Equibles

10-Q

Stellar Bancorp, Inc. (STEL)

10-Q 2024-07-26 For: 2024-06-30
View Original
Added on April 04, 2026

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________

FORM 10-Q

_______________________________________________

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2024

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-38280

_______________________________________________

Stellar Bancorp, Inc.

(Exact name of registrant as specified in its charter)

_______________________________________________

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

9 Greenway Plaza, Suite 110

Houston, Texas 77046

(Address of principal executive offices, including zip code)

(713) 210-7600

(Registrant’s telephone number, including area code)

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

Title of each class Trading<br><br>Symbol(s) Name of each exchange on which registered
Common Stock, par value, $0.01 per share STEL New York Stock Exchange

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

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

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

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

Large accelerated filer S Accelerated filer £
Non-accelerated filer £ Smaller reporting company £
Emerging growth company £

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

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

As of July 24, 2024, the registrant had 53,574,833 shares common stock, $0.01 par value per share, outstanding.

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STELLAR BANCORP, INC.

INDEX TO FORM 10-Q

June 30, 2024

PART I—FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements 3
Consolidated Balance Sheets (unaudited) 3
Consolidated Statements of Income (unaudited) 4
Consolidated Statements of Comprehensive Income (unaudited) 5
Consolidated Statements of Changes inShareholders’Equity (unaudited) 6
Consolidated Statements of Cash Flows (unaudited) 7
Condensed Notes to Interim Consolidated Financial Statements (unaudited) 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures about Market Risk 58
Item 4. Controls and Procedures 59
PART II—OTHER INFORMATION
Item 1. Legal Proceedings 59
Item 1A. Risk Factors 59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 59
Item 3. Defaults upon Senior Securities 59
Item 4. Mine Safety Disclosures 60
Item 5. Other Information 60
Item 6. Exhibits 60
Signatures 61

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PART I—FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

STELLAR BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30,<br>2024 December 31,<br>2023
(In thousands, except shares and par value)
ASSETS
Cash and due from banks $ 110,341 $ 121,004
Interest-bearing deposits at other financial institutions 379,909 278,233
Total cash and cash equivalents 490,250 399,237
Available for sale securities, at fair value 1,630,971 1,395,680
Loans held for investment 7,713,897 7,925,133
Less: allowance for credit losses on loans (94,772) (91,684)
Loans, net 7,619,125 7,833,449
Accrued interest receivable 43,348 44,244
Premises and equipment, net 113,984 118,683
Federal Home Loan Bank stock 15,089 25,051
Bank-owned life insurance 106,262 105,084
Goodwill 497,318 497,318
Core deposit intangibles, net 104,315 116,712
Other assets 103,001 111,681
TOTAL ASSETS $ 10,723,663 $ 10,647,139
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 3,308,441 $ 3,546,815
Interest-bearing
Demand 1,564,405 1,659,999
Money market and savings 2,213,031 2,136,777
Certificates and other time 1,639,426 1,529,876
Total interest-bearing deposits 5,416,862 5,326,652
Total deposits 8,725,303 8,873,467
Accrued interest payable 12,327 11,288
Borrowed funds 240,000 50,000
Subordinated debt 109,964 109,765
Other liabilities 70,274 81,601
Total liabilities 9,157,868 9,126,121
COMMITMENTS AND CONTINGENCIES (See Note 13)
SHAREHOLDERS’ EQUITY:
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2024 and December 31, 2023 — —
Common stock, $0.01 par value; 140,000,000 shares authorized; 53,564,116 shares issued and outstanding at June 30, 2024 and 53,291,079 shares issued and outstanding at December 31, 2023 536 533
Capital surplus 1,238,477 1,232,627
Retained earnings 447,948 405,945
Accumulated other comprehensive loss (121,166) (118,087)
Total shareholders’ equity 1,565,795 1,521,018
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 10,723,663 $ 10,647,139

See condensed notes to interim consolidated financial statements.

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STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees $ 135,885 $ 133,931 $ 270,570 $ 259,660
Securities:
Taxable 11,923 9,726 21,216 19,379
Tax-exempt 816 436 1,634 1,698
Deposits in other financial institutions 3,555 2,865 7,182 6,636
Total interest income 152,179 146,958 300,602 287,373
INTEREST EXPENSE:
Demand, money market and savings deposits 28,399 20,708 55,929 38,745
Certificates and other time deposits 18,758 9,622 33,842 12,929
Borrowed funds 1,700 6,535 3,474 7,852
Subordinated debt 1,912 1,812 3,829 3,739
Total interest expense 50,769 38,677 97,074 63,265
NET INTEREST INCOME 101,410 108,281 203,528 224,108
(Reversal of) provision for credit losses (1,935) 1,915 2,163 5,581
Net interest income after provision for credit losses 103,345 106,366 201,365 218,527
NONINTEREST INCOME:
Service charges on deposit accounts 1,648 1,575 3,246 2,924
(Loss) gain on sale of assets (64) (6) 449 192
Bank-owned life insurance income 591 532 1,178 1,054
Debit card and ATM income 543 1,821 1,070 3,519
Other 2,698 1,561 5,769 5,292
Total noninterest income 5,416 5,483 11,712 12,981
NONINTEREST EXPENSE:
Salaries and employee benefits 39,061 37,300 80,437 77,075
Net occupancy and equipment 4,503 3,817 8,893 7,905
Depreciation 1,948 1,841 3,912 3,677
Data processing and software amortization 5,501 4,674 10,395 9,728
Professional fees 1,620 1,564 4,282 3,091
Regulatory assessments and FDIC insurance 2,299 2,755 4,153 4,049
Amortization of intangibles 6,215 6,881 12,427 13,760
Communications 847 689 1,784 1,390
Advertising 891 907 1,656 1,746
Acquisition and merger-related expenses — 2,897 — 9,062
Other 8,331 5,882 14,687 10,322
Total noninterest expense 71,216 69,207 142,626 141,805
INCOME BEFORE INCOME TAXES 37,545 42,642 70,451 89,703
Provision for income taxes 7,792 7,467 14,551 17,380
NET INCOME $ 29,753 $ 35,175 $ 55,900 $ 72,323
EARNINGS PER SHARE:
Basic $ 0.56 $ 0.66 $ 1.05 $ 1.36
Diluted $ 0.56 $ 0.66 $ 1.04 $ 1.36
DIVIDENDS PER SHARE $ 0.13 $ 0.13 $ 0.26 $ 0.26

See condensed notes to interim consolidated financial statements.

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STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
(In thousands)
Net income $ 29,753 $ 35,175 $ 55,900 $ 72,323
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Change in unrealized holding gain (loss) on available for sale securities during the period 11,418 (23,717) (3,912) 14,249
Reclassification of gain realized on securities — — — (234)
Total other comprehensive income (loss) 11,418 (23,717) (3,912) 14,015
Deferred tax (expense) benefit related to other comprehensive (income) loss (2,395) 4,994 833 (2,758)
Other comprehensive income (loss), net of tax 9,023 (18,723) (3,079) 11,257
Comprehensive (income ) loss $ 38,776 $ 16,452 $ 52,821 $ 83,580

See condensed notes to interim consolidated financial statements.

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STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

Common Stock Capital<br>Surplus Retained<br>Earnings Accumulated<br>Other Comprehensive<br>(Loss) Income Total Shareholders’<br>Equity
Shares Amount
(Dollars in thousands, except per share data)
BALANCE AT MARCH 31, 2023 53,296,038 $ 533 $ 1,225,596 $ 333,368 $ (113,281) $ 1,446,216
Net income — — — 35,175 — 35,175
Other comprehensive loss — — — — (18,723) (18,723)
Cash dividends declared, $0.13 per share — — — (6,924) — (6,924)
Common stock issued in connection<br><br>with the exercise of stock options<br><br>and restricted stock awards 6,696 — 94 — — 94
Stock-based compensation expense — — 2,842 — — 2,842
BALANCE AT JUNE 30, 2023 53,302,734 $ 533 $ 1,228,532 $ 361,619 $ (132,004) $ 1,458,680
BALANCE AT MARCH 31, 2024 53,550,820 $ 536 $ 1,235,221 $ 425,130 $ (130,189) $ 1,530,698
Net income — — — 29,753 — 29,753
Other comprehensive income — — — 9,023 9,023
Cash dividends declared, $0.13 per share — — — (6,935) — (6,935)
Common stock issued in connection<br><br>with the exercise of stock options<br><br>and restricted stock awards 13,296 — 473 — — 473
Stock-based compensation expense — — 2,783 2,783
BALANCE AT JUNE 30, 2024 53,564,116 $ 536 $ 1,238,477 $ 447,948 $ (121,166) $ 1,565,795
BALANCE AT DECEMBER 31, 2022 52,954,985 $ 530 $ 1,222,761 $ 303,146 $ (143,261) $ 1,383,176
Net income — — — 72,323 — 72,323
Other comprehensive income — — — 11,257 11,257
Cash dividends declared $0.26 per share — — — (13,850) — (13,850)
Common stock issued in connection<br><br>with the exercise of stock options<br><br>and restricted stock awards 347,749 3 348 — — 351
Stock-based compensation expense — — 5,423 — — 5,423
BALANCE AT JUNE 30, 2023 53,302,734 $ 533 $ 1,228,532 $ 361,619 $ (132,004) $ 1,458,680
BALANCE AT DECEMBER 31, 2023 53,291,079 $ 533 $ 1,232,627 $ 405,945 $ (118,087) $ 1,521,018
Net income — — — 55,900 — 55,900
Other comprehensive loss — — — — (3,079) (3,079)
Cash dividends declared $0.26 per share — — — (13,897) — (13,897)
Common stock issued in connection<br><br>with the exercise of stock options<br><br>and restricted stock awards 273,037 3 220 — — 223
Stock-based compensation expense — — 5,630 — — 5,630
BALANCE AT JUNE 30, 2024 53,564,116 $ 536 $ 1,238,477 $ 447,948 $ (121,166) $ 1,565,795

See condensed notes to interim consolidated financial statements.

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STELLAR BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended June 30,
2024 2023
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,900 $ 72,323
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangibles amortization 16,339 17,437
Net accretion on loans (18,649) (22,665)
Net amortization of premium on securities 4,606 1,564
Provision for credit losses 2,163 5,581
Deferred income tax expense 1,387 11,961
Stock-based compensation expense 5,630 5,423
Net change in operating leases 2,262 2,088
Bank-owned life insurance income (1,178) (1,054)
Federal Home Loan Bank stock dividends (493) (400)
Gain on sale of assets (449) (192)
Excess tax benefit from stock based compensation (183) (47)
Decrease in accrued interest receivable and other assets 10,329 6,453
Decrease in accrued interest payable and other liabilities (8,451) (484)
Net cash provided by operating activities 69,213 97,988
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities (323,235) (33,287)
Proceeds from maturities and principal paydowns of available for sale securities 72,512 55,312
Proceeds from sales and calls of available for sale securities 6,914 320,691
Net change in total loans 226,533 (291,730)
Purchase of bank premises and equipment (1,552) (2,479)
Proceeds from sale of bank premises, equipment and other real estate 2,011 3,652
Net redemptions (purchases) of Federal Home Loan Bank stock 10,455 (9,020)
Net cash (used in) provided by investing activities (6,362) 43,139
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in noninterest-bearing deposits (238,374) (516,633)
Net increase in interest-bearing deposits 90,210 15,389
Net change in borrowed funds 190,000 306,000
Dividends paid to common shareholders (13,897) (13,850)
Proceeds from the issuance of restricted stock and stock option exercises 223 351
Net cash provided by (used in) financing activities 28,162 (208,743)
NET CHANGE IN CASH AND CASH EQUIVALENTS 91,013 (67,616)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 399,237 371,705
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 490,250 $ 304,089
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 5,700 $ —
Interest paid 96,035 60,808
Cash paid for operating lease liabilities 2,424 2,230
SUPPLEMENTAL NONCASH DISCLOSURE:
Loans transferred to other real estate $ 2,639 $ —
Branch assets transferred to assets held for sale — 3,819

See condensed notes to interim consolidated financial statements.

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STELLAR BANCORP, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2024

(Unaudited)

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

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

The Company is focused on delivering a wide variety of relationship-driven commercial banking products and community-oriented services tailored to meet the needs of small-to medium-sized businesses, professionals and individuals through its 54 banking centers with 37 banking centers in the Houston metropolitan statistical area (“MSA”), 16 banking centers in the Beaumont MSA and one banking center in Dallas, Texas.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. Transactions between Stellar and the Bank have been eliminated. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

Reclassifications—Certain items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

Significant Accounting and Reporting Policies—The Company’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Recent Accounting Standards

Accounting Standards Update (“ASU”) 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” was issued in December 2023. This update requires that public business entities on an annual basis (1) disclose specific categories in the tax rate reconciliation, (2) provide additional information for reconciling items that meet a quantitative threshold and (3) disaggregate income taxes paid by jurisdiction. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the impact of this ASU, but does not believe it will have a significant impact.

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2. GOODWILL AND OTHER INTANGIBLE ASSETS

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

Goodwill Core Deposit <br>Intangibles Servicing Assets
(In thousands)
Balance as of December 31, 2022 $ 497,260 $ 143,525 $ 309
Amortization — (26,813) (70)
Goodwill true-up 58 — —
Decrease due to payoff of serviced loans — — (27)
Balance as of December 31, 2023 497,318 116,712 212
Amortization — (12,397) (30)
Decrease due to payoff of serviced loans — — (4)
Balance as of June 30, 2024 $ 497,318 $ 104,315 $ 178

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired 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.

Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company’s policy is to test goodwill for impairment annually as of October 1st, or on an interim basis if an event triggering an impairment assessment is determined to have occurred.

Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that an impairment has occurred, it proceeds to the quantitative impairment test, whereby it calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. In its performance of impairment testing, the Company has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the reporting unit exceeds the fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the reporting unit that is greater than the carrying amount, then no impairment charge is recorded.

The estimated aggregate future amortization expense for core deposit intangible assets remaining as of June 30, 2024 is as follows (in thousands):

Remaining 2024 $ 11,769
2025 21,528
2026 18,896
2027 16,272
Thereafter 35,850
Total $ 104,315

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3. SECURITIES

The amortized cost and fair value of securities available for sale were as follows:

June 30, 2024
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair<br>Value
(In thousands)
Available for Sale
U.S. government and agency securities $ 290,354 $ 261 $ (8,445) $ 282,170
Municipal securities 220,518 869 (26,778) 194,609
Agency mortgage-backed pass-through securities 473,300 61 (40,179) 433,182
Agency collateralized mortgage obligations 688,587 257 (66,999) 621,845
Corporate bonds and other 111,574 23 (12,432) 99,165
Total $ 1,784,333 $ 1,471 $ (154,833) $ 1,630,971 December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- ---
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross <br>Unrealized<br>Losses Fair<br>Value
(In thousands)
Available for Sale
U.S. government and agency securities $ 307,529 $ 90 $ (10,201) $ 297,418
Municipal securities 229,615 1,615 (27,171) 204,059
Agency mortgage-backed pass-through securities 424,664 370 (37,161) 387,873
Agency collateralized mortgage obligations 462,498 172 (64,553) 398,117
Corporate bonds and other 120,824 56 (12,667) 108,213
Total $ 1,545,130 $ 2,303 $ (151,753) $ 1,395,680

As of June 30, 2024, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This belief 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.

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The amortized cost and fair value of investment securities at June 30, 2024, 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<br>Cost Fair<br>Value
(In thousands)
Due in one year or less $ 76,080 $ 74,852
Due after one year through five years 82,426 78,174
Due after five years through ten years 130,626 115,122
Due after ten years 333,314 307,796
Subtotal 622,446 575,944
Agency mortgage-backed pass-through securities<br><br>and collateralized mortgage obligations 1,161,887 1,055,027
Total $ 1,784,333 $ 1,630,971

Securities with unrealized losses segregated by length of time in a continuous loss position were as follows:

June 30, 2024
Less than 12 Months More than 12 Months Total
Estimated<br>Fair Value Unrealized<br>Losses Estimated<br>Fair Value Unrealized<br>Losses Estimated<br>Fair Value Unrealized<br>Losses
(In thousands)
Available for Sale
U.S. government and agency<br>securities $ 23,505 $ (233) $ 217,429 $ (8,212) $ 240,934 $ (8,445)
Municipal securities 5,249 (111) 170,568 (26,667) 175,817 (26,778)
Agency mortgage-backed<br><br>pass-through securities 109,961 (1,868) 291,919 (38,311) 401,880 (40,179)
Agency collateralized mortgage<br><br>obligations 222,596 (2,072) 323,436 (64,927) 546,032 (66,999)
Corporate bonds and other 7,022 (2,582) 80,027 (9,850) 87,049 (12,432)
Total $ 368,333 $ (6,866) $ 1,083,379 $ (147,967) $ 1,451,712 $ (154,833) December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Less than 12 Months More than 12 Months Total
Estimated<br>Fair Value Unrealized<br>Losses Estimated<br>Fair Value Unrealized<br>Losses Estimated<br>Fair Value Unrealized<br>Losses
(In thousands)
Available for Sale
U.S. government and agency<br>securities $ 110,038 $ (2,208) $ 154,145 $ (7,993) $ 264,183 $ (10,201)
Municipal securities 1,303 (14) 177,957 (27,157) 179,260 (27,171)
Agency mortgage-backed<br><br>pass-through securities 80,208 (1,444) 257,779 (35,717) 337,987 (37,161)
Agency collateralized mortgage<br><br>obligations 23,051 (621) 348,854 (63,932) 371,905 (64,553)
Corporate bonds and other 11,279 (1,452) 85,285 (11,215) 96,564 (12,667)
Total $ 225,879 $ (5,739) $ 1,024,020 $ (146,014) $ 1,249,899 $ (151,753)

During the six months ended June 30, 2024, the Company had sales and calls of securities of $6.9 million. During the six months ended June 30, 2023, the Company had sales and calls of securities of $320.7 million and recorded gross gains of

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$234 thousand. At June 30, 2024 and December 31, 2023, the Company did not own securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of consolidated shareholders’ equity at such respective dates.

The carrying value of pledged securities was $612.9 million at June 30, 2024 and $607.5 million at December 31, 2023. The majority of the securities in each case were pledged to collateralize public fund deposits.

4. 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 segregated by class of loan were as follows:

June 30, 2024 December 31, 2023
(In thousands)
Commercial and industrial $ 1,392,435 $ 1,409,002
Paycheck Protection Program (PPP) 3,629 5,100
Real estate:
Commercial real estate (including multi-family residential) 4,029,671 4,071,807
Commercial real estate construction and land development 922,805 1,060,406
1-4 family residential (including home equity) 1,098,681 1,047,174
Residential construction 200,134 267,357
Consumer and other 66,542 64,287
Total loans 7,713,897 7,925,133
Allowance for credit losses on loans (94,772) (91,684)
Loans, net $ 7,619,125 $ 7,833,449

Nonaccrual and Past Due Loans

An aging analysis of past due loans, segregated by class of loans, is included below.

June 30, 2024
Loans Past Due and Still Accruing Nonaccrual<br>Loans Current<br>Loans Total<br>Loans
30-89<br>Days 90 or More<br>Days Total Past<br>Due Loans
(In thousands)
Commercial and industrial $ 6,271 $ — $ 6,271 $ 18,448 $ 1,367,716 $ 1,392,435
Paycheck Protection Program (PPP) 429 — 429 3 3,197 3,629
Real estate:
Commercial real estate (including<br><br>multi-family residential) 16,806 — 16,806 18,094 3,994,771 4,029,671
Commercial real estate construction<br><br>and land development 14,276 — 14,276 1,641 906,888 922,805
1-4 family residential (including<br><br>home equity) 2,660 — 2,660 12,454 1,083,567 1,098,681
Residential construction 1,193 — 1,193 155 198,786 200,134
Consumer and other 80 — 80 111 66,351 66,542
Total loans $ 41,715 $ — $ 41,715 $ 50,906 $ 7,621,276 $ 7,713,897

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December 31, 2023
Loans Past Due and Still Accruing Nonaccrual<br>Loans Current<br>Loans Total<br>Loans
30-89<br>Days 90 or More<br>Days Total Past<br>Due Loans
(In thousands)
Commercial and industrial $ 6,096 $ — $ 6,096 $ 5,048 $ 1,397,858 $ 1,409,002
Paycheck Protection Program (PPP) 375 — 375 — 4,725 5,100
Real estate:
Commercial real estate (including<br><br>multi-family residential) 9,600 — 9,600 16,699 4,045,508 4,071,807
Commercial real estate construction<br><br>and land development 7,341 — 7,341 5,043 1,048,022 1,060,406
1-4 family residential (including<br><br>home equity) 3,492 — 3,492 8,874 1,034,808 1,047,174
Residential construction 498 — 498 3,288 263,571 267,357
Consumer and other 64 — 64 239 63,984 64,287
Total loans $ 27,466 $ — $ 27,466 $ 39,191 $ 7,858,476 $ 7,925,133

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt. The Company utilizes a risk rating matrix to assign a risk rating to each of its loans. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks certain risk ratings to be used as credit quality indicators including trends related to (1) the weighted-average risk grade of loans, (2) the level of classified loans, (3) the delinquency status of loans, (4) nonperforming loans and (5) the general economic conditions in our market. 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 or higher, a special assets officer will be involved in the monitoring of the loan on an on-going basis.

