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Item 1A. Risk Factors

2023-02-22 compared with 2022-02-23 · 248 added, 211 removed, 333 unchanged (58% of the section changed)

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Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects.

These risks are discussed more fully in Item 1A.

Risk Factors herein.

These risks include, but are not limited to, the following:

• We are subject to various risks associated with COVID-19;

• The discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to us;

These risks are discussed more fully after the summary, and risks include, but are not limited to, the following:

• Current uncertain economic conditions (both domestic and international) pose challenges, and could adversely affect our business, financial condition and results of operations;

• Changes in interest rates could have an adverse impact on our results of operations and financial condition including decreased net interest margin, impact on loan demand, competition for, and increased cost of funding, deposits, and the value of our securities portfolio (including any losses recognized);

• We are subject to risks related to inflation, rising prices and the government and Federal Reserve response to the same;

• We may not be able to adequately measure and limit our credit risk;

• Adverse conditions in the general business or economic environment could have a material adverse effect on our financial condition and results of operations;

• Our allowance for loan credit losses may prove to be insufficient to absorb losses inherent in our loan portfolio and our earnings could decrease;

• Negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing certain of our loans;

• The loss of executive management or other key employees could adversely impact our business or reputation;

• Unauthorized access, cyber-crime and other threats to data security may cause harm to our business;

• The deterioration in value of receivables, inventory, equipment or other commercial collateral could expose us to credit losses;

• The geographic concentration of our markets in Texas, Louisiana and Mississippi makes us more sensitive than our more geographically diversified competitors to adverse changes in the local economy;

• A large portion of our loan portfolio is comprised of commercial loans secured by receivables, inventory, equipment or other commercial collateral, the deterioration in value of which could expose us to credit losses;

• Our loan portfolio contains a number of large loans to certain borrowers, and deterioration in the financial condition of these borrowers could have a significant adverse impact on our asset quality;

• Our allowance for loan credit losses may prove to be insufficient to absorb losses inherent in our loan portfolio and our earnings could decrease;

• We are subject to various risks associated with COVID-19;

• The loss of executive management or other key employees, as well as our ability to attract and retain profitable bankers, could adversely impact our business or reputation;

• Unauthorized access, cyber-crime and other threats to data security may cause harm to our business;

• The discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to us;

• We may have exposure to tax liabilities that are larger than we anticipate;

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• We face significant competition to attract and retain customers, which could impair our growth, decrease our profitability or result in loss of market share;

• Our ability to maintain our reputation is critical to the success of our business;

• Risks related to environmental, social and governance ("ESG") strategies and initiatives, the scope and pace of which could alter our reputation and shareholder, associate, customer and third-party affiliations;

• Our business has grown rapidly, and we may not be able to maintain our historical rate of growth, which could have an adverse effect on our ability to successfully implement our business strategy;

• We may pursue acquisitions or new lines of business in the future, which could expose us to financial, execution and operational risks;

• We are susceptible to environmental risks, such as hurricanes and other natural disasters, adverse weather and climate change effects;

• We have a continuing need for technological change, and we may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology;

• We operate in a highly regulated environment and the laws and regulations that govern our operations could subject us to regulatory consequences;

• The effectiveness of derivative financial instruments and hedging activities to manage risks;

• We are subject to various liquidity risks, credit, and market risks;

• Risks related to the extensive use, reliability, disruption, and accuracy of the models and data we rely on;

• Our ability to maintain adequate internal controls over financial reporting;

• Our reliance on third parties to provide key components of our business infrastructure;

• Risks related to potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions;

• We operate in a highly regulated environment and the laws and regulations that govern our operations, including accounting policies, standards, and interpretations, could subject us to regulatory consequences;

• We are subject to stringent capital requirements, which may result in lower returns on equity, require us to raise additional capital, limit growth opportunities or result in regulatory restrictions;

• The market price of our common stock may be subject to substantial fluctuations.

