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

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 Credit Losses. Effective January 1, 2020, we adopted the current expected credit losses methodology ("CECL") for estimating allowances for credit losses, resulting in a change to the reporting of credit losses for assets held at amortized cost basis and available for sale debt securities. As a result, we recognized a one-time, after-tax cumulative effect adjustment of $760,000 to retained earnings at the beginning of the first quarter of 2020, increasing the allowance for credit losses by approximately $1.2 million and decreasing the off-balance sheet reserve by $381,000.

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. 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 credit losses when management believes the loss is confirmed.

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In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay the regulatory capital impact for up to two years (beginning January 1, 2020), followed by a three-year transition period. We elected to use the two-year delay of CECL’s impact on our regulatory capital (from January 1, 2020 through December 31, 2021) followed by the three-year transition period of CECL’s initial impact on our regulatory capital (from January 1, 2022 through December 31, 2024), and, accordingly, we will begin to amortize the CECL adoption impact to our regulatory capital beginning on January 1, 2022. Given the small size of the CECL adoption impact the amortization is not expected to significantly affect our regulatory capital.

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. Deeply rooted in our history is a culture committed to providing personalized, relationship banking to its clients and communities. We provide a broad range of financial services to businesses, municipalities, high net-worth individuals and retail clients. We currently operate 44 banking centers located from Dallas/Fort Worth and Houston, Texas, across North Louisiana and into Mississippi. 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.

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.

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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)PTPP earnings and tangible book value per common share, are non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures to their comparable U.S. GAAP measures, please see "Non-GAAP Financial Measures in Item 7 of this report.

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

Net Interest Income and Net Interest Margin

Net interest income for the year ended December 31, 2021, was $216.3 million, an increase of $24.7 million over the year ended December 31, 2020. The increase was primarily due to a $13.7 million reduction in total deposit interest expenses, coupled with increases of $9.4 million, $5.2 million and $4.2 million in interest income from PPP loans, mortgage warehouse lines of credit and investment securities, respectively. These increases were partially offset by a decrease of $6.9 million in interest earned on commercial and industrial, excluding PPP loans, coupled with an increase of $3.2 million of interest expense on our subordinated indebtedness, during the year ended December 31, 2021, compared to the year ended December 31, 2020.

Deposit interest expense decreased to $13.4 million during the year ended December 31, 2021, compared to $27.2 million during the year ended December 31, 2020, primarily due to a reduction in deposit rates during the intervening 12-month period. The average rate paid on savings and interest-bearing transaction accounts was 0.24% for the year ended December 31, 2021, down from 0.52% for the year ended December 31, 2020, accounting for $10.2 million of the decrease in interest expense from the year ended December 31, 2020. The average rate on time deposits decreased to 0.75% for the year ended December 31, 2021, down from 1.62% for the year ended December 31, 2020, providing an additional decrease of $5.3 million in interest expense. These two rate-driven interest expense declines were partially offset by a $3.9 million increase in interest expense due to an increase in the average balance of savings and interest-bearing transaction accounts when comparing the year ended December 31, 2021, to the year ended December 31, 2020.

PPP loans, which we began funding in the second quarter of 2020, contributed a $9.6 million increase in interest income due to an increase in yield during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily as a result of the SBA forgiveness process and the recognition of deferred loan fees as the loans were forgiven. Interest income earned on mortgage warehouse lines of credit increased by $5.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to higher average mortgage activity driven by the low interest rate environment, coupled with additional mortgage warehouse clients being on-boarded and funding loans. Interest income earned on investment securities increased by $4.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a shift in balance sheet composition as liquidity surged primarily due to increases in deposits and to declines in PPP and mortgage warehouse lines of credit ending loan balances and was redeployed into investment securities. Interest income earned on investment securities increased $9.3 million primarily due to higher average balances of investment securities, partially offset by a $5.1 million decrease in interest income earned on investment securities due to declines in average yields, compared to the year ended December 31, 2020. Interest income earned on commercial and industrial loans, excluding PPP loans, decreased $6.9 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the impact of lower yields. The $3.2 million increase in interest paid on subordinated indebtedness was primarily due to the issuance of $70.0 million and $80.0 million, in February 2020 and October 2020, respectively, in aggregate principal amount of subordinated notes.