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

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

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

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

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

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

The following table presents risk ratings by category and the gross charge-offs by primary loan type and year of origination or renewal. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period

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originations for purposes of the table below. The following summarizes the amortized cost basis of loans by year of origination/renewal and credit quality indicator by class of loan as of June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023
Term Loans Amortized Cost Basis by Origination Year Revolving<br>Loans Revolving Loans<br>Converted to Term Loans Total Total
2024 2023 2022 2021 2020 Prior
(In thousands)
Commercial and industrial
Pass $ 157,690 $ 262,432 $ 197,082 $ 141,074 $ 30,441 $ 28,347 $ 487,752 $ 45,801 $ 1,350,619 $ 1,377,118
Special Mention — 568 2,132 567 53 293 2,885 1,011 7,509 8,340
Substandard 485 2,628 3,937 685 468 11,791 2,508 11,760 34,262 23,496
Doubtful — 45 — — — — — — 45 48
Total commercial and industrial<br>loans $ 158,175 $ 265,673 $ 203,151 $ 142,326 $ 30,962 $ 40,431 $ 493,145 $ 58,572 $ 1,392,435 $ 1,409,002
Current period gross charge-offs $ — $ 34 $ 162 $ 244 $ 144 $ 40 $ 50 $ 136 $ 810
Paycheck Protection Program (PPP)
Pass $ — $ — $ — $ 2,052 $ 1,577 $ — $ — $ — $ 3,629 $ 5,100
Special Mention — — — — — — — — — —
Substandard — — — — — — — — — —
Doubtful — — — — — — — — — —
Total PPP loans $ — $ — $ — $ 2,052 $ 1,577 $ — $ — $ — $ 3,629 $ 5,100
Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Commercial real estate<br>(including multi-family residential)
Pass $ 235,570 $ 421,034 $ 1,349,553 $ 792,350 $ 376,727 $ 536,049 $ 121,215 $ 17,365 $ 3,849,863 $ 3,959,675
Special Mention 14,839 1,048 26,153 18,053 29,152 22,584 3,496 482 115,807 54,483
Substandard 1,011 10,961 7,297 24,347 8,798 9,903 1,684 — 64,001 57,649
Doubtful — — — — — — — — — —
Total commercial real estate<br>(including multi-family<br><br>residential) loans $ 251,420 $ 433,043 $ 1,383,003 $ 834,750 $ 414,677 $ 568,536 $ 126,395 $ 17,847 $ 4,029,671 $ 4,071,807
Current period gross charge-offs $ — $ — $ — $ 527 $ — $ — $ — $ — $ 527
Commercial real estate construction <br>and land development
Pass $ 131,783 $ 230,901 $ 346,680 $ 78,893 $ 13,594 $ 9,635 $ 70,381 $ 3,468 $ 885,335 $ 1,032,789
Special Mention 4,815 4,262 8,610 5,274 — 1,441 380 — 24,782 9,737
Substandard 3,742 4,422 1,319 2,510 71 79 135 410 12,688 17,880
Doubtful — — — — — — — — — —
Total commercial real estate<br>construction and land development $ 140,340 $ 239,585 $ 356,609 $ 86,677 $ 13,665 $ 11,155 $ 70,896 $ 3,878 $ 922,805 $ 1,060,406
Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

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June 30, 2024 December 31, 2023
Term Loans Amortized Cost Basis by Origination Year Revolving Loans Revolving Loans<br>Converted to Term Loans
2024 2023 2022 2021 2020 Prior Total Total
(In thousands)
1-4 family residential (including <br>    home equity)
Pass $ 74,729 $ 160,702 $ 287,884 $ 208,701 $ 107,466 $ 123,150 $ 86,186 $ 12,841 $ 1,061,659 $ 1,011,743
Special Mention 911 1,173 1,244 1,099 1,958 1,192 — 150 7,727 5,384
Substandard 1,581 3,459 1,390 4,594 1,276 7,186 8,191 1,618 29,295 30,047
Doubtful — — — — — — — — — —
Total 1-4 family residential<br>(including home equity) $ 77,221 $ 165,334 $ 290,518 $ 214,394 $ 110,700 $ 131,528 $ 94,377 $ 14,609 $ 1,098,681 $ 1,047,174
Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Residential construction
Pass $ 87,896 $ 90,527 $ 18,709 $ 349 $ 275 $ — $ 1,047 $ — $ 198,803 $ 264,069
Special Mention 460 661 — — — — — — 1,121 —
Substandard — 210 — — — — — — 210 3,288
Doubtful — — — — — — — — — —
Total residential construction $ 88,356 $ 91,398 $ 18,709 $ 349 $ 275 $ — $ 1,047 $ — $ 200,134 $ 267,357
Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ —
Consumer and other
Pass $ 27,293 $ 13,251 $ 6,350 $ 2,146 $ 770 $ 481 $ 15,273 $ 744 $ 66,308 $ 63,881
Special Mention — — 28 18 — — — — 46 67
Substandard — 1 105 22 — 3 2 55 188 339
Doubtful — — — — — — — — — —
Total consumer and other $ 27,293 $ 13,252 $ 6,483 $ 2,186 $ 770 $ 484 $ 15,275 $ 799 $ 66,542 $ 64,287
Current period gross charge-offs $ — $ 9 $ — $ 4 $ — $ — $ — $ 92 $ 105
Total loans
Pass $ 714,961 $ 1,178,847 $ 2,206,258 $ 1,225,565 $ 530,850 $ 697,662 $ 781,854 $ 80,219 $ 7,416,216 $ 7,714,375
Special Mention 21,025 7,712 38,167 25,011 31,163 25,510 6,761 1,643 156,992 78,011
Substandard 6,819 21,681 14,048 32,158 10,613 28,962 12,520 13,843 140,644 132,699
Doubtful — 45 — — — — — — 45 48
Total loans $ 742,805 $ 1,208,285 $ 2,258,473 $ 1,282,734 $ 572,626 $ 752,134 $ 801,135 $ 95,705 $ 7,713,897 $ 7,925,133
Current period gross charge-offs $ — $ 43 $ 162 $ 775 $ 144 $ 40 $ 50 $ 228 $ 1,442

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The following table presents the activity in the allowance for credit losses on loans by portfolio type for the three and six months ended June 30, 2024 and 2023:

Commercial<br><br>and industrial Paycheck Protection<br><br>Program (PPP) Commercial real<br><br>estate (including multi-family<br><br>residential) Commercial real<br><br>estate construction and land<br><br>development 1-4 family residential<br><br>(including<br><br>home equity) Residential<br><br>construction Consumer<br><br>and other Total
(In thousands)
Allowance for credit losses on<br><br>loans:
Three Months Ended
Balance March 31, 2024 $ 37,451 $ — $ 36,611 $ 14,052 $ 5,055 $ 2,695 $ 421 $ 96,285
Provision for credit losses on loans 1,225 — (714) (1,541) 174 (732) 74 (1,514)
Charge-offs (501) — — — — — (100) (601)
Recoveries 601 — — — 1 — — 602
Net recoveries 100 — — — 1 — (100) 1
Balance June 30, 2024 $ 38,776 $ — $ 35,897 $ 12,511 $ 5,230 $ 1,963 $ 395 $ 94,772
Six Months Ended
Balance December 31, 2023 $ 31,979 $ — $ 38,187 $ 13,627 $ 4,785 $ 2,623 $ 483 $ 91,684
Provision for credit losses on loans 6,892 — (1,763) (1,116) 439 (660) 9 3,801
Charge-offs (810) — (527) — — — (105) (1,442)
Recoveries 715 — — — 6 — 8 729
Net charge-offs (95) — (527) — 6 — (97) (713)
Balance June 30, 2024 $ 38,776 $ — $ 35,897 $ 12,511 $ 5,230 $ 1,963 $ 395 $ 94,772
Three Months Ended
Balance March 31, 2023 $ 39,516 $ — $ 37,700 $ 13,579 $ 2,832 $ 2,089 $ 472 $ 96,188
Provision for credit losses on loans (814) — 1,263 921 1,946 991 (64) 4,243
Charge-offs (1,058) — — — (23) — (30) (1,111)
Recoveries 861 — — — 2 — 12 875
Net charge-offs (197) — — — (21) — (18) (236)
Balance June 30, 2023 $ 38,505 $ — $ 38,963 $ 14,500 $ 4,757 $ 3,080 $ 390 $ 100,195
Six Months Ended
Balance December 31, 2022 $ 41,236 $ — $ 32,970 $ 14,121 $ 2,709 $ 1,796 $ 348 $ 93,180
Provision for credit losses on loans (2,316) — 5,979 379 2,062 1,284 55 7,443
Charge-offs (1,484) — — — (23) — (38) (1,545)
Recoveries 1,069 — 14 — 9 — 25 1,117
Net charge-offs (415) — 14 — (14) — (13) (428)
Balance June 30, 2023 $ 38,505 $ — $ 38,963 $ 14,500 $ 4,757 $ 3,080 $ 390 $ 100,195

Allowance for Credit Losses on Unfunded Commitments

In addition to the allowance for credit losses on loans, the Company has established an allowance for credit losses on unfunded commitments, classified in other liabilities and adjusted as a provision for credit loss expense. The allowance represents estimates of expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is informed by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund is informed by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. The allowance for credit losses on unfunded commitments as of June 30, 2024 and December 31, 2023 was $9.7 million and $11.3 million, respectively. This reserve is maintained at a level management believes to be sufficient to

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absorb losses arising from unfunded loan commitments. The Company recorded a reversal of provision on unfunded commitments of $421 thousand during the three months ended June 30, 2024 compared to a reversal of provision on unfunded commitments of $2.3 million for the three months ended June 30, 2023 and a reversal of provision on unfunded commitments of $1.6 million for the six months ended June 30, 2024 compared to a $1.9 million reversal of provision on unfunded commitments for the six months ended June 30, 2023.

Collateral Dependent Loans

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

The following tables present the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of June 30, 2024 and December 31, 2023:

June 30, 2024
Real Estate Business Assets Other Total
(In thousands)
Commercial and industrial $ — $ — $ — $ —
Real estate:
Commercial real estate (including multi-family residential) 5,955 — — 5,955
Commercial real estate construction and land development 1,179 — — 1,179
1-4 family residential (including home equity) 1,027 — — 1,027
Residential construction — — — —
Consumer and other — — — —
Total $ 8,161 $ — $ — $ 8,161 December 31, 2023
--- --- --- --- --- --- --- --- ---
Real Estate Business Assets Other Total
(In thousands)
Commercial and industrial $ — $ 70 $ — $ 70
Real estate:
Commercial real estate (including multi-family residential) 5,548 — — 5,548
Commercial real estate construction and land development 437 — — 437
1-4 family residential (including home equity) 424 — — 424
Residential construction — — — —
Consumer and other — — — —
Total $ 6,409 $ 70 $ — $ 6,479

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Nonaccrual Loans

The following tables present additional information regarding nonaccrual loans. No interest income was recognized on nonaccrual loans as of June 30, 2024 and December 31, 2023.

June 30, 2024
Nonaccrual Loans with No Related Allowance Nonaccrual Loans with Related Allowance Total Nonaccrual Loans
(In thousands)
Commercial and industrial $ 1,027 $ 17,421 $ 18,448
Paycheck Protection Program (PPP) 3 — 3
Real estate:
Commercial real estate (including multi-family residential) 13,842 4,252 18,094
Commercial real estate construction and land development 899 742 1,641
1-4 family residential (including home equity) 8,068 4,386 12,454
Residential construction 155 — 155
Consumer and other 28 83 111
Total loans $ 24,022 $ 26,884 50,906 December 31, 2023
--- --- --- --- --- --- ---
Nonaccrual Loans with No Related Allowance Nonaccrual Loans with Related Allowance Total Nonaccrual Loans
(In thousands)
Commercial and industrial $ 1,616 $ 3,432 $ 5,048
Paycheck Protection Program (PPP) — — —
Real estate:
Commercial real estate (including multi-family residential) 11,844 4,855 16,699
Commercial real estate construction and land development 5,043 — 5,043
1-4 family residential (including home equity) 7,400 1,474 8,874
Residential construction 3,288 — 3,288
Consumer and other 54 185 239
Total loans $ 29,245 $ 9,946 $ 39,191

Loan Modifications

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. The percentage of loans modified comprised less than 1% of their respective classes of loan portfolios at June 30, 2024.

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The following tables present information regarding loans that were modified due to the borrowers experiencing financial difficulty during the three and six months ended June 30, 2024 and 2023:

Three Months Ended June 30, 2024
Interest Rate Reduction Term Extension Payment Delay Principal Forgiveness Combination Term Extension and Principal Forgiveness Combination Term Extension and Payment Delay Total
(In thousands)
Commercial and industrial $ — $ 103 $ — $ — $ — $ 407 $ 510
Real estate:
Commercial real estate (including multi-family residential) — — — — 1,496 1,496
Commercial real estate construction and land development — — — — — — —
1-4 family residential (including home equity) — — — — — — —
Residential construction — — — — — —
Consumer and other — — — — — — —
Total $ — $ 103 $ — $ — $ — $ 1,903 $ 2,006 Six Months Ended June 30, 2024
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Interest Rate Reduction Term Extension Payment Delay Principal Forgiveness Combination Term Extension and Principal Forgiveness Combination Term Extension and Payment Delay Total
(In thousands)
Commercial and industrial $ — $ 1,163 $ 813 $ — $ — $ 875 $ 2,851
Real estate:
Commercial real estate (including multi-family residential) — — 1,768 — — 1,496 3,264
Commercial real estate construction and land development — 2,068 — — — 2,269 4,337
1-4 family residential (including home equity) — — 1,797 — — 281 2,078
Residential construction — 55 — — — — 55
Consumer and other — — — — — — —
Total $ — $ 3,286 $ 4,378 $ — $ — $ 4,921 $ 12,585

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Three Months Ended June 30, 2023
Interest Rate Reduction Term Extension Payment Delay Principal Forgiveness Combination Term Extension and Principal Forgiveness Combination Term Extension and Payment Delay Total
(In thousands)
Commercial and industrial $ — $ — $ — $ — $ — $ 260 $ 260
Real estate:
Commercial real estate (including multi-family residential) — — — — — 1,710 1,710
Commercial real estate construction and land development — 6,950 — — — — 6,950
1-4 family residential (including home equity) — — — — — — —
Residential construction — — — — — — —
Consumer and other — 96 — — — — 96
Total $ — $ 7,046 $ — $ — $ — $ 1,970 $ 9,016
Six Months Ended June 30, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Interest Rate Reduction Term Extension Payment Delay Principal Forgiveness Combination Term Extension and Principal Forgiveness Combination Term Extension and Payment Delay Total
(In thousands)
Commercial and industrial $ 92 $ 2,251 $ — $ — $ — $ 260 $ 2,603
Real estate:
Commercial real estate (including multi-family residential) — — 790 — — 1,710 2,500
Commercial real estate construction and land development — 6,950 — — — — 6,950
1-4 family residential (including home equity) — 721 — — — — 721
Residential construction — — — — — — —
Consumer and other — 96 — — — — 96
Total $ 92 $ 10,018 $ 790 $ — $ — $ 1,970 $ 12,870

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The following table summarizes, by loan portfolio, the financial effect of the Company’s loan modifications for the periods indicated:

Three Months Ended June 30, 2024 Three Months Ended June 30, 2023
Weighted-Average Term Extension Weighted-Average Interest Rate Reduction Weighted-Average Term Extension Weighted-Average Interest Rate Reduction
(months) (months)
Commercial and industrial 6 0.0 % 12 0.0 %
Real estate:
Commercial real estate (including multi-family residential) — 0.0 % 12 0.0 %
Commercial real estate construction and land development — 0.0 % 12 0.0 %
1-4 family residential (including home equity) — 0.0 % — 0.0 %
Residential construction — 0.0 % — 0.0 %
Consumer and other — 0.0 % 4 0.0 % Six Months Ended June 30, 2024 Six Months Ended June 30, 2023
--- --- --- --- --- --- ---
Weighted-Average Term Extension Weighted-Average Interest Rate Reduction Weighted-Average Term Extension Weighted-Average Interest Rate Reduction
(months) (months)
Commercial and industrial 4 0.0 % 12 2.0 %
Real estate:
Commercial real estate (including multi-family residential) — 0.0 % 12 0.0 %
Commercial real estate construction and land development 5 0.0 % 12 0.0 %
1-4 family residential (including home equity) — 0.0 % 12 0.0 %
Residential construction 6 0.0 % — 0.0 %
Consumer and other — 0.0 % 4 0.0 %

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The following table summarizes modified loans that had a payment default, determined as 90 or more days past due, within the past twelve months that were modified due to the borrowers experiencing financial difficulty during the periods indicated:

Twelve Months Ended June 30, 2024 Twelve Months Ended June 30, 2023
Term Extension Payment Delay Interest Rate Reduction Term Extension Payment Delay Interest Rate Reduction
(In thousands)
Commercial and industrial $ 1,047 $ 814 $ — $ 670 $ — $ 92
Real estate:
Commercial real estate (including multi-family residential) — — — — — —
Commercial real estate construction and land development 1,703 — — — — —
1-4 family residential (including home equity) — — — 721 — —
Residential construction — — — — — —
Consumer and other — — — — — —
$ 2,750 $ 814 $ — $ 1,391 $ — $ 92

5. LEASES

At June 30, 2024, the Company had 32 operating leases consisting of branch locations, office facilities and equipment. The right-of-use asset is classified within premises and equipment and the lease liability is included in other liabilities on the balance sheet. The Company also owns certain office facilities which it leases to outside parties under operating lessor leases; however, such leases are not significant. There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the six months ended June 30, 2024 and 2023.

Supplemental lease information at the dates indicated was as follows:

June 30, 2024 December 31, 2023
(Dollars in thousands)
Balance Sheet:
Operating lease right-of-use asset classified as premises and equipment $ 18,484 $ 20,746
Operating lease liability classified as other liabilities $ 18,964 $ 20,659
Weighted average lease term, in years 7.53 7.67
Weighted average discount rate 4.24 % 4.17 %

Lease costs for the dates indicated was as follows:

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
(In thousands)
Income Statement:
Operating lease cost $ 2,095 $ 1,579 $ 4,038 $ 3,393
Short-term lease cost 6 10 11 15
Total operating lease costs $ 2,101 $ 1,589 $ 4,049 $ 3,408

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The following table summarizes the contractual maturity of the Company’s lease liabilities as of the dates indicated below:

June 30, 2024 December 31, 2023
(In thousands)
Lease payments due:
Within one year $ 2,036 $ 4,428
After one but within two years 4,255 3,978
After two but within three years 3,748 3,430
After three but within four years 3,578 3,227
After four but within five years 3,414 3,047
After five years 6,845 6,605
Total lease payments 23,876 24,715
Less: discount on cash flows (4,912) (4,056)
Total lease liability $ 18,964 $ 20,659

6. FAIR VALUE

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

Fair Value Hierarchy

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

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

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

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

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

June 30, 2024
Carrying<br>Amount Estimated Fair Value
Level 1 Level 2 Level 3 Total
(In thousands)
Financial assets
Cash and cash equivalents $ 490,250 $ 490,250 $ — $ — $ 490,250
Available for sale securities 1,630,971 — 1,630,971 — 1,630,971
Loans held for investment, net of allowance 7,619,125 — — 7,396,330 7,396,330
Accrued interest receivable 43,348 159 7,042 36,147 43,348
Financial liabilities
Deposits $ 8,725,303 $ — $ 8,719,835 $ — $ 8,719,835
Accrued interest payable 12,327 — 12,327 — 12,327
Borrowed funds 240,000 — 240,000 — 240,000
Subordinated debt 109,964 — 108,402 — 108,402 December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Carrying<br>Amount Estimated Fair Value
Level 1 Level 2 Level 3 Total
(In thousands)
Financial assets
Cash and cash equivalents $ 399,237 $ 399,237 $ — $ — $ 399,237
Available for sale securities 1,395,680 — 1,395,680 — 1,395,680
Loans held for investment, net of allowance 7,833,449 — — 7,627,962 7,627,962
Accrued interest receivable 44,244 118 6,716 37,410 44,244
Financial liabilities
Deposits $ 8,873,467 $ — $ 8,866,645 $ — $ 8,866,645
Accrued interest payable 11,288 — 11,288 — 11,288
Borrowed funds 50,000 — 50,000 — 50,000
Subordinated debt 109,765 — 109,390 — 109,390

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The following tables present fair values for assets and liabilities measured at fair value on a recurring basis.