• The market price of our common stock may be subject to substantial fluctuations and is subject to risk of loss;

• Other factors and risks described under “Risk Factors” herein and in any of our subsequent reports filed with the SEC and available on our website at www.sec.gov .

Risks Related to Our Business

The COVID-19 pandemic and measures intended to prevent its spread have had and could continue to have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced certain sectors of economic activity.

Efforts to contain the pandemic, including vaccinations, have made progress in reducing the impact of COVID-19 and some restrictions that were put in place to reduce the spread of the virus have relaxed.

However, as new variants of the virus cause additional outbreaks, their impact cannot be predicted at this time and could depend on numerous factors, including the effectiveness of COVID-19 vaccines against the variants, the availability of effective vaccines in different parts of the world, vaccination rates among the population and the response by governmental bodies to the pandemic.

The United States and state and local governments have taken steps to attempt to mitigate some of the more severe economic effects of the virus, including Congress’s passage of the CARES Act and related stimulus legislation.

For example, the CARES Act, which was enacted on March 27, 2020, provided certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic

forbearance, and the Consolidated Appropriations Act, 2021, extended some of these relief provisions in certain respects as well as provided other forms of relief.

Additionally, provisions of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, and interagency guidance of the federal banking agencies, provide financial institutions the option to temporarily suspend requirements under United States generally accepted accounting principles ("U.S.

GAAP") related to classification of certain loan modifications as troubled debt restructurings to account for the current and anticipated effects of COVID-19.

Further, in response to the COVID-19 outbreak, the Federal Reserve implemented a number of facilities to provide emergency liquidity to various segments of the U.S.

economy and financial markets.

Many of these facilities have since expired.

If economic conditions decline, the absence of these facilities and other legislative stimulus could have an adverse effect on the U.S.

economy and ultimately on our business.

The full impact on our business activities as a result of these government and regulatory policies, programs and guidelines, as well as regulators’ reactions to such activities, remains uncertain.

Origin Bank’s participation in the PPP could subject us to increased governmental and regulatory scrutiny, negative publicity or increased exposure to litigation, which could increase our operational, legal and compliance costs and damage our reputation.

Furthermore, the outbreak has adversely impacted, and is likely to further adversely impact, our workforce and operations and the operations of our borrowers, customers and business partners.

In particular, we have and may continue to experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

• credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hotel, energy, non-essential retail, restaurant and assisted living industries, but across other industries as well;

• third-party disruptions, including outages at network providers and other suppliers;

• increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;

• operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The spread of COVID-19 has caused us to modify our business practices, specifically developing work from home and social distancing plans for our employees.

We may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners.

There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the continuing spread and rise of new variants, the actions to contain the virus or treat its impact, the rollout and effectiveness of vaccination programs and the effectiveness of vaccines against new variants, and how quickly and to what extent normal economic and operating conditions can resume.

Even after the COVID-19 outbreak has subsided, there may continue to be seasonal resurgences and we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change.

We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole.

However, the effects could have a continuing material impact on our results of operations and heighten many of our known risks described herein.

The discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to us.

On March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that (i) 24 LIBOR settings would cease to exist immediately after December 31, 2021 (all seven euro LIBOR settings;

all seven Swiss franc LIBOR settings;

the Spot Next, 1-week, 2-month, and 12-month Japanese yen LIBOR settings;

the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings;

and the 1-week and 2-month US dollar LIBOR settings);

(ii) the 1-month, 3-month, 6-month and 12-month US LIBOR settings would cease to exist after June 30, 2023;

and (iii) the FCA would consult on whether the remaining nine LIBOR settings should continue to be published on a synthetic basis for a certain period using the FCA’s proposed new powers that the UK government is legislating to grant to them.

Central banks and regulators in a number of major jurisdictions (for example, United States, United Kingdom, European Union, Switzerland and Japan) have convened working groups to find, and implement the transition to, suitable replacements for interbank offered rates.

