Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion and analysis is to focus on significant changes in the financial condition of Red River Bancshares, Inc. on a consolidated basis from December 31, 2021 through March 31, 2022, and on our results of operations for the quarters ended March 31, 2022 and December 31, 2021, and for the three months ended March 31, 2022 and March 31, 2021. The comparison periods presented for our results of operations in this Report have changed since our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, which was our immediately prior Form 10-Q. Beginning with this Report, we will report our results of operations for the most recently completed quarter compared to the immediately preceding quarter as opposed to comparing to the corresponding quarter of the prior year. We believe this comparison aligns our quarterly disclosures more closely to how our management oversees our Company. Since we are a financial institution, we believe we are not as highly subject to seasonal fluctuations as other businesses and industries. Therefore, we believe comparing our results of operations to the immediately preceding fiscal quarter offers a more meaningful analysis to our investors.
This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021, and information presented elsewhere in this Report, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.
The following discussion contains forward-looking statements that reflect our current views with respect to, among other things, future events and our financial performance. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. See “Cautionary Note Regarding Forward-Looking Statements” and “Part II - Item 1A. Risk Factors” in this Report. Also, see risk factors and other cautionary statements described in “Part I - Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
CORPORATE SUMMARY
Red River Bancshares, Inc. is the bank holding company for Red River Bank, a Louisiana state-chartered bank established in 1999 that provides a fully integrated suite of banking products and services tailored to the needs of our commercial and retail customers. Red River Bank operates from a network of 27 banking centers throughout Louisiana and two combined LDPOs, one each in Lafayette, Louisiana and New Orleans, Louisiana. Banking centers are located in the following Louisiana markets: Central, which includes the Alexandria MSA; Northwest, which includes the Shreveport-Bossier City MSA; Capital, which includes the Baton Rouge MSA; Southwest, which includes the Lake Charles MSA; the Northshore, which includes Covington; and Acadiana, which includes the Lafayette MSA.
Our priority is to drive shareholder value through the establishment of a market-leading commercial banking franchise based in Louisiana. We provide our services through relationship-oriented bankers who are committed to their customers and the communities where we offer our products and services. Our strategy is to expand market share in existing markets and engage in opportunistic new market de novo expansion, supplemented by strategic acquisitions of financial institutions with customer-oriented, compatible philosophies and in desirable geographic areas.
FIRST QUARTER 2022 FINANCIAL AND OPERATIONAL HIGHLIGHTS
In the first quarter of 2022, the Company had solid loan growth, deployed funds into the securities portfolio, and had reduced earnings. We continued to execute our organic expansion plan in the New Orleans and Acadiana markets, renewed the stock repurchase program, and announced changes to the board of directors.
•Assets were fairly consistent during the first quarter of 2022, and totaled $3.21 billion as of March 31, 2022. The asset mix improved due to deploying funds into securities and loans.
•Net income for the first quarter of 2022 was $7.4 million, or $1.03 diluted EPS, a decrease of $1.1 million, or 13.1%, compared to $8.5 million, or $1.17 diluted EPS for the prior quarter and a decrease of $673,000, or 8.3%, compared to $8.1 million, or $1.10 diluted EPS, for the first quarter of 2021. For the first quarter of 2022, the quarterly return on assets was 0.93%, and the quarterly return on equity was 10.27%.
•Net income for the first quarter of 2022 was lower than the prior quarter due to lower PPP loan income, lower mortgage loan fee income, and a loss on equity securities, partially offset by higher securities AFS income.
•Red River Bank is participating in the SBA PPP. As of March 31, 2022, PPP loans were $6.4 million, net of $169,000 of deferred income, or 0.4% of loans HFI. PPP loan income decreased in the first quarter of 2022 due to lower PPP loan balances. PPP loan income for the first quarter of 2022 was $485,000, compared to $1.2 million for the prior quarter.
•Mortgage loan income for the first quarter of 2022 was $1.1 million, $540,000 lower than the prior quarter. The decrease in mortgage loan income was a result of reduced activity due to rising home prices and higher mortgage interest rates, as well as limited housing stock available for purchase.
•Equity securities are an investment in a CRA mutual fund consisting primarily of bonds. The mutual fund had a loss of $365,000 for the first quarter of 2022, compared to a loss of $75,000 for the fourth quarter of 2021.
•In the first quarter of 2022, excess funds were deployed into the securities AFS portfolio. Securities AFS as of March 31, 2022, were $810.8 million, or 25.2% of assets, compared to $659.2 million, or 20.4% of assets, as of December 31, 2021. This portfolio increased $151.6 million, or 23.0%, during the first quarter of 2022, which resulted in a $550,000 increase in securities income.
•As of March 31, 2022, non-PPP loans HFI (non-GAAP) were $1.73 billion, an increase of $68.3 million, or 4.1%, from December 31, 2021. The growth in non-PPP loans HFI was primarily a result of new customer activity associated with new lenders in our expansion markets and increased loan activity in various legacy markets. For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
•Excluding PPP loan income, the net interest margin FTE (non-GAAP) for the first quarter of 2022 was 2.41%, compared to 2.38% for the prior quarter. This increase was primarily a result of deploying low-yielding, short-term liquid assets into higher-yielding securities and loans. For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
•NPAs were $973,000, or 0.03% of assets, as of March 31, 2022. As of March 31, 2022, the allowance for loan losses was $19.2 million, or 1.11% of loans HFI.
•The board of directors approved changes to the Red River Bank 401(k) Profit Sharing Plan (“401(k) Plan”). Effective April 1, 2022, employees have the opportunity to invest a portion of their 401(k) Plan funds in the Company’s common stock through a unitized fund.
•We paid a quarterly cash dividend of $0.07 per common share.
•In the fourth quarter of 2021, the $5.0 million stock repurchase program that was approved in August 2021 was completed after reaching the purchase limit. On February 4, 2022, the board of directors approved the renewal of our stock repurchase program. The renewed repurchase program authorizes the Company to purchase up to $5.0 million of outstanding shares of common stock from February 4, 2022 through December 31, 2022. In accordance with this stock repurchase program, we repurchased 4,465 shares of our common stock in the first quarter of 2022 at an aggregate cost of $218,000.
•We continued implementing our organic expansion plan. On January 26, 2022, we opened our first Red River Bank full-service banking center in Lafayette, Louisiana. In March 2022, we leased an existing banking center location in downtown New Orleans, which, pending regulatory approval, we expect to open as the Bank’s first full-service banking center in the New Orleans market in the second quarter of 2022. Also, we purchased property in Metairie, Louisiana, a New Orleans suburb, with the plan to construct a full-service banking center.
•Various changes occurred with the Boards of Directors of the Company and the Bank. John C. Simpson, Chair Emeritus and a founding director, retired from the Board of Directors of the Company and the Bank at the end of his term at the Company’s 2022 annual shareholder meeting on May 5, 2022. Michael D. Crowell was appointed to the boards of the Company and the Bank.
The following tables contain selected financial information regarding our financial position and performance as of and for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| As of | | Change from December 31, 2021 to March 31, 2022 |
(dollars in thousands) | March 31, 2022 | | December 31, 2021 | | $ Change | | % Change |
Selected Period End Balance Sheet Data: | | | | | | | |
Total assets | $ | 3,212,460 | | | $ | 3,224,710 | | | $ | (12,250) | | | (0.4) | % |
Interest-bearing deposits in other banks | 506,982 | | | 761,721 | | | (254,739) | | | (33.4) | % |
Securities available-for-sale | 810,804 | | | 659,178 | | | 151,626 | | | 23.0 | % |
Loans held for investment | 1,741,026 | | | 1,683,832 | | | 57,194 | | | 3.4 | % |
Total deposits | 2,927,728 | | | 2,910,348 | | | 17,380 | | | 0.6 | % |
Total stockholders’ equity | 264,874 | | | 298,150 | | | (33,276) | | | (11.2) | % |
| | | | | | | | | | | | | | | | | | | | | |
| As of and for the Three Months Ended | | |
(dollars in thousands, except per share data) | March 31, 2022 | | December 31, 2021 | | March 31, 2021 | | | | |
Net Income | $ | 7,392 | | | $ | 8,510 | | | $ | 8,065 | | | | | |
| | | | | | | | | |
Per Common Share Data: | | | | | | | | | |
Earnings per share, basic | $ | 1.03 | | | $ | 1.18 | | | $ | 1.10 | | | | | |
Earnings per share, diluted | $ | 1.03 | | | $ | 1.17 | | | $ | 1.10 | | | | | |
Book value per share | $ | 36.91 | | | $ | 41.52 | | | $ | 38.99 | | | | | |
Tangible book value per share(1,2) | $ | 36.69 | | | $ | 41.31 | | | $ | 38.78 | | | | | |
Realized book value per share(1,3) | $ | 43.02 | | | $ | 42.05 | | | $ | 39.04 | | | | | |
Cash dividends per share | $ | 0.07 | | | $ | 0.07 | | | $ | 0.07 | | | | | |
Shares outstanding | 7,176,365 | | | 7,180,155 | | | 7,306,747 | | | | | |
Weighted average shares outstanding, basic | 7,179,624 | | | 7,229,324 | | | 7,317,995 | | | | | |
Weighted average shares outstanding, diluted | 7,198,616 | | | 7,247,277 | | | 7,337,151 | | | | | |
| | | | | | | | | |
Summary Performance Ratios: | | | | | | | | | |
Return on average assets | 0.93 | % | | 1.09 | % | | 1.20 | % | | | | |
Return on average equity | 10.27 | % | | 11.33 | % | | 11.36 | % | | | | |
Net interest margin | 2.41 | % | | 2.46 | % | | 2.69 | % | | | | |
Net interest margin FTE(4) | 2.46 | % | | 2.52 | % | | 2.76 | % | | | | |
Efficiency ratio(5) | 60.80 | % | | 57.33 | % | | 54.02 | % | | | | |
Loans HFI to deposits ratio | 59.47 | % | | 57.86 | % | | 63.69 | % | | | | |
Noninterest-bearing deposits to deposits ratio | 40.34 | % | | 39.50 | % | | 40.37 | % | | | | |
Noninterest income to average assets | 0.56 | % | | 0.72 | % | | 1.01 | % | | | | |
Operating expense to average assets | 1.77 | % | | 1.79 | % | | 1.96 | % | | | | |
| | | | | | | | | |
Summary Credit Quality Ratios: | | | | | | | | | |
NPAs to total assets | 0.03 | % | | 0.03 | % | | 0.13 | % | | | | |
Nonperforming loans to loans HFI | 0.02 | % | | 0.02 | % | | 0.18 | % | | | | |
Allowance for loan losses to loans HFI | 1.11 | % | | 1.14 | % | | 1.21 | % | | | | |
Net charge-offs to average loans | 0.00 | % | | 0.01 | % | | 0.00 | % | | | | |
| | | | | | | | | |
Capital Ratios: | | | | | | | | | |
Total stockholders’ equity to total assets | 8.25 | % | | 9.25 | % | | 10.10 | % | | | | |
Tangible common equity to tangible assets(1,6) | 8.20 | % | | 9.20 | % | | 10.05 | % | | | | |
Total risk-based capital to risk-weighted assets | 17.28 | % | | 17.83 | % | | 18.87 | % | | | | |
Tier 1 risk-based capital to risk-weighted assets | 16.26 | % | | 16.76 | % | | 17.66 | % | | | | |
Common equity Tier 1 capital to risk-weighted assets | 16.26 | % | | 16.76 | % | | 17.66 | % | | | | |
Tier 1 risk-based capital to average assets | 9.51 | % | | 9.67 | % | | 10.43 | % | | | | |
(1)Non-GAAP financial measure. Calculations of this measure and reconciliations to GAAP are included in “ - Non-GAAP Financial Measures” in this Report. This measure has not been audited.
(2)We calculate tangible book value per share as total stockholders’ equity, less intangible assets, divided by the outstanding number of shares of our common stock at the end of the relevant period.
(3)We calculate realized book value per share as total stockholders’ equity, less AOCI, divided by the outstanding number of shares of our common stock at the end of the relevant period.
(4)Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.
(5)Efficiency ratio represents operating expenses divided by the sum of net interest income and noninterest income.
(6)We calculate tangible common equity as total stockholders’ equity, less intangible assets, net of accumulated amortization, and we calculate tangible assets as total assets, less intangible assets, net of accumulated amortization.
