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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-16 · 370 added, 432 removed, 775 unchanged (51% of the section changed)

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2023 FINANCIAL AND OPERATIONAL HIGHLIGHTS

2022 was a year of unusual interest rate increases and a changing economic environment.

Higher market interest rates helped us achieve net interest margin expansion and record-high earnings;

however, they also created deposit pressures.

In addition, we opened full-service banking centers in both New Orleans and Lafayette, substantially completed the SBA PPP, and achieved solid loan growth.

• Net income for the year ended December 31, 2022, was $36.9 million, or $5.13 diluted EPS, an increase of $4.0 million, or 12.0%, compared to $33.0 million, or $4.51 diluted EPS, for the year ended December 31, 2021.

2023 was a challenging year due to the failure of a few financial institutions in the first half of the year.

These issues and the changing interest rate environment impacted most financial institutions.

However, we navigated these challenges and had steady and solid financial results for 2023.

We also implemented the CECL methodology, completed the 2023 stock repurchase program, increased the cash dividend, and improved our banking center network.

• Net income for the year ended December 31, 2023, was $34.9 million, or $4.86 diluted EPS, a decrease of $2.0 million, or 5.5%, compared to $36.9 million, or $5.13 diluted EPS, for the year ended December 31, 2022.

These decreases were mainly due to higher operating expenses, partially offset by higher noninterest income and lower provision for credit losses.

Net interest income was consistent between the years with offsetting increases in interest income and interest expense.

• The return on assets was 1.15% for 2023 and 1.18% for 2022.

• The return on equity was 12.44% for 2023 and 13.98% for 2022.

• Assets decreased $142.0 million, or 4.4%, to $3.08 billion as of December 31, 2022, compared to $3.22 billion as of December 31, 2021.

This decrease was primarily driven by a $111.4 million, or 3.8%, decrease in deposits for the same period due to customer deposit activity in response to the changing interest rate environment.

• Non-PPP loans HFI (non-GAAP) increased $250.0 million, or 15.0%, to $1.92 billion as of December 31, 2022, compared to $1.67 billion as of December 31, 2021.

The increase in loans was due to loan activity in various markets across Louisiana.

For additional information on non-GAAP financial measures, see “-Non-GAAP Financial Measures” in this Report.

• As of December 31, 2022, our participation in the SBA PPP was materially complete, and PPP loans were $14,000, which was less than 0.1% of loans HFI.

As of December 31, 2021, PPP loans were $17.6 million, net of $626,000 of deferred income, or 1.0% of loans HFI.

PPP loan income for 2022 was $670,000, compared to $5.8 million for 2021.

• The net interest income and net interest margin FTE increased in 2022 compared to 2021.

Net interest income for 2022 was $86.6 million compared to $71.7 million for 2021.

Net interest margin FTE for 2022 was 2.86% compared to 2.60% for the prior year.

The net interest income and net interest margin FTE for 2022 were positively impacted by the higher interest rate environment in 2022 and an improved asset mix.

• Assets increased $46.1 million, or 1.5%, to $3.13 billion as of December 31, 2023, compared to $3.08 billion as of December 31, 2022.

• Loans HFI increased $76.6 million, or 4.0%, to $1.99 billion as of December 31, 2023, compared to $1.92 billion as of December 31, 2022.

The increase in loans was due to improved loan activity in various markets across Louisiana.

• Deposits totaled $2.80 billion as of December 31, 2023, consistent with December 31, 2022.

During 2023, there was a deposit mix shift as customers moved funds from lower yielding categories to higher yielding categories.

• As of December 31, 2023, total securities were $714.3 million, or 22.8% of assets, compared to $776.1 million, or 25.2% of assets, as of December 31, 2022.

During the first and second quarters of 2022, we restructured the securities portfolio, which resulted in higher interest income and an improved securities yield.

• During the second quarter of 2022, management reclassified 20.5% of the securities portfolio from AFS to HTM.

Securities decreased $61.8 million mainly due to maturities and principal repayments exceeding purchases, partially offset by a smaller net unrealized loss on securities AFS.

• For 2023, average liquid assets, which are cash and cash equivalents, decreased $186.8 million to $237.9 million, compared to $424.8 million for 2022.

The liquid assets to assets ratio was 9.8% as of December 31, 2023 and 9.0% as of December 31, 2022.

• Net interest income was fairly consistent for 2023 and 2022, with offsetting increases in interest income and interest expense.

The net interest margin FTE increased slightly to 2.91% for 2023 compared to 2.86% for the prior year.

The 2023 net interest income and net interest margin FTE were impacted by the higher interest rate environment in 2023, an improved asset mix, and increased deposit costs.

• The CECL methodology became effective for us on January 1, 2023.

The adoption of CECL resulted in a $720,000 adjustment to the ACL and reserve for unfunded commitments.

This adjustment was 3.5% of the December 31, 2022 ALL.

Provision expense was $735,000 for 2023 compared to $1.8 million for 2022.

• NPAs were $2.6 million, or 0.08% of assets, as of December 31, 2023.

As of December 31, 2022, the ALL was $20.6 million, or 1.08% of loans HFI.

• The board of directors approved changes to the 401(k) Plan.

Effective April 1, 2022, employees have the opportunity to invest a portion of their 401(k) Plan funds in our common stock through a unitized fund.

As of December 31, 2023, the ACL was $21.3 million, or 1.07% of loans HFI.

• We expanded organically throughout Louisiana with the following events:

◦ In our Acadiana market, in the first quarter of 2022, we opened our first Red River Bank full-service banking center in Lafayette, Louisiana.

In the second quarter of 2022, we relocated the staff and services from the Lafayette LDPO to the new banking center and closed the LDPO located there.

◦ In the first quarter of 2022, we purchased property in Metairie, Louisiana, a New Orleans suburb.

Plans to construct a full-service banking center are in process.

◦ In our New Orleans market, we remodeled and received regulatory approval on a leased banking center location in downtown New Orleans, which we opened as the Bank’s first full-service banking center in New Orleans on August 1, 2022.

◦ In the fourth quarter of 2022, we finished remodeling and opened the new Red River Bank operations center building.

This remodeled 21,000 square foot building is located adjacent to the Red River Bank headquarters building in Alexandria, Louisiana.