To identify a successor rate for U.S.

dollar LIBOR, the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, was formed.

The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR.

SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S.

Treasury securities, and is based on directly observable U.S.

Treasury-backed repurchase transactions.

At this time, it is not possible to predict the effect of these changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere or whether the COVID-19 outbreak will have a further effect on LIBOR transition plans.

It is also not possible to predict the effect of any such alternative rates on the value of LIBOR-based securities or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally.

Given LIBOR's extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions and could have a range of adverse effects on our business, financial condition and results of operations.

Our commercial and consumer businesses issue, trade and hold various products that are currently indexed to LIBOR.

Among other products, at December 31, 2021, we had approximately $1.80 billion of loans indexed to LIBOR.

Our products that are indexed to LIBOR are significant, and if not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, litigation, reputational or compliance risks to us.

The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, swaps and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.

All Origin notes contain fallback language that allows us to replace the index in the event LIBOR becomes unavailable, or unascertainable, ceases to be published or is otherwise unreliable.

Such replacement is to be determined by Origin in our sole discretion and can include an effective adjustment to the spread, if deemed necessary by us.

In addition, Origin Bank has reviewed various instruments' contracts and any inadequate fallback language may result in issues establishing an alternative index and adjusting the margin as applicable.

We continue to monitor this activity and evaluate the related risks.

In addition, in light of the FCA's announced schedule for the cessation of LIBOR, we will need to renegotiate credit agreements executed prior to the addition of the LIBOR fallback language and extending beyond June 30, 2023 that utilize LIBOR as a factor in determining the interest rate, in order to replace LIBOR with SOFR or another new standard that is established, which may have an adverse effect on our overall financial condition or results of operations.

Following the replacement of LIBOR, some or all of these credit agreements may bear interest at a lower interest rate, which could have an adverse impact on our results of operations.

federal banking agencies expect banking organizations to cease entering into new contracts that use U.S.

dollar LIBOR as a reference rate by no later than December 31, 2021, and to ensure existing contracts have robust fallback language that includes a clearly defined alternative reference rate.

Origin suspended the utilization of LIBOR as an index for new and renewed loans and instrument contracts as of December 31, 2021.

We will be subject to heightened regulatory requirements if our total assets grow in excess of $10 billion as of December 31 of any calendar year.

As of December 31, 2021, our total assets were $7.86 billion.

In addition to our current regulatory requirements, banks with $10 billion or more in total assets are, among other things:

examined directly by the United States Consumer Financial Protection Bureau with respect to various federal consumer financial laws;

subject to limits on debit interchange fees pursuant to Section 1075 of the Dodd-Frank Act, known as the Durbin Amendment;

eligible for potentially a smaller dividend on holdings of Federal Reserve Bank stock;

subject to the Volcker Rule’s limitations on proprietary trading and investments or sponsorship in covered funds;

no longer treated as a “small institution” for FDIC deposit insurance assessment purposes;

subject to the large bank assessment methodology for calculating FDIC insurance premiums;

and no longer eligible to elect to be subject to the CBLR.

Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, or the incurrence of other significant expenses, among other things, any of which could have a significant adverse effect on our business, financial condition or results of operations.

Our regulators may also consider our preparation for compliance with these regulatory requirements in the course of examining our operations generally or when considering any request from us or the Bank.

We will become subject to reduced debit interchange income and could face related adverse business consequences if our total assets grow in excess of $10 billion as of December 31 of any calendar year.

Debit card interchange fee restrictions set forth in the Durbin Amendment, as implemented by regulations of the Federal Reserve, cap the maximum debit interchange fee that a debit card issuer may receive per transaction.

Debit card issuers with total consolidated assets of less than $10 billion are exempt from these interchange fee restrictions.

The exemption for small issuers ceases to apply as of July 1 of the year following the calendar year in which the debit card issuer has total consolidated assets of $10 billion or more at calendar year end.