RESULTS OF OPERATIONS
Net income for the first quarter of 2022 was $7.4 million, or $1.03 diluted EPS, a decrease of $1.1 million or 13.1%, compared to $8.5 million, or $1.17 diluted EPS, in the fourth quarter of 2021. The decrease in net income was due to a $1.3 million decrease in noninterest income, a $47,000 decrease in net interest income, and a $46,000 increase in operating expenses, partially offset by a $245,000 decrease in income tax expense. The return on assets for the first quarter of 2022 was 0.93%, compared to 1.09% for the fourth quarter of 2021. The return on equity was 10.27% for the first quarter of 2022 and 11.33% for the fourth quarter of 2021. Our efficiency ratio for the first quarter of 2022 was 60.80%, compared to 57.33% for the fourth quarter of 2021.
Net income for the three months ended March 31, 2022, was $7.4 million, or $1.03 diluted EPS, a decrease of $673,000, or 8.3%, compared to $8.1 million, or $1.10 diluted EPS, for the three months ended March 31, 2021. The decrease in net income was due to a $2.4 million decrease in noninterest income and an $899,000 increase in operating expenses, partially offset by a $1.3 million decrease in the provision for loan losses, a $1.1 million increase in net interest income, and a $162,000 decrease in income tax expense. The return on assets for the three months ended March 31, 2022, was 0.93%, compared to 1.20% for the same period in the prior year. The return on equity was 10.27% for the three months ended March 31, 2022, and 11.36% for the three months ended March 31, 2021. Our efficiency ratio for the three months ended March 31, 2022, was 60.80%, compared to 54.02% for the three months ended March 31, 2021.
Net Interest Income and Net Interest Margin
Our operating results depend primarily on our net interest income. Fluctuations in market interest rates impact the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities impact our net interest income. To evaluate net interest income, we measure and monitor: (1) yields on loans and other interest-earning assets; (2) the cost of deposits and other funding sources; (3) net interest spread; and (4) net interest margin. Since noninterest-bearing sources of funds, such as noninterest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing funding sources.
Beginning March 2020, we were in a low interest rate environment that impacted both the net interest income and net interest margin FTE. In March 2020, the target federal funds rate decreased 150 bps to 0.25% and remained at that rate until March 16, 2022, when the FOMC increased the target federal funds rate 25 bps to 0.50%. The average effective federal funds rate for the first quarter of 2022 was 0.12% compared to 0.08% for both the fourth quarter of 2021 and the first quarter of 2021. The net interest income and net interest margin FTE continued to be impacted by the low interest rate environment, despite the FOMC increasing the target federal funds rate.
First Quarter of 2022 vs. Fourth Quarter of 2021
Net interest income for the first quarter of 2022 was $18.7 million, which was $47,000, or 0.3%, lower than the fourth quarter of 2021, due to a $66,000 decrease in interest and dividend income, partially offset by a $19,000 decrease in interest expense. The decrease in interest and dividend income was primarily due to a decrease in PPP loan income, partially offset by an increase in securities income. PPP loan income decreased $727,000 due to lower average PPP loans outstanding and lower fees recognized to income on PPP loans. Securities income increased $550,000 during the first quarter as we increased our investment in our securities portfolio by deploying lower-yielding short-term liquid assets into higher-yielding taxable securities. Interest expense decreased in the first quarter of 2022 as a result of our third quarter 2021 adjustment to rates, which impacted new and renewing time deposits, partially offset by an increase in the average balance of interest-bearing transaction deposits.
The net interest margin FTE decreased six bps to 2.46% for the first quarter of 2022, compared to 2.52% for the prior quarter, primarily due to a 16 bp decrease in loan yield driven by a $727,000 decrease in PPP loan income. This decrease was partially offset by an eight bp increase in the yield on taxable securities driven by our deployment of short-term liquid assets into the securities portfolio. This activity increased the balance of higher-yielding taxable securities and decreased the balance of lower-yielding short-term liquid assets, which also benefited from higher yields compared to the prior quarter due to a higher interest rate environment.
The FOMC is expected to raise the target federal funds rate several more times in 2022. Our balance sheet is asset sensitive, and historically, our deposit interest rates have adjusted more slowly than the change in the federal funds rate. As of March 31, 2022, floating rate loans were 14.5% of loans HFI, and floating rate transaction deposits were 4.4% of interest-bearing transaction deposits. Dependent upon balance sheet activity and excluding PPP loans, we expect an increasing interest rate environment to positively impact our net interest income and net interest margin FTE in 2022.
The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yields earned and rates paid for the three months ended March 31, 2022 and December 31, 2021:
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| For the Three Months Ended |
| March 31, 2022 | | December 31, 2021 |
(dollars in thousands) | Average Balance Outstanding | | Interest Earned/ Interest Paid | | Average Yield/ Rate | | Average Balance Outstanding | | Interest Earned/ Interest Paid | | Average Yield/ Rate |
Assets | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Loans(1,2) | $ | 1,690,445 | | | $ | 16,770 | | | 3.97 | % | | $ | 1,654,711 | | | $ | 17,415 | | | 4.13 | % |
Securities - taxable | 556,648 | | | 1,879 | | | 1.35 | % | | 423,724 | | | 1,347 | | | 1.27 | % |
Securities - tax-exempt | 215,360 | | | 1,083 | | | 2.01 | % | | 210,263 | | | 1,065 | | | 2.03 | % |
Federal funds sold | 53,249 | | | 25 | | | 0.19 | % | | 55,342 | | | 21 | | | 0.15 | % |
Interest-bearing balances due from banks | 589,794 | | | 251 | | | 0.17 | % | | 645,627 | | | 226 | | | 0.14 | % |
Nonmarketable equity securities | 3,450 | | | 1 | | | 0.10 | % | | 3,449 | | | 1 | | | 0.10 | % |
| | | | | | | | | | | |
Total interest-earning assets | 3,108,946 | | | $ | 20,009 | | | 2.58 | % | | 2,993,116 | | | $ | 20,075 | | | 2.64 | % |
Allowance for loan losses | (19,203) | | | | | | | (19,164) | | | | | |
Noninterest-earning assets | 124,258 | | | | | | | 130,268 | | | | | |
Total assets | $ | 3,214,001 | | | | | | | $ | 3,104,220 | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing transaction deposits | $ | 1,418,583 | | | $ | 455 | | | 0.13 | % | | $ | 1,310,430 | | | $ | 410 | | | 0.12 | % |
Time deposits | 332,585 | | | 826 | | | 1.01 | % | | 341,445 | | | 890 | | | 1.03 | % |
Total interest-bearing deposits | 1,751,168 | | | 1,281 | | | 0.30 | % | | 1,651,875 | | | 1,300 | | | 0.31 | % |
| | | | | | | | | | | |
Other borrowings | — | | | — | | | — | % | | — | | | — | | | — | % |
Total interest-bearing liabilities | 1,751,168 | | | $ | 1,281 | | | 0.30 | % | | 1,651,875 | | | $ | 1,300 | | | 0.31 | % |
Noninterest-bearing liabilities: | | | | | | | | | | | |
Noninterest-bearing deposits | 1,153,377 | | | | | | | 1,136,342 | | | | | |
Accrued interest and other liabilities | 17,514 | | | | | | | 18,050 | | | | | |
Total noninterest-bearing liabilities | 1,170,891 | | | | | | | 1,154,392 | | | | | |
Stockholders’ equity | 291,942 | | | | | | | 297,953 | | | | | |
Total liabilities and stockholders’ equity | $ | 3,214,001 | | | | | | | $ | 3,104,220 | | | | | |
Net interest income | | | $ | 18,728 | | | | | | | $ | 18,775 | | | |
Net interest spread | | | | | 2.28 | % | | | | | | 2.33 | % |
Net interest margin | | | | | 2.41 | % | | | | | | 2.46 | % |
Net interest margin FTE(3) | | | | | 2.46 | % | | | | | | 2.52 | % |
Cost of deposits | | | | | 0.18 | % | | | | | | 0.18 | % |
Cost of funds | | | | | 0.17 | % | | | | | | 0.17 | % |
(1)Includes average outstanding balances of loans HFS of $4.3 million and $6.1 million for the three months ended March 31, 2022 and December 31, 2021, respectively.
(2)Nonaccrual loans are included as loans carrying a zero yield.
(3)Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.
Average PPP loans outstanding, net of deferred income, for the first quarter of 2022 were $11.1 million, which was $18.1 million lower than the prior quarter. During the first quarter of 2022, we received $11.6 million in SBA forgiveness and borrower repayments on PPP loans, compared to $29.6 million in the prior quarter. PPP loans have a 1.0% interest rate, and PPP loan origination fees are recorded to interest income over the loan term, or until the loans are forgiven by the SBA or repaid by the borrower. When PPP loan forgiveness payments or borrower payments are received in full, the remaining portion of origination fees are recorded to income. For the first quarter of 2022, PPP loan interest and fees totaled $485,000, resulting in a 17.77% yield, compared to $1.2 million in interest and fees and a 16.46% yield for the prior quarter. The decrease in PPP loan income was primarily due to a lower amount of PPP loans forgiven by the SBA in the first quarter of 2022 than in the fourth quarter of 2021. The increase in PPP loan yield was primarily due to forgiving loans with higher origination fee percentages in the first quarter of 2022 when compared to the prior quarter. As of March 31, 2022, deferred PPP fees were $169,000.
Excluding PPP loan income, net interest income (non-GAAP) for the first quarter of 2022 was $18.2 million, which was $680,000, or 3.9%, higher than the fourth quarter of 2021. Also, with PPP loans excluded for the first quarter of 2022, the yield on non-PPP loans (non-GAAP) was 3.88%, and the net interest margin FTE (non-GAAP) was 2.41%. For the first
quarter of 2022, PPP loans had a nine bp accretive impact to the yield on loans and a five bp accretive impact to the net interest margin FTE. For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
The following table presents interest income for total loans, PPP loans, total non-PPP loans (non-GAAP), as well as net interest income and net interest ratios excluding PPP loans (non-GAAP) for the three months ended March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| March 31, 2022 | | December 31, 2021 |
(dollars in thousands) | Average Balance Outstanding | | Interest/Fee Earned | | Average Yield | | Average Balance Outstanding | | Interest/Fee Earned | | Average Yield |
Loans(1,2) | $ | 1,690,445 | | | $ | 16,770 | | | 3.97 | % | | $ | 1,654,711 | | | $ | 17,415 | | | 4.13 | % |
Less: PPP loans, net | | | | | | | | | | | |
Average | 11,061 | | | | | | | 29,191 | | | | | |
Interest | | | 28 | | | | | | | 76 | | | |
Fees | | | 457 | | | | | | | 1,136 | | | |
Total PPP loans, net | 11,061 | | | 485 | | | 17.77 | % | | 29,191 | | | 1,212 | | | 16.46 | % |
Non-PPP loans (non-GAAP)(3) | $ | 1,679,384 | | | $ | 16,285 | | | 3.88 | % | | $ | 1,625,520 | | | $ | 16,203 | | | 3.90 | % |
| | | | | | | | | | | |
Net interest income, excluding PPP loan income (non-GAAP) |
Net interest income | | | $ | 18,728 | | | | | | | $ | 18,775 | | | |
PPP loan income | | | (485) | | | | | | | (1,212) | | | |
Net interest income, excluding PPP loan income (non-GAAP)(3) | | | $ | 18,243 | | | | | | | $ | 17,563 | | | |
| | | | | | | | | | | |
Ratios excluding PPP loans, net (non-GAAP)(3) | | | | | | | | | | |
Net interest spread | | | | | 2.22 | % | | | | | | 2.19 | % |
Net interest margin | | | | | 2.35 | % | | | | | | 2.33 | % |
Net interest margin FTE(4) | | | | | 2.41 | % | | | | | | 2.38 | % |
(1)Includes average outstanding balances of loans HFS of $4.3 million and $6.1 million for the three months ended March 31, 2022 and December 31, 2021, respectively.
(2)Nonaccrual loans are included as loans carrying a zero yield.
(3)Non-GAAP financial measure. See also “ - Non-GAAP Financial Measures” in this Report.
(4)Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.
Three Months Ended March 31, 2022 vs. Three Months Ended March 31, 2021
Net interest income for the three months ended March 31, 2022 was $18.7 million, which was $1.1 million, or 6.5%, higher than $17.6 million for the three months ended March 31, 2021. Net interest income increased due to an $831,000 increase in interest and dividend income and a $306,000 decrease in interest expense.
