Red River Bancshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company is a Louisiana bank holding company; its subsidiary Red River Bank operates 28 banking centers and a loan and deposit production office in Louisiana.
Financial performance and condition
| Metric | Q2 2022 / June 30, 2022 | Comparable period or prior year-end |
|---|---|---|
| Net income | $9.1 million; diluted EPS $1.27 | Q2 2021: $8.2 million; $1.13 diluted EPS. Q1 2022 net income: $7.4 million. |
| Six-month net income | $16.5 million; diluted EPS $2.30 | First half 2021: $16.3 million; diluted EPS $2.22. |
| Net interest income | Q2: $21.1 million; first half: $39.9 million | Q2 2021: $17.2 million; first half 2021: $34.8 million. |
| Net interest margin | Q2: 2.70% GAAP; 2.75% FTE. First half: 2.55% GAAP; 2.61% FTE. | Q1 2022 FTE: 2.46%; first half 2021 FTE: 2.64%. |
| Operating results | Q2 noninterest income $4.9 million; operating expenses $14.5 million; provision for loan losses $250,000. | First half noninterest income $9.3 million and expenses $28.5 million, versus $13.2 million and $26.6 million in first half 2021. |
| Assets and loans | Total assets $3.12 billion; loans held for investment $1.84 billion. | December 31, 2021: assets $3.22 billion; loans $1.68 billion. |
| Deposits and liquidity | Deposits $2.85 billion; cash and cash equivalents $356.4 million. No outstanding borrowings. | December 31, 2021: deposits $2.91 billion; cash and cash equivalents $784.9 million. |
| Equity and securities | Stockholders’ equity $253.6 million; AOCI loss $63.8 million. AFS securities fair value $651.1 million; HTM securities amortized cost $159.6 million. | December 31, 2021: equity $298.2 million; AOCI loss $3.8 million; AFS securities $659.2 million and no HTM securities. |
| Credit quality | Allowance for loan losses $19.4 million, or 1.05% of loans; nonperforming assets $971,000, or 0.03% of assets. | Allowance was $19.2 million, or 1.14% of loans, at year-end; NPAs were $979,000. |
| Cash flows, first half | Operating cash flow $18.2 million; investing cash outflow $385.3 million; financing cash outflow $61.4 million; net cash decrease $428.5 million. | First half 2021: operating cash flow $35.3 million; investing outflow $41.1 million; financing inflow $226.0 million. |
Material changes and management commentary
- Q2 net income increased 23.7% from Q1, primarily reflecting a $2.4 million sequential increase in net interest income. For the first half, net income was up 1.4% year over year: higher net interest income and lower loan-loss provision were partly offset by lower noninterest income and higher expenses.
- Loans held for investment grew 9.4% from year-end, while deposits declined 2.1%, which management attributed primarily to expected customer account activity. The loan-to-deposit ratio rose to 64.61% from 57.86%.
- Management deployed short-term funds into loans and securities. Interest-bearing deposits at other banks fell $444.7 million from year-end. Management said higher rates and improved asset mix lifted Q2 net interest margin; it described the balance sheet as asset-sensitive and expected a rising-rate environment to benefit 2022 net interest income and margin, subject to balance-sheet activity.
- Mortgage loan income fell sharply year over year as higher mortgage rates and limited housing inventory reduced activity. First-half noninterest income declined 29.7%, while operating expenses increased 7.4%.
- Market-rate increases produced a $63.7 million net unrealized loss on AFS securities and a $60.0 million after-tax AOCI reduction during the first half. In Q2, the company transferred $166.3 million of securities, net of $17.9 million unrealized loss, from AFS to HTM. Management characterized the losses as interest-rate-driven and temporary, and stated it did not intend to sell and expected to be able to hold the securities until recovery.
- The bank reported capital ratios above Basel III minimums: total risk-based capital 16.27%, Tier 1 risk-based capital 15.29%, and Tier 1 leverage 9.35%. The company exceeded $3.0 billion in assets at the June 30 measurement date and expects to lose small-bank-holding-company Policy Statement benefits beginning in 2023.
Outlook, risks, and contingencies
- No specific full-year earnings or revenue guidance is provided. Management noted that the Federal Reserve was expected to raise rates further in 2022; actual effects depend on asset and deposit repricing, balances, and market conditions.
- Interest-rate sensitivity modeling estimated that a parallel 100-basis-point rate decrease would reduce one-year net interest income by 8.3%, and a 200-basis-point decrease by 15.8%. The latter slightly exceeded the bank’s stated policy limit. The filing cautions that model results depend on uncertain assumptions.
- CECL adoption is scheduled for January 1, 2023. Preliminary analysis indicated a 1.0%–5.0% combined increase in the allowance for credit losses and allowance for unfunded commitments; the eventual effect could differ with portfolio composition and economic conditions.
- Uninsured deposits were estimated at approximately $1.10 billion. Available contingent funding included $779.5 million of net FHLB borrowing capacity and $101.0 million of other lines; neither source had an outstanding balance at quarter-end. Unfunded loan commitments were $372.3 million, and standby letters of credit totaled $14.3 million.
- Management cited inflation, changing monetary policy, economic conditions, borrower and collateral performance, liquidity, cybersecurity, regulatory changes, and natural disasters among its risks. Legal matters arise in the ordinary course; management did not expect their resolution to have a material adverse effect. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Track whether deposit outflows continue, particularly given the estimated $1.10 billion in uninsured deposits, and how loan growth affects liquidity and the loan-to-deposit ratio.
- Review the size and duration of unrealized securities losses, the HTM transfer and its effect on available liquidity, and whether management’s hold-to-recovery assessment remains supportable.
- Monitor the impact of rate changes on net interest margin, funding costs, and the downside sensitivity that exceeded policy limits in the modeled 200-basis-point decline scenario.
- Confirm the eventual CECL allowance impact against the preliminary 1.0%–5.0% estimate and assess loan-quality trends as the portfolio grows.
- Assess the financial and reporting implications of losing small-bank-holding-company Policy Statement benefits beginning in 2023.