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The fully tax-equivalent net interest margin was 3.10% for the year ended December 31, 2021, an eight basis point decrease from the year ended December 31, 2020. The yield earned on interest-earning assets for the year ended December 31, 2021, was 3.42%, a 33 basis point decrease from 3.75% for the year ended December 31, 2020. This decrease was partially offset by the decrease in interest rates paid on interest-bearing deposits. The rate paid on total interest-bearing liabilities for the year ended December 31, 2021, was 0.54%, representing a decrease of 35 basis points compared to 0.89% for the year ended December 31, 2020. The margin compression we experienced since the year ended December 31, 2020, was partially caused by decreasing loan yields driven by declining short-term interest rates during the end of 2020 and early to mid-2021, coupled with increasing liquidity as PPP loan balances were paid down through the SBA's forgiveness process and mortgage warehouse loan balances continued to normalize.

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

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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.

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

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

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

We recorded a provision for credit loss benefit of $10.8 million for the year ended December 31, 2021, a $70.7 million decrease from a provision expense of $59.9 million for the year ended December 31, 2020. The decrease in provision expense for the year ended December 31, 2021, compared to the year ended December 31, 2020, reflects an improvement in forecasted economic conditions compared to worsening forecasted economic conditions experienced during the year ended December 31, 2020. Net charge-offs were $11.3 million during the year ended December 31, 2021, compared to net charge-offs of $11.1 million during the year ended December 31, 2020. Our allowance for loan credit losses was 1.23% of total LHFI at December 31, 2021, compared to 1.51% at December 31, 2020. The allowance for loan credit losses as a percentage of nonperforming LHFI was 259.35% at December 31, 2021, compared to 331.45% at December 31, 2020.

Pursuant to rules promulgated by the federal banking agencies, we elected to use a two-year delay of CECL’s impact on our regulatory capital (from January 1, 2020 through December 31, 2021) followed by a three-year transition period of CECL’s initial impact on our regulatory capital (from January 1, 2022 through December 31, 2024) and, accordingly, we will begin to amortize the CECL adoption impact to our regulatory capital beginning on January 1, 2022. Given the small size of the CECL adoption impact the amortization is not expected to significantly affect our regulatory capital.

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

Noninterest Income

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

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

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N/M = Not meaningful.

Noninterest income for the year ended December 31, 2021, decreased by $2.5 million, or 3.8%, to $62.2 million, compared to $64.7 million for the year ended December 31, 2020, and was largely driven by decreases of $16.7 million and $1.7 million in mortgage banking revenue and swap fee income, respectively. The decreases were partially offset by increases of $5.6 million, $5.1 million, $2.1 million and $1.2 million, in limited partnership investment income, other noninterest income, service charges and fees income, and gain on sales of securities, respectively, combined with a $1.0 million decrease in loss on sales and disposals of other assets, net.

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

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

Gains on sales of securities, net. The $1.2 million increase in gain on sales of securities, net, was the result of the movement out of positions in lower-yielding securities. We used the funds generated from the sale of the securities to prepay relatively high-cost FHLB advances.

Loss on sales and disposals of other assets, net. The $1.0 million decrease in loss on sales and disposals of other assets, net was primarily due to the decline in value and subsequent write-down of two commercial real estate owned properties during the year ended December 31, 2020. No similar transactions occurred during the year ended December 31, 2021.

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

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

Other noninterest income. The $5.1 million increase in other noninterest income was primarily due to the Company's acquisition of the remaining 62% equity interest in the Lincoln Agency. The Company remeasured the previously held 38% equity method investment in the Lincoln Agency to its fair value, resulting in recognition of a gain of $5.2 million in other noninterest income.

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Noninterest Expense

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

Noninterest expense for the year ended December 31, 2021, increased by $4.8 million, or 3.2%, to $156.8 million, compared to $151.9 million for the year ended December 31, 2020. The increase was primarily due to increases of $1.9 million, $1.4 million and $1.4 million in salaries and employee benefits expenses, loan-related expenses and other noninterest expense, respectively.

Salaries and employee benefits. The $1.9 million increase in salaries and employee benefits expenses was primarily driven by increases of $2.1 million and $1.4 million in employee salaries and incentive compensation bonus, respectively, during the year ended December 31, 2021, which were partially offset by a $1.0 million decrease in commission expense. The increase in employee salaries was mainly driven by an increase of 17 full-time equivalent employees during the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase in incentive compensation bonus is primarily due to the growth in loan production during the year ended December 31, 2021. The decrease in commission expense is mainly due to the decline in mortgage origination volume during the year ended December 31, 2021.