The increase in interest and dividend income for the three months ended March 31, 2022, when compared to the three months ended March 31, 2021, was primarily due to our deployment of excess liquidity, which resulted in increases to non-PPP loan income and securities income, partially offset by a decrease in PPP loan income. Non-PPP loan income increased $1.3 million due to a $192.9 million increase in the average balance of non-PPP loans when compared to the first quarter of 2021, partially offset by lower rates on new and renewed non-PPP loans. Securities income increased $1.1 million due to a higher average balance of securities as we increased our investment in our securities portfolio during the first quarter of 2022 by deploying lower-yielding short-term liquid assets into higher-yielding taxable securities. PPP loan income decreased $1.6 million due to lower average PPP loan balances outstanding and lower fees recognized to income on PPP loans.
Interest expense decreased over the past 12 months as deposits continued to price downward as we adjusted rates on interest-bearing deposits. This decrease was partially offset by higher interest-bearing deposit balances. For the three months ended March 31, 2022, average interest-bearing deposits increased $286.1 million, or 19.5%, compared to the three months ended March 31, 2021.
Net interest margin FTE decreased 30 bps to 2.46% for the three months ended March 31, 2022, from 2.76% for the three months ended March 31, 2021, primarily due to a 34 bp decrease in loan yield. Loan yield decreased as a result of a $1.6 million decrease in PPP loan income and a 17 bp decrease in the yield on non-PPP loans. PPP loan income decreased
due to lower fees recognized to income on PPP loans and a lower average balance of PPP loans outstanding. The yield on non-PPP loans decreased from 4.05% to 3.88% due to lower rates on new and renewed non-PPP loans over the past 12 months. These decreases were partially offset by an 18 bp increase in the yield on taxable securities driven by our deployment of short-term liquid assets into our securities portfolio. This deployment increased the average balance of higher-yielding taxable securities from $295.5 million to $556.6 million, an increase of $261.1 million or 88.4%. In addition, the yield on taxable securities benefited from higher market interest rates on securities purchased during the first quarter of 2022, compared to the interest rate on taxable securities during the same period in 2021. The net interest margin also benefited from a nine bp decrease in the cost of deposits. The cost of deposits decreased from 0.27% to 0.18% for the three months ended March 31, 2022, due to a 14 bp decrease in the rate on interest-bearing deposits as a result of our adjustments to deposit rates.
The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yields earned and rates paid for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| March 31, 2022 | | March 31, 2021 |
(dollars in thousands) | Average Balance Outstanding | | Interest Earned/ Interest Paid | | Average Yield/ Rate | | Average Balance Outstanding | | Interest Earned/ Interest Paid | | Average Yield/ Rate |
Assets | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Loans(1,2) | $ | 1,690,445 | | | $ | 16,770 | | | 3.97 | % | | $ | 1,594,796 | | | $ | 17,165 | | | 4.31 | % |
Securities - taxable | 556,648 | | | 1,879 | | | 1.35 | % | | 295,501 | | | 862 | | | 1.17 | % |
Securities - tax-exempt | 215,360 | | | 1,083 | | | 2.01 | % | | 195,406 | | | 1,028 | | | 2.10 | % |
Federal funds sold | 53,249 | | | 25 | | | 0.19 | % | | 77,484 | | | 22 | | | 0.11 | % |
Interest-bearing balances due from banks | 589,794 | | | 251 | | | 0.17 | % | | 447,265 | | | 100 | | | 0.09 | % |
Nonmarketable equity securities | 3,450 | | | 1 | | | 0.10 | % | | 3,447 | | | 1 | | | 0.13 | % |
| | | | | | | | | | | |
Total interest-earning assets | $ | 3,108,946 | | | $ | 20,009 | | | 2.58 | % | | $ | 2,613,899 | | | $ | 19,178 | | | 2.94 | % |
Allowance for loan losses | (19,203) | | | | | | | (18,669) | | | | | |
Noninterest-earning assets | 124,258 | | | | | | | 133,381 | | | | | |
Total assets | $ | 3,214,001 | | | | | | | $ | 2,728,611 | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing transaction deposits | $ | 1,418,583 | | | $ | 455 | | | 0.13 | % | | $ | 1,124,341 | | | $ | 479 | | | 0.17 | % |
Time deposits | 332,585 | | | 826 | | | 1.01 | % | | 340,705 | | | 1,108 | | | 1.32 | % |
Total interest-bearing deposits | 1,751,168 | | | 1,281 | | | 0.30 | % | | 1,465,046 | | | 1,587 | | | 0.44 | % |
| | | | | | | | | | | |
Other borrowings | — | | | — | | | — | % | | — | | | — | | | — | % |
Total interest-bearing liabilities | 1,751,168 | | | $ | 1,281 | | | 0.30 | % | | 1,465,046 | | | $ | 1,587 | | | 0.44 | % |
Noninterest-bearing liabilities: | | | | | | | | | | | |
Noninterest-bearing deposits | 1,153,377 | | | | | | | 956,612 | | | | | |
Accrued interest and other liabilities | 17,514 | | | | | | | 18,187 | | | | | |
Total noninterest-bearing liabilities | 1,170,891 | | | | | | | 974,799 | | | | | |
Stockholders’ equity | 291,942 | | | | | | | 288,766 | | | | | |
Total liabilities and stockholders’ equity | $ | 3,214,001 | | | | | | | $ | 2,728,611 | | | | | |
Net interest income | | | $ | 18,728 | | | | | | | $ | 17,591 | | | |
Net interest spread | | | | | 2.28 | % | | | | | | 2.50 | % |
Net interest margin | | | | | 2.41 | % | | | | | | 2.69 | % |
Net interest margin FTE(3) | | | | | 2.46 | % | | | | | | 2.76 | % |
Cost of deposits | | | | | 0.18 | % | | | | | | 0.27 | % |
Cost of funds | | | | | 0.17 | % | | | | | | 0.25 | % |
(1)Includes average outstanding balances of loans HFS of $4.3 million and $11.1 million for the three months ended March 31, 2022 and 2021, respectively.
(2)Nonaccrual loans are included as loans carrying a zero yield.
(3)Net interest margin FTE includes an FTE adjustment using a 21% federal income tax rate on tax-exempt securities and tax-exempt loans.
Excluding PPP loan income, net interest income (non-GAAP) for the three months ended March 31, 2022, was $18.2 million, which was $2.8 million, or 18.0%, higher than the three months ended March 31, 2021. Also, with PPP loans excluded for the three months ended March 31, 2022, the yield on non-PPP loans (non-GAAP) was 3.88%, and the net interest margin FTE (non-GAAP) was 2.41%. For the three months ended March 31, 2022, PPP loans had a nine bp
accretive impact to the yield on loans and a five bp accretive impact to the net interest margin FTE. For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
The following table presents interest income for total loans, PPP loans, total non-PPP loans (non-GAAP), as well as net interest income and net interest ratios excluding PPP loans (non-GAAP) for the three months ended March 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| March 31, 2022 | | March 31, 2021 |
(dollars in thousands) | Average Balance Outstanding | | Interest/Fee Earned | | Average Yield | | Average Balance Outstanding | | Interest/Fee Earned | | Average Yield |
Loans(1,2) | $ | 1,690,445 | | | $ | 16,770 | | | 3.97 | % | | $ | 1,594,796 | | | $ | 17,165 | | | 4.31 | % |
Less: PPP loans, net | | | | | | | | | | | |
Average | 11,061 | | | | | | | 108,334 | | | | | |
Interest | | | 28 | | | | | | | 284 | | | |
Fees | | | 457 | | | | | | | 1,848 | | | |
Total PPP loans, net | 11,061 | | | 485 | | | 17.77 | % | | 108,334 | | | 2,132 | | | 7.97 | % |
Non-PPP loans (non-GAAP)(3) | $ | 1,679,384 | | | $ | 16,285 | | | 3.88 | % | | $ | 1,486,462 | | | $ | 15,033 | | | 4.05 | % |
| | | | | | | | | | | |
Net interest income, excluding PPP loan income (non-GAAP) |
Net interest income | | | $ | 18,728 | | | | | | | $ | 17,591 | | | |
PPP loan income | | | (485) | | | | | | | (2,132) | | | |
Net interest income, excluding PPP loan income (non-GAAP)(3) | | | $ | 18,243 | | | | | | | $ | 15,459 | | | |
| | | | | | | | | | | |
Ratios excluding PPP loans, net (non-GAAP)(3) | | | | | | | | | | |
Net interest spread | | | | | 2.22 | % | | | | | | 2.28 | % |
Net interest margin | | | | | 2.35 | % | | | | | | 2.47 | % |
Net interest margin FTE(4) | | | | | 2.41 | % | | | | | | 2.53 | % |
(1)Includes average outstanding balances of loans HFS of $4.3 million and $11.1 million for the three months ended March 31, 2022 and 2021, respectively.
(2)Nonaccrual loans are included as loans carrying a zero yield.
(3)Non-GAAP financial measure. See also “ - Non-GAAP Financial Measures” in this Report.
(4)Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.
Rate/Volume Analysis
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Three Months Ended |
| March 31, 2022 vs. December 31, 2021 | | March 31, 2022 vs. March 31, 2021 |
| Increase (Decrease) Due to Change in | | Total Increase | | Increase (Decrease) Due to Change in | | Total Increase |
(in thousands) | Volume | | Rate | | (Decrease) | | Volume | | Rate | | (Decrease) |
Interest-earning assets: | | | | | | | | | | | |
Loans | $ | 377 | | | $ | (1,022) | | | $ | (645) | | | $ | 1,031 | | | $ | (1,426) | | | $ | (395) | |
Securities - taxable | 423 | | | 109 | | | 532 | | | 762 | | | 255 | | | 1,017 | |
Securities - tax-exempt | 26 | | | (8) | | | 18 | | | 105 | | | (50) | | | 55 | |
Federal funds sold | (1) | | | 5 | | | 4 | | | (7) | | | 10 | | | 3 | |
Interest-bearing balances due from banks | (18) | | | 43 | | | 25 | | | 39 | | | 112 | | | 151 | |
Nonmarketable equity securities | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Total interest-earning assets | $ | 807 | | | $ | (873) | | | $ | (66) | | | $ | 1,930 | | | $ | (1,099) | | | $ | 831 | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing transaction deposits | $ | 27 | | | $ | 18 | | | $ | 45 | | | $ | 128 | | | $ | (152) | | | $ | (24) | |
Time deposits | (23) | | | (41) | | | (64) | | | (26) | | | (256) | | | (282) | |
Total interest-bearing deposits | 4 | | | (23) | | | (19) | | | 102 | | | (408) | | | (306) | |
| | | | | | | | | | | |
Other borrowings | — | | | — | | | — | | | — | | | — | | | — | |
Total interest-bearing liabilities | $ | 4 | | | $ | (23) | | | $ | (19) | | | $ | 102 | | | $ | (408) | | | $ | (306) | |
Increase (decrease) in net interest income | $ | 803 | | | $ | (850) | | | $ | (47) | | | $ | 1,828 | | | $ | (691) | | | $ | 1,137 | |
Provision for Loan Losses
The provision for loan losses is a charge to income necessary to maintain the allowance for loan losses at a level considered appropriate by management. Factors impacting the provision include loan portfolio growth, changes in the quality and composition of the loan portfolio, the level of nonperforming loans, delinquency and charge-off trends, and current economic conditions.
The table below presents, for the periods indicated, the provision for loan losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
(dollars in thousands) | March 31, 2022 | | December 31, 2021 | | Increase (Decrease) | | | | | | |
Provision for loan losses | $ | 150 | | | $ | 150 | | | $ | — | | | — | % | | | | | | | | |
The provision for loan losses for the first quarter of 2022 was $150,000, which was consistent with the prior quarter provision. The economic activity in Louisiana remained relatively consistent, and our asset quality metrics remained favorable for the quarter. We will continue to evaluate future provision needs in relation to loan growth and trends in asset quality.
The table below presents, for the periods indicated, the provision for loan losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
(dollars in thousands) | March 31, 2022 | | March 31, 2021 | | Increase (Decrease) | | | | | | |
Provision for loan losses | $ | 150 | | | $ | 1,450 | | | $ | (1,300) | | | (89.7) | % | | | | | | | | |
The provision for loan losses for the three months ended March 31, 2022 was $150,000, a decrease of $1.3 million, or 89.7%, from $1.5 million for the three months ended March 31, 2021. The decrease in provision expense for 2022 was attributed to continued, favorable asset quality metrics. The higher provision for loan losses in the same period of 2021 was due to the anticipated adverse effects of the COVID-19 pandemic.
