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 September 30, 2022, and on our results of operations for the quarters ended September 30, 2022 and June 30, 2022, and for the nine months ended September 30, 2022 and September 30, 2021.
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 28 banking centers throughout Louisiana and one combined LDPO in 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; Acadiana, which includes the Lafayette MSA; and New Orleans.
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.
THIRD QUARTER 2022 FINANCIAL AND OPERATIONAL HIGHLIGHTS
The third quarter of 2022 financial results included record-high quarterly net income for the second consecutive quarter and an improved net interest margin FTE. Our balance sheet reflects continued solid loan growth, as well as lower securities, deposits, and assets. We also continued to execute our organic expansion plan in the New Orleans market.
•Net income for the third quarter of 2022 was $10.2 million, or $1.42 diluted EPS, an increase of $1.0 million, or 11.4%, compared to $9.1 million, or $1.27 diluted EPS for the second quarter of 2022. These increases were mainly due to a $1.9 million increase in net interest income.
•For the third quarter of 2022, the return on assets was 1.30%, and the return on equity was 15.48%.
•Net interest income and net interest margin FTE increased in the third quarter of 2022, compared to the prior quarter. Net interest income for the third quarter of 2022 was $23.1 million, compared to $21.1 million for the prior quarter. Net interest margin FTE was 3.06% for the third quarter of 2022, compared to 2.75% for the prior quarter. These increases were a result of the impact of a higher interest rate environment and an improved asset mix.
•As of September 30, 2022, assets were $3.06 billion, a decrease of $61.4 million from June 30, 2022. The decrease in assets was mainly due to a $53.7 million decrease in deposits primarily due to customer deposit activity in response to the changing interest rate environment.
•Our participation in the SBA PPP is substantially complete. As of September 30, 2022, PPP loans were $1.4 million, net of $28,000 of deferred income, or 0.1% of loans HFI.
•As of September 30, 2022, loans HFI were $1.88 billion, an increase of $38.1 million, or 2.1%, from June 30, 2022. The growth in loans HFI was primarily a result of loan activity in various markets across Louisiana.
•As of September 30, 2022, total securities were $764.5 million, or 25.0% of assets, compared to $810.7 million, or 26.0% of assets, as of June 30, 2022. Securities decreased primarily due to a larger unrealized loss and principal repayments in the securities portfolio.
•NPAs were $2.7 million, or 0.09% of assets, as of September 30, 2022. As of September 30, 2022, the allowance for loan losses was $20.0 million, or 1.06% of loans HFI.
•We paid a quarterly cash dividend of $0.07 per common share in the third quarter of 2022.
•We did not repurchase any shares through our stock repurchase program in the third quarter of 2022.
•We continued implementing our organic expansion plan in the New Orleans market. We remodeled and received regulatory approval on a leased banking center location in downtown New Orleans, which we opened as the Bank’s first full-service banking center in New Orleans on August 1, 2022.
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 September 30, 2022 |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
Selected Period End Balance Sheet Data: | | | | | | | |
Total assets | $ | 3,059,678 | | | $ | 3,224,710 | | | $ | (165,032) | | | (5.1) | % |
Interest-bearing deposits in other banks | 261,608 | | | 761,721 | | | (500,113) | | | (65.7) | % |
Securities available-for-sale, at fair value | 609,748 | | | 659,178 | | | (49,430) | | | (7.5) | % |
Securities held-to-maturity, at amortized cost | 154,736 | | | — | | | 154,736 | | | — | % |
Loans held for investment | 1,879,669 | | | 1,683,832 | | | 195,837 | | | 11.6 | % |
Total deposits | 2,796,494 | | | 2,910,348 | | | (113,854) | | | (3.9) | % |
Total stockholders’ equity | 243,413 | | | 298,150 | | | (54,737) | | | (18.4) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the Three Months Ended | | As of and for the Nine Months Ended |
(dollars in thousands, except per share data) | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net Income | $ | 10,186 | | | $ | 9,147 | | | $ | 8,138 | | | $ | 26,725 | | | $ | 24,442 | |
| | | | | | | | | |
Per Common Share Data: | | | | | | | | | |
Earnings per share, basic | $ | 1.42 | | | $ | 1.27 | | | $ | 1.12 | | | $ | 3.72 | | | $ | 3.35 | |
Earnings per share, diluted | $ | 1.42 | | | $ | 1.27 | | | $ | 1.12 | | | $ | 3.71 | | | $ | 3.34 | |
Book value per share | $ | 33.88 | | | $ | 35.34 | | | $ | 41.05 | | | $ | 33.88 | | | $ | 41.05 | |
Tangible book value per share(1,2) | $ | 33.67 | | | $ | 35.12 | | | $ | 40.84 | | | $ | 33.67 | | | $ | 40.84 | |
Realized book value per share(1,3) | $ | 45.54 | | | $ | 44.23 | | | $ | 41.06 | | | $ | 45.54 | | | $ | 41.06 | |
Cash dividends per share | $ | 0.07 | | | $ | 0.07 | | | $ | 0.07 | | | $ | 0.21 | | | $ | 0.21 | |
Shares outstanding | 7,183,915 | | | 7,176,365 | | | 7,276,400 | | | 7,183,915 | | | 7,276,400 | |
Weighted average shares outstanding, basic | 7,183,915 | | | 7,176,365 | | | 7,278,192 | | | 7,179,984 | | | 7,298,597 | |
Weighted average shares outstanding, diluted | 7,197,100 | | | 7,196,643 | | | 7,294,011 | | | 7,193,958 | | | 7,314,938 | |
| | | | | | | | | |
Summary Performance Ratios: | | | | | | | | | |
Return on average assets | 1.30 | % | | 1.15 | % | | 1.11 | % | | 1.13 | % | | 1.15 | % |
Return on average equity | 15.48 | % | | 14.30 | % | | 10.83 | % | | 13.25 | % | | 11.17 | % |
Net interest margin | 3.00 | % | | 2.70 | % | | 2.54 | % | | 2.70 | % | | 2.57 | % |
Net interest margin FTE(4) | 3.06 | % | | 2.75 | % | | 2.60 | % | | 2.76 | % | | 2.63 | % |
Efficiency ratio(5) | 53.80 | % | | 55.64 | % | | 57.61 | % | | 56.52 | % | | 56.07 | % |
Loans HFI to deposits ratio | 67.22 | % | | 64.61 | % | | 59.99 | % | | 67.22 | % | | 59.99 | % |
Noninterest-bearing deposits to deposits ratio | 41.92 | % | | 41.46 | % | | 42.29 | % | | 41.92 | % | | 42.29 | % |
Noninterest income to average assets | 0.62 | % | | 0.61 | % | | 0.77 | % | | 0.60 | % | | 0.89 | % |
Operating expense to average assets | 1.93 | % | | 1.82 | % | | 1.86 | % | | 1.84 | % | | 1.90 | % |
| | | | | | | | | |
Summary Credit Quality Ratios: | | | | | | | | | |
NPAs to total assets | 0.09 | % | | 0.03 | % | | 0.08 | % | | 0.09 | % | | 0.08 | % |
Nonperforming loans to loans HFI | 0.14 | % | | 0.02 | % | | 0.09 | % | | 0.14 | % | | 0.09 | % |
Allowance for loan losses to loans HFI | 1.06 | % | | 1.05 | % | | 1.18 | % | | 1.06 | % | | 1.18 | % |
Net charge-offs to average loans | 0.00 | % | | 0.01 | % | | 0.03 | % | | 0.01 | % | | 0.03 | % |
| | | | | | | | | |
Capital Ratios: | | | | | | | | | |
Total stockholders’ equity to total assets | 7.96 | % | | 8.13 | % | | 9.89 | % | | 7.96 | % | | 9.89 | % |
Tangible common equity to tangible assets(1,6) | 7.91 | % | | 8.08 | % | | 9.84 | % | | 7.91 | % | | 9.84 | % |
Total risk-based capital to risk-weighted assets | 17.15 | % | | 16.89 | % | | 18.74 | % | | 17.15 | % | | 18.74 | % |
Tier 1 risk-based capital to risk-weighted assets | 16.16 | % | | 15.92 | % | | 17.60 | % | | 16.16 | % | | 17.60 | % |
Common equity Tier 1 capital to risk-weighted assets | 16.16 | % | | 15.92 | % | | 17.60 | % | | 16.16 | % | | 17.60 | % |
Tier 1 risk-based capital to average assets | 10.31 | % | | 9.73 | % | | 10.21 | % | | 10.31 | % | | 10.21 | % |
(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 third quarter of 2022 was $10.2 million, or $1.42 diluted EPS, an increase of $1.0 million, or 11.4%, compared to $9.1 million, or $1.27 diluted EPS, for the second quarter of 2022. The increase in net income was due to a $1.9 million increase in net interest income, a $13,000 decrease in income tax expense, and a $7,000 increase in noninterest income, partially offset by a $570,000 increase in operating expenses and a $350,000 increase in provision for loan losses. The return on assets for the third quarter of 2022 was 1.30%, compared to 1.15% for the second quarter of 2022. The return on equity was 15.48% for the third quarter of 2022, compared to 14.30% for the second quarter of 2022. Our efficiency ratio for the third quarter of 2022 was 53.80%, compared to 55.64% for the second quarter of 2022.
