Red River Bancshares(RRBI) - 2022 Q3 - Quarterly Report

FORM 10-Q Filing Information This section provides key filing details for Red River Bancshares, Inc.'s Quarterly Report on Form 10-Q - Red River Bancshares, Inc. filed its Quarterly Report on Form 10-Q for the period ended September 30, 2022[2] - The company's common stock trades on The Nasdaq Stock Market, LLC under the symbol RRBI[3] - As of October 31, 2022, the registrant had 7,183,915 shares of common stock issued and outstanding[3] Table of Contents This section lists the organizational structure and page references for the report's content Glossary of Terms This section defines key financial and industry-specific terms used throughout the report Cautionary Note Regarding Forward-Looking Statements This section advises readers on the inherent risks and uncertainties associated with forward-looking statements in the report - The report contains forward-looking statements regarding future events and financial performance, which are subject to risks and uncertainties[14] - Key risk factors include general business and economic conditions, the impact of COVID-19, government and regulatory actions, increased competition, interest rate volatility, and asset quality deterioration[15] - The company does not undertake to publicly update or review any forward-looking statement, except as required by applicable law[15] PART I. Financial Information This part presents the company's unaudited consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheets This table provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Assets | $3,059,678 | $3,224,710 | $(165,032) | (5.1)% | | Total Liabilities | $2,816,265 | $2,926,560 | $(110,295) | (3.8)% | | Total Stockholders' Equity | $243,413 | $298,150 | $(54,737) | (18.4)% | | 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)% | | Securities Available-for-Sale | $609,748 | $659,178 | $(49,430) | (7.5)% | | Securities Held-to-Maturity | $154,736 | $— | $154,736 | — | Consolidated Statements of Income This table details the company's revenues, expenses, and net income over specific reporting periods | Metric (in thousands) | Q3 2022 | Q3 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Net Interest Income | $23,088 | $18,109 | $4,979 | 27.5% | | Provision for loan losses | $600 | $150 | $450 | 300.0% | | Total Noninterest Income | $4,867 | $5,643 | $(776) | (13.8)% | | Total Operating Expenses | $15,041 | $13,684 | $1,357 | 9.9% | | Net Income | $10,186 | $8,138 | $2,048 | 25.2% | | Basic EPS | $1.42 | $1.12 | $0.30 | 26.8% | | Diluted EPS | $1.42 | $1.12 | $0.30 | 26.8% | | Metric (in thousands) | 9M 2022 | 9M 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Net Interest Income | $62,965 | $52,947 | $10,018 | 18.9% | | Provision for loan losses | $1,000 | $1,750 | $(750) | (42.9)% | | Total Noninterest Income | $14,128 | $18,821 | $(4,693) | (24.9)% | | Total Operating Expenses | $43,573 | $40,239 | $3,334 | 8.3% | | Net Income | $26,725 | $24,442 | $2,283 | 9.3% | | Basic EPS | $3.72 | $3.35 | $0.37 | 11.0% | | Diluted EPS | $3.71 | $3.34 | $0.37 | 11.1% | Consolidated Statements of Comprehensive Income This table presents net income and other comprehensive income components, reflecting changes in equity not from net income | Metric (in thousands) | Q3 2022 | Q3 2021 | Change ($ thousands) | | :-------------------- | :----------- | :----------- | :------------------- | | Net income | $10,186 | $8,138 | $2,048 | | Total other comprehensive income (loss) | $(19,940) | $(1,119) | $(18,821) | | Comprehensive Income (Loss) | $(9,754) | $7,019 | $(16,773) | | Metric (in thousands) | 9M 2022 | 9M 2021 | Change ($ thousands) | | :-------------------- | :----------- | :----------- | :------------------- | | Net income | $26,725 | $24,442 | $2,283 | | Total other comprehensive income (loss) | $(79,971) | $(6,982) | $(72,989) | | Comprehensive Income (Loss) | $(53,246) | $17,460 | $(70,706) | - Unrealized net loss on securities arising during the nine months ended September 30, 2022, significantly increased to $(102.8 million) from $(8.6 million) in the prior year, primarily due to rising interest rates[22] Consolidated Statements of Changes in Stockholders' Equity This table outlines the changes in the company's equity accounts over the reporting period | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | | :-------------------- | :----------- | :----------- | :------------------- | | Common Stock | $60,050 | $60,233 | $(183) | | Additional Paid-In Capital | $2,014 | $1,814 | $200 | | Retained Earnings | $265,093 | $239,876 | $25,217 | | Accumulated Other Comprehensive Income (Loss) | $(83,744) | $(3,773) | $(79,971) | | Total Stockholders' Equity | $243,413 | $298,150 | $(54,737) | - The decrease in total stockholders' equity was primarily driven by a significant increase in accumulated other comprehensive loss, mainly due to unrealized losses on securities[18][26] - The company repurchased 4,465 shares of common stock for $218 thousand during the nine months ended September 30, 2022[26] Consolidated Statements of Cash Flows This table summarizes the cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity (in thousands) | 9M 2022 | 9M 2021 | Change ($ thousands) | | :-------------------------------- | :----------- | :----------- | :------------------- | | Net cash provided by (used in) operating activities | $35,343 | $50,070 | $(14,727) | | Net cash provided by (used in) investing activities | $(403,554) | $(126,418) | $(277,136) | | Net cash provided by (used in) financing activities | $(115,580) | $359,711 | $(475,291) | | Net change in cash and cash equivalents | $(483,791) | $283,363 | $(767,154) | | Cash and cash equivalents - end of period | $301,073 | $730,564 | $(429,491) | - The significant increase in cash used in investing activities was primarily due to $313.5 million in securities purchases and a $196.1 million net increase in loans held for investment during the nine months ended September 30, 2022[29] - Financing activities shifted from a net cash inflow of $359.7 million in 9M 2021 to a net cash outflow of $115.6 million in 9M 2022, mainly due to a decrease in deposits[29] Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited consolidated financial statements 1. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements - The company adopted ASU No. 2021-05, Leases (Topic 842), as of January 1, 2022, with no material impact on financial statements[37] - ASU No. 2016-13 (CECL model) is effective for the company on January 1, 2023, and is expected to result in a combined 1.0% to 5.0% increase in its allowance for credit losses and unfunded commitments[38] - ASU No. 2022-02, eliminating accounting guidance for Troubled Debt Restructurings (TDRs), is effective January 1, 2023, and is not expected to have a material impact[40] 2. Securities This note details the composition, fair value, and reclassification of the company's securities portfolio - Total securities were $764.5 million as of September 30, 2022[41] - The company reclassified $166.3 million (20.5% of the securities portfolio) from available-for-sale (AFS) to held-to-maturity (HTM) during the second quarter of 2022[43] | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | | :-------------------- | :----------- | :----------- | :------------------- | | Securities AFS (Fair Value) | $609,748 | $659,178 | $(49,430) | | Securities HTM (Amortized Cost) | $154,736 | $— | $154,736 | | Net Unrealized Loss on Securities AFS | $(89,593) | $(9,614) | $(79,979) | - Equity securities, primarily an investment in a CRA mutual fund, were liquidated in April 2022 due to a significant increase in interest rates, resulting in a recognized loss of $447 thousand for the nine months ended September 30, 2022[51] 3. Loans and Asset Quality This note provides a breakdown of the loan portfolio, including categories, growth, and asset quality metrics | Loan Category (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :--------------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Loans Held for Investment | $1,879,669 | $1,683,832 | $195,837 | 11.6% | | Commercial real estate | $787,464 | $670,293 | $117,171 | 17.5% | | One-to-four family residential | $532,034 | $474,420 | $57,614 | 12.1% | | Construction and development | $140,398 | $106,339 | $34,059 | 32.0% | | Commercial and industrial | $307,159 | $311,373 | $(4,214) | (1.4)% | | SBA PPP, net | $1,350 | $17,550 | $(16,200) | (92.3)% | | Allowance for Loan Losses | $(19,953) | $(19,176) | $(777) | 4.1% | | Asset Quality (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :--------------------------- | :----------- | :----------- | :------------------- | :--------- | | Nonaccrual