June 30, 2024
Level 1 Level 2 Level 3 Total
(In thousands)
Financial assets
Available for sale securities:
U.S. government and agency securities $ — $ 282,170 $ — $ 282,170
Municipal securities — 194,609 — 194,609
Agency mortgage-backed pass-through securities — 433,182 — 433,182
Agency collateralized mortgage obligations — 621,845 — 621,845
Corporate bonds and other — 99,165 — 99,165
Interest rate swaps — 6,926 — 6,926
Credit risk participation agreements — — 13 13
Total fair value of financial assets $ — $ 1,637,897 $ 13 $ 1,637,910
Financial liabilities
Interest rate swaps $ — $ 6,926 $ — $ 6,926
Total fair value of financial liabilities $ — $ 6,926 $ — $ 6,926 December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- ---
Level 1 Level 2 Level 3 Total
(In thousands)
Financial assets
Available for sale securities:
U.S. government and agency securities $ — $ 297,418 $ — $ 297,418
Municipal securities — 204,059 — 204,059
Agency mortgage-backed pass-through securities — 387,873 — 387,873
Agency collateralized mortgage obligations — 398,117 — 398,117
Corporate bonds and other — 108,213 — 108,213
Interest rate swaps — 6,692 — 6,692
Credit risk participation agreements — — 20 20
Total fair value of financial assets $ — $ 1,402,372 $ 20 $ 1,402,392
Financial liabilities
Interest rate swaps $ — $ 6,692 $ — $ 6,692
Total fair value of financial liabilities $ — $ 6,692 $ — $ 6,692

There were no transfers between levels during the six months ended June 30, 2024 or 2023.

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Certain assets, including purchase credit deteriorated and individually evaluated loans with allowances for credit losses and branch assets held for sale, are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances such as impairment. There were no liabilities measured at fair value on a nonrecurring basis at June 30, 2024 and December 31, 2023. Assets measured on a nonrecurring basis for the periods noted are summarized in the table below.

June 30, 2024
Level 1 Level 2 Level 3
(In thousands)
Loans:
Commercial and industrial $ — $ — $ 17,415
Commercial real estate (including multi-family residential) — — 5,302
Commercial real estate construction and land development — — 2,094
1-4 family residential (including home equity) — — 6,287
Residential construction — — —
Consumer and other — — 102
$ — $ — $ 31,200 December 31, 2023
--- --- --- --- --- --- --- --- --- ---
Level 1 Level 2 Level 3
(In thousands)
Loans:
Commercial and industrial $ — $ — $ 10,084
Commercial real estate (including multi-family residential) — — 7,134
Commercial real estate construction and land development — — 6,654
1-4 family residential (including home equity) — — 3,892
Consumer and other — — 106
Branch assets held for sale(1) 2,033 — —
$ 2,033 $ — $ 27,870

(1) Branch assets held for sale are banking centers that closed and were for sale.

7. DEPOSITS

Time deposits that met or exceeded the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000 at June 30, 2024 and December 31, 2023 were $531.3 million and $548.4 million, respectively.

Scheduled maturities of time deposits as of June 30, 2024 were as follows (in thousands):

2024 $ 961,610
2025 541,579
2026 56,779
2027 42,710
Thereafter 36,748
Total $ 1,639,426

The Company had $741.3 million and $615.9 million of brokered deposits as of June 30, 2024 and December 31, 2023, respectively. There were no concentrations of deposits with any one depositor at June 30, 2024 and December 31, 2023.

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8. DERIVATIVE 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 June 30, 2024, management determined there was no such deterioration.

At June 30, 2024 and December 31, 2023, the Company had nine and 15 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in other noninterest income. Fair value amounts are included in other assets and other liabilities.

At June 30, 2024 and December 31, 2023 the Company had three credit risk participation agreements with another financial institution that are associated with interest rate swaps related to loans for which the Company is the lead agent bank and the other financial institution provides credit protection to the Company should the borrower fail to perform under the terms of the interest rate swap agreements. The fair value of the agreements is determined based on the market value of the underlying interest rate swaps adjusted for credit spreads and recovery rates.

Derivative instruments not designated as hedges outstanding as of the periods indicated below were as follows (dollars in thousands):

June 30, 2024
Classification Notional Amounts Fair Value Fixed Rate Floating Rate Weighted Average Maturity (Years)
Interest rate swaps:
Financial institutions Other assets $ 66,889 $ 6,580 3.50% - 5.40% SOFR 1M + 2.50% - 3.00% 6.18
Financial institutions Other assets 4,849 346 4.99% U.S. Prime 3.46
Customers Other liabilities 4,849 (346) 4.99% U.S. Prime 3.46
Customers Other liabilities 66,889 (6,580) 3.50% - 5.40% SOFR 1M + 2.50% - 3.00% 6.18
Credit risk participation agreements:
Financial institutions Other assets 20,348 13 3.50% - 5.40% SOFR 1M + 2.50% 6.82

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December 31, 2023
Classification Notional Amounts Fair Value Fixed Rate Floating Rate Weighted Average Maturity (Years)
Interest rate swaps:
Financial institutions Other assets $ 104,930 $ 6,367 3.25% - 5.58% SOFR 1M + 2.50% - 3.00% 4.51
Financial institutions Other assets 4,911 295 4.99% U.S. Prime 3.96
Customers Other assets 4,875 30 6.25% SOFR 1M + 2.50% 4.04
Financial institutions Other liabilities 4,875 (30) 6.25% SOFR 1M + 2.50% 4.04
Customers Other liabilities 4,911 (295) 4.99% U.S. Prime 3.96
Customers Other liabilities 104,930 (6,367) 3.25% - 5.58% SOFR 1M + 2.50% - 3.00% 4.51
Credit risk participation agreements:
Financial institutions Other assets $ 20,758 $ 20 3.50% - 5.40% SOFR 1M + 2.50% 7.33

9. BORROWINGS AND BORROWING CAPACITY

The Company has an available line of credit with the Federal Home Loan Bank (“FHLB”) of Dallas, which allows the Company to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At June 30, 2024, the Company had a total borrowing capacity of $3.08 billion, of which $1.86 billion was available under this agreement and $1.23 billion was outstanding pursuant to FHLB advances and letters of credit. There were $240.0 million of FHLB short-term advances outstanding at June 30, 2024 at a weighted-average rate of 5.67%.

At June 30, 2024, FHLB letters of credit pledged as collateral for public and other deposits of state and local government agencies totaled $986.0 million, which expire in the following periods (in thousands):

2024 $ 97,915
2025 328,300
2026 57,300
2027 402,500
Thereafter 100,000
Total $ 986,015

On December 13, 2022, Stellar entered into a loan agreement with another financial institution (the “Loan Agreement”) that provides for a $75.0 million revolving line of credit. At June 30, 2024, there were no outstanding borrowings on this line of credit and no draws were taken on this line of credit during the six months ended June 30, 2024. Draws can be made on the line of credit for a period of 24 months, which will end December 13, 2024, after which no further draws are permitted and the outstanding balance will amortize over a period of 60 months. 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 obligations of Stellar under the Loan Agreement are secured by a pledge of all the issued and outstanding shares of capital stock of the Bank.

Covenants made under the Loan Agreement include, among other things, while there are obligations outstanding under Loan Agreement, the Company shall maintain a cash flow to debt service (as defined in the Loan Agreement) of not less than 1.25, the Bank’s Texas Ratio (as defined in the Loan Agreement) not to exceed 25.0% and the Bank shall maintain a Tier 1 Leverage Ratio (as defined under the Loan Agreement) of at least 7.0% and restrictions on the ability of Stellar and its subsidiaries to incur certain additional debt. As of June 30, 2024, the Company believes it was in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.

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10. SUBORDINATED DEBT

Junior Subordinated Debentures

In connection with the acquisition of F&M Bancshares, Inc. in 2015, Stellar assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in Stellar'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 Stellar.. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon Stellar making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. Stellar has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by each trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The trust preferred securities bear a floating rate of interest equal to 3-Month SOFR plus a spread adjustment. 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, Stellar 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 Stellar’s junior subordinated debentures outstanding at June 30, 2024 is set forth in the table below:

Description Issuance<br><br>Date Trust<br><br>Preferred<br><br>Securities<br><br>Outstanding Junior<br><br>Subordinated<br><br>Debt Owed<br><br>to Trusts Maturity<br><br>Date(1)
(Dollars in thousands)
Farmers & Merchants Capital Trust II November 13, 2003 $ 7,500 $ 7,732 November 8, 2033
Farmers & Merchants Capital Trust III June 30, 2005 3,500 3,609 July 7, 2035
$ 11,341
(1) All junior subordinated debentures were callable at June 30, 2024.

Subordinated Notes

In December 2017, the Bank issued $40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the “Bank Notes”) due December 15, 2027. The Bank Notes bear a floating rate of interest equal to 3-Month SOFR plus a spread adjustment 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, 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 are within five years of maturity, only 60% of the notes are eligible for Tier 2 capital treatment at June 30, 2024.

In September 2019, Stellar issued $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 3-Month SOFR, plus 3.13%, for each quarterly interest period, 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.

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11. INCOME TAXES

The amount of the Company’s income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible items.

Three Months Ended Six Months Ended
June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023
Income tax expense $ 7,792 $ 7,467 $ 14,551 $ 17,380
Effective income tax rate 20.8 % 17.5 % 20.7 % 19.4 %

Interest and penalties related to tax positions are recognized in the period in which they begin accruing or when the entity claims the position that does not meet the minimum statutory thresholds. The Company does not have any uncertain tax positions and does not have any interest or penalties recorded in the income statement for the three and six months ended June 30, 2024 and 2023.

12. STOCK BASED COMPENSATION

Under the 2022 Omnibus Incentive Plan (the “2022 Plan”) the Company is authorized to issue a maximum aggregate of 2,000,000 shares of common stock. All restricted stock and performance share awards outstanding at June 30, 2024 were issued under the 2022 Plan. At June 30, 2024, there were 786,851 shares reserved and available for issuance under the 2022 Plan.

The Company accounts for stock based employee compensation plans using the fair value-based method of accounting. The Company recognized total stock based compensation expense of $2.8 million and $2.8 million for both of the three months ended June 30, 2024 and 2023 and $5.6 million and $5.4 million for the six months ended June 30, 2024 and 2023, respectively.

Stock Options

Stock options outstanding at June 30, 2024 were issued under equity compensation plans that are no longer active. No additional shares may be issued under these compensation plans.

Stock option activity during the six months ended June 30, 2024 was as follows:

Number of <br>Options Weighted-<br>Average<br>Exercise<br>Price Weighted-<br>Average<br>Remaining<br>Contractual Term Aggregate<br>Intrinsic<br>Value
(In thousands) (In years) (In thousands)
Options outstanding, January 1, 2024 258 $ 18.56 2.09 $ 2,398
Options granted — —
Options exercised (53) 15.05
Options forfeited (4) 14.11
Options outstanding, June 30, 2024 201 $ 19.57 1.96 $ 791
Options vested and exercisable, June 30, 2024 201 $ 19.57 1.96 $ 791

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 generally vest over a period of two or three years from the date of grant 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 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.

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Nonvested shares of restricted stock activity during the six months ended June 30, 2024 was as follows:

Number of<br>Shares Weighted-<br>Average Grant<br>Date Fair Value
(In thousands)
Nonvested share awards outstanding, January 1, 2024 458 $ 29.38
Share awards granted 311 23.17
Share awards vested (85) 25.18
Unvested share awards forfeited or cancelled (45) 24.88
Nonvested share awards outstanding, June 30, 2024 639 $ 27.23

As of June 30, 2024, there was $11.6 million of unrecognized compensation expense related to restricted stock awards which is expected to be recognized over a weighted-average period of 1.87 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 77,624 PSAs awarded during the six months ended June 30, 2024. The grant date fair value of the PSAs is based on the probable outcome of the applicable performance conditions and is calculated at target based on a combination of the closing market price of our common stock on the grant date and a Monte Carlo simulated fair value in accordance with accounting standards codification (“ASC”) 718. At June 30, 2024, there was $3.6 million of unrecognized compensation expense related to the PSAs, which is expected to be recognized over a weighted-average period of 2.08 years.

13. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States are not included in the Company’s consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

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

June 30, 2024 December 31, 2023
Fixed<br>Rate Variable<br>Rate Fixed<br>Rate Variable<br>Rate
(In thousands)
Commitments to extend credit $ 314,420 $ 1,323,829 $ 367,068 $ 1,425,946
Standby letters of credit 13,807 25,331 16,147 21,514
Total $ 328,227 $ 1,349,160 $ 383,215 $ 1,447,460

At June 30, 2024 and December 31, 2023, the Company had FHLB letters of credit in the amount of $986.0 million and $1.82 billion, respectively, pledged as collateral for public and other deposits of state and local government agencies. For more information on FHLB borrowings, see Note 9 – Borrowings and Borrowing Capacity.

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Commitments to Extend Credit

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

Commitments to make loans are generally made for an approval period of 120 days or less. As of June 30, 2024, the fixed rate loan commitments had interest rates ranging from 2.10% to 13.50% with a weighted average maturity of 2.23 years and a weighted-average rate of 6.95%.

Standby Letters of Credit

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

Litigation

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

14. REGULATORY CAPITAL MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines, and for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Management believes as of June 30, 2024 and December 31, 2023, the Company and the Bank met all capital adequacy requirements to which they were then subject.

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

The Bank’s capital ratios as of June 30, 2024 exceed the minimum levels necessary to be considered “well-capitalized” under the prompt corrective action regulatory framework.

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The following is a summary of the Company’s and the Bank’s actual and required capital ratios as of June 30, 2024 and December 31, 2023:

Actual Minimum Required for Capital<br><br>Adequacy Purposes Minimum Required Plus<br><br>Capital Conservation Buffer To Be Categorized As Well-Capitalized Under<br>Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
STELLAR BANCORP, INC. (Consolidated)
June 30, 2024
Total Capital (to risk-weighted assets) $ 1,283,125 15.34 % $ 669,072 8.00 % $ 878,157 10.50 % N/A N/A
Common Equity Tier 1 Capital (to<br><br>risk-weighted assets) 1,085,328 12.98 % 376,353 4.50 % 585,438 7.00 % N/A N/A
Tier 1 Capital (to risk-weighted assets) 1,095,226 13.10 % 501,804 6.00 % 710,889 8.50 % N/A N/A
Tier 1 Leverage (to average tangible assets) 1,095,226 10.93 % 400,889 4.00 % 400,889 4.00 % N/A N/A
December 31, 2023
Total Capital (to risk-weighted assets) $ 1,221,060 14.02 % $ 696,529 8.00 % $ 914,195 10.50 % N/A N/A
Common Equity Tier 1 Capital (to<br><br>risk-weighted assets) 1,025,076 11.77 % 391,798 4.50 % 604,463 7.00 % N/A N/A
Tier 1 Capital (to risk-weighted assets) 1,034,974 11.89 % 522,397 6.00 % 740,062 8.50 % N/A N/A
Tier 1 Leverage (to average tangible assets) 1,034,974 10.18 % 406,859 4.00 % 406,859 4.00 % N/A N/A
STELLAR BANK
June 30, 2024
Total Capital (to risk-weighted assets) $ 1,223,208 14.65 % $ 668,098 8.00 % $ 876,879 10.50 % $ 835,123 10.00 %
Common Equity Tier 1 Capital (to<br><br>risk-weighted assets) 1,095,348 13.12 % 375,805 4.50 % 584,586 7.00 % 542,830 6.50 %
Tier 1 Capital (to risk-weighted assets) 1,095,348 13.12 % 501,074 6.00 % 709,854 8.50 % 668,098 8.00 %
Tier 1 Leverage (to average tangible assets) 1,095,348 10.94 % 400,435 4.00 % 400,435 4.00 % 500,543 5.00 %
December 31, 2023
Total Capital (to risk-weighted assets) $ 1,186,710 13.65 % $ 695,746 8.00 % $ 913,167 10.50 % $ 869,683 10.00 %
Common Equity Tier 1 Capital (to<br><br>risk-weighted assets) 1,060,624 12.20 % 391,357 4.50 % 608,778 7.00 % 565,294 6.50 %
Tier 1 Capital (to risk-weighted assets) 1,060,624 12.20 % 521,810 6.00 % 739,231 8.50 % 695,746 8.00 %
Tier 1 Leverage (to average tangible assets) 1,060,624 10.44 % 406,453 4.00 % 406,453 4.00 % 508,066 5.00 %

Dividend Restrictions

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. In addition, the Company’s credit agreement with another financial institution also limits its ability to pay dividends. Under applicable banking regulations, the amount of dividends that may be paid by the Bank in any calendar year is limited to the current year’s net profits combined with the retained net profits of the preceding two years, subject to the capital requirements described above.

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15. EARNINGS PER COMMON SHARE

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

Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Amount Per Share<br>Amount Amount Per Share<br>Amount Amount Per Share<br>Amount Amount Per Share<br>Amount
(Amounts in thousands, except per share data)
Net income attributable to shareholders $ 29,753 $ 35,175 $ 55,900 $ 72,323
Basic:
Weighted average shares outstanding 53,572 $ 0.56 53,297 $ 0.66 53,457 $ 1.05 53,160 $ 1.36
Diluted:
Add incremental shares for:
Dilutive effect of stock option exercises and performance share units 36 78 49 101
Total 53,608 $ 0.56 53,375 $ 0.66 53,506 $ 1.04 53,261 $ 1.36

There were 101,166 and 30,074 antidilutive shares as of June 30, 2024 and 2023, respectively.

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

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

Cautionary Notice Regarding Forward-Looking Statements

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

There are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these forward‑looking statements, including, but not limited to, the risks described in “Part I— Item 1A.—Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 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, FDIC 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 the Company’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;

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

•the inability to sustain revenue and earnings growth;

•impairment of the Company’s goodwill or other intangible assets;

•the composition of the Company’s loan portfolio and the concentration of loans in commercial real estate and commercial real estate construction;

•the geographic concentration of the Company’s market;

•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 ability to maintain important deposit customer relationships;

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

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•the risk that the anticipated benefits from the Merger may not be fully realized or may take longer than anticipated to be realized;

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

•natural disasters (including hurricanes) and adverse weather in 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 conflicts in Ukraine or the Middle East, or other international or domestic calamities;

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

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

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

•the impact, extent and timing of technological changes;

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

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

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

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

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

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

Overview

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

Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in our market, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our market and throughout the state of Texas.

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Our net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and borrowed funds, referred to as a “rate change.” Fluctuations in market interest rates are driven by many factors, 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.

Critical Accounting Policies

Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that determining the allowance for credit losses is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1– Nature of Operations and Summary of Significant Accounting and Reporting Policies in our Annual Report on Form 10-K for the year ended December 31, 2023.

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. Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. 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 nonaccrual loans 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. Estimating the timing and amounts of future losses is subject to management’s judgment as these projected cash flows rely upon the estimates discussed above and factors that are reflective of current or future expected conditions using analytical and forecasting models and tools. Volatility in certain credit metrics and differences between expected and actual outcomes are to be expected. For example, 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.

Loans with similar risk characteristics are aggregated into homogenous pools and are collectively evaluated by applying reserve factors, such as historical lifetime loss, concentration risk, volume, growth and composition of the loan portfolio, current and forecasted economic conditions to amortized cost balances over the remaining contractual life of the collectively evaluated portfolio. Historical lifetime loss is determined by utilizing an open-pool (“cumulative loss rate”) methodology, adjusted for credit risk characteristics and current and forecasted economic conditions. Losses are predicted over a reasonable and supportable period of one year for all loan pools, followed by an immediate reversion to long-term historical averages. The reasonable and supportable period and reversion period are re-evaluated as needed by the Company and are dependent on the current economic environment among other factors.

Loans that no longer share risk characteristics with the collectively evaluated loan pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. In order to assess which loans are to be individually evaluated, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Individual credit loss estimates are typically performed for nonaccrual loans, modified loans classified as troubled loan modifications and all other loans identified by management. All loans deemed as being individually evaluated are reviewed on a quarterly basis in order to determine whether a specific reserve is required. The Company considers certain loans to be collateral dependent if the borrower is experiencing financial difficulty and management expects repayment for the loan to be substantially through the operation or sale of the collateral. For collateral dependent loans, loss estimates are based on the fair value of collateral, less estimated cost to sell (if applicable). Collateral values supporting individually evaluated loans are assessed quarterly and appraisals are typically obtained at least annually. The Company allocates a specific loan loss reserve on an individual loan basis primarily based on the value of the collateral securing the individually evaluated loan. Through this loan review process, the Company assesses the overall quality of the loan portfolio and the adequacy of the allowance for credit losses on loans while considering risk elements attributable to particular loan types in assessing the quality of individual loans. In addition, for each category of loans, the Company considers secondary sources of income and the financial strength and credit history of the borrower and any guarantors.