Noninterest Income
Our primary sources of noninterest income are fees related to the sale of mortgage loans, service charges on deposit accounts, debit card fees, brokerage income from advisory services, and other loan and deposit fees.
First Quarter of 2022 vs. Fourth Quarter of 2021
Noninterest income decreased $1.3 million to $4.4 million for the first quarter of 2022, compared to $5.7 million for the fourth quarter of 2021. The decrease in noninterest income was primarily due to lower mortgage loan income, a loss on equity securities, lower other income, and lower net debit card income.
The table below presents, for the periods indicated, the major categories of noninterest income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
(dollars in thousands) | March 31, 2022 | | December 31, 2021 | | Increase (Decrease) | | | | | | |
Noninterest income: | | | | | | | | | | | | | | | |
Service charges on deposit accounts | $ | 1,308 | | | $ | 1,318 | | | $ | (10) | | | (0.8) | % | | | | | | | | |
Debit card income, net | 936 | | | 1,071 | | | (135) | | | (12.6) | % | | | | | | | | |
Mortgage loan income | 1,127 | | | 1,667 | | | (540) | | | (32.4) | % | | | | | | | | |
Brokerage income | 775 | | | 806 | | | (31) | | | (3.8) | % | | | | | | | | |
Loan and deposit income | 371 | | | 457 | | | (86) | | | (18.8) | % | | | | | | | | |
Bank-owned life insurance income | 172 | | | 175 | | | (3) | | | (1.7) | % | | | | | | | | |
Gain (Loss) on equity securities | (365) | | | (75) | | | (290) | | | (386.7) | % | | | | | | | | |
Gain (Loss) on sale and call of securities | 39 | | | 1 | | | 38 | | | 3,800.0 | % | | | | | | | | |
SBIC income | 20 | | | 38 | | | (18) | | | (47.4) | % | | | | | | | | |
Other income (loss) | 19 | | | 214 | | | (195) | | | (91.1) | % | | | | | | | | |
Total noninterest income | $ | 4,402 | | | $ | 5,672 | | | $ | (1,270) | | | (22.4) | % | | | | | | | | |
Mortgage loan income decreased $540,000 to $1.1 million for the first quarter of 2022, compared to $1.7 million for the previous quarter. This decrease was primarily driven by reduced activity due to rising home prices and higher mortgage interest rates, as well as limited housing stock available for purchase.
Equity securities are an investment in a CRA mutual fund consisting primarily of bonds. The gain or loss on equity securities is a fair value adjustment primarily driven by changes in the interest rate environment. In the first quarter of 2022, there was a significant increase in interest rates, which caused equity securities to have a fair value loss of $365,000, compared to a loss of $75,000 for the previous quarter. In April 2022, all shares invested in the mutual fund were liquidated.
Other income for the first quarter of 2022 was $19,000, compared to $214,000 for the prior quarter. Other real estate owned properties and a bank property were sold in the fourth quarter of 2021, resulting in a nonrecurring $196,000 net gain on sale.
Debit card income, net, decreased $135,000 to $936,000 for the first quarter of 2022, when compared to the prior quarter due to a seasonal decline in the number of debit card transactions.
Three Months Ended March 31, 2022 vs. Three Months Ended March 31, 2021
Noninterest income decreased $2.4 million to $4.4 million for the three months ended March 31, 2022, compared to $6.8 million for the three months ended March 31, 2021. The decrease in noninterest income was due to lower mortgage loan income, a loss on equity securities, reduced income from an SBIC limited partnership of which Red River Bank is a member, a lower gain on sale and call of securities, lower net debit card income, and lower loan and deposit income. These decreases were partially offset by increased service charges on deposit accounts.
The table below presents, for the periods indicated, the major categories of noninterest income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended |
(dollars in thousands) | | | | | | | March 31, 2022 | | March 31, 2021 | | Increase (Decrease) |
Noninterest income: | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | | | | | | | $ | 1,308 | | | $ | 1,059 | | | $ | 249 | | | 23.5 | % |
Debit card income, net | | | | | | | | | 936 | | | 1,046 | | | (110) | | | (10.5) | % |
Mortgage loan income | | | | | | | | | 1,127 | | | 2,882 | | | (1,755) | | | (60.9) | % |
Brokerage income | | | | | | | | | 775 | | | 834 | | | (59) | | | (7.1) | % |
Loan and deposit income | | | | | | | | | 371 | | | 473 | | | (102) | | | (21.6) | % |
Bank-owned life insurance income | | | | | | | | | 172 | | | 133 | | | 39 | | | 29.3 | % |
Gain (Loss) on equity securities | | | | | | | | | (365) | | | (70) | | | (295) | | | (421.4) | % |
Gain (Loss) on sale and call of securities | | | | | | | | | 39 | | | 159 | | | (120) | | | (75.5) | % |
SBIC income | | | | | | | | | 20 | | | 241 | | | (221) | | | (91.7) | % |
Other income (loss) | | | | | | | | | 19 | | | 18 | | | 1 | | | 5.6 | % |
Total noninterest income | | | | | | | | | $ | 4,402 | | | $ | 6,775 | | | $ | (2,373) | | | (35.0) | % |
Mortgage loan income decreased $1.8 million to $1.1 million for the first quarter of 2022, compared to $2.9 million for the same quarter prior year due to rising mortgage interest rates and home prices, as well as limited housing stock available for purchase. The low interest rate environment in the first quarter of 2021 contributed to the high levels of mortgage lending activity for that period.
Due to a significant increase in interest rates, equity securities had a fair value loss of $365,000 for the first quarter of 2022, compared to a loss of $70,000 for the same period in 2021.
SBIC income decreased $221,000 to $20,000 for the first quarter of 2021 due to lower operating income being distributed by the SBIC in the first quarter of 2022.
The gain on the sale and call of securities was $39,000 for the first quarter of 2022 as a result of municipal securities with unaccreted balances being called. In the first quarter of 2021, the gain on the sale and call of securities was $159,000, primarily due to favorable pricing obtained from the sale of lower yielding taxable municipal securities.
Debit card income, net, decreased $110,000 to $936,000 for the first quarter of 2022, compared to the same quarter prior year. This decrease was mainly due to higher debit card expense as a result of upgrading our debit card stock in the first quarter of 2022.
Loan and deposit income decreased $102,000 to $371,000 for the first quarter of 2022, compared to the same period in 2021. The decrease was primarily related to $110,000 of nonrecurring commercial real estate loan fees in the first quarter of 2021.
Service charges on deposit accounts increased $249,000 to $1.3 million for the first quarter of 2022, compared to the first quarter of 2021. This increase was mainly due to more non-sufficient fund transactions in the first quarter of 2022.
Operating Expenses
Operating expenses are composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships, and providing services.
First Quarter of 2022 vs. Fourth Quarter of 2021
Operating expenses increased $46,000 to $14.1 million for the first quarter of 2022, compared to $14.0 million for the fourth quarter of 2021. The increase in operating expenses was mainly due to higher other taxes, technology expenses, personnel expenses, and occupancy and equipment expenses. These increases were offset by lower data processing expense and loan and deposit expenses.
The following table presents, for the periods indicated, the major categories of operating expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
(dollars in thousands) | March 31, 2022 | | December 31, 2021 | | Increase (Decrease) | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | |
Personnel expenses | $ | 8,452 | | | $ | 8,362 | | | $ | 90 | | | 1.1 | % | | | | | | | | |
Non-staff expenses: | | | | | | | | | | | | | | | |
Occupancy and equipment expenses | 1,492 | | | 1,424 | | | 68 | | | 4.8 | % | | | | | | | | |
Technology expenses | 771 | | | 667 | | | 104 | | | 15.6 | % | | | | | | | | |
Advertising | 219 | | | 230 | | | (11) | | | (4.8) | % | | | | | | | | |
Other business development expenses | 303 | | | 280 | | | 23 | | | 8.2 | % | | | | | | | | |
Data processing expense | 316 | | | 537 | | | (221) | | | (41.2) | % | | | | | | | | |
Other taxes | 636 | | | 498 | | | 138 | | | 27.7 | % | | | | | | | | |
Loan and deposit expenses | 130 | | | 243 | | | (113) | | | (46.5) | % | | | | | | | | |
Legal and professional expenses | 418 | | | 493 | | | (75) | | | (15.2) | % | | | | | | | | |
Regulatory assessment expenses | 250 | | | 268 | | | (18) | | | (6.7) | % | | | | | | | | |
Other operating expenses | 1,075 | | | 1,014 | | | 61 | | | 6.0 | % | | | | | | | | |
Total operating expenses | $ | 14,062 | | | $ | 14,016 | | | $ | 46 | | | 0.3 | % | | | | | | | | |
Other taxes increased $138,000 to $636,000 for the first quarter of 2022, compared to the prior quarter. This increase was due to an increase in State of Louisiana bank stock tax resulting from higher deposit account balances and higher net income for the applicable tax years.
Technology expenses increased $104,000 to $771,000 for the first quarter of 2022, compared to the prior quarter. This increase was primarily due to $59,000 of nonrecurring computer hardware and software expenses related to opening new locations in our expansion markets.
Personnel expenses are the largest component of operating expenses and include payroll expenses, incentive compensation, benefit plans, health insurance, and payroll taxes. Personnel expenses increased $90,000 to $8.5 million for the first quarter of 2022, compared to the prior quarter. This increase was primarily due to having a full quarter of expenses for new staff added in the fourth quarter of 2021 in our expansion markets, partially offset by lower commission compensation related to lower mortgage loan activity. As of March 31, 2022 and December 31, 2021, we had 355 and 358 total employees, respectively.
Occupancy and equipment expenses increased $68,000 to $1.5 million for the first quarter of 2022, compared to the prior quarter. This increase was primarily due to $124,000 of nonrecurring expenses in the first quarter of 2022 related to opening new locations in our expansion markets, partially offset by lower facility maintenance and repair expenses.
Data processing expense decreased $221,000 to $316,000 for the first quarter of 2022, compared to the prior quarter. This decrease was primarily attributed to receipt of a $230,000 periodic refund from our data processing center in the first quarter of 2022.
Loan and deposit expenses decreased $113,000 to $130,000 for the first quarter of 2022, compared to the prior quarter. This decrease was primarily due to receipt of a $122,000 negotiated, variable rebate from a vendor in the first quarter of 2022.
Three Months Ended March 31, 2022 vs. Three Months Ended March 31, 2021
Operating expenses increased $899,000 to $14.1 million for the three months ended March 31, 2022, compared to $13.2 million for the three months ended March 31, 2021. The increase in operating expenses was mainly due to higher personnel expenses, occupancy and equipment expenses, other taxes, and technology expenses. These increases were partially offset by lower loan and deposit expenses.
The following table presents, for the periods indicated, the major categories of operating expenses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
(dollars in thousands) | March 31, 2022 | | March 31, 2021 | | Increase (Decrease) | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | |
Personnel expenses | $ | 8,452 | | | $ | 8,021 | | | $ | 431 | | | 5.4 | % | | | | | | | | |
Non-staff expenses: | | | | | | | | | | | | | | | |
Occupancy and equipment expenses | 1,492 | | | 1,278 | | | 214 | | | 16.7 | % | | | | | | | | |
Technology expenses | 771 | | | 665 | | | 106 | | | 15.9 | % | | | | | | | | |
Advertising | 219 | | | 183 | | | 36 | | | 19.7 | % | | | | | | | | |
Other business development expenses | 303 | | | 299 | | | 4 | | | 1.3 | % | | | | | | | | |
Data processing expense | 316 | | | 385 | | | (69) | | | (17.9) | % | | | | | | | | |
Other taxes | 636 | | | 525 | | | 111 | | | 21.1 | % | | | | | | | | |
Loan and deposit expenses | 130 | | | 255 | | | (125) | | | (49.0) | % | | | | | | | | |
Legal and professional expenses | 418 | | | 368 | | | 50 | | | 13.6 | % | | | | | | | | |
Regulatory assessment expenses | 250 | | | 201 | | | 49 | | | 24.4 | % | | | | | | | | |
Other operating expenses | 1,075 | | | 983 | | | 92 | | | 9.4 | % | | | | | | | | |
Total operating expenses | $ | 14,062 | | | $ | 13,163 | | | $ | 899 | | | 6.8 | % | | | | | | | | |
Personnel expenses increased $431,000 to $8.5 million for the first quarter of 2022, compared to the same quarter prior year. As of March 31, 2022 and 2021, we had 355 and 336 total employees, respectively. Personnel expenses, and the number of employees, increased primarily as a result of expansion in our newer markets. Partially offsetting this increase was lower commission compensation related to lower mortgage loan activity when compared to the same quarter prior year.
