Red River Bancshares Inc: Form 10-Q for the period ended Jun 30, 2024

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, 2023 through June 30, 2024, and on our results of operations for the quarters ended June 30, 2024 and March 31, 2024, and for the six months ended June 30, 2024 and June 30, 2023.

This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2023, included in our Annual Report on Form 10-K for the year ended December 31, 2023, 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, 2023. 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.

SECOND QUARTER 2024 FINANCIAL AND OPERATIONAL HIGHLIGHTS

In the second quarter of 2024, the Company had an improved net interest margin along with fairly consistent earnings and loan and deposit balances. Stock buyback activity was steady, and Red River Bank opened a new banking center location in the New Orleans market.

• Net income for the second quarter of 2024 was $8.0 million, or $1.16 diluted EPS, a decrease of $201,000, or 2.5%, compared to $8.2 million, or $1.16 diluted EPS, for the first quarter of 2024. Net income for the second quarter benefited from higher net interest income and an improved net interest margin FTE. Net income for the first quarter of 2024 benefited from approximately $800,000 of nonrecurring noninterest income payments and operating expense reduction items.
• For the second quarter of 2024, the return on assets was 1.05%, and the return on equity was 10.69%.
• Net interest income and net interest margin FTE increased for the second quarter of 2024 compared to the prior quarter. Net interest income for the second quarter of 2024 was $21.8 million compared to $21.4 million for the prior quarter. Net interest margin FTE for the second quarter of 2024 was 2.92% compared to 2.83% for the prior quarter. These increases were due to improved yields on loans and securities outpacing higher deposit rates.
• As of June 30, 2024, assets were $3.05 billion, which was $24.8 million, or 0.8%, lower than March 31, 2024. The decrease was due to a $29.2 million decrease in deposits.
• Deposits totaled $2.72 billion as of June 30, 2024, a decrease of $29.2 million, or 1.1%, compared to $2.75 billion as of March 31, 2024. In the second quarter of 2024, deposit activity was normal and included the seasonal outflow of funds for income tax payments.
• As of June 30, 2024, loans HFI were $2.05 billion, slightly higher than $2.04 billion as of March 31, 2024. In the second quarter of 2024, new loan activity was steady throughout all markets.
• As of June 30, 2024, NPAs were $3.2 million, or 0.11% of assets, and the ACL was $21.6 million, or 1.06% of loans HFI.
• As of June 30, 2024, liquid assets, which are cash and cash equivalents, were $213.1 million, and the liquid assets to assets ratio was 6.99%. We do not have any borrowings, brokered deposits, or internet-sourced deposits.
• We paid a quarterly cash dividend of $0.09 per common share in the second quarter of 2024.
• The 2024 stock repurchase program authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2024 through December 31, 2024. In the second quarter of 2024, we repurchased 16,220 shares of our common stock at an aggregate cost of $764,000. As of June 30, 2024, the 2024 stock repurchase program had $4.2 million remaining.
• As of June 30, 2024, capital levels were strong with a stockholders’ equity to assets ratio of 10.07%, a leverage ratio of 11.74%, and a total risk-based capital ratio of 18.01%.
• We continue to implement our organic expansion plan. In June 2024, we opened a second Red River Bank full-service banking center in the New Orleans market, and in July 2024, we held a grand opening ceremony at this newly constructed location on Veterans Memorial Boulevard in Metairie, Louisiana.
• In July 2024, Bank Director Magazine ranked the Company 9th in the top 30 best-performing publicly traded financial institutions in 2023 with assets less than $5.0 billion.

The following tables contain selected financial information regarding our financial position and performance as of and for the periods indicated:

(in thousands)

28

(dollars in thousands, except per share data)

(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 second quarter of 2024 was $8.0 million, or $1.16 diluted EPS, a decrease of $201,000, or 2.5%, compared to $8.2 million, or $1.16 diluted EPS, for the first quarter of 2024. The decrease in net income was due to an $816,000 increase in operating expenses, partially offset by a $424,000 increase in net interest income, a $170,000 increase in noninterest income, and a $21,000 decrease in income tax expense. The return on assets for the second quarter of 2024 was 1.05%, compared to 1.07% for the first quarter of 2024. The return on equity was 10.69% for the second quarter of 2024, compared to 10.77% for the first quarter of 2024. Our efficiency ratio for the second quarter of 2024 was 62.07%, compared to 60.37% for the first quarter of 2024.

Net income for the six months ended June 30, 2024, was $16.2 million, or $2.31 diluted EPS, a decrease of $2.4 million, or 12.9%, compared to $18.6 million, or $2.58 diluted EPS, for the six months ended June 30, 2023. The decrease in net income was due to a $1.3 million decrease in net interest income, a $942,000 increase in operating expenses, a $321,000 decrease in noninterest income, and a $300,000 increase in the provision for credit losses, partially offset by a $441,000 decrease in income tax expense. The return on assets for the six months ended June 30, 2024, was 1.06%, compared to 1.24% for the six months ended June 30, 2023. The return on equity was 10.73% for the six months ended June 30, 2024, compared to 13.54% for the six months ended June 30, 2023. Our efficiency ratio for the six months ended June 30, 2024, was 61.23%, compared to 57.74% for the six months ended June 30, 2023.

