-head, oil in the ground or extracting oil or gas, including any activity, product or service related to the oil and gas industry, such as exploration and production, drilling, equipment, services, midstream companies,

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

~~As of September 30, 2022 and December 31, 2021, the Company’s loan portfolio included $378.9 million and $358.3 million, respectively, of community development loans,~~associated tax credits, which fund Texas based projects to promote affordable housing.

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

As of March 31, 2023, the Company’s commercial relate estate construction and land development portfolio included $84.6 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.

1-4 Family Residential (Including Home Equity). Our residential real estate loans include the origination of 1-4 family residential mortgage loans (including home equity and home improvement loans and home equity lines of credit) collateralized by owner-occupied residential properties located in our market area. Our residential real estate portfolio (including home equity) increased $7.4 million, or 0.7%, to $1.01 billion as of March 31, 2023 from $1.00 billion as of December 31, 2022.

Residential Construction. We make residential construction loans to home builders and individuals to fund the construction of single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or with the proceeds of a mortgage loan. These loans are secured by the real property being built and are made based on our assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio increased $24.0 million, or 8.9%, to $292.1 million as of March 31, 2023 from $268.2 million as of December 31, 2022.

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

Asset Quality

We have procedures in place to assist us in maintaining 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
September 30, 2022

Commercial and industrial:

Fixed rate

$
52,941

$
147,256

$
4,320

$
—

$
204,517
Variable rate

175,044

125,566

62,464

480

363,554

227,985

272,822

66,784

480

568,071
Real estate:


Commercial real estate:

Fixed rate

71,069

520,448

82,018

—

673,535
Variable rate

26,456

339,615

182,475

20,037

568,583

97,525

860,063

264,493

20,037

1,242,118
Construction and development:

Fixed rate

52,706

86,184

1,728

12,163

152,781
Variable rate

66,967

260,955

10,701

16,166

354,789

119,673

347,139

12,429

28,329

507,570
1-4 family residential:

Fixed rate

3,458

42,936

16,973

111,825

175,192
Variable rate

1,134

2,975

14,043

95,112

113,264

4,592

45,911

31,016

206,937

288,456
Multi-family residential:

Fixed rate

1,273

16,505

200,984

41,100

259,862
Variable rate

80,710

29,618

201

—

110,529

81,983

46,123

201,185

41,100

370,391
Consumer:

Fixed rate

6,276

8,356

—

—

14,632
Variable rate

7,935

1,795

147

—

9,877

14,211

10,151

147

—

24,509
Agriculture:

Fixed rate

6,711

1,299

—

—

8,010
Variable rate

3,151

24

—

—

3,175

9,862

1,323

—

—

11,185
Other:

Fixed rate

2,128

1,007

—

—

3,135
Variable rate

28,131

88,110

4,215

—

120,456

30,259

89,117

4,215

—

123,591
Total:

Fixed rate loans

196,562

823,991

306,023

165,088

1,491,664
Variable rate loans

389,528

848,658

274,246

131,795

1,644,227
Total gross loans

$
586,090

$
1,672,649

$
580,269

$
296,883

$
3,135,891

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.

~~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/~~totaled $43.5 million, or ~~the collection~~0.41% of ~~principal~~total assets, at March 31, 2023 compared to $45.0 million, or ~~interest is in doubt.~~ 0.41% of total assets, at December 31, 2022.

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


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

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

(Dollars in thousands)

September 30, 2022

December 31, 2021
Nonaccrual loans

$
22,410

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

—

—
Total nonperforming loans

22,410

22,568
Foreclosed assets

—

—
Total nonperforming assets

$
22,410

$
22,568
Total assets

$
4,271,831

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

3,126,421

2,867,524
Allowance for credit losses for loans

32,577

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

145.37%

138.89%
Nonperforming loans to loans excluding loans held for sale

0.72%

0.79%
Nonperforming assets to total assets

0.52%

0.50%

a nonperforming loan.

Nonaccrual loans consisted o

f 94 separate credits at March 31, 2023 compared to 96 separate credits at December 31, 2022. Nonperforming assets were ~~$22.4~~ 0.55% of total loans at March 31, 2023 compared to 0.58% at December 31, 2022.

Table of Contents

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.

Allowance for Credit Losses on Loans

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

At March 31, 2023, our allowance for credit losses on loans amounted to $96.2 million, or ~~0.52%~~1.22% of total loans, compared with $93.2 million, or 1.20%, of total loans as of December 31, 2022. The increase in the allowance for credit losses on loans during the first quarter of 2023 reflected an increase in loans among other factors. The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:


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


Consumer and other	(8)			(48)
Total charge-offs for all loan types	(434)			(707)
Recoveries:
Commercial and industrial loans	208			390
Real estate:
Commercial real estate (including multi-family residential)	14			—

1-4 family residential (including home equity)	7			—

Consumer and other	13			—
Total recoveries for all loan types	242			390
Net charge-offs	(192)			(317)
Allowance for credit losses on loans at end of period	$	96,188		$	49,215
Allowance for credit losses on loans to total loans	1.22		%	1.15		%
Net charge-offs to average loans(1)	0.01		%	0.03		%
Allowance for credit losses on loans to nonperforming loans	221.56		%	187.31		%

(1)Interim periods annualized.

Table of Contents

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

Available for Sale Securities

We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and to meet pledging and regulatory capital requirements. As of March 31, 2023, the carrying amount of investment securities totaled $1.52 billion, a decrease of $288.4 million, or 16.0%, compared with $1.81 billion as of December 31, 2022. Securities represented 14.3% and 16.6% of total assets as of ~~September 30, 2022~~March 31, 2023 and ~~$22.6 million, or 0.50% of total assets, as of~~ December 31, ~~2021.~~

~~Troubled Debt Restructurings~~

~~Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the nine months ended September 30,~~ 2022, ~~and 2021, which remained outstanding as~~respectively.

All of the ~~end~~securities in our securities portfolio are classified as available for sale. Securities classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of ~~those periods were~~tax, as ~~follows:~~

accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income.

~~Table of Contents~~

~~Risk Gradings~~

~~As part~~The following table summarizes the amortized cost and fair value of the ~~on-going monitoring of the credit quality of the Company’s loan~~securities in our securities 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
September 30, 2022

Commercial and industrial

$
555,541

$
—

$
12,530

$
568,071
Real estate:








Commercial real estate

1,209,994

2,161

29,963

1,242,118
Construction and development

496,685

421

10,464

507,570
1-4 family residential

282,486

—

5,970

288,456
Multi-family residential

370,391

—

—

370,391
Consumer

24,278

—

231

24,509
Agriculture

11,126

—

59

11,185
Other

123,590

—

1

123,591
Total gross loans

$
3,074,091

$
2,582

$
59,218

$
3,135,891

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 nine months of 2022, loans with an internal rating of pass increased $290.7 million primarily due to new originations, loans with an internal rating of special mention decreased $10.2 million primarily due to loan payoffs changes in risk gradings and loans with an internal rating of substandard decreased $21.0 million primarily due to payoffs and loans 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.”