Any reduction in interchange income as a result of the loss of the exemption for small issuers under the Durbin Amendment could have a significant adverse effect on our business, financial condition and results of operations.

Moreover, our loss of eligibility under the exemption for small issuers could adversely affect or reduce our ability to maintain certain of our fee-sharing prepaid card partnerships, which have the right to terminate our agreement with respect to certain financial services under such circumstances.

Current uncertain economic conditions pose challenges, and could adversely affect our business, financial condition and results of operations.

We are operating in an uncertain economic environment.

The pandemic caused a global economic slowdown, and while we have seen economic recovery, continuing supply chain issues, labor shortages and inflation risk are affecting the continued recovery.

Our business and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the U.S.

Continued economic uncertainty and a recessionary or stagnant economy could result in financial stress on our borrowers, which could adversely affect our business, financial condition and results of operations.

We decreased the expense for credit losses over fiscal year 2021 as the economy began to recover, however, deteriorating conditions in the regional economies we serve, or in certain sectors of those economies, could drive losses beyond that which is provided for in our allowance for credit losses.

We could also face the following risks in connection with the following events:

• inflationary pressures remained elevated throughout 2022 and are likely to continue into 2023;

• market developments and economic stagnation or slowdown may affect consumer confidence levels and may cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities;

• the processes we use to estimate the allowance for credit losses and other reserves may prove to be unreliable.

Such estimates rely upon complex modeling inputs and judgments, including forecasts of economic conditions, which may be rendered inaccurate and/or no longer subject to accurate forecasting;

• our ability to assess the creditworthiness of our borrowers may be impaired if the models and approaches we use to select, manage, and underwrite loans become less predictive of future charge-offs;

• regulatory scrutiny of the industry could increase, leading to increased regulation of the industry that could lead to a higher cost of compliance, limit our ability to pursue business opportunities and increase our exposure to litigation or fines;

• ineffective monetary policy or other market conditions could cause rapid changes in interest rates and asset values that would have a materially adverse impact on our profitability and overall financial condition;

• erosion in the fiscal condition of the U.S.

Treasury could lead to new taxes that would limit our ability to pursue growth and return profits to shareholders;

government’s decisions regarding its debt ceiling and the possibility that the U.S.

could default on its debt obligations may cause further interest rate increases, disrupt access to capital markets and deepen recessionary conditions.

If these conditions or similar ones continue to exist or worsen, we could experience adverse effects on our financial condition.

Changes in interest rates could have an adverse impact on our results of operations and financial condition.

Significant increases in market interest rates on loans, or the perception that an increase may occur, could adversely affect both our ability to originate new loans and our ability to grow.

Beginning early in 2022, in response to growing signs of inflation, the Federal Reserve has increased interest rates rapidly.

Further, the Federal Reserve announced an intention to take further actions to mitigate inflationary pressures.

Rapid changes in interest rates may make it difficult for us to balance our loan and deposit portfolios, which may adversely affect our results of operations by, for example, reducing asset yields or spreads, or having other adverse impacts on our business.

Conversely, decreases in interest rates could result in an acceleration of loan prepayments.

The increased market interest rates could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations.

If this occurred, it could cause an increase in nonperforming assets and charge offs, which could adversely affect our business.

Further, our earnings and financial condition are dependent to a large degree upon net interest income, which is the difference or spread, between interest earned on interest-earning assets and interest paid on interest-bearing liabilities.

When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities may fluctuate.

This can cause decreases in our spread and can adversely affect our earnings and financial condition.

Interest rates are highly sensitive to many factors including:

• The rate of inflation;

• Economic conditions;

• Federal monetary policies;

• Stability of domestic and foreign markets.

Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.

When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in the same period, an increase in interest rates could reduce net interest income.

Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income.