Net income for the nine months ended September 30, 2022, was $26.7 million, or $3.71 diluted EPS, an increase of $2.3 million, or 9.3%, compared to $24.4 million, or $3.34 diluted EPS, for the nine months ended September 30, 2021. The increase in net income was due to a $10.0 million increase in net interest income and a $750,000 decrease in the provision for loan losses, partially offset by a $4.7 million decrease in noninterest income, a $3.3 million increase in operating expenses, and a $458,000 increase in income tax expense. The return on assets for the nine months ended September 30, 2022, was 1.13%, compared to 1.15% for the nine months ended September 30, 2021. The return on equity was 13.25% for the nine months ended September 30, 2022, compared to 11.17% for the nine months ended September 30, 2021. Our efficiency ratio for the nine months ended September 30, 2022, was 56.52%, compared to 56.07% for the nine months ended September 30, 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 a range of 0.00% to 0.25% and remained at that rate until March 2022, when the FOMC began increasing the target federal funds rate. The FOMC increased the target federal funds rate by 25 bps in March 2022, 50 bps in May 2022, and 75 bps in each of June, July, and September 2022, resulting in a range of 3.00% to 3.25% as of September 30, 2022. The average effective federal funds rate for the third quarter of 2022 was 2.19% compared to 0.77% for the second quarter of 2022. For the nine months ended September 30, 2022, the average effective federal funds rate was 1.03% compared to 0.08% for the nine months ended September 30, 2021. The 2022 net interest income and net interest margin FTE were positively impacted by the 2022 target federal funds rate increases by the FOMC.
Third Quarter of 2022 vs. Second Quarter of 2022
Net interest income for the third quarter of 2022 was $23.1 million, which was $1.9 million, or 9.2%, higher than the second quarter of 2022, due to a $2.4 million increase in interest and dividend income, partially offset by a $449,000 increase in interest expense. The increase in interest and dividend income was primarily due to an increase in non-PPP loan income and an increase in income on short-term liquid assets. Non-PPP loan income increased $1.9 million due to higher rates on new and renewed non-PPP loans and a $78.4 million increase in the average balance of non-PPP loans when compared to the prior quarter. Income on short-term liquid assets increased $768,000 due to the FOMC’s increases to the target federal funds rate. The increase in interest expense in the third quarter of 2022 was primarily a result of an increase in the rates on interest-bearing transaction deposits.
The net interest margin FTE increased 31 bps to 3.06% for the third quarter of 2022, compared to 2.75% for the prior quarter. This increase was driven primarily by the higher interest rate environment and an improved asset mix in the third quarter of 2022. The yield on non-PPP loans increased 18 bps driven by higher rates on new and renewed loans, and the yield on short-term liquid assets increased 144 bps due to the higher interest rate environment. These increases were partially offset by a 12 bp increase in the rate on interest-bearing deposits.
The FOMC raised the target federal funds rate by 75 bps in November 2022 and is expected to raise the target federal funds rate one additional time in the fourth quarter of 2022 and in early 2023. Our balance sheet is asset sensitive, and interest income on earning assets generally improves in a higher interest rate environment. However, we also expect additional pressure on deposit interest rates due to the higher interest rate environment. As of September 30, 2022, floating rate loans were 14.5% of loans HFI, and floating rate transaction deposits were 3.6% of interest-bearing transaction deposits. Depending on 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 the fourth quarter of 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 September 30, 2022 and June 30, 2022:
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| For the Three Months Ended |
| September 30, 2022 | | June 30, 2022 |
(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) | $ | 1,871,834 | | | $ | 19,740 | | | 4.13 | % | | $ | 1,796,322 | | | $ | 18,032 | | | 3.97 | % |
Securities - taxable | 658,245 | | | 2,536 | | | 1.54 | % | | 690,772 | | | 2,615 | | | 1.52 | % |
Securities - tax-exempt | 207,182 | | | 1,036 | | | 2.00 | % | | 211,672 | | | 1,062 | | | 2.01 | % |
Federal funds sold | 55,201 | | | 317 | | | 2.25 | % | | 53,216 | | | 116 | | | 0.86 | % |
Interest-bearing balances due from banks | 219,845 | | | 1,238 | | | 2.21 | % | | 351,092 | | | 671 | | | 0.76 | % |
Nonmarketable equity securities | 3,452 | | | 19 | | | 2.24 | % | | 3,451 | | | 2 | | | 0.22 | % |
| | | | | | | | | | | |
Total interest-earning assets | 3,015,759 | | | $ | 24,886 | | | 3.24 | % | | 3,106,525 | | | $ | 22,498 | | | 2.87 | % |
Allowance for loan losses | (19,667) | | | | | | | (19,293) | | | | | |
Noninterest-earning assets | 100,685 | | | | | | | 99,687 | | | | | |
Total assets | $ | 3,096,777 | | | | | | | $ | 3,186,919 | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing transaction deposits | $ | 1,323,081 | | | $ | 938 | | | 0.28 | % | | $ | 1,410,270 | | | $ | 547 | | | 0.16 | % |
Time deposits | 321,547 | | | 860 | | | 1.06 | % | | 328,420 | | | 802 | | | 0.98 | % |
Total interest-bearing deposits | 1,644,628 | | | 1,798 | | | 0.43 | % | | 1,738,690 | | | 1,349 | | | 0.31 | % |
| | | | | | | | | | | |
Other borrowings | — | | | — | | | — | % | | — | | | — | | | — | % |
Total interest-bearing liabilities | 1,644,628 | | | $ | 1,798 | | | 0.43 | % | | 1,738,690 | | | $ | 1,349 | | | 0.31 | % |
Noninterest-bearing liabilities: | | | | | | | | | | | |
Noninterest-bearing deposits | 1,173,387 | | | | | | | 1,175,251 | | | | | |
Accrued interest and other liabilities | 17,756 | | | | | | | 16,459 | | | | | |
Total noninterest-bearing liabilities | 1,191,143 | | | | | | | 1,191,710 | | | | | |
Stockholders’ equity | 261,006 | | | | | | | 256,519 | | | | | |
Total liabilities and stockholders’ equity | $ | 3,096,777 | | | | | | | $ | 3,186,919 | | | | | |
Net interest income | | | $ | 23,088 | | | | | | | $ | 21,149 | | | |
Net interest spread | | | | | 2.81 | % | | | | | | 2.56 | % |
Net interest margin | | | | | 3.00 | % | | | | | | 2.70 | % |
Net interest margin FTE(3) | | | | | 3.06 | % | | | | | | 2.75 | % |
Cost of deposits | | | | | 0.25 | % | | | | | | 0.19 | % |
Cost of funds | | | | | 0.24 | % | | | | | | 0.17 | % |
(1)Includes average outstanding balances of loans HFS of $2.7 million and $3.8 million for the three months ended September 30, 2022 and June 30, 2022, 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.
For the third quarter of 2022, PPP loans had a minimal impact on loan yield and the net interest margin FTE. For the third quarter of 2022, PPP loan interest and fees totaled $6,000, compared to $150,000 in interest and fees for the prior quarter. As of September 30, 2022, deferred PPP fees were $28,000. 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, and 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 September 30, 2022 and June 30, 2022:
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| For the Three Months Ended |
| September 30, 2022 | | June 30, 2022 |
(dollars in thousands) | Average Balance Outstanding | | Interest/Fee Earned | | Average Yield | | Average Balance Outstanding | | Interest/Fee Earned | | Average Yield |
Loans(1,2) | $ | 1,871,834 | | | $ | 19,740 | | | 4.13 | % | | $ | 1,796,322 | | | $ | 18,032 | | | 3.97 | % |
Less: PPP loans, net | | | | | | | | | | | |
Average | 1,350 | | | | | | | 4,202 | | | | | |
Interest | | | 4 | | | | | | | 11 | | | |
Fees | | | 2 | | | | | | | 139 | | | |
Total PPP loans, net | 1,350 | | | 6 | | | 1.62 | % | | 4,202 | | | 150 | | | 14.30 | % |
Non-PPP loans (non-GAAP)(3) | $ | 1,870,484 | | | $ | 19,734 | | | 4.13 | % | | $ | 1,792,120 | | | $ | 17,882 | | | 3.95 | % |
| | | | | | | | | | | |
Net interest income, excluding PPP loan income (non-GAAP) |
Net interest income | | | $ | 23,088 | | | | | | | $ | 21,149 | | | |
PPP loan income | | | (6) | | | | | | | (150) | | | |
Net interest income, excluding PPP loan income (non-GAAP)(3) | | | $ | 23,082 | | | | | | | $ | 20,999 | | | |
| | | | | | | | | | | |
Ratios excluding PPP loans, net (non-GAAP)(3) | | | | | | | | | | |
Net interest spread | | | | | 2.81 | % | | | | | | 2.55 | % |
Net interest margin | | | | | 3.00 | % | | | | | | 2.68 | % |
Net interest margin FTE(4) | | | | | 3.06 | % | | | | | | 2.73 | % |
(1)Includes average outstanding balances of loans HFS of $2.7 million and $3.8 million for the three months ended September 30, 2022 and June 30, 2022, 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.
Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021
Net interest income for the nine months ended September 30, 2022 was $63.0 million, which was $10.0 million, or 18.9%, higher than $52.9 million for the nine months ended September 30, 2021. Net interest income increased due to a $10.1 million increase in interest and dividend income, partially offset by a $111,000 increase in interest expense.