This building was designed to provide an efficient and modern facility for Red River Bank operations and support departments and to improve the Red River Bank business continuity plan.

• In 2022, we paid a quarterly cash dividend of $0.07 per share, resulting in cash dividends of $0.28 per share for 2022, which was consistent with 2021.

In the first quarter of 2023, we paid a quarterly cash dividend of $0.08 per share.

• In accordance with our stock repurchase program, during 2022, we repurchased 4,465 shares of our common stock at an aggregate cost of $218,000.

The 2022 stock repurchase program began February 4, 2022, and expired on December 31, 2022.

On November 4, 2022, our board of directors approved the renewal of our stock repurchase program for 2023.

◦ In our Southwest market, we closed one of our banking centers in the first quarter of 2023 and relocated the staff and services to an existing, expanded banking center.

◦ In the third quarter of 2023, Red River Bank held a groundbreaking ceremony for a banking center in Metairie, Louisiana, which is our third banking location in our New Orleans market.

Construction on this new banking center is in process, and it is projected to open for business in the third quarter of 2024.

• In 2023, we paid a quarterly cash dividend of $0.08 per share, resulting in annual cash dividends of $0.32 per share.

In 2022, we paid a quarterly cash dividend of $0.07 per share, resulting in annual cash dividends of $0.28 per share.

In the first quarter of 2024, we declared a quarterly cash dividend of $0.09 per share.

• The 2023 stock repurchase program authorized us to purchase up to $5.0 million of our outstanding common stock from January 1, 2023 through December 31, 2023.

In 2023, we repurchased 101,298 shares of our common stock at an aggregate cost of $5.0 million and completed the program.

On December 14, 2023, our board of directors approved the renewal of our stock repurchase program for 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.

• Various changes occurred in 2022 with the boards of directors of the Company and the Bank.

Simpson, Chair Emeritus, and founding director, retired from the board of directors of the Company and the Bank at the end of his term at the Company’s 2022 annual shareholder meeting on May 5, 2022.

Crowell was appointed to the boards of the Company and the Bank on February 24, 2022.

• In mid-2023, S&P Market Intelligence ranked Red River Bank 45th of the top 50 best-performing community banks in 2022 with assets between $3.0 and $10.0 billion.

• In the fourth quarter of 2023, the American Banker publication included Red River Bank in its “2023 Best Banks to Work For” ranking.

• On January 25, 2024, Michael J.

Brown, CFA was appointed to the boards of the Company and the Bank.

The following tables set forth selected historical consolidated financial information for each of the periods indicated.

The historical financial information as of and for the years ended December 31, 2022 and 2021, except for the selected ratios, is derived from our audited consolidated financial statements included elsewhere in this Report.

The historical financial information as of and for the year ended December 31, 2020, except for the selected ratios, is derived from our audited consolidated financial statements that are not included in this Report.

The historical financial information as of and for the years ended December 31, 2023, 2022, and 2021, except for the selected ratios, is derived from our audited consolidated financial statements.

Our historical results may not be indicative of our future performance.

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Summary Credit Quality Ratios:

NPAs to total assets

NPAs to assets

0.08 % 0.08 % 0.03 %

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0.13 % 0.12 % 0.02 %

Allowance for loan losses to loans HFI

ACL to loans HFI

1.07 % 1.08 % 1.14 %

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Capital Ratios:

Total stockholders’ equity to total assets

Stockholders’ equity to assets

9.71 % 8.62 % 9.25 %

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RESULTS OF OPERATIONS

Net income for the year ended December 31, 2022, was $36.9 million, or $5.13 diluted EPS, an increase of $4.0 million, or 12.0%, compared to $33.0 million, or $4.51 diluted EPS, for the year ended December 31, 2021.

The increase in net income was primarily due to a $14.9 million increase in net interest income, partially offset by a $5.7 million decrease in noninterest income and a $4.4 million increase in operating expenses.

The return on average assets for the year ended December 31, 2022, was 1.18%, compared to 1.13% for the prior year.

The return on average equity was 13.98% for the year ended December 31, 2022, compared to 11.21% for the prior year.

Net income for the year ended December 31, 2023, was $34.9 million, or $4.86 diluted EPS, a decrease of $2.0 million, or 5.5%, compared to $36.9 million, or $5.13 diluted EPS, for the year ended December 31, 2022.

The decrease in net income was mainly due to a $5.2 million increase in operating expenses, partially offset by a $2.4 million increase in noninterest income and a $1.0 million decrease in the provision for credit losses.

The return on assets for the year ended December 31, 2023, was 1.15%, compared to 1.18% for the prior year.

The return on equity was 12.44% for the year ended December 31, 2023, compared to 13.98% for the prior year.

Our efficiency ratio for the year ended December 31, 2023, was 59.39%, compared to 56.60% for the year ended December 31, 2022.

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These market rates impact pricing of certain assets and liabilities used by financial institutions.

Our net interest income and net interest margin are directly affected by these rates and their changes.

Beginning March 2020, we were in a low interest rate environment that impacted both the net interest income and net interest margin FTE.

In March 2020, the target federal funds rate decreased 150 bps to a range of 0.00% to 0.25% and remained at that rate until March 2022, when the FOMC began increasing the target federal funds rate.

The FOMC increased the target federal funds rate by 25 bps in March 2022;

50 bps in May 2022;

75 bps in each of June, July, September, and November 2022;

and 50 bps in December 2022, resulting in a range of 4.25% to 4.50% as of December 31, 2022.

The average effective federal funds rate was 1.68% for 2022 and 0.08% for 2021.

The 2022 net interest income and net interest margin FTE were positively impacted by the higher interest rate environment in 2022 and an improved asset mix.

Net interest income for the year ended December 31, 2022, was $86.6 million, which was $14.9 million, or 20.8%, higher than $71.7 million for the year ended December 31, 2021.

Net interest income increased due to a $17.0 million increase in interest and dividend income, partially offset by a $2.1 million increase in interest expense.

The increase in interest and dividend income for 2022 when compared to 2021 was primarily due to an increase in non-PPP loan income, an increase in taxable securities income, and an increase in income on short-term liquid assets, partially offset by a decrease in PPP loan income.

Non-PPP loan income increased $13.0 million in 2022 primarily due to a $267.8 million, or 17.3%, increase in the average balance of non-PPP loans, when compared to 2021.