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

Other noninterest expense. The increase in other noninterest expense was due to prepayment fees of $1.6 million incurred related to the early termination of long-term FHLB advances during the year ended December 31, 2021. We terminated the advances early due to the relatively high cost of the funding using the proceeds from the sale of underperforming investment securities as referenced under "Gain on sales of securities, net" above.

Income Tax Expense

For the year ended December 31, 2021, we recognized income tax expense of $23.9 million, compared to $8.0 million for the year ended December 31, 2020. Our effective tax rate was 18.0% for both the years ended December 31, 2021 and 2020.

Our effective income tax rates have differed from the applicable U.S. statutory rates of 21% at December 31, 2021 and 2020, 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, 2021, and December 31, 2020

General

Total assets increased by $233.0 million, or 3.1%, to $7.86 billion at December 31, 2021, from $7.63 billion at December 31, 2020. The increase was primarily attributable to increases of $480.6 million and $255.6 million in total securities and interest-bearing deposits in banks, respectively, which was partially offset by a $493.4 million decrease in LHFI for the comparable periods.

Loan Portfolio

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

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

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(1)Includes $17.0 million of commercial real estate loans for which the fair value option was elected at December 31, 2020. There were no loans for which the fair value option was elected at December 31, 2021.

At December 31, 2021, total LHFI were $5.23 billion, a decrease of $493.4 million, or 8.6%, compared to $5.72 billion at December 31, 2020. The decrease primarily reflected declines of $456.9 million in mortgage warehouse lines of credit and $440.8 million in PPP loans, primarily due to record high mortgage warehouse lines of credit production during fiscal year 2020 and PPP loan forgiveness from the SBA, respectively. Mortgage warehouse lines of credit loan balances have fallen within our expected range of 10% to 12% of total LHFI at December 31, 2021. Total LHFI at December 31, 2021, excluding PPP and mortgage warehouse lines of credit, were $4.50 billion, reflecting an increase of $404.2 million, or 9.9%, compared to December 31, 2020. Our lending focus is on operating companies, including commercial loans and lines of credit as well as owner-occupied commercial real estate loans. We currently do not plan to significantly alter the real estate concentrations within our loan portfolio.

Under the CARES Act, Congress allocated funds to the PPP, which was designed to provide short-term loans to certain qualifying businesses that retained employees during the COVID-19 pandemic. These loans, totaling $105.8 million with $3.0 million in unearned net deferred loan fees for the Company at December 31, 2021, have a maximum maturity of five years, bear a fixed rate of interest at one percent for the entire term, and as of December 31, 2021, approximately 84.5% of our total PPP loans granted have been forgiven under this program.

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Loan Portfolio Maturity Analysis

The table below presents the maturity distribution of our LHFI at December 31, 2021. 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 contractual terms of the loan. Interest income on nonaccrual loans may be recognized to the extent cash payments are received, but payments received are usually applied to principal. Nonaccrual loans are generally returned to accrual status when contractual payments are less than 90 days past due, the customer has made required payments for at least six months, and the Company reasonably expects to collect all principal and interest. 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.

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.

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

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

At December 31, 2021, total nonperforming LHFI decreased by $1.2 million, or 4.8%, from December 31, 2020, primarily due to reductions in most nonperforming LHFI loan categories, except for residential real estate, which represented 160 loans with an average loan balance of $73,000, and reflected a $5.1 million increase year over year. Please see Note 4 - 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, no loss of principal or interest is envisioned, and 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 no expectation of the recovery of any payments in respect to loans rated as loss. Information regarding the internal risk ratings of our loans at December 31, 2021, is included in Note 4 - Loans to our consolidated financial statements contained in Item 8 of this report.

Allowance for Loan Losses

Effective January 1, 2020, the Company adopted CECL resulting in a change to the Company's reporting of credit losses for assets held at amortized cost basis and available for sale debt securities. Please see Note 1 - Significant Accounting Policies to the consolidated financial statements contained in Item 8 of the Company's Annual Report for the year ended December 31, 2020, on Form 10-K filed with the SEC for a description of policy revisions resulting from the Company's adoption of ASU 2016-13.

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. The Company evaluates LHFI on a pool basis with pools of loans characterized by loan type, collateral, industry, internal credit risk rating and FICO score. The Company applied a probability of default, loss given default loss methodology to the loan pools at December 31, 2021. Historical loss rates for each pool are calculated based on charge-off and recovery data beginning with the second quarter of 2012. These loss rates are adjusted for the effects of certain economic variables forecast over a one-year period, particularly for differences between current period conditions, including the ongoing effects of COVID-19 on the U.S. economy, and the conditions existing during the historical loss period. 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.