The increase in interest and dividend income for the nine months ended September 30, 2022, when compared to the nine months ended September 30, 2021, was primarily due to an increase in non-PPP loan income, an increase in securities income, and an increase in income on short-term liquid assets, partially offset by a decrease in PPP loan income. Non-PPP loan income increased $8.0 million due to a $264.3 million increase in the average balance of non-PPP loans, when compared to the same period prior year. Securities income increased $4.0 million primarily due to a higher average balance of securities due to our deployment of lower-yielding short-term liquid assets into higher-yielding securities during the first half of 2022. Income on short-term liquid assets increased $2.1 million due to the FOMC’s increases to the target federal funds rate in 2022. PPP loan income decreased $3.9 million due to lower average PPP loan balances outstanding and lower fees recognized to income on PPP loans.
Interest expense was slightly higher for the nine months ended September 30, 2022, compared to the same period in 2021 mainly due to a higher balance of interest-bearing transaction deposits. For the nine months ended September 30, 2022, average interest-bearing transaction deposits increased $206.4 million, or 17.5%, compared to the nine months ended September 30, 2021; however, interest expense on time deposits decreased due to time deposits being priced downward as we adjusted rates on new and renewed time deposits in 2021.
Net interest margin FTE increased 13 bps to 2.76% for the nine months ended September 30, 2022, from 2.63% for the nine months ended September 30, 2021, primarily due to the higher interest rate environment and an improved asset mix. The FOMC’s increases to the target federal funds rate during the first nine months of 2022 increased the yield on short-term liquid assets by 68 bps when compared to the same period in 2021. Our deployment of lower-yielding short-term liquid assets into higher-yielding securities in 2022 also benefited the net interest margin FTE. This deployment increased the average balance of higher-yielding taxable securities from $318.4 million in 2021 to $635.6 million in 2022, an
increase of $317.2 million or 99.7%. The yield on taxable securities also benefited from higher market interest rates on securities purchased during 2022, compared to the interest rate on taxable securities during 2021. The yield on taxable securities increased 16 bps for the nine months ended September 30, 2022, when compared to the nine months ended September 30, 2021. The net interest margin FTE was further benefited by a two bp decrease in the cost of deposits. The cost of deposits decreased from 0.23% to 0.21% for the nine months ended September 30, 2022, due to a 19 bp decrease in the rate on time deposits as we adjusted rates on new and renewed time deposits in 2021. These increases were partially offset by an 11 bp decrease in loan yield. The loan yield decreased primarily as a result of a $3.2 million decrease in PPP loan fee income. 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 slightly to 3.99% from 4.00% due to lower rates on new and renewed non-PPP loans through the first quarter of 2022, offset by higher loan rates in the second and third quarters of 2022.
The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yields earned and rates paid for the nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended |
| September 30, 2022 | | September 30, 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) | $ | 1,786,864 | | | $ | 54,543 | | | 4.03 | % | | $ | 1,610,449 | | | $ | 50,509 | | | 4.14 | % |
Securities - taxable | 635,594 | | | 7,029 | | | 1.48 | % | | 318,354 | | | 3,145 | | | 1.32 | % |
Securities - tax-exempt | 211,375 | | | 3,181 | | | 2.01 | % | | 199,556 | | | 3,102 | | | 2.07 | % |
Federal funds sold | 53,896 | | | 458 | | | 1.12 | % | | 70,841 | | | 67 | | | 0.13 | % |
Interest-bearing balances due from banks | 385,556 | | | 2,160 | | | 0.74 | % | | 521,118 | | | 432 | | | 0.11 | % |
Nonmarketable equity securities | 3,451 | | | 22 | | | 0.86 | % | | 3,448 | | | 9 | | | 0.34 | % |
| | | | | | | | | | | |
Total interest-earning assets | $ | 3,076,736 | | | $ | 67,393 | | | 2.90 | % | | $ | 2,723,766 | | | $ | 57,264 | | | 2.78 | % |
Allowance for loan losses | (19,390) | | | | | | | (19,152) | | | | | |
Noninterest-earning assets | 108,124 | | | | | | | 133,400 | | | | | |
Total assets | $ | 3,165,470 | | | | | | | $ | 2,838,014 | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing transaction deposits | $ | 1,383,628 | | | $ | 1,940 | | | 0.19 | % | | $ | 1,177,220 | | | $ | 1,238 | | | 0.14 | % |
Time deposits | 327,477 | | | 2,488 | | | 1.02 | % | | 341,847 | | | 3,079 | | | 1.20 | % |
Total interest-bearing deposits | 1,711,105 | | | 4,428 | | | 0.35 | % | | 1,519,067 | | | 4,317 | | | 0.38 | % |
| | | | | | | | | | | |
Other borrowings | — | | | — | | | — | % | | — | | | — | | | — | % |
Total interest-bearing liabilities | 1,711,105 | | | $ | 4,428 | | | 0.35 | % | | 1,519,067 | | | $ | 4,317 | | | 0.38 | % |
Noninterest-bearing liabilities: | | | | | | | | | | | |
Noninterest-bearing deposits | 1,167,412 | | | | | | | 1,009,188 | | | | | |
Accrued interest and other liabilities | 17,244 | | | | | | | 17,324 | | | | | |
Total noninterest-bearing liabilities | 1,184,656 | | | | | | | 1,026,512 | | | | | |
Stockholders’ equity | 269,709 | | | | | | | 292,435 | | | | | |
Total liabilities and stockholders’ equity | $ | 3,165,470 | | | | | | | $ | 2,838,014 | | | | | |
Net interest income | | | $ | 62,965 | | | | | | | $ | 52,947 | | | |
Net interest spread | | | | | 2.55 | % | | | | | | 2.40 | % |
Net interest margin | | | | | 2.70 | % | | | | | | 2.57 | % |
Net interest margin FTE(3) | | | | | 2.76 | % | | | | | | 2.63 | % |
Cost of deposits | | | | | 0.21 | % | | | | | | 0.23 | % |
Cost of funds | | | | | 0.19 | % | | | | | | 0.21 | % |
(1)Includes average outstanding balances of loans HFS of $3.6 million and $9.4 million for the nine months ended September 30, 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 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.
Excluding PPP loan income, net interest income (non-GAAP) for the nine months ended September 30, 2022, was $62.3 million, which was $13.9 million, or 28.8%, higher than the nine months ended September 30, 2021. Also, with PPP loans excluded for the nine months ended September 30, 2022, the yield on non-PPP loans (non-GAAP) was 3.99%, and the
net interest margin FTE (non-GAAP) was 2.73%. For the nine months ended September 30, 2022, PPP loans had a four bp accretive impact to the yield on loans and a three 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, and total non-PPP loans (non-GAAP), as well as net interest income and net interest ratios excluding PPP loans (non-GAAP) for the nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
(dollars in thousands) | Average Balance Outstanding | | Interest/Fee Earned | | Average Yield | | Average Balance Outstanding | | Interest/Fee Earned | | Average Yield |
Loans(1,2) | $ | 1,786,864 | | | $ | 54,543 | | | 4.03 | % | | $ | 1,610,449 | | | $ | 50,509 | | | 4.14 | % |
Less: PPP loans, net | | | | | | | | | | | |
Average | 5,502 | | | | | | | 93,408 | | | | | |
Interest | | | 42 | | | | | | | 734 | | | |
Fees | | | 598 | | | | | | | 3,827 | | | |
Total PPP loans, net | 5,502 | | | 640 | | | 15.54 | % | | 93,408 | | | 4,561 | | | 6.51 | % |
Non-PPP loans (non-GAAP)(3) | $ | 1,781,362 | | | $ | 53,903 | | | 3.99 | % | | $ | 1,517,041 | | | $ | 45,948 | | | 4.00 | % |
| | | | | | | | | | | |
Net interest income, excluding PPP loan income (non-GAAP) |
Net interest income | | | $ | 62,965 | | | | | | | $ | 52,947 | | | |
PPP loan income | | | (640) | | | | | | | (4,561) | | | |
Net interest income, excluding PPP loan income (non-GAAP)(3) | | | $ | 62,325 | | | | | | | $ | 48,386 | | | |
| | | | | | | | | | | |
Ratios excluding PPP loans, net (non-GAAP)(3) | | | | | | | | | | |
Net interest spread | | | | | 2.52 | % | | | | | | 2.27 | % |
Net interest margin | | | | | 2.68 | % | | | | | | 2.43 | % |
Net interest margin FTE(4) | | | | | 2.73 | % | | | | | | 2.49 | % |
(1)Includes average outstanding balances of loans HFS of $3.6 million and $9.4 million for the nine months ended September 30, 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.
