Red River Bancshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; interim financial statements are unaudited. Red River Bancshares is a Louisiana bank holding company whose subsidiary, Red River Bank, operates 28 banking centers and a loan and deposit production office in Louisiana.
Financial performance and position
| Metric | Q3 2022 / September 30, 2022 | Comparison |
|---|---|---|
| Net income | $10.2 million; diluted EPS $1.42 | Up 11.4% from Q2 2022 ($9.1 million) and up from $8.1 million in Q3 2021 |
| Net interest income | $23.1 million | Up 9.2% from Q2 2022 ($21.1 million) |
| Net interest margin / FTE | 3.00% / 3.06% | 2.70% / 2.75% in Q2 2022 |
| Return on average assets / equity | 1.30% / 15.48% | 1.15% / 14.30% in Q2 2022 |
| Total assets | $3.06 billion | Down 5.1% from December 31, 2021 |
| Loans held for investment | $1.88 billion | Up 11.6% from December 31, 2021 |
| Total deposits | $2.80 billion | Down 3.9% from December 31, 2021 |
| Stockholders’ equity | $243.4 million | Down 18.4% from year-end, largely reflecting securities-related AOCI losses |
Nine months ended September 30: Net income was $26.7 million, up 9.3% year over year; diluted EPS was $3.71 versus $3.34. Net interest income rose 18.9% to $63.0 million, while noninterest income fell 24.9% to $14.1 million and operating expenses increased 8.3% to $43.6 million. Net interest margin FTE was 2.76% versus 2.63%; return on assets was 1.13% versus 1.15%, and return on equity was 13.25% versus 11.17%.
Cash flow and liquidity: For the first nine months, operating cash flow was $35.3 million, investing cash outflow was $403.6 million, and financing cash outflow was $115.6 million. Cash and cash equivalents decreased $483.8 million to $301.1 million, primarily as the bank deployed liquidity into loans and securities and deposits declined. The bank had no outstanding borrowings at September 30; reported FHLB net borrowing capacity was $859.0 million, with an additional $101.0 million available through other borrowing lines.
Credit, capital and other measures: The allowance for loan losses was $20.0 million, or 1.06% of loans held for investment. Nonperforming assets were $2.7 million, or 0.09% of assets, up from $1.0 million at year-end; nonaccrual loans rose to $2.7 million. The Bank reported a 16.57% total risk-based capital ratio and a 9.94% Tier 1 leverage ratio, above stated regulatory minimums. No outstanding debt borrowings were reported.
Material changes and notable items
- Higher market rates and loan growth lifted quarterly net interest income and margin. Management attributed the improvement to repricing of loans and liquid assets and a more favorable asset mix; deposit costs also increased.
- Net unrealized losses on available-for-sale securities reached $89.6 million, and accumulated other comprehensive loss was $83.7 million at quarter-end. The company attributed the valuation decline mainly to rising interest rates and said it did not intend to sell the securities before recovery. In Q2, it transferred securities from available-for-sale to held-to-maturity; held-to-maturity securities had a $154.7 million amortized cost and $133.8 million fair value at quarter-end.
- Deposits declined $113.9 million year to date, driven by customer activity and response to the changing rate environment. Noninterest-bearing deposits increased and were 41.9% of deposits; estimated uninsured deposits were approximately $1.05 billion.
- Mortgage loan income declined sharply year over year as higher mortgage rates and limited housing stock reduced activity. Expenses rose with staffing and expansion; the first full-service New Orleans banking center opened August 1, 2022.
- The company paid a $0.07 per-share quarterly dividend. It repurchased 4,465 shares for $218,000 year to date and made no repurchases in Q3. The board approved a further $5.0 million repurchase authorization for calendar 2023.
Outlook, risks and contingencies
- Management described the balance sheet as asset-sensitive and expected a rising-rate environment to benefit net interest income and margin in Q4 2022, depending on balance-sheet activity; it also anticipated further pressure on deposit pricing. These are expectations, not guidance guarantees.
- Management cited inflation, changing monetary policy, loan growth, labor and supply-chain constraints, and Louisiana natural disasters as factors relevant to future credit-loss provisions. It reported a preliminary expectation that CECL adoption on January 1, 2023 would increase the combined allowance for credit losses and unfunded commitments by 1% to 5%; the eventual impact could differ materially.
- Unfunded loan commitments were $384.6 million and standby letters of credit were $14.5 million. The filing notes these commitments may expire unused. Outstanding investment commitments included $4.3 million to an SBIC partnership, $727,000 to a bank technology partnership, and $226,000 to another SBIC partnership.
- Interest-rate simulation showed estimated net interest income rising 3.7% under an instantaneous +100 basis-point shock and falling 4.9% under a -100 basis-point shock. Model estimates are subject to assumptions and may differ from actual outcomes.
- Management said ordinary-course legal matters were not expected to have a material adverse effect; the filing cautions that unfavorable outcomes could still be costly. It reported no material changes to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether deposit outflows continue and how deposit pricing affects funding costs, liquidity and net interest margin.
- Whether securities unrealized losses remain manageable, given the portfolio’s market-value decline and the transfer of securities to held-to-maturity.
- Whether the rise in nonaccrual loans and nonperforming assets persists, and whether the allowance remains adequate as loan growth and economic conditions evolve.
- The final CECL-related increase in credit-loss and unfunded-commitment allowances when adopted in 2023.
- Whether reported capital, liquidity capacity and management’s asset-sensitive outlook remain consistent with actual results as rates and balance-sheet composition change.