Red River Bancshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Red River Bancshares is a Louisiana bank holding company operating Red River Bank, with 27 banking centers and a loan and deposit production office in Louisiana.
Financial performance and position
- Profit: Net income was $9.6 million, or $1.33 diluted EPS, up 29.8% from $7.4 million, or $1.03 diluted EPS, in Q1 2022. Compared with Q4 2022, net income declined 5.8% from $10.2 million and diluted EPS declined from $1.42.
- Revenue and margins: Net interest income increased 22.3% year over year to $22.9 million. Net interest margin was 3.07% (3.13% FTE), versus 2.41% (2.46% FTE) a year earlier; quarter over quarter, FTE margin declined from 3.17%. Noninterest income was $4.3 million, down 1.4% year over year. The efficiency ratio was 56.84%, improved from 60.80% in Q1 2022 but worse than 54.76% in Q4 2022.
- Expenses and returns: Operating expenses rose 10.1% year over year to $15.5 million. Return on assets was 1.28% and return on equity was 14.33%.
- Balance sheet: Assets totaled $3.03 billion, down 1.7% from year-end 2022. Loans held for investment were $1.92 billion, up 0.3%; deposits were $2.73 billion, down 2.4%. Stockholders’ equity was $276.6 million, up 4.1%.
- Cash flow and liquidity: Operating cash flow was $13.3 million; cash and cash equivalents declined $49.2 million during the quarter to $229.2 million. The decline reflected deposit outflows and other activity. Management reported $1.35 billion in available borrowing capacity and no outstanding borrowings. Estimated uninsured deposits were $871.6 million, or 31.9% of deposits; excluding collateralized public entity deposits, the estimate was $698.0 million, or 25.6%.
- Credit and capital: Nonperforming assets were $2.4 million, or 0.08% of assets. The allowance for credit losses was $20.9 million, or 1.09% of loans; net charge-offs were $52,000. The Bank’s total risk-based capital ratio was 17.39%, above the 10.00% well-capitalized threshold.
Material changes versus comparable periods
- Year-over-year earnings growth was driven principally by higher loan and short-term asset yields: net interest income rose $4.2 million. Deposit interest expense also increased $3.5 million as rates and funding competition intensified.
- Compared with Q4 2022, net interest income fell $765,000, mainly because interest expense increased $1.5 million, partly offset by higher interest income. The average cost of deposits rose to 0.71% from 0.47%.
- Deposits decreased $67.6 million from December 31, 2022, reflecting customer activity amid rising rates and seasonal public-entity drawdowns. Customers also shifted balances toward higher-yielding products.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $278,000, established a $442,000 reserve for unfunded commitments, and reduced retained earnings by $569,000 net of tax. No provision for credit losses was recorded in Q1 2023.
- Accumulated other comprehensive loss improved to $68.5 million from $71.2 million, while the available-for-sale securities portfolio still had $71.2 million of net unrealized losses at quarter-end. Held-to-maturity securities had $19.9 million of unrealized losses.
Outlook, commentary and risks
- Management said the balance sheet is asset-sensitive, but deposit-rate competition is causing funding costs to rise. It expects net interest margin FTE and net interest income to continue to compress, subject to balance-sheet activity, deposit pricing and deposit mix. No specific earnings or financial guidance was provided.
- Management reported close monitoring of liquidity amid uncertainty in the banking industry. Liquidity sources include cash, securities, FHLB and correspondent-bank capacity, and the Federal Reserve’s Bank Term Funding Program. Some securities are pledged to secure public deposits, and HTM securities are not treated as a readily available liquidity source.
- Interest-rate simulations showed estimated net interest income increasing 1.7% under a 100-basis-point rate increase and decreasing 1.4% under a 100-basis-point decrease. Management cautioned that actual results may differ from model estimates.
- Key risks include deposit withdrawals and higher funding costs, interest-rate and securities valuation exposure, borrower and collateral deterioration, economic and local-market conditions, cybersecurity and operational risks, and regulatory changes. Management identified inflation, labor and supply-chain constraints, and natural disasters affecting Louisiana as potential credit risks.
- There were no loan modifications to borrowers experiencing financial difficulty in the quarter. Management said ordinary-course legal matters were not expected to have a material adverse effect. One banking center in the Southwest market was closed and its services relocated to an existing center.
Important facts for investors to verify
- Whether subsequent deposit trends, uninsured-deposit levels and funding costs confirm or worsen the Q1 deposit outflow and margin-compression trends.
- How the $71.2 million AFS and $19.9 million HTM unrealized securities losses, including pledged securities, affect liquidity, capital and the ability to hold investments to recovery or maturity.
- Whether asset quality, charge-offs and the CECL allowance remain adequate as economic conditions and loan concentrations evolve.
- Whether management’s expected further net interest income and margin compression is reflected in later results, and how rate changes affect deposit pricing and asset yields.
- The actual use and availability of stated borrowing capacity, including collateral requirements and the Bank Term Funding Program, if liquidity needs change.