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| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2022 vs. June 30, 2022 | | September 30, 2022 vs. September 30, 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 | $ | 759 | | | $ | 949 | | | $ | 1,708 | | | $ | 5,542 | | | $ | (1,508) | | | $ | 4,034 | |
Securities - taxable | (123) | | | 44 | | | (79) | | | 3,134 | | | 750 | | | 3,884 | |
Securities - tax-exempt | (23) | | | (3) | | | (26) | | | 184 | | | (105) | | | 79 | |
Federal funds sold | 4 | | | 197 | | | 201 | | | (16) | | | 407 | | | 391 | |
Interest-bearing balances due from banks | (253) | | | 820 | | | 567 | | | (92) | | | 1,820 | | | 1,728 | |
Nonmarketable equity securities | — | | | 17 | | | 17 | | | — | | | 13 | | | 13 | |
| | | | | | | | | | | |
Total interest-earning assets | $ | 364 | | | $ | 2,024 | | | $ | 2,388 | | | $ | 8,752 | | | $ | 1,377 | | | $ | 10,129 | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing transaction deposits | $ | (24) | | | $ | 415 | | | $ | 391 | | | $ | 219 | | | $ | 483 | | | $ | 702 | |
Time deposits | (17) | | | 75 | | | 58 | | | (129) | | | (462) | | | (591) | |
Total interest-bearing deposits | (41) | | | 490 | | | 449 | | | 90 | | | 21 | | | 111 | |
| | | | | | | | | | | |
Other borrowings | — | | | — | | | — | | | — | | | — | | | — | |
Total interest-bearing liabilities | $ | (41) | | | $ | 490 | | | $ | 449 | | | $ | 90 | | | $ | 21 | | | $ | 111 | |
Increase (decrease) in net interest income | $ | 405 | | | $ | 1,534 | | | $ | 1,939 | | | $ | 8,662 | | | $ | 1,356 | | | $ | 10,018 | |
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) | September 30, 2022 | | June 30, 2022 | | Increase (Decrease) | | | | | | |
Provision for loan losses | $ | 600 | | | $ | 250 | | | $ | 350 | | | 140.0 | % | | | | | | | | |
The provision for loan losses for the third quarter of 2022 was $600,000, which was $350,000 higher than the provision for loan losses of $250,000 for the prior quarter. This increase was due to potential economic challenges resulting from the current inflationary environment, changing monetary policy, and loan growth. We will continue to evaluate future provision needs in relation to current economic situations, loan growth, and trends in asset quality.
The table below presents, for the periods indicated, the provision for loan losses:
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| For the Nine Months Ended | | |
(dollars in thousands) | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) | | | | | | |
Provision for loan losses | $ | 1,000 | | | $ | 1,750 | | | $ | (750) | | | (42.9) | % | | | | | | | | |
The provision for loan losses for the nine months ended September 30, 2022, was $1.0 million, a decrease of $750,000, or 42.9%, from $1.8 million for the nine months ended September 30, 2021. The provision for loan losses for 2022 was due to the current inflationary environment, changing monetary policy, and loan growth. The provision for loan losses in the same period of 2021 was due to the anticipated adverse effects of the COVID-19 pandemic at that time.
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.
Third Quarter of 2022 vs. Second Quarter of 2022
Noninterest income was consistent at $4.9 million for the third and second quarters of 2022. The slight increase in noninterest income was mainly due to a gain on the sale and call of securities, higher loan and deposit income, no impact related to equity securities due to their liquidation in the second quarter, and higher SBIC income, all of which was partially offset by lower mortgage loan income and net debit card income.
The table below presents, for the periods indicated, the major categories of noninterest income:
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| For the Three Months Ended | | |
(dollars in thousands) | September 30, 2022 | | June 30, 2022 | | Increase (Decrease) | | | | | | |
Noninterest income: | | | | | | | | | | | | | | | |
Service charges on deposit accounts | $ | 1,488 | | | $ | 1,410 | | | $ | 78 | | | 5.5 | % | | | | | | | | |
Debit card income, net | 934 | | | 1,056 | | | (122) | | | (11.6) | % | | | | | | | | |
Mortgage loan income | 624 | | | 892 | | | (268) | | | (30.0) | % | | | | | | | | |
Brokerage income | 870 | | | 890 | | | (20) | | | (2.2) | % | | | | | | | | |
Loan and deposit income | 502 | | | 410 | | | 92 | | | 22.4 | % | | | | | | | | |
Bank-owned life insurance income | 181 | | | 180 | | | 1 | | | 0.6 | % | | | | | | | | |
Gain (Loss) on equity securities | — | | | (82) | | | 82 | | | 100.0 | % | | | | | | | | |
Gain (Loss) on sale and call of securities | 16 | | | (114) | | | 130 | | | (114.0) | % | | | | | | | | |
SBIC income | 231 | | | 151 | | | 80 | | | 53.0 | % | | | | | | | | |
Other income (loss) | 21 | | | 67 | | | (46) | | | (68.7) | % | | | | | | | | |
Total noninterest income | $ | 4,867 | | | $ | 4,860 | | | $ | 7 | | | 0.1 | % | | | | | | | | |
The gain on the sale and call of securities was $16,000 for the third quarter of 2022 as a result of a municipal security that was called. In the second quarter of 2022, the loss on the sale and call of securities was $114,000 as a result of portfolio restructuring transactions.
Loan and deposit income increased $92,000 to $502,000 for the third quarter of 2022 from the previous quarter. This increase was primarily related to annual renewals of letters of credit.
Equity securities were 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. The mutual fund had a loss of $82,000 in the second quarter of 2022. In April 2022, we liquidated all shares invested in the mutual fund.
SBIC income for the third quarter of 2022 increased $80,000 to $231,000 from the prior quarter primarily due to a $95,000 dividend received from the SBIC.
Mortgage loan income decreased $268,000 to $624,000 for the third quarter of 2022, compared to $892,000 for the previous quarter. This decrease was primarily driven by reduced purchase activity due to higher mortgage interest rates.
Debit card income, net, decreased $122,000 to $934,000 for the third quarter of 2022 from the prior quarter. This decrease was mainly due to a decrease in the number of debit card transactions and higher debit card processing fees.
Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021
Noninterest income decreased $4.7 million to $14.1 million for the nine months ended September 30, 2022, compared to $18.8 million for the nine months ended September 30, 2021. The decrease in noninterest income was due to lower mortgage loan income and net debit card income, losses on equity securities and the sale and call of securities, and reduced income from an SBIC limited partnership of which Red River Bank is a member. 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:
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| | | For the Nine Months Ended |
(dollars in thousands) | | | | | | | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) |
Noninterest income: | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | | | | | | | | $ | 4,205 | | | $ | 3,457 | | | $ | 748 | | | 21.6 | % |
Debit card income, net | | | | | | | | | 2,926 | | | 3,344 | | | (418) | | | (12.5) | % |
Mortgage loan income | | | | | | | | | 2,643 | | | 7,009 | | | (4,366) | | | (62.3) | % |
Brokerage income | | | | | | | | | 2,536 | | | 2,491 | | | 45 | | | 1.8 | % |
Loan and deposit income | | | | | | | | | 1,283 | | | 1,281 | | | 2 | | | 0.2 | % |
Bank-owned life insurance income | | | | | | | | | 533 | | | 473 | | | 60 | | | 12.7 | % |
Gain (Loss) on equity securities | | | | | | | | | (447) | | | (100) | | | (347) | | | (347.0) | % |
Gain (Loss) on sale and call of securities | | | | | | | | | (59) | | | 193 | | | (252) | | | (130.6) | % |
SBIC income | | | | | | | | | 401 | | | 616 | | | (215) | | | (34.9) | % |
Other income (loss) | | | | | | | | | 107 | | | 57 | | | 50 | | | 87.7 | % |
Total noninterest income | | | | | | | | | $ | 14,128 | | | $ | 18,821 | | | $ | (4,693) | | | (24.9) | % |
Mortgage loan income decreased $4.4 million to $2.6 million for the nine months ended September 30, 2022, compared to $7.0 million for the same period prior year due to rising mortgage interest rates and home prices, as well as limited housing stock available for purchase. The low mortgage interest rate environment in the nine months ended September 30, 2021, contributed to the high levels of mortgage lending activity for that period.
Debit card income, net, decreased $418,000 to $2.9 million for the nine months ended September 30, 2022, compared to the same period in the prior year. This decrease was primarily related to higher debit card expense as a result of upgrading our debit card stock in the first quarter of 2022 and higher debit card processing fees.
Due to a significant increase in interest rates, equity securities had a fair value loss of $447,000 for the nine months ended September 30, 2022, compared to a loss of $100,000 for the same period in 2021. In April 2022, we liquidated all shares invested in the mutual fund.
The loss on the sale and call of securities was $59,000 for the nine months ended September 30, 2022, and consisted of a loss of $114,000 related to portfolio restructuring transactions in the second quarter of 2022, offset by a $55,000 gain from municipal securities being called in 2022. For the nine months ended September 30, 2021, the gain on the sale and call of securities was $193,000 as a result of portfolio restructuring transactions to improve the structure and yield of the portfolio.
SBIC income decreased $215,000 to $401,000 for the nine months ended September 30, 2022, due to lower operating income being distributed by the SBIC in 2022.
Service charges on deposit accounts increased $748,000 to $4.2 million for the nine months ended September 30, 2022, compared to the same period in the prior year. This increase was mainly due to a larger number of non-sufficient fund transactions and related fee income in 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.
Third Quarter of 2022 vs. Second Quarter of 2022
Operating expenses increased $570,000 to $15.0 million for the third quarter of 2022, compared to $14.5 million for the second quarter of 2022. The increase was mainly due to higher personnel expenses, other business development expenses, legal and professional expenses, and occupancy and equipment expenses.
