What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-23 · 242 added, 208 removed, 554 unchanged (45% of the section changed)

8 unchanged sentences

Discussion in this Form 10-K includes results of operations and financial condition for 2022 and 2021 and year-over-year comparisons between 2022 and 2021.

For discussion on results of operations and financial condition pertaining to 2020 and 2019 and year-over-year comparisons between 2020 and 2019, please refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 2, 2021.

For discussion on results of operations and financial condition pertaining to 2021 and 2020 and year-over-year comparisons between 2021 and 2020, please refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022.

Critical Accounting Policies and Estimates

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We believe that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate.

Allowance for Credit Losses.

Effective January 1, 2020, we adopted the current expected credit losses methodology ("CECL") for estimating allowances for credit losses, resulting in a change to the reporting of credit losses for assets held at amortized cost basis and available for sale debt securities.

As a result, we recognized a one-time, after-tax cumulative effect adjustment of $760,000 to retained earnings at the beginning of the first quarter of 2020, increasing the allowance for credit losses by approximately $1.2 million and decreasing the off-balance sheet reserve by $381,000.

Allowance for Loan Credit Losses.

The allowance for loan credit losses represents the estimated losses for loans accounted for on an amortized cost basis.

Expected losses are calculated using relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

We evaluate LHFI on a pool basis with pools of loans characterized by loan type, collateral, industry, internal credit risk rating and FICO score.

We evaluate loans held for investment ("LHFI") on a pool basis with pools of loans characterized by loan type, collateral, industry, internal credit risk rating and FICO score.

The amount of the allowance for loan credit losses is affected by loan charge-offs, which decrease the allowance, recoveries on loans previously charged off, which increase the allowance, as well as the provision for loan credit losses charged to income, which increases the allowance.

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This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Credit losses are charged against the allowance for credit losses when management believes the loss is confirmed.

Credit losses are charged against the allowance for loan credit losses when management believes the loss is confirmed.

Loan Acquisition Accounting.

We account for our mergers/acquisitions under Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting.

All identifiable assets acquired, including loans, are recorded at fair value.

The fair value for acquired loans at the time of acquisition or merger is based on a variety of factors, including discounted expected cash flows, adjusted for estimated prepayments and credit losses.

In accordance with ASC 326, the fair value adjustment is recorded as premium or discount to the unpaid principal balance of each acquired loan.

Loans that have been identified as having experienced a more-than-insignificant deterioration in credit quality since origination is a purchase credit deteriorated (“PCD”) loan.

The net premium or discount on PCD loans is adjusted by the Company’s allowance for credit losses recorded at the time of merger/acquisition.

The remaining net premium or discount is accreted or amortized into interest income over the remaining life of the loan using the effective interest rate method.

The net premium or discount on loans that are not classified as PCD (“non-PCD”), that includes credit and non-credit components, is accreted or amortized into interest income over the remaining life of the loan using a constant yield method.

We then record the necessary allowance for credit losses on the non-PCD loans through provision for loan credit losses expense.

In the first quarter of 2020, U.S.

federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay the regulatory capital impact for up to two years (beginning January 1, 2020), followed by a three-year transition period.

We elected to use the two-year delay of CECL’s impact on our regulatory capital (from January 1, 2020 through December 31, 2021) followed by the three-year transition period of CECL’s initial impact on our regulatory capital (from January 1, 2022 through December 31, 2024), and, accordingly, we will begin to amortize the CECL adoption impact to our regulatory capital beginning on January 1, 2022.

Given the small size of the CECL adoption impact the amortization is not expected to significantly affect our regulatory capital.

federal regulatory authorities issued an interim final rule that provided banking organizations that adopted the Current Expected Credit Loss (“CECL”) methodology during the 2020 calendar year with the option to delay the regulatory capital impact for up to two years (beginning January 1, 2020), followed by a three-year transition period.

We elected to use the two-year delay of CECL’s impact on our regulatory capital (from January 1, 2020, through December 31, 2021), followed by the three-year transition period of CECL’s initial impact on our regulatory capital (from January 1, 2022, through December 31, 2024), and, accordingly, we began to amortize the CECL adoption impact to our regulatory capital beginning on January 1, 2022.

The amount representing the CECL impact to the Company's regulatory capital that will be ratably transitioning back into regulatory capital over the transition period is $5.1 million and $7.6 million at December 31, 2022 and 2021, respectively.

Mortgage Servicing Rights.

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We are a financial holding company headquartered in Ruston, Louisiana.

Our wholly-owned bank subsidiary, Origin Bank, was founded in 1912.

Deeply rooted in our history is a culture committed to providing personalized, relationship banking to its clients and communities.

We provide a broad range of financial services to businesses, municipalities, high net-worth individuals and retail clients.

We currently operate 44 banking centers located from Dallas/Fort Worth and Houston, Texas, across North Louisiana and into Mississippi.

Our wholly-owned bank subsidiary, Origin Bank, was founded in 1912 in Choudrant, Louisiana.

Deeply rooted in our history is a culture committed to providing personalized, relationship banking to businesses, municipalities, and personal clients to enrich the lives of the people in the communities we serve.

We provide a broad range of financial services and currently operate 59 banking centers located in Dallas/Fort Worth, East Texas, Houston, North Louisiana and Mississippi.

As a financial holding company operating through one segment, we generate the majority of our revenue from interest earned on loans and investments, service charges and fees on deposit accounts.

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Net income $ 87,715 $ 108,546 $ 36,357

Pre-tax, pre-provision earnings ("PTPP") (1)

121,666 104,253 76,116

Financial ratios:

Return on average assets (2)

1.01 % 1.45 % 0.56 %

Return on average equity (2)

10.81 15.79 5.82

Capital ratio:

Book value per common share $ 30.90 $ 30.75 $ 27.53

____________________________

(1) PTPP earnings and tangible book value per common share, are non-GAAP financial measures.

For a reconciliation of these non-GAAP financial measures to their comparable U.S.

GAAP measures, please see "Non-GAAP Financial Measures in Item 7 of this report.

(1) All average balances are calculated using average daily balances.

Net Interest Income and Net Interest Margin

Net interest income for the year ended December 31, 2021, was $216.3 million, an increase of $24.7 million over the year ended December 31, 2020.

The increase was primarily due to a $13.7 million reduction in total deposit interest expenses, coupled with increases of $9.4 million, $5.2 million and $4.2 million in interest income from PPP loans, mortgage warehouse lines of credit and investment securities, respectively.

These increases were partially offset by a decrease of $6.9 million in interest earned on commercial and industrial, excluding PPP loans, coupled with an increase of $3.2 million of interest expense on our subordinated indebtedness, during the year ended December 31, 2021, compared to the year ended December 31, 2020.

Deposit interest expense decreased to $13.4 million during the year ended December 31, 2021, compared to $27.2 million during the year ended December 31, 2020, primarily due to a reduction in deposit rates during the intervening 12-month period.

The average rate paid on savings and interest-bearing transaction accounts was 0.24% for the year ended December 31, 2021, down from 0.52% for the year ended December 31, 2020, accounting for $10.2 million of the decrease in interest expense from the year ended December 31, 2020.

The average rate on time deposits decreased to 0.75% for the year ended December 31, 2021, down from 1.62% for the year ended December 31, 2020, providing an additional decrease of $5.3 million in interest expense.

These two rate-driven interest expense declines were partially offset by a $3.9 million increase in interest expense due to an increase in the average balance of savings and interest-bearing transaction accounts when comparing the year ended December 31, 2021, to the year ended December 31, 2020.

PPP loans, which we began funding in the second quarter of 2020, contributed a $9.6 million increase in interest income due to an increase in yield during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily as a result of the SBA forgiveness process and the recognition of deferred loan fees as the loans were forgiven.

Interest income earned on mortgage warehouse lines of credit increased by $5.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to higher average mortgage activity driven by the low interest rate environment, coupled with additional mortgage warehouse clients being on-boarded and funding loans.

Interest income earned on investment securities increased by $4.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a shift in balance sheet composition as liquidity surged primarily due to increases in deposits and to declines in PPP and mortgage warehouse lines of credit ending loan balances and was redeployed into investment securities.

Interest income earned on investment securities increased $9.3 million primarily due to higher average balances of investment securities, partially offset by a $5.1 million decrease in interest income earned on investment securities due to declines in average yields, compared to the year ended December 31, 2020.

Interest income earned on commercial and industrial loans, excluding PPP loans, decreased $6.9 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the impact of lower yields.

