# Origin Bancorp, Inc. (OBK) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Origin Bancorp, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1516912/000151691224000027/obnk-20231231.htm
Accession: 0001516912-24-000027
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OBK/
All MD&A years: /company/OBK/mda/
Previous year: /company/OBK/mda/fy2022/ (FY 2022)
Next year: /company/OBK/mda/fy2024/ (FY 2024)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, we conduct all of our material business operations through our wholly-owned bank subsidiary, Origin Bank, and the discussion and analysis that follows primarily relates to activities conducted at the Bank level.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes contained in Item 8 of this report. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled "Cautionary Note Regarding Forward-Looking Statements" and "Item 1A. Risk Factors." We assume no obligation to update any of these forward-looking statements.

Discussion in this Form 10-K includes results of operations and financial condition for 2023 and 2022 and year-over-year comparisons between 2023 and 2022. For discussion on results of operations and financial condition pertaining to 2022 and 2021 and year-over-year comparisons between 2022 and 2021, 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, 2022, filed with the SEC on February 22, 2023.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates. Please refer to Note 1 — Significant Accounting Policies to our consolidated financial statements contained in Item 8 of this report for a full discussion of our accounting policies, including estimates.

We have identified the following accounting estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those estimates and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate.

Allowance for Loan Credit Losses. The allowance for loan credit losses (“ALCL”) 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 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 ALCL 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. In determining the provision for loan credit losses, management monitors fluctuations in the allowance resulting from actual charge-offs and recoveries and periodically reviews the size and composition of the loan portfolio in light of current and forecasted economic conditions. If actual losses exceed the amount of ALCL, it could materially and adversely affect our earnings. 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 ALCL when management believes the loss is confirmed.

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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 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 $2.5 million and $5.1 million at December 31, 2023 and 2022, respectively.

Mortgage Servicing Rights. We recognize the rights to service mortgage loans based on the estimated fair value of the mortgage servicing right ("MSR") when loans are sold and the associated servicing rights are retained. We elected to account for the MSR at fair value.

The fair value of the MSR is determined using a valuation model administered by a third-party that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income and other ancillary income such as late fees. Management reviews all significant assumptions quarterly. Mortgage loan prepayment speeds, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change. Estimating prepayment speed and/or discount rates within ranges that market participants would use in determining the fair value of the MSR requires significant management judgment.

General

We are a financial holding company headquartered in Ruston, Louisiana. 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 has over 60 locations from Dallas/Fort Worth, East Texas and Houston, across North Louisiana and into Mississippi. In early 2024, we entered our new Southeast market with two planned banking locations in Mobile, Alabama and Fort Walton Beach, Florida. 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.

We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans, securities and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

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Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions, as well as developments affecting the real estate, technology, financial services, insurance, transportation and manufacturing sectors within our target markets.

Results of Operations

[[GREPCENT_TABLE]]
[["","At and for the Years Ended December 31,"],["(Dollars in thousands, except per share amounts)","2023","","2022","","2021"],["Net income","$","83,800","","","$","87,715","","","$","108,546"],["Financial ratios:"],["ROAA(1)","0.84","%","","1.01","%","","1.45","%"],["ROAE(1)","8.38","","","10.81","","","15.79"],["Capital ratio:"],["Book value per common share","$","34.30","","","$","30.90","","","$","30.75"]]
[[/GREPCENT_TABLE]]
____________________________

(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, 2023, was $299.6 million, an increase of $24.3 million, or 8.8%, compared to the year ended December 31, 2022. Increases in interest rates and average interest-earning assets drove increases of $129.4 million and $67.4 million, respectively, in total interest income. The increase in total interest income was partially offset by a $172.5 million increase in interest expense, of which $163.5 million of the increase was driven by increases in interest rates.

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. The Federal Funds target rate range had increased 525 basis points starting with the Federal Reserve Board’s first rate increase in 2022, and in order to remain competitive as market interest rates increased, we increased interest rates paid on our deposits. Increases in interest rates contributed $107.8 million to the total increase in interest income earned on total LHFI during the year ended December 31, 2023, while rising interest rates increased our total deposit interest expense and FHLB advances and other borrowings interest expense by $152.6 million and $10.3 million, respectively, during the same period.

Interest income earned on LHFI during the year ended December 31, 2023, increased in all loan categories when compared to the year ended December 31, 2022. Interest income earned on real estate loans and commercial and industrial loans contributed $112.5 million and $65.3 million, respectively, of the $181.1 million total increase in interest income earned on LHFI when compared to the year ended December 31, 2022. Increases in average balances and interest rates drove $57.3 million and $55.2 million, respectively, of the total increase in interest income earned on real estate loans, while increases in interest rates drove $44.9 million of the $65.3 million increase in interest income earned on commercial and industrial loans for the comparable periods.

Purchase accounting accretion on acquired loans was $2.0 million for the year ended December 31, 2023, with remaining purchase accounting net loan discounts totaling $222,000 at December 31, 2023. Net purchase accounting accretion income on deposits and subordinated indebtedness totaled $124,000 for the year ended December 31, 2023, bringing the impact from purchase accounting treatment on total net interest income to $2.1 million for the year ended December 31, 2023. Net purchase accounting accretion was $3.3 million during the year ended December 31, 2022.

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Towards the end of the first quarter of 2023, in response to the uncertainty in the marketplace surrounding the bank failures that occurred during this time, we strategically borrowed and held approximately $700.0 million in excess cash for contingency liquidity. This excess liquidity was held at a weighted-average rate of 5.17% and added $130.0 million in average interest-bearing assets for the year ended December 31, 2023, which negatively impacted the fully tax-equivalent net interest margin (“NIM-FTE”) by 10 basis points. The $700.0 million in excess cash was repaid by June 30, 2023.

During the third quarter of 2023, we made a strategic decision to sell available for sale investment securities with a book value of $181.9 million, and realized a loss of $7.2 million, in order to use the proceeds to pay down FHLB advances. The impact on the NIM-FTE for the year ended December 31, 2023, was three basis points. While the associated loss resulted in an $0.15 negative impact to diluted EPS for the year ended December 31, 2023, the difference between the relatively low yield on securities sold and the higher cost of FHLB advances was an attractive trade-off, with an estimated annualized positive forward impact to NIM-FTE of 11 basis points, an estimated annualized forward diluted EPS benefit of approximately $0.11 and an estimated earn-back period of 1.7 years. The estimated metrics above use our annualized third quarter of 2023 net income, less any non-operating income items, and added the estimated annualized tax-effected net interest income using a weighted average tax-effected yield of 3.08% on the securities sold and an expected interest rate of 5.62% on the FHLB advances paid off.

During the month ended December 31, 2023, we sold available for sale investment securities with a book value of $78.9 million, and realized a loss of $4.6 million. We intend to use the proceeds in order to support loan growth in our markets, including our new Southeast market; however, in the interim, the proceeds will be held in our interest-earning deposits with banks with an estimated annual yield of 5.4%. Due to the timing of this transaction, it had no impact on our NIM-FTE for the year ended December 31, 2023. While the associated loss resulted in an $0.11 negative impact to diluted EPS for the year ended December 31, 2023, the difference between the relatively low yield on the securities sold and the higher yield of either interest-earning deposits in banks and/or new loan originations as we deploy proceeds was an attractive trade-off. Depending on how long it takes to deploy from cash to loans, we estimate an annualized positive forward impact to NIM-FTE of three to five basis points, an estimated annualized forward diluted EPS benefit of approximately $0.06 to $0.11, and an estimated earn-back period of 1.9 to 1.1 years. The metrics above used the estimated annualized tax-effected net interest income generated in excess of the weighted average tax-effected yield of 2.04% on the securities sold compared to an estimated interest yield of 5.4% if the proceeds are invested in interest-earning deposits at other banks, or 7.7% if the proceeds are used to fund new loan production.

The NIM-FTE was 3.23% for the year ended December 31, 2023, a 19 basis point decrease from the year ended December 31, 2022. The decrease was primarily due to 83 basis points of margin compression experienced during the year ended December 31, 2023, and reflected a 240 basis point increase in interest rates paid on total interest-bearing liabilities offset by a 157 basis point increase in the yield earned on interest-earning assets for the year ended December 31, 2023. The increase in the Federal Funds rate, and the pace at which it increased, caused a shift in average deposit balances reflected in increases of $782.5 million, or 127.0%, in average time deposit balances, and a $413.1 million, or 18.5%, increase in money market deposit balances compared to the year ended December 31, 2022. The change in market interest rates driven primarily by the Federal Funds rate increases during the intervening period was also reflected in the decline of $275.1 million, or 11.4%, in average noninterest-bearing deposits for the year ended December 31, 2023, compared to the year ended December 31, 2022.