A change in the allowance for credit losses on loans can be attributable to several factors, most notably historical lifetime loss, specific reserves for individually evaluated loans and changes in qualitative factors and growth within the loan portfolio. The estimated loan losses for all loan pools are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully

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accounted for, including adjustments for foresight risk, input imprecision and model imprecision. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in portfolio concentrations, changes in lending policies and procedures, policy exceptions, independent loan review results, internal risk ratings and peer group credit quality trends. Additional qualitative considerations are made for any identified risk which did not exist within our portfolio historically and therefore may not be adequately addressed through evaluation of such risk factors based on historical portfolio trends. Qualitative adjustments also include current and forecasted economic conditions primarily measured by local and national economic metrics, such as GDP, unemployment rates, interest rates and oil and gas prices based on historical and forecasted economic research scenarios provided by industry-leading financial intelligence and analytical solutions, which the Company has subscribed to. The qualitative allowance allocation is increased or decreased for each loan pool based on the assessment of these various qualitative factors. Management recognizes the sensitivity of various assumptions made in the quantitative modeling of expected losses and may adjust reserves depending upon the level of uncertainty that currently exists in one or more assumptions.

As of June 30, 2024, based on sensitivity analyses across all segments of the performing loan portfolio, a 5% increase in historical loss rates would have increased funded reserves by $1.8 million. On the other hand, a 5% increase in each qualitative risk factor across all segments (where assigned) would have increased funded reserves by $3.1 million. An increase of 5 basis points to the estimated loss rates (i.e., quantitative and qualitative) would have a $3.7 million impact.

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.

Goodwill

Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired in a business combination. During the measurement period, the Company may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.

Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company’s policy is to test goodwill for impairment at least annually as of October 1st, or on an interim basis if an event triggering an impairment assessment is determined to have occurred. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. The impairment test compares the estimated fair value of each reporting unit with its net book value. If the unit’s fair value is less than its carrying value, an impairment loss is recognized in our results of operations in the periods in which they become known in an amount equal to this excess.

During 2023, economic uncertainty and market volatility resulting from the rising interest rate environment and bank failures resulted in a decrease in the Company’s stock price and market capitalization. Management believed the collective events met the requirements of a triggering event and an interim goodwill impairment quantitative analysis was performed as of September 30, 2023. The Company engaged an independent third-party service provider to assist management with the determination of the fair value of the Company as of September 30, 2023. A weighted combination of the guideline public company method and income approach method was employed.

In performing the discount cash flow analysis, the Company utilized multi-year cash projections that rely on internal forecasts of loan and deposit growth, bond mix, financing composition, market pricing of securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations.

The discount rate was calculated as the cost of equity capital using the modified capital asset pricing model, which includes variables including the risk-free interest rate, beta, equity risk premium, size premium, and company-specific risk premium.

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The market approach considers a combination of price to book value and price to earnings, adjusted based on companies similar to the reporting unit and adjusted for selected multiples, along with a control premium based on a review of transactions in the banking industry in order to calculate the indicated value of the Company’s equity on a control, marketable basis. The analysis resulted in the Company’s fair value exceeding its carrying value resulting in no impairment charge for the period.

A significant amount of judgment is involved in the determination of the fair value of a reporting unit. Future events could cause the Company to conclude that the Company’s goodwill has become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Management will continue evaluating the economic conditions at future reporting periods for triggering events.

See Note 2 – Goodwill and Other Intangible Assets to the consolidated financial statements for additional information on the Company’s goodwill and intangibles.

Recently Issued Accounting Pronouncements

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

Results of Operations

Net income was $29.8 million, or $0.56 per diluted share, for the three months ended June 30, 2024 compared to $35.2 million, or $0.66 per diluted share, for the three months ended June 30, 2023. The decrease in net income was primarily due to a $6.9 million decrease in net interest income and a $2.0 million increase in noninterest expense, partially offset by a $3.9 million decrease in the provision for credit losses.

Annualized returns on average assets, returns on average equity and efficiency ratios were 1.13%, 7.78% and 66.63%, for the three months ended June 30, 2024, respectively, compared to 1.31%, 9.67% and 60.83% for the three months ended June 30, 2023, respectively. The efficiency ratio is calculated by dividing total noninterest expense by the sum of net interest income plus noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for loan losses are not part of the efficiency ratio calculation.

Net income was $55.9 million, or $1.04 per diluted share, for the six months ended June 30, 2024 compared to $72.3 million, or $1.36 per diluted share, for the six months ended June 30, 2023. The decrease in net income was primarily due to a $20.6 million decrease in net interest income and a $1.3 million decrease in noninterest income, partially offset by a $3.4 million decrease in the provision for credit losses and a $2.8 million decrease in the provision for income taxes.

Annualized returns on average assets, returns on average equity and efficiency ratios were 1.06%, 7.33% and 66.40%, respectively, for the six months ended June 30, 2024, respectively, compared to 1.35%, 10.14% and 59.86%, respectively, for the six months ended June 30, 2023.

Net Interest Income

Three months ended June 30, 2024 compared with three months ended June 30, 2023. Net interest income before the provision for credit losses for the three months ended June 30, 2024 was $101.4 million compared with $108.3 million for the three months ended June 30, 2023, a decrease of $6.9 million, or 6.3%, primarily due to the increase in the cost of funds and average interest-bearing liabilities more than offsetting the increase in interest income.

Interest income was $152.2 million for the three months ended June 30, 2024, an increase of $5.2 million, or 3.6%, compared with $147.0 million for the three months ended June 30, 2023, primarily due to higher-yielding loans and securities. Average interest-earning assets decreased $76.7 million, or 0.8%, for the three months ended June 30, 2024 compared with the three months ended June 30, 2023, primarily due the decrease in average loans, partially offset by increases in securities and deposits in other financial institutions. Average loans to average interest earning assets decreased to 81.2% for the three months ended June 30, 2024 compared to 82.3% for the same period in the prior year. Additionally, interest income from purchase accounting adjustments was $10.1 million for the three months ended June 30, 2024 compared to $12.6 million for the three months ended June 30, 2023.

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Interest expense was $50.8 million for the three months ended June 30, 2024, an increase of $12.1 million, or 31.3%, compared with $38.7 million for the three months ended June 30, 2023. 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 deposits liabilities, partially offset by a decrease in average borrowed funds. The cost of average interest-bearing liabilities increased to 3.59% for the three months ended June 30, 2024 compared to 2.86% for the same period in 2023. Average interest-bearing liabilities increased $265.5 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily due to an increases in certificates and other time deposits and interest-bearing demand deposits partially offset by a decrease in average borrowed funds.

Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the three months ended June 30, 2024 was 4.24%, a decrease of 25 basis points compared to 4.49% for the three months ended June 30, 2023. The decrease in the net interest margin on a tax equivalent basis was primarily due to increased funding costs. The average rate paid on interest-bearing liabilities of 3.59% and the average yield on interest-earning assets of 6.36% for the three months ended June 30, 2024 increased by 73 basis points and 28 basis points, respectively, over the same period in 2023. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the three months ended June 30, 2024 and 2023, thus making tax-exempt yields comparable to taxable asset yields.

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

Three Months Ended June 30,
2024 2023
Average<br>Balance Interest<br>Earned/<br>Interest<br>Paid Average<br>Yield/ Rate Average<br>Balance Interest<br>Earned/<br>Interest<br>Paid Average<br>Yield/ Rate
(Dollars in thousands)
Assets
Interest-earning Assets:
Loans $ 7,808,320 $ 135,885 7.00 % $ 7,980,856 $ 133,931 6.73 %
Securities 1,549,638 12,739 3.31 % 1,502,949 10,162 2.71 %
Deposits in other financial institutions 258,916 3,555 5.52 % 209,722 2,865 5.48 %
Total interest-earning assets 9,616,874 $ 152,179 6.36 % 9,693,527 $ 146,958 6.08 %
Allowance for credit losses on loans (96,306) (96,414)
Noninterest-earning assets 1,103,297 1,143,025
Total assets $ 10,623,865 $ 10,740,138
Liabilities and Shareholders’ Equity
Interest-bearing Liabilities:
Interest-bearing demand deposits $ 1,545,096 $ 12,213 3.18 % $ 1,387,604 $ 9,343 2.70 %
Money market and savings deposits 2,227,393 16,186 2.92 % 2,220,827 11,365 2.05 %
Certificates and other time deposits 1,694,536 18,758 4.45 % 1,225,834 9,622 3.15 %
Borrowed funds 112,187 1,700 6.09 % 479,896 6,535 5.46 %
Subordinated debt 109,910 1,912 7.00 % 109,499 1,812 6.64 %
Total interest-bearing liabilities 5,689,122 $ 50,769 3.59 % 5,423,660 $ 38,677 2.86 %
Noninterest-bearing Liabilities:
Noninterest-bearing demand deposits 3,308,633 3,779,594
Other liabilities 87,986 78,411
Total liabilities 9,085,741 9,281,665
Shareholders’ equity 1,538,124 1,458,473
Total liabilities and shareholders’ equity $ 10,623,865 $ 10,740,138
Net interest rate spread 2.77 % 3.22 %
Net interest income and margin(1) $ 101,410 4.24 % $ 108,281 4.48 %
Net interest income and margin (tax equivalent)(2) $ 101,482 4.24 % $ 108,509 4.49 %
Cost of funds 2.27 % 1.69 %
Cost of deposits 2.16 % 1.41 %

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

(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the three months ended June 30, 2024 and 2023.

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Six months ended June 30, 2024 compared with six months ended June 30, 2023. Net interest income before the provision for credit losses for the six months ended June 30, 2024 was $203.5 million compared with $224.1 million for the six months ended June 30, 2023, a decrease of $20.6 million, or 9.2%, primarily due to the increase in the cost of funds and average interest-bearing liabilities more than offsetting the increase in interest income.

Interest income was $300.6 million for the six months ended June 30, 2024, an increase of $13.2 million, or 4.6%, compared with $287.4 million for the six months ended June 30, 2023, primarily due to higher-yielding loans. Average interest-earning assets decreased $123.1 million, or 1.3%, for the six months ended June 30, 2024 compared with the six months ended June 30, 2023 primarily due decreases in securities and loans. Additionally, interest income from purchase accounting adjustments was $18.6 million for the six months ended June 30, 2024 compared to $22.7 million for the six months ended June 30, 2023.

Interest expense was $97.1 million for the six months ended June 30, 2024, an increase of $33.8 million, or 53.4%, compared with $63.3 million for the six months ended June 30, 2023. This increase was primarily due to higher funding costs on interest-bearing deposits due to higher interest rates on interest-bearing deposits and an increase in average interest-bearing liabilities. The cost of average interest-bearing liabilities increased to 3.48% for the six months ended June 30, 2024 compared to 2.40% for the same period in 2023. Average interest-bearing liabilities increased $291.6 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to an increase in certificates and other time deposits and interest-bearing demand deposits, partially offset by a decrease in average money market and savings deposits and borrowed funds.

Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the six months ended June 30, 2024 was 4.25%, a decrease of 39 basis points compared to 4.64% for the six months ended June 30, 2023. The decrease in the net interest margin on a tax equivalent basis was primarily due to increased funding costs. The average rate paid on interest-bearing liabilities of 3.48% and the average yield on interest-earning assets of 6.28% for the six months ended June 30, 2024 increased by 108 basis points and 34 basis points, respectively, over the same period in 2023. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the six months ended June 30, 2024 and 2023, thus making tax-exempt yields comparable to taxable asset yields.

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

Six Months Ended June 30,
2024 2023
Average<br>Balance Interest<br>Earned/<br>Interest<br>Paid Average<br>Yield/ Rate Average<br>Balance Interest<br>Earned/<br>Interest<br>Paid Average<br>Yield/ Rate
(Dollars in thousands)
Assets
Interest-earning Assets:
Loans $ 7,873,572 $ 270,570 6.91 % $ 7,914,303 $ 259,660 6.62 %
Securities 1,495,726 22,850 3.07 % 1,553,200 21,077 2.74 %
Deposits in other financial institutions 261,911 7,182 5.52 % 286,823 6,636 4.67 %
Total interest-earning assets 9,631,209 $ 300,602 6.28 % 9,754,326 $ 287,373 5.94 %
Allowance for credit losses on loans (93,959) (94,881)
Noninterest-earning assets 1,118,077 1,151,497
Total assets $ 10,655,327 $ 10,810,942
Liabilities and Shareholders’ Equity
Interest-bearing Liabilities:
Interest-bearing demand deposits $ 1,621,154 $ 24,491 3.04 % $ 1,518,213 $ 17,725 2.35 %
Money market and savings deposits 2,189,099 31,438 2.89 % 2,355,112 21,020 1.80 %
Certificates and other time deposits 1,569,292 33,842 4.34 % 1,044,721 12,929 2.50 %
Borrowed funds 123,293 3,474 5.67 % 293,578 7,852 5.39 %
Subordinated debt 109,859 3,829 7.01 % 109,458 3,739 6.89 %
Total interest-bearing liabilities 5,612,697 $ 97,074 3.48 % 5,321,082 $ 63,265 2.40 %
Noninterest-bearing Liabilities:
Noninterest-bearing demand deposits 3,417,196 3,971,862
Other liabilities 92,223 79,609
Total liabilities 9,122,116 9,372,553
Shareholders’ equity 1,533,211 1,438,389
Total liabilities and shareholders’ equity $ 10,655,327 $ 10,810,942
Net interest rate spread 2.80 % 3.54 %
Net interest income and margin(1) $ 203,528 4.25 % $ 224,108 4.63 %
Net interest income and margin (tax equivalent)(2) $ 203,688 4.25 % $ 224,628 4.64 %
Cost of funds 2.16 % 1.37 %
Cost of deposits 2.05 % 1.17 %

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

(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the six months ended June 30, 2024 and 2023.

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

Three Months Ended June 30, Six Months Ended June 30,
2024 vs. 2023 2024 vs. 2023
Increase (Decrease)<br>Due to Change in Increase (Decrease)<br>Due to Change in
Volume Rate Total Volume Rate Total
(In thousands)
Interest-earning Assets:
Loans $ (2,887) $ 4,841 $ 1,954 $ (1,341) $ 12,251 $ 10,910
Securities 315 2,262 2,577 (783) 2,556 1,773
Deposits in other financial institutions 670 20 690 (579) 1,125 546
Total (decrease) increase in interest income (1,902) 7,123 5,221 (2,703) 15,932 13,229
Interest-bearing Liabilities:
Interest-bearing demand deposits 1,057 1,813 2,870 1,203 5,563 6,766
Money market and savings deposits 33 4,788 4,821 (1,486) 11,904 10,418
Certificates and other time deposits 3,671 5,465 9,136 6,521 14,392 20,913
Borrowed funds (4,992) 157 (4,835) (4,564) 186 (4,378)
Subordinated debt 7 93 100 14 76 90
Total (decrease) increase in interest expense (224) 12,316 12,092 1,688 32,121 33,809
Decrease in net interest income $ (1,678) $ (5,193) $ (6,871) (4,391) (16,189) $ (20,580)

Provision for Credit Losses

Our allowance for credit losses is established through charges to income in the form of the provision in order to bring our allowance for credit losses for various types of financial instruments including loans, unfunded commitments and securities to a level deemed appropriate by management. We recorded a reversal of provision for credit losses of $1.9 million and a provision for credit losses of $1.9 million for the three months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024 and 2023, we recorded a provision for credit losses of $2.2 million and $5.6 million, respectively. The reversal of provision for credit losses for the three months ended June 30, 2024 was primarily due to the decrease in loan growth. The provision for credit losses for the six months ended June 30, 2024 primarily resulted from changes to the specific reserves within the allowance for credit losses model, among other things, partially offset by the decrease in loan growth. See further discussion of the allowance for credit losses in “Financial Condition-Asset Quality.”

Noninterest Income

Our primary sources of noninterest income are service charges on deposit accounts, debit card and ATM income and income earned on bank-owned life insurance. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method.

Three months ended June 30, 2024 compared with three months ended June 30, 2023. Noninterest income totaled $5.4 million for the three months ended June 30, 2024 compared with $5.5 million for the same period in 2023, a decrease of $67 thousand, or 1.2%, primarily due to decreased debt card and ATM income due the impact of the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Durbin Amendment”).

Six months ended June 30, 2024 compared with six months ended June 30, 2023. Noninterest income totaled $11.7 million for the six months ended June 30, 2024 compared with $13.0 million for the same period in 2023, a decrease of $1.3 million, or 9.8%, primarily due to decreased debt card and ATM income due the impact of the Durbin Amendment.

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

Three Months Ended June 30, Increase<br>(Decrease) Six Months Ended June 30, Increase <br>(Decrease)
2024 2023 2024 2023
(In thousands)
Service charges on deposit accounts $ 1,648 $ 1,575 $ 73 $ 3,246 $ 2,924 $ 322
(Loss) gain on sale of assets (64) (6) (58) 449 192 257
Bank-owned life insurance income 591 532 59 1,178 1,054 124
Debit card and ATM income 543 1,821 (1,278) 1,070 3,519 (2,449)
Other(1) 2,698 1,561 1,137 5,769 5,292 477
Total noninterest income $ 5,416 $ 5,483 $ (67) $ 11,712 $ 12,981 $ (1,269)

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

Noninterest Expense

Three months ended June 30, 2024 compared with three months ended June 30, 2023. Noninterest expense was $71.2 million for the three months ended June 30, 2024 compared to $69.2 million for the three months ended June 30, 2023, an increase of $2.0 million, or 2.9%, primarily due to an increase of $1.8 million in salaries and employee benefits and a $2.4 million increase other noninterest expenses, partially offset by decreased acquisition and merger-related expenses of $2.9 million.

Six months ended June 30, 2024 compared with six months ended June 30, 2023. Noninterest expense was $142.6 million for the six months ended June 30, 2024 compared to $141.8 million for the six months ended June 30, 2023, an increase of $821 thousand, or 0.6%, primarily due to a $3.4 million increase in salaries and employee benefits, a $1.2 million increase in professional fees and a $4.4 million increase in other noninterest expenses, partially offset by a $9.1 million decrease in acquisition and merger-related expenses.

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

Three Months Ended June 30, Increase<br>(Decrease) Six Months Ended June 30, Increase <br>(Decrease)
2024 2023 2024 2023
(In thousands)
Salaries and employee benefits(1) $ 39,061 $ 37,300 $ 1,761 $ 80,437 $ 77,075 $ 3,362
Net occupancy and equipment 4,503 3,817 686 8,893 7,905 988
Depreciation 1,948 1,841 107 3,912 3,677 235
Data processing and software amortization 5,501 4,674 827 10,395 9,728 667
Professional fees 1,620 1,564 56 4,282 3,091 1,191
Regulatory assessments and FDIC insurance 2,299 2,755 (456) 4,153 4,049 104
Amortization of intangibles 6,215 6,881 (666) 12,427 13,760 (1,333)
Communications 847 689 158 1,784 1,390 394
Advertising 891 907 (16) 1,656 1,746 (90)
Acquisition and merger-related expenses — 2,897 (2,897) — 9,062 (9,062)
Other 8,331 5,882 2,449 14,687 10,322 4,365
Total noninterest expense $ 71,216 $ 69,207 $ 2,009 $ 142,626 $ 141,805 $ 821

(1)Total salaries and employee benefits includes $2.8 million for each of the three months ended June 30, 2024 and 2023 and $5.6 million and $5.4 million for the six months ended June 30, 2024 and 2023, respectively, of stock-based compensation expense.

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Salaries and employee benefits. Salaries and benefits increased $1.8 million in the three months ended June 30, 2024 and $3.4 million in the six months ended June 30, 2024, compared to the same periods in 2023 primarily due to annual salary increases, increases in full-time equivalent employees and severance expense recorded in 2024.

Professional fees. Professional fees increased $56 thousand during the three months ended June 30, 2024 and $1.2 million during the six months ended June 30, 2024, compared to the same periods in 2023, primarily due to increased consulting fees for various projects, some of which related to the Company’s assets crossing the $10 billion threshold.

Acquisition and merger-related expenses. Acquisition and merger-related expenses of $2.9 million and $9.1 million incurred during the three months and six months ended June 30, 2023, respectively, were primarily related to compensation, legal and advisory fees associated with the Merger. No acquisition and merger-related expenses were incurred during the three and six months ended June 30, 2024.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of our performance. We calculate our efficiency ratio by dividing total noninterest expense by the sum of net interest income and noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for credit losses are not part of this calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio was 66.63% for the three months ended June 30, 2024 compared to 60.83% for the three months ended June 30, 2023 and 66.40% for the six months ended June 30, 2024 compared to 59.86% for the six months ended June 30, 2023, respectively.