Taxable securities income increased $5.0 million primarily due to a $292.3 million, or 84.8%, increase in the average balance of taxable securities to $637.2 million in 2022 from $344.9 million in 2021, due to our deployment of lower-yielding short-term liquid assets into higher-yielding taxable securities during the first half of 2022.

Income on short-term liquid assets increased $4.0 million due to the FOMC’s increases to the target federal funds rate in 2022.

PPP loan income decreased $5.1 million due to lower average PPP loan balances outstanding and lower fees recognized to income on PPP loans.

Interest expense increased in 2022 when compared to 2021, primarily due to an increase in the rates on interest-bearing transaction deposits.

However, interest expense on time deposits decreased due to time deposits being priced downward as we adjusted rates on new and renewed time deposits in 2021.

Net interest margin FTE increased 26 bps to 2.86% for the year ended December 31, 2022, from 2.60% for the year ended December 31, 2021, primarily due to the higher interest rate environment and an improved asset mix.

The FOMC’s increases to the target federal funds rate during 2022 increased the yield on short-term liquid assets by 110 bps when compared to 2021.

Our deployment of lower-yielding short-term liquid assets into higher-yielding non-PPP loans and securities in 2022 also benefited the net interest margin FTE.

The yield on non-PPP loans increased 12 bps due to higher loan rates on new, renewed, and floating rate loans during 2022 when compared to 2021.

The yield on taxable securities also benefited from higher market interest rates on securities purchased during 2022, compared to the interest rate on taxable securities during 2021.

The yield on taxable securities increased 19 bps for the year ended December 31, 2022, when compared to the year ended December 31, 2021.

These increases were partially offset by a decrease in PPP loan income and a ten bp increase in the rate on interest-bearing deposits.

PPP loan income decreased $5.1 million due to lower fees recognized to income on PPP loans and a lower average balance of PPP loans outstanding.

The rate on interest-bearing transaction deposits increased due to rate competition for deposits that began in the second half of 2022.

Between March 2020 and September 2023, the interest rate environment changed significantly.

In March 2020, the target federal funds range decreased 150 bps to a range of 0.00% to 0.25% and remained at that level until March 2022, when the FOMC began increasing the target federal funds range.

The FOMC increased the federal funds rate by 425 bps in 2022, by 50 bps in the first quarter of 2023, by 25 bps in the second quarter of 2023, by 25 bps in the third quarter of 2023, and kept the rate consistent during the fourth quarter of 2023, ending 2023 with a target range of 5.25% to 5.50%.

The average effective federal funds rate was 5.03% for 2023 compared to 1.68% for 2022.

The net interest income and net interest margin FTE for the twelve months ended December 31, 2023, were both impacted by the federal funds rate increases by the FOMC in 2023.

Net interest income for the year ended December 31, 2023, was $86.4 million, which was fairly consistent with the year ended December 31, 2022.

Net interest income was impacted by a $24.4 million increase in interest expense, mostly offset by a $24.2 million increase in interest and dividend income.

Interest expense increased during 2023 primarily due to increased deposit rates as a result of deposit rate pressures, combined with larger balances in higher cost deposit accounts.

We also 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 year ended December 31, 2023, when compared to the year ended December 31, 2022, was primarily due to higher interest income on loans and short-term liquid assets.

Loan income increased $17.6 million due to higher rates on new, renewed, and floating rate loans and a $126.8 million increase in the average balance of loans, when compared to the year ended December 31, 2022.

Interest income on short-term liquid assets increased $5.9 million due to the FOMC’s increases to the target federal funds range, partially offset by a $179.3 million decrease in the average balance of these short-term liquid assets.

Net interest margin FTE increased five bps to 2.91% for the year ended December 31, 2023, from 2.86% for the year ended December 31, 2022, primarily due to the higher interest rate environment and an improved asset mix.

The yield on loans increased 62 bps due to higher rates on new, renewed, and floating rate loans resulting from the higher interest rate environment.

The average rate on new and renewed loans was 7.19% for the year ended December 31, 2023.

Our deployment of lower-yielding short-term liquid assets into these higher-yielding loans further benefited the net interest margin FTE.

Also, the yield on securities increased 15 bps for the same period, primarily due to reinvesting securities cash flows received during 2023 into new securities at higher yields.

In addition, the yield on short-term liquid assets was 388 bps higher for the year ended December 31, 2023, compared to the prior year.

The net interest margin FTE was negatively impacted by an increase in the cost of deposits.

The cost of deposits increased 91 bps to 1.18% for the year ended December 31, 2023, from 0.27% for the year ended December 31, 2022, due to a 140 bp increase in the rate on interest-bearing deposits, combined with customers moving deposits from lower yielding categories to higher yielding categories in 2023.

Within total interest-bearing deposits, the rate on time deposits and interest-bearing transaction deposits increased 197 and 111 bps, respectively.

These rates increased as we responded to deposit rate pressure that began in the second half of 2022 and continued into 2023.

In the fourth quarter of 2023, the target range for the federal funds rate was 5.25% to 5.50%.

The expectation is that the FOMC will lower the federal funds rate in 2024.

During 2024, we anticipate receiving approximately $145.0 million in securities cash flows.

We expect to redeploy these cash flows into higher yielding assets, which should benefit both net interest income and net interest margin FTE.

As of December 31, 2023, floating rate loans were 11.7% of loans HFI, and floating rate transaction deposits were 6.1% of interest-bearing transaction deposits.

Depending on balance sheet activity and the movement of interest rates, we expect the net interest margin FTE to improve slightly in the first half 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 years presented:

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Outstanding Interest

Income/Expense Average

Outstanding Interest

Income/Expense Average

Interest-earning assets:

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Total interest-earning assets 2,961,892 $ 118,568 3.96 % 3,053,340 $ 94,375 3.06 %

Allowance for loan losses (19,608) (19,155)

Allowance for credit losses (20,980) (19,608)

Noninterest-earning assets 86,939 100,543

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(3) Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.

Excluding PPP loan income, net interest income (non-GAAP) for the year ended December 31, 2022, was $86.0 million, which was $20.0 million, or 30.4%, higher than the prior year.

Also, with PPP loans excluded for the year ended December 31, 2022, the yield on non-PPP loans (non-GAAP) was 4.09%, and the net interest margin FTE (non-GAAP) was 2.84%.