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.

In 2023, the interest rate environment continued to trend upward. The FOMC increased the federal funds rate by 50 bps in the first quarter of 2023, by 25 bps in the second and third quarters of 2023, and kept the rate consistent through the second quarter of 2024 with a target range of 5.25%-5.50%. The average effective federal funds rate was 5.33% for the first and second quarters of 2024, compared to 4.75% for the first six months of 2023. The net interest income and net interest margin FTE increased in the second quarter of 2024 compared to the prior quarter. The net interest income and net interest margin FTE decreased for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Second Quarter of 2024 vs. First Quarter of 2024

Net interest income for the second quarter of 2024 was $21.8 million, which was $424,000, or 2.0%, higher than the first quarter of 2024, due to a $663,000 increase in interest and dividend income, partially offset by a $239,000 increase in interest expense. The increase in interest and dividend income was due to higher interest income on loans, partially offset by lower interest income on short-term liquid assets. Loan income increased $989,000 due to higher rates on new and renewed loans, combined with higher balances in loans HFI. The average rate on new and renewed loans was 7.98% for the second quarter of 2024, compared to 7.56% for the prior quarter. Interest income on short-term liquid assets decreased due to lower balances in these accounts during the second quarter. The increase in interest expense was primarily due to higher rates on new and renewed time deposits, combined with larger balances in these accounts.

The net interest margin FTE increased nine bps to 2.92% for the second quarter of 2024, compared to 2.83% for the prior quarter. This increase was due to improved yields on loans and securities, partially offset by higher deposit costs. The yield on loans increased 12 bps due to higher rates on new and renewed loans. The yield on securities increased eight bps due to reinvesting securities cash flows received into new securities at higher yields. These increases were partially offset by an eight bp increase in the rate on interest-bearing deposits during the second quarter. The cost of deposits increased five bps to 1.75% for the second quarter of 2024, compared to 1.70% for the previous quarter.

In the second quarter of 2024, the target range for the federal funds rate remained at 5.25%-5.50%. The market’s expectation is that the FOMC will lower the target federal funds rate in the second half of 2024. During the 12 months ending June 30, 2025, we anticipate receiving approximately $126.0 million in securities cash flows with an average yield of 2.40%, and we project approximately $215.3 million of fixed rate loans will mature with an average yield of 5.55%. We expect to redeploy these balances into higher yielding assets, which should benefit both net interest income and net interest margin FTE. As of June 30, 2024, floating rate loans were 13.9% of loans HFI, and floating rate transaction deposits were 6.5% of interest-bearing transaction deposits. Depending on balance sheet activity and the movement in interest rates, we expect the net interest margin FTE to improve slightly in the third and fourth quarters of 2024.

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 June 30, 2024 and March 31, 2024:

(dollars in thousands)

(1) Includes average outstanding balances of loans HFS of $3.2 million and $2.0 million for the three months ended June 30, 2024 and March 31, 2024, 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.

Six Months Ended June 30, 2024 vs. Six Months Ended June 30, 2023

Net interest income for the six months ended June 30, 2024 was $43.2 million, which was $1.3 million, or 2.9%, lower than $44.4 million for the six months ended June 30, 2023. Net interest income decreased due to an $11.8 million increase in interest expense, partially offset by a $10.5 million increase in interest and dividend income.

The increase in interest expense for the six months ended June 30, 2024, when compared to the six months ended June 30, 2023, was due to an increase in deposit rates as we responded to deposit rate pressure, combined with larger balances in higher cost deposit accounts. During 2023, we experienced a change in the deposit mix due to customers moving deposits from lower yielding categories to higher yielding categories. The increase in interest and dividend income for the six months ended June 30, 2024, compared to the same period prior year, was primarily due to higher interest income on loans and short-term liquid assets. Loan income increased $8.2 million due to higher rates on new, renewed, and floating rate loans and a $103.0 million increase in the average balance of loans, when compared to the same period prior year. The interest income on short-term liquid assets increased $1.5 million due to the higher interest rate environment and a $32.0 million increase in the average balance of these assets.

Net interest margin FTE decreased 15 bps to 2.89% for the six months ended June 30, 2024, from 3.04% for the six months ended June 30, 2023, due to the increase in the cost of deposits exceeding the increase in the yield on earning assets. The cost of deposits increased 85 bps to 1.72% for the six months ended June 30, 2024, from 0.87% for the six months ended June 30, 2023, due to a 117 bp increase in the rate on interest-bearing deposits, combined with customers moving deposits from lower yielding categories to higher yielding categories. Within total interest-bearing deposits, the rate on time deposits and interest-bearing transaction deposits increased 177 and 73 bps, respectively. These rates increased as we continued to respond to deposit rate pressure.