The $3.2 million increase in interest paid on subordinated indebtedness was primarily due to the issuance of $70.0 million and $80.0 million, in February 2020 and October 2020, respectively, in aggregate principal amount of subordinated notes.

The fully tax-equivalent net interest margin was 3.10% for the year ended December 31, 2021, an eight basis point decrease from the year ended December 31, 2020.

The yield earned on interest-earning assets for the year ended December 31, 2021, was 3.42%, a 33 basis point decrease from 3.75% for the year ended December 31, 2020.

This decrease was partially offset by the decrease in interest rates paid on interest-bearing deposits.

The rate paid on total interest-bearing liabilities for the year ended December 31, 2021, was 0.54%, representing a decrease of 35 basis points compared to 0.89% for the year ended December 31, 2020.

The margin compression we experienced since the year ended December 31, 2020, was partially caused by decreasing loan yields driven by declining short-term interest rates during the end of 2020 and early to mid-2021, coupled with increasing liquidity as PPP loan balances were paid down through the SBA's forgiveness process and mortgage warehouse loan balances continued to normalize.

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2021, 2020 and 2019.

During the third quarter of 2022, we completed our merger with BTH.

As a result of the merger, the Company acquired $1.24 billion in loans, net of fair value accounting adjustments, $456.8 million in investment securities and $1.57 billion in deposits, which impacted most net interest income and interest expense categories.

Net interest income for the year ended December 31, 2022, was $275.3 million, an increase of $59.0 million compared to the year ended December 31, 2021.

Increases in interest rates and average interest-earning assets drove increases of $51.5 million and $33.5 million, respectively, in total interest income.

The increase in total interest income was offset by a $25.9 million increase in interest expense;

$22.5 million of the increase was driven by increases in interest rates.

Purchase accounting accretion on acquired loans was $2.8 million for the year ended December 31, 2022, with remaining purchase accounting net loan discounts totaling $2.2 million at December 31, 2022.

Net purchase accounting accretion income on deposits and subordinated indebtedness totaled $472,000 for the year ended December 31, 2022, bringing the impact from purchase accounting treatment on total net interest income to $3.3 million for the year ended December 31, 2022.

Interest income earned on LHFI during the year ended December 31, 2022, increased in all loan categories, except for mortgage warehouse lines of credit, when compared to the year ended December 31, 2021.

Interest income earned on commercial real estate and commercial and industrial loans contributed $26.4 million and $23.4 million, respectively, of the $68.6 million total increase in interest income earned on LHFI when compared to the year ended December 31, 2021.

These increases were offset by an $8.7 million decrease in interest income earned on mortgage warehouse lines of credit for the year ended December 31, 2022, compared to the year ended December 31, 2021.

Increases in mortgage interest rates during the year ended December 31, 2022, negatively impacted the volume of mortgage warehouse lines during the year ended December 31, 2022.

An increase in average balances drove $18.5 million of the $26.4 million increase in interest income earned on commercial real estate, while increases in interest rates drove $21.4 million of the $23.4 million increase in interest income earned on commercial and industrial loans for the comparable periods.

The merger with BTH contributed $79.0 million of the $449.4 million growth in average balances in commercial real estate.

The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the loan and deposit rates offered by financial institutions.

In early 2020, the Federal Reserve lowered the target rate range to 0.00% to 0.25%, which remained in effect throughout all of 2021.

On March 17, 2022, the target rate range was increased to 0.25% to 0.50%, then subsequently increased six more times during 2022, to 4.25% to 4.50%.

At December 31, 2022, the Federal Funds target rate had range increased 425 basis points on a year-to-date basis.

In order to remain competitive as market interest rates increase, interest rates paid on deposits must also increase.

Increases in interest rates contributed $43.3 million to the total increase in interest income earned on total LHFI, while interest rates increased our total deposit interest expense and FHLB and advances and other borrowings interest expense by $19.0 million and $3.3 million, respectively.

The fully tax-equivalent net interest margin was 3.42% for the year ended December 31, 2022, a 32 basis point increase from the year ended December 31, 2021.

The yield earned on interest-earning assets for the year ended December 31, 2022, was 4.02%, a 60 basis point increase from 3.42% for the year ended December 31, 2021.

This increase was partially offset by a 43 basis point increase in interest rates paid on total interest-bearing liabilities.

The net increase in purchase accounting accretion income due to the BTH merger increased the fully tax-equivalent NIM by four basis points during the year ended December 31, 2022.

The following table presents average consolidated balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the year ended December 31, 2022, 2021 and 2020.

Year Ended December 31,

8 unchanged sentences

Residential real estate 1,143,190 49,635 4.34 916,039 37,045 4.04 769,838 34,147 4.44

PPP 380,894 19,145 5.03 388,736 9,759 2.51 — — —

Commercial and industrial excl.

PPP 1,246,183 47,919 3.85 1,321,912 54,860 4.15 1,324,002 68,991 5.21

Commercial and industrial 1,675,719 90,499 5.40 1,627,077 67,064 4.12 1,710,648 64,619 3.78

Mortgage warehouse lines of credit 420,639 18,732 4.45 753,588 27,470 3.65 574,837 22,320 4.15

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All average balances are daily average balances.

(2) Includes Government National Mortgage Association ("GNMA") repurchase average balances of $53.9 million, $37.7 million and $26.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

(2) Includes Government National Mortgage Association ("GNMA") repurchase average balances of $33.6 million, $53.9 million and $37.7 million for the year ended December 31, 2022, 2021 and 2020, respectively.

The GNMA repurchase asset and liability are recorded as equal offsetting amounts in the consolidated balance sheets, with the asset included in loans held for sale and the liability included in FHLB advances and other borrowings.

17 unchanged sentences

Residential real estate 9,186 3,404 12,590

PPP (197) 9,583 9,386

Commercial and industrial excl.

PPP (2,960) (3,981) (6,941)

Commercial and industrial 2,005 21,430 23,435

Mortgage warehouse lines of credit (12,137) 3,399 (8,738)

39 unchanged sentences

FHLB advances & other borrowings (1,658) 417 (1,241)

Securities sold under agreements to repurchase (202) (122) (324)

Junior subordinated debentures 4,475 (911) 3,564

Subordinated indebtedness 3,216 (5) 3,211

Total interest-bearing liabilities 3,344 (15,106) (11,762)

1 unchanged sentence

Provision for Credit Losses

We recorded a provision for credit loss expense of $24.7 million for the year ended December 31, 2022, a $35.5 million increase from a provision net benefit of $10.8 million for the year ended December 31, 2021.

The increase was primarily due to the merger with BTH, which drove a $14.9 million provision for loan credit losses for the CECL requirement on non-PCD loans.

In addition, the total LHFI, excluding BTH loans and mortgage warehouse lines of credit, increased $978.6 million during the comparable periods.

Net charge-offs were $4.6 million during the year ended December 31, 2022, compared to $11.3 million during the year ended December 31, 2021, while the allowance for loan credit losses to nonperforming LHFI was 876.87% at December 31, 2022, compared to 259.35% at December 31, 2021, primarily driven by a $15.0 million decrease in nonperforming LHFI at December 31, 2022, compared to December 31, 2021, as well as the $22.6 million increase in the Company’s allowance for loan credit losses during the intervening period.

While the majority of our credit metrics continue to improve, uncertainty remains due to risks related to continued inflation, economic recession concerns, market interest rate increases, geopolitical risks, labor pressures, and continued global supply-chain disruptions.

The provision for credit losses, which includes the provisions for loan losses, off-balance sheet commitments and investment security credit losses, is based on management's assessment of the adequacy of our allowance for credit losses ("ACL") for loans, securities and our reserve for off-balance sheet lending commitments.

Factors impacting the provision include inherent risk characteristics in our loan portfolio, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of the change in collateral values, reasonable and supportable forecasts, and the funding probability on unfunded lending commitments.

The provision for credit losses is charged against earnings in order to maintain our ACL, which reflects management's best estimate of life of loan credit losses inherent in our loan portfolio at the balance sheet date, investment security credit losses and our reserve for off-balance sheet lending commitments, which reflects management's best estimate of losses inherent in our legally binding lending-related commitments.

The provision for credit losses is charged against earnings in order to maintain our allowance for credit losses, which reflects management's best estimate of life of loan credit losses inherent in our loan portfolio at the balance sheet date, investment security credit losses and our reserve for off-balance sheet lending commitments, which reflects management's best estimate of losses inherent in our legally binding lending-related commitments.