The following table presents, for the periods indicated, the major categories of operating expenses:
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| For the Three Months Ended | | |
(dollars in thousands) | September 30, 2022 | | June 30, 2022 | | Increase (Decrease) | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | |
Personnel expenses | $ | 8,853 | | | $ | 8,574 | | | $ | 279 | | | 3.3 | % | | | | | | | | |
Non-staff expenses: | | | | | | | | | | | | | | | |
Occupancy and equipment expenses | 1,531 | | | 1,473 | | | 58 | | | 3.9 | % | | | | | | | | |
Technology expenses | 653 | | | 695 | | | (42) | | | (6.0) | % | | | | | | | | |
Advertising | 316 | | | 306 | | | 10 | | | 3.3 | % | | | | | | | | |
Other business development expenses | 436 | | | 340 | | | 96 | | | 28.2 | % | | | | | | | | |
Data processing expense | 604 | | | 564 | | | 40 | | | 7.1 | % | | | | | | | | |
Other taxes | 650 | | | 647 | | | 3 | | | 0.5 | % | | | | | | | | |
Loan and deposit expenses | 164 | | | 185 | | | (21) | | | (11.4) | % | | | | | | | | |
Legal and professional expenses | 553 | | | 475 | | | 78 | | | 16.4 | % | | | | | | | | |
Regulatory assessment expenses | 280 | | | 251 | | | 29 | | | 11.6 | % | | | | | | | | |
Other operating expenses | 1,001 | | | 961 | | | 40 | | | 4.2 | % | | | | | | | | |
Total operating expenses | $ | 15,041 | | | $ | 14,471 | | | $ | 570 | | | 3.9 | % | | | | | | | | |
Personnel expenses increased $279,000 to $8.9 million for the third quarter of 2022, compared to the prior quarter. This increase was primarily due to an increase in headcount. As of September 30, 2022 and June 30, 2022, we had 358 and 348 total employees, respectively.
Other business development expenses increased $96,000 to $436,000 for the third quarter of 2022, compared to the prior quarter. This increase was primarily the result of an increase in community sponsorships and CRA related contributions, as well as expenses associated with an SBIC limited partnership.
Legal and professional expenses increased $78,000 to $553,000 for the third quarter of 2022, compared to the prior quarter. This increase was primarily due to higher professional fees and auditing fees.
Occupancy and equipment expenses increased $58,000 to $1.5 million for the third quarter of 2022, compared to the prior quarter. This increase was primarily due to $44,000 of nonrecurring expenses related to the third-quarter opening of a new location in our New Orleans market, partially offset by lower expenses due to relocating the staff and closing the Lafayette LDPO on June 30, 2022.
Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021
Operating expenses increased $3.3 million to $43.6 million for the nine months ended September 30, 2022, compared to $40.2 million for the nine months ended September 30, 2021. The increase in operating expenses was mainly due to higher personnel expenses, occupancy and equipment expenses, other taxes, other operating expenses, and legal and professional expenses, partially offset by lower loan and deposit expenses.
The following table presents, for the periods indicated, the major categories of operating expenses:
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| For the Nine Months Ended | | |
(dollars in thousands) | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | |
Personnel expenses | $ | 25,879 | | | $ | 24,087 | | | $ | 1,792 | | | 7.4 | % | | | | | | | | |
Non-staff expenses: | | | | | | | | | | | | | | | |
Occupancy and equipment expenses | 4,496 | | | 4,019 | | | 477 | | | 11.9 | % | | | | | | | | |
Technology expenses | 2,118 | | | 2,144 | | | (26) | | | (1.2) | % | | | | | | | | |
Advertising | 841 | | | 691 | | | 150 | | | 21.7 | % | | | | | | | | |
Other business development expenses | 1,079 | | | 889 | | | 190 | | | 21.4 | % | | | | | | | | |
Data processing expense | 1,484 | | | 1,445 | | | 39 | | | 2.7 | % | | | | | | | | |
Other taxes | 1,933 | | | 1,584 | | | 349 | | | 22.0 | % | | | | | | | | |
Loan and deposit expenses | 479 | | | 773 | | | (294) | | | (38.0) | % | | | | | | | | |
Legal and professional expenses | 1,446 | | | 1,189 | | | 257 | | | 21.6 | % | | | | | | | | |
Regulatory assessment expenses | 781 | | | 665 | | | 116 | | | 17.4 | % | | | | | | | | |
Other operating expenses | 3,037 | | | 2,753 | | | 284 | | | 10.3 | % | | | | | | | | |
Total operating expenses | $ | 43,573 | | | $ | 40,239 | | | $ | 3,334 | | | 8.3 | % | | | | | | | | |
Personnel expenses increased $1.8 million to $25.9 million for the nine months ended September 30, 2022, compared to the same period in 2021. This increase was primarily due to having nine months of expenses for new staff that were added in the fourth quarter of 2021 in our expansion markets, as well as additional staff in our existing markets, which was partially offset by lower commission compensation in 2022 due to lower mortgage loan activity, when compared to the same period in 2021. As of September 30, 2022 and 2021, we had 358 and 344 total employees, respectively.
Occupancy and equipment expenses increased $477,000 to $4.5 million for the nine months ended September 30, 2022, compared to the same period in 2021. This increase was primarily a result of opening new locations in our expansion markets.
Other taxes increased $349,000 to $1.9 million for the nine months ended September 30, 2022, compared to the same period in 2021. This increase was due to a $353,000 increase in State of Louisiana bank stock tax resulting from higher deposit account balances and higher net income for the applicable tax years.
Other operating expenses increased $284,000 to $3.0 million for the nine months ended September 30, 2022, compared to the same period in 2021. This increase was primarily the result of opening new locations in our expansion markets and an increase in employee related events due to removal of COVID-19 pandemic restrictions.
Legal and professional expenses increased $257,000 to $1.4 million for the nine months ended September 30, 2022, compared to the same period in 2021. This increase was primarily due to higher professional fees and public company expenses due to organizational growth, partially offset by lower attorney fees as a result of the completion of various legal matters.
Loan and deposit expenses decreased $294,000 to $479,000 for the nine months ended September 30, 2022, compared to the same period in 2021. The decrease in loan expenses was primarily due to decreased mortgage loan activity, which was largely driven by rising mortgage interest rates. Deposit expenses decreased 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) | September 30, 2022 | | June 30, 2022 | | Increase (Decrease) | | | | | | |
Income tax expense | $ | 2,128 | | | $ | 2,141 | | | $ | (13) | | | (0.6) | % | | | | | | | | |
For the three months ended September 30, 2022, income tax expense totaled $2.1 million, which was consistent with the second quarter of 2022. The slight decrease in income tax expense was a result of an adjustment to the income tax accrual for the third quarter due to the liquidation of equity securities in the second quarter of 2022. Our effective income tax rates for each of the quarters ended September 30, 2022 and June 30, 2022, were 17.3% and 19.0%, respectively.
The table below presents, for the periods indicated, income tax expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended | | |
(dollars in thousands) | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) | | | | | | |
Income tax expense | $ | 5,795 | | | $ | 5,337 | | | $ | 458 | | | 8.6 | % | | | | | | | | |
For the nine months ended September 30, 2022 and 2021, income tax expense totaled $5.8 million and $5.3 million, respectively. The increase in income tax expense was primarily due to the increase in pre-tax income. Our effective income tax rates for the nine months ended September 30, 2022 and 2021, were 17.8% and 17.9%, respectively.
FINANCIAL CONDITION
General
As of September 30, 2022, assets were $3.06 billion, which was $165.0 million, or 5.1%, lower than assets of $3.22 billion as of December 31, 2021, primarily due to a decrease in deposits. Total deposits decreased $113.9 million, or 3.9%, to $2.80 billion as of September 30, 2022, from $2.91 billion as of December 31, 2021. During the nine months ended September 30, 2022, we made several changes to the asset mix, including deploying short-term liquid assets into loans and the securities portfolio, as well as restructuring the securities portfolio. However, in the third quarter of 2022, we did not engage in any securities purchases or sales. Due to the securities purchased in the first half of 2022, total securities increased $97.5 million, or 14.6%, to $764.5 million during the first nine months of 2022, and were 25.0% of assets as of September 30, 2022. As a result of the increase in loans and securities, interest-bearing deposits in other banks decreased $500.1 million, or 65.7%, to $261.6 million and were 8.6% of assets as of September 30, 2022. Loans HFI increased $195.8 million, or 11.6%, which included a $212.0 million, or 12.7%, increase in non-PPP loans compared to December 31, 2021. Stockholders’ equity decreased $54.7 million during the first nine months of 2022 to $243.4 million as of September 30, 2022. As of September 30, 2022, the loans HFI to deposits ratio was 67.22%, compared to 57.86% as of December 31, 2021, and the noninterest-bearing deposits to total deposits ratio was 41.92%, compared to 39.50% as of December 31, 2021.
Interest-bearing Deposits in Other Banks
Interest-bearing deposits in other banks are the third-largest component of earning assets as of September 30, 2022. 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, and continuing into the first quarter of 2022, interest-bearing deposits in other banks had become the second-largest component of earning assets as deposit growth exceeded loan growth. As of September 30, 2022, interest-bearing deposits in other banks were $261.6 million and were 8.6% of assets, a decrease of $500.1 million, or 65.7%, compared to $761.7 million and 23.6% of assets as of December 31, 2021. In the first nine months of 2022, we deployed excess liquidity into loans and the securities portfolio, although we did not engage in any securities purchases or sales in the third quarter of 2022.
Securities
Our securities portfolio is the second-largest component of earning assets and provides a significant source of revenue. Securities are classified as AFS, HTM, and equity securities. As of September 30, 2022, our total securities portfolio was 25.0% 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 and Securities HTM
Securities AFS and securities HTM are debt securities. Total debt securities were $764.5 million as of September 30, 2022, an increase of $105.3 million, or 16.0%, from $659.2 million as of December 31, 2021.