The net interest margin FTE was positively impacted by the increase in the yield on earning assets, for the six months ended June 30, 2024, when compared to the six months ended June 30, 2023. The yield on loans increased 54 bps due to higher rates on new, renewed, and floating rate loans due to the higher interest rate environment. The yield on securities increased 44 bps for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, due to reinvesting securities cash flows received into new securities at higher yields. In addition, the yield on short-term liquid assets increased 65 bps due to the FOMC’s increases to the target federal funds range, compared to the same period prior year.

The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yields earned and rates paid for the six months ended June 30, 2024 and 2023:

(dollars in thousands)

(1) Includes average outstanding balances of loans HFS of $2.6 million and $2.4 million for the six months ended June 30, 2024 and 2023, 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.

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 for the periods presented. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates.

(in thousands)

(1) 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. Changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

Provision for Credit Losses

The provision for credit losses is the amount necessary to maintain the ACL 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 credit losses:

(dollars in thousands)

The provision for credit losses for the second quarter of 2024 was $300,000, which was consistent with the first quarter of 2024. The provision in the first and second quarters 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, trends in asset quality, forecasted information, and other conditions influencing loss expectations.

The table below presents, for the periods indicated, the provision for credit losses:

(dollars in thousands)

33

The provision for credit losses for the six months ended June 30, 2024, was $600,000, an increase of $300,000, or 100.0%, from $300,000 for the six months ended June 30, 2023. The primary drivers of the increase were the current inflationary environment, changing monetary policy, current economic forecasts, and loan growth. Effective January 1, 2023, we adopted ASC 326, the CECL methodology for estimating credit losses. For the cumulative effect of adopting ASC 326, we recorded a $569,000, net of tax, decrease to stockholders’ equity as of January 1, 2023. No provision expense was recorded for the first quarter of 2023 under the new CECL methodology.

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.

Second Quarter of 2024 vs. First Quarter of 2024

Noninterest income increased $170,000 to $5.1 million for the second quarter of 2024 compared to $4.9 million for the first quarter of 2024. The increase in noninterest income was mainly due to an increase in mortgage loan income and income from SBIC limited partnerships of which Red River Bank is a member, partially offset by a decrease in brokerage income and net debit card income.

The table below presents, for the periods indicated, the major categories of noninterest income:

(dollars in thousands)

Mortgage loan income increased $194,000 to $650,000 for the second quarter of 2024, compared to the prior quarter due to increased purchase activity.

SBIC income increased $102,000 to $454,000 for the second quarter of 2024, compared to the prior quarter. This increase was primarily due to higher normal income received from these partnerships in the second quarter. In the first quarter of 2024, we received a distribution payment of $114,000, in addition to normal income from these partnerships. We expect SBIC income to be lower in future quarters.

Brokerage income decreased $94,000 to $893,000 for the second quarter of 2024, compared to the prior quarter. The lower income in the second quarter of 2024 was mainly due to lower investing activities by clients. Assets under management were $1.09 billion as of June 30, 2024, and $1.07 billion as of March 31, 2024.

Debit card income, net, decreased $73,000 to $949,000 for the second quarter of 2024, compared to the prior quarter. In the first quarter of 2024, we terminated our previous debit card provider contract, which resulted in $145,000 of nonrecurring income. In January 2024, a newly negotiated debit card provider contract became effective. The second quarter of 2024 benefited from a higher number of debit card transactions and related income.

Six Months Ended June 30, 2024 vs. Six Months Ended June 30, 2023

Noninterest income decreased $321,000 to $10.0 million for the six months ended June 30, 2024, compared to $10.3 million for the six months ended June 30, 2023. The decrease in noninterest income was mainly due to lower income from SBIC limited partnerships of which Red River Bank is a member, partially offset by higher mortgage loan income, brokerage income, and net debit card income.

The table below presents, for the periods indicated, the major categories of noninterest income:

(dollars in thousands)

SBIC income decreased $753,000 to $806,000 for the six months ended June 30, 2024, compared to the same period prior year. In the first half of 2024, we received $114,000 of distribution payments, in addition to normal income. In the first half of 2023, we received income from the sale of an investment, in addition to normal income.

Mortgage loan income increased $186,000 to $1.1 million for the six months ended June 30, 2024, compared to the same period prior year mainly due to adjusted mortgage loan fees.

Brokerage income increased $150,000 to $1.9 million for the six months ended June 30, 2024, compared to the same period prior year. This increase was primarily due to higher investing activities by clients. Assets under management were $1.09 billion and $997.3 million as of June 30, 2024 and 2023, respectively.

Debit card income, net, increased $113,000 to $2.0 million for the six months ended June 30, 2024, compared to the same period prior year. In the first quarter of 2024, we terminated our previous debit card provider contract, which resulted in $145,000 of nonrecurring income. In January 2024, a newly negotiated debit card provider contract became effective, which resulted in an increase in debit card income. These increases were partially offset by higher debit card processing expenses in the first half of 2024.

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.

Second Quarter of 2024 vs. First Quarter of 2024

Operating expenses increased $816,000 to $16.7 million for the second quarter of 2024, compared to $15.9 million for the first quarter of 2024. The increase in operating expenses was due to higher loan and deposit expenses, data processing expense, other business development expenses, legal and professional expenses, and occupancy and equipment expenses, partially offset by lower other taxes.