Occupancy and equipment expenses increased $214,000 to $1.5 million for the first quarter of 2022, compared to the same quarter prior year. This increase was primarily due to $124,000 of nonrecurring expenses in the first quarter of 2022 related to opening new locations in our expansion markets.
Other taxes increased $111,000 to $636,000 for the first quarter of 2022, compared to the same quarter prior year. This increase was due to a $112,000 increase in State of Louisiana bank stock tax resulting from higher deposit account balances and higher net income for the applicable tax years.
Technology expenses increased $106,000 to $771,000 for the first quarter of 2022, compared to the same quarter prior year. This increase was mainly due to $59,000 of nonrecurring computer hardware and software expenses in the first quarter of 2022 related to opening new locations in our expansion markets.
Loan and deposit expenses decreased $125,000 to $130,000 for the first quarter of 2022, compared to the same quarter prior year. This decrease was primarily due to receipt of a $122,000 negotiated, variable rebate from a vendor in the first quarter of 2022.
Income Tax Expense
The amount of income tax expense is influenced by the amount of our pre-tax income, tax-exempt income, and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Our effective income tax rates have differed from the U.S. statutory rate due to the effect of tax-exempt income from loans, securities, life insurance policies, and the income tax effects associated with stock-based compensation.
The table below presents, for the periods indicated, income tax expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
(dollars in thousands) | March 31, 2022 | | December 31, 2021 | | Increase (Decrease) | | | | | | |
Income tax expense | $ | 1,526 | | | $ | 1,771 | | | $ | (245) | | | (13.8) | % | | | | | | | | |
For the quarters ended March 31, 2022 and December 31, 2021, income tax expense totaled $1.5 million and $1.8 million, respectively. The decrease in income tax expense was primarily due to the decrease in pre-tax income. Our effective
income tax rates for each of the quarters ended March 31, 2022 and December 31, 2021, were 17.1% and 17.2%, respectively.
The table below presents, for the periods indicated, income tax expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
(dollars in thousands) | March 31, 2022 | | March 31, 2021 | | Increase (Decrease) | | | | | | |
Income tax expense | $ | 1,526 | | | $ | 1,688 | | | $ | (162) | | | (9.6) | % | | | | | | | | |
For the three months ended March 31, 2022 and 2021, income tax expense totaled $1.5 million and $1.7 million, respectively. The decrease in income tax expense was primarily due to the decrease in pre-tax income. Our effective income tax rates for the three months ended March 31, 2022 and 2021, were 17.1% and 17.3%, respectively.
FINANCIAL CONDITION
General
As of March 31, 2022, assets were $3.21 billion, which was $12.3 million, or 0.4%, lower than assets of $3.22 billion as of December 31, 2021. During the first quarter of 2022, we deployed short-term liquid assets into the securities AFS portfolio and had non-PPP loan growth. Interest-bearing deposits in other banks decreased $254.7 million, or 33.4%, to $507.0 million and were 15.8% of assets as of March 31, 2022. Securities AFS increased $151.6 million, or 23.0%, to $810.8 million during the first quarter and were 25.2% of assets as of March 31, 2022. Partially offsetting the increase in the securities AFS portfolio was a $50.7 million net unrealized loss during the first quarter due to the change in market interest rates. The net unrealized loss on securities AFS was $55.5 million as of March 31, 2022, compared to $4.8 million as of December 31, 2021. Loans HFI increased $57.2 million, or 3.4%, which included a $68.3 million, or 4.1%, increase in non-PPP loans compared to the prior quarter. As of March 31, 2022, the loans HFI to deposits ratio was 59.47%, compared to 57.86% as of December 31, 2021, and the noninterest-bearing deposits to total deposits ratio was 40.34%, compared to 39.50% as of December 31, 2021. Stockholders’ equity decreased $33.3 million in the first quarter of 2022 to $264.9 million as of March 31, 2022.
Interest-bearing Deposits in Other Banks
Interest-bearing deposits in other banks are the third-largest component of earning assets. Excess liquidity that is not being deployed into loans or securities is placed in these accounts. Starting during the COVID-19 pandemic, which began in the first quarter of 2020, interest-bearing deposits in other banks had become the second-largest component of earning assets as deposit growth exceeded loan growth. Since December 31, 2021, we have deployed excess liquidity into loans and securities AFS. As of March 31, 2022, interest-bearing deposits in other banks were $507.0 million and were 15.8% of assets, a decrease of $254.7 million, or 33.4%, compared to $761.7 million and 23.6% of assets as of December 31, 2021.
Securities
Our securities portfolio is the second-largest component of earning assets and provides a significant source of revenue. As of March 31, 2022, our securities portfolio was 25.5% of assets. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring unnecessary interest rate and credit risk, and complement our lending activities. We may invest in various types of liquid assets that are permissible under governing regulations and approved by our investment policy, which include U.S. Treasury obligations, U.S. government agency obligations, certificates of deposit of insured domestic banks, mortgage-backed and mortgage-related securities, corporate notes having an investment rating of “A” or better, municipal bonds, and certain equity securities.
Securities AFS
Securities AFS were $810.8 million as of March 31, 2022, an increase of $151.6 million, or 23.0%, from $659.2 million as of December 31, 2021. Investment activity for the three months ended March 31, 2022, included $232.7 million of securities purchased and $29.8 million in maturities, principal repayments, and calls. The net unrealized loss of the securities AFS portfolio was $55.5 million as of March 31, 2022, compared to $4.8 million as of December 31, 2021.
Of the $232.7 million of securities AFS purchased during the three months ended March 31, 2022, $130.3 million were mortgage-backed securities, $89.8 million were U.S. Treasuries, and $12.6 million were municipal securities. The U.S. Treasuries purchased had a yield of 1.51% and an average life of 2.04 years. The mortgage-backed securities had a yield of 1.72% and an average life of 3.68 years, and the municipal securities had a yield of 2.61% and an average life of 14.43 years. The overall price risk of the portfolio decreased 50 bps, compared to December 31, 2021, primarily due to the short-term U.S. Treasury securities purchased in the first quarter of 2022.
During the three months ended March 31, 2022, we reallocated $193.1 million from overnight funds yielding 0.17% to securities AFS yielding 1.66%. We expect this reallocation to improve future interest income by moving these funds from
overnight funds to a higher-yielding investment. In addition, $39.6 million of securities yielding 1.86% were purchased as we reinvested cash flows from the securities portfolio.
The securities AFS portfolio tax-equivalent yield was 1.68% for the three months ended March 31, 2022, compared to 1.76% for the three months ended March 31, 2021. The decrease in yield for the three months ended March 31, 2022, compared to the same period for 2021, was due to purchasing a significant amount of securities over the past 12 months with lower yields than the portfolio yield as of March 31, 2021.
The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected lives because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay. Monthly pay downs on mortgage-backed securities may cause the average lives of the securities to be much different than the stated contractual maturity. During a period of rising interest rates, fixed rate mortgage-backed securities are not likely to experience heavy prepayments of principal, and consequently, the average lives of these securities are typically lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated average lives of these securities. As of March 31, 2022, the average life of our securities portfolio was 6.5 years with an estimated effective duration of 5.6 years. As of December 31, 2021, the average life of our securities portfolio was 4.9 years with an estimated effective duration of 4.1 years. Both the average life and the effective duration increased due to the increase in market rates during the first quarter of 2022 and the impact this had on mortgage-backed securities.
The carrying values of our securities AFS are adjusted for unrealized gain or loss, and any unrealized gain or loss is reported on an after-tax basis as a component of AOCI in stockholders’ equity. As of March 31, 2022, the net unrealized loss of the securities AFS portfolio was $55.5 million, an increase of $50.7 million, compared to a net unrealized loss of $4.8 million as of December 31, 2021. This change is attributed to a significant increase in market rates, which resulted in lower prices on securities and therefore, an overall lower market value of the portfolio.
The following tables summarize the amortized cost and estimated fair value of our securities by type as of the dates indicated. As of March 31, 2022, other than securities issued by U.S. government agencies or government-sponsored enterprises, our securities portfolio did not contain securities of any one issuer with an aggregate book value in excess of 10.0% of our stockholders’ equity.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
(in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities AFS: | | | | | | | |
Mortgage-backed securities | $ | 496,302 | | | $ | 7 | | | $ | (34,821) | | | $ | 461,488 | |
Municipal bonds | 231,198 | | | 237 | | | (18,165) | | | 213,270 | |
U.S. Treasury securities | 131,508 | | | — | | | (2,385) | | | 129,123 | |
U.S. agency securities | 7,263 | | | — | | | (340) | | | 6,923 | |
Total Securities AFS | $ | 866,271 | | | $ | 244 | | | $ | (55,711) | | | $ | 810,804 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities AFS: | | | | | | | |
Mortgage-backed securities | $ | 386,874 | | | $ | 1,112 | | | $ | (8,460) | | | $ | 379,526 | |
Municipal bonds | 227,248 | | | 3,665 | | | (942) | | | 229,971 | |
U.S. Treasury securities | 41,770 | | | — | | | (154) | | | 41,616 | |
U.S. agency securities | 8,062 | | | 61 | | | (58) | | | 8,065 | |
Total Securities AFS | $ | 663,954 | | | $ | 4,838 | | | $ | (9,614) | | | $ | 659,178 | |
| | | | | | | |
| | | | | | | |
The following table shows the fair value of securities AFS that mature during each of the periods indicated. The contractual maturity of a mortgage-backed security is the date the last underlying mortgage matures. Yields are weighted-average tax equivalent yields that are calculated by dividing projected annual income by the average amortized cost of the applicable securities while using a 21.0% federal income tax rate, when applicable.
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| Contractual Maturity as of March 31, 2022 |
| Within One Year | | After One Year but Within Five Years | | After Five Years but Within Ten Years | | After Ten Years | | Total |
(dollars in thousands) | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) | | Amount | | Yield(1) |
Securities AFS: | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | $ | 130 | | | 1.31 | % | | $ | 806 | | | 1.74 | % | | $ | 65,037 | | | 1.45 | % | | $ | 395,515 | | | 1.46 | % | | $ | 461,488 | | | 1.46 | % |
Municipal bonds | 6,059 | | | 1.36 | % | | 25,522 | | | 1.86 | % | | 15,049 | | | 2.71 | % | | 166,640 | | | 2.58 | % | | 213,270 | | | 2.48 | % |
U.S. Treasury securities | 3,999 | | | 1.11 | % | | 125,124 | | | 1.25 | % | | — | | | — | % | | — | | | — | % | | 129,123 | | | 1.25 | % |
U.S. agency securities | 193 | | | 2.09 | % | | 3,987 | | | 1.62 | % | | 2,743 | | | 1.31 | % | | — | | | — | % | | 6,923 | | | 1.51 | % |
Total Securities AFS | $ | 10,381 | | | 1.28 | % | | $ | 155,439 | | | 1.36 | % | | $ | 82,829 | | | 1.67 | % | | $ | 562,155 | | | 1.80 | % | | $ | 810,804 | | | 1.70 | % |
(1)Tax equivalent projected book yield as of March 31, 2022. During the second quarter of 2022, the Company decided to reclassify a selected portion of the securities portfolio from AFS to HTM. For additional information, see “Part I. Financial Information - Item. 1 Financial Statements (Unaudited) - Notes to Unaudited Consolidated Financial Statements - Note 10. Subsequent Events.”
Equity Securities
Equity securities are an investment in a CRA mutual fund, consisting primarily of bonds. Equity securities are carried at fair value on the consolidated balance sheets with periodic changes in value recorded through the consolidated statements of income. The fair value of our equity securities was $7.5 million as of March 31, 2022, with a recognized loss of $365,000 for the three months ended March 31, 2022, compared to a fair value of $7.8 million as of December 31, 2021, with a recognized loss of $175,000 for the year ended December 31, 2021. The loss on equity securities in the first quarter of 2022 was due to a significant increase in interest rates. In April 2022, all shares invested in the mutual fund were liquidated.
Loan Portfolio
Our loan portfolio is our largest category of earning assets, and interest income earned on our loan portfolio is our primary source of income. We maintain a diversified loan portfolio with a focus on commercial real estate, one-to-four family residential, and commercial and industrial loans. As of March 31, 2022, loans HFI were $1.74 billion, an increase of $57.2 million, or 3.4%, compared to $1.68 billion as of December 31, 2021.