Securities AFS are held for indefinite periods of time and are carried at estimated fair value. As of September 30, 2022, the estimated fair value of securities AFS was $609.7 million. The net unrealized loss on securities AFS increased $84.8 million for the nine months ended September 30, 2022, resulting in a net unrealized loss of $89.6 million as of September 30, 2022.
Over the past year, due to the increase in our securities portfolio size, the current and projected balance sheet mix and growth, cash flows, and available liquidity sources, we evaluated transferring selected securities from AFS to HTM. In the second quarter of 2022, we reclassified $166.3 million, net of $17.9 million of unrealized loss, or 20.5% of the securities portfolio from AFS to HTM. Securities HTM, which we have the intent and ability to hold until maturity, are carried at amortized cost. As of September 30, 2022, the amortized cost of securities HTM was $154.7 million.
Investment activity for the nine months ended September 30, 2022, included $313.5 million of securities purchased, partially offset by $31.8 million in sales and $73.4 million in maturities, principal repayments, and calls. There were no purchases or sales of securities HTM for the same period.
Securities AFS purchased during the nine months ended September 30, 2022, primarily consisted of $159.8 million in U.S. Treasuries and $139.1 million in mortgage-backed securities. The U.S. Treasuries purchased had a yield of 1.78% and an average life of 1.85 years, and the mortgage-backed securities had a yield of 1.78% and an average life of 3.63 years. The overall price risk of the securities AFS and securities HTM portfolio decreased 210 bps, compared to December 31, 2021, primarily due to the short-term U.S. Treasury securities purchased in the first and second quarters of 2022 and the rising interest rate environment.
During the first six months of 2022, we reallocated $260.5 million from overnight funds yielding 0.39% to securities AFS yielding 1.80% and purchased $53.0 million of securities yielding 1.91% as we reinvested cash flows from the securities portfolio. In the third quarter of 2022, we did not engage in any purchases or sales transactions; however, we will continue to monitor our portfolio.
The securities AFS portfolio tax-equivalent yield was 1.74% for the nine months ended September 30, 2022, compared to 1.82% for the nine months ended September 30, 2021. The decrease in yield for the nine months ended September 30, 2022, compared to the same period for 2021, was due to purchasing a significant amount of securities in the second half of 2021 and the first half of 2022 with lower yields than the overall portfolio yield at the time of purchase.
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 September 30, 2022, the average life of our securities portfolio was 6.9 years with an estimated effective duration of 5.0 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 and the resulting impact on mortgage-backed securities and our callable municipal 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 September 30, 2022, the net unrealized loss of the securities AFS portfolio was $89.6 million, an increase of $84.8 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 September 30, 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.
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| September 30, 2022 |
(in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities AFS: | | | | | | | |
Mortgage-backed securities | $ | 295,166 | | | $ | — | | | $ | (37,623) | | | $ | 257,543 | |
Municipal bonds | 220,078 | | | 1 | | | (44,780) | | | 175,299 | |
U.S. Treasury securities | 176,500 | | | — | | | (6,631) | | | 169,869 | |
U.S. agency securities | 7,596 | | | — | | | (559) | | | 7,037 | |
Total Securities AFS | $ | 699,340 | | | $ | 1 | | | $ | (89,593) | | | $ | 609,748 | |
| | | | | | | |
Securities HTM: | | | | | | | |
Mortgage-backed securities | $ | 153,826 | | | $ | — | | | $ | (20,785) | | | $ | 133,041 | |
U.S. agency securities | 910 | | | — | | | (114) | | | 796 | |
Total Securities HTM | $ | 154,736 | | | $ | — | | | $ | (20,899) | | | $ | 133,837 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | |
Securities HTM: | | | | | | | |
Mortgage-backed securities | $ | — | | | $ | — | | | $ | — | | | $ | — | |
U.S. agency securities | — | | | — | | | — | | | — | |
Total Securities HTM | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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 September 30, 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 | $ | 136 | | | 1.59 | % | | $ | 795 | | | 2.02 | % | | $ | 60,900 | | | 1.50 | % | | $ | 195,712 | | | 1.83 | % | | $ | 257,543 | | | 1.76 | % |
Municipal bonds | 4,948 | | | 1.33 | % | | 20,428 | | | 1.80 | % | | 13,639 | | | 2.89 | % | | 136,284 | | | 2.56 | % | | 175,299 | | | 2.48 | % |
U.S. Treasury securities | 53,067 | | | 1.48 | % | | 116,802 | | | 1.43 | % | | — | | | — | % | | — | | | — | % | | 169,869 | | | 1.45 | % |
U.S. agency securities | 55 | | | 1.66 | % | | 5,288 | | | 1.75 | % | | 1,694 | | | 1.26 | % | | — | | | — | % | | 7,037 | | | 1.62 | % |
Total Securities AFS | $ | 58,206 | | | 1.47 | % | | $ | 143,313 | | | 1.50 | % | | $ | 76,233 | | | 1.74 | % | | $ | 331,996 | | | 2.15 | % | | $ | 609,748 | | | 1.91 | % |
(1)Tax equivalent projected book yield as of September 30, 2022.
The following table shows the amortized cost of securities HTM 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 September 30, 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 HTM: | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | $ | — | | | —% | | | $ | — | | | —% | | | $ | — | | | —% | | | $ | 153,826 | | | 2.95% | | | $ | 153,826 | | | 2.95% | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
U.S. agency securities | — | | | —% | | | — | | | —% | | | 910 | | | 2.61% | | | — | | | —% | | | 910 | | | 2.61% | |
Total Securities HTM | $ | — | | | —% | | | $ | — | | | —% | | | $ | 910 | | | 2.61% | | | $ | 153,826 | | | 2.95% | | | $ | 154,736 | | | 2.95% | |
(1)Tax equivalent projected book yield as of September 30, 2022.
Equity Securities
Equity securities were an investment in a CRA mutual fund, consisting primarily of bonds. Equity securities were carried at fair value on the consolidated balance sheets with periodic changes in value recorded through the consolidated statements of income. As of December 31, 2021, equity securities had a fair value of $7.8 million with a recognized loss of $175,000 for the year ended December 31, 2021. Equity securities had a recognized loss of $447,000 for the nine months ended September 30, 2022. The loss on equity securities during 2022 was due to a significant increase in interest rates. In April 2022, we liquidated all shares invested in this fund.
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 September 30, 2022, loans HFI were $1.88 billion, an increase of $195.8 million, or 11.6%, compared to $1.68 billion as of December 31, 2021.
As of September 30, 2022, our participation in the SBA PPP was substantially complete. As of September 30, 2022, PPP loans totaled $1.4 million, net of $28,000 of deferred income, and were 0.1% of loans HFI.
As of September 30, 2022, non-PPP loans HFI (non-GAAP) were $1.88 billion, an increase of $212.0 million, or 12.7%, from December 31, 2021, due to new customer activity associated with new lenders in our expansion markets and increased loan activity across Louisiana. 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:
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| September 30, 2022 | | December 31, 2021 | | | | | | |
(dollars in thousands) | Amount | | Percent | | Amount | | Percent | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | $ | 787,464 | | | 41.9 | % | | $ | 670,293 | | | 39.8 | % | | | | | | | | | | | | |
One-to-four family residential | 532,034 | | | 28.3 | % | | 474,420 | | | 28.2 | % | | | | | | | | | | | | |
Construction and development | 140,398 | | | 7.5 | % | | 106,339 | | | 6.3 | % | | | | | | | | | | | | |
Commercial and industrial | 307,159 | | | 16.3 | % | | 311,373 | | | 18.5 | % | | | | | | | | | | | | |
SBA PPP, net of deferred income | 1,350 | | | 0.1 | % | | 17,550 | | | 1.0 | % | | | | | | | | | | | | |
Tax-exempt | 84,947 | | | 4.5 | % | | 80,726 | | | 4.8 | % | | | | | | | | | | | | |
Consumer | 26,317 | | | 1.4 | % | | 23,131 | | | 1.4 | % | | | | | | | | | | | | |
Total loans HFI | $ | 1,879,669 | | | 100.0 | % | | $ | 1,683,832 | | | 100.0 | % | | | | | | | | | | | | |
Total non-PPP loans HFI (non-GAAP)(1) | $ | 1,878,319 | | | | | $ | 1,666,282 | | | | | | | | | | | | | | | |
Total loans HFS | $ | 1,536 | | | | | $ | 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 September 30, 2022, health care loans were $145.7 million, or 7.8% 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 $344,000 as of September 30, 2022, and $295,000 as of December 31, 2021. Within the health care sector, loans to nursing and residential care facilities were 3.9% of non-PPP loans HFI (non-GAAP) as of September 30, 2022, and 3.6% as of December 31, 2021. Loans to physician and dental practices were 3.8% of non-PPP loans HFI (non-GAAP) as of September 30, 2022, and 4.6% as of December 31, 2021.
Energy loans were 2.1% of non-PPP loans HFI (non-GAAP) as of September 30, 2022, and 1.2% as of December 31, 2021. For additional information on non-GAAP financial measures, see “ - Non-GAAP Financial Measures” in this Report.