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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, 2023, 2022 and 2021.

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023","","2022","","2021"],["(Dollars in thousands)Assets","Average Balance(1)","","Income/Expense","","Yield/Rate","","Average Balance(1)","","Income/Expense","","Yield/Rate","","Average Balance(1)","","Income/Expense","","Yield/Rate"],["Commercial real estate","$","2,404,530","","","$","135,117","","","5.62","%","","$","1,951,246","","","$","88,175","","","4.52","%","","$","1,501,890","","","$","61,804","","","4.12","%"],["Construction/land/land development","1,015,178","","","69,630","","","6.86","","","708,758","","","36,352","","","5.13","","","528,618","","","21,914","","","4.15"],["Residential real estate","1,629,589","","","81,964","","","5.03","","","1,143,190","","","49,635","","","4.34","","","916,039","","","37,045","","","4.04"],["Commercial and industrial","2,054,081","","","155,842","","","7.59","","","1,675,719","","","90,499","","","5.40","","","1,627,077","","","67,064","","","4.12"],["Mortgage warehouse lines of credit","314,079","","","21,476","","","6.84","","","420,639","","","18,732","","","4.45","","","753,588","","","27,470","","","3.65"],["Consumer","24,627","","","1,918","","","7.79","","","20,913","","","1,444","","","6.91","","","16,764","","","972","","","5.80"],["LHFI","7,442,084","","","465,947","","","6.26","","","5,920,465","","","284,837","","","4.81","","","5,343,976","","","216,269","","","4.05"],["Loans held for sale","18,055","","","868","","","4.81","","","32,272","","","1,313","","","4.07","","","68,917","","","2,512","","","3.65"],["Loans receivable","7,460,139","","","466,815","","","6.26","","","5,952,737","","","286,150","","","4.81","","","5,412,893","","","218,781","","","4.04"],["Investment securities-taxable","1,295,871","","","31,682","","","2.44","","","1,497,226","","","27,795","","","1.86","","","899,532","","","14,555","","","1.62"],["Investment securities-non-taxable","214,232","","","5,098","","","2.38","","","270,701","","","7,172","","","2.65","","","280,157","","","6,337","","","2.26"],["Non-marketable equity securities held in other financial institutions","67,956","","","3,408","","","5.01","","","58,441","","","1,802","","","3.08","","","48,970","","","1,181","","","2.41"],["Interest-bearing deposits in banks","318,559","","","16,388","","","5.14","","","349,484","","","3,685","","","1.05","","","418,034","","","802","","","0.19"],["Total interest-earning assets","9,356,757","","","523,391","","","5.59","","","8,128,589","","","326,604","","","4.02","","","7,059,586","","","241,656","","","3.42"],["Noninterest-earning assets(2)","584,263","","","","","","","557,642","","","","","","","411,341"],["Total assets","$","9,941,020","","","","","","","$","8,686,231","","","","","","","$","7,470,927"],["Liabilities and Stockholders\u2019 Equity"],["Liabilities"],["Interest-bearing liabilities"],["Savings and interest-bearing transaction accounts","$","4,725,929","","","$","144,324","","","3.05","%","","$","4,066,981","","","$","29,025","","","0.71","%","","$","3,640,713","","","$","8,842","","","0.24","%"],["Time deposits","1,398,734","","","52,133","","","3.73","","","616,197","","","4,484","","","0.73","","","607,742","","","4,576","","","0.75"],["Total interest-bearing deposits","6,124,663","","","196,457","","","3.21","","","4,683,178","","","33,509","","","0.72","","","4,248,455","","","13,418","","","0.32"],["FHLB advances & other borrowings","327,792","","","17,258","","","5.26","","","444,426","","","9,411","","","2.12","","","337,076","","","4,654","","","1.38"],["Subordinated indebtedness","198,856","","","10,119","","","5.09","","","176,028","","","8,406","","","4.78","","","157,304","","","7,332","","","4.66"],["Total interest-bearing liabilities","6,651,311","","","223,834","","","3.37","","","5,303,632","","","51,326","","","0.97","","","4,742,835","","","25,404","","","0.54"],["Noninterest-bearing liabilities"],["Noninterest-bearing deposits","2,147,019","","","","","","","2,422,132","","","","","","","1,905,045"],["Other liabilities(2)","142,786","","","","","","","148,984","","","","","","","135,399"],["Total liabilities","8,941,116","","","","","","","7,874,748","","","","","","","6,783,279"],["Stockholders\u2019 Equity","999,904","","","","","","","811,483","","","","","","","687,648"],["Total liabilities and stockholders\u2019 equity","$","9,941,020","","","","","","","$","8,686,231","","","","","","","$","7,470,927"],["Net interest spread","","","","","2.22","%","","","","","","3.05","%","","","","","","2.88","%"],["Net interest income and margin","","","$","299,557","","","3.20","","","","","$","275,278","","","3.39","","","","","$","216,252","","","3.06"],["Net interest income and margin - (tax equivalent)(3)","","","$","302,132","","","3.23","","","","","$","278,403","","","3.42","","","","","$","219,155","","","3.10"]]
[[/GREPCENT_TABLE]]

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(1)Nonaccrual loans are included in their respective loan category for the purpose of calculating the yield earned. All average balances are daily average balances.

(2)Includes Government National Mortgage Association ("GNMA") repurchase average balances of $1.1 million, $33.6 million, $53.9 million for the year ended December 31, 2023, 2022 and 2021, 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. During the second half of 2022, the Company entered into an agreement to sell its GNMA MSR portfolio, which met all final sale conditions in early 2023. The Company derecognized the related GNMA repurchase asset and offsetting liability during the quarter ended March 31, 2023. For more information on the GNMA repurchase option, see Note 9 — Mortgage Banking in the notes to our consolidated financial statements.

(3)In order to present pre-tax income and resulting yields on tax-exempt investments comparable to those on taxable investments, a tax-equivalent adjustment has been computed. This adjustment also includes income tax credits received on Qualified School Construction Bonds and income from tax-exempt investments, and tax credits were computed using a federal income tax rate of 21%.

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Rate/Volume Analysis

The following tables present the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate changes has been determined by applying the change in rate between periods to average balances outstanding in the earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. For purposes of the below table, changes attributable to both rate and volume that cannot be segregated, including the difference in day count, have been allocated to rate.

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2023 vs. Year Ended December 31, 2022"],["(Dollars in thousands)Interest-earning assets","Increase (Decrease) due to Change in"],["Loans:","Volume","","Yield/Rate","","Total Change"],["Commercial real estate","$","20,483","","","$","26,459","","","$","46,942"],["Construction/land/land development","15,716","","","17,562","","","33,278"],["Residential real estate","21,118","","","11,211","","","32,329"],["Commercial and industrial","20,434","","","44,909","","","65,343"],["Mortgage warehouse lines of credit","(4,745)","","","7,489","","","2,744"],["Consumer","256","","","218","","","474"],["Loans held for sale","(578)","","","133","","","(445)"],["Loans receivable","72,684","","","107,981","","","180,665"],["Investment securities-taxable","(3,738)","","","7,625","","","3,887"],["Investment securities-non-taxable","(1,496)","","","(578)","","","(2,074)"],["Non-marketable equity securities held in other financial institutions","293","","","1,313","","","1,606"],["Interest-bearing deposits in banks","(326)","","","13,029","","","12,703"],["Total interest-earning assets","67,417","","","129,370","","","196,787"],["Interest-bearing liabilities"],["Savings and interest-bearing transaction accounts","4,703","","","110,596","","","115,299"],["Time deposits","5,694","","","41,955","","","47,649"],["FHLB advances & other borrowings","(2,470)","","","10,317","","","7,847"],["Subordinated indebtedness","1,090","","","623","","","1,713"],["Total interest-bearing liabilities","9,017","","","163,491","","","172,508"],["Net interest income","$","58,400","","","$","(34,121)","","","$","24,279"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022 vs. Year Ended December 31, 2021"],["(Dollars in thousands)Interest-earning assets","Increase (Decrease) due to Change in"],["Loans:","Volume","","Yield/Rate","","Total Change"],["Commercial real estate","$","18,491","","","$","7,880","","","$","26,371"],["Construction/land/land development","7,468","","","6,970","","","14,438"],["Residential real estate","9,186","","","3,404","","","12,590"],["Commercial and industrial","2,005","","","21,430","","","23,435"],["Mortgage warehouse lines of credit","(12,137)","","","3,399","","","(8,738)"],["Consumer","240","","","232","","","472"],["Loans held for sale","(1,336)","","","137","","","(1,199)"],["Loans receivable","23,917","","","43,452","","","67,369"],["Investment securities-taxable","9,671","","","3,569","","","13,240"],["Investment securities-non-taxable","(214)","","","1,049","","","835"],["Non-marketable equity securities held in other financial institutions","229","","","392","","","621"],["Interest-bearing deposits in banks","(131)","","","3,014","","","2,883"],["Total interest-earning assets","33,472","","","51,476","","","84,948"],["Interest-bearing liabilities"],["Savings and interest-bearing transaction accounts","1,035","","","19,148","","","20,183"],["Time deposits","64","","","(156)","","","(92)"],["FHLB advances & other borrowings","1,482","","","3,275","","","4,757"],["Subordinated indebtedness","873","","","201","","","1,074"],["Total interest-bearing liabilities","3,454","","","22,468","","","25,922"],["Net interest income","$","30,018","","","$","29,008","","","$","59,026"]]
[[/GREPCENT_TABLE]]