The allowance is increased by the provision for loan credit losses and decreased by charge-offs, net of recoveries.

We recorded a provision for credit loss benefit of $10.8 million for the year ended December 31, 2021, a $70.7 million decrease from a provision expense of $59.9 million for the year ended December 31, 2020.

The decrease in provision expense for the year ended December 31, 2021, compared to the year ended December 31, 2020, reflects an improvement in forecasted economic conditions compared to worsening forecasted economic conditions experienced during the year ended December 31, 2020.

Net charge-offs were $11.3 million during the year ended December 31, 2021, compared to net charge-offs of $11.1 million during the year ended December 31, 2020.

Our allowance for loan credit losses was 1.23% of total LHFI at December 31, 2021, compared to 1.51% at December 31, 2020.

The allowance for loan credit losses as a percentage of nonperforming LHFI was 259.35% at December 31, 2021, compared to 331.45% at December 31, 2020.

Pursuant to rules promulgated by the federal banking agencies, we elected to use a two-year delay of CECL’s impact on our regulatory capital (from January 1, 2020 through December 31, 2021) followed by a three-year transition period of CECL’s initial impact on our regulatory capital (from January 1, 2022 through December 31, 2024) and, accordingly, we will begin to amortize the CECL adoption impact to our regulatory capital beginning on January 1, 2022.

Given the small size of the CECL adoption impact the amortization is not expected to significantly affect our regulatory capital.

While economic forecasts have improved, uncertainty remains due to risks related to the resurgence or lingering effects of COVID-19, rising inflation and labor pressures, as well as continued global supply-chain disruptions that could cause an increase in our provision for loan credit losses in the future.

Noninterest Income

Our primary sources of recurring noninterest income are service charges on deposit accounts, mortgage banking revenue, insurance commission and fee income, and other fee income.

The table below presents the various components of and changes in our noninterest income for the periods indicated.

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Service charges and fees $ 17,669 $ 15,049 $ 12,998 $ 2,620 17.4 % $ 2,051 15.8 %

Mortgage banking revenue 12,927 29,603 12,309 (16,676) (56.3) 17,294 140.5

Insurance commission and fee income 22,869 13,098 12,746 9,771 74.6 352 2.8

Gain on sales of securities, net 1,748 580 20 1,168 N/M 560 N/M

Loss on sales and disposals of other assets, net (185) (1,213) (333) 1,028 84.7 (880) N/M

Limited partnership investment income (loss) 5,701 78 (6) 5,623 N/M 84 N/M

Swap fee income 814 2,546 2,185 (1,732) (68.0) 361 16.5

Mortgage banking revenue 6,722 12,927 29,603 (6,205) (48.0) (16,676) (56.3)

Other fee income 3,530 2,879 2,253 651 22.6 626 27.8

Gain on sales of securities, net 1,664 1,748 580 (84) (4.8) 1,168 N/M

Loss on sales and disposals of other assets, net (175) (185) (1,213) 10 5.4 1,028 (84.7)

Limited partnership investment (loss) income (199) 5,701 78 (5,900) (103.5) 5,623 N/M

Swap fee income 457 814 2,546 (357) (43.9) (1,732) (68.0)

Other income 4,737 10,162 5,061 (5,425) (53.4) 5,101 100.8

2 unchanged sentences

N/M = Not meaningful.

Noninterest income for the year ended December 31, 2021, decreased by $2.5 million, or 3.8%, to $62.2 million, compared to $64.7 million for the year ended December 31, 2020, and was largely driven by decreases of $16.7 million and $1.7 million in mortgage banking revenue and swap fee income, respectively.

The decreases were partially offset by increases of $5.6 million, $5.1 million, $2.1 million and $1.2 million, in limited partnership investment income, other noninterest income, service charges and fees income, and gain on sales of securities, respectively, combined with a $1.0 million decrease in loss on sales and disposals of other assets, net.

Service charges and fees .

The $2.1 million increase in service charges and fees income was primarily driven by an increase of $1.3 million in debit interchange fees due to an increase in debit card transactions by customers during the year ended December 31, 2021, as compared to the year ended December 31, 2020.

Noninterest income for the year ended December 31, 2022, decreased by $4.9 million, or 7.9%, to $57.3 million, compared to $62.2 million for the year ended December 31, 2021, and was largely driven by decreases of $6.2 million, $5.9 million and $5.4 million in mortgage banking revenue, limited partnership investment income and other noninterest income, respectively.

The decreases were partially offset by increases of $9.8 million and $2.6 million in insurance commission and fee income and service charges and fees income, respectively.

Mortgage banking revenue.

The $16.7 million decrease in mortgage banking revenue compared to the year ended December 31, 2020, was primarily due to decreases of $14.2 million and $2.2 million in the mortgage held for sale and pipeline fair value adjustment, and gain on sale of loans sold, respectively, primarily as a result of a 29% decline in the volume of the loans originated for sale, as well as declines in gain on sale margins of 23 basis points.

Gains on sales of securities, net .

The $1.2 million increase in gain on sales of securities, net, was the result of the movement out of positions in lower-yielding securities.

We used the funds generated from the sale of the securities to prepay relatively high-cost FHLB advances.

Loss on sales and disposals of other assets, net .

The $1.0 million decrease in loss on sales and disposals of other assets, net was primarily due to the decline in value and subsequent write-down of two commercial real estate owned properties during the year ended December 31, 2020.

No similar transactions occurred during the year ended December 31, 2021.

The $6.2 million decrease in mortgage banking revenue compared to the year ended December 31, 2021, was primarily due to a $9.8 million decrease in gain on sale of loans sold including MSR origination, primarily due to a 44.9% reduction in origination volume, a 51.2% reduction in sales volume and a 13.5% reduction in sales margin experienced during the year ended December 31, 2022, as well as a $2.0 million impairment on the held for sale GNMA MSR portfolio.

The decreases were partially offset by a $5.5 million increase in mortgage held for sale and pipeline fair value adjustment.

During the second half of 2022, the Company recognized an impairment of $2.0 million and entered into an agreement to sell its GNMA MSR portfolio, which met all final sale conditions in early 2023.

The Company sold approximately $1.8 million in GNMA MSR, with no significant additional gain or loss realized, and derecognized the related GNMA repurchase asset and offsetting liability of $24.6 million in the first quarter of 2023.

Limited partnership investment income.

The $5.6 million increase in the limited partnership investment income during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to valuation increases as a result of investment performance in limited partnership funds.

Swap fee income .

The $1.7 million decrease in swap fee income was due to higher volume of back-to-back swaps executed with commercial customers during the year ended December 31, 2020, driven by the low market rate environment during that period.

Other noninterest income .

The $5.1 million increase in other noninterest income was primarily due to the Company's acquisition of the remaining 62% equity interest in the Lincoln Agency.

The Company remeasured the previously held 38% equity method investment in the Lincoln Agency to its fair value, resulting in recognition of a gain of $5.2 million in other noninterest income.

The $5.9 million decrease in limited partnership investment income during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to a net $5.7 million valuation increase in the limited partnership funds during the year ended December 31, 2021, compared to a net $256,000 valuation decrease recorded during the year ended December 31, 2022.

Other income.

The decrease in other noninterest income was primarily due to the acquisition of the remaining 62% equity interest in The Lincoln Agency in December 2021.

The previously held 38% equity method investment in Lincoln Agency was remeasured to its fair value, resulting in recognition of a gain of $5.2 million in other noninterest income during the year ended December 31, 2021.

Insurance commission and fee income .

The increase in insurance commission and fee income during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily driven by $8.3 million of additional contribution income as a result of the insurance acquisitions that occurred on December 31, 2021, which significantly expanded the Company's insurance presence in the North Louisiana market.

Service charges and fees .

The $2.6 million increase in service charges and fees income was primarily driven by increases of $444,000, $321,000 and $606,000, excluding BTH service charges, in overdraft fee income, account analysis income and debit interchange fees due to increases in debit card transactions, respectively.

In total, BTH contributed $749,000 to the total service charges and fee income since the date of the merger.