Geographic Markets
As of September 30, 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:
| | | | | | | | | | | | | | |
| September 30, 2022 | |
(dollars in thousands) | Amount | | Percent of Non-PPP Loans HFI (non-GAAP) | |
Central | $ | 610,692 | | | 32.5 | % | |
Capital | 511,572 | | | 27.2 | % | |
Northwest | 369,374 | | | 19.7 | % | |
Southwest | 140,977 | | | 7.5 | % | |
Northshore | 127,609 | | | 6.8 | % | |
New Orleans | 66,676 | | | 3.6 | % | |
Acadiana | 51,419 | | | 2.7 | % | |
Total non-PPP loans HFI | $ | 1,878,319 | | | 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 September 30, 2022, 2.1% 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 $2.7 million as of September 30, 2022, an increase of $1.7 million, or 177.3%, from $979,000 as of December 31, 2021. This increase was primarily due to additional loans placed on nonaccrual status in the third quarter of 2022, partially offset by payments on nonaccrual loans and the sale of foreclosed assets during the year. The ratio of NPAs to total assets was 0.09% as of September 30, 2022, and 0.03% as of December 31, 2021.
Nonperforming loan and asset information is summarized below:
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Nonperforming loans: | | | |
Nonaccrual loans | $ | 2,703 | | | $ | 280 | |
Accruing loans 90 or more days past due | 12 | | | 39 | |
Total nonperforming loans | 2,715 | | | 319 | |
Foreclosed assets: | | | |
Real estate | — | | | 660 | |
| | | |
Total foreclosed assets | — | | | 660 | |
Total NPAs | $ | 2,715 | | | $ | 979 | |
| | | |
Troubled debt restructurings:(1,2) | | | |
Nonaccrual loans | $ | 147 | | | $ | — | |
| | | |
Performing loans | 4,204 | | | 3,944 | |
Total TDRs | $ | 4,351 | | | $ | 3,944 | |
| | | |
Nonaccrual loans to loans HFI | 0.14% | | | 0.02 | % |
Nonperforming loans to loans HFI(1) | 0.14% | | | 0.02 | % |
NPAs to total assets | 0.09% | | | 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.
Nonaccrual loans are summarized below by category:
| | | | | | | | | | | |
(in thousands) | September 30, 2022 | | December 31, 2021 |
Real estate: | | | |
Commercial real estate | $ | 722 | | | $ | 51 | |
One-to-four family residential | 372 | | | 216 | |
Construction and development | 9 | | | — | |
Commercial and industrial | 1,498 | | | 13 | |
SBA PPP, net of deferred income | — | | | — | |
Tax-exempt | — | | | — | |
Consumer | 102 | | | — | |
Total nonaccrual loans | $ | 2,703 | | | $ | 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 September 30, 2022, loans classified as pass were 98.6% of loans HFI, and loans classified as special mention and substandard were 1.1% and 0.3%, respectively, of loans HFI. There were no loans as of September 30, 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. Based upon our preliminary CECL analysis as of September 30, 2022, we expect the adoption of CECL will result in a combined 1.0% to 5.0% increase in our allowance for credit losses and allowance for unfunded commitments. 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 September 30, 2022, the allowance for loan losses was $20.0 million, or 1.06% 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 $777,000 increase in the allowance for loan losses for the nine months ended September 30, 2022, was mainly due to $1.0 million from the provision for loan losses, partially offset by $223,000 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 nine months ended September 30, 2022, was $1.0 million, a decrease of $750,000, or 42.9%, from $1.8 million for the nine months ended September 30, 2021. The provision for loan losses for 2022 was due to the current inflationary environment, changing monetary policy, and loan growth. The provision for loan losses in the same period of 2021 was due to the anticipated adverse effects of the COVID-19 pandemic at that time. We will continue to evaluate future provision needs in relation to current economic situations, 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 Nine Months Ended |
(dollars in thousands) | September 30, 2022 | | | | September 30, 2021 |
Loans HFI | $ | 1,879,669 | | | | | $ | 1,622,593 | |
Non-PPP Loans HFI (non-GAAP)(1) | $ | 1,878,319 | | | | | $ | 1,576,631 | |
Nonaccrual loans | $ | 2,703 | | | | | $ | 1,375 | |
Average loans | $ | 1,786,864 | | | | | $ | 1,610,449 | |
| | | | | |
Allowance for loan losses at beginning of period | $ | 19,176 | | | | | $ | 17,951 | |
Provision for loan losses | 1,000 | | | | | 1,750 | |
Charge-offs: | | | | | |
Real estate: | | | | | |
Commercial real estate | — | | | | | (410) | |
One-to-four family residential | — | | | | | (10) | |
Construction and development | (18) | | | | | — | |
Commercial and industrial | (25) | | | | | (47) | |
Consumer | (384) | | | | | (243) | |
Total charge-offs | (427) | | | | | (710) | |
Recoveries: | | | | | |
Real estate: | | | | | |
One-to-four family residential | 8 | | | | | 15 | |
Construction and development | 18 | | | | | 2 | |
Commercial and industrial | 81 | | | | | 26 | |
Consumer | 97 | | | | | 134 | |
Total recoveries | 204 | | | | | 177 | |
Net (charge-offs)/recoveries | (223) | | | | | (533) | |
Allowance for loan losses at end of period | $ | 19,953 | | | | | $ | 19,168 | |
| | | | | |
Allowance for loan losses to loans HFI | 1.06 | % | | | | 1.18 | % |
Allowance for loan losses to non-PPP loans HFI (non-GAAP)(1) | 1.06 | % | | | | 1.22 | % |
Allowance for loan losses to nonaccrual loans | 738.18% | | | | | 1,394.04% | |
Net charge-offs to average loans | 0.01 | % | | | | 0.03 | % |
(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 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 decreased $113.9 million, or 3.9%, to $2.80 billion as of September 30, 2022, from $2.91 billion as of December 31, 2021. This decrease was primarily a result of expected customer deposit account activity and customer response to the changing interest rate environment. Noninterest-bearing deposits increased by $22.5 million, or 2.0%, to $1.17 billion as of September 30, 2022. Noninterest-bearing deposits as a percentage of total deposits were 41.92% as of
September 30, 2022, compared to 39.50% as of December 31, 2021. Interest-bearing deposits decreased by $136.3 million, or 7.7%, to $1.62 billion as of September 30, 2022.
The following table presents our deposits by account type as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | | Change from December 31, 2021 to September 30, 2022 |
(dollars in thousands) | Balance | | % of Total | | Balance | | % of Total | | $ Change | | % Change |
Noninterest-bearing deposits | $ | 1,172,157 | | | 41.9 | % | | $ | 1,149,672 | | | 39.5 | % | | $ | 22,485 | | | 2.0 | % |
Interest-bearing deposits: | | | | | | | | | | | |
NOW accounts | 449,543 | | | 16.1 | % | | 503,383 | | | 17.3 | % | | (53,840) | | | (10.7) | % |
Money market accounts | 644,318 | | | 23.1 | % | | 733,044 | | | 25.2 | % | | (88,726) | | | (12.1) | % |
Savings accounts | 198,741 | | | 7.1 | % | | 191,076 | | | 6.5 | % | | 7,665 | | | 4.0 | % |
Time deposits less than or equal to $250,000 | 238,614 | | | 8.5 | % | | 243,596 | | | 8.4 | % | | (4,982) | | | (2.0) | % |
Time deposits greater than $250,000 | 93,121 | | | 3.3 | % | | 89,577 | | | 3.1 | % | | 3,544 | | | 4.0 | % |
Total interest-bearing deposits | 1,624,337 | | | 58.1 | % | | 1,760,676 | | | 60.5 | % | | (136,339) | | | (7.7) | % |
Total deposits | $ | 2,796,494 | | | 100.0 | % | | $ | 2,910,348 | | | 100.0 | % | | $ | (113,854) | | | (3.9) | % |
The following table presents deposits by customer type as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | | Change from December 31, 2021 to September 30, 2022 |
(dollars in thousands) | Balance | | % of Total | | Balance | | % of Total | | $ Change | | % Change |
Consumer | $ | 1,333,893 | | | 47.7 | % | | $ | 1,400,369 | | | 48.1 | % | | $ | (66,476) | | | (4.7) | % |
Commercial | 1,296,758 | | | 46.4 | % | | 1,283,992 | | | 44.1 | % | | 12,766 | | | 1.0 | % |
Public | 165,843 | | | 5.9 | % | | 225,987 | | | 7.8 | % | | (60,144) | | | (26.6) | % |
Total deposits | $ | 2,796,494 | | | 100.0 | % | | $ | 2,910,348 | | | 100.0 | % | | $ | (113,854) | | | (3.9) | % |
Our uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $1.05 billion and $1.22 billion at September 30, 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) | September 30, 2022 |
Three months or less | $ | 10,368 | |
Over three months through six months | 16,914 | |
Over six months through 12 months | 9,280 | |
Over 12 months | 13,559 | |
Total | $ | 50,121 | |
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 September 30, 2022 or December 31, 2021.
Equity and Regulatory Capital Requirements
Total stockholders’ equity as of September 30, 2022, was $243.4 million, compared to $298.2 million as of December 31, 2021, a decrease of $54.7 million, or 18.4%. This decrease was attributed to an $80.0 million, net of tax, market adjustment to AOCI related to securities, $1.5 million in cash dividends, and the repurchase of 4,465 shares of common stock for $218,000, partially offset by $26.7 million of net income for the nine months ended September 30, 2022, and $235,000 of stock compensation.