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.

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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.

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

Our allowance for loan credit losses decreased by $22.1 million or 25.5%, to $64.6 million at December 31, 2021, from $86.7 million at December 31, 2020. The ratio of allowance for loan credit losses to total LHFI at December 31, 2021 and 2020, was 1.23% and 1.51%, respectively. The Company's credit quality profile in relation to the allowance for loan credit losses drove a decline of $25.1 million in the collectively evaluated portion of the reserve during the year ended December 31, 2021, of which a $19.6 million decrease was related to qualitative factor changes across the Company's risk pools for the year ended December 31, 2021. These declines were partially offset by an increase in certain specific loan reserves at December 31, 2021.

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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 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 $1.53 billion at December 31, 2021, representing an increase of $480.6 million, or 45.6%, from $1.05 billion at December 31, 2020. The increase in securities during the year ended December 31, 2021, reflects a shift in balance sheet composition as liquidity increased due to declines in PPP and mortgage warehouse lines of credit loan balances, as a result of the SBA’s forgiveness process and the normalization of mortgage warehouse lines of credit balances. Also contributing to the increase in liquidity was a $819.4 million year over year increase in deposits. For additional information regarding our securities portfolio, please see Note 3 - 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, 2021. 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.

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(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 than 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, 2021 or 2020. 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, 2021, we held one fixed rate community investment bond of $7.5 million. At December 31, 2020, we held two fixed rate community investment bonds totaling $11.6 million. We elected the fair value option on these securities to offset corresponding changes in the fair value of related interest rate swap agreements.

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

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.

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

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Our average deposit balance was $6.15 billion for the year ended December 31, 2021, an increase of $1.01 billion, or 19.7%, from $5.14 billion for the year ended December 31, 2020. The average annualized rate paid on our interest-bearing deposits for the year ended December 31, 2021, was 0.32%, compared to 0.75% for the year ended December 31, 2020. The decrease in the average cost of our deposits was primarily the result of the low interest rate environment. The Federal Reserve lowered the federal funds target rate twice during March 2020, resulting in an aggregate 150 basis point decrease in the target rate, which did not change during the year ended December 31, 2021. When the target rate reductions began, we took action to lower deposit rates on non-maturity deposits.

Average noninterest-bearing deposits at December 31, 2021, were $1.91 billion, compared to $1.50 billion at December 31, 2020, an increase of $405.1 million, or 27.0%, and represented 31.0% and 29.2% of average total deposits for the year ended December 31, 2021 and 2020, 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, 2021. There were no otherwise uninsured time deposits below the FDIC insurance limit at December 31, 2021. The estimated total amount of uninsured deposits at December 31, 2021, was $3.79 billion.

Borrowings

Short-term FHLB advances decreased $650.0 million at December 31, 2021 compared to December 31, 2020, primarily driven by PPP forgiveness payments, increases in deposits and declines in warehouse loan balances during the year ended December 31, 2021, which drove an increase in overall liquidity and a reduction in the reliance on borrowings. Additionally, using funds generated from the sale of investment securities, we prepaid $13.1 million in long-term FHLB advances and incurred related prepayment fees of $1.6 million during the first quarter of 2021.

Borrowed funds are summarized as follows:

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

Overnight repurchase agreements with depositors consist of obligations of ours to depositors and mature on a daily basis. These obligations to depositors carried a daily average interest rate of 0.08% and 0.22% for the years ended December 31, 2021 and 2020, respectively.

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, 2021, ranged from 1.65% to 4.57% and were subject to restrictions or penalties in the event of prepayment.

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At December 31, 2021, we held 43 unfunded letters of credit from the FHLB totaling $599.3 million with expiration dates ranging from January 20, 2022, to March 22, 2023. These letters of credit either support pledges for our public fund deposits or confirm letters of credit we have issued to support our customers' businesses. Security for all indebtedness and outstanding commitments to the FHLB consists of a blanket floating lien on all of our first mortgage loans, commercial real estate and other real estate loans, as well as our investment in capital stock of the FHLB and deposit accounts at the FHLB. The net amounts available under the blanket floating lien at December 31, 2021 and 2020, were $982.2 million and $456.9 million, respectively.