loans | $2,703 | $280 | $2,423 | 865.4% | | Accruing loans 90+ days past due | $12 | $39 | $(27) | (69.2)% | | Total Nonperforming Loans | $2,715 | $319 | $2,396 | 751.1% | | Total Troubled Debt Restructurings | $4,351 | $3,944 | $407 | 10.3% | - Loans classified as 'Pass' decreased from 99.5% of loans HFI at December 31, 2021, to 98.6% at September 30, 2022, while 'Special Mention' and 'Substandard' loans increased[66] 4. Deposits This note details the composition of the company's deposits, including interest-bearing and noninterest-bearing categories | Deposit Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Deposits | $2,796,494 | $2,910,348 | $(113,854) | (3.9)% | | Noninterest-bearing deposits | $1,172,157 | $1,149,672 | $22,485 | 2.0% | | Interest-bearing deposits | $1,624,337 | $1,760,676 | $(136,339) | (7.7)% | - The decrease in total deposits was primarily due to expected customer deposit account activity and response to the changing interest rate environment[70] 5. Contingencies This note discusses potential future obligations arising from legal proceedings and other business activities - Management believes that current legal proceedings are not expected to have a material adverse effect on the company's consolidated results of operations, financial condition, or cash flows[71] 6. Fair Value This note explains the methodologies and hierarchy used for measuring assets and liabilities at fair value - The company uses a fair value hierarchy (Level 1, 2, and 3) to categorize assets and liabilities measured at fair value[74] - Securities AFS, loans HFS, and equity securities are recorded at fair value on a recurring basis, primarily using Level 2 inputs[79] - Impaired loans and foreclosed assets are measured at fair value on a nonrecurring basis, often utilizing Level 3 inputs based on discounted appraisals and collateral discounts[77][78][84] 7. Regulatory Capital Requirements This note outlines the company's compliance with regulatory capital ratios and its 'well capitalized' status | Red River Bank Capital Ratios | Sep 30, 2022 | Dec 31, 2021 | Minimum Basel III Requirement | | :---------------------------- | :----------- | :----------- | :---------------------------- | | Total Risk-Based Capital | 16.57% | 17.06% | 10.50% | | Tier I Risk-Based Capital | 15.58% | 15.99% | 8.50% | | Common Equity Tier I Capital | 15.58% | 15.99% | 7.00% | | Tier I Leverage Capital | 9.94% | 9.23% | 4.00% | - Red River Bank met all capital adequacy requirements under Basel III as of September 30, 2022, and was categorized as 'well capitalized' by the FDIC[87] - The company expects to no longer receive benefits under the Small Bank Holding Company Policy Statement starting in 2023, as its assets exceeded $3.0 billion as of June 30, 2022[89] - The company and the Bank qualify for the Community Bank Leverage Ratio (CBLR) framework but do not intend to utilize it[91] 8. Earnings Per Common Share This note provides a breakdown of basic and diluted earnings per common share for the reporting periods | EPS Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :--------- | :------ | :------ | :------ | :------ | | Basic EPS | $1.42 | $1.12 | $3.72 | $3.35 | | Diluted EPS | $1.42 | $1.12 | $3.71 | $3.34 | - Diluted EPS increased by $0.30 (26.8%) for Q3 2022 compared to Q3 2021, and by $0.37 (11.1%) for 9M 2022 compared to 9M 2021[93] 9. Equity This note details changes in stockholders' equity, including share repurchases and accumulated other comprehensive income - The company did not repurchase any shares of common stock during the third quarter of 2022, with $4.8 million remaining available under the current stock repurchase program as of September 30, 2022[94] - A new stock repurchase program authorizing up to $5.0 million of common stock purchases was approved for January 1, 2023, through December 31, 2023[212] - The net unamortized, unrealized loss on securities transferred from AFS to HTM, included in AOCI, totaled $13.0 million (net of tax) as of September 30, 2022[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial performance, condition, and key operational drivers Corporate Summary This section provides an overview of Red River Bancshares, Inc.'s business, operations, and strategic focus - Red River Bancshares, Inc. is a bank holding company for Red