Noninterest Expense

7 unchanged sentences

Data processing 10,456 9,117 8,321 1,339 14.7 796 9.6

Office and operations 8,120 6,399 5,624 1,721 26.9 775 13.8

Loan-related expenses 6,097 7,688 6,316 (1,591) (20.7) 1,372 21.7

Professional services 3,813 3,644 3,975 169 4.6 (331) (8.3)

Electronic banking 3,958 3,563 3,686 395 11.1 (123) (3.3)

Communications 1,574 1,767 2,098 (193) (10.9) (331) (15.8)

Advertising and marketing 4,431 3,438 3,710 993 28.9 (272) (7.3)

Professional services 3,644 3,975 3,577 (331) (8.3) 398 11.1

Regulatory assessments 2,904 3,826 1,694 (922) (24.1) 2,132 125.9

Loan-related expenses 7,688 6,316 4,174 1,372 21.7 2,142 51.3

Office and operations 6,399 5,624 6,674 775 13.8 (1,050) (15.7)

Intangible asset amortization 844 1,060 1,321 (216) (20.4) (261) (19.8)

Franchise tax expense 3,582 2,538 2,186 1,044 41.1 352 16.1

Regulatory assessments 3,547 2,904 3,826 643 22.1 (922) (24.1)

Intangible asset amortization 5,488 844 1,060 4,644 N/M (216) (20.4)

Communications 1,246 1,574 1,767 (328) (20.8) (193) (10.9)

Merger-related expense 6,171 — — 6,171 N/A — —

Other expenses 4,336 4,697 3,337 (361) (7.7) 1,360 40.8

Total noninterest expense $ 200,419 $ 156,779 $ 151,935 $ 43,640 27.8 $ 4,844 3.2

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N/M = Not meaningful.

N/A = Not applicable.

Noninterest expense for the year ended December 31, 2022, increased by $43.6 million, or 27.8%, to $200.4 million, compared to $156.8 million for the year ended December 31, 2021.

The increase was primarily due to increases of $1.9 million, $1.4 million and $1.4 million in salaries and employee benefits expenses, loan-related expenses and other noninterest expense, respectively.

The increase was primarily due to increases of $25.9 million, $6.2 million, $4.6 million, $2.9 million and $1.7 million in salaries and employee benefits expenses, merger-related expense, intangible asset amortization, occupancy and equipment, net and office and operations, respectively.

The increases were partially offset by a $1.6 million decrease in loan-related expenses.

Salaries and employee benefits.

The $1.9 million increase in salaries and employee benefits expenses was primarily driven by increases of $2.1 million and $1.4 million in employee salaries and incentive compensation bonus, respectively, during the year ended December 31, 2021, which were partially offset by a $1.0 million decrease in commission expense.

The increase in employee salaries was mainly driven by an increase of 17 full-time equivalent employees during the year ended December 31, 2021, compared to the year ended December 31, 2020.

The increase in incentive compensation bonus is primarily due to the growth in loan production during the year ended December 31, 2021.

The decrease in commission expense is mainly due to the decline in mortgage origination volume during the year ended December 31, 2021.

The $25.9 million increase in salaries and employee benefits expenses was primarily driven by an increase in full-time equivalent employees to 1,011 at December 31, 2022, from 776 at December 31, 2021, and reflected a $14.6 million increase in salary alone.

• The BTH merger contributed 114 of the new full time positions and $5.6 million to the salaries and employee benefits expense increase.

• The insurance acquisition at December 31, 2021, contributed 34 new full time positions and $4.8 million to the salaries and employee benefits expense increase.

• Incentive compensation increased $5.7 million due to loan production exceeding performance goals.

• Also contributing to the increase was the impact of cost of living adjustments and annual raises made on March 1, 2022, and additional cost of living increases made in August 2022.

Merger-related expense.

The $6.2 million merger-related expenses during the year ended December 31, 2022, were associated with the BTH merger that closed on August 1, 2022.

Intangible asset amortization expense.

The $4.6 million increase in intangible asset amortization expense was primarily due to the core deposit intangible established in conjunction with the BTH merger, which contributed $3.4 million to the total increase.

The insurance acquisition at December 31, 2021, contributed $1.4 million to the total increase for the relationship-based and noncompete intangibles established in conjunction with the acquisition.

Occupancy and equipment, net.

The $2.9 million increase in occupancy and equipment expense was primarily due to the BTH merger that closed on August 1, 2022, which contributed $1.6 million to the total increase.

In addition, the rental expense increased by $323,000 primarily due to one new banking center location which opened during the last quarter of 2022, and total maintenance and repairs expense increased on property, furniture, fixtures and equipment by $296,000.

Office and operations.

The increase in office and operations expense was primarily due to increases in business development costs and credit card reward expenses.

Loan-related expenses.

The increase in loan-related expenses was primarily driven by an increase of $1.5 million in the loan-related legal fees.

Other noninterest expense.

The increase in other noninterest expense was due to prepayment fees of $1.6 million incurred related to the early termination of long-term FHLB advances during the year ended December 31, 2021.

We terminated the advances early due to the relatively high cost of the funding using the proceeds from the sale of underperforming investment securities as referenced under "Gain on sales of securities, net" above.

The decrease in loan-related expenses was primarily driven by a decrease of $1.2 million in loan-related legal fees, primarily due to our lower past due and nonperforming LHFI balances.

Income Tax Expense

For the year ended December 31, 2022, we recognized income tax expense of $19.7 million, compared to $23.9 million for the year ended December 31, 2021.

Our effective tax rate was 18.0% for both the years ended December 31, 2021 and 2020.

Our effective tax rate was 18.4% for the year ended December 31, 2022, compared to 18.0% for the year ended December 31, 2021.

The effective tax rate was lower for the year ended December 31, 2021, compared to the rate for the year ended December 31, 2022, primarily due to the tax impact of the exercise of stock options and vesting of stock awards during the year ended December 31, 2021.

Offsetting the increase in the effective tax rate during the year ended December 31, 2022, compared to the effective tax rate during the year ended December 31, 2021, was the impact of merger-related expenses during 2022, which drove net income before income taxes down.

Our effective income tax rates have differed from the applicable U.S.

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Comparison of Financial Condition at December 31, 2022, and December 31, 2021

Total assets increased by $233.0 million, or 3.1%, to $7.86 billion at December 31, 2021, from $7.63 billion at December 31, 2020.

The increase was primarily attributable to increases of $480.6 million and $255.6 million in total securities and interest-bearing deposits in banks, respectively, which was partially offset by a $493.4 million decrease in LHFI for the comparable periods.

The merger with BTH affected most material financial metrics of the Company at December 31, 2022.

Total assets increased by $1.82 billion, or 23.2%, to $9.69 billion at December 31, 2022, from $7.86 billion at December 31, 2021.

The increase in total assets is primarily due to $1.85 billion in total assets, net of purchase accounting adjustments, acquired from the merger with BTH, which included $1.24 billion in loan balances, net of purchase accounting adjustments.

Organic loan growth contributed an additional $619.2 million increase in our loan portfolio balances which grew to $7.09 billion at December 31, 2022, from $5.23 billion at December 31, 2021.

The increase in total assets was offset by a $346.6 million decrease in cash and cash equivalents to $359.0 million at December 31, 2022, from $705.6 million at December 31, 2021.

Total deposits increased $1.21 billion to $7.78 billion at December 31, 2022, from $6.57 billion at December 31, 2021.

The increase in deposits was due to the assumption of $1.57 billion in deposits, net of purchase accounting adjustments, from the BTH merger.

Excluding the deposits acquired in the BTH merger at August 1, 2022, total deposit balances decreased by $361.5 million, or 5.5%, with the remaining BTH-originated deposits totaling $1.45 billion at December 31, 2022.

Overall, higher rates of inflation tend to cause individuals and businesses to hold fewer liquid assets thereby contributing to tightening liquidity.

Stockholders’ equity increased $219.7 million to $949.9 million at December 31, 2022, compared to $730.2 million at December 31, 2021.

The increase in stockholders’ equity is primarily associated with the $306.3 million in consideration paid related to the BTH merger and the $87.7 million in net income for the year ended December 31, 2022, partially offset by the $165.6 million in other comprehensive loss and the $15.9 million of stockholder dividends declared in 2022.

Loan Portfolio

Our loan portfolio is our largest category of interest-earning assets, and interest income earned on our loan portfolio is our primary source of income.

At December 31, 2021, 82.3% of the loan portfolio held for investment was comprised of commercial and industrial loans, including PPP loans, mortgage warehouse lines of credit, commercial real estate and construction/land/land development loans, which were primarily originated within our market areas of Texas, North Louisiana, and Mississippi.

At December 31, 2022, 78.8% of the loan portfolio held for investment was comprised of commercial and industrial loans, including mortgage warehouse lines of credit, commercial real estate and construction/land/land development loans, which were primarily originated within our market areas of Texas, North Louisiana, and Mississippi, compared to 82.3% at December 31, 2021.