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Provision for Credit Losses

We recorded a provision expense of $16.8 million for the year ended December 31, 2023, a $7.9 million decrease from $24.7 million for the year ended December 31, 2022. The decrease was primarily due to the $14.9 million provision for loan credit losses on non-PCD loans associated with the BTH merger that occurred on August 1, 2022, offset by an increase in loan provision primarily due to loan growth during the intervening period, as well as increases in required reserves on individually evaluated loans at December 31, 2023, compared to December 31, 2022. In addition, we recorded a release of credit loss provision of $836,000 on our investment securities during the year ended December 31, 2023, an improvement of $1.6 million from a provision expense of $732,000 during the year ended December 31, 2022. Net charge-offs were $7.8 million during the year ended December 31, 2023, compared to $4.6 million during the year ended December 31, 2022. The ALCL to nonperforming LHFI was 321.66% at December 31, 2023, compared to 876.87% at December 31, 2022, primarily driven by a $20.2 million increase in nonperforming LHFI compared to December 31, 2022. The increase in nonperforming loans was driven by increases of $14.5 million and $5.3 million in commercial and industrial and nonperforming residential real estate loans, respectively.

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 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.

Noninterest Income

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

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","Years Ended December 31,","","","","","2023 vs. 2022","","2022 vs. 2021"],["Noninterest income:","2023","","2022","","","2021","","","","","","$ Change","","% Change","","$ Change","","% Change"],["Insurance commission and fee income","$","25,085","","","$","22,869","","","","$","13,098","","","","","","","$","2,216","","","9.7","%","","$","9,771","","","74.6","%"],["Service charges and fees","18,803","","","17,669","","","","15,049","","","","","","","1,134","","","6.4","","","2,620","","","17.4"],["Mortgage banking revenue","3,356","","","6,722","","","","12,927","","","","","","","(3,366)","","","(50.1)","","","(6,205)","","","(48.0)"],["Other fee income","3,871","","","3,530","","","","2,879","","","","","","","341","","","9.7","","","651","","","22.6"],["Swap fee income","1,277","","","457","","","","814","","","","","","","820","","","N/M","","(357)","","","(43.9)"],["(Loss) gain on sales of securities, net","(11,635)","","","1,664","","","","1,748","","","","","","","(13,299)","","","N/M","","(84)","","","(4.8)"],["Limited partnership investment gain (loss) income","405","","","(199)","","","","5,701","","","","","","","604","","","N/M","","(5,900)","","","(103.5)"],["Gain (loss) on sales and disposals of other assets, net","64","","","(175)","","","","(185)","","","","","","","239","","","N/M","","10","","","(5.4)"],["Change in fair value of equity investments","10,096","","","\u2014","","","","\u2014","","","","","","","10,096","","","N/A","","\u2014","","","N/A"],["Other income","7,013","","","4,737","","","","10,162","","","","","","","2,276","","","48.0","","","(5,425)","","","(53.4)"],["Total noninterest income","$","58,335","","","$","57,274","","","","$","62,193","","","","","","","$","1,061","","","1.9","","","$","(4,919)","","","(7.9)"],["____________________________N/M = Not meaningful.N/A = Not applicable."]]
[[/GREPCENT_TABLE]]

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Noninterest income for the year ended December 31, 2023, increased by $1.1 million, or 1.9%, to $58.3 million, compared to $57.3 million for the year ended December 31, 2022. The increase was primarily due to increases of $10.1 million, $2.3 million and $2.2 million in the change in fair value of equity investments, other noninterest income and insurance commission and fee income, respectively. The BTH merger contributed $1.8 million of the noninterest income increase between the two periods, primarily reflected in service charges and fee income. The increases were partially offset by an increase of $13.3 million in the loss on sales of securities, net, and a decrease of $3.4 million in mortgage banking revenue, respectively.

Insurance commission and fee income. The $2.2 million increase in insurance commission and fee income was mainly due to increases in new commercial accounts combined with higher contingency income earned due to lower claims for catastrophic events experienced by our insurance agency counterparties during the year ended December 31, 2023, compared to the year ended December 31, 2022.

Mortgage banking revenue. The $3.4 million decrease in mortgage banking revenue compared to the year ended December 31, 2022, was primarily due to a slowdown in the residential housing market brought on by higher mortgage interest rates, and in some key markets, continued housing supply shortages, leading to overall lower lending during the period. During December 2023 and January 2024, the Company solicited non-binding indications of interest with respect to the proposed sale of substantially all of its mortgage servicing rights asset and recognized an impairment of $1.8 million. The Company plans to sell approximately $17.4 million in mortgage servicing rights, representing approximately $1.39 billion in unpaid principal balances, subject to successful negotiation of a definitive purchase and sale agreement and satisfaction of all closing conditions. Late in the year ended December 31, 2022, we recorded a $2.0 million impairment on the held for sale GNMA MSR portfolio. We sold the GNMA MSR, with no significant additional gain or loss realized, and derecognized the related GNMA repurchase asset and offsetting liability early in the year ended December 31, 2023.

(Loss) gain on sales of securities, net. The loss on sales of securities was due to the sale of available for sale investment securities with a book value of $260.8 million, which realized a loss on sale of $11.8 million during the second half of 2023. We used the proceeds from the sales to pay down FHLB advances and support loan growth in our markets. Please see the Net Interest Income and Net Interest Margin section above for more information on these transactions.

Change in fair value of equity investments. The $10.1 million increase in change in fair value of equity investments was due to a gain realized from a positive valuation adjustment on one of our non-marketable equity securities, which qualified for the practical expedient under which we carry these securities at cost adjusted for any observable transactions during the period, less any impairment. During the year ended December 31, 2023, we observed multiple orderly transactions for identical equity securities indicating a price change had occurred and adjusted our basis upwards accordingly.

Other noninterest income. The $2.3 million increase in other noninterest income was primarily due to a positive fair value adjustment of our municipal securities of $726,000 for the year ended December 31, 2023, compared to a negative fair value adjustment of $854,000 for the year ended December 31, 2022.