River Bank, operating 28 banking centers and one loan and deposit production office across Louisiana[100] - The company's strategy focuses on expanding market share in existing markets, opportunistic de novo expansion, and strategic acquisitions[101] Third Quarter 2022 Financial and Operational Highlights This section summarizes the key financial and operational achievements for the third quarter of 2022 | Metric | Q3 2022 | Q2 2022 | Change ($ millions) | Change (%) | | :----- | :----------- | :----------- | :------------------ | :--------- | | Net Income | $10.2 million | $9.1 million | $1.1 million | 12.1% | | Diluted EPS | $1.42 | $1.27 | $0.15 | 11.8% | | Return on Assets | 1.30% | 1.15% | 0.15% | 13.0% | | Return on Equity | 15.48% | 14.30% | 1.18% | 8.2% | | Net Interest Income | $23.1 million | $21.1 million | $2.0 million | 9.5% | | Net Interest Margin FTE | 3.06% | 2.75% | 0.31% | 11.3% | - Assets decreased by $61.4 million from June 30, 2022, mainly due to a $53.7 million decrease in deposits[103] - Loans Held for Investment increased by $38.1 million (2.1%) to $1.88 billion as of September 30, 2022[103] - Nonperforming assets were $2.7 million, or 0.09% of assets, as of September 30, 2022[103] Results of Operations This section analyzes the company's financial performance, including net income, interest income, noninterest income, and expenses Net Income This section details the drivers of net income and related profitability metrics for the reporting periods | Metric | Q3 2022 | Q2 2022 | Change ($ millions) | Change (%) | | :----- | :----------- | :----------- | :------------------ | :--------- | | Net Income | $10.2 million | $9.1 million | $1.1 million | 12.1% | | Diluted EPS | $1.42 | $1.27 | $0.15 | 11.8% | | Return on Assets | 1.30% | 1.15% | 0.15% | 13.0% | | Return on Equity | 15.48% | 14.30% | 1.18% | 8.2% | | Metric | 9M 2022 | 9M 2021 | Change ($ millions) | Change (%) | | :----- | :----------- | :----------- | :------------------ | :--------- | | Net Income | $26.7 million | $24.4 million | $2.3 million | 9.4% | | Diluted EPS | $3.71 | $3.34 | $0.37 | 11.1% | | Return on Assets | 1.13% | 1.15% | (0.02)% | (1.7)% | | Return on Equity | 13.25% | 11.17% | 2.08% | 18.6% | - The increase in Q3 2022 net income was mainly due to a $1.9 million increase in net interest income[108] - The increase in 9M 2022 net income was primarily due to a $10.0 million increase in net interest income and a $750 thousand decrease in provision for loan losses, partially offset by lower noninterest income and higher operating expenses[109] Net Interest Income and Net Interest Margin This section analyzes the components of net interest income and the net interest margin, reflecting interest rate dynamics | Metric | Q3 2022 | Q2 2022 | Change ($ millions) | Change (%) | | :----- | :----------- | :----------- | :------------------ | :--------- | | Net Interest Income | $23.1 million | $21.1 million | $2.0 million | 9.5% | | Net Interest Margin FTE | 3.06% | 2.75% | 0.31% | 11.3% | | Metric | 9M 2022 | 9M 2021 | Change ($ millions) | Change (%) | | :----- | :----------- | :----------- | :------------------ | :--------- | | Net Interest Income | $63.0 million | $52.9 million | $10.1 million | 19.1% | | Net Interest Margin FTE | 2.76% | 2.63% | 0.13% | 4.9% | - The increase in net interest income and margin was driven by a higher interest rate environment and an improved asset mix, with the FOMC raising the target federal funds rate multiple times in 2022[111][113] - The company's balance sheet is asset sensitive, and an increasing interest rate environment is expected to positively impact net interest income and net interest margin FTE in Q4 2022[114][234] Provision for Loan Losses This section discusses the provision for loan losses, reflecting management's assessment of credit risk | Metric (in thousands) | Q3 2022 | Q2 2022 | Change ($ thousands) | Change (%) | | :-------------------- | :------ | :------ | :------------------- | :--------- | | Provision for loan losses | $600 | $250 | $350 | 140.0% | | Metric (in thousands) | 9M 2022 | 9M 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :------ | :------ | :------------------- | :--------- | | Provision for loan losses | $1,000 | $1,750 | $(750) | (42.9)% | - The increase in Q3 2022 provision was due to potential economic challenges