~~Table of Contents~~

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


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Available for Sale
U.S. government and agency securities	$	426,544	$	570	$	(13,417)	$	413,697
Municipal securities	259,944		2,658		(30,403)		232,199
Agency mortgage-backed pass-through securities	382,495		879		(34,962)		348,412
Agency collateralized mortgage obligations	466,160		231		(58,203)		408,188
Corporate bonds and other	127,396		85		(10,802)		116,679
Total	$	1,662,539	$	4,423	$	(147,787)	$	1,519,175


	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:~~

~~The ACL for loans was $32.6 million, or 1.04% of loans excluding loans held~~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

Table of Contents

likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of March 31, 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

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 ~~September 30, 2022, compared to $31.3 million, or 1.09% of loans excluding loans held~~which the last underlying mortgage matures. Available for sale securities are shown at amortized cost. For purposes of the table below, municipal securities are calculated on a tax equivalent basis.


	March 31, 2023
	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	$	76,456	0.55	%	$	173,519	0.92	%	$	15,264	4.82	%	$	161,305	4.83	%	$	426,544	2.47	%
Municipal securities	—		—	%	2,895		4.46	%	54,251		2.82	%	202,798		2.79	%	259,944		2.81	%
Agency mortgage-backed pass-through securities	1		2.35	%	14,340		3.93	%	14,745		4.26	%	353,409		3.04	%	382,495		3.12	%
Agency collateralized mortgage obligations	—		—	%	17,271		2.80	%	7,972		2.68	%	440,917		1.55	%	466,160		1.62	%
Corporate bonds and other	1,056		2.40	%	4,000		6.20	%	63,786		5.17	%	58,554		4.85	%	127,396		5.03	%
Total	$	77,513	0.57	%	$	212,025	1.42	%	$	156,018	4.11	%	$	1,216,983	2.78	%	$	1,662,539	2.63	%


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

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers may have the right to prepay their obligations. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay and, in particular, monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security.

As of March 31, 2023 and December 31, ~~2021.~~ 2022, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which the aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity.

The average yield of our securities portfolio was 2.76% during the three months ended March 31, 2023 compared with 1.68% for the three months ended March 31, 2022. The increase in average yield during 2023 compared to the ~~ACL from December 31, 2021 to September 30,~~same period in 2022 was primarily due to the ~~increase in~~mix of higher-yielding securities within the ~~loan~~ portfolio.

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

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021
Beginning balance

$
31,345

$
40,637
Provision (recapture):

Commercial and industrial

(2,101)

(2,028)
Real estate:

Commercial real estate

1,195

(2,054)

Construction and development

654

(2,755)

1-4 family residential

152

(875)

Multi-family residential

723

(357)
Consumer

22

(85)
Agriculture

24

(75)
Other

353

(732)
Total provision (recapture)

1,022

(8,961)
Net (charge-offs) recoveries:




Commercial and industrial

284

394
Real estate:





Commercial real estate

(25)

—

1-4 family residential

(2)

(3)
Consumer

(57)

94
Agriculture

10

47
Total net (charge-offs) recoveries

210

532
Ending balance

$
32,577

$
32,208
Total average loans

2,953,607

2,812,449
Net charge-offs (recoveries) to total average loans

(0.01%)

(0.03%)

Table of ~~Contents~~Contents

~~Annualized net charge-off (recoveries) to average loans by loan category for the periods indicated below were~~

Goodwill and Core Deposit Intangibles

Our goodwill was $497.3 million as ~~follows:~~

Nine Months Ended September 30,
(Dollars in thousands)

2022

2021
Commercial and industrial

(0.06%)

(0.08%)
Real estate:

Commercial real estate

0.00%

—
1-4 family residential

0.00%

0.00%
Consumer

0.29%

(0.41%)
Agriculture

(0.14%)

(0.72%)

~~The ACL for unfunded commitments was $3.8 million and $3.3 million September 30, 2022~~of both March 31 2023 and December 31, ~~2021, respectively.~~

~~Securities~~

~~The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as~~2022. Goodwill resulting from business combinations represents the excess of the ~~dates indicated below were as follows:~~

~~As of September 30, 2022,~~consideration paid over the fair value of the ~~Company’s securities totaled $511.3~~net assets acquired. Goodwill is assessed annually for impairment and on an interim basis if an event occurs or circumstances change that would indicate that the carrying amount of the asset may not be recoverable.

Our core deposit intangibles, net, as of March 31, 2023 was $136.7 million ~~compared to $425.0~~and $143.5 million as of December 31, ~~2021,~~2022. Core deposit intangibles are amortized using the straight-line or an ~~increase~~accelerated method over the estimated useful life of ~~$86.2 million. Amortized cost increased $178.6 million during 2022,~~seven to ten years.

Deposits

Our lending and investing activities are primarily asfunded by deposits. We offer a ~~result~~variety of purchases totaling $662.6 million outpacing maturities, calls and paydowns totaling $483.5 million. Net unrealized losses on the securities portfolio were $88.5 million at September 30, 2022, compared todeposit accounts having a ~~net unrealized gains of $3.9 million at December 31, 2021. This decrease of $92.4 million was due to a reduction in fair value as a result~~wide range of interest ~~rate increases~~rates and ~~anticipated increases.~~

~~The Company’s mortgage-backed securities at September 30, 2022~~terms including demand, savings, money market 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 elementscertificates 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 ~~the securities portfolio.~~

both a lending and deposit relationship with us.

~~Table of Contents~~

The weighted-average life of the securities portfolio was 7.5 years with an estimated modified duration of 6.0 years as of September 30, 2022. See “Part I—Item 1.—Financial Statements—Note 2” for securities by contractual maturity.

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
September 30, 2022

Debt securities:

State and municipal securities

—

2.20%

2.60%

2.17%

2.22%
U.S. Treasury securities

1.34%

1.43%

1.26%

—

1.37%
U.S. agency securities:

Callable debentures

—

—

1.37%

—

1.37%
Collateralized mortgage obligations

—

—

2.56%

2.23%

2.24%
Mortgage-backed securities

3.71%

3.44%

2.80%

2.01%

2.10%
Equity securities:

1.25%

—

—

—

1.25%
Total securities

1.34%

1.47%

2.55%

2.11%

2.02%

At September 30, 2022 and December 31, 2021, securities with a carrying amount of approximately $25.4 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 September 30, 2022~~at March 31, 2023 were ~~$3.7~~$8.74 billion, a decrease of ~~$107.5~~$528.8 million, or ~~2.8%~~5.7%, compared towith $9.27 billion at December 31, ~~2021.~~2022 primarily driven by seasonality, industry-wide pressures and the maintenance of pricing discipline in an intensely competitive market for deposits. Noninterest-bearing deposits ~~as of September 30, 2022~~at March 31, 2023 were ~~$1.8~~$3.88 billion, a decrease of ~~$4.5~~$352.3 million, or ~~0.3%~~8.3%, compared towith $4.23 billion at December 31, ~~2021. Total interest-bearing account balances as of September 30, 2022~~2022. Interest-bearing deposits at March 31, 2023 were ~~$1.9~~$4.86 billion, a decrease of ~~$103.0~~$176.4 million, or ~~5.0%~~3.5%, ~~from~~compared with $5.04 billion at December 31, ~~2021, primarily due to decreases in interest-bearing demand~~2022. Estimated uninsured deposits, ~~money market accounts and certificates less than $100,000, partially offset by increases in certificates over $100,000.~~

excluding collateralized deposits, totaled $4.06 billion, or 46.4%, of total deposits at March 31, 2023.