Red River Bank began participating in the SBA PPP in the second quarter of 2020. Through March 31, 2022, we had received SBA forgiveness and borrower payments on 97.5% of the PPP loans originated. As of March 31, 2022, PPP loans totaled $6.4 million, net of $169,000 of deferred income, and were 0.4% of loans HFI.
As of March 31, 2022, non-PPP loans HFI (non-GAAP) were $1.73 billion, an increase of $68.3 million, or 4.1%, from December 31, 2021, due to new customer activity associated with new lenders in our expansion markets and increased loan activity in various legacy markets. For calculations and reconciliations to GAAP of non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
Loans by Category
Loans HFI by category, non-PPP loans HFI (non-GAAP), and loans HFS are summarized below as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | | | | | |
(dollars in thousands) | Amount | | Percent | | Amount | | Percent | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | $ | 723,418 | | | 41.6 | % | | $ | 670,293 | | | 39.8 | % | | | | | | | | | | | | |
One-to-four family residential | 484,871 | | | 27.8 | % | | 474,420 | | | 28.2 | % | | | | | | | | | | | | |
Construction and development | 117,526 | | | 6.8 | % | | 106,339 | | | 6.3 | % | | | | | | | | | | | | |
Commercial and industrial | 303,556 | | | 17.4 | % | | 311,373 | | | 18.5 | % | | | | | | | | | | | | |
SBA PPP, net of deferred income | 6,397 | | | 0.4 | % | | 17,550 | | | 1.0 | % | | | | | | | | | | | | |
Tax-exempt | 81,000 | | | 4.6 | % | | 80,726 | | | 4.8 | % | | | | | | | | | | | | |
Consumer | 24,258 | | | 1.4 | % | | 23,131 | | | 1.4 | % | | | | | | | | | | | | |
Total loans HFI | $ | 1,741,026 | | | 100.0 | % | | $ | 1,683,832 | | | 100.0 | % | | | | | | | | | | | | |
Total non-PPP loans HFI (non-GAAP)(1) | $ | 1,734,629 | | | | | $ | 1,666,282 | | | | | | | | | | | | | | | |
Total loans HFS | $ | 6,641 | | | | | $ | 4,290 | | | | | | | | | | | | | | | |
(1)Non-GAAP financial measure. Calculations of this measure and reconciliations to GAAP are included in “ - Non-GAAP Financial Measures” in this Report.
Industry Concentrations
Health care loans are our largest loan industry concentration and are made up of a diversified portfolio of health care providers. As of March 31, 2022, health care loans were $155.5 million, or 9.0% of non-PPP loans HFI (non-GAAP), compared to $138.1 million, or 8.3% of non-PPP loans HFI (non-GAAP) as of December 31, 2021. The average health care loan size was $337,000 as of March 31, 2022, and $295,000 as of December 31, 2021. Within the health care sector, nursing and residential care loans were 4.7% of non-PPP loans HFI (non-GAAP) as of March 31, 2022, and 3.6% as of December 31, 2021. Loans to physician and dental practices were 4.2% of non-PPP loans HFI (non-GAAP) as of March 31, 2022, and 4.6% as of December 31, 2021.
Energy loans were 1.2% of non-PPP loans HFI (non-GAAP) as of March 31, 2022, and December 31, 2021. For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
Geographic Markets
As of March 31, 2022, Red River Bank operates in seven geographic markets throughout the state of Louisiana. We entered the Acadiana market in the fourth quarter of 2020 and the New Orleans market in the fourth quarter of 2021. The following table summarizes non-PPP loans HFI (non-GAAP) by market of origin:
| | | | | | | | | | | | | | |
| March 31, 2022 | |
(dollars in thousands) | Amount | | Percent of Non-PPP Loans HFI (non-GAAP) | |
Central | $ | 613,274 | | | 35.4 | % | |
Capital | 478,255 | | | 27.6 | % | |
Northwest | 352,512 | | | 20.3 | % | |
Southwest | 119,254 | | | 6.9 | % | |
Northshore | 97,528 | | | 5.6 | % | |
New Orleans | 37,214 | | | 2.1 | % | |
Acadiana | 36,592 | | | 2.1 | % | |
Total non-PPP loans HFI | $ | 1,734,629 | | | 100.0 | % | |
For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
LIBOR
In July 2017, the United Kingdom Financial Conduct Authority, the authority that regulates LIBOR, announced its intent to stop compelling banks to submit rates for the calculation of LIBOR after 2021. Subsequently, on March 5, 2021, it was announced that certain U.S. Dollar LIBOR rates would cease to be published after June 30, 2023. As of March 31, 2022, 3.0% of our non-PPP loans HFI (non-GAAP) were LIBOR-based with a setting that expires June 30, 2023. Alternative rate language is present in each credit agreement with a LIBOR-based rate. We do not anticipate any issue with transitioning
each loan to a non-LIBOR-based rate. For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
Nonperforming Assets
NPAs consist of nonperforming loans and property acquired through foreclosures or repossession. Nonperforming loans include loans that are contractually past due 90 days or more and loans that are on nonaccrual status. Loans are considered past due when principal and interest payments have not been received as of the date such payments are due.
Asset quality is managed through disciplined underwriting policies, continual monitoring of loan performance, and focused management of NPAs. There can be no assurance, however, that the loan portfolio will not become subject to losses due to declines in economic conditions, deterioration in the financial condition of our borrowers, or a decline in the value of collateral.
NPAs totaled $973,000 as of March 31, 2022, down $6,000, or 0.6%, from $979,000 as of December 31, 2021, primarily due to payments on nonaccrual loans. The ratio of NPAs to total assets was 0.03% as of March 31, 2022 and December 31, 2021.
Nonperforming loan and asset information is summarized below:
| | | | | | | | | | | |
(dollars in thousands) | March 31, 2022 | | December 31, 2021 |
Nonperforming loans: | | | |
Nonaccrual loans | $ | 269 | | | $ | 280 | |
Accruing loans 90 or more days past due | 44 | | | 39 | |
Total nonperforming loans | 313 | | | 319 | |
Foreclosed assets: | | | |
Real estate | 660 | | | 660 | |
| | | |
Total foreclosed assets | 660 | | | 660 | |
Total NPAs | $ | 973 | | | $ | 979 | |
| | | |
Troubled debt restructurings:(1,2) | | | |
Nonaccrual loans | $ | — | | | $ | — | |
| | | |
Performing loans | 3,900 | | | 3,944 | |
Total TDRs | $ | 3,900 | | | $ | 3,944 | |
| | | |
Nonaccrual loans to loans HFI | 0.02% | | | 0.02% | |
Nonperforming loans to loans HFI(1) | 0.02 | % | | 0.02 | % |
Nonperforming loans to non-PPP loans HFI (non-GAAP)(1,3) | 0.02 | % | | 0.02 | % |
NPAs to total assets | 0.03 | % | | 0.03 | % |
(1)Troubled debt restructurings – nonaccrual and accruing loans 90 or more days past due are included in the respective components of nonperforming loans.
(2)In accordance with interagency regulatory guidance issued in March 2020, and revised in April 2020, COVID-19 pandemic-related short-term deferrals are not deemed to be TDRs to the extent they meet the terms of such guidance.
(3)Non-GAAP financial measure. For calculations and reconciliations to GAAP of non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
Nonaccrual loans are summarized below by category:
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Real estate: | | | |
Commercial real estate | $ | 48 | | | $ | 51 | |
One-to-four family residential | 209 | | | 216 | |
Construction and development | — | | | — | |
Commercial and industrial | 12 | | | 13 | |
SBA PPP, net of deferred income | — | | | — | |
Tax-exempt | — | | | — | |
Consumer | — | | | — | |
Total nonaccrual loans | $ | 269 | | | $ | 280 | |
Potential Problem Loans
From a credit risk standpoint, we classify loans in one of five categories: pass, special mention, substandard, doubtful, or loss. Loan classifications reflect a judgment about the risk of default and loss associated with the loans. Classifications are reviewed periodically and adjusted to reflect the degree of risk and loss believed to be inherent in each loan. The methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Loans classified as pass are of satisfactory quality and do not require a more severe classification.
Loans classified as special mention have potential weaknesses that deserve management’s close attention. If these weaknesses are not corrected, repayment possibilities for the loan may deteriorate. However, the loss potential does not warrant substandard classification.
Loans classified as substandard have well-defined weaknesses that jeopardize normal repayment of principal and interest. Prompt corrective action is required to reduce exposure and to assure adequate remedial actions are taken by the borrower. If these weaknesses do not improve, loss is possible.
Loans classified as doubtful have well-defined weaknesses that make full collection improbable.
Loans classified as loss are considered uncollectible and charged-off to the allowance for loan losses.
As of March 31, 2022, loans classified as pass were 99.4% of loans HFI, and loans classified as special mention and substandard were 0.2% and 0.4%, respectively, of loans HFI. There were no loans as of March 31, 2022, classified as doubtful or loss. As of December 31, 2021, loans classified as pass were 99.5% of loans HFI, and loans classified as special mention and substandard were 0.1% and 0.4%, respectively, of loans HFI. There were no loans as of December 31, 2021, classified as doubtful or loss.
Allowance for Loan Losses
The allowance for loan losses is established for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date. It is maintained at a level estimated to be adequate to absorb potential losses through periodic changes to loan losses.
In connection with the review of the loan portfolio, risk elements attributable to particular loan types or categories are considered in assessing the quality of individual loans. Some of the risk elements considered include:
• for commercial real estate loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements); operating results of the owner in the case of owner occupied properties; the loan-to-value ratio; the age and condition of the collateral; and the volatility of income, property value, and future operating results typical of properties of that type;
• for one-to-four family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability; the loan-to-value ratio; and the age, condition, and marketability of the collateral;
• for construction and development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease; the quality and nature of contracts for presale or prelease, if any; experience and ability of the developer; and the loan-to-value ratio; and
• for commercial and industrial loans, the debt service coverage ratio; the operating results of the commercial, industrial, or professional enterprise; the borrower’s business, professional, and financial ability and expertise; the specific risks and volatility of income and operating results typical for businesses in that category; the value, nature, and marketability of collateral; and the financial resources of the guarantor(s), if any.
As an SEC registrant with smaller reporting company filing status as determined on June 30, 2019, CECL is effective for us on January 1, 2023. When effective, the CECL allowance model, prescribed by ASU No. 2016-13, will require measurement of expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts. This model will replace the existing incurred loss model. Refer to “Item 1. Financial Statements - Note 1 - Summary of Significant Accounting Policies - Recent Accounting Pronouncements” in this Report for more information on ASU No. 2016-13.
As of March 31, 2022, the allowance for loan losses was $19.2 million, or 1.11% of both loans HFI and non-PPP loans HFI (non-GAAP). As of December 31, 2021, the allowance for loan losses totaled $19.2 million, or 1.14% of loans HFI, and 1.15% of non-PPP loans HFI (non-GAAP). The $68,000 increase in the allowance for loan losses for the three months ended March 31, 2022, was mainly due to $150,000 from the provision for loan losses, partially offset by $82,000 of net
charge-offs. For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
The provision for loan losses for the three months ended March 31, 2022, was $150,000, a decrease of $1.3 million, or 89.7%, from $1.5 million for the three months ended March 31, 2021. The decrease in provision for loan losses for 2022 was attributed to continued, favorable asset quality metrics. The higher provision for loan losses in the same period of 2021 was due to the anticipated adverse effects of the COVID-19 pandemic. We will continue to evaluate future provision needs in relation to loan growth and trends in asset quality.