from inflation, changing monetary policy, and loan growth[129] - The decrease in 9M 2022 provision compared to 9M 2021 was because the prior year's provision was influenced by anticipated adverse effects of the COVID-19 pandemic[131] Noninterest Income This section analyzes the various sources of noninterest income, including service charges and mortgage loan income | Noninterest Income (in thousands) | Q3 2022 | Q2 2022 | Change ($ thousands) | Change (%) | | :-------------------------------- | :------ | :------ | :------------------- | :--------- | | Total Noninterest Income | $4,867 | $4,860 | $7 | 0.1% | | Mortgage loan income | $624 | $892 | $(268) | (30.0)% | | Debit card income, net | $934 | $1,056 | $(122) | (11.6)% | | SBIC income | $231 | $151 | $80 | 53.0% | | Noninterest Income (in thousands) | 9M 2022 | 9M 2021 | Change ($ thousands) | Change (%) | | :-------------------------------- | :------ | :------ | :------------------- | :--------- | | Total Noninterest Income | $14,128 | $18,821 | $(4,693) | (24.9)% | | Mortgage loan income | $2,643 | $7,009 | $(4,366) | (62.3)% | | Debit card income, net | $2,926 | $3,344 | $(418) | (12.5)% | | Service charges on deposit accounts | $4,205 | $3,457 | $748 | 21.6% | - The significant decrease in mortgage loan income for both periods was driven by rising mortgage interest rates and reduced purchase activity[137][139] - Service charges on deposit accounts increased due to a larger number of non-sufficient fund transactions[143] Operating Expenses This section examines the trends and drivers of the company's operating expenses, including personnel and occupancy costs | Operating Expenses (in thousands) | Q3 2022 | Q2 2022 | Change ($ thousands) | Change (%) | | :-------------------------------- | :------ | :------ | :------------------- | :--------- | | Total Operating Expenses | $15,041 | $14,471 | $570 | 3.9% | | Personnel expenses | $8,853 | $8,574 | $279 | 3.3% | | Other business development expenses | $436 | $340 | $96 | 28.2% | | Operating Expenses (in thousands) | 9M 2022 | 9M 2021 | Change ($ thousands) | Change (%) | | :-------------------------------- | :------ | :------ | :------------------- | :--------- | | Total Operating Expenses | $43,573 | $40,239 | $3,334 | 8.3% | | Personnel expenses | $25,879 | $24,087 | $1,792 | 7.4% | | Occupancy and equipment expenses | $4,496 | $4,019 | $477 | 11.9% | | Other taxes | $1,933 | $1,584 | $349 | 22.0% | - Personnel expenses increased due to higher headcount, including new staff in expansion markets[147][151] - Occupancy and equipment expenses rose due to the opening of new locations in expansion markets[149][152] Income Tax Expense This section analyzes the company's income tax expense and effective tax rates for the reporting periods | Metric (in thousands) | Q3 2022 | Q2 2022 | Change ($ thousands) | Change (%) | | :-------------------- | :------ | :------ | :------------------- | :--------- | | Income tax expense | $2,128 | $2,141 | $(13) | (0.6)% | | Effective income tax rate | 17.3% | 19.0% | (1.7)% | (8.9)% | | Metric (in thousands) | 9M 2022 | 9M 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :------ | :------ | :------------------- | :--------- | | Income tax expense | $5,795 | $5,337 | $458 | 8.6% | | Effective income tax rate | 17.8% | 17.9% | (0.1)% | (0.6)% | - The increase in income tax expense for the nine months ended September 30, 2022, was primarily due to the increase in pre-tax income[160] Financial Condition This section provides an in-depth review of the company's balance sheet, including assets, liabilities, and equity General This section provides an overview of the company's overall financial position and key balance sheet changes | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Assets | $3,059,678 | $3,224,710 | $(165,032) | (5.1)% | | Total Deposits | $2,796,494 | $2,910,348 | $(113,854) | (3.9)% | | Loans Held for Investment | $1,879,669 | $1,683,832 | $195,837 | 11.6% | | Total Stockholders' Equity | $243,413 | $298,150 | $(54,737) | (18.4)% | - The decrease in total assets was primarily due to a decrease in deposits, while loans held for investment increased significantly[161] Interest-bearing Deposits in Other Banks This section details the changes in interest-bearing deposits held with other financial institutions | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Interest-bearing deposits in other banks | $261,608 | $761,721 | $(500,113) | (65.7)% | - The decrease was a result of deploying excess liquidity into loans and the securities portfolio during the first nine months of 2022[162] Securities This section analyzes the company's securities portfolio, including available-for-sale and held-to-maturity categories | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Debt Securities | $764,485 | $659,178 | $105,307 | 16.0% | | Securities AFS (Fair Value) | $609,748 | $659,178 | $(49,430) | (7.5)% | | Securities HTM (Amortized Cost) | $154,736 | $— | $154,736 | — | | Net Unrealized Loss on Securities AFS | $(89,593) | $(4,838) | $(84,755) | 1751.9% | - The net unrealized loss on securities AFS increased significantly by $84.8 million, primarily due to a substantial increase in market interest rates[165][172] - The average life of the securities portfolio increased from 4.9 years to 6.9 years, and the effective duration increased from 4.1 years to 5.0 years, reflecting the impact of rising market rates[171] Loan Portfolio This section provides a detailed breakdown of the company's loan portfolio by category and industry concentration | Loan Category (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :--------------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Loans Held for Investment | $1,879,669 | $1,683,832 | $195,837 | 11.6% | | Non-PPP Loans HFI (non-GAAP) | $1,878,319 | $1,666,282 | $212,037 | 12.7% | | Commercial real estate | $787,464 | $670,293 | $117,171 | 17.5% | | One-to-four family residential | $532,034 | $474,420 | $57,614 | 12.1% | | Construction and development | $140,398 | $106,339 | $34,059 | 32.0% | - Non-PPP loans HFI increased by $212.0 million, or 12.7%, driven by new customer activity in expansion markets and increased loan activity across Louisiana[182] - Health care loans represent the largest industry concentration at $145.7 million, or 7.8% of non-PPP loans HFI, as of September 30, 2022[184] - As of September 30, 2022, 2.1% of non-PPP loans HFI were LIBOR-based, with alternative rate language in each credit agreement for transition[187] Nonperforming Assets This section details the company's nonperforming assets, including nonaccrual loans and their impact on asset quality | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Nonperforming Assets | $2,715 | $979 | $1,736 | 177.3% | | Nonperforming Loans to Loans HFI | 0.14% | 0.02% | 0.12% | 600.0% | | NPAs to Total Assets | 0.09% | 0.03% | 0.06% | 200.0% | - The increase in NPAs was primarily due to additional loans placed on nonaccrual status in Q3 2022[190] - Loans classified as 'Pass' decreased from 99.5% of loans HFI at December 31, 2021, to 98.6% at September 30, 2022[196] Allowance for Loan Losses This section discusses the allowance for loan losses, its adequacy, and the impact of net charge-offs | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Allowance for Loan Losses | $19,953 | $19,176 | $777 | 4.1% | | ALL to Loans HFI | 1.06% | 1.14% | (0.08)% | (7.0)% | | Net Charge-offs (9M) | $223 | $533 | $(310) | (58.2)% | - The allowance for loan losses increased by $777 thousand for the nine months ended September 30, 2022, mainly due to a $1.0 million provision for loan losses, partially offset by $223 thousand of net charge-offs[199] - The adoption of the CECL model on January 1, 2023, is expected to result in a 1.0% to 5.0% increase in the allowance for credit losses[198] Deposits This section analyzes the company's deposit base, including interest-bearing and noninterest-bearing categories | Deposit Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Deposits | $2,796,494 | $2,910,348 | $(113,854) | (3.9)% | | Noninterest-bearing deposits | $1,172,157 | $1,149,672 | $22,485 | 2.0% | | Interest-bearing deposits | $1,624,337 | $1,760,676 | $(136,339) | (7.7)% | | Noninterest-bearing deposits to total deposits | 41.92% | 39.50% | 2.42% | 6.1% | - The decrease in total deposits was primarily due to customer activity and response to the changing interest rate environment[204] - Uninsured deposits were approximately $1.05 billion as of September 30, 2022, down from $1.22 billion at December 31, 2021[205] Borrowings This section reports on the company's outstanding borrowings and available credit facilities - The company