The following table presents, for the periods indicated, the major categories of operating expenses:

(dollars in thousands)

Loan and deposit expenses increased $351,000 to $309,000 for the second quarter of 2024, compared to the prior quarter. The first quarter of 2024 benefited from the receipt of a $262,000 negotiated, variable rebate from a vendor.

Data processing expense increased $304,000 to $651,000 for the second quarter of 2024, compared to the prior quarter. The first quarter of 2024 benefited from the receipt of a $284,000 periodic refund from our data processing center.

Other business development expenses increased $118,000 to $593,000 for the second quarter of 2024, compared to the prior quarter. This increase was mainly the result of an increase in CRA-related contributions, as well as higher expenses associated with the SBIC limited partnerships.

Legal and professional expenses increased $111,000 to $729,000 for the second quarter of 2024, compared to the prior quarter. This increase was primarily due to higher public company expenses and audit expenses.

Occupancy and equipment expenses increased $82,000 to $1.7 million for the second quarter of 2024, compared to the prior quarter. This increase was primarily due to $67,000 of nonrecurring expenses related to our new location in the New Orleans market and other property renovations.

Other taxes decreased $237,000 to $500,000 for the second quarter of 2024, compared to the prior quarter. This decrease was primarily attributable to the reversal of $145,000 of stock repurchase tax expense in the second quarter of 2024 due to finalized guidelines. Stock repurchase tax expense was $100,000 in the first quarter of 2024.

Six Months Ended June 30, 2024 vs. Six Months Ended June 30, 2023

Operating expenses increased $942,000 to $32.6 million for the six months ended June 30, 2024, compared to $31.6 million for the six months ended June 30, 2023. The increase in operating expenses was mainly due to higher personnel expenses, legal and professional expenses, other business development expenses, and occupancy and equipment expenses, partially offset by lower loan and deposit expenses and other taxes.

The following table presents, for the periods indicated, the major categories of operating expenses:

(dollars in thousands)

Personnel expenses increased $607,000 to $19.2 million for the six months ended June 30, 2024, compared to the same period prior year. This increase was primarily due to higher compensation expense as a result of net staff changes, offset by a decrease in medical insurance expense. As of June 30, 2024 and 2023, we had 361 and 353 total employees, respectively.

Legal and professional expenses increased $250,000 to $1.3 million for the six months ended June 30, 2024, compared to the same period prior year. This increase was due to higher contracted services, higher public company expenses, and higher professional and advisory services mainly related to a newly negotiated debit card provider contract effective January 2024.

Other business development expenses increased $138,000 to $1.1 million for the six months ended June 30, 2024, compared to the same period prior year. This increase was mainly the result of an increase in CRA-related contributions, as well as higher marketing expenses.

Occupancy and equipment expenses increased $43,000 to $3.3 million for the six months ended June 30, 2024, compared to the same period prior year. This increase was primarily due to a full period of expenses related to properties that were expanded or opened in 2023 and $67,000 of nonrecurring expenses related to our new location in the New Orleans market and other 2024 property renovations. The first half of 2023 had $189,000 of nonrecurring expenses related to opening our new operations center building and the expansion of a banking center in the Southwest market.

Loan and deposit expenses decreased $222,000 to $267,000 for the six months ended June 30, 2024, compared to the same period prior year. The first half of 2024 benefited from the receipt of a $262,000 negotiated, variable rebate from a vendor.

Other taxes decreased $141,000 to $1.2 million for the six months ended June 30, 2024, compared to the same period prior year. This decrease was primarily due to a decrease in State of Louisiana bank stock tax resulting from lower deposit account balances and lower net income for the applicable tax years.

Income Tax Expense

The amount of income tax expense is influenced by the amounts 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 accrued tax rate is based on an annualized projection and changes considering our most recent financial results and balances. 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, income tax effects associated with stock-based compensation, and permanent and temporary tax differences.

The table below presents, for the periods indicated, income tax expense:

(dollars in thousands)

For the quarters ended June 30, 2024 and March 31, 2024, income tax expense remained consistent at $1.9 million. The slight decrease in income tax expense was primarily due to a slight decrease in pre-tax income. Our effective income tax rates for the quarters ended June 30, 2024 and March 31, 2024, were 19.3% and 19.1%, respectively.

The table below presents, for the periods indicated, income tax expense:

(dollars in thousands)

For the six months ended June 30, 2024 and 2023, income tax expense totaled $3.8 million and $4.3 million, respectively. The decrease in income tax expense was primarily due to a decrease in pre-tax income. Our effective income tax rates for the six months ended June 30, 2024 and 2023, were 19.2% and 18.7%, respectively.