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Noninterest Expense

The following table presents the significant components of noninterest expense for the periods indicated:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","Years Ended December 31,","","2023 vs. 2022","","2022 vs. 2021"],["Noninterest expense:","2023","","2022","","2021","","$ Change","","% Change","","$ Change","","% Change"],["Salaries and employee benefits","$","138,819","","","$","118,971","","","$","93,026","","","$","19,848","","","16.7","%","","$","25,945","","","27.9","%"],["Occupancy and equipment, net","26,783","","","20,203","","","17,347","","","6,580","","","32.6","","","2,856","","","16.5"],["Data processing","11,590","","","10,456","","","9,117","","","1,134","","","10.8","","","1,339","","","14.7"],["Intangible asset amortization","9,628","","","5,488","","","844","","","4,140","","","75.4","","","4,644","","","N/M"],["Office and operations","10,834","","","8,120","","","6,399","","","2,714","","","33.4","","","1,721","","","26.9"],["Professional services","5,931","","","3,813","","","3,644","","","2,118","","","55.5","","","169","","","4.6"],["Loan-related expenses","5,035","","","6,097","","","7,688","","","(1,062)","","","(17.4)","","","(1,591)","","","(20.7)"],["Advertising and marketing","5,986","","","4,431","","","3,438","","","1,555","","","35.1","","","993","","","28.9"],["Electronic banking","4,712","","","3,958","","","3,563","","","754","","","19.1","","","395","","","11.1"],["Franchise tax expense","3,334","","","3,582","","","2,538","","","(248)","","","(6.9)","","","1,044","","","41.1"],["Regulatory assessments","6,456","","","3,547","","","2,904","","","2,909","","","82.0","","","643","","","22.1"],["Communications","1,527","","","1,246","","","1,574","","","281","","","22.6","","","(328)","","","(20.8)"],["Merger-related expense","\u2014","","","6,171","","","\u2014","","","(6,171)","","","(100.0)","","","6,171","","","N/A"],["Other expenses","4,581","","","4,336","","","4,697","","","245","","","5.7","","","(361)","","","(7.7)"],["Total noninterest expense","$","235,216","","","$","200,419","","","$","156,779","","","$","34,797","","","17.4","","","$","43,640","","","27.8"]]
[[/GREPCENT_TABLE]]

____________________________

N/M = Not meaningful.

N/A = Not applicable.

Noninterest expense for the year ended December 31, 2023, increased by $34.8 million, or 17.4%, to $235.2 million, compared to $200.4 million for the year ended December 31, 2022. The BTH merger contributed $18.1 million the total increase, excluding merger-related expenses.

Salaries and employee benefits. The $19.8 million increase in salaries and employee benefits expenses was primarily driven by increases of $15.0 million, $1.2 million and $1.1 million in salary expense, incentive compensation and medical self-insurance costs, respectively, for the year ended December 31, 2023, compared to the year ended December 31, 2022.

•The BTH merger contributed $7.5 million to the total salaries and employee benefits increase, primarily due to an additional seven months of BTH expense during the year ended December 31, 2023, compared to five months of BTH expense during the year ended December 31, 2022.

•The impact of the cost of living increases made in August 2022 and annual cost of living adjustments and raises made on March 1, 2023, increased the comparative change in salaries and employee benefits between the two periods.

Occupancy and equipment, net. The $6.6 million increase was primarily due to the BTH merger that closed on August 1, 2022, which contributed $3.3 million to the total increase. Additionally, the increase was due to the addition of two new banking locations and two mortgage production offices being added during the intervening period.

Intangible asset amortization expense. The $4.1 million increase was primarily due to the core deposit intangible established in conjunction with the BTH merger.

Office and operations. These increases were mainly due to increases in connection with the BTH merger.

Professional services. The increase was mainly due to a $1.1 million increase in consulting expense.

Regulatory assessment. The $2.9 million increase in regulatory assessments was driven primarily by an increase in the blended FDIC’s Uniform Assessment rate to 7.10% at December 31, 2023, from 4.09% at December 31, 2022, which was primarily the result of growth in our average assets during the intervening period.

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Merger-related expense. The $6.2 million merger-related expenses in 2022 were associated with the BTH merger that was closed on August 1, 2022, while no comparable expense occurred during the year ended December 31, 2023.

Income Tax Expense

For the year ended December 31, 2023, we recognized income tax expense of $22.1 million, compared to $19.7 million for the year ended December 31, 2022. Our effective tax rate was 20.9% for the year ended December 31, 2023, compared to 18.4% for the year ended December 31, 2022. The effective tax rate was higher for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher state income taxes as a result of higher state income, as well as an increase in stock compensation tax expense during the year ended December 31, 2023.

Comparison of Financial Condition at December 31, 2023, and December 31, 2022

General

Total assets increased by $36.5 million, or 0.4%, to $9.72 billion at December 31, 2023, from $9.69 billion at December 31, 2022. The increase in total assets is primarily due to an increase of $570.9 million, or 8.1%, in our loans held for investment (“LHFI”). LHFI was $7.66 billion at December 31, 2023, compared to $7.09 billion at December 31, 2022. The increase was partially offset by decreases of $387.9 million and $78.5 million in available for sale securities and cash and cash equivalents, respectively. Available for sale securities and cash and cash equivalents were $1.25 billion and $280.4 million at December 31, 2023, respectively compared to $1.64 billion and $359.0 million at December 31, 2022, respectively.

Federal Home Loan Bank advances, repurchase obligations and other borrowings decreased $555.6 million, or 86.9%, to $83.6 million at December 31, 2023, from $639.2 million at December 31, 2022, offset by a $475.4 million, or 6.1%, increase in total deposits to $8.25 billion at December 31, 2023, from $7.78 billion at December 31, 2022. Total deposits increased at December 31, 2023, compared to December 31, 2022, primarily due to increases in brokered time deposits and money market deposits.

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, 2023, 77.1% 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 legacy market areas of Texas, North Louisiana, and Mississippi, compared to 78.8% at December 31, 2022.

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

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","December 31, 2023","","December 31, 2022","","2023 vs. 2022"],["Real estate:","Amount","","Percent","","Amount","","Percent","","$ Change","","% Change"],["Commercial real estate (\u201cCRE\u201d)(1)","$","2,442,734","","","31.9","%","","$","2,304,678","","","32.6","%","","$","138,056","","","6.0","%"],["Construction/land/land development","1,070,225","","","14.0","","","945,625","","","13.3","","","124,600","","","13.2"],["Residential real estate","1,734,935","","","22.6","","","1,477,538","","","20.8","","","257,397","","","17.4"],["Total real estate","5,247,894","","","68.5","","","4,727,841","","","66.7","","","520,053","","","11.0"],["Commercial and industrial","2,059,460","","","26.9","","","2,051,161","","","28.9","","","8,299","","","0.4"],["Mortgage warehouse lines of credit","329,966","","","4.3","","","284,867","","","4.0","","","45,099","","","15.8"],["Consumer","23,624","","","0.3","","","26,153","","","0.4","","","(2,529)","","","(9.7)"],["Total LHFI","$","7,660,944","","","100.0","%","","$","7,090,022","","","100.0","%","","$","570,922","","","8.1"]]
[[/GREPCENT_TABLE]]
______________________

(1)Includes owner-occupied CRE of $953.8 million and $843.0 million at December 31, 2023, and 2022, respectively.

At December 31, 2023, total LHFI were $7.66 billion, an increase of $570.9 million, or 8.1%, compared to $7.09 billion at December 31, 2022. The increase was primarily driven by loan growth of $520.1 million in real estate loans. Total LHFI at December 31, 2023, excluding mortgage warehouse lines of credit, was $7.33 billion, reflecting an increase of $525.8 million, or 7.7%, compared to December 31, 2022. 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.

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A significant portion, 31.9%, of our LHFI portfolio at December 31, 2023, consisted of CRE loans secured by real estate properties. Such loans can involve high principal loan amounts, and the repayment of these loans is dependent, in large part, on a borrower’s ongoing business operations or on income generated from the properties that are leased to third parties.

The table below sets forth the CRE loan portfolio, by portfolio industry sector and collateral location as of December 31, 2023.

[[GREPCENT_TABLE]]
[["","December 31, 2023"],["(Dollars in thousands)","Louisiana State","","Mississippi State","","Texas State","","All other states","","Total"],["Non-owner occupied CRE:"],["Office building","$","24,165","","","$","49,501","","","$","281,160","","","$","21,065","","","$","375,891"],["Retail shopping","47,633","","","36,200","","","206,309","","","104,677","","","394,819"],["Real estate & construction","35,253","","","5,234","","","138,369","","","54,314","","","233,170"],["Healthcare","47,905","","","5,865","","","113,686","","","35,931","","","203,387"],["Hotels","51,238","","","36,790","","","7,085","","","9,902","","","105,015"],["All others sectors","17,192","","","8,626","","","114,247","","","36,565","","","176,630"],["Total non-owner occupied CRE","223,386","","","142,216","","","860,856","","","262,454","","","1,488,912"],["Owner-occupied CRE:"],["Real estate & construction","$","44,764","","","$","21,939","","","$","175,688","","","$","13,146","","","$","255,537"],["Retail shopping","15,190","","","191","","","120,075","","","98","","","135,554"],["Consumer Services","23,513","","","4,715","","","45,040","","","\u2014","","","73,268"],["Entertainment & Recreation","21,432","","","10,658","","","37,890","","","\u2014","","","69,980"],["All others sectors","120,081","","","25,545","","","205,184","","","68,673","","","419,483"],["Total owner-occupied CRE","224,980","","","63,048","","","583,877","","","81,917","","","953,822"],["Total CRE loans","$","448,366","","","$","205,264","","","$","1,444,733","","","$","344,371","","","$","2,442,734"]]
[[/GREPCENT_TABLE]]

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Loan Portfolio Maturity Analysis

The table below presents the maturity distribution of our LHFI at December 31, 2023. The table also presents the portion of our loans that have fixed interest rates, rather than interest rates that fluctuate over the life of the loans, based on changes in the interest rate environment.

[[GREPCENT_TABLE]]
[["","December 31, 2023"],["(Dollars in thousands)","One Year or Less","","After One Year Through Five Years","","After Five Years Through Fifteen Years","","After Fifteen Years","","Total"],["Real estate:"],["Commercial real estate","$","382,457","","","$","1,545,582","","","$","496,836","","","$","17,859","","","$","2,442,734"],["Construction/land/land development","310,988","","","582,521","","","138,852","","","37,864","","","1,070,225"],["Residential real estate","103,946","","","716,411","","","121,440","","","793,138","","","1,734,935"],["Total real estate","797,391","","","2,844,514","","","757,128","","","848,861","","","5,247,894"],["Commercial and industrial","860,534","","","1,093,768","","","105,025","","","133","","","2,059,460"],["Mortgage warehouse lines of credit","329,966","","","\u2014","","","\u2014","","","\u2014","","","329,966"],["Consumer","9,234","","","13,393","","","485","","","512","","","23,624"],["Total LHFI","$","1,997,125","","","$","3,951,675","","","$","862,638","","","$","849,506","","","$","7,660,944"],["Amounts with fixed rates","$","475,146","","","$","2,275,168","","","$","517,740","","","$","151,555","","","$","3,419,609"],["Amounts with variable rates","1,521,979","","","1,676,507","","","344,898","","","697,951","","","4,241,335"],["Total","$","1,997,125","","","$","3,951,675","","","$","862,638","","","$","849,506","","","$","7,660,944"]]
[[/GREPCENT_TABLE]]

Nonperforming Assets

Nonperforming assets consist of nonperforming/nonaccrual loans and property acquired through foreclosures or repossession, as well as bank-owned property not in use and listed for sale.

Loans are placed on nonaccrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions, and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans may be placed on nonaccrual status even if the contractual payments are not past due if information becomes available that causes substantial doubt about the borrower’s ability to meet the contractual obligations of the loan. When accrual of interest is discontinued, all unpaid accrued interest is reversed. 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 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 ALCL.

Purchased loans that have experienced more than insignificant credit deterioration since origination are purchased 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) borrowers are experiencing financial difficulty which results in modification to the loan terms; (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 previously been 60 days delinquent twice. 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 $34.8 million of unpaid principal balance PCD loans at December 31, 2023, and $48.1 million of unpaid principal balance PCD loans at December 31, 2022.

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.

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

[[GREPCENT_TABLE]]
[["(Dollars in thousands)"],["Nonperforming LHFI:","","","","","December 31, 2023","","December 31, 2022"],["Commercial real estate","","","","","$","786","","","$","526"],["Construction/land/land development","","","","","305","","","270"],["Residential real estate","","","","","13,037","","","7,712"],["Commercial and industrial","","","","","15,897","","","1,383"],["Consumer","","","","","90","","","49"],["Total nonperforming LHFI","","","","","30,115","","","9,940"],["Nonperforming loans held for sale","","","","","\u2014","","","3,933"],["Total nonperforming loans","","","","","30,115","","","13,873"],["Other real estate owned:"],["Commercial real estate, construction/land/land development","","","","","3,068","","","\u2014"],["Residential real estate","","","","","846","","","806"],["Total other real estate owned","","","","","3,914","","","806"],["Other repossessed assets owned","","","","","15","","","\u2014"],["Total repossessed assets owned","","","","","3,929","","","806"],["Total nonperforming assets","","","","","$","34,044","","","$","14,679"],["Loan modifications made to borrowers experiencing financial difficulty - nonaccrual(1)","","","","","$","8,388","","","$","4,389"],["Loan modifications made to borrowers experiencing financial difficulty - accruing(1)","","","","","28,969","","","3,248"],["Total LHFI","","","","","7,660,944","","","7,090,022"],["Ratio of nonperforming LHFI to total LHFI","","","","","0.39","%","","0.14","%"],["Ratio of nonperforming assets to total assets","","","","","0.35","","","0.15"]]
[[/GREPCENT_TABLE]]

______________________

(1)December 31, 2022, amounts were previously disclosed as troubled debt restructured (“TDR”) loans under Accounting Standards Codification 310-40. Accounting Standards Update 2022-02 eliminated the TDR guidance effective for public business entities on January 1, 2023.

At December 31, 2023, total nonperforming LHFI increased by $20.2 million from December 31, 2022. The increase in nonperforming LHFI was driven by increases of $14.5 million and $5.3 million in nonperforming commercial and industrial loans and residential real estate loans, respectively. The net increase in nonperforming commercial and industrial loans was mainly due to two relationships totaling $11.1 million, which maintained reserves of $5.2 million as of December 31, 2023. The increase in nonperforming residential real estate loans was driven by a reclassification of nonperforming mortgage loans from the held for sale portfolio to the held for investment portfolio during the year ended December 31, 2023, which contributed a $5.8 million increase in nonperforming residential real estate loans, with government guarantees of $5.0 million. The residential real estate loans carry government guarantees and considering the guaranty, as well as the value, of the underlying collateral resulted in an immaterial impact to the ALCL. Please see Note 4 — Loans to our consolidated financial statements contained in Part II, Item 8 of this report for more information on nonperforming loans.

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Potential Problem Loans

From a credit risk standpoint, we classify loans using risk grades which fall into one of five categories: pass, special mention, substandard, doubtful or loss. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on loans and adjust them to reflect the degree of risk and loss that is felt to be inherent or expected in each loan. The methodology is structured so that reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss). Loans rated special mention reflect borrowers who exhibit credit weaknesses or downward trends deserving close attention. 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 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. A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower might be in jeopardy.

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 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, 2023, is included in Note 4 — Loans to our consolidated financial statements contained in Part II, Item 8 of this report.

Allowance for Loan Credit Losses

The ALCL 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 applied a probability of default, loss given default loss methodology to the loan pools at December 31, 2023. 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 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. The estimated remaining lives consist of the contractual lives, adjusted for estimated prepayments. Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis. Certain of these loans are considered to be collateral dependent, with the borrower experiencing financial difficulty. For these loans, the fair value of collateral practical expedient is elected whereby the allowance is calculated as the amount by which the amortized cost exceeds the fair value of collateral, less costs to sell (if applicable). Those individual loans that are not collateral dependent are evaluated based on a discounted cash flow methodology.

The amount of the ALCL 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. In determining the provision for loan credit losses, management monitors fluctuations in the allowance resulting from actual charge-offs and recoveries and periodically reviews the size and composition of the loan portfolio in light of current and forecasted economic conditions. If actual losses exceed the amount of the ALCL, 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 ALCL 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 ALCL are recorded through the provision for credit losses.

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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. It will remain nonperforming until it performs in a manner that it is reasonable to expect that we will collect principal and accrued interest in full. When the amount or likelihood of a loss on a loan has been confirmed, a charge-off will be taken in the period it is determined.

We establish general allocations for each major loan category and credit quality. The general allocation is based, in part, on historical charge-off experience and loss given default methodology, derived from our internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. We give consideration to trends, changes in loan mix, delinquencies, prior losses, reasonable and supportable forecasts and other related information.

In connection with the review of our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:

•for commercial real estate loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;

•for construction, land and land development loans, the perceived feasibility of the project, including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio;

•for residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral; and

•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.

[[GREPCENT_TABLE]]
[["The following table presents the allowance for credit loss by loan category:"],["","December 31,"],["(Dollars in thousands)","2023","","2022"],["Loans secured by real estate:","Amount","","%(1)","","Amount","","%(1)"],["Commercial real estate","$","19,625","","","31.9","%","","$","19,772","","","32.6","%"],["Construction/land/land development","9,990","","","14.0","","","7,776","","","13.3"],["Residential real estate","10,619","","","22.6","","","8,230","","","20.8"],["Commercial and industrial","55,330","","","26.9","","","50,148","","","28.9"],["Mortgage warehouse lines of credit","529","","","4.3","","","379","","","4.0"],["Consumer","775","","","0.3","","","856","","","0.4"],["Total","$","96,868","","","100.0","%","","$","87,161","","","100.0","%"]]
[[/GREPCENT_TABLE]]

___________________________

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

Our ALCL increased by $9.7 million, or 11.1%, to $96.9 million at December 31, 2023, from $87.2 million at December 31, 2022. The ratio of ALCL to total LHFI increased to 1.26% at December 31, 2023, compared to 1.23% at December 31, 2022. Qualitative factor changes across the Company’s risk pools drove a $6.7 million increase in the ALCL, with the allowance for individually evaluated loans contributing another $4.4 million of the increase for the year ended December 31, 2023, when compared to the year ended December 31, 2022.

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The following table presents an analysis of the ALCL and other related data at the periods indicated.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","Years Ended December 31,"],["ALCL","2023","","2022"],["Balance at beginning of period","$","87,161","","","$","64,586"],["ALCL - BTH merger","\u2014","","","5,527"],["Provision for loan credit losses","17,514","","","21,613"],["Charge-offs:"],["Commercial real estate","42","","","166"],["Residential real estate","27","","","91"],["Commercial and industrial","11,833","","","8,459"],["Consumer","147","","","43"],["Total charge-offs","12,049","","","8,759"],["Recoveries:"],["Commercial real estate","140","","","40"],["Construction/land/land development","3","","","211"],["Residential real estate","17","","","102"],["Commercial and industrial","4,068","","","3,825"],["Consumer","14","","","16"],["Total recoveries","4,242","","","4,194"],["Net charge-offs","7,807","","","4,565"],["Balance at end of period","$","96,868","","","$","87,161"],["Ratio of ALCL to:"],["Nonperforming LHFI","321.66","%","","876.87","%"],["LHFI","1.26","","","1.23"],["Net charge-offs as a percentage of:"],["Provision for loan credit losses","44.58","","","21.12"],["ALCL","8.06","","","5.24"],["Average LHFI","0.10","","","0.08"]]
[[/GREPCENT_TABLE]]

The ALCL to nonperforming LHFI decreased to 321.66% at December 31, 2023, compared to 876.87% at December 31, 2022, primarily driven by a $20.2 million increase in nonperforming LHFI at December 31, 2023. Past due loans to total LHFI increased to 0.34% at December 31, 2023, compared to 0.15% at December 31, 2022.

The steep incline in the interest rate environment driven by the Federal Reserve Board’s Federal Funds rate setting policy, as outlined in the Results of Operations section above, has negatively impacted borrowers with variable or floating rate loans causing their cost of borrowings to increase significantly over the last eighteen months. This has put pressure on borrower’s cash flow and contributed to higher overall nonperforming loans at December 31, 2023 compared to December 31, 2022.

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Securities

Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. We use the securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk and meet collateral as well as regulatory capital requirements. We manage the securities portfolio to optimize returns while maintaining an appropriate level of risk. 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 (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 Part II, Item 8 of this report.

Our securities portfolio totaled $1.27 billion at December 31, 2023, representing a decrease of $387.1 million, or 23.3%, from $1.66 billion at December 31, 2022. The decrease was primarily due to sales, maturities and calls, as well as normal principal paydowns, which was partially offset by decrease in unrealized losses during the year ended December 31, 2023. During the last few days of the quarter ended September 30, 2023, we made a strategic decision to sell available for sale investment securities with a book value of $181.9 million and realized a loss of $7.2 million, the proceeds of which were used to pay down FHLB advances. In order to support loan operations heading into 2024, during the last quarter of the 2023 year we sold available for sale investment securities with a book value of $78.9 million and realized a loss of $4.6 million.

Our available for sale portfolio totaled $1.25 billion at December 31, 2023, and represented 98.6% of our total security portfolio and is comprised of 47.8% mortgage-backed, 22.5% municipal, 6.4% treasury/agency, 13.2% collateralized mortgage obligations and 10.1% corporate/asset-backed securities. Our available for sale portfolio totaled $1.64 billion at December 31, 2022, and represented 98.9% of our total security portfolio and was comprised of 40.5% mortgage-backed, 23.7% municipal, 15.1% treasury/agency, 11.3% collateralized mortgage obligations and 9.4% corporate/asset-backed securities.

The securities portfolio had a weighted average effective duration of 4.28 years at December 31, 2023, compared to 4.24 years at December 31, 2022. For additional information regarding our securities portfolio, please see Note 3 — Securities to our consolidated financial statements contained in Part II, Item 8 of this report.

The following table sets forth the composition of our securities portfolio at the dates indicated.

[[GREPCENT_TABLE]]
[["","December 31,"],["(Dollars in thousands)","2023","","2022"],["Available for sale:","Carrying Amount","","% of Total","","Carrying Amount","","% of Total"],["State and municipal securities","$","282,126","","","22.5","%","","$","389,477","","","23.7","%"],["Corporate bonds","83,635","","","6.7","","","82,258","","","5.0"],["U.S. government and agency securities","79,640","","","6.4","","","248,420","","","15.1"],["Commercial mortgage-backed securities","93,396","","","7.5","","","91,943","","","5.6"],["Residential mortgage-backed securities","506,502","","","40.3","","","572,303","","","34.9"],["Commercial collateralized mortgage obligations","35,183","","","2.8","","","38,813","","","2.4"],["Residential collateralized mortgage obligations","130,144","","","10.4","","","146,370","","","8.9"],["Asset-backed securities","43,005","","","3.4","","","71,900","","","4.4"],["Total","$","1,253,631","","","100.0","%","","$","1,641,484","","","100.0","%"],["Held to maturity:"],["State and municipal securities, net of allowance","$","11,615","","","","","$","11,275"],["Securities carried at fair value through income:"],["State and municipal securities","$","6,808","","","","","$","6,368"]]
[[/GREPCENT_TABLE]]

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The following table presents the fair value of securities available for sale and amortized cost of securities held to maturity and their corresponding yields at December 31, 2023. The securities are grouped by contractual maturity and use amortized cost for all yield calculations. Mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, which do not have contractual payments due at a single maturity date, are shown at the date the last underlying mortgage matures.

[[GREPCENT_TABLE]]
[["","December 31, 2023"],["(Dollars in thousands)","Within One Year","","After One Year but Within Five Years","","After Five Years but Within Ten Years","","After Ten Years","","Total"],["Available for sale:","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield","","Amount","","Yield"],["State and municipal securities (1)","$","17,798","","","0.42","%","","$","36,964","","","1.85","%","","$","83,551","","","2.15","%","","$","143,813","","","2.17","%","","$","282,126","","","2.01","%"],["Corporate bonds","3,970","","","4.23","","","9,197","","","3.75","","","70,124","","","4.64","","","344","","","4.50","","","83,635","","","4.52"],["U.S. government and agency securities","45,392","","","1.44","","","30,653","","","1.27","","","\u2014","","","\u2014","","","3,595","","","1.60","","","79,640","","","1.38"],["Commercial mortgage-backed securities","\u2014","","","\u2014","","","80,082","","","1.66","","","13,314","","","1.58","","","\u2014","","","\u2014","","","93,396","","","1.65"],["Residential mortgage-backed securities","\u2014","","","\u2014","","","3,643","","","2.87","","","76,237","","","1.52","","","426,622","","","1.92","","","506,502","","","1.87"],["Commercial collateralized mortgage obligations","\u2014","","","\u2014","","","22,902","","","1.66","","","12,281","","","1.80","","","\u2014","","","\u2014","","","35,183","","","1.71"],["Residential collateralized mortgage obligations","\u2014","","","\u2014","","","\u2014","","","\u2014","","","10,239","","","2.82","","","119,905","","","1.96","","","130,144","","","2.03"],["Asset-backed securities","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","43,005","","","6.54","","","43,005","","","6.54"],["Total securities available for sale","$","67,160","","","1.33","","","$","183,441","","","1.76","","","$","265,746","","","2.61","","","$","737,284","","","2.24","","","$","1,253,631","","","2.20"],["Held to maturity:"],["State and municipal securities (1)","\u2014","","","\u2014","","","\u2014","","","\u2014","","","5,164","","","6.91","","","6,514","","","2.50","","","11,678","","","4.45"],["Securities carried at fair value through income:"],["State and municipal securities (1)","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","6,808","","","4.51","","","6,808","","","4.51"],["Total","$","67,160","","","1.33","","","$","183,441","","","1.76","","","$","270,910","","","2.69","","","$","750,606","","","2.26","","","$","1,272,117","","","2.23"]]
[[/GREPCENT_TABLE]]

____________________________

(1)Tax-exempt security yields are calculated without consideration of their tax benefit status.

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. 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 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. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated average life of these securities.

All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored entities. Other than securities issued by government agencies or government sponsored enterprises, we did not own securities of any one issuer for which aggregate cost exceeded 10.0% of consolidated stockholders’ equity at December 31, 2023 or 2022. Additionally, we do not hold any Fannie Mae or Freddie Mac preferred stock, collateralized debt obligations, structured investment vehicles or second lien elements in the investment portfolio, nor does the investment portfolio contain any securities that are directly backed by subprime or Alt-A mortgages.

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Securities Carried at Fair Value through Income

At December 31, 2023 and 2022, we held one fixed rate community investment bond of $6.8 million and $6.4 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

Deposits are the primary funding source used to fund our loans, investments and operating needs. We offer a variety of products designed to attract and retain both consumer and commercial deposit customers. These products consist of noninterest and interest-bearing checking accounts, savings deposits, money market accounts and time deposits. Deposits are primarily gathered from individuals, partnerships and corporations in our market areas. We also obtain deposits from local municipalities and state agencies.

Total deposits increased at December 31, 2023, compared to December 31, 2022, primarily due to increases in brokered time deposits and money market deposits, which increased by $439.6 million and $330.2 million, respectively, partially offset by a decrease in noninterest-bearing demand deposits of $562.8 million compared to December 31, 2022. Typically, higher interest rates and sustained inflation will cause customers to move liquid asset balances into higher interest-earning vehicles such as money market funds.

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

[[GREPCENT_TABLE]]
[["","December 31, 2023","","December 31, 2022"],["(Dollars in thousands)","Balance","","% of Total","","Balance","","% of Total","","$ Change","","% Change"],["Noninterest-bearing demand","$","1,919,638","","","23.3","%","","$","2,482,475","","","32.0","%","","$","(562,837)","","","(22.7)","%"],["Money market","2,772,807","","","33.6","","","2,442,559","","","31.4","","","330,248","","","13.5"],["Interest-bearing demand","1,875,864","","","22.7","","","1,737,158","","","22.3","","","138,706","","","8.0"],["Time deposits","967,901","","","11.7","","","781,880","","","10.0","","","186,021","","","23.8"],["Brokered time deposits","444,989","","","5.4","","","5,407","","","0.1","","","439,582","","","N/M"],["Savings","269,926","","","3.3","","","326,223","","","4.2","","","(56,297)","","","(17.3)"],["Total deposits","$","8,251,125","","","100.0","%","","$","7,775,702","","","100.0","%","","$","475,423","","","6.1"],["__________________N/M = Not meaningful."]]
[[/GREPCENT_TABLE]]

We manage our interest expense on deposits through specific deposit product pricing that is based on competitive pricing, economic conditions and current and anticipated funding needs. We may use interest rates as a mechanism to attract or deter additional deposits based on our anticipated funding needs and liquidity position. We also consider potential interest rate risk caused by extended maturities of time deposits when setting the interest rates in periods of future economic uncertainty.

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The following table reflects the classification of our average deposits and the average rate paid on each deposit category for the periods indicated:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2023","","2022","","2021"],["(Dollars in thousands)","Average Balance","","Interest Expense","","Average Rate Paid","","Average Balance","","Interest Expense","","Average Rate Paid","","Average Balance","","Interest Expense","","Average Rate Paid"],["Interest-bearing demand","$","1,788,423","","","$","50,033","","","2.80","%","","$","1,545,581","","","$","11,007","","","0.71","%","","$","1,396,805","","","$","2,822","","","0.20","%"],["Money market","2,646,447","","","91,685","","","3.46","","","2,233,390","","","17,501","","","0.78","","","2,011,827","","","5,863","","","0.29"],["Time deposits","928,694","","","27,892","","","3.00","","","611,195","","","4,476","","","0.73","","","607,742","","","4,576","","","0.75"],["Brokered time deposits","470,040","","","24,241","","","5.16","","","5,002","","","8","","","0.16","","","\u2014","","","\u2014","","","\u2014"],["Savings","291,059","","","2,606","","","0.90","","","288,010","","","517","","","0.18","","","232,081","","","157","","","0.07"],["Total interest-bearing","6,124,663","","","196,457","","","3.21","","","4,683,178","","","33,509","","","0.72","","","4,248,455","","","13,418","","","0.32"],["Noninterest-bearing demand","2,147,019","","","\u2014","","","","","2,422,132","","","\u2014","","","","","1,905,045","","","\u2014"],["Total average deposits","$","8,271,682","","","$","196,457","","","2.38","","","$","7,105,310","","","$","33,509","","","0.47","","","$","6,153,500","","","$","13,418","","","0.22"]]
[[/GREPCENT_TABLE]]

Our average deposit balance was $8.27 billion for the year ended December 31, 2023, an increase of $1.17 billion, or 16.4%, from $7.11 billion for the year ended December 31, 2022. The average annualized rate paid on our interest-bearing deposits for the year ended December 31, 2023, was 3.21%, compared to 0.72% for the year ended December 31, 2022.

The increase in the average cost of our deposits was primarily the result of the rapidly rising interest rate environment experienced since March 17, 2022, when the Federal Reserve Board started a series of eleven Federal Funds target range rate increases cumulating in a 525 basis point increase to the current target range of 5.25% to 5.50%. 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, 2023.

Average noninterest-bearing deposits during the year ended December 31, 2023, were $2.15 billion, compared to $2.42 billion at December 31, 2022, a decrease of $275.1 million, or 11.4%, and represented 26.0% and 34.1% of average total deposits for the year ended December 31, 2023 and 2022, respectively. Noninterest-bearing deposits are impacted by the higher interest rate environment, as customers move out of noninterest-bearing deposit balances into higher interest-earning investments.

The following table presents the maturity distribution of our time deposits and the amount of such deposits in excess of the FDIC insurance limit at December 31, 2023. There were no otherwise uninsured time deposits below the FDIC insurance limit at December 31, 2023. The estimated total amount of uninsured deposits at December 31, 2023 and 2022, was $3.58 billion and $4.19 billion, respectively.

[[GREPCENT_TABLE]]
[["(Dollars in thousands)Remaining maturity:","U.S. Time Deposits in Excess of the FDIC Insurance Limit","","Total Time & Brokered Time Deposits"],["3 months or less","$","82,865","","","$","506,313"],["Over 3 through 6 months","72,627","","","383,610"],["Over 6 through 12 months","97,583","","","422,843"],["Over 12 months","17,320","","","100,124"],["Total","$","270,395","","","$","1,412,890"]]
[[/GREPCENT_TABLE]]

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The following table reflects the estimated total amount of uninsured and uncollateralized deposits for the periods indicated:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","December 31, 2023","","December 31, 2022"],["Total deposits","$","8,251,125","","","$","7,775,702"],["Estimated insured deposits:"],["FDIC insured","(3,425,268)","","","(3,331,724)"],["FDIC insured reciprocal","(801,699)","","","(245,621)"],["FDIC insured brokered time deposits","(444,989)","","","(5,407)"],["Total estimated FDIC insured deposits","(4,671,956)","","","(3,582,752)"],["Estimated FDIC uninsured deposits","3,579,169","","","4,192,950"],["Collateralized public funds","(849,603)","","","(762,366)"],["Estimated uninsured/uncollateralized deposits","$","2,729,566","","","$","3,430,584"],["Percentage of estimated uninsured/uncollateralized deposits to total deposits","33.1","%","","44.1","%"]]
[[/GREPCENT_TABLE]]

Borrowings

Borrowed funds are summarized as follows:

[[GREPCENT_TABLE]]
[["","December 31,"],["(Dollars in thousands)","2023","","2022"],["Short-term FHLB advances","$","70,000","","","$","550,000"],["Long-term FHLB advances","6,474","","","6,740"],["GNMA repurchase liability","\u2014","","","24,569"],["Overnight repurchase agreements with depositors","7,124","","","27,921"],["Correspondent short-term borrowings","\u2014","","","30,000"],["Total FHLB advances and other borrowings","$","83,598","","","$","639,230"],["Subordinated indebtedness, net","$","194,279","","","$","201,765"]]
[[/GREPCENT_TABLE]]

Short-term FHLB advances decreased $480.0 million, or 87.3%, at December 31, 2023, compared to December 31, 2022. During the last few days of the quarter ended September 30, 2023, we made a strategic decision to sell available for sale investment securities with a book value of $181.9 million and realized a loss of $7.2 million, and used the proceeds to pay down FHLB advances.

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, 2023 and 2022, ranged from 1.99% to 4.57% and were subject to restrictions or penalties in the event of prepayment.

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 2.21% and 0.24% for the years ended December 31, 2023, and 2022, respectively.

At December 31, 2023, we held 31 unfunded letters of credit from the FHLB totaling $693.6 million with expiration dates ranging from January 14, 2024, 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 our borrowing capacity from the FHLB at December 31, 2023 and 2022, were $2.01 billion and $1.29 billion, respectively.

Additionally, at December 31, 2023 and 2022, we had the ability to borrow $1.42 billion and $1.23 billion from the discount window at the Federal Reserve Bank of Dallas ("FRB"), with $1.69 billion and $1.76 billion in commercial and industrial loans pledged as collateral, respectively. There were no borrowings against this line at both December 31, 2023 and 2022.

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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 $50.0 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 $50.0 million, upon the request of the Company. The revolving line of credit matures on October 27, 2024, and the Company had no balance outstanding on this revolving credit loan under the Loan Agreement at December 31, 2023, and $30.0 million outstanding at December 31, 2022.

Subordinated Indebtedness

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. At December 31, 2023, the Company had BTH Notes of $34.7 million with maturity dates ranging from December 2024 to June 2031. Interest rates on the BTH Notes primarily reprice quarterly and range from Prime +50 bps to Prime +175 bps, with a floor of 3.875% on all the BTH Notes, and ceilings ranging from 6.125% to 6.375%.

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 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. On June 30, 2023, in conjunction with the customary fallback provision upon the discontinuation of LIBOR, the rate for the floating rate periods from and including February 15, 2025, on these notes transitioned to the three-month term SOFR plus 308 basis points. 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, 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 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. During the year ended December 31, 2023, and with the approval of the Board of Governors of the Federal Reserve System, the Company repurchased $5.0 million of the 4.50% notes in conjunction the Federal Deposit Insurance Corporation’s failed bank resolution process.

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.

For additional information regarding our holding company line of credit, subordinated indebtedness, including the junior subordinated debentures underlying the issuance of trust preferred securities, please see Note 11 — Borrowings in the notes to our consolidated financial statements contained in Part II, Item 8 of this report.

Liquidity and Capital Resources

Management oversees our liquidity position to ensure adequate cash and liquid assets are available to support our operations and satisfy current and future financial obligations, including demand for loan funding and deposit withdrawals. Management continually monitors, forecasts and tests our liquidity and non-core dependency ratios to ensure compliance with targets established by our Asset-Liability Management Committee and approved by our board of directors.

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Management measures our liquidity position by giving consideration to both on-balance sheet and off-balance sheet sources of and demands for funds on a daily and weekly basis. At December 31, 2023 and 2022, our cash and liquid securities totaled 10.9% and 12.1% of total assets, respectively, providing liquidity to support our existing operations.

The Company, which is a separate legal entity apart from the Bank, must provide for its own liquidity, including the funding of the payment of any dividends that may be declared for our common stockholders and interest and principal on any outstanding debt or trust preferred securities incurred by the Company. The available cash balances as noted in the table below are available for the general corporate purposes described above, as well as providing capital support to the Bank. In addition, the Company has a line of credit as referenced above under Holding Company Line of Credit.

The table below shows the liquidity measures for the Company at the dates indicated:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","December 31, 2023","","December 31, 2022"],["Available cash balances at the holding company (unconsolidated)","$","87,698","","","$","99,810"],["Cash and liquid securities as a percentage of total assets","10.9","%","","12.1","%"]]
[[/GREPCENT_TABLE]]

There are regulatory restrictions on the ability of the Bank to pay dividends under federal and state laws, regulations and policies. See "Item 1. Business - Regulation and Supervision" above for more information.

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. We may also use the discount window at the FRB as a source of short-term funding.

Core deposits, which are total deposits excluding time deposits greater than $250,000 and brokered deposits, are a major source of funds used to meet cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring our liquidity.

The investment portfolio is another source for meeting our liquidity needs. Monthly payments on mortgage-backed securities are used for short-term liquidity, and our investments are generally traded in active markets that offer a readily available source of cash through sales, if needed. Securities in our investment portfolio are also used to secure certain deposit types, such as deposits from state and local municipalities, and can be pledged as collateral for other borrowing sources.

Other sources available for meeting liquidity needs include long- and short-term advances from the FHLB, and federal funds lines of credit. Long-term funds obtained from the FHLB are primarily used as an alternative source to fund long-term growth of the balance sheet by supporting growth in loans and other long-term interest-earning assets. We typically rely on such funding when the cost of such borrowings compares favorably to the rates that we would be required to pay for other funding sources, including certain deposits. See Note 11 — Borrowings to our consolidated financial statements contained in Part II, Item 8 of this report for additional borrowing capacity and outstanding advances at the FHLB.

We also had unsecured federal funds lines of credit available to us, with no amounts outstanding at either December 31, 2023 or 2022. These lines of credit primarily provide short-term liquidity and in order to ensure availability of these funds, we test these lines of credit at least annually. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances.

Additionally, we had the ability to borrow at the discount window of the FRB using our commercial and industrial loans as collateral. There were no borrowings against this line at December 31, 2023.

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. These commitments are discussed in more detail in Note 18 — Commitments and Contingencies to our consolidated financial statements contained in Part II, Item 8 of this report.

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Stockholders’ Equity

Stockholders’ equity provides a source of permanent funding, allows for future growth and provides a degree of protection to withstand unforeseen adverse developments. Changes in stockholders’ equity is reflected below:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","Total Stockholders\u2019 Equity"],["Balance at January 1, 2023","$","949,943"],["Net income","83,800"],["Other comprehensive income, net of tax","38,852"],["Dividends declared - common stock ($0.60 per share)","(18,797)"],["Other","9,107"],["Balance at December 31, 2023","$","1,062,905"]]
[[/GREPCENT_TABLE]]

Stock Repurchases

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 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 Securities and Exchange Commission. 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, 2023 or 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. There was no impact to our financial condition or result of operations as a result of this tax.

Regulatory Capital Requirements

Together with the Bank, we are subject to various regulatory capital requirements administered by federal banking agencies. 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, 2023 and 2022, 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. However, we expect to monitor and control growth in order to remain “well capitalized” under applicable regulatory guidelines and in compliance with all applicable regulatory capital standards. While we are currently classified as “well capitalized,” an extended economic recession could adversely impact our reported and regulatory capital ratios.

The following table presents our regulatory capital ratios, as well as those of the Bank, at the dates indicated:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","December 31, 2023","","December 31, 2022"],["Origin Bancorp, Inc.","Amount","","Ratio","","Amount","","Ratio"],["Common equity Tier 1 capital (to risk-weighted assets)","$","1,012,916","","","11.83","%","","$","906,859","","","10.93","%"],["Tier 1 capital (to risk-weighted assets)","1,028,729","","","12.01","","","922,584","","","11.12"],["Total capital (to risk-weighted assets)","1,286,604","","","15.02","","","1,180,665","","","14.23"],["Tier 1 capital (to average total consolidated assets)","1,028,729","","","10.50","","","922,584","","","9.66"],["Origin Bank"],["Common equity Tier 1 capital (to risk-weighted assets)","$","1,019,732","","","11.95","%","","$","952,579","","","11.50","%"],["Tier 1 capital (to risk-weighted assets)","1,019,732","","","11.95","","","952,579","","","11.50"],["Total capital (to risk-weighted assets)","1,188,000","","","13.92","","","1,109,257","","","13.39"],["Tier 1 capital (to average total consolidated assets)","1,019,732","","","10.45","","","952,579","","","9.94"]]
[[/GREPCENT_TABLE]]

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