Stellar Bancorp, Inc.STEL
Stellar Bancorp, Inc. Fair Value Disclosure
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.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for certain assets and liabilities measured at fair value is set forth below.
The carrying amounts and estimated fair values of financial instruments on the balance sheet were as follows:
| December 31, 2025 | |||||||||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 419,453 | $ | 419,453 | $ | — | $ | — | $ | 419,453 | |||||||||||||||||||
| Available for sale securities | 2,198,459 | — | 2,198,459 | — | 2,198,459 | ||||||||||||||||||||||||
| Loans held for investment, net of allowance | 7,216,962 | — | — | 7,203,747 | 7,203,747 | ||||||||||||||||||||||||
| Accrued interest receivable | 35,869 | 294 | 7,950 | 27,625 | 35,869 | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | 9,021,466 | $ | — | $ | 9,019,219 | $ | — | $ | 9,019,219 | |||||||||||||||||||
| Accrued interest payable | 5,508 | — | 5,508 | — | 5,508 | ||||||||||||||||||||||||
| Subordinated debt | 40,226 | — | 40,473 | — | 40,473 | ||||||||||||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 911,216 | $ | 911,216 | $ | — | $ | — | $ | 911,216 | |||||||||||||||||||
| Available for sale securities | 1,673,016 | — | 1,673,016 | — | 1,673,016 | ||||||||||||||||||||||||
| Loans held for investment, net of allowance | 7,358,796 | — | — | 7,223,895 | 7,223,895 | ||||||||||||||||||||||||
| 37,884 | 330 | 7,197 | 30,357 | 37,884 | |||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | 9,128,384 | $ | — | $ | 9,128,234 | $ | — | $ | 9,128,234 | |||||||||||||||||||
| Accrued interest payable | 17,052 | — | 17,052 | — | 17,052 | ||||||||||||||||||||||||
| Borrowed funds | — | — | — | — | — | ||||||||||||||||||||||||
| Subordinated debt | 70,105 | — | 68,963 | — | 68,963 | ||||||||||||||||||||||||
The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value, non-financial assets and non-financial liabilities and for estimating fair value for financial instruments not recorded at fair value:
Cash and Cash Equivalents—The carrying amount is a reasonable estimate of fair value for these short-term instruments. The Company classifies the estimated fair value of these instruments as Level 1.
Available for Sale Securities—Fair values for available for sale securities are based upon quoted market prices, if available, and are considered Level 1 inputs. For all other available for sale securities, if quoted prices are not available, fair values are measured based on market prices for similar securities and are considered Level 2 inputs. For these securities, the Company generally obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators and are considered Level 3 inputs. Available for sale securities are recorded at fair value on a recurring basis.
Loans—The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and that have no significant change in credit risk resulting in a Level 3 classification. Fair values for fixed-rate loans and variable rate loans which reprice infrequently are estimated by discounting future cash flows. In accordance with ASU 2016-01, the discount rates used to determine the fair value of loans used interest rate spreads that reflect factors such as liquidity, credit and nonperformance risk of the loans.
Deposits—The fair value of demand deposits (e.g., interest and noninterest checking, savings and certain types of money market deposits) is the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. The fair value of fixed rate certificates of deposit is estimated using a discounted cash flows calculation that applies interest rates currently offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Accrued Interest—The carrying amounts of accrued interest approximate their fair values resulting in a Level 1, 2 or 3 classification.
Borrowed Funds—The fair value of the Company’s borrowed funds is estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements and are measured utilizing Level 2 inputs.
Subordinated Debt—The fair values of subordinated debentures and notes are estimated using discounted cash flow analyses based on the Company’s current borrowing rates for similar types of borrowing arrangements and are measured utilizing Level 2 inputs.
Interest Rate Swaps, Interest Rate Caps and Credit Risk Participation Agreements—Fair value measurements for interest rate swaps, interest rate caps and credit participation agreements are obtained from an independent pricing service which uses the income approach. The income approach calls for the utilization of valuation techniques to convert future cash flows as due to be exchanged per the terms of the financial instrument, into a single present value amount. Measurement is based on the value indicated by the market expectations about those future amounts as of the measurement date. The proprietary curves of the independent pricing service utilize pricing models derived from industry standard analytic tools, considering both Level 1 and Level 2 inputs. Interest rate swaps and interest rate caps are classified as Level 2 and credit participation agreements are classified on as Level 3 and they all are recorded at fair value on a recurring basis.