We monitor the efficiency ratio in comparison with changes in our total assets and loans, and we believe that maintaining or reducing the efficiency ratio during periods of growth demonstrates the scalability of our operating platform. We expect to continue to benefit from our scalable platform in future periods as we continue to monitor overhead expenses necessary to support our growth.

Income Taxes

The amount of federal and state income tax expense is influenced by the amount of pre-tax income, tax-exempt income and other nondeductible expenses. Income tax expense increased $325 thousand for the three months ended June 30, 2024 and decreased $2.8 million for the six months ended June 30, 2024 compared with the same period in 2023 primarily due to the decrease in pre-tax net income. Our effective tax rate was 20.8% and 17.5% for the three months ended June 30, 2024 and 2023, respectively, and 20.7% and 19.4% for the six months ended June 30, 2024 and 2023, respectively.

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Financial Condition

Loan Portfolio

At June 30, 2024, total loans were $7.71 billion, a decrease of $211.2 million, or 2.7%, compared with December 31, 2023. Total loans as a percentage of deposits were 88.4% and 89.3% as of June 30, 2024 and December 31, 2023, respectively. Total loans as a percentage of assets were 71.9% and 74.4% as of June 30, 2024 and December 31, 2023, respectively.

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

June 30, 2024 December 31, 2023
Amount Percent Amount Percent
(Dollars in thousands)
Commercial and industrial $ 1,392,435 18.1 % $ 1,409,002 17.8 %
Paycheck Protection Program (PPP) 3,629 — % 5,100 0.1 %
Real estate:
Commercial real estate (including multi-family residential) 4,029,671 52.2 % 4,071,807 51.3 %
Commercial real estate construction and land development 922,805 12.0 % 1,060,406 13.4 %
1-4 family residential (including home equity) 1,098,681 14.2 % 1,047,174 13.2 %
Residential construction 200,134 2.6 % 267,357 3.4 %
Consumer and other 66,542 0.9 % 64,287 0.8 %
Total loans 7,713,897 100.0 % 7,925,133 100.0 %
Allowance for credit losses on loans (94,772) (91,684)
Loans, net $ 7,619,125 $ 7,833,449

Our lending activities originate from the efforts of our bankers with an emphasis on lending to individuals, professionals, small- to medium-sized businesses and commercial companies generally located in our market. Our strategy for credit risk management generally includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for credit exposures. The strategy generally emphasizes regular credit examinations and management reviews of loans. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. We maintain an independent loan review which includes third-party loan review services to review the credit risk on a periodic basis. The internal loan review department focuses on credits not reviewed by the third-party loan reviewer to ensure more complete coverage of credit risk. Results of these reviews are presented to management and the risk committee of the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by bankers and credit personnel and contained in our policies and procedures.

The principal categories of our loan portfolio are discussed below:

Commercial and Industrial. We make commercial and industrial loans in our market area that are underwritten on the basis of the borrower’s ability to service the debt from income. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and therefore typically yield a higher return. The increased risk in commercial loans derives from the expectation that commercial and industrial loans generally are serviced principally from the operations of the business, which may not be successful and from the type of collateral securing these loans. As a result, commercial and industrial loans require more extensive underwriting and servicing than other types of loans. Our commercial and industrial loan portfolio decreased by $16.6 million, or 1.2%, to $1.39 billion as of June 30, 2024 from $1.41 billion as of December 31, 2023.

Paycheck Protection Program (“PPP”). The balance of PPP loans decreased $1.5 million to $3.6 million as of June 30, 2024 from $5.1 million as of December 31, 2023 due to loan forgiveness.

Commercial Real Estate (Including Multi-Family Residential). We make loans collateralized by owner-occupied, nonowner-occupied and multi-family real estate to finance the purchase or ownership of real estate. Our commercial real estate loan portfolio decreased $42.1 million, or 1.0%, to $4.03 billion as of June 30, 2024 from $4.07 billion as of December 31, 2023. As of June 30, 2024 and December 31, 2023, 47.5% and 46.6%, respectively, of our commercial real estate loans were owner-occupied. Our commercial real estate portfolio includes $423.3 million of multi-family residential loans as of June 30, 2024 and $488.8 million as of December 31, 2023. We had 227 multi-family residential loans with an average loan size of $1.9 million as of June 30, 2024.

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As of June 30, 2024, our commercial real estate (including multi-family residential) loan portfolio included $234.4 million of multifamily community development loans with associated tax credits, which fund Texas-based projects to promote affordable housing, compared to $298.9 million as of December 31, 2023.

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 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. Commercial real estate construction and land development loans decreased $137.6 million, or 13.0%, to $922.8 million as of June 30, 2024 compared to $1.06 billion as of December 31, 2023. As of June 30, 2024 and December 31, 2023, 13.4% and 21.1%, respectively, of our commercial real estate construction and land development loans were owner-occupied.

As of June 30, 2024, our commercial real estate construction and land development portfolio included $127.3 million of construction and development loans to support multifamily community development loans with associated tax credits, which fund Texas-based projects to promote affordable housing, compared to $80.5 million as of December 31, 2023.

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 areas. Our residential real estate portfolio (including home equity) increased $51.5 million, or 4.9%, compared to December 31, 2023 to $1.10 billion as of June 30, 2024.

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 decreased $67.2 million, or 25.1%, to $200.1 million as of June 30, 2024 from $267.4 million as of December 31, 2023.

Consumer and Other. Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes and deferred fees and costs on all loan types. Generally, consumer loans entail greater risk than residential real estate loans because they may be unsecured or if secured the value of the collateral, such as an automobile or boat, may be more difficult to assess and more likely to decrease in value than real estate. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. Our consumer and other loan portfolio increased $2.3 million, or 3.5%, to $66.5 million as of June 30, 2024 from $64.3 million as of December 31, 2023.

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Asset Quality

We have procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our officers and monitor our delinquency levels for any negative or adverse trends.

Nonperforming Assets

Nonperforming assets totaled $53.5 million, or 0.50% of total assets, at June 30, 2024 compared to $39.2 million, or 0.37%, of total assets at December 31, 2023. Nonaccrual loans consisted of 158 separate credits at June 30, 2024 compared to 114 separate credits at December 31, 2023. The following table presents information regarding nonperforming assets as of the dates indicated.

June 30, 2024 December 31, 2023
(Dollars in thousands)
Nonaccrual loans:
Commercial and industrial $ 18,448 $ 5,048
Paycheck Protection Program (PPP) 3 —
Real estate:
Commercial real estate (including multi-family residential) 18,094 16,699
Commercial real estate construction and land development 1,641 5,043
1-4 family residential (including home equity) 12,454 8,874
Residential construction 155 3,288
Consumer and other 111 239
Total nonaccrual loans 50,906 39,191
Accruing loans 90 or more days past due — —
Total nonperforming loans 50,906 39,191
Other real estate 2,548 —
Total nonperforming assets $ 53,454 $ 39,191
Troubled loan modifications(1) $ 7,963 $ 15,727
Nonperforming assets to total assets 0.50 % 0.37 %
Nonperforming loans to total loans 0.66 % 0.49 %

(1)Troubled loan modifications are loans that were modified that are not included in nonperforming loans.

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 accounting standards codification topic (“ASC”) 326, “Financial Instruments - Credit Losses” 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 Significant Accounting and Reporting Policies and Note 4 – Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statements.

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Allowance for Credit Losses on Loans

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

At June 30, 2024, our allowance for credit losses on loans was $94.8 million, or 1.23% of total loans, compared with $91.7 million, or 1.16% of total loans, as of December 31, 2023. The increase in the allowance for credit losses on loans during 2024 primarily resulted from changes to the specific reserves within the allowance for credit losses model, among other things. The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:

June 30,
2024 2023
(Dollars in thousands)
Average loans outstanding $ 7,873,572 $ 7,914,303
Gross loans outstanding at end of period 7,713,897 8,068,718
Allowance for credit losses on loans at beginning of period 91,684 93,180
Provision for credit losses on loans 3,801 7,443
Charge-offs:
Commercial and industrial loans (810) (1,484)
Real estate:
Commercial real estate (including multi-family residential) (527) —
Commercial real estate construction and land development — —
1-4 family residential (including home equity) — (23)
Residential construction — —
Consumer and other (105) (38)
Total charge-offs for all loan types (1,442) (1,545)
Recoveries:
Commercial and industrial loans 715 1,069
Real estate:
Commercial real estate (including multi-family residential) — 14
Commercial real estate construction and land development — —
1-4 family residential (including home equity) 6 9
Residential construction — —
Consumer and other 8 25
Total recoveries for all loan types 729 1,117
Net charge-offs (713) (428)
Allowance for credit losses on loans at end of period $ 94,772 $ 100,195
Allowance for credit losses on loans to total loans 1.23 % 1.24 %
Net charge-offs to average loans(1) 0.02 % 0.01 %
Allowance for credit losses on loans to nonperforming loans 186.17 % 231.14 %

(1)Annualized.

Allowance for Credit Losses on Unfunded Commitments

The allowance for credit losses on unfunded commitments estimates current expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The allowance for credit losses on unfunded commitments is a liability account reported as a component of other liabilities in our consolidated balance sheets and is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate

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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 June 30, 2024, our allowance for credit losses on unfunded commitments was $9.7 million compared to $11.3 million at December 31, 2023.

Available for Sale Securities

We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and to meet pledging and regulatory capital requirements. As of June 30, 2024, the carrying amount of investment securities totaled $1.63 billion, an increase of $235.3 million, or 16.9%, compared with $1.40 billion as of December 31, 2023. Securities represented 15.2% and 13.1% of total assets as of June 30, 2024 and December 31, 2023, respectively.

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

June 30, 2024
Amortized<br>Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair <br>Value
(In thousands)
Available for Sale
U.S. government and agency securities $ 290,354 $ 261 $ (8,445) $ 282,170
Municipal securities 220,518 869 (26,778) 194,609
Agency mortgage-backed pass-through securities 473,300 61 (40,179) 433,182
Agency collateralized mortgage obligations 688,587 257 (66,999) 621,845
Corporate bonds and other 111,574 23 (12,432) 99,165
Total $ 1,784,333 $ 1,471 $ (154,833) $ 1,630,971 December 31, 2023
--- --- --- --- --- --- --- --- ---
Amortized<br> Cost Gross<br>Unrealized<br>Gains Gross<br>Unrealized<br>Losses Fair <br>Value
(In thousands)
Available for Sale
U.S. government and agency securities $ 307,529 $ 90 $ (10,201) $ 297,418
Municipal securities 229,615 1,615 (27,171) 204,059
Agency mortgage-backed pass-through securities 424,664 370 (37,161) 387,873
Agency collateralized mortgage obligations 462,498 172 (64,553) 398,117
Corporate bonds and other 120,824 56 (12,667) 108,213
Total $ 1,545,130 $ 2,303 $ (151,753) $ 1,395,680

Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under ASC 326. See Note 3 – Securities in the accompanying notes to the consolidated financial statements for additional information. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of June 30, 2024, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore, no losses have been recognized in the Company’s consolidated statements of income.

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The following tables summarize the contractual maturity of securities and their weighted average yields as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. Available for sale securities are shown at amortized cost. For purposes of the tables below, municipal securities are calculated on a tax equivalent basis.

June 30, 2024
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 $ 74,987 0.81 % $ 77,323 1.26 % $ 5,764 4.78 % $ 132,280 4.84 % $ 290,354 2.84 %
Municipal securities — 0.00 % 2,102 4.76 % 66,863 2.44 % 151,553 2.68 % 220,518 2.63 %
Agency mortgage-backed pass-through securities 3,895 2.64 % 1,305 3.07 % 11,667 4.35 % 456,433 3.72 % 473,300 3.73 %
Agency collateralized mortgage obligations — 0.00 % 28,942 3.76 % 49,022 5.76 % 610,623 2.75 % 688,587 3.00 %
Corporate bonds and other 1,093 1.44 % 3,000 5.75 % 58,000 5.03 % 49,481 3.04 % 111,574 4.13 %
Total $ 79,975 0.91 % $ 112,672 2.11 % $ 191,316 4.26 % $ 1,400,370 3.27 % $ 1,784,333 3.19 % December 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 $ 84,932 1.35 % $ 78,193 1.31 % $ 7,442 4.69 % $ 136,962 4.61 % $ 307,529 2.87 %
Municipal securities — 0.00 % 1,806 4.78 % 67,735 2.35 % 160,074 2.65 % 229,615 2.58 %
Agency mortgage-backed pass-through securities 640 2.98 % 4,852 2.92 % 12,025 4.32 % 407,147 3.45 % 424,664 3.47 %
Agency collateralized mortgage obligations — 0.00 % 11,170 2.80 % 7,869 2.66 % 443,459 1.90 % 462,498 1.93 %
Corporate bonds and other 1,077 2.50 % 3,000 5.75 % 62,368 4.75 % 54,379 2.98 % 120,824 3.96 %
Total $ 86,649 1.37 % $ 99,021 1.76 % $ 157,439 3.58 % $ 1,202,021 2.88 % $ 1,545,130 2.80 %

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 the security.

As of June 30, 2024 and December 31, 2023, 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 3.07% for the six months ended June 30, 2024 compared with 2.74% for the six months ended June 30, 2023. The increase in average yield during the six months ended June 30, 2024 compared to the same period in 2023 was primarily due to the mix of higher-yielding securities within the portfolio.

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Goodwill and Core Deposit Intangibles

Our goodwill was $497.3 million as of both June 30, 2024 and December 31, 2023. Goodwill resulting from business combinations represents the excess of the consideration paid over the fair value of the 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 June 30, 2024 was $104.3 million and $116.7 million as of December 31, 2023. Core deposit intangibles are amortized using the straight-line or an accelerated method over the estimated useful life of seven to ten years.

Deposits

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

Total deposits at June 30, 2024 were $8.73 billion, a decrease of $148.2 million, or 1.7%, compared with $8.87 billion at December 31, 2023 primarily driven by industry-wide pressures and the maintenance of pricing discipline in an intensely competitive market for deposits. Noninterest-bearing deposits at June 30, 2024 were $3.31 billion, a decrease of $238.4 million, or 6.7%, compared with $3.55 billion at December 31, 2023. Interest-bearing deposits at June 30, 2024 were $5.42 billion, an increase of $90.2 million, or 1.7%, compared with $5.33 billion at December 31, 2023. Estimated uninsured deposits totaled $4.79 billion and estimated uninsured deposits net of collateralized deposits of $1.01 billion were $3.78 billion, or 43.3%, of total deposits at June 30, 2024.

The following table sets forth the amount of time deposits that met or exceeded the FDIC insurance limit of $250 thousand by time remaining until maturity at June 30, 2024 (in thousands):

Three months or less $ 177,906
Over three months through six months 230,914
Over six months through 12 months 91,142
Over 12 months 31,387
Total $ 531,349

Borrowings

We have an available line of credit with the Federal Home Loan Bank (“FHLB”) of Dallas, which allows us to borrow on a collateralized basis. FHLB advances are used to manage liquidity. The advances are secured by a blanket lien on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At June 30, 2024, we had a total borrowing capacity of $3.08 billion, of which $1.86 billion was available and $1.23 billion was outstanding pursuant to FHLB advances and letters of credit. There were $240.0 million of FHLB short-term advances outstanding at June 30, 2024 at a weighted-average rate of 5.67%.

At June 30, 2024, the Company had FHLB letters of credit pledged as collateral for public and other deposits of state and local government agencies totaling $986.0 million, which expire in the following periods (in thousands):

2024 $ 97,915
2025 328,300
2026 57,300
2027 402,500
Thereafter 100,000
Total $ 986,015

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Credit Agreement

On December 13, 2022, Stellar entered into a loan agreement with another financial institution (the “Loan Agreement”) that provides for a $75.0 million revolving line of credit. At June 30, 2024, there were no outstanding borrowings on this line of credit and no draws were taken on this line of credit during the six months ended June 30, 2024. Draws can be made on the line of credit for a period of 24 months, which will end December 13, 2024, after which no further draws are permitted and the outstanding balance will amortize over a period of 60 months. 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 obligations of Stellar under the Loan Agreement are secured by a pledge of all the issued and outstanding shares of capital stock of the Bank.

Covenants made under the Loan Agreement include, among other things, while there are obligations outstanding under Loan Agreement, the Company shall maintain a cash flow to debt service (as defined in the Loan Agreement) of not less than 1.25, the Bank’s Texas Ratio (as defined in the Loan Agreement) not to exceed 25.0% and the Bank shall maintain a Tier 1 Leverage Ratio (as defined under the Loan Agreement) of at least 7.0% and restrictions on the ability of Stellar and its subsidiaries to incur certain additional debt. As of June 30, 2024, the Company believes it was in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.

Junior Subordinated Debentures

In connection with the acquisition of F&M Bancshares, Inc. in 2015, Stellar assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in Stellar'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 Stellar.. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon Stellar making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. Stellar has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by each trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The trust preferred securities bear a floating rate of interest equal to 3-Month SOFR plus a spread adjustment. 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, Stellar 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 Stellar’s junior subordinated debentures outstanding at June 30, 2024 is set forth in the table below:

Description Issuance<br><br>Date Trust<br><br>Preferred<br><br>Securities<br><br>Outstanding Junior<br><br>Subordinated<br><br>Debt Owed<br><br>to Trusts Maturity<br><br>Date(1)
(Dollars in thousands)
Farmers & Merchants Capital Trust II November 13, 2003 $ 7,500 $ 7,732 November 8, 2033
Farmers & Merchants Capital Trust III June 30, 2005 3,500 3,609 July 7, 2035
$ 11,341

(1) All junior subordinated debentures were callable at June 30, 2024.

Subordinated Notes

In December 2017, the Bank issued $40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the “Bank Notes”) due December 15, 2027. The Bank Notes bear a floating rate of interest equal to 3-Month SOFR plus a spread adjustment 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, 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

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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 are within five years of maturity, only 60% of the notes are eligible for Tier 2 capital treatment at June 30, 2024.

In September 2019, Stellar issued $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 3-Month SOFR, plus 3.13%, for each quarterly interest period, 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.

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 June 30, 2024 and December 31, 2023, we had outstanding $1.64 billion and $1.79 billion, respectively, in commitments to extend credit and $39.1 million and $37.7 million in commitments associated with outstanding letters of credit for those same periods. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

Liquidity and Capital Resources

Liquidity

Liquidity is the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital, strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and manage unexpected events, all at a reasonable cost. During the six months ended June 30, 2024 and the year ended December 31, 2023, our liquidity needs have been primarily met by deposits, borrowed funds and securities. The Bank has access to purchased funds from correspondent banks, the Federal Reserve discount window and advances from the FHLB, on a collateralized basis, are available under a security and pledge agreement to take advantage of investment opportunities.

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

Our largest source of funds is deposits and our largest use of funds is loans. Average total deposits decreased $93.2 million, or 1.0%, and average loans decreased $40.7 million, or 0.51%, during the six months ended June 30, 2024 compared to the six months

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ended June 30, 2023. Our average deposit account size was $78 thousand at June 30, 2024. 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 7.4 years and 7.6 years at June 30, 2024 and December 31, 2023, respectively.

Total immediate contingent funding sources, including unrestricted cash, available-for-sale securities that are not pledged and total available borrowing capacity was $4.14 billion, or 47.4% of total deposits at June 30, 2024. Including policy-driven capacity for brokered deposits, the Bank would have been able to add approximately $1.01 billion to its contingent sources of liquidity, bringing total contingent funding sources to approximately $5.15 billion, or 59.0%, of deposits at June 30, 2024.

As of June 30, 2024 and December 31, 2023, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.

Capital Resources

Capital management consists of providing equity to support our current and future operations. We are subject to capital adequacy requirements imposed by the Federal Reserve and the Bank is subject to capital adequacy requirements imposed by the FDIC. Both the Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

Under current guidelines, the minimum ratio of total capital to risk-weighted assets (which are primarily the credit risk equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is 8.0%. At least half of total capital must be composed of Tier 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 and maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category.

Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including: termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver.

As of June 30, 2024 and December 31, 2023, the Bank was well-capitalized under regulatory capital guidelines. Total shareholders’ equity was $1.57 billion at June 30, 2024 compared with $1.52 billion at December 31, 2023, an increase of $44.8 million. This increase was primarily due to net income of $55.9 million partially offset by the $0.26 per common share dividend paid for the six months ended June 30, 2024 and a $3.1 million increase in the accumulated other comprehensive loss, which represents a decrease in the fair value of the Company’s securities.

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The following is a summary of the Company’s and the Bank’s actual and required capital ratios as of June 30, 2024 and December 31, 2023.