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

(Dollars in thousands)

September 30, 2022

December 31, 2021

Increase (Decrease)
Interest-bearing demand accounts

$
415,970

$
468,361

$
(52,391)

(11.2%)
Money market accounts

1,144,969

1,209,659

(64,690)

(5.3%)
Savings accounts

128,886

127,031

1,855

1.5%
Certificates and other time deposits, $100,000 or greater

161,975

134,775

27,200

20.2%
Certificates and other time deposits, less than $100,000

91,501

106,477

(14,976)

(14.1%)
Total interest-bearing deposits

1,943,301

2,046,303

(103,002)

(5.0%)
Noninterest-bearing deposits

1,780,473

1,784,981

(4,508)

(0.3%)
Total deposits

$
3,723,774

$
3,831,284

$
(107,510)

(2.8%)

~~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)

September 30, 2022
Three months or less

$
46,359
Over three months through six months

20,219
Over six months through 12 months

10,822
Over 12 months

24,476
Total

$
101,876

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

~~Cash and Equivalents~~

~~Cash and equivalents decreased $579.7 million during~~time deposits that met or exceeded the ~~nine months ended September 30, 2022, primarily due to purchases~~FDIC insurance limit of ~~securities, increases in loans, net deposit outflows and repayment~~$250 thousand by time remaining until maturity:


	As of
	March 31, 2023
	(In thousands)
Three months or less	$	118,498
Over three months through six months	172,620
Over six months through 12 months	137,954
Over 12 months	69,024
Total	$	498,096

Borrowings

We have an available line of credit with the Federal Home Loan Bank ~~advances.~~

~~Other Assets~~

~~Other assets~~("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 ~~$25.3~~customer deposits. At March 31, 2023, we had a total borrowing capacity of $4.07 billion, of which $2.84 billion was available and $1.23 billion was outstanding in/through FHLB advances and letters of credit. There were $239.0 million ~~from December~~FHLB short-term advances outstanding at March 31, ~~2021 to September 30, 2022, primarily due to~~2023 at a ~~$19.6~~weighted-average rate of 5.00%. Letters of credit were $994.7 million ~~increase~~at March 31, 2023, of which $333.4 million will expire during the remaining months of 2023, $61.2 million will expire in ~~net deferred tax assets resulting from an increase~~2024, $45.0 million will expire in 2025, $60.1 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

Table of Contents

payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and ~~a $6.4 million increase~~junior in ~~the fair value~~right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations. Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.

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

Description

Issuance

Date

Trust

Preferred

Securities

Outstanding

Interest Rate(1)

Junior

Subordinated

Debt Owed

to Trusts

Maturity

Date(2)

(Dollars in thousands)

Farmers & Merchants Capital Trust II

November 13, 2003

7,500

3 month LIBOR + 3.00%

7,732

November 8, 2033

Farmers & Merchants Capital Trust III

June 30, 2005

3,500

3 month LIBOR + 1.80%

3,609

July 7, 2035

11,341


(1)			The 3-month LIBOR in effect as of March 31, 2023 was 5.19%. 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 March 31, 2023.

of 4.70% per annum until (but excluding) October 1, 2024, payable semi-annually in arrears on April 1 and October 1, commencing on April 1, 2020. Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the Company Notes will bear interest at a floating rate equal to the then-current three-month LIBOR, plus 313 basis points (3.13%), which transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 30-day LIBOR is no longer published on a future adjustment date, for each quarterly interest period (subject to certain provisions set forth under “Description of the Notes—Interest Rates and Interest Payment Dates” included in the Prospectus Supplement for the Company Notes), payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.

Credit Agreement

Table of Content

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.

Covenants made under the Loan Agreement include, among other things, while there any obligations outstanding under Loan Agreement, the Company shall maintain a cash flow to debt service (as defined in the Loan Agreement) of not less than 1.25, the Bank’s Texas Ratio (as defined in the Loan Agreement) not to exceed 25.0%, the Bank shall maintain a Tier 1 Leverage Ratio (as defined under the Loan Agreement) of at least 7.0% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. As of March 31, 2023, we believe we were in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.

Off-Balance Sheet Items

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

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

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

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

Liquidity and Capital Resources

~~The Company monitors its liquidity~~

Liquidity

Liquidity is the measure of our ability to meet the cash flow requirements of depositors and ~~may seek~~borrowers, while at the same time meeting our operating, capital, strategic cash flow needs and to ~~obtain additional financing~~maintain reserve requirements to ~~further support its business if necessary. The Company’s primary source of funds has been customer deposits~~operate on an ongoing basis and manage unexpected events, all at a reasonable cost. During the ~~primary use of funds has been funding of loans.~~

As of September 30, 2022, the Company had $370.4 million in cash and cash equivalents and $511.3 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 $493.4 million during the ninethree months ended ~~September 30, 2022 was primarily due to a $107.5 million decrease in deposits, an increase of $258.9 million in loans excluding loans held for sale~~March 31, 2023 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 nine months ended September 30, 2022 were computed on an annualized basis. Average balances and average rates paid on deposits for the periods indicated were as follows:

Nine Months Ended September 30, 2022

Year Ended December 31, 2021
(Dollars in thousands)

Average Balance

Average Rate

Average Balance

Average Rate
Interest-bearing demand accounts

$
438,589

0.06
%

$
391,388

0.05
%
Money market accounts

1,154,766

0.31
%

1,094,042

0.27
%
Savings accounts

129,582

0.04
%

115,972

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

95,526

0.39
%

142,605

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

152,784

0.84
%

126,141

1.07
%
Total interest-bearing deposits

1,971,247

0.27
%

1,870,148

0.27
%
Noninterest-bearing deposits

1,803,702

—

1,603,006

—

Total deposits

$
3,774,949

0.14
%

$
3,473,154

0.14
%

~~Table of Contents~~

~~The ratio of average noninterest-bearing deposits to average total deposits was 47.8% for the nine months ended September 30, 2022 and 46.2% for~~ the year ended December 31, ~~2021.~~

~~In addition~~2022, our liquidity needs have been primarily met by deposits, borrowed funds, security and loan maturities and amortizing investment and loan portfolios. The Bank has access to purchased funds from correspondent banks, the Federal Reserve discount window and advances from the FHLB are available under a security and pledge agreement to take advantage of investment opportunities.

Liquidity risk management is an important element in our asset/liability management process. Our liquidity position is continuously monitored and adjustments are made to the ~~liquid assets discussed above,~~balance between sources and uses of funds as deemed appropriate. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the ~~Company had $1.3~~financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.

Table of Contents

Our largest source of funds is deposits and our largest use of funds is loans. Our average deposits increased $2.96 billion, or 47.6%, and our average loans increased $3.62 billion, or 85.4%, for the three months ended March 31, 2023 compared with the three months ended March 31, 2022. Our estimated uninsured deposits are $4.06 billion and ~~$1.0~~average deposit account size is $81 thousand, excluding municipal deposits. We predominantly invest excess deposits in Federal Reserve Bank of Dallas balances, securities, interest-bearing deposits at other banks or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio had a weighted average life of 7.8 years and modified duration of 3.1 years at March 31, 2023 and a weighted average life of 8.3 years and modified duration of 4.8 years at December 31, 2022.

Total immediate contingent funding sources, including unrestricted cash, unpledged available-for-sale securities and total borrowing capacity was $4.46 billion, or 51.1%, of ~~available funds under various borrowing arrangements~~total deposits at ~~September 30, 2022~~March 31, 2023. Including policy-driven capacity for brokered deposits, the Bank would be able to add approximately $1.58 billion to its contingent sources of liquidity, bringing total contingent funding sources to approximately $6.04 billion, or 69.1%, of deposits at March 31, 2023.