For the year ended December 31, 2022, PPP loans had a three bp accretive impact to the yield on loans and a two bp accretive impact to the net interest margin FTE.

For further information on non-GAAP financial measures, see “- Non-GAAP Financial Measures” in this Report.

The following table presents interest income for total loans, PPP loans, total non-PPP loans (non-GAAP), as well as net interest income and net interest ratios excluding PPP loans (non-GAAP) for the years presented:

For the Years Ended December 31,

(dollars in thousands) Average

Outstanding Interest/Fee

Earned Average

Yield Average

Outstanding Interest/Fee

Earned Average

$ 1,816,538 $ 75,827 4.12 % $ 1,621,606 $ 67,923 4.14 %

PPP loans, net

Average 4,309 77,222

Interest 44 809

Fees 626 4,964

Total PPP loans, net 4,309 670 15.54 % 77,222 5,773 7.46 %

Non-PPP loans (non-GAAP) (3)

$ 1,812,229 $ 75,157 4.09 % $ 1,544,384 $ 62,150 3.97 %

Net interest income, excluding PPP loan income (non-GAAP)

Net interest income $ 86,639 $ 71,722

PPP loan income (670) (5,773)

Net interest income, excluding PPP loan income (non-GAAP) (3)

$ 85,969 $ 65,949

Ratios excluding PPP loans, net (non-GAAP) (3)

Net interest spread 2.58 % 2.25 %

Net interest margin 2.79 % 2.40 %

Net interest margin FTE (4)

2.84 % 2.46 %

(1) Includes average outstanding balances of loans HFS of $3.3 million and $8.6 million for the years ended December 31, 2022 and 2021, respectively.

(2) Nonaccrual loans are included as loans carrying a zero yield.

(3) Non-GAAP financial measure.

See also “- Non-GAAP Financial Measures” in this Report.

(4) Net interest margin FTE includes an FTE adjustment using a 21.0% federal income tax rate on tax-exempt securities and tax-exempt loans.

The Federal Reserve is expected to raise the target federal funds rate several more times in the first half of 2023.

Our balance sheet is asset sensitive and interest income on earning assets generally improves in a higher rate environment.

However, we also expect additional pressure on deposit rates due to the higher rate environment and competition for deposits.

As of December 31, 2022, floating rate loans were 14.5% of loans HFI, and floating rate transaction deposits were 2.6% of interest-bearing transaction deposits.

In the first half of 2023, dependent upon balance sheet activity and deposit rate pressure, we expect the net interest margin and net interest income to decrease slightly.

Rate/Volume Analysis

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates.

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.

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

The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the earlier period.

The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods.

For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

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 years ended December 31, 2023 and 2022.

For the Years Ended December 31,

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Securities - tax-exempt

(148) 59 (89)

Federal funds sold

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$ 1,080 $ (1,281) $ (201)

Provision for Loan Losses

The provision for loan losses is a charge to income necessary to maintain the allowance for loan losses at a level considered appropriate by management.

(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

Effective January 1, 2023, we adopted ASC 326 , the CECL methodology for estimating credit losses.

The guidance for CECL replaces our previous incurred loss methodology with a methodology that reflects the current expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine 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 provision expense for the year ended December 31, 2022, was $1.8 million, a decrease of $150,000 from $1.9 million for the year ended December 31, 2021.

The provision for loan losses for 2022 was due to the current inflationary environment, changing monetary policy, and loan growth.

The provision for loan losses in 2021 was due to the anticipated adverse effects of the COVID-19 pandemic at that time.

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

For the Years Ended December 31,

(dollars in thousands) 2023 2022 Increase (Decrease)

Provision for credit losses $ 735 $ 1,750 $ (1,015) (58.0 %)

The provision for credit losses for the year ended December 31, 2023, was $735,000, a decrease of $1.0 million from $1.8 million for the year ended December 31, 2022.

The primary drivers of the decrease were the current inflationary environment, changing monetary policy, current economic forecasts, and lower 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.

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.

Noninterest income decreased $5.7 million to $18.7 million for the year ended December 31, 2022, compared to $24.5 million for the prior year.

The decrease in noninterest income was due to lower mortgage loan income, lower net debit card income, higher losses on equity securities, and the loss on sale and call of securities.

These decreases were partially offset by an increase in service charges on deposit accounts and brokerage income.

Noninterest income increased $2.4 million to $21.1 million for the year ended December 31, 2023, compared to $18.7 million for the prior year.

The increase in noninterest income was due to higher income from an SBIC limited partnership of which Red River Bank is a member, a decreased loss on equity securities, and higher loan and deposit and brokerage income.

These increases were partially offset by lower mortgage and net debit card income.

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

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$ 21,114 $ 18,747 $ 2,367 12.6 %

Mortgage loan income decreased $5.6 million to $3.1 million for 2022, compared to $8.7 million for 2021 due to rising mortgage interest rates and home prices, as well as limited housing stock available for purchase in 2022.

In 2021, mortgage loan activity and income benefited from a low mortgage interest rate environment and adjusted mortgage loan fees.

Debit card income, net, decreased $518,000 to $3.9 million for 2022, compared to $4.4 million for 2021.

The decrease was primarily related to higher debit card expense as a result of upgrading our debit card stock in the first quarter of 2022 and higher debit card processing expenses.

SBIC income increased $2.3 million to $2.9 million for 2023, compared to $563,000 for 2022.

The increase was primarily due to the sale of an investment by the SBIC in the second quarter of 2023, which resulted in higher income being distributed by the SBIC.

Equity securities are an investment in a CRA mutual fund consisting primarily of bonds.

The gain or loss on equity securities is a fair value adjustment primarily driven by changes in the interest rate environment.

Due to fluctuations in market rates between periods, equity securities had a loss of $468,000 in 2022, compared to a $175,000 loss in 2021.

The loss on the sale and call of securities was $59,000 for 2022.

This consisted of a net loss of $114,000 as a result of portfolio restructuring transactions to improve the structure and yield of the portfolio, offset by a $55,000 gain from municipal securities being called in 2022.

In 2021, the gain on the sale and call of securities was $194,000, as a result of portfolio restructuring transactions to improve the structure and yield of the portfolio.