Actual<br>Ratio Minimum<br>Required<br>For Capital<br>Adequacy<br>Purposes Minimum<br>Required<br>Plus Capital<br>Conservation<br>Buffer To Be<br>Categorized As<br>Well-Capitalized<br>Under Prompt<br>Corrective<br>Action Provisions
Stellar Bancorp, Inc. (Consolidated)
June 30, 2024
Total Capital (to risk-weighted assets) 15.34 % 8.00 % 10.50 % N/A
Common Equity Tier 1 capital (to risk-weighted assets) 12.98 % 4.50 % 7.00 % N/A
Tier 1 Capital (to risk-weighted assets) 13.10 % 6.00 % 8.50 % N/A
Tier 1 Leverage (to average tangible assets) 10.93 % 4.00 % 4.00 % N/A
December 31, 2023
Total Capital (to risk-weighted assets) 14.02 % 8.00 % 10.50 % N/A
Common Equity Tier 1 capital (to risk-weighted assets) 11.77 % 4.50 % 7.00 % N/A
Tier 1 Capital (to risk-weighted assets) 11.89 % 6.00 % 8.50 % N/A
Tier 1 Leverage (to average tangible assets) 10.18 % 4.00 % 4.00 % N/A
Stellar Bank
June 30, 2024
Total Capital (to risk-weighted assets) 14.65 % 8.00 % 10.50 % 10.00 %
Common Equity Tier 1 capital (to risk-weighted assets) 13.12 % 4.50 % 7.00 % 6.50 %
Tier 1 Capital (to risk-weighted assets) 13.12 % 6.00 % 8.50 % 8.00 %
Tier 1 Leverage (to average tangible assets) 10.94 % 4.00 % 4.00 % 5.00 %
December 31, 2023
Total Capital (to risk-weighted assets) 13.65 % 8.00 % 10.50 % 10.00 %
Common Equity Tier 1 capital (to risk-weighted assets) 12.20 % 4.50 % 7.00 % 6.50 %
Tier 1 Capital (to risk-weighted assets) 12.20 % 6.00 % 8.50 % 8.00 %
Tier 1 Leverage (to average tangible assets) 10.44 % 4.00 % 4.00 % 5.00 %

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and Interest Rate Risk

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

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

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

Our exposure to interest rate risk is managed by the Asset Liability Committee (“ALCO”). The ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.

We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively. All instruments on the balance sheet are modeled at the instrument level, incorporating all relevant attributes such as next reset date, reset frequency and call dates, as well as prepayment assumptions for loans and securities and decay rates for nonmaturity deposits. Assumptions based on past experience are incorporated into the model for nonmaturity deposit account decay rates. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

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

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

Change in Interest<br>Rates (Basis Points) Percent Change in Net Interest Income Percent Change in Economic Value of Equity
June 30, 2024 December 31, 2023 June 30, 2024 December 31, 2023
+300 (0.8)% (0.9)% (3.7)% (0.9)%
+200 (0.4)% (0.6)% (1.1)% 1.8%
+100 (0.1)% 0.1% 0.2% 3.4%
Base 0.0% 0.0% 0.0% 0.0%
-100 (0.8)% 0.5% (2.0)% 1.0%
-200 (1.8)% 0.2% (6.2)% (3.6)%

These results are primarily due to the size of our cash position, the size and duration of our loan and securities portfolio, the duration of our borrowings and the expected behavior of demand, money market and savings deposits during such rate fluctuations. During the six months ended June 30, 2024, changes in our overall interest rate profile were driven by the decrease in noninterest bearing deposits and certain interest bearing deposits, increases in certificates of deposits and borrowed funds, an increase in loans and decreases in securities and cash and cash equivalents.

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ITEM 4. CONTROLS AND PROCEDURES

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

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed by the Company. Investors should carefully consider the risks described in “Part I—Item 1A.—Risk Factors” in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2023 and the Company’s other SEC filings.

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

During the second quarter of 2024, the Company’s Board of Directors authorized a share repurchase program to provide that the Company may repurchase up to $60 million of the Company’s common stock through May 31, 2025.

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

There were no shares repurchased by the Company under this plan during the three months ended June 30, 2024. The number of shares that may be repurchased under the plan was 2,613,241, which was computed based on the closing share price of the Company's common stock, as of June 30, 2024.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None of the Company’s directors or officers adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s quarter ended June 30, 2024, as such terms are defined under Item 408(a) of Regulation S-K.

ITEM 6. EXHIBITS

Exhibit<br>Number Description
3.1 Second Amended and Restated Certificate of Formation of Stellar Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 3, 2022)
3.2 Bylaws of Stellar Bancorp, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 3, 2022)
10.1* Stellar Bancorp, Inc. Form of Performance Share Award Agreement
10.2* Stellar Bancorp, Inc. Form of Restricted Stock Award Agreement
31.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1** Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

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

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

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SIGNATURES

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

Stellar Bancorp, Inc.<br><br>(Registrant)
Date: July 26, 2024 /s/ Robert R. Franklin, Jr.
Robert R. Franklin, Jr.
Chief Executive Officer
Date: July 26, 2024 /s/ Paul P. Egge
Paul P. Egge
Chief Financial Officer

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Document

Exhibit 10.1

PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD GRANT NOTICE

STELLAR BANCORP, INC.

2022 OMNIBUS INCENTIVE PLAN

Stellar Bancorp, Inc., a Texas corporation (the “Company” or “Stellar”), pursuant to its 2022 Omnibus Incentive Plan (the “Plan”), hereby grants to the individual listed below (“Participant”), this award (“Award”) of performance-based restricted stock units (the “PRSUs”). This Award is subject to all of the terms and conditions set forth herein and in the Terms and Conditions to the PRSUs attached hereto (the “Terms and Conditions”) and in the Plan, each of which is incorporated herein by reference. Unless otherwise defined, the terms in this Performance-Based Restricted Stock Unit Award Grant Notice (this “Grant Notice”) and the Terms and Conditions shall have the same defined meanings assigned to them in the Plan.

Participant: []
Award Date: []
Target Number of PRSUs: []
Maximum Number of PRSUs*: [] <br><br>(*The actual number of PRSUs that vest pursuant to the terms and condition of the PRSUs will be between 0% and 200% of the Target Number of PRSUs. The Maximum Number of PRSUs represents 200% of the Target Number of PRSUs.)
Vesting Date:
Performance Vesting Conditions: See Exhibit A attached hereto.

By his or her signature below or by electronic acceptance or authentication in a form authorized by the Company, Participant hereby: (a) agrees to be bound by the terms and conditions of the Plan, the Terms and Conditions and this Grant Notice; (b) acknowledges and agrees that Participant has reviewed the Plan, the Terms and Conditions and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of the Plan, the Terms and Conditions and this Grant Notice; (c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan, the Terms and Conditions or this Grant Notice (including any exhibit attached hereto); (d) agrees that if he or she fails to acknowledge and accept this Grant Notice within 90 days of the Award Date, then this Award may, in the Company’s discretion, be immediately cancelled and forfeited and he or she will not be entitled receive any other benefits or compensation as replacement for this Award; and (e) agrees that he or she has read, understands, and agrees to be bound by the restrictive covenants set forth in Section 8 of the Terms and Conditions.

STELLAR BANCORP, INC. PARTICIPANT
By: By:
Print Name: Print Name:
Title:

Exhibit A

PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD GRANT NOTICE

PERFORMANCE VESTING CONDITIONS

The number of PRSUs that you will earn pursuant to this Award (your “Earned PRSUs”) will range from 0% to 200% of the Target Number of PRSUs (as set forth in the Grant Notice) based on Stellar’s Total Shareholder Return relative to the Total Shareholder Return (“TSR”) of the component companies of the S&P U.S. SmallCap Bank Index on the date of this Award (the “Peer Group Members”) over the performance period that began on January 1, 2024 and ends on December 31, 2026 (the “Performance Period”). For avoidance of doubt, in no event will your number of Earned PRSUs exceed the Maximum Number of PRSUs (as set forth in the Grant Notice). All determinations made under this Exhibit A shall be made by the Administrator in its sole and absolute discretion. The Administrator will determine your number of Earned PRSUs no later than February 28, 2027 (or, if earlier, no later than three (3) business days before the date on which a Change of Control occurs). Your number Earned PRSUs shall be determined by the Administrator as follows:<br><br>Earned PRSUs (as % of Target Number of PRSUs)*<br><br><br>0%<br>100%<br>200%<br><br>Stellar’s TSR for the Performance Period Relative to Peer Group Members<br><br>Below 20th percentile<br>(Threshold)<br>At or above 45th percentile and equal to or below 55th percentile<br>(Target)<br>At or above 75th percentile<br>(Maximum)<br><br>______________<br>(*)    Straight-line interpolation shall be used to determine your number of Earned PRSUs if performance is achieved between Minimum and Target, or between Target and Maximum.<br><br>Total Shareholder Return for Stellar and for each Peer Group Member will be determined using total shareholder return performance starting on the last trading day before the first day of the Performance Period and ending the last twenty (20) trading days of the Performance Period. In addition, dividends shall be treated as reinvested in Steller or the Peer Group Member (as applicable) at the end of each calendar quarter.<br>If, (a) at the end of the Performance Period, any Peer Group Member is no longer publicly traded or (b) during the Performance Period, any Peer Group Member declares bankruptcy, the TSR of such Peer Group Member shall be deemed to be the lowest ranked TSR in the Peer Group (and, if multiple Peer Group Members are no longer publicly traded at the end of the Performance Period or declare bankruptcy during the Performance Period, such Peer Group Members shall be ranked in order of when such delisting or bankruptcy occurs, with earlier bankruptcies and delistings ranking lower than later bankruptcies, and delistings). If, during the Performance Period, any Peer Group Member is involved in a merger or acquisition, then (x) if such Peer Group Member is the surviving company, such Peer Group Member will continue to be a Peer Group Member and (y) if such Peer Group Member is not the surviving company, then the Performance Period for such Peer Group Member will end as of the closing date of such merger or acquisition, with the TSR of such Peer Group Member measured as of such closing date.<br>Notwithstanding anything in the Grant Notice or this Exhibit A to the contrary, in the event of a Change of Control: (a) the Vesting Date will be the date on which the Change of Control occurs; and (b) the “Performance Period” will be deemed to end on the date that is ten (10) business days immediately preceding such Change of Control.<br>Unless otherwise defined, capitalized terms used herein shall have the meanings ascribed to them in the Plan, the Terms and Conditions, or the Grant Notice.

TERMS AND CONDITIONS

PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD

STELLAR BANCORP, INC. 2022 OMNIBUS INCENTIVE PLAN

These Terms and Conditions, collectively with the accompanying Performance-Based Restricted Stock Unit Award Grant Notice (the “Grant Notice”) comprise your agreement (the “Agreement”) with the Company regarding the performance-based restricted stock units awarded under the Stellar Bancorp, Inc. 2022 Omnibus Incentive Plan (as amended and restated, the “Plan”). Capitalized terms not specifically in the Agreement have the same meanings assigned to them in the Plan.

1.PRSU Grant. Each Earned PRSU represents the unsecured right to receive one (1) share of Stock, subject to the terms and conditions contained in this Agreement and the Plan. In the event of any conflict between the terms of the Plan and this Agreement, the terms of the Plan shall govern.

2.Settlement; Issuance of Shares.

(a)Settlement. No shares of Stock shall be issued to you prior to the date on which the PRSUs vest. After any PRSUs are earned and vest pursuant to the vesting terms set forth in Grant Notice (and, if applicable, Sections 4(c) or 4(d) below), the Company shall promptly cause to be issued in book-entry form, registered in your name or in the name of your legal representatives or heirs, as the case may be, shares of Stock in payment of such vested whole PRSUs; provided, however, that in the event such PRSUs do not vest on a day during which the Stock is quoted on the New York Stock Exchange (or traded on such other principal national securities market or exchange on which the Stock may then be listed) (“Trading Day”), the Company shall cause shares of Stock to be issued on the next Trading Day following the date on which such PRSUs vest; provided, further, that in no event shall the Company cause such shares of Stock to be issued later than the sixtieth (60) day following (i) the Vesting Date, or (ii) an earlier settlement date as a result of a vesting acceleration event pursuant to Section 4(c) or Section 4(d). For purposes of the PRSUs, the date on which the shares of Stock underlying the PRSUs are issued shall be referred to as the “Settlement Date.”

(b)Fractional Shares. Unless otherwise determined by the Administrator in its sole discretion, no fractional shares shall be issued pursuant to the PRSUs, and any fractional share resulting from the vesting of the PRSUs in accordance with the terms of this Agreement shall be rounded down to the next whole share.

3.Dividend Equivalent Rights. Each Earned PRSU shall have a dividend equivalent right associated with it with respect to any cash dividends on the Stock that have a record date after the Award Date and prior to the applicable Settlement Date for such Earned PRSU (the total accrued dividends for each Earned PRSU, a “PRSU Dividend Equivalent Amount”). For the avoidance of doubt, no dividend equivalent right shall accrue in respect of a PRSU which is not earned. The PRSU Dividend Equivalent Amount shall be calculated by crediting a hypothetical bookkeeping account for you with an amount equal to the amount of cash dividends that would have been paid on the dividend payment date with respect to the number of shares of Stock underlying the unsettled Earned PRSUs (or PRSUs which become Earned PRSUs in accordance with this Agreement) if such shares had been outstanding on the dividend record date. Your PRSU Dividend Equivalent Amount shall not be credited with interest or earnings. Any PRSU Dividend Equivalent Amount: (a) shall be subject to the same terms and conditions applicable to the Earned PRSU to which the dividend equivalent right relates, including, without limitation, the restrictions on transfer and the forfeiture conditions contained in the Agreement; (b) shall vest and be settled upon the same terms and at the same time of settlement as the Earned PRSUs to which they relate; and (c) will be denominated and payable solely in cash. The payment of the PRSU Dividend Equivalent Amounts, if any, will be net of all applicable withholding taxes pursuant to Section 7.

4.Earning and Vesting of PRSUs.

(a)Earning of PRSUs. The PRSUs will be earned if and to the extent the Performance Vesting Conditions (as set forth in the Grant Notice) are satisfied. Any PRSUs that become earned are herein referred to as “Earned PRSUs”. Any PRSUs (and related PRSU Dividend Equivalent Amounts) that do not become Earned PRSUs due to the failure to satisfy the

Performance Vesting Conditions will be forfeited to the Company, and you will not thereafter have any rights with respect to such PRSUs (or related PRSU Dividend Equivalent Amounts) that are so forfeited.

(b)Vesting. Earned PRSUs (and related PRSU Dividend Equivalent Amounts) will vest on the Vesting Date set forth in the Grant Notice; provided, that you continue to be an employee, director or consultant of the Company or a Subsidiary (a “Service Provider”) from the Award Date through the Vesting Date. Any PRSUs (and related PRSU Dividend Equivalent Amounts) that do not become vested as of the Vesting Date will be forfeited to the Company for no consideration, and you will not thereafter have any rights with respect to such PRSUs (and related PRSU Dividend Equivalent Amounts) that are so forfeited.

(c)Death; Disability. Notwithstanding anything in Section 4(a) to the contrary, if you cease to be a Service Provider due to your death or Disability (as hereinafter defined), then a portion of the Target Number of PRSUs (as set forth in the Grant Notice) and related PRSU Dividend Equivalent Amounts will fully vest effective as the date you cease to be a Service Provider, with such prorated portion equal to a fraction, (i) the numerator of which is the number of calendar days that elapsed from the Award Date until the date you cease to be a Service Provider, and (ii) the denominator of which is the total number of calendar days between the Award Date until the Vesting Date. For purposes of this Agreement, “Disability” means that you are unable to perform your duties with the Company and its Subsidiaries on a full-time basis as a result of incapacity due to mental or physical illness, which inability exists for 90 continuous days or 180 days during any 12-month period, as determined by a physician selected by the Company or its insurers.

(d)Change of Control. Notwithstanding anything in this Agreement to the contrary, in the event that the Company experiences a Change of Control (as defined in the Plan), then the Administrator shall determine and approve the Company’s performance with respect to the Performance Vesting Conditions no later than three (3) business days before the date on which such Change of Control occurs. Provided that you remain a Service Provider from the Award Date to the date of the Change of Control, you will be deemed to have earned and vested, effective as of immediately prior to the Change of Control, the number of PRSUs (and related PRSU Dividend Equivalent Amounts) determined based on the Company’s performance (as determined by the Administrator in its sole discretion) and subject to any limitations set forth in the Grant Notice. All unearned PRSUs (and related PRSU Dividend Equivalent Amounts) will be automatically forfeited to and reacquired by the Company without consideration immediately upon the Change of Control.

5.Forfeiture of PRSUs. Except as otherwise provided in Section 4(c), if your status as a Service Provider terminates for any reason before the Vesting Date, all of your PRSUs (and related PRSU Dividend Equivalent Amounts) will be forfeited to the Company for no consideration, and you will not thereafter have any rights with respect to such PRSUs (and related PRSU Dividend Equivalent Amounts). All PRSUs (and related PRSU Dividend Equivalent Amounts), whether vested or unvested, shall be immediately forfeited for no consideration upon termination of your employment or service by the Company and its Subsidiaries for Cause (as hereinafter defined) or your resignation at a time when Cause to terminate your employment or service exists, and, in such event, the Company may, in its sole discretion, also: (a) cancel any shares of Stock issued to you in settlement of any of your PRSUs; and/or (b) require you to pay to the Company the amount of any (i) proceeds received by you from your sale or disposition of any shares of Stock issued to you in settlement of any PRSUs and/or (ii) PRSU Dividend Equivalent Amounts paid to you. Notwithstanding any provision herein to the contrary, in the event of any inconsistency between this Section 5 and any employment agreement entered into by and between you and the Company (your “Employment Agreement”), the terms of the employment agreement shall control.

For purposes of this Award, your status as a Service Provider will be considered terminated (regardless of the reason for termination and whether or not the termination is in breach of applicable laws) effective as of the date you are no longer employed by or providing services to the Company or Subsidiary. The Administrator will have the exclusive discretion to determine when your status as a Service Provider terminates for purposes of this Award (including whether you may still be considered to be employed by or providing services to the Company or a Subsidiary while on a leave of absence).

For purposes of this Award, “Cause” has the meaning given in your Employment Agreement; provided, however, that if you are not party to an Employment Agreement or if such Employment Agreement does not define “Cause” (or terms of similar meaning), then “Cause” means, as determined by the Administrator in its discretion: (i) your commission of, conviction for, or plea of no contest to, a felony or any other crime involving moral turpitude; (ii) your commission of an act or omission involving misappropriation, embezzlement, theft, or fraud with respect to the Company or any of its Subsidiaries, or any of their customers or suppliers; (iii) your failure to comply with the Company’s or its Subsidiaries’ material policies,

procedures, and guidelines, including corporate governance, human relations, anti-harassment, and anti-discrimination policies, and applicable laws with respect to the Company’s or its Subsidiaries’ business operations; (iv) your breach of fiduciary duty or willful misconduct that causes material and demonstrable injury, monetarily or otherwise, to the Company or its Subsidiaries; or (v) your material breach of any confidentiality, noncompetition, nonsolicitation, or no-hire obligations set forth in this Agreement or in any other written agreement between you, on the one hand, and the Company or any of its Subsidiaries, on the other hand.

6.Nontransferability. Except as otherwise provided in the Plan, no right or interest of yours in the PRSUs (and related PRSU Dividend Equivalent Amounts) may be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of by you other than by will or by the laws of descent and distribution, and any such purported sale, assignment, transfer, pledge, hypothecation or other disposition shall be void and unenforceable against the Company. Notwithstanding the foregoing, you may, in the manner established by the Administrator, designate a beneficiary or beneficiaries to exercise your rights and receive any property distributable with respect to the PRSUs upon your death.

7.Responsibility for Taxes. Regardless of any action the Company or, if different, your employer (the “Employer”) takes with respect to any or all income tax, social insurance, payroll tax, fringe benefit tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items is and remains your responsibility and may exceed the amount actually withheld by the Company or the Employer. You further acknowledge that the Company and/or the Employer: (a) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the PRSUs (and related PRSU Dividend Equivalent Amounts), including, but not limited to, the grant, earning or vesting of the PRSUs (and related PRSU Dividend Equivalent Amounts), the subsequent sale of earned and vested PRSUs and the receipt of any PRSU Dividend Equivalent Amounts; and (b) do not commit to and are under no obligation to structure the terms of the Award or any aspect of the PRSUs or the PRSU Dividend Equivalent Amounts to reduce or eliminate your liability for Tax-Related Items or achieve any particular tax result. Further, if you are subject to tax in more than one jurisdiction, you acknowledge that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

Prior to any relevant taxable or tax withholding event, as applicable, you will pay or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all Tax-Related Items. In this regard, you authorize the Company, the Employer, and their respective agents, at their discretion, to satisfy any applicable withholding obligations with regard to all Tax-Related Items by one or a combination of the following:

(a)withholding from your wages or other cash compensation payable to you by the Company and/or the Employer, including any PRSU Dividend Equivalent Amount;

(b)withholding from proceeds of the sale of shares of Stock issuable or issued to you upon the Settlement Date with respect to any earned and vested PRSUs, either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf pursuant to this authorization without your further consent or authorization);

(c)withholding from proceeds of the sale of Shares either through a voluntary sale or through a mandatory sale arranged by the Company (on Participant’s behalf pursuant to this authorization without further consent);

(d)requiring you to make a payment in cash by certified check acceptable to the Company or wire transfer; or

(e)any other method determined by the Company, and to the extent required by applicable laws or the Plan, approved by the Administrator.