As of March 31, 2023 and December 31, ~~2021, respectively. See “Part I—Item 1.—Financial Statements—Note 11” for additional details of these arrangements. At September 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

$
1,241,283

$
(27,000)

$
1,214,283
Loan Agreement

30,000

—

30,000
Federal Funds

45,000

—

45,000
Total

$
1,316,283

$
(27,000)

$
1,289,283

~~(1)~~

~~Outstanding amount for the Federal Home Loan Bank Facility includes $27.0 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:~~

September 30, 2022

December 31, 2021
Sources of funds:





Deposits:





Interest-bearing

45.0
%

45.2
%
Noninterest-bearing

41.2
%

38.8
%
Federal Home Loan Bank advances

0.4
%

1.2
%
Other liabilities

1.0
%

1.3
%
Shareholders’ equity

12.4
%

13.5
%
Total sources

100.0
%

100.0
%
Uses of funds:





Loans

67.4
%

67.4
%
Securities

12.3
%

7.8
%
Interest-bearing deposits at other financial institutions

13.6
%

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

78.2
%

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
September 30, 2022

Non-cancellable future operating leases

$
1,775

$
3,894

$
10,585

$
16,254
Certificates of deposit

206,671

35,875

10,930

253,476
Total

$
208,446

$
39,769

$
21,515

$
269,730
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 September 30, 2022, the Company~~we 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~~March 31, 2023 and December 31, 2022, the Bank was well-capitalized. Total shareholder’s equity was $1.45 billion at March 31, 2023, compared with $1.38 billion at December 31, 2022, an increase of $63.0 million. This increase was primarily due the decrease in accumulated other comprehensive loss and net income of $37.1 million, partially offset by the ~~contract, generally have fixed expiration dates or other termination clauses~~$0.13 per common share dividend paid for the three months ended March 31, 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
September 30, 2022

Commitments to extend credit

$
517,940

$
400,095

$
71,013

$
989,048
Standby letters of credit

10,241

1,370

—

11,611
Total

$
528,181

$
401,465

$
71,013

$
1,000,659
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 March 31, 2023
Total capital (to risk weighted assets)	12.72	%	8.00	%	10.50	%	N/A
Common equity Tier 1 capital (to risk weighted assets)	10.39	%	4.50	%	7.00	%	N/A
Tier 1 capital (to risk weighted assets)	10.50	%	6.00	%	8.50	%	N/A
Tier 1 capital (to average assets)	9.01	%	4.00	%	4.00	%	N/A
As of December 31, 2022
Total capital (to risk weighted assets)	12.39	%	8.00	%	10.50	%	N/A
Common equity Tier 1 capital (to risk weighted assets)	10.04	%	4.50	%	7.00	%	N/A
Tier 1 capital (to risk weighted assets)	10.15	%	6.00	%	8.50	%	N/A
Tier 1 capital (to average tangible assets)	8.55	%	4.00	%	4.00	%	N/A
Stellar Bank
As of March 31, 2023
Total capital (to risk weighted assets)	12.42	%	8.00	%	10.50	%	10.00	%
Common equity Tier 1 capital (to risk weighted assets)	10.87	%	4.50	%	7.00	%	6.50	%
Tier 1 capital (to risk weighted assets)	10.87	%	6.00	%	8.50	%	8.00	%
Tier 1 capital (to average tangible assets)	9.35	%	4.00	%	4.00	%	5.00	%
As of December 31, 2022
Total capital (to risk weighted assets)	12.02	%	8.00	%	10.50	%	10.00	%
Common equity Tier 1 capital (to risk weighted assets)	10.46	%	4.50	%	7.00	%	6.50	%
Tier 1 capital (to risk weighted assets)	10.46	%	6.00	%	8.50	%	8.00	%
Tier 1 capital (to average tangible assets)	8.81	%	4.00	%	4.00	%	5.00	%

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 September 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 capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business

~~Table of Contents~~

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. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet.

The ~~results from these models are impacted by~~following table summarizes the behavior 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 changessimulated change in net interest income over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in 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.

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

September 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

10.6
%

(3.6)
%

25.4
%

6.7
%
+ 200

7.1
%

(0.6)
%

16.9
%

13.0
%
+ 100

3.7
%

0.8
%

7.9
%

8.8
%
Base

—
%

—
%

—
%

—
%
−100

(9.2)
%

(10.3)
%

(2.5)
%

(37.2)
%
−200

(19.0)
%

(22.6)
%

(3.2)
%

(70.8)
%

indicated:


Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income		Percent Change in Economic Value of Equity
	As of March 31, 2023	As of December 31, 2022	As of March 31, 2023	As of December 31, 2022
+300	(3.6)%	0.5%	0.0%	(2.9)%
+200	(2.7)%	0.5%	2.7%	(0.7)%
+100	(1.8)%	0.4%	4.4%	0.6%
Base	0.0%	0.0%	0.0%	0.0%
-100	(0.9)%	(2.0)%	0.0%	(3.2)%
-200	(2.8)%	(7.5)%	(7.5)%	(9.4)%

The Company's model simulation as of September 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 first quarter, changes in ~~an interest-bearing account at~~our overall interest rate profile were driven by the ~~Federal Reserve) to originate loan growth~~decrease in noninterest bearing deposits during ~~2022 and deposit balance run off that resulted in~~the quarter, an increase ~~to the economic value~~in interest bearing deposits and borrowed funds, an increase 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 March 31, 2023, LIBOR was used as an index rate for ~~a majority~~less than 1% of the Company’s interest-rate swaps and approximately 4.5% of the Company’s loans at September 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.

loans.

~~Table of Contents~~

ITEM 4. CONTROLS AND PROCEDURES

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 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.

~~Table of Contents~~

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)

September 30, 2022

December 31, 2021
Tangible Equity




Total shareholders’ equity

$
501,425

$
562,125
Adjustments:




Goodwill

(80,950)

(80,950)
Other intangibles

(3,188)

(3,658)
Tangible equity

$
417,287

$
477,517
Tangible Assets




Total assets

$
4,271,831

$
4,486,001
Adjustments:




Goodwill

(80,950)

(80,950)
Other intangibles

(3,188)

(3,658)
Tangible assets

$
4,187,693

$
4,401,393
Common shares outstanding

24,015

24,488
Book value per share

$
20.88

$
22.96
Tangible book value per share

$
17.38

$
19.50
Total shareholders’ equity to total assets

11.74%

12.53%
Tangible equity to tangible assets

9.96%

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.~~

report. 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 ~~September 30, 2022,~~March 31, 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 he first and second quarter of 2023, including Silicon Valley Bank, Signature Bank and First Republic Bank have caused significant volatility in the trading prices of stocks of publicly traded bank holding companies and general uncertainty and concern regarding the liquidity and financial strength of the banking sector as a whole. In the future, events such as these bank failures could have an adverse effect on our financial condition and results of operations and cause volatility in our stock price.