The following table presents the ending balance of our loan portfolio held for investment at the dates indicated.

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Commercial real estate $ 2,304,678 32.6 % $ 1,693,512 32.4 % $ 611,166 36.1 %

$ 1,693,512 32.4 % $ 1,387,939 24.2 % $ 305,573 22.0 %

Construction/land/land development

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Total real estate 4,727,841 66.7 3,133,334 59.9 1,594,507 50.9

PPP 105,761 2.0 546,519 9.5 (440,758) (80.6)

Commercial and industrial 1,348,474 25.8 1,271,343 22.3 77,131 6.1

Commercial and industrial total 2,051,161 28.9 1,454,235 27.8 596,926 41.0

Mortgage warehouse lines of credit 284,867 4.0 627,078 12.0 (342,211) (54.6)

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Total LHFI $ 7,090,022 100.0 % $ 5,231,331 100.0 % $ 1,858,691 35.5

___________________________

(1) Includes $17.0 million of commercial real estate loans for which the fair value option was elected at December 31, 2020.

There were no loans for which the fair value option was elected at December 31, 2021.

At December 31, 2021, total LHFI were $5.23 billion, a decrease of $493.4 million, or 8.6%, compared to $5.72 billion at December 31, 2020.

The decrease primarily reflected declines of $456.9 million in mortgage warehouse lines of credit and $440.8 million in PPP loans, primarily due to record high mortgage warehouse lines of credit production during fiscal year 2020 and PPP loan forgiveness from the SBA, respectively.

Mortgage warehouse lines of credit loan balances have fallen within our expected range of 10% to 12% of total LHFI at December 31, 2021.

Total LHFI at December 31, 2021, excluding PPP and mortgage warehouse lines of credit, were $4.50 billion, reflecting an increase of $404.2 million, or 9.9%, compared to December 31, 2020.

Our lending focus is on operating companies, including commercial loans and lines of credit as well as owner-occupied commercial real estate loans.

We currently do not plan to significantly alter the real estate concentrations within our loan portfolio.

Under the CARES Act, Congress allocated funds to the PPP, which was designed to provide short-term loans to certain qualifying businesses that retained employees during the COVID-19 pandemic.

These loans, totaling $105.8 million with $3.0 million in unearned net deferred loan fees for the Company at December 31, 2021, have a maximum maturity of five years, bear a fixed rate of interest at one percent for the entire term, and as of December 31, 2021, approximately 84.5% of our total PPP loans granted have been forgiven under this program.

At December 31, 2022, total LHFI were $7.09 billion, an increase of $1.86 billion, or 35.5%, compared to $5.23 billion at December 31, 2021.

The merger with BTH has contributed $1.22 billion to the increase, net of purchase accounting adjustments, at December 31, 2022.

Our organic loan growth contributed to the remaining increase.

Total LHFI at December 31, 2022, excluding mortgage warehouse lines of credit, were $6.81 billion, reflecting an increase of $2.20 billion, or 47.8%, increase, compared to December 31, 2021.

Our lending focus continues to be on operating companies, including commercial loans and lines of credit, as well as owner-occupied commercial real estate loans.

Loan Portfolio Maturity Analysis

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(Dollars in thousands) One Year

or Less Over One Year

Years Over Five

or Less After One

Years After Five

Fifteen Years After Fifteen

Commercial real estate $ 293,043 $ 1,400,616 $ 592,660 $ 18,359 $ 2,304,678

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When accrual of interest is discontinued, all unpaid accrued interest is reversed.

Past due status is based on contractual terms of the loan.

Past due status is based on the contractual terms of the loan.

Interest income on nonaccrual loans may be recognized to the extent cash payments are received, but payments received are usually applied to principal.

Nonaccrual loans are generally returned to accrual status when contractual payments are less than 90 days past due, the customer has made required payments for at least six months, and the Company reasonably expects to collect all principal and interest.

Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

If a loan is determined by management to be uncollectible, regardless of size, the portion of the loan determined to be uncollectible is then charged to the allowance for loan credit losses.

Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans.

The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following:

(1) nonaccrual status;

(2) troubled debt restructured designation;

(3) risk ratings of special mention, substandard or doubtful;

(4) watchlist credits;

and (5) delinquency status, including loans that are current on merger/acquisition date, but had been previously delinquent two times 60 days.

An allowance for credit losses is determined using the same methodology as other individually evaluated loans.

Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.

We held approximately $48.1 million of unpaid principal balance PCD loans at December 31, 2022, and no PCD loans at December 31, 2021.

We manage the quality of our lending portfolio in part through a disciplined underwriting policy and through continual monitoring of loan performance and borrowers' financial condition.

There can be no assurance, however, that our loan portfolio will not become subject to losses due to declines in economic conditions or deterioration in the financial condition of our borrowers.

Overall, credit metrics have improved at December 31, 2022, compared to December 31, 2021;

however, uncertainty remains due to risks related to rising inflation, economic recession concerns, market interest rate increases, labor pressures, continued global supply-chain disruptions and increased geopolitical risks.

The following table shows our nonperforming loans and nonperforming assets at the dates indicated:

(Dollars in thousands)

December 31, December 31,

Nonperforming LHFI:

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Total nonperforming LHFI

24,903 26,149

Nonperforming loans held for sale

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Ratio of nonperforming assets to total assets

At December 31, 2021, total nonperforming LHFI decreased by $1.2 million, or 4.8%, from December 31, 2020, primarily due to reductions in most nonperforming LHFI loan categories, except for residential real estate, which represented 160 loans with an average loan balance of $73,000, and reflected a $5.1 million increase year over year.

Ratio of nonperforming assets to average LHFI

At December 31, 2022, total nonperforming LHFI decreased by $15.0 million, or 60.1%, from December 31, 2021, primarily due to lower nonperforming commercial and industrial and residential loan balances.

Please see Note 5 - Loans to our consolidated financial statements contained in Item 8 of this report for more information on nonperforming loans.

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If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank's credit position at some future date.

While potentially weak, no loss of principal or interest is envisioned, and these borrowers currently do not pose sufficient risk to warrant adverse classification.

While potentially weak these borrowers currently do not pose sufficient risk to warrant adverse classification.

Loans rated substandard are those borrowers with deteriorating trends and well-defined weaknesses that jeopardize the orderly liquidation of debt.

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Loans rated as doubtful have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable, and there is a high probability of loss based on currently existing facts, conditions and values.

Loans classified as loss are charged-off and we have no expectation of the recovery of any payments in respect to loans rated as loss.

Loans classified as loss are charged-off and we have low expectations for the recovery of any payments in respect to loans rated as loss.

Information regarding the internal risk ratings of our loans at December 31, 2022, is included in Note 5 - Loans to our consolidated financial statements contained in Item 8 of this report.

Allowance for Loan Losses

Effective January 1, 2020, the Company adopted CECL resulting in a change to the Company's reporting of credit losses for assets held at amortized cost basis and available for sale debt securities.

Please see Note 1 - Significant Accounting Policies to the consolidated financial statements contained in Item 8 of the Company's Annual Report for the year ended December 31, 2020, on Form 10-K filed with the SEC for a description of policy revisions resulting from the Company's adoption of ASU 2016-13.

Allowance for Loan Credit Losses

The allowance for loan credit losses represents the estimated losses for loans accounted for on an amortized cost basis.

The Company evaluates LHFI on a pool basis with pools of loans characterized by loan type, collateral, industry, internal credit risk rating and FICO score.

The Company applied a probability of default, loss given default loss methodology to the loan pools at December 31, 2021.

We evaluate LHFI on a pool basis with pools of loans characterized by loan type, collateral, industry, internal credit risk rating and FICO score.

We applied a probability of default, loss given default loss methodology to the loan pools at December 31, 2022.

Historical loss rates for each pool are calculated based on charge-off and recovery data beginning with the second quarter of 2012.

These loss rates are adjusted for the effects of certain economic variables forecast over a one-year period, particularly for differences between current period conditions, including the ongoing effects of COVID-19 on the U.S.

economy, and the conditions existing during the historical loss period.

These loss rates are adjusted for the effects of certain economic variables forecast over a one-year period, particularly for differences between current period conditions and the conditions existing during the historical loss period.

Subsequent to the forecast effects, historical loss rates are used to estimate losses over the estimated remaining lives of the loans.

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If actual losses exceed the amount of the allowance for loan credit losses, it would materially and adversely affect our earnings.