Service charges on deposit accounts increased $790,000 to $5.6 million for 2022, compared to $4.8 million for 2021.

The increase was due to a larger number of non-sufficient fund transactions and related fee income in 2022.

In 2023, we sold $7.0 million of the CRA mutual fund.

The mutual fund had a loss of $14,000 in 2023, compared to a $468,000 loss in 2022.

Loan and deposit income increased $417,000 to $2.1 million for 2023, compared to $1.7 million for 2022.

The increase was primarily associated with fees related to customers moving funds from lower yielding deposit accounts to higher yielding deposit accounts.

Brokerage income increased $249,000 to $3.8 million for 2023, compared to $3.5 million for 2022.

The increase was primarily due to funds invested by new clients.

Assets under management were $915.1 million and $787.1 million as of December 31, 2022 and 2021, respectively.

The increase was primarily due to investing activities of new clients.

Assets under management were $1.04 billion and $915.1 million as of December 31, 2023 and 2022, respectively.

Mortgage loan income decreased $1.1 million to $2.0 million for 2023, compared to $3.1 million for 2022 due to higher mortgage interest rates and reduced purchase activity.

Debit card income, net, decreased $334,000 to $3.6 million for 2023, compared to $3.9 million for 2022.

The decrease was primarily related to higher debit card processing expenses.

Operating Expenses

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Operating expenses increased $5.2 million to $63.9 million for the year ended December 31, 2023, compared to $58.7 million for the year ended December 31, 2022.

The increase in operating expenses was mainly due to higher personnel expenses, occupancy and equipment expenses, other taxes, other business development expenses, and legal and professional expenses.

These increases were partially offset by lower loan and deposit expenses.

The increase in operating expenses was mainly due to higher personnel expenses, regulatory assessment expenses, occupancy and equipment expenses, legal and professional expenses, other business development expenses, and loan and deposit expenses.

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

12 unchanged sentences

Legal and professional expenses 2,378 1,997 381 19.1 %

Regulatory assessment expense 1,058 933 125 13.4 %

Regulatory assessment expenses 1,645 1,058 587 55.5 %

Other operating expenses 3,955 3,923 32 0.8 %

2 unchanged sentences

Personnel expenses increased $2.7 million to $37.2 million for 2023 compared to $34.6 million for 2022.

This increase was primarily due to having a full year of expenses for new staff added in the fourth quarter of 2021 in our New Orleans market, as well as additional staff in our existing markets.

This increase was partially offset by lower commission compensation in 2022 due to lower mortgage loan activity, when compared to 2021.

Due to an increase in open positions in late 2022, we had 351 and 358 total employees as of December 31, 2022 and 2021, respectively.

This increase was primarily due to higher personnel health insurance expenses and additional staff added during the year.

As of December 31, 2023 and 2022, we had 362 and 351 total employees, respectively.

Regulatory assessment expenses increased $587,000 to $1.6 million for 2023 compared to $1.1 million for 2022.

This increase was primarily due to the FDIC raising the deposit insurance assessment rate by two bps, effective January 1, 2023, for all insured depository institutions.

Occupancy and equipment expenses increased $472,000 to $6.6 million for 2023 compared to $6.1 million for 2022.

This increase was primarily the result of expansion in our newer markets in the second half of 2021 and throughout 2022.

Other taxes increased $632,000 to $2.7 million for 2022 compared to $2.1 million for 2021.

This increase was due to a $635,000 increase in the State of Louisiana’s bank stock tax resulting from higher deposit account balances, higher net income for the applicable tax years, and a higher tax rate.

This new rate will also be applicable for 2023.

Other business development expenses increased $476,000 to $1.6 million for 2022 compared to $1.2 million for 2021.

This increase was primarily the result of higher CRA related contributions and community sponsorships combined with a full year of business development expense in our New Orleans market.

This increase was mainly due to opening the new operations center building in the first quarter of 2023, the expansion of a banking center in the Southwest market in the second quarter of 2023, and renovations of the main office building in Alexandria, Louisiana, in the second half of 2023.

Legal and professional expenses increased $381,000 to $2.4 million for 2023 compared to $2.0 million for 2022.

This increase was primarily due to higher professional fees, auditing fees, and public company expenses due to organizational growth, partially offset by lower attorney fees as a result of the completion of various legal matters.

Loan and deposit expenses decreased $357,000 to $659,000 for 2022 compared to $1.0 million for 2021.

The decrease in loan expenses was primarily due to lower mortgage loan activity as well as lower loan expenses, which were impacted by the higher interest rate environment in 2022.

Deposit expenses decreased due to receipt of a $122,000 negotiated, variable rebate from a vendor in the first quarter of 2022.

This increase was primarily due to higher audit and compliance fees.

Other business development expenses increased $342,000 to $2.0 million for 2023 compared to $1.6 million for 2022.

This increase was mainly the result of an increase in community sponsorships and CRA related contributions, as well as expenses associated with an SBIC limited partnership.

Loan and deposit expenses increased $325,000 to $984,000 for 2023 compared to $659,000 for 2022.

Deposit expenses in 2022 benefited from the receipt of a $122,000 negotiated, variable rebate from a vendor, resulting in lower loan and deposit expenses during that period.

Income Tax Expense

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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, and the income tax effects associated with stock-based compensation.

The CARES Act passed in March of 2020, with certain provisions expiring in 2021 and 2022, did not have a material impact on our income tax expense or our effective tax rate for the years ended December 31, 2022 and 2021.

For the years ended December 31, 2022 and 2021, income tax expense totaled $8.1 million and $7.1 million, respectively.

The increase in income tax expense was primarily due to the increase in pre-tax income.

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:

For the Years Ended December 31,

(dollars in thousands) 2023 2022 Increase (Decrease)

Income tax expense $ 8,065 $ 8,065 $ — — %

For the years ended December 31, 2023 and 2022, income tax expense remained consistent at $8.1 million.

The comparability in income tax expense was primarily due to the decrease in pre-tax income offset by an increase in the effective income tax rate due to permanent book versus tax differences.

The effective income tax rate for 2023 was 18.8%, compared to 17.9% for 2022.

FINANCIAL CONDITION

As of December 31, 2022, assets were $3.08 billion, which was $142.0 million, or 4.4%, lower than assets of $3.22 billion as of December 31, 2021, primarily due to a decrease in deposits.