During the second quarter of 2022, the Company reclassified certain securities from AFS to HTM. Such transfers are made at fair value on the date of transfer. The net unrealized holding loss on the date of transfer is retained, net of tax, in AOCI, with no immediate change to the total balance in AOCI. The unrealized holding loss will be amortized over the remaining life of the securities.
At the date of transfer, the net unamortized, unrealized loss on the transferred securities included in the consolidated balance sheets totaled $17.9 million, of which $14.2 million, net of tax, was included in AOCI. As of September 30, 2022, the net unamortized, unrealized loss remaining on the transferred securities included in the consolidated balance sheets totaled $16.0 million, of which $13.0 million, net of tax, was included in AOCI.
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. For the three months ended September 30, 2022, the Company did not repurchase any shares of its common stock. For the nine months ended September 30, 2022, the Company repurchased 4,465 shares of its common stock at an aggregate cost of $218,000. As of September 30, 2022, we had $4.8 million available for repurchasing our common stock under this program.
On November 4, 2022, our Board of Directors approved the renewal of the stock repurchase program that will expire on December 31, 2022. This renewed repurchase program has similar terms to the previous program and authorizes us to purchase $5.0 million of our outstanding shares of common stock from January 1, 2023 through December 31, 2023. 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.
The Economic Growth Act, which was signed into law in May 2018, provides, among other items, certain targeted modifications to prior financial services reform regulatory requirements. One of the Economic Growth Act’s highlights, with implications for us, was the asset threshold under the Policy Statement being increased from $1.0 billion to $3.0 billion, which benefits bank holding companies by, among various other items, allowing for an 18-month safety and soundness examination cycle as opposed to a 12-month examination cycle, scaled biannual regulatory reporting requirements as opposed to quarterly regulatory reporting requirements, and not being subject to capital adequacy guidelines on a consolidated basis. Because we had less than $3.0 billion in assets as of each of the June 30th measurement dates starting with the Economic Growth Act’s enactment and going through June 30, 2021, we have received benefits under the Policy Statement and will continue to do so through 2022, except with regard to the timing of the Red River Bank safety and soundness exam by the FDIC and the OFI. Due to the timing of the asset balance determination for the Red River Bank safety and soundness examination, a 12-month examination cycle will begin in 2022. As of June 30, 2022, the last applicable measurement date, we had more than $3.0 billion in assets. Therefore, beginning in 2023, we expect to no longer receive any benefits under the Policy Statement.
Another significant provision was the Economic Growth Act’s directive that federal bank regulatory agencies adopt a threshold for a CBLR framework. 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 September 30, 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 nine months ended September 30, 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 $284.7 million, or 11.0%, for the nine months ended September 30, 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. Our average total loans increased $165.3 million, or 10.2%, for the nine months ended September 30, 2022, compared to average total loans for the twelve months ended December 31, 2021.
Our securities AFS portfolio is an alternative source for meeting liquidity needs, and was our second-largest component of assets as of September 30, 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 September 30, 2022, securities AFS totaled $609.7 million, or 19.9% of assets, compared to $659.2 million, or 20.4% of assets as of December 31, 2021. However, certain investments within our securities AFS portfolio are also used to secure specific deposit types, such as for public entities, which impacts their liquidity. As of September 30, 2022, securities AFS with a carrying value of $164.8 million, or 27.0% of the securities AFS portfolio, were pledged to secure public entity deposits as compared to securities AFS with a carrying value of $118.6 million, or 18.0% of the securities AFS portfolio, similarly pledged as of December 31, 2021. The increase of $46.2 million, or 39.0%, was primarily the result of utilizing securities to replace FHLB letters of credit as pledged collateral, combined with an increase in several public entity deposit accounts that occurred during 2022. During the second quarter of 2022, the Company reclassified $166.3 million, or 20.5%, of the securities portfolio from AFS to HTM. Significant limitations exist for selling debt securities classified as HTM, and therefore, are excluded from liquidity sources. For additional information, see “Part I. Financial Information - Item. 1 Financial Statements (Unaudited) - Notes to Unaudited Consolidated Financial Statements - Note 2. Securities - Securities AFS and Securities HTM.”
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 September 30, 2022. Interest-bearing deposits in other banks were $261.6 million, or 8.6% of assets as of September 30, 2022, compared to $761.7 million, or 23.6% of assets as of December 31, 2021. The decrease of $500.1 million, or 65.7%, was primarily a result of deploying funds into securities and loans, combined with an outflow of deposits, during the first nine months of the year.
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 September 30, 2022 and December 31, 2021, our total borrowing availability from the FHLB was $874.0 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 September 30, 2022 and December 31, 2021, we held unfunded letters of credit in the amount of $15.0 million and $143.8 million, respectively. As of September 30, 2022 and December 31, 2021, our net borrowing capacity from the FHLB was $859.0 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2022, we had $384.6 million in unfunded loan commitments and $14.5 million in commitments associated with outstanding standby letters of credit. 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 September 30, 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 September 30, 2022, there was a $4.3 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 September 30, 2022, there was a $727,000 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 0.64% as of September 30, 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-earning 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 simulations within a static balance sheet model. This model tests the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. 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 simulation 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 September 30, 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 | 10.7 | % | | (1.6) | % | | 45.7 | % | | 16.7 | % |
+200 | 7.1 | % | | (0.7) | % | | 30.6 | % | | 13.3 | % |
+100 | 3.7 | % | | 0.2 | % | | 15.3 | % | | 8.0 | % |
Base | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
-100 | (4.9) | % | | (1.9) | % | | (0.4) | % | | (18.9) | % |
-200 | (9.9) | % | | (6.1) | % | | (2.6) | % | | (32.8) | % |
The results above, as of September 30, 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.
As of September 30, 2022, the reported percentage changes in net interest income and fair value of equity remained within the policy thresholds. These values are reported at each quarterly Asset-Liability Committee meeting. The net interest income at risk and the fair value of equity will continue to be monitored, and appropriate mitigating action will be taken if needed.
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 September 30, 2022, floating rate loans were 14.5% of the loans HFI, and floating rate transaction deposits were 3.6% 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 September 30, 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, stockholders’ equity to realized common equity, and assets to tangible assets, and presents related resulting ratios.
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(dollars in thousands, except per share data) | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | |
Tangible common equity | | | | | | | |
Total stockholders’ equity | $ | 243,413 | | | $ | 253,596 | | | $ | 298,688 | | | |
Adjustments: | | | | | | | |
Intangible assets | (1,546) | | | (1,546) | | | (1,546) | | | |
Total tangible common equity (non-GAAP) | $ | 241,867 | | | $ | 252,050 | | | $ | 297,142 | | | |
Realized common equity | | | | | | | |
Total stockholders’ equity | $ | 243,413 | | | $ | 253,596 | | | $ | 298,688 | | | |
Adjustments: | | | | | | | |
Accumulated other comprehensive (income) loss | 83,744 | | | 63,804 | | | 61 | | | |
Total realized common equity (non-GAAP) | $ | 327,157 | | | $ | 317,400 | | | $ | 298,749 | | | |
Common shares outstanding | 7,183,915 | | | 7,176,365 | | | 7,276,400 | | | |
Book value per share | $ | 33.88 | | | $ | 35.34 | | | $ | 41.05 | | | |
Tangible book value per share (non-GAAP) | $ | 33.67 | | | $ | 35.12 | | | $ | 40.84 | | | |
Realized book value per share (non-GAAP) | $ | 45.54 | | | $ | 44.23 | | | $ | 41.06 | | | |
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Tangible assets | | | | | | | |
Total assets | $ | 3,059,678 | | | $ | 3,121,113 | | | $ | 3,020,784 | | | |
Adjustments: | | | | | | | |
Intangible assets | (1,546) | | | (1,546) | | | (1,546) | | | |
Total tangible assets (non-GAAP) | $ | 3,058,132 | | | $ | 3,119,567 | | | $ | 3,019,238 | | | |
Total stockholders’ equity to assets | 7.96 | % | | 8.13 | % | | 9.89 | % | | |
Tangible common equity to tangible assets (non-GAAP) | 7.91 | % | | 8.08 | % | | 9.84 | % | | |
PPP-Adjusted Metrics
Red River Bank has 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 September 30, 2022, we had received $259.5 million in SBA forgiveness and borrower payments on 99.9% of the PPP loans originated. As of September 30, 2022, PPP loans totaled $1.4 million, net of $28,000 of deferred income, and were 0.1% 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) | September 30, 2022 | | December 31, 2021 | | | | September 30, 2021 |
Non-PPP loans HFI | | | | | | | |
Loans HFI | $ | 1,879,669 | | | $ | 1,683,832 | | | | | $ | 1,622,593 | |
Adjustments: | | | | | | | |
PPP loans, net | (1,350) | | | (17,550) | | | | | (45,962) | |
Non-PPP loans HFI (non-GAAP) | $ | 1,878,319 | | | $ | 1,666,282 | | | | | $ | 1,576,631 | |
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Allowance for loan losses | $ | 19,953 | | | $ | 19,176 | | | | | $ | 19,168 | |
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Allowance for loan losses to loans HFI | 1.06 | % | | 1.14 | % | | | | 1.18 | % |
Allowance for loan losses to non-PPP loans HFI (non-GAAP) | 1.06 | % | | 1.15 | % | | | | 1.22 | % |
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.”