Acquisition Accounting and Acquired Loans .

We account for our mergers/acquisitions under Financial Accounting Standards Board ("FASB") ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting.

All identifiable assets acquired, including loans, are recorded at fair value.

In accordance with ASC 326, we record a discount or premium, and also an allowance for credit losses on acquired loans.

All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements .

The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans.

An allowance for loan credit losses is determined using the same methodology as other individually evaluated loans.

The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis.

The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized or accreted into interest income over the life of the loan.

Subsequent changes to the allowance for loan credit losses are recorded through the provision for credit losses.

As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or at 90 days past due, we will reflect that loan as nonperforming.

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• for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, industrial or professional enterprise, the borrower's business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral.

Overall, absent the impact of the BTH merger, most credit metrics improved at December 31, 2022, compared to December 31, 2021.

The impact of the BTH merger on loans at December 31, 2022, was as follows:

provision of $23.9 million, classified loans of $17.8 million, past due loans of $6.0 million, and nonperforming LHFI of $2.6 million.

The allowance for loan credit losses to nonperforming LHFI increased to 876.87% at December 31, 2022, compared to 259.35% at December 31, 2021, primarily driven by a $15.0 million decrease in nonperforming LHFI at December 31, 2022, compared to December 31, 2021, as well as the $22.6 million increase in the allowance for loan credit losses during the intervening period, which was predominately driven by the BTH merger.

Past due loans to total LHFI declined to 0.15% at December 31, 2022, compared to 0.49% at December 31, 2021.

The following table presents the allowance for credit loss by loan category:

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(1) Represents the ratio of each loan type to total LHFI.

Our allowance for loan credit losses decreased by $22.1 million or 25.5%, to $64.6 million at December 31, 2021, from $86.7 million at December 31, 2020.

The ratio of allowance for loan credit losses to total LHFI at December 31, 2021 and 2020, was 1.23% and 1.51%, respectively.

The Company's credit quality profile in relation to the allowance for loan credit losses drove a decline of $25.1 million in the collectively evaluated portion of the reserve during the year ended December 31, 2021, of which a $19.6 million decrease was related to qualitative factor changes across the Company's risk pools for the year ended December 31, 2021.

These declines were partially offset by an increase in certain specific loan reserves at December 31, 2021.

Our allowance for loan credit losses increased by $22.6 million, or 35.0%, to $87.2 million at December 31, 2022, from $64.6 million at December 31, 2021.

The ratio of allowance for loan credit losses to total LHFI was 1.23% at both December 31, 2022 and 2021.

The allowance for loan credit losses increased $22.6 million compared to December 31, 2021, mainly due to a $23.9 million allowance for BTH loans at December 31, 2022.

Qualitative factor changes across the Company's risk pools, which includes the impact of the BTH acquired loans, drove a $22.4 million increase for the year ended December 31, 2022.

The following table presents an analysis of the allowance for credit losses and other related data at the periods indicated.

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Balance at beginning of period $ 64,586 $ 86,670

Impact of adopting ASC 326 — 1,248

Allowance for loan credit losses - BTH merger 5,527 —

Provision for loan credit losses 21,613 (10,798)

Commercial real estate 166 170

Construction/land/land development — —

Residential real estate 91 78

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Securities within the portfolio are classified as either held-to-maturity, available-for-sale or at fair value through income, based on the intent and objective of the investment and the ability to hold to maturity.

Unrealized gains and losses arising in the available for sale portfolio as a result of changes in the fair value of the securities are reported on an after-tax basis as a component of accumulated other comprehensive income in stockholders' equity while securities classified as held to maturity are carried at amortized cost.

Unrealized gains and losses arising in the available for sale portfolio as a result of changes in the fair value of the securities are reported on an after-tax basis as a component of accumulated other comprehensive (loss) income in stockholders' equity while securities classified as held to maturity are carried at amortized cost.

For further discussion of the valuation components and classification of investment securities, see Note 1 - Significant Accounting Policies to our consolidated financial statements contained in Item 8 of this report.

Our securities portfolio totaled $1.66 billion at December 31, 2022, representing an increase of $124.1 million, or 8.1%, from $1.53 billion at December 31, 2021.

The increase in securities during the year ended December 31, 2021, reflects a shift in balance sheet composition as liquidity increased due to declines in PPP and mortgage warehouse lines of credit loan balances, as a result of the SBA’s forgiveness process and the normalization of mortgage warehouse lines of credit balances.

Also contributing to the increase in liquidity was a $819.4 million year over year increase in deposits.

At August 1, 2022, we acquired $456.8 million of available for sale securities from BTH, $447.5 million of which were sold during the third quarter of 2022, and majority of the funds were used to pay down Federal Home Loan Bank Advances.

For additional information regarding our securities portfolio, please see Note 4 - Securities to our consolidated financial statements contained in Item 8 of this report.

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The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay outstanding amounts.

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.

Monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different from 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 is typically lengthened.

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Securities Carried at Fair Value through Income

At December 31, 2021, we held one fixed rate community investment bond of $7.5 million.

At December 31, 2020, we held two fixed rate community investment bonds totaling $11.6 million.

We elected the fair value option on these securities to offset corresponding changes in the fair value of related interest rate swap agreements.

At December 31, 2022 and 2021, we held one fixed rate community investment bond of $6.4 million and $7.5 million, respectively.

We elected the fair value option on this security to offset corresponding changes in the fair value of related interest rate swap agreements.

Deposits are the primary funding source used to fund our loans, investments and operating needs.

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We also obtain deposits from local municipalities and state agencies.

Increases of $555.9 million and $409.2 million in noninterest-bearing and money market, respectively, drove the increase in total deposits compared to December 31, 2020, primarily due to continued excess liquidity in the marketplace.

Our deposit balances were impacted by the merger with BTH that occurred on August 1, 2022.

At the merger date, we assumed BTH deposits of $758.4 million in interest-bearing demand deposits, $398.1 million in noninterest-bearing demand deposits, $302.5 million in time deposits and $107.5 million in savings deposits, resulting in an overall $1.57 billion increase to our deposit balances at the merger date.

At December 31, 2022, all deposit categories increased when compared to December 31, 2021, with interest-bearing demand and noninterest-bearing deposits increasing by $325.1 million, or 23.0%, and $319.0 million, or 14.7%, respectively, compared to December 31, 2021.

The following table presents our deposit mix at the dates indicated:

December 31, 2022 December 31, 2021

(Dollars in thousands) Balance % of Total Balance % of Total

(Dollars in thousands) Balance % of Total Balance % of Total $ Change % Change

Noninterest-bearing demand

$ 2,482,475 32.0 % $ 2,163,507 32.9 % $ 318,968 14.7 %

Interest-bearing demand

2,442,559 31.4 2,204,109 33.5 238,450 10.8

Interest-bearing demand

1,737,158 22.3 1,412,089 21.5 325,069 23.0

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$ 7,105,310 $ 33,509 0.47 $ 6,153,500 $ 13,418 0.22 $ 5,139,820 $ 27,150 0.53

Our average deposit balance was $6.15 billion for the year ended December 31, 2021, an increase of $1.01 billion, or 19.7%, from $5.14 billion for the year ended December 31, 2020.

Our average deposit balance was $7.11 billion for the year ended December 31, 2022, an increase of $951.8 million, or 15.5%, from $6.15 billion for the year ended December 31, 2021.

The average annualized rate paid on our interest-bearing deposits for the year ended December 31, 2022, was 0.72%, compared to 0.32% for the year ended December 31, 2021.

The decrease in the average cost of our deposits was primarily the result of the low interest rate environment.

The Federal Reserve lowered the federal funds target rate twice during March 2020, resulting in an aggregate 150 basis point decrease in the target rate, which did not change during the year ended December 31, 2021.

When the target rate reductions began, we took action to lower deposit rates on non-maturity deposits.

The increase in the average cost of our deposits was primarily the result of the rising interest rate environment experienced during the year ended December 31, 2022.

Recently, we have managed our deposit interest expense by the strategic release of non-relationship, higher-rate deposits during 2022;

however, our current deposit rates have not yet completely absorbed all of the market interest rate increases that have occurred during the year ended December 31, 2022.

Average noninterest-bearing deposits at December 31, 2022, were $2.42 billion, compared to $1.91 billion at December 31, 2021, an increase of $517.1 million, or 27.1%, and represented 34.1% and 31.0% of average total deposits for the year ended December 31, 2022 and 2021, respectively.