Total deposits decreased $111.4 million, or 3.8%, to $2.80 billion as of December 31, 2022, from $2.91 billion as of December 31, 2021.

During 2022, we made several changes to the asset mix, including deploying short-term liquid assets into loans and the securities portfolio, as well as restructuring the securities portfolio.

Loans HFI increased $232.4 million, or 13.8%, which included a $250.0 million, or 15.0%, increase in non-PPP loans compared to December 31, 2021.

Due to securities purchased in the first half of 2022, total securities increased $109.0 million, or 16.3%, to $776.1 million, and were 25.2% of assets as of December 31, 2022.

As a result of the increase in loans and securities, interest-bearing deposits in other banks decreased $521.2 million, or 68.4%, to $240.6 million and were 7.8% of assets as of December 31, 2022.

Stockholders’ equity decreased $32.4 million during 2022 to $265.8 million as of December 31, 2022, primarily due to a $67.4 million decrease in AOCI related to securities partially offset by $36.9 million of net income.

As of December 31, 2023, assets were $3.13 billion, which was $46.1 million, or 1.5%, higher than $3.08 billion as of December 31, 2022.

During 2023, loans HFI increased $76.6 million, or 4.0%, during the year to $1.99 billion as of December 31, 2023.

The increase in loans was due to improved loan activity in various markets across Louisiana.

Cash and cash equivalents increased $27.0 million, or 9.7%, to $305.4 million and were 9.8% of assets as of December 31, 2023.

Total securities decreased $61.8 million, or 8.0%, to $714.3 million and were 22.8% of assets as of December 31, 2023.

The decrease in securities was due to maturities and principal repayments exceeding purchases, partially offset by a smaller net unrealized loss on securities AFS.

Deposits were consistent at $2.80 billion as of December 31, 2023 and 2022.

During 2023, there was a deposit mix shift as customers moved funds from lower yielding categories to higher yielding categories.

We had no outstanding borrowings as of December 31, 2023 and 2022.

During 2023, stockholders’ equity increased $38.1 million to $303.9 million as of December 31, 2023.

As of December 31, 2023, the loans HFI to deposits ratio was 71.13%, compared to 68.46% as of December 31, 2022, and the noninterest-bearing deposits to total deposits ratio was 32.71%, compared to 38.96% as of December 31, 2022.

1 unchanged sentence

Interest-bearing deposits in other banks were the third-largest component of earning assets as of December 31, 2023.

As of December 31, 2023, interest-bearing deposits in other banks were $252.4 million and were 8.1% of assets, an increase of $11.8 million, or 4.9%, compared to $240.6 million and 7.8% of assets as of December 31, 2022.

Excess liquidity that is not being deployed into loans or securities is placed in these accounts.

Starting during the COVID-19 pandemic, which began in the first quarter of 2020, and continuing into the first quarter of 2022, interest-bearing deposits in other banks had become the second-largest component of earning assets as deposit growth exceeded loan growth.

During 2022, we deployed excess liquidity into loans and securities, with most securities purchases and sales occurring during the first half of 2022.

As of December 31, 2022, interest-bearing deposits in other banks were $240.6 million and were 7.8% of assets, a decrease of $521.2 million, or 68.4%, compared to $761.7 million and 23.6% of assets as of December 31, 2021.

Our securities portfolio is the second-largest component of earning assets and provides a significant source of revenue.

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Securities AFS and securities HTM are debt securities.

Total debt securities were $766.1 million as of December 31, 2022, an increase of $106.9 million, or 16.2%, from $659.2 million as of December 31, 2021.

Total debt securities were $711.3 million as of December 31, 2023, a decrease of $54.8 million, or 7.1%, from $766.1 million as of December 31, 2022.

Securities AFS are held for indefinite periods of time and are carried at estimated fair value.

As of December 31, 2023, the estimated fair value of securities AFS was $570.1 million.

The net unrealized loss on securities AFS increased $69.4 million for the year ended December 31, 2022, resulting in a net unrealized loss of $74.1 million as of December 31, 2022.

Over the past year, due to the increase in our securities portfolio size, the current and projected balance sheet mix and growth, cash flows, and available liquidity sources, we evaluated transferring selected securities from AFS to HTM.

In the second quarter of 2022, we reclassified $166.3 million, net of $17.9 million of unrealized loss, or 20.5% of the securities portfolio, from AFS to HTM.

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 decreased $12.0 million for the year ended December 31, 2023, resulting in a net unrealized loss of $62.2 million as of December 31, 2023, compared to a net unrealized loss of $74.1 million as of December 31, 2022.

Securities HTM, which we have the intent and ability to hold until maturity, are carried at amortized cost.

As of December 31, 2023, the amortized cost of securities HTM was $141.2 million.

Investment activity for the year ended December 31, 2022, included $313.5 million of securities purchased, partially offset by $31.8 million in sales and $87.1 million in maturities, principal repayments, and calls.

There were no purchases or sales of securities HTM for the same period.

Securities AFS purchased for the year ended December 31, 2022, primarily consisted of $159.8 million in U.S.

Treasury securities and $139.1 million in mortgage-backed securities.

Treasury securities purchased had a yield of 1.78% and an average life of 1.85 years, and the mortgage-backed securities had a yield of 1.78% and an average life of 3.63 years.

As of December 31, 2022, the overall price risk of the securities AFS and securities HTM portfolio in the applicable scenario decreased 190 bps, compared to December 31, 2021, primarily due to the short-term U.S.

Treasury securities purchased in the first and second quarters of 2022.

During the first six months of 2022, we reallocated $260.5 million from overnight funds yielding 0.39% to securities AFS yielding 1.80% and purchased $53.0 million of securities yielding 1.91% as we reinvested cash flows from the securities

In the third and fourth quarters of 2022, we did not engage in any purchases or sales transactions;

however, we will continue to evaluate future transactions.

Securities HTM had an unrealized loss of $22.2 million as of December 31, 2023, compared to an unrealized loss of $19.3 million as of December 31, 2022.

Investment activity for the year ended December 31, 2023, included $163.1 million in maturities, principal repayments, and calls, partially offset by $96.4 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.

Securities AFS purchased for the year ended December 31, 2023, consisted of $53.0 million in mortgage-backed securities, $23.7 million in U.S.

agency securities, and $19.8 million in U.S.