The following table displays activity in the allowance for loan losses for the periods shown:
| | | | | | | | | | | | | |
| As of and For the Three Months Ended |
(dollars in thousands) | March 31, 2022 | | | | March 31, 2021 |
Loans HFI | $ | 1,741,026 | | | | | $ | 1,602,086 | |
Non-PPP Loans HFI (non-GAAP)(1) | $ | 1,734,629 | | | | | $ | 1,482,728 | |
Nonaccrual loans | $ | 269 | | | | | $ | 2,805 | |
Average loans | $ | 1,690,445 | | | | | $ | 1,594,796 | |
| | | | | |
Allowance for loan losses at beginning of period | $ | 19,176 | | | | | $ | 17,951 | |
Provision for loan losses | 150 | | | | | 1,450 | |
Charge-offs: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Commercial and industrial | (6) | | | | | (7) | |
Consumer | (123) | | | | | (88) | |
Total charge-offs | (129) | | | | | (95) | |
Recoveries: | | | | | |
Real estate: | | | | | |
One-to-four family residential | 3 | | | | | 3 | |
Construction and development | — | | | | | 1 | |
Commercial and industrial | 4 | | | | | 10 | |
Consumer | 40 | | | | | 57 | |
Total recoveries | 47 | | | | | 71 | |
Net (charge-offs)/recoveries | (82) | | | | | (24) | |
Allowance for loan losses at end of period | $ | 19,244 | | | | | $ | 19,377 | |
| | | | | |
Allowance for loan losses to loans HFI | 1.11 | % | | | | 1.21 | % |
Allowance for loan losses to non-PPP loans HFI (non-GAAP)(1) | 1.11 | % | | | | 1.31 | % |
Allowance for loan losses to nonaccrual loans | 7,153.90% | | | | | 690.80% | |
Net charge-offs to average loans | 0.00 | % | | | | 0.00 | % |
(1)Non-GAAP financial measure. Calculations of this measure and reconciliations to GAAP are included in “ - Non-GAAP Financial Measures” in this Report.
We believe the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above. Future provisions for loan losses are subject to ongoing evaluations of the factors and loan portfolio risks described above, including economic pressures related to the COVID-19 pandemic, inflation, labor market and supply chain constraints, and natural disasters affecting the state of Louisiana. A decline in market area economic conditions, deterioration of asset quality, or growth in portfolio size could cause the allowance to become inadequate, and material additional provisions for loan losses could be required.
Deposits
Deposits are the primary funding source for loans and investments. We offer a variety of deposit products designed to attract and retain consumer, commercial, and public entity customers. These products consist of noninterest and interest-bearing checking accounts, savings accounts, money market accounts, and time deposit accounts. Deposits are gathered
from individuals, partnerships, corporations, and public entities located primarily in our market areas. We do not have any internet-sourced or brokered deposits.
Total deposits increased $17.4 million, or 0.6%, to $2.93 billion as of March 31, 2022, from $2.91 billion as of December 31, 2021. This increase was primarily a result of customers maintaining higher deposit balances, partially offset by the normal seasonal drawdowns as public entity customers distributed their year-end funds to other organizations. Noninterest-bearing deposits increased by $31.5 million, or 2.7%, to $1.18 billion as of March 31, 2022. Noninterest-bearing deposits as a percentage of total deposits were 40.34% as of March 31, 2022, compared to 39.50% as of December 31, 2021. Interest-bearing deposits decreased by $14.1 million, or 0.8%, to $1.75 billion as of March 31, 2022.
The following table presents our deposits by account type as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | Change from December 31, 2021 to March 31, 2022 |
(dollars in thousands) | Balance | | % of Total | | Balance | | % of Total | | $ Change | | % Change |
Noninterest-bearing deposits | $ | 1,181,136 | | | 40.3 | % | | $ | 1,149,672 | | | 39.5 | % | | $ | 31,464 | | | 2.7 | % |
Interest-bearing deposits: | | | | | | | | | | | |
NOW accounts | 466,019 | | | 15.9 | % | | 503,383 | | | 17.3 | % | | (37,364) | | | (7.4) | % |
Money market accounts | 747,397 | | | 25.5 | % | | 733,044 | | | 25.2 | % | | 14,353 | | | 2.0 | % |
Savings accounts | 200,342 | | | 6.9 | % | | 191,076 | | | 6.5 | % | | 9,266 | | | 4.8 | % |
Time deposits less than or equal to $250,000 | 242,088 | | | 8.3 | % | | 243,596 | | | 8.4 | % | | (1,508) | | | (0.6) | % |
Time deposits greater than $250,000 | 90,746 | | | 3.1 | % | | 89,577 | | | 3.1 | % | | 1,169 | | | 1.3 | % |
Total interest-bearing deposits | 1,746,592 | | | 59.7 | % | | 1,760,676 | | | 60.5 | % | | (14,084) | | | (0.8) | % |
Total deposits | $ | 2,927,728 | | | 100.0 | % | | $ | 2,910,348 | | | 100.0 | % | | $ | 17,380 | | | 0.6 | % |
The following table presents deposits by customer type as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | Change from December 31, 2021 to March 31, 2022 |
(dollars in thousands) | Balance | | % of Total | | Balance | | % of Total | | $ Change | | % Change |
Consumer | $ | 1,452,427 | | | 49.6 | % | | $ | 1,400,369 | | | 48.1 | % | | $ | 52,058 | | | 3.7 | % |
Commercial | 1,288,921 | | | 44.0 | % | | 1,283,992 | | | 44.1 | % | | 4,929 | | | 0.4 | % |
Public | 186,380 | | | 6.4 | % | | 225,987 | | | 7.8 | % | | (39,607) | | | (17.5) | % |
Total deposits | $ | 2,927,728 | | | 100.0 | % | | $ | 2,910,348 | | | 100.0 | % | | $ | 17,380 | | | 0.6 | % |
Our uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $1.17 billion and $1.22 billion at March 31, 2022 and December 31, 2021, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.
The following table presents the amount of time deposits, by account, that are in excess of the FDIC insurance limit (currently $250,000) by time remaining until maturity for the period indicated:
| | | | | |
(in thousands) | March 31, 2022 |
Three months or less | $ | 11,063 | |
Over three months through six months | 6,543 | |
Over six months through 12 months | 10,821 | |
Over 12 months | 10,569 | |
Total | $ | 38,996 | |
Borrowings
Although deposits are our primary source of funds, we may, from time to time, utilize borrowings as a cost-effective source of funds when such borrowings can then be invested at a positive interest rate spread for additional capacity to fund loan demand or to meet our liquidity needs. We had no outstanding borrowings as of March 31, 2022 or December 31, 2021.
Equity and Regulatory Capital Requirements
Total stockholders’ equity as of March 31, 2022, was $264.9 million, compared to $298.2 million as of December 31, 2021, a decrease of $33.3 million, or 11.2%. This decrease was attributed to a $40.0 million, net of tax, market adjustment to AOCI related to securities AFS, $502,000 in cash dividends, and the repurchase of 4,465 shares of common stock for $218,000, partially offset by $7.4 million of net income for the three months ended March 31, 2022, and $98,000 of stock compensation.
On February 4, 2022, our Board of Directors approved the renewal of the stock repurchase program that was completed in the fourth quarter of 2021 after reaching its purchase limit. The renewed repurchase program authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from February 4, 2022 through December 31, 2022. Repurchases may be made from time to time in the open market at prevailing prices and based on market conditions, or in privately negotiated transactions.
As part of the directive under the Economic Growth Act, on September 17, 2019, the FDIC and other federal bank regulatory agencies approved the CBLR framework. This optional framework became effective January 1, 2020, and is available as an alternative to the Basel III risk-based capital framework. The CBLR framework provides for a simple measure of capital adequacy for certain community banking organizations. Specifically, depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a Tier 1 leverage ratio of greater than 9.00% (subsequently temporarily reduced to 8.00% for 2020 and 8.50% for 2021 as a COVID-19 relief measure), are considered qualifying community banking organizations and are eligible to opt into the CBLR framework and replace the applicable Basel III risk-based capital requirements.
As of March 31, 2022, the Company and the Bank qualify for the CBLR framework. Management does not intend to utilize the CBLR framework.
LIQUIDITY AND ASSET-LIABILITY MANAGEMENT
Liquidity
Liquidity involves our ability to raise funds to support asset growth and potential acquisitions or to reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements, and otherwise to operate on an ongoing basis and manage unexpected events. For the three months ended March 31, 2022, and the year ended December 31, 2021, liquidity needs were primarily met by core deposits, security and loan maturities, and cash flows from amortizing security and loan portfolios. While maturities and scheduled amortization of loans are predictable sources of funds, deposit outflows, mortgage prepayments, and prepayments on amortizing securities are greatly influenced by market interest rates, economic conditions, and the competitive environment in which we operate, and therefore, these cash flows are monitored regularly.
Our most liquid assets are cash and short-term investments that include both interest-earning demand deposits and securities AFS. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Access to purchased funds from correspondent banks and overnight advances from the FHLB and the Federal Reserve Bank of Atlanta are also available. Purchased funds from correspondent banks and overnight advances can be utilized to meet funding obligations, although we do not generally rely on these external funding sources.
Our primary source of funds is deposits, and our primary use of funds is the funding of loans. We invest excess deposits in interest-earning deposits at other banks or at the Federal Reserve, federal funds sold, securities, or other short-term liquid investments until the deposits are needed to fund loan growth or other obligations. Our average deposits increased $310.8 million, or 12.0%, for the three months ended March 31, 2022, compared to the average deposits for the twelve months ended December 31, 2021. The increase in average total deposits was primarily a result of customers maintaining higher deposit balances, partially offset by the normal seasonal drawdowns as public entity customers distributed their year-end funds to other organizations. Our average total loans increased $68.8 million, or 4.2%, for the three months ended March 31, 2022, compared to average total loans for the twelve months ended December 31, 2021.
Our securities portfolio is an alternative source for meeting liquidity needs, and was our second-largest component of assets as of March 31, 2022. Securities generate cash flow through principal repayments, calls, and maturities, and they generally have readily available markets that allow for their conversion to cash. As of March 31, 2022, securities AFS totaled $810.8 million, or 25.2% of assets, compared to $659.2 million, or 20.4% of assets as of December 31, 2021. However, certain investments within our securities portfolio are also used to secure specific deposit types, such as for public entities, which impacts their liquidity. As of March 31, 2022, securities with a carrying value of $133.6 million, or 16.5% of the securities AFS portfolio, were pledged to secure public entity deposits as compared to securities with a carrying value of $118.6 million, or 18.0% of the securities AFS portfolio, similarly pledged as of December 31, 2021. This increase of $15.0 million, or 12.7%, was primarily due to an increase in several public entity deposit accounts that occurred during the first quarter of 2022. Public entity account balances generally fluctuate throughout the year. During the second quarter of 2022, the Company decided to reclassify a selected portion of the securities portfolio from AFS to HTM. For additional information, see “Part I. Financial Information - Item. 1 Financial Statements (Unaudited) - Notes to Unaudited Consolidated Financial Statements - Note 10. Subsequent Events.”
Interest-bearing deposits in other banks are our main source for meeting daily liquidity needs and were our third-largest component of assets as of March 31, 2022. Interest-bearing deposits in other banks were $507.0 million, or 15.8% of assets as of March 31, 2022, compared to $761.7 million, or 23.6% of assets as of December 31, 2021. The decrease of $254.7 million, or 33.4%, was primarily a result of deploying funds into the securities AFS portfolio and also into loans during the first quarter.
We also utilize the FHLB as needed as a viable funding source. FHLB advances may be used to meet short-term liquidity needs, particularly if the prevailing interest rate on an FHLB advance compares favorably to the rates that would be required to attract the necessary deposits. As of March 31, 2022 and December 31, 2021, our total borrowing availability from the FHLB was $789.0 million and $748.6 million, respectively. At various times, we may obtain letters of credit from the FHLB as collateral for our public entity deposits. As of March 31, 2022 and December 31, 2021, we held unfunded letters of credit in the amount of $91.8 million and $143.8 million, respectively. As of March 31, 2022 and December 31, 2021, our net borrowing capacity from the FHLB was $697.2 million and $604.8 million, respectively.
Other sources available for meeting liquidity needs include federal funds lines, repurchase agreements, and other lines of credit. We maintain four federal funds lines of credit with commercial banks that provided for the availability to borrow up to an aggregate of $95.0 million in federal funds as of March 31, 2022 and December 31, 2021. We also maintain an additional $6.0 million revolving line of credit at one of our correspondent banks. As of March 31, 2022 and December 31, 2021, we had total borrowing capacity of $101.0 million through these combined funding sources. We had no outstanding balances from either of these sources as of March 31, 2022 and December 31, 2021.
Commitments to Extend Credit
In the normal course of business, we enter into certain financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of our customers. These commitments involve elements of credit risk, interest rate risk, and liquidity risk. Some instruments may not be reflected in the accompanying consolidated financial statements until they are funded, although they expose us to varying degrees of credit risk and interest rate risk in much the same way as funded loans.
Commitments to extend credit are agreements to lend to a customer if all conditions of the commitment have been met. Commitments include revolving and nonrevolving credit lines and are primarily issued for commercial purposes. Commitments to extend credit generally have fixed expiration dates or other termination clauses. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions.