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

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

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 previously disclosed by the ~~Company and Allegiance.~~Company. Investors should carefully consider the risks described in “Part I—Item 1A.—Risk Factors” in the Company’s ~~and Allegiance’s~~ Annual Reports on Form 10-K for the year ended December 31, ~~2021~~2022 and the Company’s other SEC ~~filings, including the Joint Proxy Statement Prospectus regarding the Merger that the Company filed with the SEC on April 7, 2022 pursuant to Rule 424(b)(3).~~

~~Item~~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~~

In 2021, the Company’s Board of Directors authorized a share repurchase program, or the 2021 Repurchase Program, under which the Company could repurchase up to $40.0 million of the Company’s common stock starting September 16, 2021 through September 30, 2022. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In 2022, the Company’s Board of Directors authorized a share

~~Table of Contents~~

repurchase program, or the 2022 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September 22, 2022 through September 30, 2023. ~~No shares were repurchased under the 2022 Repurchase Program during the three months ended September 30, 2022.~~

Repurchases under the ~~2021 Repurchase Program and 2022 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 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 ~~September 30, 2022~~March 31, 2023. The number of shares that may be repurchased under the ~~Company made or~~plan were ~~made~~1,625,356, 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⁾
July 1, 2022 - July 31, 2022

—

—

—

1,208,842
August 1, 2022 -August 31, 2022

47,111
⁽¹⁾

$ 29.80

47,000

1,208,444
September 1, 2022 - September 30, 2022

369,746
⁽²⁾

$ 29.90

369,746

1,367,521
Total

416,857

$ 29.89

416,746

of March 31, 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)~~

Includes 47,000 shares repurchased under the 2021 Repurchase Program described above and 111 shares employees 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~~


101*						~~The following materials from CBTX’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in~~
101.INS*						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)

~~+ The schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K~~

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


		Stellar Bancorp, Inc.	(Registrant)
			~~CBTX, INC.~~
Date: May 4, 2023			~~(Registrant)~~



~~Date: October 28, 2022~~	/s/ Robert R. Franklin, Jr.
			Robert R. Franklin, Jr.
			Chief Executive Officer
			~~(Principal Executive Officer)~~
Date: May 4, 2023


~~Date: October 28, 2022~~	/s/ Paul P. Egge
		Paul P. Egge
		~~Senior Executive Vice President and~~ Chief Financial Officer
	~~(Principal Financial and Accounting Officer)~~

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

Item 1.			Interim Consolidated Financial Statements ~~– (Unaudited)~~		1 3
			~~Condensed~~ Consolidated Balance Sheets ~~as of September 30, 2022 and December 31, 2021~~(unaudited)		1 3
			~~Condensed~~ Consolidated Statements of Income ~~for the Three and Nine Months Ended September 30, 2022 and 2021~~(unaudited)		2 4
			~~Condensed~~ Consolidated Statements of Comprehensive Income ~~for the Three and Nine Months Ended September 30, 2022 and 2021~~(unaudited)		3 5
			~~Condensed~~ Consolidated Statements of Changes in ~~Shareholders’~~Shareholders' Equity ~~for the Three and Nine Months Ended September 30, 2022 and 2021~~(unaudited)		4 6
			~~Condensed~~ Consolidated Statements of Cash Flows ~~for the Nine Months Ended September 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		38 33
			~~Cautionary Note Regarding Forward-Looking Statements~~	38
	~~Overview~~	40
	~~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 52
Item 4.			Controls and Procedures		61 53

PART ~~II —~~ II—OTHER INFORMATION
~~Item 1.~~			~~Legal Proceedings~~		61
Item ~~1A.~~1.			~~Risk Factors~~Legal Proceedings		61 53
Item 1A.			Risk Factors		53
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		61 54
Item 3.			Defaults ~~Upon~~upon Senior Securities		62 54
Item 4.			Mine Safety Disclosures		62 54
Item 5.			Other Information		62 54
Item 6.			Exhibits		63 55
Signatures ~~SIGNATURES~~			65		56



	September 30, 2022		December 31, 2021
Assets:
Cash and due from banks	$	41,219	$	27,689
Interest-bearing deposits at other financial institutions		329,229		922,457
Total cash and cash equivalents		370,448		950,146
Securities		511,282		425,046
Equity investments		17,835		17,727
Loans held for sale		—		164
Loans, net of allowance for credit losses of $32,577 and $31,345 at September 30, 2022 and December 31, 2021, respectively		3,093,844		2,836,179
Premises and equipment, net of accumulated depreciation of $40,493 and $39,196 at September 30, 2022 and December 31, 2021, respectively		55,594		58,417
Goodwill		80,950		80,950
Other intangible assets, net of accumulated amortization of $17,863 and $17,345 at September 30, 2022 and December 31, 2021, respectively		3,188		3,658
Bank-owned life insurance		74,274		73,156
Operating lease right-to-use assets		10,992		11,191
Deferred tax assets, net		29,581		9,973
Other assets		23,843		19,394
Total assets	$	4,271,831	$	4,486,001

Liabilities:
Noninterest-bearing deposits	$	1,780,473	$	1,784,981
Interest-bearing deposits		1,943,301		2,046,303
Total deposits		3,723,774		3,831,284
Federal Home Loan Bank advances		—		50,000
Operating lease liabilities		13,748		14,142
Other liabilities		32,884		28,450
Total liabilities		3,770,406		3,923,876
Commitments and contingencies (Note 16)
Shareholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued		—		—
Common stock, $0.01 par value, 90,000,000 shares authorized, 24,015,272 and 25,323,558 shares issued at September 30, 2022 and December 31, 2021, respectively; 24,015,272 and 24,487,730 shares outstanding at September 30, 2022 and December 31, 2021, respectively		240		253
Additional paid-in capital		308,197		335,846
Retained earnings		262,804		237,165
Treasury stock, at cost, 835,828 shares held at December 31, 2021		—		(14,196)
Accumulated other comprehensive income (loss), net of tax of $(18,559) and $813 at September 30, 2022 and December 31, 2021, respectively		(69,816)		3,057
Total shareholders’ equity		501,425		562,125
Total liabilities and shareholders’ equity	$	4,271,831	$	4,486,001


	March 31, 2023		December 31, 2022
	(Dollars in thousands, except par value)
ASSETS
Cash and due from banks	$	99,231	$	67,063
Interest-bearing deposits at other financial institutions	164,102		304,642
Total cash and cash equivalents	263,333		371,705
Available for sale securities, at fair value	1,519,175		1,807,586
Loans held for investment	7,886,044		7,754,751
Less: allowance for credit losses on loans	(96,188)		(93,180)
Loans, net	7,789,856		7,661,571
Accrued interest receivable	42,405		44,743
Premises and equipment, net	124,723		126,803
Federal Home Loan Bank stock	19,676		15,058
Bank owned life insurance	103,616		103,094
Goodwill	497,260		497,260
Core deposit intangibles, net	136,665		143,525
Other assets	108,009		129,092
TOTAL ASSETS	$	10,604,718	$	10,900,437
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	3,877,859	$	4,230,169
Interest-bearing
Demand	1,394,244		1,591,828
Money market and savings	2,401,840		2,575,923
Certificates and other time	1,064,932		869,712
Total interest-bearing deposits	4,861,016		5,037,463
Total deposits	8,738,875		9,267,632
Accrued interest payable	3,875		2,098
Borrowed funds	238,944		63,925
Subordinated debt	109,420		109,367
Other liabilities	67,388		74,239
Total liabilities	9,158,502		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 March 31, 2023 and December 31, 2022	—		—
Common stock, $0.01 par value; 140,000,000 shares authorized 53,296,038 shares issued and outstanding at March 31, 2023 and 52,954,985 shares issued and outstanding at December 31, 2022	533		530
Capital surplus	1,225,596		1,222,761
Retained earnings	333,368		303,146
Accumulated other comprehensive loss	(113,281)		(143,261)
Total shareholders’ equity	1,446,216		1,383,176
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,604,718	$	10,900,437