FINANCIAL CONDITION

As of June 30, 2024, assets were $3.05 billion, which was $80.3 million, or 2.6%, lower than $3.13 billion as of December 31, 2023, primarily due to a decrease in deposits. Total deposits decreased $85.2 million, or 3.0%, to $2.72 billion as of June 30, 2024, from $2.80 billion as of December 31, 2023. Cash and cash equivalents decreased $92.4 million, or 30.2%, to $213.1 million and were 6.99% of assets as of June 30, 2024. Total securities decreased $47.7 million, or 6.7%, to $666.6 million and were 21.87% of assets as of June 30, 2024. During the first six months of the year, loans HFI increased $55.0 million, or 2.8%, to $2.05 billion as of June 30, 2024. As of June 30, 2024, and December 31, 2023, we had no borrowings. Stockholders’ equity increased $3.1 million during the first six months of 2024 to $307.0 million as of June 30, 2024. As of June 30, 2024, the loans HFI to deposits ratio was 75.38%, compared to 71.13% as of December 31, 2023, and the noninterest-bearing deposits to total deposits ratio was 32.87%, compared to 32.71% as of December 31, 2023.

Interest-bearing Deposits in Other Banks

Interest-bearing deposits in other banks were the third-largest component of earning assets as of June 30, 2024. Excess liquidity that is not being deployed into loans or securities is placed in these accounts. As of June 30, 2024, interest-bearing deposits in other banks were $178.0 million and were 5.8% of assets, a decrease of $74.3 million, or 29.5%, compared to $252.4 million and 8.1% of assets as of December 31, 2023. This decrease was primarily due to the outflow of customer deposits during the first half of 2024.

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 June 30, 2024, our total securities portfolio was 21.9% 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 on the consolidated balance sheets were $663.7 million as of June 30, 2024, a decrease of $47.6 million, or 6.7%, from $711.3 million as of December 31, 2023.

Securities AFS are held for indefinite periods of time and are carried at estimated fair value. As of June 30, 2024, the estimated fair value of securities AFS was $526.9 million. 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. The net unrealized loss on securities AFS increased $2.2 million for the six months ended June 30, 2024, resulting in a net unrealized loss of $64.4 million as of June 30, 2024, compared to a net unrealized loss of $62.2 million as of December 31, 2023.

Securities HTM, which we have the intent and ability to hold until maturity, are carried at amortized cost. As of June 30, 2024, the amortized cost of securities HTM was $136.8 million. Securities HTM had an unrealized loss of $22.8 million as of June 30, 2024, compared to an unrealized loss of $22.2 million as of December 31, 2023.

Investment activity for the six months ended June 30, 2024, included $80.3 million in maturities, principal repayments, and calls, partially offset by $34.9 million of securities purchased. There were no sales of securities AFS, and there were no purchases or sales of securities HTM for the same period.

The securities portfolio tax-equivalent yield was 2.30% for the six months ended June 30, 2024, compared to 1.85% for the six months ended June 30, 2023. The increase in yield for the six months ended June 30, 2024, was primarily due to reinvesting securities cash flows received between June 30, 2023 and June 30, 2024, into new securities at higher yields.

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 June 30, 2024, the average life of our securities portfolio was 6.9 years with an estimated effective duration of 5.0 years. As of December 31, 2023, the average life of our securities portfolio was 7.1 years with an estimated effective duration of 5.0 years.

The following tables summarize the amortized cost and estimated fair value of our securities by type as of the dates indicated. As of June 30, 2024, 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.

(in thousands)

(in thousands)

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.

(dollars in thousands)

(1) Tax equivalent projected book yield as of June 30, 2024.

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.

(dollars in thousands)

(1) Tax equivalent projected book yield as of June 30, 2024.

Equity Securities

Equity securities are an investment in a CRA mutual fund, consisting primarily of bonds. Equity securities are carried at fair value on the consolidated balance sheets with periodic changes in value recorded through the consolidated statements of income. As of June 30, 2024, equity securities had a fair value of $2.9 million with a recognized loss of $44,000 for the six months ended June 30, 2024. As of December 31, 2023, equity securities had a fair value of $3.0 million with a recognized loss of $14,000 for the year ended December 31, 2023.

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 June 30, 2024, loans HFI were $2.05 billion, an increase of $55.0 million, or 2.8%, compared to $1.99 billion as of December 31, 2023. In the first six months of 2024, loans HFI increased primarily due to new loan activity in various markets across Louisiana.

Loans by Category

Loans HFI by category, loans HFI, and loans HFS are summarized below as of the dates indicated:

(dollars in thousands)

Commercial real estate loans are collateralized by owner occupied and non-owner occupied properties mainly in Louisiana. Non-owner occupied office loans were $57.4 million, or 2.8%, of loans HFI as of June 30, 2024, and $62.3 million, or 3.1% of loans HFI, as of December 31, 2023. The properties are primarily centered in low-rise suburban areas.

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 June 30, 2024, health care loans were $167.4 million, or 8.2% of loans HFI, compared to $153.8 million, or 7.7% of loans HFI, as of December 31, 2023. The average health care loan size was $361,000 as of June 30, 2024 and $334,000 as of December 31, 2023. Within the health care sector, loans to nursing and residential care facilities were 4.5% of loans HFI as of June 30, 2024, and 4.0% as of December 31, 2023. Loans to physician and dental practices were 3.5% of loans HFI as of June 30, 2024, and 3.6% as of December 31, 2023.