As of December 31, 2022, our net interest income simulations projected that 100 and 200 basis point increases in interest rates would result in a positive variance in net interest income of 3.64% and 7.10%, respectively, relative to the base case over the next 12 months, while decreases in interest rates of 100 and 200 basis points would result in a negative variance in net interest income of 2.26% and 6.72%, respectively, relative to the base case over the next 12 months.

These are estimates and assume that the composition of our interest sensitive assets and liabilities existing at each year-end will remain constant over the relevant twelve month measurement period and that changes in market interest rates are instant and constant across the yield curve regardless of duration of pricing characteristics of specific assets or liabilities.

Changes in market values of investment securities classified as available for sale are impacted by higher rates and can negatively impact our other comprehensive (loss) income and equity levels through accumulated other comprehensive (loss) income, which includes net unrealized gains and losses on those securities.

Further, such losses could be realized into earnings should liquidity and/or business strategy necessitate the sales of securities in a loss position.

Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates.

A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio and increased competition for deposits.

Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume, loan portfolio and our overall results.

Moreover, although we have implemented practices we believe will reduce the potential effects of changes in interest rates on our net interest income, these practices may not always be successful.

Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest income and our net interest margin, asset quality, loan and lease origination volume, liquidity, and overall profitability.

We cannot assure you that we can minimize our interest rate risk.

In addition, we originate residential mortgage loans for sale and for our portfolio.

The origination of residential mortgage loans is highly dependent on the local real estate market and the level of interest rates.

Increasing interest rates tend to reduce the origination of loans for sale and fee income, which we report as gain on sale of loans.

Decreasing interest rates generally result in increased prepayments of loans and mortgage-backed securities, as borrowers refinance their debt in order to reduce their borrowing cost.

This typically leads to reinvestment at lower rates than the loans or securities were paying.

Changes in market interest rates could also reduce the value of our financial assets.

Our financial condition and results of operations could be adversely affected if we are unsuccessful in managing the effects of changes in interest rates.

Changes in interest rates may change the value of our mortgage servicing rights portfolio, which may increase the volatility of our earnings.

As a result of our mortgage servicing business, we have a portfolio of mortgage servicing rights on unpaid principal balances of $1.90 billion at December 31, 2022.

During the second half of 2022, we entered into an agreement to sell our GNMA mortgage servicing rights portfolio, which met all final sale conditions in early 2023.

We sold approximately $1.8 million in GNMA mortgage servicing rights, representing $453.3 million in unpaid principal balances and derecognized the related GNMA repurchase asset and offsetting liability of $24.6 million.

A mortgage servicing right is the right to service a mortgage loan - collect principal, interest and escrow amounts - for a fee.

We measure and carry our residential mortgage servicing rights using the fair value measurement method.

Fair value is determined as the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.

The primary risk associated with mortgage servicing rights is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments.

Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced.

Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than previously estimated.

An increase in the size of our mortgage servicing rights portfolio may increase our interest rate risk.

At December 31, 2022, our mortgage servicing rights had a fair value of $20.8 million, compared to $16.2 million at December 31, 2021.

Changes in fair value of our mortgage servicing rights are recorded to earnings in each period.

Depending on the interest rate environment, it is possible that the fair value of our mortgage servicing rights may be reduced in the future.

If such changes in fair value significantly reduce the carrying value of our mortgage servicing rights, our business, financial condition and results of operations could be adversely affected.

Inflationary pressures and rising prices may affect our results of operations and financial condition.

Inflation rose in 2022 at levels not seen for over 40 years.

Inflationary pressures are likely to continue into 2023.

Inflation could lead to increased costs to our customers, making it more difficult for them to repay their loans or other obligations increasing our credit risk.

Sustained higher interest rates by the Federal Reserve may be needed to tame persistent inflationary price pressures, which could push down asset prices and weaken economic activity.

A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.

Changes to monetary policy by the Federal Reserve could adversely impact our results of operations.

The Federal Reserve is responsible for regulating the supply of money in the United States, including open market operations used to stabilize prices in times of economic stress, as well as setting monetary policies.