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest income:
Interest and fees on loans	$	39,058	$	30,765	$	102,047	$	94,723
Securities		3,046		1,435		8,275		3,940
Interest-bearing deposits at other financial institutions		2,408		340		3,994		740
Equity investments		161		157		473		461
Total interest income		44,673		32,697		114,789		99,864
Interest expense:
Deposits		1,661		1,227		4,003		3,844
Federal Home Loan Bank advances		—		221		272		663
Total interest expense		1,661		1,448		4,275		4,507
Net interest income		43,012		31,249		110,514		95,357
Provision (recapture) for credit losses:
Provision (recapture) for credit losses for loans		523		(5,057)		1,022		(8,961)
Provision (recapture) for credit losses for unfunded commitments		489		162		551		(605)
Total provision (recapture) for credit losses		1,012		(4,895)		1,573		(9,566)
Net interest income after provision (recapture) for credit losses		42,000		36,144		108,941		104,923
Noninterest income:
Deposit account service charges		1,320		1,352		4,076		3,712
Card interchange fees		1,056		1,048		3,228		3,119
Earnings on bank-owned life insurance		376		2,323		1,118		3,103
Net gain on sales of assets		85		360		673		918
Other		612		479		3,229		1,312
Total noninterest income		3,449		5,562		12,324		12,164
Noninterest expense:
Salaries and employee benefits		16,453		15,000		46,405		43,922
Occupancy expense		2,595		2,660		7,362		7,778
Professional and director fees		942		1,567		2,963		5,711
Data processing and software		1,502		1,629		4,723		4,866
Regulatory fees		599		478		2,016		1,535
Advertising, marketing and business development		350		493		965		1,288
Telephone and communications		348		516		1,151		1,529
Security and protection expense		386		425		880		1,352
Amortization of intangibles		165		182		518		559
Other expenses		5,981		1,422		10,748		4,314
Total noninterest expense		29,321		24,372		77,731		72,854
Net income before income tax expense		16,128		17,334		43,534		44,233
Income tax expense		3,381		2,913		8,485		8,090
Net income	$	12,747	$	14,421	$	35,049	$	36,143
Earnings per common share
Basic	$	0.52	$	0.59	$	1.43	$	1.48
Diluted	$	0.52	$	0.59	$	1.43	$	1.47


											Accumulated
				Additional							Other
	Common Stock			Paid-In		Retained		Treasury Stock			Comprehensive
	Shares	Amount		Capital		Earnings		Shares	Amount		Income (Loss)		Total
Nine Months Ended September 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	—		—		—		36,143	—		—		—		36,143
Dividends on common stock, $0.39 per share	—		—		—		(9,587)	—		—		—		(9,587)
Stock-based compensation expense	—		—		1,813		—	—		—		—		1,813
Vesting of restricted stock, net of shares withheld for employee tax liabilities	18,997		—		(87)		—	—		—		—		(87)
Exercise of stock options, net of shares withheld for employee tax liabilities	—		—		(11)		—	2,032		35		—		24
Shares repurchased	(214,219)		(2)		(5,823)		—	—		—		—		(5,825)
Other comprehensive loss, net of tax	—		—		—		—	—		—		(4,339)		(4,339)
Balance at September 30, 2021	25,263,594	$	253	$	335,226	$	241,012	(843,956)	$	(14,334)	$	2,436	$	564,593

Nine Months Ended September 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	—		—		—		35,049	—		—		—		35,049
Dividends on common stock, $0.39 per share	—		—		—		(9,410)	—		—		—		(9,410)
Stock-based compensation expense	—		—		1,537		—	—		—		—		1,537
Vesting of restricted stock, net of shares withheld for employee tax liabilities	22,463		—		(135)		—	—		—		—		(135)
Exercise of stock options, net of shares withheld for employee tax liabilities	6,407		—		23		—	8,833		150		—		173
Shares repurchased	(510,161)		(5)		(15,036)		—	—		—		—		(15,041)
Retirement of Treasury Stock	(826,995)		(8)		(14,038)		—	826,995		14,046		—		—
Other comprehensive loss, net of tax	—		—		—		—	—		—		(72,873)		(72,873)
Balance at September 30, 2022	24,015,272	$	240	$	308,197	$	262,804	—	$	—	$	(69,816)	$	501,425


	Nine Months Ended September 30,
(Dollars in thousands)	2022		2021
Supplemental disclosures of cash flow information:
Cash paid for taxes	$	6,750	$	4,559
Cash paid for interest		4,171		4,694
Supplemental disclosures of non-cash flow information:
Operating lease right-to-use asset increased (decreased) in exchange for lease liabilities		809		(617)
Change in liability for dividends accrued		167		(755)


			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
September 30, 2022
Debt securities available for sale:
State and municipal securities	$	175,763	$	—	$	(40,665)	$	135,098
U.S. Treasury securities		111,045		—		(3,786)		107,259
U.S. agency securities:
Callable debentures		3,000		—		(436)		2,564
Collateralized mortgage obligations		97,307		—		(12,909)		84,398
Mortgage-backed securities		211,497		—		(30,579)		180,918
Equity securities		1,201		—		(156)		1,045
Total	$	599,813	$	—	$	(88,531)	$	511,282
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
September 30, 2022
Amortized cost:
Debt securities available for sale:
State and municipal securities	$	—	$	506	$	21,400	$	153,857	$	175,763
U.S. Treasury securities		69,486		38,655		2,904		—		111,045
U.S. agency securities:
Callable debentures		—		—		3,000		—		3,000
Collateralized mortgage obligations		—		—		2,487		94,820		97,307
Mortgage-backed securities		2		593		24,013		186,889		211,497
Equity securities		1,201		—		—		—		1,201
Total	$	70,689	$	39,754	$	53,804	$	435,566	$	599,813
Fair value:
Debt securities available for sale:
State and municipal securities	$	—	$	484	$	19,797	$	114,817	$	135,098
U.S. Treasury securities		68,069		36,672		2,518		—		107,259
U.S. agency securities:
Callable debentures		—		—		2,564		—		2,564
Collateralized mortgage obligations		—		—		2,408		81,990		84,398
Mortgage-backed securities		2		575		22,280		158,061		180,918
Equity securities		1,045		—		—		—		1,045
Total	$	69,116	$	37,731	$	49,567	$	354,868	$	511,282



	Less than Twelve Months				Twelve Months or More
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses
September 30, 2022
Debt securities available for sale:
State and municipal securities	$	110,933	$	(28,504)	$	24,165	$	(12,161)
U.S. Treasury securities		104,544		(3,427)		2,715		(359)
U.S. agency securities:
Callable debentures		2,564		(436)		—		—
Collateralized mortgage obligations		62,830		(8,187)		21,568		(4,722)
Mortgage-backed securities		138,312		(20,371)		42,529		(10,208)
Equity securities		—		—		1,045		(156)
	$	419,183	$	(60,925)	$	92,022	$	(27,606)
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)


	Participations		Participations
(Dollars in thousands)	Purchased		Sold
September 30, 2022
Commercial and industrial	$	24,192		1,943
Commercial real estate		30,455		1,247
Construction and development		—		122
Other		5,261		—
	$	59,908	$	3,312
September 30, 2021
Commercial and industrial	$	—	$	1,336
Commercial real estate		—		375
Construction and development		—		22
Other		1,941		—
	$	1,941	$	1,733