Treasury securities.

securities purchased had a yield of 5.78% and an average life of 5.22 years.

The mortgage-backed securities purchased had a yield of 5.35% and an average life of 4.37 years.

Treasury securities purchased had a yield of 5.30% and an average life of 0.15 years.

The securities AFS portfolio tax-equivalent yield was 1.90% for the year ended December 31, 2023, compared to 1.75% for the year ended December 31, 2022.

The yield remained fairly consistent due to the timing of purchases in 2022.

The increase in yield for the year ended December 31, 2023, was primarily due to reinvesting securities cash flows received during 2023 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.

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As of December 31, 2022, the average life of our securities portfolio was 6.8 years with an estimated effective duration of 5.0 years.

Both the average life and the effective duration increased due to the increase in market rates and the resulting impact on mortgage-backed securities and our callable municipal securities.

The carrying values of our securities AFS are adjusted for unrealized gain or loss, and any unrealized gain or loss is reported on an after-tax basis as a component of AOCI in stockholders’ equity.

As of December 31, 2022, the net unrealized loss of the securities AFS portfolio was $74.1 million, an increase of $69.4 million, compared to a net unrealized loss of $4.8 million as of December 31, 2021.

This change is attributed to a significant increase in market rates, which resulted in lower prices on securities and therefore an overall lower market value of the portfolio.

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

38 unchanged sentences

agency securities

912 — (134) 778

Total Securities HTM

48 unchanged sentences

As of December 31, 2022, equity securities had a fair value of $10.0 million with a recognized loss of $468,000 for the year ended December 31, 2022.

In April 2022, we liquidated all shares invested in this fund and recorded a loss of $447,000 from January 1, 2022, through the date of liquidation.

In December 2022, we purchased shares in this fund.

The loss on equity securities during 2022 was due to a significant increase in interest rates.

During 2023, we sold $7.0 million of the mutual fund.

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.

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As of December 31, 2023, loans HFI were $1.99 billion, an increase of $76.6 million, or 4.0%, compared to $1.92 billion as of December 31, 2022.

As of December 31, 2022, our participation in the SBA PPP was materially complete, and PPP loans totaled $14,000.

As of December 31, 2022, non-PPP loans HFI (non-GAAP) were $1.92 billion, an increase of $250.0 million, or 15.0%, from December 31, 2021.

The increase in non-PPP loans HFI (non-GAAP) was due to loan activity in various markets across Louisiana.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see “- Non-GAAP Financial Measures” in this Report.

Loans HFI increased primarily due to improved loan activity in various markets across Louisiana.

Loans by Category

Loans HFI by category, non-PPP loans HFI (non-GAAP), and loans HFS are summarized below as of the dates indicated:

(dollars in thousands) Amount Percent Amount Percent

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

December 31, 2023 December 31, 2022 Change from

December 31, 2022 to December 31, 2023

(dollars in thousands) Amount Percent Amount Percent $ Change % Change

Commercial real estate

6 unchanged sentences

315,327 15.8 % 310,067 16.2 % 5,260 1.7 %

SBA PPP, net of deferred income 14 — % 17,550 1.0 %

Tax-exempt 72,913 3.7 % 83,166 4.3 % (10,253) (12.3 %)

2 unchanged sentences

$ 1,992,858 100.0 % $ 1,916,267 100.0 % $ 76,591 4.0 %

Total non-PPP loans HFI (non-GAAP) (1)

$ 1,916,253 $ 1,666,282

Total loans HFS

$ 1,306 $ 518 $ 788 152.1 %

(1) Non-GAAP financial measure.

For calculations and reconciliations to GAAP of non-GAAP financial measures, see “- Non-GAAP Financial Measures” in this Report.

Average loan HFI size, excluding credit cards $ 239 $ 236 $ 3 1.3 %

Commercial Real Estate Loans.

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Commercial real estate loans increased $56.9 million, or 7.2%, to $851.6 million as of December 31, 2023, from $794.7 million as of December 31, 2022.

The average CRE loan size was $938,000 as of December 31, 2023 and $917,000 as of December 31, 2022.

Non-owner occupied commercial real estate loans were $438.8 million, or 22.0% of loans HFI, and represented 115.9% of the Bank’s total risk-based capital as of December 31, 2023.

Investor-owned office properties were $62.3 million, or 3.1% of loans HFI, as of December 31, 2023, and are primarily centered in low-rise suburban areas.

The owner occupied and non-owner occupied components of the commercial real estate portfolio are summarized below:

4 unchanged sentences

Total commercial real estate $ 851,582 42.7 % $ 794,723 41.5 %

Industry concentrations, based on NAICS, within the commercial real estate loan portfolio are presented below:

(dollars in thousands) Amount Percent of Loans HFI Amount Percent of Loans HFI

Owner Occupied

Retail trade $ 41,768 2.1 % $ 40,898 2.1 %

Health care 36,709 1.8 % 45,685 2.4 %

Religious and other nonprofit 21,092 1.1 % 21,577 1.1 %

Agriculture, forestry, fishing, and hunting 20,389 1.0 % 21,397 1.2 %

Repair and maintenance 16,810 0.8 % 12,269 0.7 %

Investor one-to-four family and multifamily 14,532 0.7 % 10,445 0.5 %

Hospitality services 14,362 0.7 % 14,004 0.7 %

Energy 13,118 0.7 % 14,888 0.8 %

Transportation and warehousing 12,103 0.6 % 6,172 0.3 %

Professional, scientific, and technical services 11,543 0.6 % 9,626 0.5 %

Arts, entertainment, and recreation 9,894 0.5 % 4,672 0.3 %

All other 200,423 10.1 % 191,771 10.0 %

Total owner occupied $ 412,743 20.7 % $ 393,404 20.6 %

Non-Owner Occupied

Health care $ 53,449 2.7 % $ 56,379 2.9 %

Investor one-to-four family and multifamily 46,439 2.3 % 34,318 1.8 %

Hospitality services 31,766 1.6 % 33,999 1.8 %

Wholesale trade 7,880 0.3 % 8,200 0.4 %

Construction 6,599 0.3 % 4,833 0.3 %

Energy 6,132 0.3 % 6,504 0.3 %

Educational services 3,876 0.2 % 4,700 0.2 %

Management of company and enterprises 3,742 0.2 % 2,525 0.1 %

Retail trade 3,582 0.2 % 3,782 0.2 %

Information 3,200 0.2 % 1,391 0.1 %

Finance and insurance 3,199 0.2 % 3,343 0.2 %

All other 268,975 13.5 % 241,345 12.6 %

Total non-owner occupied $ 438,839 22.0 % $ 401,319 20.9 %

Total commercial real estate $ 851,582 42.7 % $ 794,723 41.5 %

One-to-Four Family Residential Loans.

