Red River Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Red River Bancshares is a Louisiana bank holding company; its subsidiary, Red River Bank, operates 27 banking centers and one loan and deposit production office in Louisiana. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2023 / September 30, 2023 | Comparable period / prior date |
|---|---|---|
| Net income | $8.0; diluted EPS $1.12 | $10.2 in Q3 2022; $9.0 in Q2 2023 |
| Net interest income | $20.7 | $23.1 in Q3 2022; $21.5 in Q2 2023 |
| Net interest margin (FTE) | 2.78% | 3.06% in Q3 2022; 2.96% in Q2 2023 |
| Total assets | $3,066.2 | $3,082.7 at December 31, 2022 |
| Loans held for investment | $1,948.6 | $1,916.3 at December 31, 2022 |
| Total deposits | $2,759.9 | $2,798.9 at December 31, 2022 |
| Cash and cash equivalents | $322.2 | $278.4 at December 31, 2022 |
| Stockholders’ equity | $282.0 | $265.8 at December 31, 2022 |
| Allowance for credit losses | $21.2; 1.09% of loans HFI | $20.6 at December 31, 2022 |
| Borrowings | None outstanding | $60.0 FHLB advance repaid in July 2023 |
- Quarter and year-to-date results: Q3 net income fell 21% year over year and 10.6% from Q2; diluted EPS was $1.12, versus $1.42 and $1.25, respectively. Nine-month net income was $26.6, essentially flat with $26.7 in 2022; diluted EPS was $3.70 versus $3.71.
- Revenue, costs, and earnings: Q3 interest and dividend income was $30.3, while interest expense was $9.6. Noninterest income was $5.6 and operating expenses $16.2; pretax income was $9.9. For the first nine months, net interest income was $65.1, noninterest income $15.9, operating expenses $47.9, and provision for credit losses $0.5.
- Cash flow: For the nine months, operating activities provided $32.0; investing activities provided $54.7, principally reflecting securities cash flows; financing activities used $42.9. Cash and cash equivalents increased $43.8.
- Margins and returns: Q3 return on assets was 1.05%, return on equity 11.15%, and efficiency ratio 61.70%. For nine months, those measures were 1.18%, 12.71%, and 59.02%, respectively.
- Capital and liquidity: At September 30, the company’s Tier 1 leverage ratio was 11.56%, total risk-based capital ratio 18.35%, and equity-to-assets ratio 9.20%. The Bank’s corresponding leverage and total risk-based capital ratios were 11.29% and 17.94%. Management stated both company and Bank met applicable capital adequacy requirements. Cash and cash equivalents were 10.51% of assets; reported cash plus available borrowing capacity equaled 216.3% of estimated uninsured deposits.
Material changes versus comparable periods
- Q3 net interest income declined from Q2 as deposit interest expense rose $2.6, exceeding the $1.9 increase in interest and dividend income. Deposit cost rose to 1.40% from 1.03%; the FTE margin fell 18 basis points to 2.78%.
- Compared with Q3 2022, interest and dividend income increased to $30.3 from $24.9, but interest expense increased to $9.6 from $1.8. Net interest income consequently decreased to $20.7 from $23.1.
- For the first nine months, net interest income increased 3.5% year over year, supported by higher loan and short-term asset yields. This was largely offset by higher deposit costs and expenses; operating expenses rose 9.8% to $47.9.
- Deposits decreased $39.0 from year-end. Noninterest-bearing deposits fell $118.4, while interest-bearing deposits rose $79.3, reflecting customer migration to higher-yielding categories. Q3 deposits increased $95.7 from June 30.
- Loans HFI increased 1.7% from year-end. Nonperforming assets were $2.1, or 0.07% of assets, compared with $2.4 and 0.08% at year-end. The allowance ratio was 1.09%, versus 1.08% at year-end.
- Total securities were $675.3, down $100.8 from year-end. AFS securities had $83.3 of gross unrealized losses; HTM securities had $26.2. AOCI was a loss of $77.5 at quarter-end, compared with a loss of $71.2 at year-end.
Outlook, commentary, and risks
- Management expected Q4 2023 FTE net interest margin to remain fairly consistent, subject to balance-sheet activity, rate movements, deposit pricing pressure, and deposit mix. It anticipated approximately $45.0 of Q4 securities cash flows for reinvestment in higher-yielding assets.
- Management attributed margin pressure to rising deposit rates and customers shifting into higher-cost accounts. It said deposit pricing pressure may continue; the filing provides no earnings or full-year financial guidance.
- SBIC income was $0.9 in Q3, down from $1.4 in Q2 following an investment sale in the prior quarter; management expected SBIC income to be lower in future quarters. Nine-month SBIC income increased to $2.5 from $0.4 a year earlier.
- The company adopted CECL on January 1, 2023. Adoption produced a $0.7 adjustment to the allowance and unfunded-commitment reserve and a $0.6 after-tax reduction to retained earnings. Management emphasized that credit-loss estimates involve judgment and may change with economic conditions, portfolio growth, and asset quality.
- Rate, liquidity, and securities valuation remain material sensitivities. The filing reports a $1.49 billion available borrowing capacity and no outstanding borrowings, but also identifies deposit outflows, funding costs, unrealized securities losses, and interest-rate movements as risks. Interest-rate simulations are estimates and may differ from actual results.
- The filing disclosed that third-party vendors using MOVEit Transfer may have been compromised and that certain customer personal information was exfiltrated; the company’s internal network was not impacted. The filing does not quantify financial impact. Management did not expect ordinary-course legal matters to have a material adverse effect, while noting unfavorable outcomes could still be material.
- The Bank was constructing a third New Orleans banking location, projected to open in Q3 2024. The remaining construction commitment was approximately $2.0. The company repurchased 42,250 shares for $2.1 during the first nine months and had $2.9 remaining under its $5.0 authorization.
Important facts for investors to verify
- Whether deposit retention and mix stabilize, and how continued pricing competition affects deposit costs, net interest margin, and earnings.
- Whether management’s Q4 margin expectation and planned reinvestment of approximately $45.0 in securities cash flows are realized.
- Credit trends, including criticized loans, delinquencies, charge-offs, and the adequacy of the CECL allowance as economic conditions evolve.
- The market value and potential liquidity implications of the securities portfolio’s unrealized losses, including the distinction between AFS and HTM holdings.
- Any further disclosures about the MOVEit incident, affected customers, remediation, or associated costs or claims.
- Actual use and availability of borrowing sources, uninsured-deposit levels, capital ratios, and execution of the remaining share-repurchase authorization.