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There were no otherwise uninsured time deposits below the FDIC insurance limit at December 31, 2022.

The estimated total amount of uninsured deposits at December 31, 2021, was $3.79 billion.

The estimated total amount of uninsured deposits at December 31, 2022 and 2021, was $4.19 billion and $3.79 billion, respectively.

(Dollars in thousands)

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$ 178,971 $ 787,287

Short-term FHLB advances decreased $650.0 million at December 31, 2021 compared to December 31, 2020, primarily driven by PPP forgiveness payments, increases in deposits and declines in warehouse loan balances during the year ended December 31, 2021, which drove an increase in overall liquidity and a reduction in the reliance on borrowings.

Additionally, using funds generated from the sale of investment securities, we prepaid $13.1 million in long-term FHLB advances and incurred related prepayment fees of $1.6 million during the first quarter of 2021.

Borrowed funds are summarized as follows:

(Dollars in thousands) 2022 2021

Overnight repurchase agreements with depositors $ 9,447 $ 8,408

Short-term FHLB advances $ 550,000 $ —

GNMA repurchase liability

43,355 55,485

Long-term FHLB advances 6,740 256,999

GNMA repurchase liability

24,569 43,355

Overnight repurchase agreements with depositors 27,921 9,447

Holding company line of credit 30,000 —

Total FHLB advances and other borrowings $ 639,230 $ 309,801

Subordinated indebtedness, net $ 201,765 $ 157,417

____________________________

(1) Includes a FHLB advance of $250.0 million at December 31, 2021 and 2020, callable quarterly with a final maturity in 2033, carrying a rate of 1.65%.

Overnight repurchase agreements with depositors consist of obligations of ours to depositors and mature on a daily basis.

These obligations to depositors carried a daily average interest rate of 0.08% and 0.22% for the years ended December 31, 2021 and 2020, respectively.

Short-term FHLB advances increased $550.0 million at December 31, 2022, compared to December 31, 2021, primarily due to a combination of the organic growth of $619.2 million in loan balances, decline in cash and cash equivalents of $346.6 million, pay down of $250.3 million in long-term FHLB advances and decrease in deposit balances, excluding BTH assumed deposits, of $240.2 million compared to December 31, 2021.

We used funds generated primarily from the sale of BTH-acquired available for sale investment securities, to reduce our balances in long-term FHLB advances and support our loan growth.

Our long-term debt consists of advances from the FHLB with original maturities greater than one year and the subordinated indebtedness captioned and described below.

Interest rates for FHLB long-term advances outstanding at December 31, 2022, ranged from 1.99% to 4.57% and were subject to restrictions or penalties in the event of prepayment.

At December 31, 2021, we held 43 unfunded letters of credit from the FHLB totaling $599.3 million with expiration dates ranging from January 20, 2022, to March 22, 2023.

Interest rates for FHLB long-term advances outstanding at December 31, 2021, ranged from 1.65% to 4.57%.

In conjunction with the BTH merger, the Company assumed certain repurchase agreements with former BTH depositors that included the sale and repurchase of BTH investment securities of at least equal to the daily balance of the BTH depositor's account, subject to maximum limitations, with various maturity dates.

These BTH repurchase agreements were restructured and integrated into the Company's repurchase agreements which include the sale and repurchase of investment securities and mature on a daily basis.

The total overnight repurchase agreements with depositors carried a daily average interest rate of 0.24% for the year ended December 31, 2022, and 0.08% for the year ended December 31, 2021.

At December 31, 2022, we held 28 unfunded letters of credit from the FHLB totaling $277.4 million with expiration dates ranging from January 14, 2023, to September 22, 2027.

These letters of credit either support pledges for our public fund deposits or confirm letters of credit we have issued to support our customers' businesses.

Security for all indebtedness and outstanding commitments to the FHLB consists of a blanket floating lien on all of our first mortgage loans, commercial real estate and other real estate loans, as well as our investment in capital stock of the FHLB and deposit accounts at the FHLB.

The net amounts available under the blanket floating lien at December 31, 2021 and 2020, were $982.2 million and $456.9 million, respectively.

Additionally, at December 31, 2021, we had the ability to borrow $856.8 million from the discount window at the Federal Reserve Bank of Dallas ("FRB"), with $1.09 billion in commercial and industrial loans pledged as collateral.

The net amounts available under the blanket floating lien at December 31, 2022 and 2021, were $1.29 billion and $982.2 million, respectively.

Additionally, at December 31, 2022, we had the ability to borrow $1.23 billion from the discount window at the Federal Reserve Bank of Dallas ("FRB"), with $1.76 billion in commercial and industrial loans pledged as collateral.

There were no borrowings against this line at December 31, 2022.

Holding Company Line of Credit

The Company has a line of credit under the terms of which the loan amount shall not exceed an aggregate principal balance of $100 million, consisting of an initial $50 million extension of credit and any one or more potential incremental revolving loan amounts that the lender may make in its sole discretion, up to an aggregate principal of $50 million, upon the request of the Company.

The revolving line of credit matures on October 27, 2023, and the Company had $30.0 million and zero outstanding on this revolving credit loan under the Loan Agreement at December 31, 2022 and 2021, respectively.

For additional information regarding our holding company line of credit, please see Note 12 - Borrowings in the notes to our consolidated financial statements contained in Item 8 of this report.

Subordinated Indebtedness

In February 2020, Origin Bank completed an offering of $70.0 million in aggregate principal amount of 4.25% fixed-to-floating rate subordinated notes due 2030 (the "Notes") to certain accredited investors in a transaction exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended.

Included in subordinated indebtedness, net in the table above, are $37.6 million of subordinated promissory notes ("BTH Notes") assumed from BTH in conjunction with the merger on August 1, 2022.

The BTH Notes are intended to qualify for Tier 2 capital treatment and are substantively identical in terms and conditions, including priority, except for the maturity dates and interest rates payable on the notes.

Interest is payable on the BTH Notes quarterly, and the principal amount of each BTH Note is payable at maturity.

After the five-year anniversary of issuance, the Company can redeem the BTH Notes in part or in full at the Company’s discretion and, if applicable, subject to receipt of any required regulatory approvals.

In addition, the BTH Notes can be redeemed at any time without penalty, upon not less than ten days’ notice, in the event that (i) the BTH Notes no longer qualify as Tier 2 capital as a result of any amendment or change in interpretation or application of laws or regulation that becomes effective after the date of issuance of the BTH Notes, (ii) a tax event, or (iii) investment company act event, as defined in the BTH Notes.

The BTH Notes are unsecured and rank senior to the Company’s common stock, any preferred stock that may be issued, and the BTH TruPS (defined below).

In February 2020, Origin Bank completed an offering of $70.0 million in aggregate principal amount of 4.25% fixed-to-floating rate subordinated notes due 2030 (the “4.25% Notes”) to certain investors in a transaction exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended.

The 4.25% Notes initially bear interest at a fixed annual rate of 4.25%, payable semi-annually in arrears, to but excluding February 15, 2025.

From and including February 15, 2025, to but excluding the maturity date or earlier redemption date, the interest rate will equal three-month LIBOR (provided, that in the event the three-month LIBOR is less than zero, the three-month LIBOR will be deemed to be zero) plus 282 basis points, payable quarterly in arrears, subject to customary fallback provision upon the discontinuation of LIBOR.

From and including February 15, 2025, to but excluding the maturity date or early redemption date, the interest rate will equal the three-month LIBOR rate (provided that in the event the three-month LIBOR is less than zero, the three-month LIBOR will be deemed to be zero) plus 282 basis points, payable quarterly in arrears, subject to customary fallback provision upon the discontinuation of LIBOR.

Origin Bank is entitled to redeem the 4.25% Notes, in whole or in part, on or after February 15, 2025, and to redeem the 4.25% Notes at any time in whole upon certain other specified events.

The 4.25% Notes qualify as Tier 2 capital for regulatory capital purposes for Origin Bank.

In October 2020, we completed of an offering of $80.0 million in aggregate principal amount of 4.50% fixed-to-floating rate subordinated notes due 2030 (the “4.50% Notes”).

In October 2020, the Company completed of an offering of $80.0 million in aggregate principal amount of 4.50% fixed-to-floating rate subordinated notes due 2030 (the “4.50% Notes”).

The 4.50% Notes bear a fixed interest rate of 4.50%, payable semi-annually in arrears, to but excluding November 1, 2025.