had no outstanding borrowings as of September 30, 2022, or December 31, 2021[207] Equity and Regulatory Capital Requirements This section details changes in stockholders' equity and compliance with regulatory capital requirements | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :-------------------- | :----------- | :----------- | :------------------- | :--------- | | Total Stockholders' Equity | $243,413 | $298,150 | $(54,737) | (18.4)% | - The decrease in stockholders' equity was primarily attributed to an $80.0 million (net of tax) market adjustment to Accumulated Other Comprehensive Income (AOCI) related to securities[208] - The company expects to lose certain benefits under the Economic Growth Act's Policy Statement in 2023 due to its assets exceeding $3.0 billion[213] Liquidity and Asset-Liability Management This section discusses the company's liquidity position, funding sources, and management of interest rate risk Liquidity This section outlines the company's sources and uses of liquidity to meet its financial obligations - Liquidity needs are primarily met by core deposits, security and loan maturities, and cash flows from amortizing portfolios[215] - Total borrowing availability from the FHLB was $874.0 million as of September 30, 2022, with a net borrowing capacity of $859.0 million[219] - The company maintains federal funds lines of credit totaling $95.0 million and an additional $6.0 million revolving line of credit, with no outstanding balances from these sources[220] Commitments to Extend Credit This section details the company's unfunded loan commitments and standby letters of credit | Commitment Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change ($ thousands) | Change (%) | | :----------------------------- | :----------- | :----------- | :------------------- | :--------- | | Unfunded loan commitments | $384,600 | $357,900 | $26,700 | 7.5% | | Standby letters of credit | $14,500 | $12,500 | $2,000 | 16.0% | - The total outstanding commitments may not reflect actual future cash funding requirements as many are expected to expire unused[223] Investment Commitments This section outlines the company's outstanding commitments to various investment partnerships - The company has outstanding commitments of $226 thousand and $4.3 million to two SBIC limited partnerships[224][225] - An additional outstanding commitment of $727 thousand exists for a bank technology limited partnership[225] Interest Rate Sensitivity and Market Risk This section assesses the company's exposure to interest rate fluctuations and its impact on net interest income and equity - The balance sheet is asset sensitive, meaning assets have the opportunity to reprice faster than liabilities in a rising interest rate environment[234] | Change in Interest Rates (Bps) | % Change in Net Interest Income (Sep 30, 2022) | % Change in Fair Value of Equity (Sep 30, 2022) | | :----------------------------- | :--------------------------------------------- | :---------------------------------------------- | | +300 | 10.7% | (1.6)% | | +200 | 7.1% | (0.7)% | | +100 | 3.7% | 0.2% | | -100 | (4.9)% | (1.9)% | | -200 | (9.9)% | (6.1)% | - Policy thresholds for net interest income decline are <10.0% for a 100 bp shift and <15.0% for a 200 bp shift, and for fair value of equity decline are <20.0% for a 100 bp shift and <25.0% for a 200 bp shift[232] Non-GAAP Financial Measures This section presents non-GAAP financial measures used by management to evaluate performance, providing additional insights Tangible Assets, Tangible Equity, Tangible Book Value, and Realized Book Value This section defines and presents non-GAAP metrics like tangible book value, excluding intangible assets and AOCI - The company uses non-GAAP measures like tangible book value per share, tangible common equity to tangible assets, and realized book value per share to evaluate operating performance, excluding the impact of intangible assets and AOCI[240][241][243] | Metric | Sep 30, 2022 | Jun 30, 2022 | Sep 30, 2021 | | :----- | :----------- | :----------- | :----------- | | 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 | | Tangible common equity to tangible assets (non-GAAP) | 7.91% | 8.08% | 9.84% | PPP-Adjusted Metrics This section provides financial metrics adjusted for the impact of Paycheck Protection Program (PPP) loans - PPP-adjusted metrics are used to provide a more accurate portrayal of financial condition and performance, given the unique characteristics of PPP loans[247] | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Sep 30, 2021 | | :-------------------- | :----------- | :----------- | :----------- | | Loans HFI | $1,879,669 | $1,683,832 | $1,622,593 | | PPP loans, net | $(1,350) | $(17,550) | $(45,962) | | Non-PPP loans HFI (non-GAAP) | $1,878,319 | $1,666,282 | $1,576,631 | | Allowance for loan losses to non-PPP loans HFI (non-GAAP) | 1.06% | 1.15% | 1.22% | - As of September 30, 2022, PPP loans totaled $1.4 million, representing 0.1% of loans HFI, with $259.5 million in SBA forgiveness and borrower payments received[246] Critical Accounting Estimates This section confirms no material changes in the methodologies for critical accounting estimates - There were no material changes or developments in the methodologies used for critical accounting estimates during the reporting period[249] Recent Accounting Pronouncements This section refers to Note 1 for details on recently adopted and upcoming accounting standards - Refer to Note 1 of the Unaudited Consolidated Financial Statements for information on recent accounting pronouncements[251] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section incorporates market risk disclosures by reference from the Annual Report on Form 10-K and additional details from Item 2 - Information on market risk is incorporated by reference from the Annual Report on Form 10-K and additional details in Item 2 of this report[251] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and reports no material changes in internal control - The company's disclosure controls and procedures were effective as of September 30, 2022[252] - There were no material changes in the company's internal control over financial reporting during the third quarter of 2022[253] PART II. Other Information This part contains additional information not covered in the financial statements, including legal proceedings and risk factors Item 1. Legal Proceedings This section addresses the company's involvement in legal matters and their expected financial impact - No material adverse effect is expected from current legal proceedings[254] - Legal matters are costly and can divert management's attention, potentially affecting reputation[254] Item 1A. Risk Factors This section refers to the comprehensive list of risk factors detailed in the company's latest Annual Report on Form 10-K - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for December 31, 2021[255] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on common stock repurchases and the status of the company's stock repurchase programs - No common stock repurchases were made during the third quarter of 2022[256] - As of September 30, 2022, $4.8 million was available for repurchasing common stock under the current program[256] - A new stock repurchase program authorizing $5.0 million of common stock purchases was approved for January 1, 2023, through December 31, 2023[256] Item 3. Defaults Upon Senior Securities This section confirms that the company reported no defaults on its senior securities during the period - No defaults upon senior securities were reported[257] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Mine Safety Disclosures are not applicable to the registrant[258] Item 5. Other Information This section indicates that no other material information was required to be reported - No other information was reported[259] Item 6. Exhibits This section lists all documents filed as exhibits to the Form 10-Q, including corporate governance and certifications - Key exhibits include Restated Articles of Incorporation, Amended and Restated Bylaws, Supplemental Executive Retirement Benefits Agreement, and certifications from Principal Executive and Financial Officers[263] - The financial information for the quarter ended September 30, 2022, is formatted in Inline Extensible Business Reporting Language (XBRL) as Exhibit 101[263] Signatures This section confirms the official signing of the report by the company's President, CEO, and CFO - The report was signed by R. Blake Chatelain, President and Chief Executive Officer[267] - The report was signed by Isabel V. Carriere, Executive Vice President and Chief Financial Officer[267]