Additionally, at December 31, 2021, we had the ability to borrow $856.8 million from the discount window at the Federal Reserve Bank of Dallas ("FRB"), with $1.09 billion in commercial and industrial loans pledged as collateral. There were no borrowings against this line at December 31, 2021.

Subordinated Indebtedness

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

In October 2020, we completed of an offering of $80.0 million in aggregate principal amount of 4.50% fixed-to-floating rate subordinated notes due 2030 (the “4.50% Notes”). The 4.50% Notes bear a fixed interest rate of 4.50% payable semi-annually in arrears, to but excluding November 1, 2025. From and including November 1, 2025, to but excluding the maturity date or earlier redemption date, the 4.50% Notes bear a floating interest rate expected to equal the three-month term SOFR plus 432 basis points, payable quarterly in arrears. We may redeem the 4.50% Notes at any time upon certain specified events or in whole or in part on or after November 1, 2025. The 4.50% Notes qualify as Tier 2 capital for regulatory capital purposes for the Company and $51.0 million was transferred to Origin Bank during the fourth quarter of 2020, which qualifies as Tier 1 capital for regulatory capital purposes for the Bank.

The Company has two wholly-owned, unconsolidated subsidiary grantor trusts that were established for the purpose of issuing trust preferred securities. For additional information regarding these trusts, please see Note 11 - Borrowings in the consolidated financial statements contained in Item 8 of this report.

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.

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, 2021 and 2020, our cash and liquid securities totaled 23.2% and 13.6% 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 $28.9 million and $42.9 million at December 31, 2021 and 2020, 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 11 - Borrowings to our consolidated financial statements contained in Item 8 of this report for more information on the holding company line of credit.

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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.

During 2020, we took a number of precautionary actions to enhance our financial flexibility by bolstering our liquidity to ensure we had adequate cash readily available to meet both expected and unexpected funding needs. Currently, we believe we have sufficient liquidity from our available on- and off-balance sheet liquidity sources, however, should market conditions change, we may take further actions to enhance our financial flexibility.

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 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, 2021 or 2020. 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, 2021.

Origin Bank completed an offering in February 2020 of $70.0 million in aggregate principal amount of 4.25% fixed-to-floating rate subordinated notes due 2030, and the Company completed an offering in October 2020 of $80.0 million in aggregate principal amount of 4.50% fixed-to-floating rate subordinated notes due 2030. The notes provided us with $68.8 million and $78.6 million, respectively, in additional liquidity.

In the normal course of business as a financial services provider, we enter into various financial instruments, such as certain contractual obligations and commitments to extend credit and letters of credit, to meet the financing needs of our customers. These commitments are discussed in more detail in Note 18 - 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, our board of directors authorized a stock buyback program pursuant to which we may, from time to time, purchase up to $40 million of our outstanding common stock. The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the SEC. The stock buyback program was initially approved for a period of 36 months, but may be extended, terminated or amended by our board of directors. The stock buyback program does not obligate us to purchase any shares at any time.

During the first quarter of the year ended December 31, 2021, the Company repurchased an aggregate of 37,568 shares of its common stock pursuant to its stock buyback program at an average price per share of $33.42, for an aggregate purchase price of $1.3 million. There were no stock repurchases after March 2021. Prior to December 31, 2020, the Company had cumulatively repurchased an aggregate of 330,868 shares of its common stock shares pursuant to its stock buyback program for an aggregate purchase price of $10.8 million. As of December 31, 2021, there remained approximately $28.0 million of capacity under the program.

Regulatory Capital Requirements

Together with the Bank, we are subject to various regulatory capital requirements administered by federal banking agencies. These requirements are discussed in greater detail in "Item 1. Business - Regulation and Supervision". Failure to meet minimum capital requirements may result in certain actions by regulators that, if enforced, could have a direct material effect on our financial statements. At December 31, 2021, and December 31, 2020, we and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized" for purposes of the prompt corrective action regulations of the Federal Reserve. 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:

Non-GAAP Financial Measures

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

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

We believe non-GAAP measures and ratios, when taken together with the corresponding U.S. GAAP measures and ratios, provide meaningful supplemental information regarding our performance and capital strength. We use, and believe that investors benefit from referring to, non-GAAP measures in assessing our operating results and related trends. However, non-GAAP measures should be considered in addition to, and not as a substitute for or preferable to, amounts prepared in accordance with U.S. GAAP. In the following table, we have provided a reconciliation of pre-tax, pre-provision earnings to net income and the detail of the calculation of tangible book value per common share.

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