Red River Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Red River Bancshares is a Louisiana bank holding company operating Red River Bank, with 27 banking centers and a loan production office across Louisiana.
Financial results and condition
Amounts are in millions except per-share data and ratios.
| Metric | Q2 2023 | Comparison |
|---|---|---|
| Interest and dividend income | $28.5 | $22.5 in Q2 2022 |
| Net interest income | $21.5 | $21.1 in Q2 2022; $22.9 in Q1 2023 |
| Net interest margin / FTE margin | 2.91% / 2.96% | 2.70% / 2.75% in Q2 2022; FTE 3.13% in Q1 2023 |
| Noninterest income | $6.0 | $4.9 in Q2 2022; Q2 2023 included $1.38 of SBIC income |
| Operating expenses | $16.1 | $14.5 in Q2 2022 |
| Provision for credit losses | $0.3 | $0.25 in Q2 2022; none in Q1 2023 |
| Net income / diluted EPS | $9.0 / $1.25 | $9.15 / $1.27 in Q2 2022; $9.6 / $1.33 in Q1 2023 |
- For the first six months, net income was $18.6 million, up 12.3% from $16.5 million; diluted EPS was $2.58 versus $2.30. Net interest income rose 11.4% to $44.4 million, while noninterest income increased 11.7% to $10.3 million.
- Q2 net income fell 6.6% sequentially, chiefly as deposit interest expense rose and net interest income declined. Q2 deposit cost increased to 1.03% from 0.71% in Q1; interest-bearing deposit cost was 1.66%.
- At June 30, assets were $3.03 billion, down 1.8% from year-end 2022. Loans held for investment were $1.95 billion, up 1.6%; deposits were $2.66 billion, down 4.8%; stockholders’ equity was $283.4 million, up 6.6%.
- Six-month cash flows were $17.9 million from operations, $2.6 million from investing and negative $76.8 million from financing. Cash and cash equivalents fell $56.3 million to $222.1 million.
- Liquidity included $222.1 million in cash and cash equivalents and $1.27 billion in available borrowing capacity. Estimated uninsured deposits were $805 million, or 30.2% of deposits; excluding collateralized public deposits, the estimate was $672.6 million, or 25.2%.
- The company had $60 million of FHLB advances outstanding at 5.49% at quarter-end; the advance matured and was repaid in July 2023. Total interest expense on borrowings was $28,000 for the first half.
- Capital remained strong: company total risk-based capital ratio was 18.13%, Tier 1 leverage ratio 11.48%, and equity-to-assets ratio 9.36%. The Bank exceeded applicable “well capitalized” thresholds.
Material changes and asset quality
- Deposit balances declined amid rate competition and normal tax payments, with customers shifting from lower-yielding accounts to higher-yielding products. Noninterest-bearing deposits fell $101.0 million from year-end and represented 37.1% of deposits, versus 39.0% at year-end.
- Nonperforming assets were $2.0 million, or 0.07% of assets, versus $2.4 million and 0.08% at year-end. The allowance for credit losses was $21.1 million, or 1.08% of loans. Loans classified as pass were 98.9% of the portfolio; no loans were rated doubtful or loss.
- The company adopted CECL on January 1, 2023. Adoption increased the allowance by $278,000, established a $442,000 reserve for unfunded commitments, and reduced retained earnings by $569,000 net of tax. The allowance estimate is judgmental and sensitive to economic assumptions.
- Available-for-sale securities had a $73.0 million net unrealized loss at June 30; held-to-maturity securities had a $22.1 million unrealized loss. Management reported no securities credit-loss allowance and said it did not intend to sell the securities before recovery and believed it could hold them. Accumulated other comprehensive loss was $69.7 million.
Outlook, commentary, risks and unusual items
- Management expected FTE net interest margin to remain fairly consistent for the remainder of 2023, depending on balance-sheet activity, interest rates, deposit competition and deposit mix. It anticipated approximately $100 million of securities cash flows through year-end for redeployment into higher-yielding assets.
- Management cited continued deposit-rate pressure. The July 26, 2023 FOMC rate increase and expectation of rates holding through December were described as the market outlook at the time of filing, not company guidance.
- Q2 SBIC income rose $1.2 million sequentially, primarily because the partnership sold an investment; management expected SBIC income to be lower in future quarters. Mortgage income also improved sequentially, while first-half mortgage income was down 54.4% year over year.
- Interest-rate risk simulations showed the balance sheet was asset sensitive; modeled net interest income increased 1.7% under a 100-basis-point rate increase and declined 1.3% under a 100-basis-point decrease. Management cautioned that model assumptions are uncertain.
- Key risks include deposit outflows and funding costs, interest-rate movements, credit quality and collateral values, economic conditions, regulatory changes, and cybersecurity. Certain customer information was exposed through third-party vendors’ MOVEit incident. The company said its own network was not affected, operations continued, customer notifications were underway, and it expected most related costs to be covered by third parties.
- The filing reports no legal proceedings expected by management to have a material adverse effect. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit balances, noninterest-bearing mix and deposit pricing stabilize, and how that affects net interest margin and earnings.
- Whether the expected $100 million of securities cash flows are received and redeployed as planned; monitor the securities’ unrealized losses, liquidity and duration exposure.
- Trends in loan delinquencies, nonperforming assets, criticized loans, charge-offs and CECL allowance assumptions, especially amid economic uncertainty.
- Actual liquidity and borrowing capacity relative to uninsured deposits, including the effect of deposit movements and any future reliance on wholesale funding.
- The ultimate scope, customer impact and costs of the MOVEit-related data exposure, including recovery from third parties and any regulatory or reputational consequences.