Energy loans were 1.7% of loans HFI as of June 30, 2024 and December 31, 2023.

Geographic Markets

As of June 30, 2024, Red River Bank operates in seven geographic markets throughout the state of Louisiana. The following table summarizes loans HFI by market of origin:

(dollars in thousands)

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 $3.2 million as of June 30, 2024, an increase of $607,000, or 23.3%, from $2.6 million as of December 31, 2023. This increase was primarily due to an increase in nonaccrual loans, partially offset by a decrease in past due loans. The ratio of NPAs to assets was 0.11% as of June 30, 2024, and 0.08% as of December 31, 2023.

Nonperforming loan and asset information is summarized below:

(dollars in thousands)

42

Nonaccrual loans are summarized below by category:

(in thousands)

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 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 ACL.

The following table summarizes loans HFI by risk rating:

(dollars in thousands)

There were no loans as of June 30, 2024 or December 31, 2023, classified as doubtful or loss.

Allowance for Credit Losses

In determining the ACL for loans HFI, we estimate losses on a collective pool basis when similar risk characteristics and risk profiles exist. Loans that do not share similar risk characteristics are evaluated individually and excluded from the collective evaluation. The ACL is determined using the CECL model, which considers relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

As of June 30, 2024, the ACL was $21.6 million, or 1.06% of loans HFI. As of December 31, 2023, the ACL totaled $21.3 million, or 1.07% of loans HFI. The $291,000 increase in the ACL for the six months ended June 30, 2024, was due to $600,000 from the provision for credit losses, partially offset by $309,000 of net charge-offs.

The provision for credit losses for the six months ended June 30, 2024, was $600,000, an increase of $300,000, or 100.0%, from $300,000 for the six months ended June 30, 2023. The primary drivers of the increase were the current inflationary environment, changing monetary policy, current economic forecasts, and loan growth. Effective January 1, 2023, we adopted ASC 326, the CECL methodology for estimating credit losses. For the cumulative effect of adopting ASC 326, we recorded a $569,000, net of tax, decrease to stockholders’ equity as of January 1, 2023. We will continue to evaluate future provision needs in relation to current economic situations, loan growth, trends in asset quality, forecasted information, and other conditions influencing loss expectations.

The following table displays activity in the ACL for June 30, 2024, and June 30, 2023:

(dollars in thousands)

We believe that we have established our ACL in accordance with GAAP and that the ACL was adequate to provide for known and inherent losses in the portfolio at all times shown above. Future provisions for credit losses are subject to ongoing evaluations of the factors and loan portfolio risks, 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 credit 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 $85.2 million, or 3.0%, to $2.72 billion as of June 30, 2024, from $2.80 billion as of December 31, 2023. This decrease was primarily a result of the seasonal outflow of funds from public entity customers and income tax payments, partially offset by an increase in new customer time deposit activity. Noninterest-bearing deposits decreased by $23.5 million, or 2.6%, to $892.9 million as of June 30, 2024. Noninterest-bearing deposits as a percentage of total deposits were 32.87% as of June 30, 2024, compared to 32.71% as of December 31, 2023. Interest-bearing deposits decreased by $61.7 million, or 3.3%, to $1.82 billion as of June 30, 2024.

Red River Bank has a granular, diverse deposit portfolio with customers in a variety of industries throughout Louisiana. As of June 30, 2024 and December 31, 2023, the average deposit account size was approximately $27,000 and $28,000, respectively.

The following table presents our deposits by account type as of the dates indicated:

(dollars in thousands)

The following table presents deposits by customer type as of the dates indicated:

(dollars in thousands)

We manage our interest expense on deposits through a deposit pricing strategy that is based on competitive pricing, economic conditions, and current or anticipated funding needs. We adjust deposit rates in part based upon our anticipated funding needs and liquidity position. We also consider the potential interest rate risk caused by extended maturities of time deposits when adjusting deposit rates.

Our average deposit balance was $2.73 billion for the three months ended June 30, 2024, a decrease of $22.8 million, or 0.8%, from $2.76 billion for the three months ended March 31, 2024. The average cost of interest-bearing deposits and total deposits for the second quarter of 2024 was 2.62% and 1.75%, respectively, compared to 2.54% and 1.70% for the prior quarter, respectively. The increase in the average cost of interest-bearing deposits and total deposits in the second quarter of 2024 as compared to the prior quarter was due to time deposit activity. Also, as of June 30, 2024, 6.5% of interest-bearing transaction deposits had floating rates, which adjust with market rates.

The following table presents our average deposits by account type and the average rate paid for the periods indicated:

(dollars in thousands)

As of June 30, 2024, our estimated uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $804.6 million, or 29.6% of total deposits, compared to $887.8 million, or 31.7% of total deposits, as of December 31, 2023. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. Also, as of June 30, 2024, our estimated uninsured deposits, excluding collateralized public entity deposits, were approximately $633.2 million, or 23.3% of total deposits, compared to $643.6 million, or 23.0% of total deposits, as of December 31, 2023. As of June 30, 2024, our cash and cash equivalents of $213.1 million combined with our available borrowing capacity of $1.68 billion equaled 235.6% of our estimated uninsured deposits and 299.4% of our estimated uninsured deposits, excluding collateralized public entity deposits.