As of March 31, 2022, we had $356.4 million in unfunded loan commitments and $13.9 million in commitments associated with outstanding standby letters of credit. We have monitored the requests for extensions of credit under these lines and have not identified any requests outside of the normal course of business that appear to be attributable to COVID-19 hardships. As of December 31, 2021, we had $357.9 million in unfunded loan commitments and $12.5 million in commitments associated with outstanding standby letters of credit. As commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding commitments may not necessarily reflect the actual future cash funding requirements.
Investment Commitments
The Company is party to various investment commitments in the normal course of business. The Company’s exposure is represented by the contractual amount of these commitments.
In 2014, the Company committed to an investment into an SBIC limited partnership. As of March 31, 2022, there was a $226,000 outstanding commitment to this partnership.
In 2020, the Company committed to an additional investment into an SBIC limited partnership. As of March 31, 2022, there was a $5.0 million outstanding commitment to this partnership.
In the second quarter of 2021, the Company committed to an investment into a bank technology limited partnership. As of March 31, 2022, there was an $827,000 outstanding commitment to this partnership.
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset-liability management policies provide management with guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our rate sensitivity position within our established policy guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, other than those that have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage exposure to interest rates by structuring the balance sheet appropriately during the ordinary course of business. We have the ability to enter into interest rate swaps to mitigate interest rate risk in limited circumstances, but it is not our policy to enter into such transactions on a regular basis. We do not enter into instruments such as financial options, financial futures contracts, or forward delivery contracts for the purpose of reducing interest rate risk. We are not subject to foreign exchange risk, and our commodity price risk is immaterial, as the percentage of our agricultural loans to loans HFI was only 0.44% as of March 31, 2022.
Our exposure to interest rate risk is managed by Red River Bank’s Asset-Liability Management Committee. The committee formulates strategies based on appropriate levels of interest rate risk and monitors the results of those strategies. In determining the appropriate level of interest rate risk, the committee considers the impact on both earnings and capital given the current outlook on interest rates, regional economies, liquidity, business strategies, and other related factors.
The committee meets quarterly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and economic values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans, and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity. We employ methodologies to manage interest rate risk, which include an analysis of relationships between interest-earnings assets and interest-bearing liabilities, as well as an interest rate shock simulation model.
In conjunction with our interest rate risk management process, on a quarterly basis, we run various simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Our nonparallel rate shock model involves analysis of interest income and expense under various changes in the shape of the yield curve.
Bank policy regarding interest rate risk simulations performed by our risk model currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 10.0% for a 100 bp shift and 15.0% for a 200 bp shift. Bank policy regarding economic value at risk simulations performed by our risk model currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity for the subsequent one-year period should not decline by more than 20.0% for a 100 bp shift and 25.0% for a 200 bp shift.
The following table shows the impact of an instantaneous and parallel change in rates, at the levels indicated, and summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | As of December 31, 2021 |
| % Change in Net Interest Income | | % Change in Fair Value of Equity | | % Change in Net Interest Income | | % Change in Fair Value of Equity |
Change in Interest Rates (Bps) | | | | | | | |
+300 | 29.2 | % | | 1.8 | % | | 45.7 | % | | 16.7 | % |
+200 | 19.6 | % | | 1.8 | % | | 30.6 | % | | 13.3 | % |
+100 | 10.0 | % | | 1.4 | % | | 15.3 | % | | 8.0 | % |
Base | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
-100 | (3.3) | % | | (3.8) | % | | (0.4) | % | | (18.9) | % |
-200 | (7.6) | % | | (12.6) | % | | (2.6) | % | | (32.8) | % |
The results above, as of March 31, 2022 and December 31, 2021, demonstrate that our balance sheet is asset sensitive, which means our assets have the opportunity to reprice at a faster pace than our liabilities, over the 12-month horizon. We have also observed that, historically, our deposit interest rates have adjusted more slowly than the change in the federal funds rate. This assumption is incorporated into the risk simulation model and is generally not reflected in a gap analysis, which is the process by which we measure the repricing gap between interest rate-sensitive assets versus interest rate-sensitive liabilities.
The percentage of change in the fair value of equity in the down 200 bp scenario was back within the policy threshold as of March 31, 2022, due to the increase in market rates during the first quarter of 2022. As of December 31, 2021, the percentage of change in the fair value of equity in the down 200 bp scenario was below the policy threshold. These values
are reported at each quarterly Asset-Liability Committee meeting, along with the percentages of change in the net interest income.
The impact of our floating rate loans and floating rate transaction deposits are also reflected in the results shown in the above table. As of March 31, 2022, floating rate loans were 14.5% of the loans HFI, and floating rate transaction deposits were 4.4% of interest-bearing transaction deposits.
The assumptions incorporated into the model are inherently uncertain, and as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various management strategies and the slope of the yield curve.
NON-GAAP FINANCIAL MEASURES
Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. Certain financial measures used by management to evaluate our operating performance are discussed in this Report as supplemental non-GAAP performance measures. In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S.
Management and the board of directors review tangible book value per share, tangible common equity to tangible assets, realized book value per share, and PPP-adjusted metrics as part of managing operating performance. However, these non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner that we calculate the non-GAAP financial measures that are discussed in this Report may differ from that of other companies reporting measures with similar names. It is important to understand how such other banking organizations calculate and name their financial measures similar to the non-GAAP financial measures discussed in this Report when comparing such non-GAAP financial measures.
Tangible Assets, Tangible Equity, Tangible Book Value, and Realized Book Value
Tangible Book Value Per Share. Tangible book value per share is a non-GAAP measure commonly used by investors, financial analysts, and investment bankers to evaluate financial institutions. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. We calculate tangible book value per share as total stockholders’ equity, less intangible assets, divided by the outstanding number of shares of our common stock at the end of the relevant period. Intangible assets have the effect of increasing total book value while not increasing tangible book value. The most directly comparable GAAP financial measure for tangible book value per share is book value per share.
Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts, and investment bankers to evaluate financial institutions. We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Intangible assets have the effect of increasing both total stockholders’ equity and assets while not increasing our tangible common equity or tangible assets. We calculate tangible common equity as total stockholders’ equity less intangible assets, and we calculate tangible assets as total assets less intangible assets. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common stockholders’ equity to total assets.
As a result of previous acquisitions, we have a small amount of intangible assets. As of March 31, 2022, total intangible assets were $1.5 million, which is less than 1.0% of total assets.
Realized Book Value Per Share. Realized book value per share is a non-GAAP measure that we use to evaluate our operating performance. We believe that this measure is important because it allows us to monitor changes from period to period in book value per share exclusive of changes in AOCI. Our AOCI is impacted primarily by the unrealized gains and losses on securities AFS. These unrealized gains or losses on securities AFS are driven by market factors and may also be temporary and vary greatly from period to period. Due to the possibly temporary and greatly variable nature of these changes, we find it useful to monitor realized book value per share. We calculate realized book value per share as total stockholders’ equity, less AOCI, divided by the outstanding number of shares of our common stock at the end of the relevant period. AOCI has the effect of increasing or decreasing total book value while not increasing or decreasing realized book value. The most directly comparable GAAP financial measure for realized book value per share is book value per share.
The following table reconciles, as of the dates set forth below, stockholders’ equity to tangible common equity, and assets to tangible assets, and presents related resulting ratios.
| | | | | | | | | | | | | | | | | | | |
(dollars in thousands, except per share data) | March 31, 2022 | | December 31, 2021 | | March 31, 2021 | | |
Tangible common equity | | | | | | | |
Total stockholders’ equity | $ | 264,874 | | | $ | 298,150 | | | $ | 284,911 | | | |
Adjustments: | | | | | | | |
Intangible assets | (1,546) | | | (1,546) | | | (1,546) | | | |
Total tangible common equity (non-GAAP) | $ | 263,328 | | | $ | 296,604 | | | $ | 283,365 | | | |
Realized common equity | | | | | | | |
Total stockholders’ equity | $ | 264,874 | | | $ | 298,150 | | | $ | 284,911 | | | |
Adjustments: | | | | | | | |
Accumulated other comprehensive (income) loss | 43,819 | | | 3,773 | | | 331 | | | |
Total realized common equity (non-GAAP) | $ | 308,693 | | | $ | 301,923 | | | $ | 285,242 | | | |
Common shares outstanding | 7,176,365 | | | 7,180,155 | | | 7,306,747 | | | |
Book value per share | $ | 36.91 | | | $ | 41.52 | | | $ | 38.99 | | | |
Tangible book value per share (non-GAAP) | $ | 36.69 | | | $ | 41.31 | | | $ | 38.78 | | | |
Realized book value per share (non-GAAP) | $ | 43.02 | | | $ | 42.05 | | | $ | 39.04 | | | |
| | | | | | | |
Tangible assets | | | | | | | |
Total assets | $ | 3,212,460 | | | $ | 3,224,710 | | | $ | 2,820,672 | | | |
Adjustments: | | | | | | | |
Intangible assets | (1,546) | | | (1,546) | | | (1,546) | | | |
Total tangible assets (non-GAAP) | $ | 3,210,914 | | | $ | 3,223,164 | | | $ | 2,819,126 | | | |
Total stockholders’ equity to assets | 8.25 | % | | 9.25 | % | | 10.10 | % | | |
Tangible common equity to tangible assets (non-GAAP) | 8.20 | % | | 9.20 | % | | 10.05 | % | | |
PPP-Adjusted Metrics
In 2020 and 2021, Red River Bank participated in the SBA PPP and originated 1,888 PPP loans totaling $260.8 million. PPP loan originations were concluded in the second quarter of 2021. Through March 31, 2022, we had received $254.3 million in SBA forgiveness and borrower payments on 97.5% of the PPP loans originated. As of March 31, 2022, PPP loans totaled $6.4 million, net of $169,000 of deferred income, and were 0.4% of loans HFI.
PPP loans were implemented as a response to the COVID-19 pandemic and have characteristics that are different than the rest of our loan portfolio, including being short-term in nature (24 or 60 months or less depending on loan forgiveness timing), having a lower than market interest rate, and only being originated during specified time periods during the COVID-19 pandemic. Because of these factors, management believes that PPP-adjusted metrics provide a more accurate portrayal of certain aspects of the Company’s financial condition and performance. Accordingly, we believe it is important to investors to see certain of our metrics with PPP loans excluded. The most directly comparable GAAP financial measure for PPP-adjusted metrics is total loans HFI.
The following table reconciles, as of the dates set forth below, non-PPP loans to total loans HFI and presents certain ratios using non-PPP loans:
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(dollars in thousands) | March 31, 2022 | | December 31, 2021 | | | | March 31, 2021 |
Non-PPP loans HFI | | | | | | | |
Loans HFI | $ | 1,741,026 | | | $ | 1,683,832 | | | | | $ | 1,602,086 | |
Adjustments: | | | | | | | |
PPP loans, net | (6,397) | | | (17,550) | | | | | (119,358) | |
Non-PPP loans HFI (non-GAAP) | $ | 1,734,629 | | | $ | 1,666,282 | | | | | $ | 1,482,728 | |
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Deposits | $ | 2,927,728 | | | $ | 2,910,348 | | | | | $ | 2,515,275 | |
Allowance for loan losses | $ | 19,244 | | | $ | 19,176 | | | | | $ | 19,377 | |
Nonperforming loans | $ | 313 | | | $ | 319 | | | | | $ | 2,811 | |
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Loans HFI to deposits ratio | 59.47 | % | | 57.86 | % | | | | 63.69 | % |
Non-PPP loans HFI to deposits ratio (non-GAAP) | 59.25 | % | | 57.25 | % | | | | 58.95 | % |
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Allowance for loan losses to loans HFI | 1.11 | % | | 1.14 | % | | | | 1.21 | % |
Allowance for loan losses to non-PPP loans HFI (non-GAAP) | 1.11 | % | | 1.15 | % | | | | 1.31 | % |
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Nonperforming loans to loans HFI | 0.02 | % | | 0.02 | % | | | | 0.18 | % |
Nonperforming loans to non-PPP loans HFI | 0.02 | % | | 0.02 | % | | | | 0.19 | % |
CRITICAL ACCOUNTING ESTIMATES
There were no material changes or developments during the reporting period with respect to methodologies that we use when developing critical accounting estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
See “Item 1. Financial Statements – Note 1. Summary of Significant Accounting Policies – Recent Accounting Pronouncements.”