These activities strongly influence our rate of return on certain investments, our hedge effectiveness for mortgage servicing and our mortgage origination pipeline, as well as our costs of funds for lending and investing, all of which may adversely impact our liquidity, results of operations, financial condition and capital position.

Unstable global economic conditions may have serious adverse consequences on our business, financial condition, and operations.

The global credit and financial markets have from time to time experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, high rates of inflation, and uncertainty about economic stability.

The financial markets and the global economy may also be adversely affected by the current or anticipated impact of military conflict, including the current conflict between Russia and Ukraine, which is increasing volatility in commodity and energy prices, creating supply chain issues and causing instability in financial markets.

Sanctions imposed by the United States and other countries in response to such conflict could further adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others could exacerbate market and economic instability.

The specific consequences of the conflict in Ukraine on our business is difficult to predict at this time, but in addition to inflationary pressures affecting our operations and those of our customers and borrowers, we may also experience an increase in cyberattacks against us, our customers and borrowers, service providers and other third parties.

There can be no assurance that further deterioration in markets and confidence in economic conditions will not occur.

Our general business strategy may be adversely affected by any such economic downturn, volatile business environment, hostile third-party action or continued unpredictable and unstable market conditions.

We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.

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The creditworthiness of a borrower is affected by many factors, including local market conditions and general economic conditions.

If the overall economic climate in the U.S., generally, or our market areas, specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses.

If the overall economic climate in the United States, generally, or our market areas, specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses.

Additional factors related to the credit quality of commercial loans include the quality of the management of the business and the borrower's ability both to properly evaluate changes in the supply and demand characteristics affecting our market for products and services and to effectively respond to those changes.

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As a result, our inability to successfully manage credit risk could have an adverse effect on our business, financial condition and results of operations.

As a business operating in the financial services industry, adverse conditions in the general business or economic environment could have a material adverse effect on our financial condition and results of operations.

Uncertainty about the federal fiscal policymaking process, and the medium and long-term fiscal outlook of the federal government and U.S.

economy, is a concern for businesses, consumers and investors in the U.S.

In addition, economic conditions in foreign countries, including global political hostilities or public health outbreaks and uncertainty over the stability of foreign currency, could affect the stability of global financial markets, which could hinder domestic economic growth.

The current economic environment is characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our investment portfolio and we are unable to predict changes in market interest rates.

Additionally, our business could be adversely affected by the effects of a widespread outbreak of disease pandemics, such as the outbreak of COVID-19, which has and continues to spread significantly in the United States.

Any outbreak of disease pandemics and other adverse public health developments could further have an adverse effect on our business operations and could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could adversely affect our customers' businesses and results of operations.

All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable.

Our business is also significantly affected by monetary and related policies of the U.S.

government and its agencies.

Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control.

Adverse economic conditions and government responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our allowance for loan credit losses may prove to be insufficient to absorb losses inherent in our loan portfolio and our earnings could decrease.

Our experience in the banking industry indicates that some portion of our loans will not be fully repaid in a timely manner or at all.

Accordingly, we maintain an allowance for loan credit losses that represents management's judgment of expected losses and risks inherent in our loan portfolio.

The level of the allowance reflects management's continuing evaluation of general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral.

The determination of the appropriate level of the allowance for loan credit losses is inherently highly subjective and requires us to make significant estimates of and assumptions regarding current credit risks and future trends, all of which may undergo material changes.

Inaccurate management assumptions, deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan credit losses and additional expenses may be incurred.

At any time, we are likely to have loans in our portfolio that will result in losses but that have not been identified as nonperforming or potential problem credits.

We cannot be certain that we will be able to identify deteriorating credits before they become nonperforming assets or that we will be able to limit or correctly estimate losses on those loans that are identified.

In addition, our regulators, as an integral part of their periodic examination, review the adequacy of our allowance for loan credit losses and may direct us to make additions to the allowance based on their judgments about information available to them at the time of their examination.