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)

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 be invested at a positive interest rate spread for additional capacity to fund loan demand or to meet our liquidity needs. We established borrowing capacity with the FHLB, the Federal Reserve Bank’s Discount Window facility, and other correspondent banks to provide additional sources of operating funds. Our FHLB line of credit is collateralized by eligible Red River Bank loans. Our Federal Reserve Bank’s Discount Window line of credit is collateralized by eligible securities and eligible Red River Bank loans that are not pledged to the FHLB. As of June 30, 2024 and December 31, 2023, we had no outstanding borrowings under these agreements.

Stockholders’ Equity

Total stockholders’ equity as of June 30, 2024, was $307.0 million compared to $303.9 million as of December 31, 2023. The $3.1 million, or 1.0%, increase in stockholders’ equity was attributable to $16.2 million of net income for the six months ended June 30, 2024, and $224,000 of stock compensation, partially offset by the repurchase of 216,220 shares of common stock for $10.8 million, $1.3 million in cash dividends, and a $1.2 million, net of tax, market adjustment to AOCI related to securities.

During the second quarter of 2022, we reclassified $166.3 million, net of $17.9 million of unrealized loss, from AFS to HTM. The securities were transferred at fair value, which became the cost basis for the securities HTM. At the date of the transfer, the net unrealized loss of $17.9 million, of which $14.2 million, net of tax, was included in AOCI and is being amortized over the remaining life of the securities as a yield adjustment in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. As of June 30, 2024, the net unamortized, unrealized loss remaining on the transferred securities included in the consolidated balance sheets totaled $13.7 million, of which $10.9 million, net of tax, was included in AOCI.

On December 14, 2023, our board of directors approved the renewal of the 2023 stock repurchase program that was completed in the fourth quarter of 2023 after reaching its purchase limit. The renewed program authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2024 through December 31, 2024. 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 six months ended June 30, 2024, we repurchased 16,220 shares of our common stock at an aggregate cost of $764,000 under the stock repurchase program. As of June 30, 2024, we had $4.2 million available for repurchasing our common stock under this program.

On March 13, 2024, we entered into a privately negotiated stock repurchase agreement for the purchase of 200,000 shares of our common stock for a total purchase price of $10.0 million. The repurchase was supplemental to our $5.0 million stock repurchase program and did not impact the amount of permitted repurchases thereunder.

Effective January 1, 2023, repurchases are subject to a nondeductible excise tax under the Inflation Reduction Act of 2022 equal to 1.0% of the fair market value of the shares repurchased, subject to certain limitations. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our financial condition or results of operations.

Regulatory Capital Requirements

Capital management consists of maintaining equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, bank holding companies and FDIC-insured depository institutions are required to maintain minimum capital relative to the amount and types of assets they hold.

As we deploy our capital and continue to grow our operations, our capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

For additional information on regulatory capital guidelines and limits for Red River Bank and Red River Bancshares, Inc., see “Item 1. Financial Statements - Notes to the Unaudited Consolidated Financial Statements - Note 8. Regulatory Capital Requirements.”

LIQUIDITY AND ASSET-LIABILITY MANAGEMENT

Liquidity

As of June 30, 2024, we had sufficient liquid assets available and $1.68 billion accessible from other liquidity sources.

Liquidity involves our ability to raise funds to support asset growth and potential acquisitions, reduce assets to meet deposit withdrawals and other payment obligations, maintain reserve requirements, and otherwise operate on an ongoing basis and manage unexpected events. For the six months ended June 30, 2024, and the year ended December 31, 2023, 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; therefore, these cash flows are monitored regularly.

Liquidity levels 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.

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 deposit accounts 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 $22.0 million, or 0.81%, for the first six months of 2024, compared to the average deposits for the twelve months ended December 31, 2023. The increase in average total deposits was primarily due to new time deposit activity, partially offset by the seasonal outflow of funds from public entity customers and income tax payments. Our average total loans increased $85.5 million, or 4.40%, for the for the first six months of 2024, compared to average total loans for the twelve months ended December 31, 2023. The increase in average total loans was primarily due to the increase in commercial and industrial and real estate activity.

As of June 30, 2024, liquid assets were $213.1 million, compared to $305.4 million as of December 31, 2023. The decrease of $92.4 million, or 30.2%, was due to the outflow of deposits and the funding of loans, partially offset by net securities cash flows received during the first six months of 2024. The liquid assets to assets ratio was 6.99% as of June 30, 2024, compared to 9.76% as of December 31, 2023.