					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
September 30, 2022
Commercial and industrial	$	4,374	$	3,416	$	281	$	8,071	$	560,000	$	568,071	$	—
Real estate:
Commercial real estate		5,360		4,447		—		9,807		1,232,311		1,242,118		—
Construction and development		1,350		—		—		1,350		506,220		507,570		—
1-4 family residential		—		1,309		1,601		2,910		285,546		288,456		—
Multi-family residential		—		—		—		—		370,391		370,391		—
Consumer		—		—		—		—		24,509		24,509		—
Agriculture		15		—		—		15		11,170		11,185		—
Other		—		—		—		—		123,591		123,591		—
Total gross loans	$	11,099	$	9,172	$	1,882	$	22,153	$	3,113,738	$	3,135,891	$	—
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
September 30, 2022
Commercial and industrial	7	$	3,870	$	1,093	$	—	$	—	$	2,777
Real estate:
Commercial real estate	2		2,273		—		—		2,040		245
Construction and development	3		431		—		—		431		—
Total	12	$	6,574	$	1,093	$	—	$	2,471	$	3,022
September 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		—		—		—
Consumer	1		42		—		—		42		—
Total	6	$	6,052	$	6,010	$	—	$	42	$	—


	Troubled Debt Restructurings										Total Loans
(Dollars in thousands)	Accruing		Non-Accrual		Total		Other Non-Accrual		Other Accruing		Individually Evaluated
September 30, 2022
Commercial and industrial	$	1,870	$	7,934	$	9,804	$	51	$	1,077	$	10,932
Real estate:
Commercial real estate		7,629		10,980		18,609		96		—		18,705
Construction and development		10,325		139		10,464		—		—		10,464
1-4 family residential		26		3,149		3,175		27		—		3,202
Consumer		—		34		34		—		82		116
Other		8,523		—		8,523		—		—		8,523
Total	$	28,373	$	22,236	$	50,609	$	174	$	1,159	$	51,942
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


(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
September 30, 2022
Commercial and industrial	$	555,541	$	—	$	12,530	$	568,071
Real estate:
Commercial real estate		1,209,994		2,161		29,963		1,242,118
Construction and development		496,685		421		10,464		507,570
1-4 family residential		282,486		—		5,970		288,456
Multi-family residential		370,391		—		—		370,391
Consumer		24,278		—		231		24,509
Agriculture		11,126		—		59		11,185
Other		123,590		—		1		123,591
Total gross loans	$	3,074,091	$	2,582	$	59,218	$	3,135,891
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


	September 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	$	10,932	$	557,139	$	568,071	$	16,579	$	617,805	$	634,384
Real estate:
Commercial real estate		18,705		1,223,413		1,242,118		21,057		1,070,912		1,091,969
Construction and development		10,464		497,106		507,570		12,716		448,003		460,719
1-4 family residential		3,202		285,254		288,456		3,355		273,918		277,273
Multi-family residential		—		370,391		370,391		—		286,396		286,396
Consumer		116		24,393		24,509		125		27,965		28,090
Agriculture		—		11,185		11,185		—		7,941		7,941
Other		8,523		115,068		123,591		5,440		84,215		89,655
Total gross loans	$	51,942	$	3,083,949	$	3,135,891	$	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
September 30, 2022
Beginning balance	$	11,214	$	11,015	$	3,310	$	2,105	$	1,781	$	406	$	88	$	1,426	$	31,345
Provision (recapture)		(2,101)		1,195		654		152		723		22		24		353		1,022
Charge-offs		(44)		(25)		—		(8)		—		(63)		—		—		(140)
Recoveries		328		—		—		6		—		6		10		—		350
Net recoveries		284		(25)		—		(2)		—		(57)		10		—		210
Ending balance	$	9,397	$	12,185	$	3,964	$	2,255	$	2,504	$	371	$	122	$	1,779	$	32,577
Period-end amount allocated to:
Specific reserve	$	2,517	$	28	$	—	$	—	$	—	$	116	$	—	$	—	$	2,661
General reserve		6,880		12,157		3,964		2,255		2,504		255		122		1,779		29,916
Total	$	9,397	$	12,185	$	3,964	$	2,255	$	2,504	$	371	$	122	$	1,779	$	32,577
September 30, 2021
Beginning balance	$	13,035	$	13,798	$	6,089	$	2,578	$	2,513	$	440	$	137	$	2,047	$	40,637
Provision (recapture)		(2,028)		(2,054)		(2,755)		(875)		(357)		(85)		(75)		(732)		(8,961)
Charge-offs		(495)		—		—		(3)		—		(13)		—		—		(511)
Recoveries		889		—		—		—		—		107		47		—		1,043
Net (charge-offs) recoveries		394		—		—		(3)		—		94		47		—		532
Ending balance	$	11,401	$	11,744	$	3,334	$	1,700	$	2,156	$	449	$	109	$	1,315	$	32,208
Period-end amount allocated to:
Specific reserve	$	4,343	$	670	$	—	$	—	$	—	$	131	$	—	$	—	$	5,144
General reserve		7,058		11,074		3,334		1,700		2,156		318		109		1,315		27,064
Total	$	11,401	$	11,744	$	3,334	$	1,700	$	2,156	$	449	$	109	$	1,315	$	32,208



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


	Weighted-
	Average
	Remaining	Gross				Net
	Amortization	Intangible		Accumulated		Intangible
(Dollars in thousands)	Period	Assets		Amortization		Assets
September 30, 2022
Core deposits	1.9 years	$	13,750		(13,653)	$	97
Customer relationships	6.3 years		6,629		(3,866)		2,763
Servicing assets	7.3 years		672		(344)		328
Total other intangible assets, net		$	21,051	$	(17,863)	$	3,188
December 31, 2021
Core deposits	2.4 years	$	13,750	$	(13,538)	$	212
Customer relationships	7.0 years		6,629		(3,535)		3,094
Servicing assets	11.5 years		624		(272)		352
Total other intangible assets, net		$	21,003	$	(17,345)	$	3,658


		September 30, 2022				December 31, 2021
				Carrying				Carrying
(Dollars in thousands)		Fair Value		Amount		Fair Value		Amount
Financial assets:
Level 1 inputs:	Cash and due from banks	$	370,448	$	370,448	$	950,146	$	950,146
Level 2 inputs:	Bank-owned life insurance		74,274		74,274		73,156		73,156
	Accrued interest receivable		10,777		10,777		11,616		11,616
	Servicing asset		328		328		352		352
Level 3 inputs:	Loans, including held for sale, net		2,906,108		3,093,844		2,864,663		2,836,343
	Other investments		17,835		17,835		17,727		17,727
Total financial assets		$	3,379,770	$	3,567,506	$	3,917,660	$	3,889,340
Financial liabilities:
Level 1 inputs:	Noninterest-bearing deposits	$	1,780,473	$	1,780,473	$	1,784,981	$	1,784,981
Level 2 inputs:	Interest-bearing deposits		1,938,023		1,943,301		2,040,794		2,046,303
	Federal Home Loan Bank advances		—		—		50,591		50,000
	Accrued interest payable		306		306		201		201
Total financial liabilities		$	3,718,802	$	3,724,080	$	3,876,567	$	3,881,485