Changes in economic conditions or individual business or personal circumstances affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance.

Further, if actual charge-offs in future periods exceed our estimation of charge-offs, we may need additional provision for loan losses to restore the adequacy of our allowance for loan losses.

If we are required to materially increase our level of allowance for loan credit losses for any reason, such increases could have an adverse effect on our business, financial condition and results of operations.

Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing certain of our loans and result in loan and other losses.

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If real estate values decline, it is also more likely that we would be required to increase our allowance for loan credit losses, which could have an adverse effect on our business, financial condition and results of operations.

We rely heavily on our executive management team and other key employees, and the loss of any these individuals could adversely impact our business or reputation.

Our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees.

Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy.

We may not be successful in retaining our key employees, and the unexpected loss of services of one or more of our key personnel could have an adverse effect on our business because of their skills, knowledge of our primary markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, or at all, which could have an adverse effect on our business, financial condition and results of operations.

Unauthorized access, cyber-crime and other threats to data security may require significant resources, harm our reputation, and otherwise cause harm to our business.

We necessarily collect, use and hold personal and financial information concerning individuals and businesses with which we have a banking relationship.

This information includes non-public, personally-identifiable information that is protected under applicable federal and state laws and regulations.

Additionally, certain of these data processing functions are not handled by us directly, but are outsourced to third-party providers.

Our facilities and systems, and those of our third-party service providers, may be vulnerable to threats to data security, security breaches, acts of vandalism and other physical security threats, computer viruses or compromises, ransomware attacks, misplaced or lost data, programming and/or human errors or other similar events.

Any security breach involving the misappropriation, loss or other unauthorized disclosure of our confidential business, employee or customer information, whether originating with us, our vendors or retail businesses, could severely damage our reputation, expose us to the risks of civil litigation and liability, require the payment of regulatory fines or penalties or undertaking of costly remediation efforts with respect to third parties affected by a security breach, disrupt our operations, and have a material adverse effect on our business, financial condition and results of operations.

It is difficult or impossible to defend against every risk being posed by changing technologies or criminals intent on committing cyber-crime.

Our controls and protections and those of our vendors could prove inadequate.

In the last few years, there have been an increasing number of cyber incidents and cyber criminals continue to increase their sophistication, including several well-publicized cyber-attacks that targeted other U.S.

companies, including financial services companies much larger than us.

These cyber incidents have been initiated from a variety of sources, including terrorist organizations and hostile foreign governments.

As technology advances, the ability to initiate transactions and access data has also become more widely distributed among mobile devices, personal computers, automated teller machines, remote deposit capture sites and similar access points, some of which are not controlled or secured by us.

It is possible that we could have exposure to liability and suffer losses as a result of a security breach or cyber-attack that occurred through no fault of the Company.

Further, the probability of a successful cyber-attack against us or one of our third-party services providers cannot be predicted.

Cyber-security risks appear to be growing and, as a result, the cyber-resilience of banking organizations is of increased importance to federal and state banking agencies and other regulators.

New or revised laws and regulations may significantly impact our current and planned privacy, data protection and information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities.

For example, a final rule that the federal banking agencies issued in November 2021 requires banking organizations to notify their primary federal regulator of significant computer security incidents within 36 hours of determining that such an incident has occurred.

The compliance date of this rule is May 1, 2022.

Compliance with current or future privacy, data protection and information security laws to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could materially and adversely affect the Company's profitability.

Our ability to attract and retain profitable bankers is critical to the success of our business strategy.

Our ability to retain and grow our loans, deposits and fee income depends upon the business generation capabilities, reputation and relationship management skills of our bankers.

If we were to lose the services of any of our bankers, including profitable bankers employed by banks that we may acquire, to a new or existing competitor or otherwise, we may not be able to retain valuable relationships and some of our customers could choose to use the services of a competitor instead of our services.

Our growth strategy also relies on our ability to attract and retain additional profitable bankers.