Our securities portfolio is an alternative source for meeting liquidity needs and was our second-largest component of assets as of June 30, 2024. The securities portfolio generates cash flow through principal repayments, calls, and maturities, and certain securities can be sold or used as collateral in borrowings that allow for their conversion to cash. Securities AFS can generally be sold, while securities HTM have significant restrictions related to sales. As of June 30, 2024, we project receipt of approximately $126.0 million of principal repayments and maturities through June 30, 2025. As of June 30, 2024, approximately $424.1 million, or 66.0%, of the securities portfolio was available to be sold or to be used as collateral in borrowings as a liquidity source.

We also utilize the FHLB as needed as a viable funding source. FHLB advances may be used to meet the Bank’s 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. We currently are classified as having “blanket lien collateral status,” which means that advances can be executed at any time without further collateral requirements. As of June 30, 2024 and December 31, 2023, our net borrowing capacity from the FHLB was $989.2 million and $829.2 million, respectively. There were no outstanding borrowings from the FHLB as of June 30, 2024 and December 31, 2023.

Another borrowing source is the Federal Reserve Bank’s Discount Window. Effective the third quarter of 2023, the Bank pledged securities to have borrowing access to the Federal Reserve Bank’s Discount Window. In addition, effective March 2024, the Bank was approved for the Discount Window’s Borrower-In-Custody “BIC” program, which provides borrowing capacity through the pledging of eligible Red River Bank loans that are not pledged to the FHLB. As of June 30, 2024, we had a total borrowing capacity of $168.3 million, including $129.5 million through the BIC program, compared to a total borrowing capacity of $45.5 million as of December 31, 2023. There were no outstanding borrowings from the Federal Reserve Bank’s Discount Window as of June 30, 2024 and December 31, 2023.

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 June 30, 2024 and December 31, 2023. The rates for the federal funds lines are determined by the applicable commercial bank at the time of borrowing. We also maintain an additional $6.0 million revolving line of credit at one of our correspondent banks. As of June 30, 2024 and December 31, 2023, 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 June 30, 2024 and December 31, 2023.

The Federal Reserve’s Bank Term Funding Program ended on March 11, 2024. The Bank did not utilize this program while it was being offered.

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 June 30, 2024, we had $407.3 million in unfunded loan commitments and $12.4 million in commitments associated with outstanding standby letters of credit. As of December 31, 2023, we had $372.0 million in unfunded loan commitments and $15.4 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 June 30, 2024, 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 June 30, 2024, there was a $2.6 million outstanding commitment to this partnership.

In 2021, the Company committed to an investment into a bank technology limited partnership. As of June 30, 2024, there was a $452,000 outstanding commitment to this partnership.

Purchase Commitment

The Company has committed to an agreement to buy real estate for approximately $1.9 million as of June 30, 2024.

Construction Commitment

The Company has one committed construction agreement to construct a banking center, and there was approximately $189,000 remaining on this commitment as of June 30, 2024.

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 0.6% as of June 30, 2024.

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 simulation model and shock analysis.

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. We use parallel rate shock scenarios that assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. We also deploy a ramped rate scenario over a 12-month and 24-month horizon based upon parallel yield curve shifts. Our nonparallel rate shock model simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Contractual maturities and repricing opportunities of loans are incorporated into the model, as are prepayment assumptions and maturity date and call options within the securities portfolio. The average life of non-maturity deposit accounts are based on assumptions developed from non-maturity deposit decay studies, which calculate average lives using historic closure rates.

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. In accordance with Bank policy that was approved in September 2023, regarding economic value at risk simulations performed by our risk model 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 10.0% for a 100 bp shift and 20.0% 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.

The results above, as of June 30, 2024 and December 31, 2023, 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. Our repricing opportunity is captured 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 June 30, 2024, 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 June 30, 2024, floating rate loans were 13.9% of loans HFI, and floating rate transaction deposits were 6.5% 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, and realized book value per share 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 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.

As a result of previous acquisitions, we have a small amount of intangible assets. As of June 30, 2024, total intangible assets were $1.5 million, which is less than 1.0% of total assets.

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.

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.

(dollars in thousands, except per share data)

CRITICAL ACCOUNTING ESTIMATES

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.

There were no other 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, 2023. For details on the significant accounting principles and practices we follow, see “Item 1. Financial Statements - Note 1. Summary of Significant Accounting Policies” in this Report and “Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2023.

RECENT ACCOUNTING PRONOUNCEMENTS

See “Item 1. Financial Statements – Note 1. Summary of Significant Accounting Policies – Recent Accounting Pronouncements.”

Quantitative and qualitative disclosures about market risk are presented in our Annual Report on Form 10-K for the year ended December 31, 2023, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Asset-Liability Management - Interest Rate Sensitivity and Market Risk.” Additional information as of June 30, 2024, is included herein under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Asset-Liability Management - Interest Rate Sensitivity and Market Risk.” The foregoing information is incorporated into this Item 3 by reference.

Evaluation of disclosure controls and procedures

As of the end of the period covered by this Report, an evaluation was performed by our management, with the participation of our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating our controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this Report.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For information regarding risk factors that could affect our business, financial condition, and results of operations, see the information in “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to the risk factors disclosed in our most recent Annual Report on Form 10-K.