RED RIVER BANCSHARES INC annual report, FY2022

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Business context and reporting period

Red River Bancshares, Inc. is a Louisiana bank holding company operating through Red River Bank. This Form 10-K reports the fiscal year ended December 31, 2022; it includes unaudited fourth-quarter results and compares primarily with 2021. The bank operated 28 banking centers and one combined loan production office across Louisiana.

Financial performance and condition

  • Profitability: Net income was $36.9 million, up 12.0% from $33.0 million. Diluted EPS rose to $5.13 from $4.51. Return on average assets was 1.18% (1.13% in 2021), and return on average equity was 13.98% (11.21%). Fourth-quarter net income was $10.2 million, versus $8.5 million a year earlier.
  • Revenue and margins: Net interest income increased 20.8% to $86.6 million; net interest margin on an FTE basis expanded to 2.86% from 2.60%. Total interest and dividend income was $94.4 million, while noninterest income declined 23.5% to $18.7 million, chiefly because mortgage loan income fell. The efficiency ratio was 56.60%, compared with 56.39%.
  • Cash flow: Operating cash flow was $45.9 million, down from $62.3 million. Investing activities used $438.7 million, mainly reflecting loan growth and securities purchases; financing activities used $113.6 million, including a $111.4 million net deposit outflow. Cash and cash equivalents ended the year at $278.4 million, versus $784.9 million.
  • Balance sheet and liquidity: Total assets were $3.08 billion, down 4.4%; loans held for investment grew 13.8% to $1.92 billion. Deposits declined 3.8% to $2.80 billion, including a 21.1% fall in money-market balances. Noninterest-bearing deposits were 39.0% of deposits. The bank had no outstanding borrowings and reported $774.9 million of net FHLB borrowing capacity, plus $101.0 million of other borrowing capacity.
  • Debt, capital, and equity: No long-term debt was outstanding. Bank regulatory capital ratios were 16.85% total risk-based capital, 15.84% Tier 1 risk-based capital, and 10.35% Tier 1 leverage. Stockholders’ equity fell to $265.8 million from $298.2 million, primarily due to securities-related accumulated other comprehensive losses. Book value per share declined to $36.99; realized book value per share, a non-GAAP measure excluding AOCI, increased to $46.90.
  • Credit quality: Nonperforming assets were $2.4 million, or 0.08% of assets, versus $1.0 million and 0.03% in 2021. The allowance for loan losses was $20.6 million, or 1.08% of loans, compared with 1.14%. Net charge-offs were 0.02% of average loans. Real estate secured 78.1% of loans held for investment.

Material changes, outlook, and risks

  • Rising rates and a shift from excess cash into loans and securities supported earnings and margin expansion. Loan growth was strongest in commercial real estate and construction and development; non-PPP loans grew 15.0%.
  • Noninterest income fell largely because mortgage loan income declined from $8.7 million to $3.1 million as mortgage rates rose and housing inventory remained limited. Operating expenses rose 8.1% to $58.7 million, driven mainly by personnel, occupancy, taxes, and business development costs.
  • The securities portfolio had a $74.1 million net unrealized loss in AFS securities at year-end, following the 2022 rise in interest rates. The company reclassified $166.3 million of securities from AFS to HTM during the second quarter; HTM securities had a $19.3 million unrealized loss at year-end. Management attributed the losses principally to interest rates and reported no credit-related other-than-temporary impairment.
  • Management described the balance sheet as asset-sensitive and expected further deposit-rate pressure. It anticipated net interest income and margin could decrease slightly in the first half of 2023, depending on balance-sheet activity and deposit competition; it also expected further Federal Reserve rate increases at the time of filing. This is an outlook, not a guarantee.
  • CECL became effective January 1, 2023. Management expected adoption to increase the combined allowance for credit losses and unfunded commitments by 3.5%; first-quarter adjustments could differ as estimates were finalized.
  • Key risks include deposit attrition and funding costs, interest-rate and securities-value changes, credit deterioration (particularly in Louisiana real estate and commercial lending), inflation and economic conditions, severe weather, cybersecurity and third-party service disruptions, and regulatory change. Approximately $975 million of deposits were uninsured at year-end. The bank had $392.2 million of commitments to extend credit and standby letters of credit.
  • The company paid $0.28 per share in 2022 dividends and authorized a 2023 share-repurchase program of up to $5.0 million. Management reported no legal proceeding expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements; management concluded internal control over financial reporting was effective, but the auditor did not attest to it.

Most important facts for investors to verify

  1. Whether deposit outflows persist, especially among rate-sensitive and uninsured balances, and how deposit pricing affects funding costs and net interest margin.
  2. Whether loan growth remains sound: monitor nonaccrual loans, criticized and classified credits, charge-offs, the allowance, and Louisiana real-estate and commercial borrower conditions.
  3. How the AFS and HTM securities marks, duration, liquidity, and AOCI affect economic capital and the ability to respond to funding needs.
  4. The realized impact of CECL adoption versus management’s estimated 3.5% combined allowance increase, including any first-quarter 2023 revisions.
  5. Whether earnings can withstand weaker mortgage activity, higher operating costs, and the projected near-term margin pressure while maintaining capital, dividends, and planned repurchases.