Depending on the withholding method, the Company may withhold or account for Tax-Related Items by considering statutory withholding rates or other withholding rates, including maximum rates applicable in your jurisdiction(s), in which case you may receive a refund of any over-withheld amount in cash and will have no entitlement to the equivalent amount in Shares. If the obligation for Tax-Related Items is satisfied by withholding shares of Stock otherwise issuable to you in settlement of earned and vested PRSUs, you are deemed for tax purposes to have been issued the full number of shares of Stock issuable to you in settlement of such earned and vested PRSUs notwithstanding that a number of shares of Stock are

held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of your participation in the Plan.

8.Non-Solicitation Covenants.

(a)By accepting this Award, you hereby acknowledge and agree that (i) the Company has provided and will continue to provide you with access to confidential and proprietary information (“Confidential Information”) of the Company and its subsidiaries (the “Company Group”) for use only during your employment with the Company Group, (ii) the Company Group has entrusted you and will continue to entrust you, in your unique and special capacity, with developing the goodwill of the Company Group, and (iii) in consideration of the Company providing you with continued access to Confidential Information and as an express incentive for the Company to enter into this Agreement and grant you the PRSUs hereunder, you have voluntarily agreed to the non-solicitation covenants set forth in this Section 8. You agree and acknowledge that the limitations and restrictions set forth herein are reasonable in all respects, do not interfere with public interests, will not cause you undue hardship, and are material and substantial parts of this Agreement intended and necessary to prevent unfair competition and to protect the Company Group’s business, Confidential Information, goodwill and legitimate business interests. You further acknowledge and agree that you are receiving new consideration by entering into this Agreement that includes sufficient and independent consideration for the non-solicitation covenants set forth herein.

(b)During the Restricted Period (defined below) you shall not, without the prior written approval of the Board of Directors of the Company, directly or indirectly, for yourself or on behalf of or in conjunction with any other person or entity of any nature:

(i)solicit, canvass, approach, encourage, entice or induce any customer, client, business partner or supplier of any member of the Company Group with whom or which you had contact on behalf of any member of the Company Group, or about whom or which you had access to Confidential Information, or for whom or which you had direct or indirect responsibility for on behalf of the Company Group to cease or lessen such customer’s, client’s, business partner’s or supplier’s business with any member of the Company Group; or

(ii)solicit, canvass, approach, encourage, entice or induce any employee or contractor of any member of the Company Group to terminate his, her or its employment or engagement with any member of the Company Group.

For purposes of this Section 8, the “Restricted Period” means the period that begins on the Award Date and ends on the earliest of (x) the date that is twelve (12) months following the date on which you cease to be a Service Provider for any reason other than due to your involuntary termination by the Company Group without Cause, (y) the date that is twelve (12) months following the date on which all of the Restricted Shares covered by this Award have become fully vested, or (z) the date on which you cease to be a Service Provider due to your involuntary termination by the Company Group without Cause.

(c)Because of the difficulty of measuring economic losses to the Company Group as a result of a breach or threatened breach of the covenants set forth in this Section 8, and because of the immediate and irreparable damage that would be caused to the members of the Company Group for which they would have no other adequate remedy, the Company and each other member of the Company Group shall be entitled to enforce the foregoing non-solicitation covenants, in the event of a breach or threatened breach, by injunctions and restraining orders from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall not be the Company’s or any other member of the Company Group’s exclusive remedy for a breach but instead shall be in addition to all other rights and remedies available to the Company and each other member of the Company Group at law and equity.

(d)The non-solicitation covenants in this Section 8, and each provision and portion hereof, are severable and separate, and the unenforceability of any specific covenant (or portion thereof) shall not affect the provisions of any other covenant (or portion thereof). Moreover, in the event any arbitrator or court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which such arbitrator or court deems reasonable, and this Agreement shall thereby be reformed.

(e)The covenants in this Section 8 are in addition to and complements (and does not replace or supersede) any obligation that you have to any member of the Company Group with respect to non-solicitation under any other written agreement between you and any member of the Company Group.

9.Other Terms and Conditions.

(a)The Plan. The Agreement is further subject to the terms and provisions of the Plan. Only certain provisions of the Plan are described in the Agreement. As a condition to your receipt of this Award and the PRSUs covered hereby, you acknowledge and agree to the terms and conditions of the Agreement and the terms and provisions of the Plan, a copy of which you acknowledge receiving.

(b)Employment/Service Relationship. Nothing in the Agreement will confer on you any right to continue in the employ or service of the Company or the Employer or interfere with or restrict rights of the Company or the Employer, which are hereby expressly reserved, to terminate your employment or service at any time.

(c)Claw-Back. The PRSUs, any shares of Stock delivered in settlement of the PRSUs, any PRSU Dividend Equivalent Amounts, and any proceeds, gains or other economic benefit actually or constructively received by you upon the resale of any shares of Stock delivered in settlement of the PRSUs, shall be subject to the provisions of (i) the Company’s Policy for the Recovery of Erroneously Awarded Company (as the same may be amended or restated, the “Claw-Back Policy”) and (ii) any other policy adopted or implemented by the Company that provides for the claw-back, recoupment or recovery of compensation (an “Other Recovery Policy”), to the extent set forth in such Claw-Back Policy or Other Recovery Policy.

(d)Adjustments. The PRSUs will be subject to adjustment (including, without limitation, as to the number of PRSUs) in such manner as the Administrator, in its sole discretion, deems equitable and appropriate in connection with the occurrence of any of the events described in Section 4(c) of the Plan following the Award Date.

10.Nature of Grant. In accepting this Award, you acknowledge, understand and agree that:

(a)the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time;

(b)the grant of the PRSUs to you is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of equity awards, or benefits in lieu of equity awards, even if equity awards have been granted to you in the past;

(c)all decisions with respect to future grants of equity awards, if any, will be at the sole discretion of the Company;

(d)you are voluntarily participating in the Plan;

(e)the PRSUs, and the value of and income from such PRSUs (and any related PRSU Dividend Equivalent Amounts), are not intended to replace any pension rights, retirement benefits or other compensation;

(f)the PRSUs, and the value of and income from such PRSUs (and related PRSU Dividend Equivalent Amounts), are not part of normal or expected compensation or salary for any purpose;

(g)this Award and your participation in the Plan will not be interpreted to form an employment contract or other service relationship with the Company or any Subsidiary;

(h)the future value of the PRSUs (and related PRSU Dividend Equivalent Amounts) is unknown and cannot be predicted with certainty; and

(i)no claim or entitlement to compensation or damages will arise from forfeiture of the PRSUs (and related PRSU Dividend Equivalent Amounts) resulting from termination of your status as a Service Provider (for any reason whatsoever and whether or not in breach of applicable laws), and in consideration of the grant of this Award to which you are otherwise not entitled, you irrevocably agree to (i) never institute any such claim against the Company, the Employer or any

of their respective Affiliates, (ii) waive your ability, if any, to bring any such claim against the Company, the Employer or any of their respective Affiliates, (iii) forever release the Company, the Employer and each of their respective Affiliates from any such claim, and (iv) execute any and all documents necessary, or reasonably requested by the Company, to request dismissal or withdrawal of any such claim that is allowed by a court of competent jurisdiction, in each case to the maximum extent permitted by applicable laws.

11.No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding your participation in the Plan or your acquisition of the PRSUs. You are hereby advised to consult with your own personal tax, legal and financial advisors regarding your participation in the Plan before taking any action related to the Plan.

12.Data Privacy. You understand that the Company and the Employer hold certain personal information about you, including, but not limited to, your name, home address, email address, and telephone number, date of birth, social insurance number, or other identification number, salary, nationality, job title, any shares of Stock or directorships held in the Company, details of all PRSUs or any other entitlement to shares of Stock awarded, canceled, exercised, vested, unvested or outstanding in your favor (your “Data”), for the exclusive purpose of implementing, administering and managing the Plan.

You understand that it will be necessary for your Data to be collected, used and transferred, in electronic or other form, as described in the Agreement and any other award documentation by and among, as applicable, the Employer, the Company and any Affiliate. Such processing will be for the exclusive purpose of implementing, administering and managing your participation in the Plan, and therefore for the performance of the Agreement. The provision of your Data is a contractual requirement. Without the provision of your Data, it will not be possible to for the Company and/ or the Employer to perform their obligations under the Agreement.

You understand that, in performing the Agreement, it will be necessary for:

•your Data to be transferred to a Company-designated Plan broker, or such other stock plan service provider as may be selected by the Company in the future, which is assisting the Company with the implementation, administration and management of the Plan;

•the Company, its Plan broker and any other possible recipients which may assist the Company (presently or in the future) with implementing, administering and managing the Plan, to receive, possess, use, retain and transfer your Data, in electronic or other form, for the sole purpose of implementing, administering and managing your participation in the Plan; and

•your Data to be held only as long as is necessary to implement, administer and manage your participation in the Plan.

1.Compliance with Laws and Regulations. You will not require the Company to deliver any shares of Stock in settlement or earned and vested PRSUs, and the Company will not be obligated to deliver any shares of Stock in settlement of earned and vested PRSUs, if counsel to the Company determines that such delivery would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which shares of Stock are listed or quoted. The Company will in no event be obligated to take any affirmative action in order to cause the delivery of any shares of Stock in settlement or earned and vested PRSUs to comply with any such law, rule, regulation or agreement.

2.Successors and Assigns. The Company may assign any of its rights under the Agreement. The Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer contained herein, the Agreement will be binding upon you and your heirs, executors, administrators, legal representatives, successors and assigns.

3.Governing Law; Jurisdiction; Severability. The Agreement is to be governed by and construed in accordance with the internal laws of the State of Texas, as such laws are applied to agreements between Texas residents entered into and to be

performed entirely within Texas, excluding that body of laws pertaining to conflict of laws. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the Company and you evidenced by this grant or the Agreement, the Company and you hereby submit to and consent to the exclusive jurisdiction of the State of Texas and agree that such litigation will be conducted only in the courts of Harris County, Texas, or the federal courts for the United States for the Southern District of Texas, and no other courts, where this grant is made and/or to be performed. If any provision of the Agreement is determined by a court of law to be illegal or unenforceable, in whole or in part, that provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable.

4.Further Instruments. You agree to execute further instruments and to take further actions as may be reasonably necessary to carry out the purposes and intent of the Agreement.

5.Administrator Authority. The Administrator has the power to interpret the Plan and the Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any PRSUs or related PRSU Dividend Equivalent Amounts have vested). All actions taken and all interpretations and determinations made by the Administrator will be final and binding upon you, the Company and all other interested persons. The Administrator will not be personally liable for any action, determination or interpretation made with respect to the Plan or the Agreement.

6.Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.

7.Headings. The captions and headings of the Agreement are included for ease of reference only and will be disregarded in interpreting or construing the Agreement. All references herein to Sections will refer to Sections of these Terms and Conditions, unless otherwise noted.

8.Waiver. You acknowledge that a waiver by the Company of breach of any provision of the Agreement will not operate or be construed as a waiver of any other provision of the Agreement, or of any subsequent breach by you or any other Participant.

9.Amendment. Notwithstanding any other provision hereof, this Agreement may be supplemented or amended from time to time as approved by the Administrator as contemplated by Section 23 of the Plan. Without limiting the generality of the foregoing, without your consent:

(a)this Agreement may be amended or supplemented from time to time as approved by the Administrator (i) to cure any ambiguity or to correct or supplement any provision herein that may be defective or inconsistent with any other provision herein, (ii) to add to the covenants and agreements of the Company for your benefit or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject to any required approval of the Company’s shareholders, and provided, in each case, that such changes or corrections will not adversely affect your rights with respect to the Award evidenced hereby or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and

(b)subject to any required action by the Board of Directors or the shareholders of the Company, the Award evidenced by this Agreement may be canceled by the Plan Administrator and a new Award made in substitution therefor, provided that the Award so substituted will satisfy all of the requirements of the Plan as of the date such new Award is made and no such action will adversely affect the PRSUs to the extent then earned and vested.

10.Entire Agreement. The Plan, these Terms and Conditions and the Grant Notice, including Exhibit A thereto and your Employment Agreement, constitute the entire agreement and understanding of the parties with respect to the subject

matter of the Agreement, and supersede all prior understandings and agreements, whether oral or written, between the parties with respect to the specific subject matter hereof.

11.Notices. Unless the Company notifies the Grantee in writing of a different procedure or address, any notice or other communication to the Company with respect to this Agreement will be in writing and will be delivered personally or sent by first class mail, postage prepaid, to the address of the Company’s principal office. Unless the Company elects to notify you electronically pursuant to the online grant and administration program or via email, any notice or other communication to you with respect to this Agreement will be in writing and will be delivered personally, or will be sent by first class mail, postage prepaid, to your address as listed in the records of the Company or any Subsidiary of the Company on the Award Date, unless the Company has received written notification from you of a change of address.

12.Construction.  References in this Agreement to “this Agreement” and the words “herein,” “hereof,” “hereunder” and similar terms include all Exhibits and Schedules appended hereto, including the Plan.  All references to “Sections” in this Agreement shall be to Sections of this Agreement unless explicitly stated otherwise.  The word “include” and all variations thereof are used in an illustrative sense and not in a limiting sense.    All decisions of the Administrator upon questions regarding the Plan or this Agreement will be conclusive.  Unless otherwise expressly stated herein, in the event of any inconsistency between the terms of the Plan and this Agreement, the terms of the Plan will control.  The headings of the sections of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and will in no way modify or restrict any of the terms or provisions hereof.

13.Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan or the Agreement, if you are subject to Section 16 of the Exchange Act, then the Plan, the PRSUs and the Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable laws, the Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.

14.Section 409A. Neither the PRSUs nor any PRSU Dividend Equivalent Amounts are intended to constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code (together with any U.S. Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the date hereof, “Section 409A”). However, notwithstanding any other provision of the Plan or the Agreement, if at any time the Administrator determines that the PRSUs or any PRSU Dividend Equivalent Amounts (or any portion of any of the foregoing) may be subject to Section 409A, the Administrator shall have the right in its sole discretion (without any obligation to do so or to indemnify you or any other person for failure to do so) to adopt such amendments to the Plan or the Agreement, or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, as the Administrator determines are necessary or appropriate either for the PRSUs and/or the PRSU Dividend Equivalent Amounts to be exempt from the application of Section 409A or to comply with the requirements of Section 409A.

15.Counterparts. This Agreement may be executed in one or more counterparts, including by way of any electronic signature, subject to applicable law, each of which shall be deemed an original and all of which together shall constitute one instrument.

By signing the Grant Notice or otherwise accepting the PRSUs, you agree to be bound by terms of the Agreement and the Plan.

11

Document

Exhibit 10.2

RESTRICTED STOCK AWARD GRANT NOTICE

STELLAR BANCORP, INC.

2022 OMNIBUS INCENTIVE PLAN

Stellar Bancorp, Inc., a Texas corporation (the “Company” or “Stellar”), pursuant to its 2022 Omnibus Incentive Plan (the “Plan”), hereby grants to the individual listed below (“Participant”), the award (“Award”) of shares of restricted stock set forth below. This Award is subject to all of the terms and conditions set forth herein and in the Terms and Conditions to the Restricted Shares (the “Terms and Conditions”) and in the Plan, each of which is incorporated herein by reference. Unless otherwise defined, the terms in this Restricted Stock Award Grant Notice (this “Grant Notice”) and the Terms and Conditions shall have the same defined meanings assigned to them in the Plan.

Participant: []
Award Date: []
Number of Shares of Restricted Stock: []
Vesting Schedule: []

By his or her signature below or by electronic acceptance or authentication in a form authorized by the Company, Participant hereby: (a) agrees to be bound by the terms and conditions of the Plan, the Terms and Conditions and this Grant Notice; (b) acknowledges and agrees that Participant has reviewed the Plan, the Terms and Conditions and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of the Plan, the Terms and Conditions and this Grant Notice; (c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan, the Terms and Conditions or this Grant Notice (including any exhibit attached hereto); (d) acknowledges and agrees that if he or she fails to execute and return this Grant Notice within 90 days of the Award Date, then this Award may be immediately cancelled and forfeited and he or she will not be entitled receive any other benefits or compensation as replacement for this Award; and (e) agrees that he or she has read, understands, and agrees to be bound by the restrictive covenants set forth in Section 9 of the Terms and Conditions.

STELLAR BANCORP, INC. PARTICIPANT
By: By:
Print Name: Print Name:
Title:

TERMS AND CONDITIONS

RESTRICTED STOCK AWARD

STELLAR BANCORP, INC. 2022 OMNIBUS INCENTIVE PLAN

These Terms and Conditions, collectively with the accompanying Restricted Stock Award Grant Notice (the “Grant Notice”) comprise your agreement (the “Agreement”) with the Company regarding the shares of restricted stock awarded under the Stellar Bancorp, Inc. 2022 Omnibus Incentive Plan (as amended and restated, the “Plan”). Capitalized terms not specifically in the Agreement have the same meanings assigned to them in the Plan.

1.The Grant. Subject to the conditions set forth below, the Company hereby grants you effective as of the Award Date set forth in the Grant Notice, as a matter of separate inducement but not in lieu of any salary or other compensation for your services for the Company, an award (the “Award”) of the Number of Shares of Restricted Stock (as set forth in the Grant Notice) (the “Restricted Shares”), subject to the conditions and restrictions set forth in the Agreement and in the Plan.

2.Issuance of Restricted Shares. Upon issuance of the Restricted Shares, such Restricted Shares will be registered in a book entry account in your name. Until such time as the Restricted Shares are vested, any statement of ownership representing the Restricted Shares that may be issued, and any securities constituting Retained Distributions (defined below) will bear a restrictive legend to the effect that ownership of the Restricted Shares (and such Retained Distributions), and the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms and conditions provided in the Plan and this Agreement.

3.Restrictions. The Restricted Shares will constitute issued and outstanding shares of Stock for all corporate purposes. You will have the right to vote such Restricted Shares, to receive and retain such dividends and distributions paid or distributed on such Restricted Shares and to exercise all other rights, powers and privileges of a holder of Stock with respect to such Restricted Shares, except that: (a) you will not be entitled to delivery of the Restricted Shares until such Restricted Shares become vested or the applicable vesting conditions are waived in writing; (b) the Company or its designee will retain custody of the Restricted Shares until such time, if ever, as the Restricted Shares vest; (c) the Company or its designee will retain custody of all distributions (“Retained Distributions”) made or declared with respect to the Restricted Shares (and such Retained Distributions will be subject to the same restrictions, terms and vesting and other conditions as are applicable to the Restricted Shares) until such time, if ever, as the Restricted Shares with respect to which such Retained Distributions shall have been made, paid or declared shall have become vested, and such Retained Distributions will not bear interest or be segregated in a separate account; and (d) except as provided in Section 7, you may not sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted Shares or any Retained Distributions or your interest in any of them until the Restricted Shares and/or the Retained Distributions become vested.

4.Vesting of Restricted Shares.

(a)Vesting. Each vesting tranche of the Restricted Shares (and related Retained Distributions) will vest pursuant to the Vesting Schedule set forth in the Grant Notice; provided, that you continue to be an employee, director or consultant of the Company or a Subsidiary (a “Service Provider”) from the Award Date through the applicable vesting date for such vesting tranche.

(b)Death; Disability. Notwithstanding anything in Section 4(a) to the contrary, if you cease to be a Service Provider due to your death or Disability (as hereinafter defined), then a portion of your then-outstanding unvested Restricted Shares (and related Retained Distributions) will fully vest effective as the date you cease to be a Service Provider, with such portion equal to a fraction, (i) the numerator of which is the number of calendar days that elapsed from the Award Date until the date you cease to be a Service Provider, and (ii) the denominator of which is the total number of calendar days between the Award Date until the last vesting date in the Vesting Schedule. For purposes of this Agreement, “Disability” means that you are unable to perform your duties with the Company and its Subsidiaries on a full-time basis as a result of incapacity due

to mental or physical illness, which inability exists for 90 continuous days or 180 days during any 12-month period, as determined by a physician selected by the Company or its insurers.

(c)Change of Control. Notwithstanding anything in Section 4(a) to the contrary, if the Company experiences a Change of Control (as defined in the Plan) and provided that you remain a Service Provider from the Award Date to the date of the Change of Control, all unvested Restricted Shares will fully vest effective as of immediately prior to the Change of Control.