								Weighted
								Average
		Notional		Fair				Maturity
(Dollars in thousands)	Classification	Amounts		Value		Fixed Rate	Floating Rate	(Years)
September 30, 2022
Interest rate swaps with financial institutions	Other assets	$	87,537	$	8,485	3.25% - 5.58%	LIBOR 1M + 2.50% - 3.00%	4.58
Interest rate swaps with customers	Other assets		22,676		1,021	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Interest rate swaps with financial institutions	Other assets		5,057		438	4.99%	U.S. Prime	5.21
Interest rate swaps with customers	Other liabilities		5,057		(438)	4.99%	U.S. Prime	5.21
Interest rate swaps with financial institutions	Other liabilities		22,676		(1,021)	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Interest rate swaps with customers	Other liabilities		87,537		(8,485)	3.25% - 5.58%	LIBOR 1M + 2.50% - 3.00%	4.58
Credit risk participation agreement with financial institution	Other assets		13,163		2	3.50%	LIBOR 1M + 2.50%	7.49
Credit risk participation agreement with financial institution	Other assets		8,503		25	5.35% - 5.40%	SOFR CME 1M + 2.50%	10.22
Total derivatives		$	252,206	$	27
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


(Dollars in thousands)	September 30, 2022
1 year or less	$	1,775
Over 1 year through 2 years		1,928
Over 2 years through 3 years		1,966
Over 3 years through 4 years		1,928
Over 4 years through 5 years		1,821
Thereafter		6,836
Total undiscounted lease liability		16,254
Less:
Discount on cash flows		(2,506)
Total operating lease liability	$	13,748


	September 30, 2022
Stock Options		Exercisable		Unvested		Outstanding
Number of shares underlying options		166,160		—		166,160
Weighted-average exercise price per share	$	18.48	$	—	$	18.48
Aggregate intrinsic value (in thousands)	$	1,789	$	—	$	1,789
Weighted-average remaining contractual term (years)		3.5		—		3.5


	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	51,665		26.31	—		—
Vested	(22,210)		30.57	—		—
Forfeited	(1,411)		28.82	—		—
Outstanding at September 30, 2021	157,711		27.26	2,250		34.40

Outstanding at December 31, 2021	83,563		27.85	2,250		34.40
Granted	38,457		29.42	—		—
Vested	(27,083)		29.70	—		—
Forfeited	(1,977)		33.04	—		—
Outstanding at September 30, 2022	92,960		27.86	2,250		34.40


	September 30, 2022
Restricted Stock		Non-performance Based		Performance-based
Number of shares underlying restricted stock		92,960		2,250
Weighted-average grant date fair value per share	$	27.86	$	34.40
Aggregate fair value (in thousands)	$	2,719	$	66
Weighted-average remaining vesting period (years)		—		—


	Exercised/Vested	Shares Withheld	Shares Issued
Nine Months Ended September 30, 2022
Stock options	15,240	—	15,240
Non-performance based restricted stock	27,083	(4,620)	22,463
Nine Months Ended September 30, 2021
Stock options	2,032	—	2,032
Non-performance based restricted stock	22,210	(3,213)	18,997


			Minimum		Required to be
			Capital Required		Considered Well
	Actual		Basel III		Capitalized
(Dollars in thousands)	Amount	Ratio	Amount	Ratio	Amount	Ratio
September 30, 2022
Common Equity Tier 1 to Risk-Weighted Assets:
Consolidated	$ 487,717	14.05%	$ 243,053	7.00%	N/A	N/A
Bank Only	$ 479,175	13.81%	$ 242,969	7.00%	$ 225,614	6.50%
Tier 1 Capital to Risk-Weighted Assets:
Consolidated	$ 487,717	14.05%	$ 295,135	8.50%	N/A	N/A
Bank Only	$ 479,175	13.81%	$ 295,034	8.50%	$ 277,679	8.00%
Total Capital to Risk-Weighted Assets:
Consolidated	$ 524,112	15.09%	$ 364,579	10.50%	N/A	N/A
Bank Only	$ 515,570	14.85%	$ 364,454	10.50%	$ 347,099	10.00%
Tier 1 Leverage Capital to Average Assets:
Consolidated	$ 487,717	11.42%	$ 170,891	4.00%	N/A	N/A
Bank Only	$ 479,175	11.22%	$ 170,856	4.00%	$ 213,570	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%


Allegiance Bancshares, Inc. Condensed Statements of Income (Unaudited)	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2022		September 30, 2022
Net interest income	$	60,690	$	173,344
Provision for credit losses		1,962		5,919
Net interest income after provision for credit losses		58,728		167,425
Noninterest income		2,995		9,717
Noninterest expense		44,031		116,452
Net income before income tax expense		17,692		60,690
Income tax expense		3,406		11,310
Net income	$	14,286	$	49,380
Earnings per common share
Basic	$	0.72	$	2.44
Diluted	$	0.71	$	2.42


	September 30,		June 30,		March 31,		December 31,		September 30,
(Dollars in thousands)	2022		2022		2022		2021		2021
Risk grades:
Pass	$	3,074,091	$	2,972,739	$	2,804,237	$	2,783,385	$	2,526,395
Special mention		2,582		468		4,281		12,807		4,661
Substandard		59,218		68,768		80,460		80,235		86,501
Total gross loans	$	3,135,891	$	3,041,975	$	2,888,978	$	2,876,427	$	2,617,557
Past due loans:
30 to 59 days past due	$	11,099	$	537	$	13,603	$	905	$	2,755
60 to 89 days past due		9,172		4,611		2,032		34		143
90 days or greater past due		1,882		10,276		140		197		104
Total past due loans	$	22,153	$	15,424	$	15,775	$	1,136	$	3,002
Loans individually evaluated:
Accruing troubled debt restructurings	$	28,373	$	26,117	$	28,428	$	30,709	$	31,656
Non-accrual troubled debt restructurings		22,236		22,761		21,720		20,019		17,834
Total troubled debt restructurings		50,609		48,878		50,148		50,728		49,490
Other non-accrual		174		5,512		363		2,549		2,751
Other accruing		1,159		1,152		3,494		5,995		5,260
Total loans individually evaluated	$	51,942	$	55,542	$	54,005	$	59,272	$	57,501
Nonperforming assets:
Nonaccrual loans	$	22,410	$	28,273	$	22,083	$	22,568	$	20,585
Accruing loans 90 or more days past due		—		—		—		—		—
Total nonperforming loans		22,410		28,273		22,083		22,568		20,585
Foreclosed assets		—		—		—		—		—
Total nonperforming assets	$	22,410	$	28,273	$	22,083	$	22,568	$	20,585


	Nine Months Ended September 30, 2022,
	Compared to Nine Months Ended September 30, 2021
	Increase (Decrease) due to
(Dollars in thousands)	Rate		Volume		Total
Interest-earning assets:
Total loans	$	2,573	$	4,751	$	7,324
Securities		1,145		3,190		4,335
Interest-bearing deposits at other financial institutions		3,336		(82)		3,254
Equity investments		53		(41)		12
Total increase in interest income		7,107		7,818		14,925
Interest-bearing liabilities:
Interest-bearing deposits		(103)		262		159
Federal Home Loan Bank advances		28		(419)		(391)
Total decrease in interest expense		(75)		(157)		(232)
Increase in net interest income	$	7,182	$	7,975	$	15,157

20-8339782

(State or other jurisdiction
of

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

incorporation or organization)

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