We may face difficulties in recruiting and retaining bankers of our desired caliber, including as a result of competition from other financial institutions.

In particular, many of our competitors are significantly larger with greater financial resources, and may be able to offer more attractive compensation packages and broader career opportunities.

Additionally, we may incur significant expenses and expend significant time and resources on training, integration and business development before we are able to determine whether a new banker will be profitable or effective.

If we are unable to attract and retain profitable bankers, or if our bankers fail to meet our expectations in terms of customer relationships and profitability, we may be unable to execute our business strategy, which could have an adverse effect on our business, financial condition and results of operations.

The geographic concentration of our markets in Texas, Louisiana and Mississippi makes us more sensitive than our more geographically diversified competitors to adverse changes in the local economy.

Unlike larger financial institutions that are more geographically diversified, we are a regional banking franchise concentrated in the Interstate 20 Corridor between the Dallas/Fort Worth metropolitan area and Jackson, Mississippi, as well as in Houston, Texas.

Unlike larger financial institutions that are more geographically diversified, we are a regional bank concentrated in the Interstate 20 Corridor between the Dallas/Fort Worth metropolitan area, East Texas, North Louisiana and Jackson, Mississippi, as well as in Houston, Texas.

At December 31, 2022, 66.1% of our total loans (by dollar amount), excluding mortgage warehouse lines of credit, were made to borrowers who reside or conduct business in Texas, 20.5% attributable to Louisiana and 7.3% attributable to Mississippi, and substantially all of our real estate loans are secured by properties located in these states.

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A large portion of our loan portfolio is comprised of commercial loans secured by receivables, inventory, equipment or other commercial collateral, the deterioration in value of which could expose us to credit losses.

At December 31, 2021, approximately $1.35 billion, or 25.8%, of our total loans were commercial and industrial loans, excluding PPP loans, to businesses.

At December 31, 2022, approximately $2.05 billion, or 28.9%, of our total loans were commercial and industrial loans to businesses.

In general, these loans are collateralized by general business assets, including, among other things, accounts receivable, inventory and equipment and many are backed by a personal guaranty of the borrower or principal.

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If any of our largest borrowers become unable to repay their loan obligations as a result of economic or market conditions or personal circumstances, our nonperforming loans and our provision for loan losses could increase significantly, which could have an adverse effect on our business, financial condition and results of operations.

Our allowance for loan credit losses may prove to be insufficient to absorb losses inherent in our loan portfolio and our earnings could decrease.

Our experience in the banking industry indicates that some portion of our loans will not be fully repaid in a timely manner or at all.

Accordingly, we maintain an allowance for loan credit losses that represents management's judgment of expected losses and risks inherent in our loan portfolio.

At any time, we are likely to have loans in our portfolio that will result in losses but that have not been identified as nonperforming or potential problem credits.

Further, if actual charge-offs in future periods exceed the amounts allocated to the allowance for loan credit losses, we may need additional provision for loan losses to restore the adequacy of our allowance for loan losses.

The ongoing COVID-19 pandemic and resulting adverse economic conditions have adversely impacted, and could continue to adversely impact, our business and results.

Our business is dependent on the willingness and ability of our customers to conduct banking and other financial transactions.

The ongoing COVID-19 global and national health emergency caused significant disruption in the United States and international economies and financial markets and continues to cause illness, quarantines, reduced attendance at events and reduced travel, reduced commercial and financial activity, and overall economic and financial market instability.

While the level of disruption caused by, and the economic impact of, COVID-19 has lessened in 2022, there is no assurance that the pandemic will not worsen again, included as a result of the emergence of new strains of the virus.

Any worsening of the pandemic and its effects on the economy could further impact our business, our provision and allowance for credit losses, and the value of certain assets that we carry on our consolidated balance sheets such as goodwill.

Our customers, business partners, and third-party providers, including those who perform critical services for our business, may also be adversely affected.