From and including November 1, 2025, to but excluding the maturity date or earlier redemption date, the 4.50% Notes bear a floating interest rate expected to equal the three-month term SOFR plus 432 basis points, payable quarterly in arrears.

We may redeem the 4.50% Notes at any time upon certain specified events or in whole or in part on or after November 1, 2025.

The 4.50% Notes qualify as Tier 2 capital for regulatory capital purposes for the Company and $51.0 million was transferred to Origin Bank during the fourth quarter of 2020, which qualifies as Tier 1 capital for regulatory capital purposes for the Bank.

The Company has two wholly-owned, unconsolidated subsidiary grantor trusts that were established for the purpose of issuing trust preferred securities.

For additional information regarding these trusts, please see Note 11 - Borrowings in the consolidated financial statements contained in Item 8 of this report.

From and including November 1, 2025, to but excluding the maturity date or earlier redemption date, the 4.50% Notes bear a floating interest rate expected to equal the three-month term Secured Overnight Financing Rate plus 432 basis points, payable quarterly in arrears.

The Company may redeem the 4.50% Notes at any time upon certain specified events or in whole or in part on or after November 1, 2025.

The 4.50% Notes qualify as Tier 2 capital for regulatory capital purposes for the Company and a portion of the proceeds was transferred to Origin Bank during the fourth quarter of 2020, which qualifies as Tier 1 capital for regulatory capital purposes for the Bank.

On August 1, 2022, the Company assumed BTH's obligations with respect to $7.2 million in aggregate principal amount of junior subordinated debentures issued to a statutory trust of BTH ("BTH TruPS").

The BTH TruPS and the Company's two other wholly-owned, unconsolidated subsidiary grantor trusts were established for the purpose of issuing trust preferred securities.

The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each trust agreement.

The trusts used the net proceeds from each of the offerings to purchase a like amount of junior subordinated debentures (the "debentures") of the Company.

The debentures are the sole assets of the trusts.

The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts.

The trust preferred securities are mandatorily redeemable upon maturity of the debentures and can be currently redeemed by the Company in whole or in part, at a redemption price equal to 100% of the outstanding principal amount of the debentures, plus any accrued but unpaid interest to the redemption date.

The trust preferred securities qualify as Tier 1 capital of the Company for regulatory purposes, subject to certain limitations.

For additional information regarding our outstanding subordinated indebtedness, including the junior subordinated debentures underlying legacy issuances of trust preferred securities, please see Note 12 - Borrowings in the notes

to our consolidated financial statements contained in Item 8 of this report.

Liquidity and Capital Resources

10 unchanged sentences

Business - Regulation and Supervision" above for more information.

During 2020, we took a number of precautionary actions to enhance our financial flexibility by bolstering our liquidity to ensure we had adequate cash readily available to meet both expected and unexpected funding needs.

Currently, we believe we have sufficient liquidity from our available on- and off-balance sheet liquidity sources, however, should market conditions change, we may take further actions to enhance our financial flexibility.

Currently, we believe we have sufficient liquidity from our available on- and off-balance sheet liquidity sources, however, should market conditions change, we may take action to enhance our financial flexibility.

In addition to cash generated from operations, we utilize a number of funding sources to manage our liquidity, including core deposits, investment securities, cash and cash equivalents, loan repayments, federal funds lines of credit available from other financial institutions, as well as advances from the FHLB.

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There were no borrowings against this line at December 31, 2022.

Origin Bank completed an offering in February 2020 of $70.0 million in aggregate principal amount of 4.25% fixed-to-floating rate subordinated notes due 2030, and the Company completed an offering in October 2020 of $80.0 million in aggregate principal amount of 4.50% fixed-to-floating rate subordinated notes due 2030.

The notes provided us with $68.8 million and $78.6 million, respectively, in additional liquidity.

In the normal course of business as a financial services provider, we enter into various financial instruments, such as certain contractual obligations and commitments to extend credit and letters of credit, to meet the financing needs of our customers.

7 unchanged sentences

Net income 87,715

Other comprehensive income, net of tax (19,920)

Other comprehensive loss, net of tax (165,604)

BTH Merger 306,344

Dividends declared - common stock ($0.58 per share) (15,934)

Stock Issuance - Lincoln Agency and Pulley-White Acquisitions 7,458

Other (1,484)

Balance at December 31, 2022 $ 949,943

Stock Repurchases

In July 2019, our board of directors authorized a stock buyback program pursuant to which we may, from time to time, purchase up to $40 million of our outstanding common stock.

The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the SEC.

The stock buyback program was initially approved for a period of 36 months, but may be extended, terminated or amended by our board of directors.

The stock buyback program does not obligate us to purchase any shares at any time.

During the first quarter of the year ended December 31, 2021, the Company repurchased an aggregate of 37,568 shares of its common stock pursuant to its stock buyback program at an average price per share of $33.42, for an aggregate purchase price of $1.3 million.

There were no stock repurchases after March 2021.

Prior to December 31, 2020, the Company had cumulatively repurchased an aggregate of 330,868 shares of its common stock shares pursuant to its stock buyback program for an aggregate purchase price of $10.8 million.

As of December 31, 2021, there remained approximately $28.0 million of capacity under the program.

In July 2019, the Company's board of directors authorized a stock repurchase program, pursuant to which the Company was authorized to purchase up to $40 million of its outstanding common stock.

The stock repurchase program was approved for a period of three years and expired in June 2022, having repurchased a total of $28.0 million of outstanding common stock.

In July 2022, the Board of Directors of the Company authorized a stock repurchase program pursuant to which the Company may, from time to time, purchase up to $50 million of its outstanding common stock.

The stock repurchase program is intended to expire in three years but may be terminated or amended by the Board of Directors at any time.

The stock repurchase program does not obligate the Company to purchase any shares at any time.

There were no stock repurchases during the year ended December 31, 2022.

The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions.

The excise tax is effective beginning in 2023.

While we may complete transactions subject to the new excise tax, we do not expect a material impact to our financial condition or result of operations.

Regulatory Capital Requirements

Together with the Bank, we are subject to various regulatory capital requirements administered by federal banking agencies.

These requirements are discussed in greater detail in " Item 1.

For further information, these requirements are discussed in greater detail in " Item 1.

Business - Regulation and Supervision, ".

Failure to meet minimum capital requirements may result in certain actions by regulators that, if enforced, could have a direct material effect on our financial statements.

At December 31, 2021, and December 31, 2020, we and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized" for purposes of the prompt corrective action regulations of the Federal Reserve.

At December 31, 2022 and 2021, we and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized" for purposes of the prompt corrective action regulations of the Federal Reserve.

As we deploy capital and continue to grow operations, regulatory capital levels may decrease depending on the level of earnings.

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952,579 9.94 724,440 9.66

Non-GAAP Financial Measures

Our accounting and reporting policies conform to U.S.GAAP and the prevailing practices in the banking industry.

However, we provided other financial measures, such as pre-tax, pre-provision earnings, in this report that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with U.S.

We consider pre-tax, pre-provision earnings as presented in this report as an important measure of financial performance as it provides supplemental information that we use to evaluate our business, to assess underlying operational performance and to allow a comparison to prior periods without the impact of increases in the allowance for credit losses, and related income tax effects.

We believe non-GAAP measures and ratios, when taken together with the corresponding U.S.

GAAP measures and ratios, provide meaningful supplemental information regarding our performance and capital strength.

We use, and believe that investors benefit from referring to, non-GAAP measures in assessing our operating results and related trends.

However, non-GAAP measures should be considered in addition to, and not as a substitute for or preferable to, amounts prepared in accordance with U.S.

In the following table, we have provided a reconciliation of pre-tax, pre-provision earnings to net income and the detail of the calculation of tangible book value per common share.

(Dollars in thousands, except per share amounts) 2021 2020 2019

Calculation of PTPP Earnings:

Net Income $ 108,546 $ 36,357 $ 53,882

provision for credit losses (10,765) 59,900 9,568

income tax expense 23,885 7,996 12,666

PTPP Earnings $ 121,666 $ 104,253 $ 76,116

Calculation of Tangible Book Value per Common Share:

Total common stockholders' equity $ 730,211 $ 647,150 $ 599,262

goodwill and other intangible assets, net 51,330 30,480 31,540

Tangible Common Equity 678,881 616,670 567,722

Divided by common shares outstanding at the end of the period 23,746,502 23,506,312 23,480,945

Tangible Book Value per Common Share $ 28.59 $ 26.23 $ 24.18

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis