Origin Bancorp, Inc. (OBK) FY 2022 MD&A

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

Critical Accounting Policies and Estimates

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 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 allowance for loan credit losses is affected by loan charge-offs, which decrease the allowance, recoveries on loans previously charged off, which increase the allowance, as well as the provision for loan credit losses charged to income, which increases the allowance. 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 allowance for loan credit losses, 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 allowance for loan credit losses 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 $5.1 million and $7.6 million at December 31, 2022 and 2021, 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.

An increase in either the prepayment speed or discount rate assumption will result in a decrease in the fair value of the MSR, while a decrease in these assumptions will result in an increase in the fair value of the MSR. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may continue to be significant. Therefore, 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 operate 59 banking centers located in Dallas/Fort Worth, East Texas, Houston, North Louisiana and Mississippi. As a financial holding company operating through one segment, we generate the majority of our revenue from interest earned on loans and investments, service charges and fees on deposit accounts.

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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.

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

Selected income statement data, returns on average assets and average equity for the comparable periods were as follows:

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

Net Interest Income and Net Interest Margin

During the third quarter of 2022, we completed our merger with BTH. As a result of the merger, the Company acquired $1.24 billion in loans, net of fair value accounting adjustments, $456.8 million in investment securities and $1.57 billion in deposits, which impacted most net interest income and interest expense categories.

Net interest income for the year ended December 31, 2022, was $275.3 million, an increase of $59.0 million compared to the year ended December 31, 2021. Increases in interest rates and average interest-earning assets drove increases of $51.5 million and $33.5 million, respectively, in total interest income. The increase in total interest income was offset by a $25.9 million increase in interest expense; $22.5 million of the increase was driven by increases in interest rates. Purchase accounting accretion on acquired loans was $2.8 million for the year ended December 31, 2022, with remaining purchase accounting net loan discounts totaling $2.2 million at December 31, 2022. Net purchase accounting accretion income on deposits and subordinated indebtedness totaled $472,000 for the year ended December 31, 2022, bringing the impact from purchase accounting treatment on total net interest income to $3.3 million for the year ended December 31, 2022.

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Interest income earned on LHFI during the year ended December 31, 2022, increased in all loan categories, except for mortgage warehouse lines of credit, when compared to the year ended December 31, 2021. Interest income earned on commercial real estate and commercial and industrial loans contributed $26.4 million and $23.4 million, respectively, of the $68.6 million total increase in interest income earned on LHFI when compared to the year ended December 31, 2021. These increases were offset by an $8.7 million decrease in interest income earned on mortgage warehouse lines of credit for the year ended December 31, 2022, compared to the year ended December 31, 2021. Increases in mortgage interest rates during the year ended December 31, 2022, negatively impacted the volume of mortgage warehouse lines during the year ended December 31, 2022.

An increase in average balances drove $18.5 million of the $26.4 million increase in interest income earned on commercial real estate, while increases in interest rates drove $21.4 million of the $23.4 million increase in interest income earned on commercial and industrial loans for the comparable periods. The merger with BTH contributed $79.0 million of the $449.4 million growth in average balances in commercial real estate.

The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the loan and deposit rates offered by financial institutions. In early 2020, the Federal Reserve lowered the target rate range to 0.00% to 0.25%, which remained in effect throughout all of 2021. On March 17, 2022, the target rate range was increased to 0.25% to 0.50%, then subsequently increased six more times during 2022, to 4.25% to 4.50%. At December 31, 2022, the Federal Funds target rate had range increased 425 basis points on a year-to-date basis. In order to remain competitive as market interest rates increase, interest rates paid on deposits must also increase. Increases in interest rates contributed $43.3 million to the total increase in interest income earned on total LHFI, while interest rates increased our total deposit interest expense and FHLB and advances and other borrowings interest expense by $19.0 million and $3.3 million, respectively.

The fully tax-equivalent net interest margin was 3.42% for the year ended December 31, 2022, a 32 basis point increase from the year ended December 31, 2021. The yield earned on interest-earning assets for the year ended December 31, 2022, was 4.02%, a 60 basis point increase from 3.42% for the year ended December 31, 2021. This increase was partially offset by a 43 basis point increase in interest rates paid on total interest-bearing liabilities. The net increase in purchase accounting accretion income due to the BTH merger increased the fully tax-equivalent NIM by four basis points during the year ended December 31, 2022.

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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, 2022, 2021 and 2020.

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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 $33.6 million, $53.9 million and $37.7 million for the year ended December 31, 2022, 2021 and 2020, respectively. The GNMA repurchase asset and liability are recorded as equal offsetting amounts in the consolidated balance sheets, with the asset included in loans held for sale and the liability included in FHLB advances and other borrowings. For more information on the GNMA repurchase option, see Note 10 - 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%.

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.

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Provision for Credit Losses

We recorded a provision for credit loss expense of $24.7 million for the year ended December 31, 2022, a $35.5 million increase from a provision net benefit of $10.8 million for the year ended December 31, 2021. The increase was primarily due to the merger with BTH, which drove a $14.9 million provision for loan credit losses for the CECL requirement on non-PCD loans. In addition, the total LHFI, excluding BTH loans and mortgage warehouse lines of credit, increased $978.6 million during the comparable periods. Net charge-offs were $4.6 million during the year ended December 31, 2022, compared to $11.3 million during the year ended December 31, 2021, while the allowance for loan credit losses to nonperforming LHFI was 876.87% at December 31, 2022, compared to 259.35% at December 31, 2021, primarily driven by a $15.0 million decrease in nonperforming LHFI at December 31, 2022, compared to December 31, 2021, as well as the $22.6 million increase in the Company’s allowance for loan credit losses during the intervening period. While the majority of our credit metrics continue to improve, uncertainty remains due to risks related to continued inflation, economic recession concerns, market interest rate increases, geopolitical risks, labor pressures, and continued global supply-chain disruptions.

The provision for credit losses, which includes the provisions for loan losses, off-balance sheet commitments and investment security credit losses, is based on management's assessment of the adequacy of our allowance for credit losses ("ACL") for loans, securities and our reserve for off-balance sheet lending commitments. Factors impacting the provision include inherent risk characteristics in our loan portfolio, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of the change in collateral values, reasonable and supportable forecasts, and the funding probability on unfunded lending commitments. The provision for credit losses is charged against earnings in order to maintain our 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.

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N/M = Not meaningful.

Noninterest income for the year ended December 31, 2022, decreased by $4.9 million, or 7.9%, to $57.3 million, compared to $62.2 million for the year ended December 31, 2021, and was largely driven by decreases of $6.2 million, $5.9 million and $5.4 million in mortgage banking revenue, limited partnership investment income and other noninterest income, respectively. The decreases were partially offset by increases of $9.8 million and $2.6 million in insurance commission and fee income and service charges and fees income, respectively.

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Mortgage banking revenue. The $6.2 million decrease in mortgage banking revenue compared to the year ended December 31, 2021, was primarily due to a $9.8 million decrease in gain on sale of loans sold including MSR origination, primarily due to a 44.9% reduction in origination volume, a 51.2% reduction in sales volume and a 13.5% reduction in sales margin experienced during the year ended December 31, 2022, as well as a $2.0 million impairment on the held for sale GNMA MSR portfolio. The decreases were partially offset by a $5.5 million increase in mortgage held for sale and pipeline fair value adjustment.

During the second half of 2022, the Company recognized an impairment of $2.0 million and entered into an agreement to sell its GNMA MSR portfolio, which met all final sale conditions in early 2023. The Company sold approximately $1.8 million in GNMA MSR, with no significant additional gain or loss realized, and derecognized the related GNMA repurchase asset and offsetting liability of $24.6 million in the first quarter of 2023.

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

Other income. The decrease in other noninterest income was primarily due to the acquisition of the remaining 62% equity interest in The Lincoln Agency in December 2021. The previously held 38% equity method investment in Lincoln Agency was remeasured to its fair value, resulting in recognition of a gain of $5.2 million in other noninterest income during the year ended December 31, 2021.

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

Service charges and fees. The $2.6 million increase in service charges and fees income was primarily driven by increases of $444,000, $321,000 and $606,000, excluding BTH service charges, in overdraft fee income, account analysis income and debit interchange fees due to increases in debit card transactions, respectively. In total, BTH contributed $749,000 to the total service charges and fee income since the date of the merger.

Noninterest Expense

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

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N/M = Not meaningful.

N/A = Not applicable.

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Noninterest expense for the year ended December 31, 2022, increased by $43.6 million, or 27.8%, to $200.4 million, compared to $156.8 million for the year ended December 31, 2021. The increase was primarily due to increases of $25.9 million, $6.2 million, $4.6 million, $2.9 million and $1.7 million in salaries and employee benefits expenses, merger-related expense, intangible asset amortization, occupancy and equipment, net and office and operations, respectively. The increases were partially offset by a $1.6 million decrease in loan-related expenses.

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

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

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

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

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

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

Intangible asset amortization expense. The $4.6 million increase in intangible asset amortization expense was primarily due to the core deposit intangible established in conjunction with the BTH merger, which contributed $3.4 million to the total increase. The insurance acquisition at December 31, 2021, contributed $1.4 million to the total increase for the relationship-based and noncompete intangibles established in conjunction with the acquisition.

Occupancy and equipment, net. The $2.9 million increase in occupancy and equipment expense was primarily due to the BTH merger that closed on August 1, 2022, which contributed $1.6 million to the total increase. In addition, the rental expense increased by $323,000 primarily due to one new banking center location which opened during the last quarter of 2022, and total maintenance and repairs expense increased on property, furniture, fixtures and equipment by $296,000.

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

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

Income Tax Expense

For the year ended December 31, 2022, we recognized income tax expense of $19.7 million, compared to $23.9 million for the year ended December 31, 2021. Our effective tax rate was 18.4% for the year ended December 31, 2022, compared to 18.0% for the year ended December 31, 2021. The effective tax rate was lower for the year ended December 31, 2021, compared to the rate for the year ended December 31, 2022, primarily due to the tax impact of the exercise of stock options and vesting of stock awards during the year ended December 31, 2021. Offsetting the increase in the effective tax rate during the year ended December 31, 2022, compared to the effective tax rate during the year ended December 31, 2021, was the impact of merger-related expenses during 2022, which drove net income before income taxes down.

Our effective income tax rates have differed from the applicable U.S. statutory rates of 21% at December 31, 2022 and 2021, due to the effect of tax-exempt income from securities, low-income housing and qualified school construction bond tax credits, tax-exempt income from life insurance policies and income tax effects associated with stock-based compensation. Because of these items, we expect our effective income tax rate to continue to remain below the applicable U.S. statutory rate. These tax-exempt items can have a larger than proportional effect on the effective income tax rate as net income decreases. Any increases to the statutory tax rate would increase income taxes in the future.

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

General

The merger with BTH affected most material financial metrics of the Company at December 31, 2022. Total assets increased by $1.82 billion, or 23.2%, to $9.69 billion at December 31, 2022, from $7.86 billion at December 31, 2021. The increase in total assets is primarily due to $1.85 billion in total assets, net of purchase accounting adjustments, acquired from the merger with BTH, which included $1.24 billion in loan balances, net of purchase accounting adjustments. Organic loan growth contributed an additional $619.2 million increase in our loan portfolio balances which grew to $7.09 billion at December 31, 2022, from $5.23 billion at December 31, 2021. The increase in total assets was offset by a $346.6 million decrease in cash and cash equivalents to $359.0 million at December 31, 2022, from $705.6 million at December 31, 2021.

Total deposits increased $1.21 billion to $7.78 billion at December 31, 2022, from $6.57 billion at December 31, 2021. The increase in deposits was due to the assumption of $1.57 billion in deposits, net of purchase accounting adjustments, from the BTH merger. Excluding the deposits acquired in the BTH merger at August 1, 2022, total deposit balances decreased by $361.5 million, or 5.5%, with the remaining BTH-originated deposits totaling $1.45 billion at December 31, 2022. Overall, higher rates of inflation tend to cause individuals and businesses to hold fewer liquid assets thereby contributing to tightening liquidity.

Stockholders’ equity increased $219.7 million to $949.9 million at December 31, 2022, compared to $730.2 million at December 31, 2021. The increase in stockholders’ equity is primarily associated with the $306.3 million in consideration paid related to the BTH merger and the $87.7 million in net income for the year ended December 31, 2022, partially offset by the $165.6 million in other comprehensive loss and the $15.9 million of stockholder dividends declared in 2022.

Loan Portfolio

Our loan portfolio is our largest category of interest-earning assets, and interest income earned on our loan portfolio is our primary source of income. At December 31, 2022, 78.8% of the loan portfolio held for investment was comprised of commercial and industrial loans, including mortgage warehouse lines of credit, commercial real estate and construction/land/land development loans, which were primarily originated within our market areas of Texas, North Louisiana, and Mississippi, compared to 82.3% at December 31, 2021.

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

At December 31, 2022, total LHFI were $7.09 billion, an increase of $1.86 billion, or 35.5%, compared to $5.23 billion at December 31, 2021. The merger with BTH has contributed $1.22 billion to the increase, net of purchase accounting adjustments, at December 31, 2022. Our organic loan growth contributed to the remaining increase. Total LHFI at December 31, 2022, excluding mortgage warehouse lines of credit, were $6.81 billion, reflecting an increase of $2.20 billion, or 47.8%, increase, compared to December 31, 2021. Our lending focus continues to be on operating companies, including commercial loans and lines of credit, as well as owner-occupied commercial real estate loans.

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Loan Portfolio Maturity Analysis

The table below presents the maturity distribution of our LHFI at December 31, 2022. 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.

Nonperforming Assets

Nonperforming assets consist of nonperforming loans and property acquired through foreclosures or repossession, as well as bank-owned property not currently 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 allowance for loan credit losses.

Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) nonaccrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on merger/acquisition date, but had been previously delinquent two times 60 days. An allowance for credit losses is determined using the same methodology as other individually evaluated loans. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. We held approximately $48.1 million of unpaid principal balance PCD loans at December 31, 2022, and no PCD loans at December 31, 2021.

We manage the quality of our lending portfolio in part through a disciplined underwriting policy and through continual monitoring of loan performance and borrowers' financial condition. There can be no assurance, however, that our loan portfolio will not become subject to losses due to declines in economic conditions or deterioration in the financial condition of our borrowers.

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Overall, credit metrics have improved at December 31, 2022, compared to December 31, 2021; however, uncertainty remains due to risks related to rising inflation, economic recession concerns, market interest rate increases, labor pressures, continued global supply-chain disruptions and increased geopolitical risks.

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

At December 31, 2022, total nonperforming LHFI decreased by $15.0 million, or 60.1%, from December 31, 2021, primarily due to lower nonperforming commercial and industrial and residential loan balances. Please see Note 5 - Loans to our consolidated financial statements contained in Item 8 of this report for more information on nonperforming loans.

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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, 2022, is included in Note 5 - Loans to our consolidated financial statements contained in Item 8 of this report.

Allowance for Loan Credit Losses

The allowance for loan credit losses represents the estimated losses for loans accounted for on an amortized cost basis. Expected losses are calculated using relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We evaluate LHFI on a pool basis with pools of loans characterized by loan type, collateral, industry, internal credit risk rating and FICO score. We applied a probability of default, loss given default loss methodology to the loan pools at December 31, 2022. Historical loss rates for each pool are calculated based on charge-off and recovery data beginning with the second quarter of 2012. These loss rates are adjusted for the effects of certain economic variables forecast over a one-year period, particularly for differences between current period conditions 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 allowance for loan credit losses is affected by loan charge-offs, which decrease the allowance, recoveries on loans previously charged off, which increase the allowance, as well as the provision for loan credit losses charged to income, which increases the allowance. 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 allowance for loan credit losses, it would materially and adversely affect our earnings.

Acquisition Accounting and Acquired Loans. We account for our mergers/acquisitions under Financial Accounting Standards Board ("FASB") ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. In accordance with ASC 326, we record a discount or premium, and also an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans. An allowance for loan credit losses is determined using the same methodology as other individually evaluated loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized or accreted into interest income over the life of the loan. Subsequent changes to the allowance for loan credit losses are recorded through the provision for credit losses.

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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.

Overall, absent the impact of the BTH merger, most credit metrics improved at December 31, 2022, compared to December 31, 2021. The impact of the BTH merger on loans at December 31, 2022, was as follows: provision of $23.9 million, classified loans of $17.8 million, past due loans of $6.0 million, and nonperforming LHFI of $2.6 million.

The allowance for loan credit losses to nonperforming LHFI increased to 876.87% at December 31, 2022, compared to 259.35% at December 31, 2021, primarily driven by a $15.0 million decrease in nonperforming LHFI at December 31, 2022, compared to December 31, 2021, as well as the $22.6 million increase in the allowance for loan credit losses during the intervening period, which was predominately driven by the BTH merger. Past due loans to total LHFI declined to 0.15% at December 31, 2022, compared to 0.49% at December 31, 2021.

___________________________

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

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Our allowance for loan credit losses increased by $22.6 million, or 35.0%, to $87.2 million at December 31, 2022, from $64.6 million at December 31, 2021. The ratio of allowance for loan credit losses to total LHFI was 1.23% at both December 31, 2022 and 2021. The allowance for loan credit losses increased $22.6 million compared to December 31, 2021, mainly due to a $23.9 million allowance for BTH loans at December 31, 2022. Qualitative factor changes across the Company's risk pools, which includes the impact of the BTH acquired loans, drove a $22.4 million increase for the year ended December 31, 2022.

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

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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 Item 8 of this report.

Our securities portfolio totaled $1.66 billion at December 31, 2022, representing an increase of $124.1 million, or 8.1%, from $1.53 billion at December 31, 2021. At August 1, 2022, we acquired $456.8 million of available for sale securities from BTH, $447.5 million of which were sold during the third quarter of 2022, and majority of the funds were used to pay down Federal Home Loan Bank Advances. For additional information regarding our securities portfolio, please see Note 4 - Securities to our consolidated financial statements contained in Item 8 of this report.

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

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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, 2022. 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.

____________________________

(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.

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, 2022 or 2021. 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, 2022 and 2021, we held one fixed rate community investment bond of $6.4 million and $7.5 million, respectively. We elected the fair value option on this security to offset corresponding changes in the fair value of related interest rate swap agreements.

Deposits

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.

Our deposit balances were impacted by the merger with BTH that occurred on August 1, 2022. At the merger date, we assumed BTH deposits of $758.4 million in interest-bearing demand deposits, $398.1 million in noninterest-bearing demand deposits, $302.5 million in time deposits and $107.5 million in savings deposits, resulting in an overall $1.57 billion increase to our deposit balances at the merger date.

At December 31, 2022, all deposit categories increased when compared to December 31, 2021, with interest-bearing demand and noninterest-bearing deposits increasing by $325.1 million, or 23.0%, and $319.0 million, or 14.7%, respectively, compared to December 31, 2021. Excluding the deposits acquired in the BTH merger at August 1, 2022, total deposit balances decreased by $361.5 million, or 5.5%, with the remaining BTH-originated deposits totaling $1.45 billion at December 31, 2022.

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

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:

Our average deposit balance was $7.11 billion for the year ended December 31, 2022, an increase of $951.8 million, or 15.5%, from $6.15 billion for the year ended December 31, 2021. The average annualized rate paid on our interest-bearing deposits for the year ended December 31, 2022, was 0.72%, compared to 0.32% for the year ended December 31, 2021.

The increase in the average cost of our deposits was primarily the result of the rising interest rate environment experienced during the year ended December 31, 2022. Recently, we have managed our deposit interest expense by the strategic release of non-relationship, higher-rate deposits during 2022; however, our current deposit rates have not yet completely absorbed all of the market interest rate increases that have occurred during the year ended December 31, 2022.

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

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, 2022. There were no otherwise uninsured time deposits below the FDIC insurance limit at December 31, 2022. The estimated total amount of uninsured deposits at December 31, 2022 and 2021, was $4.19 billion and $3.79 billion, respectively.

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Borrowings

Borrowed funds are summarized as follows:

Short-term FHLB advances increased $550.0 million at December 31, 2022, compared to December 31, 2021, primarily due to a combination of the organic growth of $619.2 million in loan balances, decline in cash and cash equivalents of $346.6 million, pay down of $250.3 million in long-term FHLB advances and decrease in deposit balances, excluding BTH assumed deposits, of $240.2 million compared to December 31, 2021. We used funds generated primarily from the sale of BTH-acquired available for sale investment securities, to reduce our balances in long-term FHLB advances and support our loan growth.

Our long-term debt consists of advances from the FHLB with original maturities greater than one year and the subordinated indebtedness captioned and described below. Interest rates for FHLB long-term advances outstanding at December 31, 2022, ranged from 1.99% to 4.57% and were subject to restrictions or penalties in the event of prepayment. Interest rates for FHLB long-term advances outstanding at December 31, 2021, ranged from 1.65% to 4.57%.

In conjunction with the BTH merger, the Company assumed certain repurchase agreements with former BTH depositors that included the sale and repurchase of BTH investment securities of at least equal to the daily balance of the BTH depositor's account, subject to maximum limitations, with various maturity dates. These BTH repurchase agreements were restructured and integrated into the Company's repurchase agreements which include the sale and repurchase of investment securities and mature on a daily basis. The total overnight repurchase agreements with depositors carried a daily average interest rate of 0.24% for the year ended December 31, 2022, and 0.08% for the year ended December 31, 2021.

At December 31, 2022, we held 28 unfunded letters of credit from the FHLB totaling $277.4 million with expiration dates ranging from January 14, 2023, to September 22, 2027. These letters of credit either support pledges for our public fund deposits or confirm letters of credit we have issued to support our customers' businesses. Security for all indebtedness and outstanding commitments to the FHLB consists of a blanket floating lien on all of our first mortgage loans, commercial real estate and other real estate loans, as well as our investment in capital stock of the FHLB and deposit accounts at the FHLB. The net amounts available under the blanket floating lien at December 31, 2022 and 2021, were $1.29 billion and $982.2 million, respectively.

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

Holding Company Line of Credit

The Company has a line of credit under the terms of which the loan amount shall not exceed an aggregate principal balance of $100 million, consisting of an initial $50 million extension of credit and any one or more potential incremental revolving loan amounts that the lender may make in its sole discretion, up to an aggregate principal of $50 million, upon the request of the Company. The revolving line of credit matures on October 27, 2023, and the Company had $30.0 million and zero outstanding on this revolving credit loan under the Loan Agreement at December 31, 2022 and 2021, respectively. For additional information regarding our holding company line of credit, please see Note 12 - Borrowings in the notes to our consolidated financial statements contained in Item 8 of this report.

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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. The BTH Notes are intended to qualify for Tier 2 capital treatment and are substantively identical in terms and conditions, including priority, except for the maturity dates and interest rates payable on the notes. Interest is payable on the BTH Notes quarterly, and the principal amount of each BTH Note is payable at maturity. After the five-year anniversary of issuance, the Company can redeem the BTH Notes in part or in full at the Company’s discretion and, if applicable, subject to receipt of any required regulatory approvals. In addition, the BTH Notes can be redeemed at any time without penalty, upon not less than ten days’ notice, in the event that (i) the BTH Notes no longer qualify as Tier 2 capital as a result of any amendment or change in interpretation or application of laws or regulation that becomes effective after the date of issuance of the BTH Notes, (ii) a tax event, or (iii) investment company act event, as defined in the BTH Notes. The BTH Notes are unsecured and rank senior to the Company’s common stock, any preferred stock that may be issued, and the BTH TruPS (defined below).

In February 2020, Origin Bank completed an offering of $70.0 million in aggregate principal amount of 4.25% fixed-to-floating rate subordinated notes due 2030 (the “4.25% Notes”) to certain investors in a transaction exempt from registration under Section 3(a)(2) of the Securities Act of 1933, as amended. The 4.25% Notes initially bear interest at a fixed annual rate of 4.25%, payable semi-annually in arrears, to but excluding February 15, 2025. From and including February 15, 2025, to but excluding the maturity date or early redemption date, the interest rate will equal the three-month LIBOR rate (provided that in the event the three-month LIBOR is less than zero, the three-month LIBOR will be deemed to be zero) plus 282 basis points, payable quarterly in arrears, subject to customary fallback provision upon the discontinuation of LIBOR. Origin Bank is entitled to redeem the 4.25% Notes, in whole or in part, on or after February 15, 2025, and to redeem the 4.25% Notes at any time in whole upon certain other specified events. The 4.25% Notes qualify as Tier 2 capital for regulatory capital purposes for Origin Bank.

In October 2020, 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.

On August 1, 2022, the Company assumed BTH's obligations with respect to $7.2 million in aggregate principal amount of junior subordinated debentures issued to a statutory trust of BTH ("BTH TruPS"). The BTH TruPS and the Company's two other wholly-owned, unconsolidated subsidiary grantor trusts were established for the purpose of issuing trust preferred securities. The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each trust agreement. The trusts used the net proceeds from each of the offerings to purchase a like amount of junior subordinated debentures (the "debentures") of the Company. The debentures are the sole assets of the trusts. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon maturity of the debentures and can be currently redeemed by the Company in whole or in part, at a redemption price equal to 100% of the outstanding principal amount of the debentures, plus any accrued but unpaid interest to the redemption date. The trust preferred securities qualify as Tier 1 capital of the Company for regulatory purposes, subject to certain limitations.

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

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

Liquidity and Capital Resources

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, 2022 and 2021, our cash and liquid securities totaled 12.1% and 23.2% 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 to fund 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 Company had available cash balances of $99.8 million and $28.9 million at December 31, 2022 and 2021, respectively. This cash is available for the general corporate purposes described above, as well as providing capital support to the Bank and financing potential future acquisitions. In addition, the Company has a line of credit under the terms of which the loan amount shall not exceed an aggregate principal balance of $100 million, consisting of an initial $50 million extension of credit and any one or more potential incremental revolving loan amounts that the lender may make in its sole discretion, up to an aggregate principal of $50 million, upon the request of the Company. See Note 12 - Borrowings to our consolidated financial statements contained in Item 8 of this report for more information on the holding company line of credit.

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 12 - Borrowings to our consolidated financial statements contained in 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, 2022 or 2021. 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, 2022.

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 19 - Commitments and Contingencies to our consolidated financial statements contained in 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:

Stock Repurchases

In July 2019, the Company's board of directors authorized a stock repurchase program, pursuant to which the Company was authorized to purchase up to $40 million of its outstanding common stock. The stock repurchase program was approved for a period of three years and expired in June 2022, having repurchased a total of $28.0 million of outstanding common stock. In July 2022, the Board of Directors of the Company authorized a stock repurchase program pursuant to which the Company may, from time to time, purchase up to $50 million of its outstanding common stock. The 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, 2022.

The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in 2023. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our financial condition or result of operations.

Regulatory Capital Requirements

Together with the Bank, we are subject to various regulatory capital requirements administered by federal banking agencies. For further information, these requirements are discussed in greater detail in "Item 1. Business - Regulation and Supervision,". Failure to meet minimum capital requirements may result in certain actions by regulators that, if enforced, could have a direct material effect on our financial statements. At December 31, 2022 and 2021, we and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized" for purposes of the prompt corrective action regulations of the Federal Reserve. As we deploy capital and continue to grow operations, regulatory capital levels may decrease depending on the level of earnings. 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.

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