5.Forfeiture of Restricted Shares. Except as otherwise provided in Section 4(b), all unvested Restricted Shares (and all related Retained Distributions) will be forfeited to the Company for no consideration on the date you cease for any reason to be a Service Provider, and you will not thereafter have any rights (including dividend and voting rights) with respect to such Restricted Shares (or related Retained Distributions). All Restricted Shares (and all related Retained Distributions), whether vested or unvested, shall be immediately forfeited for no consideration upon termination of your employment or service by the Company and its Subsidiaries for Cause (as hereinafter defined) or your resignation at a time when Cause to terminate your employment or service exists, and, in such event, the Company may also require you to pay to the Company the amount of any proceeds received by you from your sale or disposition of any vested Restricted Shares covered by this Award. Notwithstanding any provision herein to the contrary, in the event of any inconsistency between this Section 5 and any employment agreement entered into by and between you and the Company (your “Employment Agreement”), the terms of the employment agreement shall control.

For purposes of this Award, your status as a Service Provider will be considered terminated (regardless of the reason for termination and whether or not the termination is in breach of applicable laws) effective as of the date you are no longer employed by or providing services to the Company or Subsidiary. The Administrator will have the exclusive discretion to determine when your status as a Service Provider terminates for purposes of this Award (including whether you may still be considered to be employed by or providing services to the Company or a Subsidiary while on a leave of absence).

For purposes of this Award, “Cause” has the meaning given in your Employment Agreement; provided, however, that if you are not party to an Employment Agreement or if such Employment Agreement does not define “Cause” (or terms of similar meaning), then “Cause” means, as determined by the Administrator in its discretion: (i) your commission of, conviction for, or plea of no contest to, a felony or any other crime involving moral turpitude; (ii) your commission of an act or omission involving misappropriation, embezzlement, theft, or fraud with respect to the Company or any of its Subsidiaries, or any of their customers or suppliers; (iii) your failure to comply with the Company’s or its Subsidiaries’ material policies, procedures, and guidelines, including corporate governance, human relations, anti-harassment, and anti-discrimination policies, and applicable laws with respect to the Company’s or its Subsidiaries’ business operations; (iv) your breach of fiduciary duty or willful misconduct that causes material and demonstrable injury, monetarily or otherwise, to the Company or its Subsidiaries; or (v) your material breach of any confidentiality, noncompetition, nonsolicitation, or no-hire obligations set forth in any other written agreement between you, on the one hand, and the Company or any of its Subsidiaries, on the other hand.

6.Delivery by the Company. As soon as practicable after the Restricted Shares become vested pursuant to this Agreement, but no later than 30 days after such event occurs, and subject to the withholding referred to in Section 8, the Company will (a) cause to be removed from the Restricted Shares the restrictions described in Section 3 or cause to be issued and delivered to you (in certificate or electronic form) an equal number of shares of Stock, and (b) shall cause to be delivered to you any Retained Distributions with respect to such Restricted Shares. If delivery of certificates is by mail, delivery of shares of Stock will be deemed effected for all purposes when a stock transfer agent of the Company has deposited the certificates in the United States mail, addressed to you.

7.Nontransferability of Restricted Shares. Restricted Shares that have not become earned and vested are not transferable (either voluntarily or involuntarily), before or after your death, except as follows: (a) during your lifetime, pursuant to a domestic relations order, issued by a court of competent jurisdiction, that is not contrary to the terms and conditions of the Plan or this Agreement, and in a form acceptable to the Administrator; or (b) after your death, by will or pursuant to the applicable laws of descent and distribution, as may be the case. Any person to whom Restricted Shares are transferred in accordance with the provisions of the preceding sentence shall take such Restricted Shares subject to all of the terms and conditions of the Plan and this Agreement, including that the vesting and termination provisions of this Agreement will continue to be applied with respect to you. Certificates representing Restricted Shares that have vested may be delivered

(or, in the case of book entry registration, registered) only to you (or during your lifetime, to your court appointed legal representative) or to a person to whom the Restricted Shares have been transferred in accordance with this Section 7.

8.Responsibility for Taxes. Regardless of any action the Company or, if different, your employer (the “Employer”) takes with respect to any or all income tax, social insurance, payroll tax, fringe benefit tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items is and remains your responsibility and may exceed the amount actually withheld by the Company or the Employer. You further acknowledge that the Company and/or the Employer: (a) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Restricted Shares, including, but not limited to, the grant or vesting of the Restricted Shares, the subsequent sale of vested Restricted Shares and the receipt of any dividends; and (b) do not commit to and are under no obligation to structure the terms of the Award or any aspect of the Restricted Shares to reduce or eliminate your liability for Tax-Related Items or achieve any particular tax result. Further, if you are subject to tax in more than one jurisdiction, you acknowledge that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

Prior to any relevant taxable or tax withholding event, as applicable, you will pay or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all Tax-Related Items. In this regard, you authorize the Company, the Employer, and their respective agents, at their discretion, to satisfy any applicable withholding obligations with regard to all Tax-Related Items by one or a combination of the following:

(a)withholding from your wages or other cash compensation payable to you by the Company and/or the Employer;

(b)withholding from proceeds of the sale of Restricted Shares issuable or issued to you upon vesting of the Restricted Shares either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf pursuant to this authorization without your further consent or direction);

(c)withholding earned and vested Restricted Shares upon vesting of such Restricted Shares;

(d)requiring you to make a payment in cash by certified check acceptable to the Company or wire transfer; or

(e)any other method determined by the Company, and to the extent required by applicable laws or the Plan, approved by the Administrator.

Depending on the withholding method, the Company may withhold or account for Tax-Related Items by considering statutory withholding rates or other withholding rates, including maximum rates applicable in your jurisdiction(s), in which case you may receive a refund of any over-withheld amount in cash and will have no entitlement to the equivalent amount in Shares. If the obligation for Tax-Related Items is satisfied by withholding earned and vested Restricted Shares, you are deemed for tax purposes to have been issued the full number of earned and vested Restricted Shares notwithstanding that a number of the earned and vested Restricted Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of your participation in the Plan.

9.Non-Solicitation Covenants.

(a)By accepting this Award, you hereby acknowledge and agree that (i) the Company has provided and will continue to provide you with access to confidential and proprietary information (“Confidential Information”) of the Company and its subsidiaries (the “Company Group”) for use only during your employment with the Company Group, (ii) the Company Group has entrusted you and will continue to entrust you, in your unique and special capacity, with developing the goodwill of the Company Group, and (iii) in consideration of the Company providing you with continued access to Confidential Information and as an express incentive for the Company to enter into this Agreement and grant you the Restricted Shares hereunder, you have voluntarily agreed to the non-solicitation covenants set forth in this Section 9. You agree and acknowledge that the limitations and restrictions set forth herein are reasonable in all respects, do not interfere with public interests, will not cause you undue hardship, and are material and substantial parts of this Agreement intended and necessary to prevent unfair competition and to protect the Company Group’s business, Confidential Information, goodwill

and legitimate business interests. You further acknowledge and agree that you are receiving new consideration by entering into this Agreement that includes sufficient and independent consideration for the non-solicitation covenants set forth herein.

(b)During the Restricted Period (defined below) you shall not, without the prior written approval of the Board of Directors of the Company, directly or indirectly, for yourself or on behalf of or in conjunction with any other person or entity of any nature:

(i)solicit, canvass, approach, encourage, entice or induce any customer, client, business partner or supplier of any member of the Company Group with whom or which you had contact on behalf of any member of the Company Group, or about whom or which you had access to Confidential Information, or for whom or which you had direct or indirect responsibility for on behalf of the Company Group to cease or lessen such customer’s, client’s, business partner’s or supplier’s business with any member of the Company Group; or

(ii)solicit, canvass, approach, encourage, entice or induce any employee or contractor of any member of the Company Group to terminate his, her or its employment or engagement with any member of the Company Group.

For purposes of this Section 9, the “Restricted Period” means the period that begins on the Award Date and ends on the earliest of (x) the date that is twelve (12) months following the date on which you cease to be a Service Provider for any reason other than due to your involuntary termination by the Company Group without Cause, (y) the date that is twelve (12) months following the date on which all of the Restricted Shares covered by this Award have become fully vested, or (z) the date on which you cease to be a Service Provider due to your involuntary termination by the Company Group without Cause.

(c)Because of the difficulty of measuring economic losses to the Company Group as a result of a breach or threatened breach of the covenants set forth in this Section 9, and because of the immediate and irreparable damage that would be caused to the members of the Company Group for which they would have no other adequate remedy, the Company and each other member of the Company Group shall be entitled to enforce the foregoing non-solicitation covenants, in the event of a breach or threatened breach, by injunctions and restraining orders from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall not be the Company’s or any other member of the Company Group’s exclusive remedy for a breach but instead shall be in addition to all other rights and remedies available to the Company and each other member of the Company Group at law and equity.

(d)The non-solicitation covenants in this Section 9, and each provision and portion hereof, are severable and separate, and the unenforceability of any specific covenant (or portion thereof) shall not affect the provisions of any other covenant (or portion thereof). Moreover, in the event any arbitrator or court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which such arbitrator or court deems reasonable, and this Agreement shall thereby be reformed.

(e)The covenants in this Section 9 are in addition to and complements (and does not replace or supersede) any obligation that you have to any member of the Company Group with respect to non-solicitation under any other written agreement between you and any member of the Company Group.

10.Other Terms and Conditions.

(a)The Plan. The Agreement is further subject to the terms and provisions of the Plan. Only certain provisions of the Plan are described in the Agreement. As a condition to your receipt of this Award and the Restricted Shares covered hereby, you acknowledge and agree to the terms and conditions of the Agreement and the terms and provisions of the Plan, a copy of which you acknowledge receiving.

(b)Employment/Service Relationship. Nothing in the Agreement will confer on you any right to continue in the employ or service of the Company or the Employer or interfere with or restrict rights of the Company or the Employer, which are hereby expressly reserved, to terminate your employment or service at any time.

(c)Claw-Back. The Restricted Shares, the Retained Dividends, and any proceeds, gains or other economic benefit actually or constructively received by you upon the resale of any Restricted Shares, shall be subject to the provisions of (i) the Company’s Policy for the Recovery of Erroneously Awarded Company (as the same may be amended or restated,

the “Claw-Back Policy”) and (ii) any other policy adopted or implemented by the Company that provides for the claw-back, recoupment or recovery of compensation (an “Other Recovery Policy”), to the extent set forth in such Claw-Back Policy or Other Recovery Policy.

(d)Adjustments. The Restricted Shares will be subject to adjustment (including, without limitation, as to the number of Restricted Shares) in such manner as the Administrator, in its sole discretion, deems equitable and appropriate in connection with the occurrence of any of the events described in Section 4(c) of the Plan following the Award Date.

11.Nature of Grant. By accepting this Award, you acknowledge, understand and agree that:

(a)the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time;

(b)the grant of the Restricted Shares to you is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of equity awards, or benefits in lieu of equity awards, even if equity awards have been granted to you in the past;

(c)all decisions with respect to future grants of equity awards, if any, will be at the sole discretion of the Company;

(d)you are voluntarily participating in the Plan;

(e)the Restricted Shares, and the value of and income from such Restricted Shares, are not intended to replace any pension rights, retirement benefits or other compensation;

(f)the Restricted Shares, and the value of and income from such Restricted Shares, are not part of normal or expected compensation or salary for any purpose;

(g)this Award and your participation in the Plan will not be interpreted to form an employment contract or other service relationship with the Company, the Employer or any Affiliate;

(h)the future value of the Restricted Shares is unknown and cannot be predicted with certainty; and

(i)no claim or entitlement to compensation or damages will arise from forfeiture of the Restricted Shares resulting from termination of your status as a Service Provider (for any reason whatsoever and whether or not in breach of applicable laws), and in consideration of the grant of this Award to which you are otherwise not entitled, you irrevocably agree to (i) never institute any such claim against the Company, the Employer or any of their respective Affiliates, (ii) waive your ability, if any, to bring any such claim against the Company, the Employer or any of their respective Affiliates, (iii) forever release the Company, the Employer and each of their respective Affiliates from any such claim, and (iv) execute any and all documents necessary, or reasonably requested by the Company, to request dismissal or withdrawal of any such claim that is allowed by a court of competent jurisdiction, in each case to the maximum extent permitted by applicable laws.

12.No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding your participation in the Plan, or your acquisition or sale of the Restricted Shares. You are hereby advised to consult with your own personal tax, legal and financial advisors regarding your participation in the Plan before taking any action related to the Plan.

13.Data Privacy. You understand that the Company and the Employer hold certain personal information about you, including, but not limited to, your name, home address, email address, and telephone number, date of birth, social insurance number, or other identification number, salary, nationality, job title, any shares of Stock or directorships held in the Company, details of all Restricted Shares or any other entitlement to shares of Stock awarded, canceled, exercised, vested, unvested or outstanding in your favor (your “Data”), for the exclusive purpose of implementing, administering and managing the Plan.

You understand that it will be necessary for your Data to be collected, used and transferred, in electronic or other form, as described in the Agreement and any other award documentation by and among, as applicable, the Employer, the Company and any Affiliate. Such processing will be for the exclusive purpose of implementing, administering and

managing your participation in the Plan, and therefore for the performance of the Agreement. The provision of your Data is a contractual requirement. Without the provision of your Data, it will not be possible for the Company and/or the Employer to perform their obligations under the Agreement.

You understand that, in performing the Agreement, it will be necessary for:

•your Data to be transferred to a Company-designated Plan broker, or such other stock plan service provider as may be selected by the Company in the future, which is assisting the Company with the implementation, administration and management of the Plan;

•the Company, its Plan broker and any other possible recipients which may assist the Company (presently or in the future) with implementing, administering and managing the Plan, to receive, possess, use, retain and transfer your Data, in electronic or other form, for the sole purpose of implementing, administering and managing your participation in the Plan; and

•your Data to be held only as long as is necessary to implement, administer and manage your participation in the Plan.

1.Compliance with Laws and Regulations. You will not require the Company to deliver any Restricted Shares or Retained Distributions and the Company will not be obligated to deliver any Restricted Shares or Retained Distributions if counsel to the Company determines that such delivery would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which shares of Stock are listed or quoted. The Company will in no event be obligated to take any affirmative action in order to cause the delivery of any Restricted Shares and Retained Distributions to comply with any such law, rule, regulation or agreement.

2.Successors and Assigns. The Company may assign any of its rights under the Agreement. The Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer contained herein, the Agreement will be binding upon you and your heirs, executors, administrators, legal representatives, successors and assigns.

3.Governing Law; Jurisdiction; Severability. The Agreement is to be governed by and construed in accordance with the internal laws of the State of Texas, as such laws are applied to agreements between Texas residents entered into and to be performed entirely within Texas, excluding that body of laws pertaining to conflict of laws. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the Company and you evidenced by this grant or the Agreement, the Company and you hereby submit to and consent to the exclusive jurisdiction of the State of Texas and agree that such litigation will be conducted only in the courts of Harris County, Texas, or the federal courts for the United States for the Southern District of Texas, and no other courts, where this grant is made and/or to be performed. If any provision of the Agreement is determined by a court of law to be illegal or unenforceable, in whole or in part, that provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable.

4.Further Instruments. You agree to execute further instruments and to take further actions as may be reasonably necessary to carry out the purposes and intent of the Agreement.

5.Administrator Authority. The Administrator has the power to interpret the Plan and the Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any Restricted Shares or Retained Distributions have vested). All actions taken and all interpretations and determinations made by the Administrator will be final and binding upon you, the Company and all other interested persons. The Administrator will not be personally liable for any action, determination or interpretation made with respect to the Plan or the Agreement.

6.Electronic Delivery and Acceptance. The Company may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. You hereby consent to receive such documents by

electronic delivery and agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.

7.Headings. The captions and headings of the Agreement are included for ease of reference only and will be disregarded in interpreting or construing the Agreement. All references herein to Sections will refer to Sections of these Terms and Conditions, unless otherwise noted.

8.Waiver. You acknowledge that a waiver by the Company of breach of any provision of the Agreement will not operate or be construed as a waiver of any other provision of the Agreement, or of any subsequent breach by you or any other Participant.

9.Amendment. Notwithstanding any other provision hereof, this Agreement may be supplemented or amended from time to time as approved by the Administrator as contemplated by Section 23 of the Plan. Without limiting the generality of the foregoing, without your consent,

(a)this Agreement may be amended or supplemented from time to time as approved by the Administrator (i) to cure any ambiguity or to correct or supplement any provision herein that may be defective or inconsistent with any other provision herein, (ii) to add to the covenants and agreements of the Company for your benefit or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject to any required approval of the Company’s shareholders, and provided, in each case, that such changes or corrections will not adversely affect your rights with respect to the Award evidenced hereby or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and

(b)subject to any required action by the Board of Directors or the shareholders of the Company, the Award evidenced by this Agreement may be canceled by the Plan Administrator and a new Award made in substitution therefor, provided that the Award so substituted will satisfy all of the requirements of the Plan as of the date such new Award is made and no such action will adversely affect the Restricted Shares to the extent then earned and vested.

10.Entire Agreement. The Plan, these Terms and Conditions, the Grant Notice and your Employment Agreement (if applicable) constitute the entire agreement and understanding of the parties with respect to the subject matter of the Agreement, and supersede all prior understandings and agreements, whether oral or written, between the parties with respect to the specific subject matter hereof.

11.Notices. Unless the Company notifies the Grantee in writing of a different procedure or address, any notice or other communication to the Company with respect to this Agreement will be in writing and will be delivered personally or sent by first class mail, postage prepaid, to the address of the Company’s principal office. Unless the Company elects to notify you electronically pursuant to the online grant and administration program or via email, any notice or other communication to you with respect to this Agreement will be in writing and will be delivered personally, or will be sent by first class mail, postage prepaid, to your address as listed in the records of the Company or any Subsidiary of the Company on the Award Date, unless the Company has received written notification from you of a change of address.

12.Construction.  References in this Agreement to “this Agreement” and the words “herein,” “hereof,” “hereunder” and similar terms include all Exhibits and Schedules appended hereto, including the Plan.  All references to “Sections” in this Agreement shall be to Sections of this Agreement unless explicitly stated otherwise.  The word “include” and all variations thereof are used in an illustrative sense and not in a limiting sense.    All decisions of the Administrator upon questions regarding the Plan or this Agreement will be conclusive.  Unless otherwise expressly stated herein, in the event of any inconsistency between the terms of the Plan and this Agreement, the terms of the Plan will control.  The headings of the sections of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and will in no way modify or restrict any of the terms or provisions hereof.

13.Nonalienation of Benefits.  Except as provided in Section 7 and prior to the vesting of any Restricted Share, (a) no right or benefit under this Agreement will be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same will be void, and (b) no right or benefit hereunder will in any manner be subjected to or liable for the debts, contracts, liabilities or torts of you or other person entitled to such benefits.

14.Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan or the Agreement, if you are subject to Section 16 of the Exchange Act, then the Plan, the Restricted Shares and the Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable laws, the Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.

15.Section 409A. Neither the Restricted Shares nor the Retained Distributions are intended to constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code (together with any U.S. Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the date hereof, “Section 409A”). However, notwithstanding any other provision of the Plan or the Agreement, if at any time the Administrator determines that the Restricted Shares or Retained Distributions (or any portion of any of the foregoing) may be subject to Section 409A, the Administrator shall have the right in its sole discretion (without any obligation to do so or to indemnify you or any other person for failure to do so) to adopt such amendments to the Plan or the Agreement, or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, as the Administrator determines are necessary or appropriate either for the Restricted Shares and/or Retained Distributions to be exempt from the application of Section 409A or to comply with the requirements of Section 409A.

16.Counterparts. This Agreement may be executed in one or more counterparts, including by way of any electronic signature, subject to applicable law, each of which shall be deemed an original and all of which together shall constitute one instrument.

By signing the Grant Notice or otherwise accepting the Restricted Shares, you agree to be bound by terms of the Agreement and the Plan.

8

Document

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Robert R. Franklin, Jr., certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Stellar Bancorp, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2024
/s/ Robert R. Franklin, Jr.
Robert R. Franklin, Jr.<br><br>Chief Executive Officer

Document

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) OF

THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Paul P. Egge, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Stellar Bancorp, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2024
/s/ Paul P. Egge
Paul P. Egge<br>Chief Financial Officer

Document

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Quarterly Report of Stellar Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert R. Franklin, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and operating results of the Company as of the dates and for the periods expressed in the Report.

IN WITNESS WHEREOF, the undersigned has executed this Certificate, effective as of July 26, 2024.

/s/ Robert R. Franklin, Jr.
Robert R. Franklin, Jr.<br><br>Chief Executive Officer

Document

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Quarterly Report of Stellar Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul P. Egge, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and operating results of the Company as of the dates and for the periods expressed in the Report.

IN WITNESS WHEREOF, the undersigned has executed this Certificate, effective as of July 26, 2024.

/s/ Paul P. Egge
Paul P. Egge<br>Chief Financial Officer

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