RED RIVER BANCSHARES INC quarterly report, Q1 FY2022

Full document

Red River Bancshares, Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless noted. The company is a Louisiana bank holding company whose subsidiary operates 27 banking centers and two loan and deposit production offices in Louisiana.

Financial performance and condition

  • Profitability: Net income was $7.4 million and diluted EPS was $1.03, versus $8.5 million and $1.17 in Q4 2021, and $8.1 million and $1.10 in Q1 2021. Return on average assets was 0.93%; return on average equity was 10.27%.
  • Interest income and margins: Net interest income was $18.7 million, up 6.5% year over year but down $47,000 from Q4 2021. GAAP net interest margin was 2.41% (2.46% FTE), compared with 2.69% (2.76% FTE) a year earlier. Excluding PPP income, FTE margin was 2.41%, up from 2.38% in Q4.
  • Other income and expenses: Noninterest income was $4.4 million, down 35.0% year over year, mainly reflecting lower mortgage income and a $365,000 fair-value loss on equity securities. Operating expenses rose 6.8% year over year to $14.1 million. The efficiency ratio was 60.80%, versus 54.02% in Q1 2021.
  • Credit costs and quality: Provision for loan losses was $150,000, compared with $1.45 million in Q1 2021. The allowance was $19.2 million, or 1.11% of held-for-investment loans. Nonperforming assets were $973,000, or 0.03% of assets; nonperforming loans were $313,000.
  • Balance sheet and funding: Total assets were $3.21 billion. Loans held for investment increased 3.4% to $1.74 billion; deposits rose 0.6% to $2.93 billion. Cash and cash equivalents declined to $547.1 million from $784.9 million as excess liquidity was deployed into securities and loans. Noninterest-bearing deposits were 40.3% of deposits; estimated uninsured deposits were $1.17 billion.
  • Securities and equity: Available-for-sale securities totaled $810.8 million, up 23.0%; their net unrealized loss widened to $55.5 million from $4.8 million. The after-tax AOCI decline of $40.0 million contributed to stockholders’ equity falling 11.2% to $264.9 million. Realized book value per share, which excludes AOCI, was $43.02, while GAAP book value was $36.91.
  • Cash flow and debt: Operating cash flow was $8.8 million, versus $24.1 million in Q1 2021. Investing cash outflow was $263.2 million, primarily reflecting $232.7 million of securities purchases and loan growth; financing cash inflow was $16.7 million. The company reported no outstanding borrowings at quarter-end.
  • Capital: Red River Bank’s total risk-based capital ratio was 16.59%, above the 10.50% minimum including the capital conservation buffer; its Tier 1 leverage ratio was 9.10%. Management said the Bank met capital adequacy requirements.

Material changes and management commentary

  • Compared with Q4 2021, net income fell 13.1%, primarily due to lower PPP and mortgage income and the equity securities loss; higher securities income partly offset these pressures. Compared with Q1 2021, net income declined 8.3%, as lower noninterest income and higher operating expenses outweighed higher net interest income and lower credit provision.
  • Non-PPP loans grew 4.1% from year-end, supported by new customer activity in expansion markets and lending in established markets. The securities portfolio also expanded as the company shifted funds from low-yielding short-term balances.
  • Management described the balance sheet as asset sensitive and expected a rising-rate environment to benefit net interest income and margin in 2022, subject to balance-sheet activity and other assumptions. Rate-simulation estimates showed net interest income increasing 10.0% under an instantaneous +100 bp shift and declining 7.6% under a -200 bp shift.
  • The company opened a full-service Lafayette banking center in January and expected to open a leased downtown New Orleans center in Q2, pending regulatory approval; it also bought Metairie property for a planned center. It renewed a $5.0 million share repurchase authorization through December 31, 2022, and repurchased $218,000 of stock in Q1. The quarterly dividend was $0.07 per share.

Outlook, risks, contingencies, and unusual items

  • No formal earnings or financial guidance was provided. Management’s rate outlook is conditional; model results depend on assumptions about rate changes, deposit pricing, balance-sheet growth, and other market conditions.
  • Rising rates drove significant AFS securities valuation losses and increased the portfolio’s average life and estimated effective duration to 6.5 and 5.6 years, respectively. Management considered the losses temporary, said it did not intend to sell the securities before recovery, and reported no credit-related impairment losses. In Q2, the company decided to reclassify a selected portion of securities from AFS to held-to-maturity.
  • In April 2022, the company liquidated all shares of its CRA mutual fund investment, following the Q1 fair-value loss. Q1 also included $59,000 of nonrecurring technology costs and $124,000 of nonrecurring occupancy costs related to expansion locations; vendor rebates and refunds reduced certain expenses.
  • Key risks include interest-rate and securities-market volatility, deposit retention and liquidity, loan performance and collateral values, local economic conditions, inflation and labor or supply-chain constraints, cybersecurity and operational risks, and regulatory compliance. Unfunded loan commitments were $356.4 million and standby letters of credit were $13.9 million. Additional investment commitments included $5.0 million to an SBIC partnership, $827,000 to a bank-technology partnership, and $226,000 to another SBIC partnership.
  • Management did not expect ordinary-course legal proceedings to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting. CECL adoption is scheduled for January 1, 2023; implementation work was ongoing, and the ultimate impact was not stated.

Investor verification priorities

  1. Track the AFS portfolio’s unrealized losses, interest-rate exposure, and the effects of the planned AFS-to-HTM reclassification on AOCI, liquidity, and reported yields.
  2. Verify whether loan growth and asset quality remain favorable, including trends in criticized loans, nonperforming assets, and allowance adequacy as CECL approaches.
  3. Monitor deposit stability and funding concentration, including uninsured deposits and seasonal public-entity balances, alongside the company’s substantial available borrowing capacity.
  4. Assess whether rising rates improve net interest income as management expects, and compare actual results with the filing’s rate-sensitivity simulations.
  5. Follow mortgage fee income, operating-cost growth, and the financial contribution and costs of the Lafayette and New Orleans expansion.