Off-balance sheet instruments—The fair values of off-balance sheet commitments to extend credit and standby letters of credit financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Company has reviewed the unfunded portion of commitments to extend credit as well as standby and other letters of credit and has determined that the fair value of such financial instruments is not material.
Financial assets and liabilities measured at fair value on a recurring basis were as follows:
| December 31, 2025 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| U.S. government and agency securities | $ | — | $ | 392,475 | $ | — | $ | 392,475 | |||||||||||||||
| Municipal securities | — | 196,201 | — | 196,201 | |||||||||||||||||||
| Agency mortgage-backed pass-through securities | — | 807,986 | — | 807,986 | |||||||||||||||||||
| Agency collateralized mortgage obligations | — | 697,065 | — | 697,065 | |||||||||||||||||||
| Corporate bonds and other | — | 104,732 | — | 104,732 | |||||||||||||||||||
| Interest rate swaps and caps | — | 4,252 | — | 4,252 | |||||||||||||||||||
| Credit risk participation agreements | — | — | 6 | 6 | |||||||||||||||||||
| Total fair value of financial assets | $ | — | $ | 2,202,711 | $ | 6 | $ | 2,202,717 | |||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Interest rate swaps and caps | $ | — | $ | 4,252 | $ | — | $ | 4,252 | |||||||||||||||
| Total fair value of financial liabilities | $ | — | $ | 4,252 | $ | — | $ | 4,252 | |||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| U.S. government and agency securities | $ | — | $ | 193,603 | $ | — | $ | 193,603 | |||||||||||||||
| Municipal securities | — | 191,453 | — | 191,453 | |||||||||||||||||||
| Agency mortgage-backed pass-through securities | — | 521,376 | — | 521,376 | |||||||||||||||||||
| Agency collateralized mortgage obligations | — | 660,363 | — | 660,363 | |||||||||||||||||||
| Corporate bonds and other | — | 106,221 | — | 106,221 | |||||||||||||||||||
| Interest rate swaps | — | 6,277 | — | 6,277 | |||||||||||||||||||
| Credit risk participation agreements | — | — | 8 | 8 | |||||||||||||||||||
| Total fair value of financial assets | $ | — | $ | 1,679,293 | $ | 8 | $ | 1,679,301 | |||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | 6,277 | $ | — | $ | 6,277 | |||||||||||||||
| Total fair value of financial liabilities | $ | — | $ | 6,277 | $ | — | $ | 6,277 | |||||||||||||||
There were no transfers between levels during 2025 and 2024.
Certain assets, including purchase credit deteriorated and individually evaluated loans with allowances for credit losses, foreclosed assets 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 December 31, 2025 and 2024. Assets measured on a nonrecurring basis for the periods noted are summarized in the table below.
| December 31, 2025 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Loans: | |||||||||||||||||
| Commercial and industrial | $ | — | $ | — | $ | 10,528 | |||||||||||
| Commercial real estate (including multi-family residential) | — | — | — | ||||||||||||||
| Commercial real estate construction and land development | — | — | 10,377 | ||||||||||||||
| 1-4 family residential (including home equity) | — | — | — | ||||||||||||||
| Consumer and other | — | — | 6,203 | ||||||||||||||
| Foreclosed assets | — | — | 7,492 | ||||||||||||||
| Total | $ | — | $ | — | $ | 34,600 | |||||||||||
| December 31, 2024 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Loans: | |||||||||||||||||
| Commercial and industrial | $ | — | $ | — | $ | 9,391 | |||||||||||
| Commercial real estate (including multi-family residential) | — | — | 3,722 | ||||||||||||||
| Commercial real estate construction and land development | — | — | 1,866 | ||||||||||||||
| 1-4 family residential (including home equity) | — | — | 4,278 | ||||||||||||||
| Consumer and other | — | — | — | ||||||||||||||
| Total | $ | — | $ | — | $ | 19,257 | |||||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Mar 3, 2025 | |
| 2023 | Feb 29, 2024 | |
| 2022 | Mar 15, 2023 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.