LEASES

Lease payments over the expected term are discounted using the Company’s incremental borrowing rate for borrowings of similar terms. Generally, the Company cannot be reasonably certain about whether or not it will renew a lease until such time as the lease is within the last two years of the existing lease term. When the Company is reasonably certain that a renewal option will be exercised, it measures/remeasures the right-of-use asset and related lease liability using the lease payments specified for the renewal period or, if such amounts are unspecified, the Company generally assumes an increase (evaluated on a case-by-case basis in light of prevailing market conditions) in the lease payment over the final period of the existing lease term.

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the years ended December 31, 2022, 2021 and 2020.

At December 31, 2022, the Company had 32 leases consisting of branch locations and office space along with equipment. On the December 31, 2022 balance sheet, the right-of-use asset is classified within premises and equipment and the lease liability is

included in other liabilities. The Company also owns certain office facilities which it leases to outside parties under operating lessor leases; however, such leases are not significant. All leases were classified as operating leases. Leases with an initial term of 12 or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. During the year ended December 31, 2022, the Company acquired 15 operating leases as part of the Merger. See Note 2 – Acquisitions for further information.

Certain leases include options to renew, with renewal terms that can extend the lease term from one to 62 years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The depreciable lives of leased assets are limited by the expected lease term.

Supplemental lease information at the dates indicated is as follows:


	December 31,
	2022			2021
	(Dollars in thousands)
Balance Sheet:
Operating lease right of use asset classified as premises and equipment	$	23,538		$	10,196
Operating lease liability classified as other liabilities	$	23,136		$	10,370
Weighted average lease term, in years	8.18			4.97
Weighted average discount rate	4.00		%	2.62		%

During 2022, operating lease right of use assets increased $13.6 million and operating lease liabilities increased $12.8 million due to the Merger. See Note 2 – Acquisitions for further information.

Lease costs for the dates indicated is as follows:


	For the Years Ended December 31,
	2022		2021		2020
	(In thousands)
Income Statement:
Operating lease cost	$	5,014	$	3,471	$	3,270
Short-term lease cost	5		34		78
Sublease income	—		(72)		(66)
Total operating lease costs	$	5,019	$	3,433	$	3,282

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


	December 31,
	2022		2021
	(In thousands)
Lease payments due:
Within one year	$	4,634	$	2,951
After one but within two years	104		2,350
After two but within three years	3,684		1,892
After three but within four years	3,132		1,366
After four but within five years	2,918		894
After five years	9,303		1,594
Total lease payments	23,775		11,047
Discount on cash flows	639		677
Total lease liability	$	23,136	$	10,370

About Leases Disclosures

Lease disclosures under ASC 842 provide a comprehensive view of a company's leased asset portfolio, including the split between operating and finance leases, discount rates used to present-value future payments, and the maturity schedule of lease obligations. This section reveals a significant source of off-balance-sheet commitments that were largely hidden before the current standard.

Key signals: the weighted-average discount rate affects the size of recorded lease liabilities — a higher rate reduces the reported obligation, so compare the chosen rate against the company's incremental borrowing rate. The operating versus finance lease mix affects both EBITDA and operating income presentation. Watch the maturity table for concentration risk: large payment cliffs in specific years may create cash flow pressure. Variable lease payments excluded from the liability measurement represent real obligations that do not appear on the balance sheet. Compare total lease costs against prior-year operating lease expense to assess the true economic burden.

Stellar Bancorp, Inc. Leases Disclosure

About Leases Disclosures

Other Available Disclosures