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The construction and development portfolio includes loans to small and medium-sized businesses to construct owner occupied facilities, loans to developers of commercial real estate investment properties and residential developments, and, to a lesser extent, loans to individual clients for construction of single-family homes.

Construction and development loans increased $51.0 million, or 48.0%, to $157.4 million as of December 31, 2022, compared to $106.3 million as of December 31, 2021.

Construction and development loans decreased $32.1 million, or 20.4%, to $125.2 million as of December 31, 2023, compared to $157.4 million as of December 31, 2022.

Commercial and Industrial Loans.

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A personal guaranty is generally obtained from the borrower or principal.

Commercial and industrial loans decreased $1.3 million, or 0.4%, to $310.1 million as of December 31, 2022, from $311.4 million as of December 31, 2021.

SBA PPP, Net of Deferred Income.

SBA PPP loans were made to small businesses and other entities and individuals according to the criteria set forth by the CARES Act in March 2020.

These loans were guaranteed by the SBA, had a 24-

or 60-month term at an interest rate of 1.0%, and were subject to forgiveness by the SBA dependent upon meeting eligibility requirements.

Commercial and industrial loans increased $5.3 million, or 1.7%, to $315.3 million as of December 31, 2023, from $310.1 million as of December 31, 2022.

Tax-Exempt Loans.

Tax-exempt loans are made to political subdivisions of the State of Louisiana including parishes, municipalities, utility districts, school districts, and development authorities.

These loans are typically secured by and paid for by ad valorem taxes.

Tax-exempt loans increased $2.4 million, or 3.0%, to $83.2 million as of December 31, 2022, compared to $80.7 million as of December 31, 2021.

These loans are typically secured by and paid

for by ad valorem taxes.

Tax-exempt loans decreased $10.3 million, or 12.3%, to $72.9 million as of December 31, 2023, compared to $83.2 million as of December 31, 2022.

Consumer Loans.

2 unchanged sentences

Industry Concentrations

The North American Industry Classification System is an industry classification system used to categorize loans by the borrower’s type of business.

Industry concentrations stated as a percentage of loans HFI are presented below:

Industry concentrations, based on NAICS, stated as a percentage of loans HFI are presented below:

December 31, 2023

1 unchanged sentence

Investor one-to-four family and multifamily 5.7 %

Retail trade 4.0 %

Construction 4.2 %

Retail trade 3.4 %

Hospitality services 3.1 %

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Total loans HFI by industry concentration 100.0 %

Health care loans are our largest loan industry concentration and are made up of a diversified portfolio of health care providers.

As of December 31, 2022, health care loans were $160.3 million, or 8.4% of loans HFI, compared to $141.0 million, or 8.4% of loans HFI, as of December 31, 2021.

Health care loans are our largest industry concentration and are made up of a diversified portfolio of health care providers.

As of December 31, 2023, total health care loans were $153.8 million, or 7.7% of loans HFI, compared to $160.3 million, or 8.4% of loans HFI, as of December 31, 2022.

The average health care loan size was $334,000 as of December 31, 2023, and $338,000 as of December 31, 2022.

25 unchanged sentences

Commercial and industrial 125,300 162,126 27,841 60 315,327

SBA PPP, net of deferred income — 14 — — 14

Tax-exempt 4,573 14,747 36,090 17,503 72,913

9 unchanged sentences

Commercial and industrial 135,382 54,645 190,027

SBA PPP, net of deferred income 14 — 14

Tax-exempt 68,340 — 68,340

4 unchanged sentences

Dollar LIBOR rates would cease to be published after June 30, 2023.

As of December 31, 2022, 2.1% of our loans HFI were LIBOR-based with a setting that expires June 30, 2023.

Alternative rate language is present in each credit agreement with a LIBOR-based rate.

We do not anticipate any issue with transitioning each loan to a non-LIBOR-based rate.

As of December 31, 2023, there were no loans HFI tied to a LIBOR-based rate.

Nonperforming Assets

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There can be no assurance, however, that the loan portfolio will not become subject to losses due to declines in economic conditions, deterioration in the financial condition of our borrowers, or a decline in the value of collateral.

NPAs totaled $2.4 million as of December 31, 2022, an increase of $1.4 million, or 141.7%, from $979,000 as of December 31, 2021.

The increase was primarily due to additional loans placed on nonaccrual status, offset by payments on nonaccrual loans, the sale of foreclosed assets during the year, and a loan that returned to accrual status.

The ratio of NPAs to assets was 0.08% as of December 31, 2022, compared to 0.03% as of December 31, 2021.

NPAs totaled $2.6 million as of December 31, 2023, an increase of $236,000, or 10.0%, from $2.4 million as of December 31, 2022.

The increase was primarily due to an increase in accruing loans 90 days or more past due.

The ratio of NPAs to assets was 0.08% as of December 31, 2023 and 2022.

Nonperforming loan and asset information is summarized below:

8 unchanged sentences

Total NPAs $ 2,602 $ 2,366

Troubled debt restructurings:

Nonaccrual loans $ 165 $ —

Performing loans

Total TDRs $ 4,320 $ 3,944

Nonaccrual loans to loans HFI 0.10 % 0.12 %

2 unchanged sentences

NPAs to assets 0.08 % 0.08 %

(1) Troubled debt restructurings – nonaccrual and accruing loans 90 or more days past due are included in the respective components of nonperforming loans.

Nonaccrual loans are summarized below by category:

4 unchanged sentences

Commercial and industrial 844 1,291

SBA PPP, net of deferred income — —

Tax-exempt — —

6 unchanged sentences

Classifications are reviewed periodically and adjusted to reflect the degree of risk and loss believed to be inherent in each loan.

The methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

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.

6 unchanged sentences

Loans classified as doubtful have well-defined weaknesses that make full collection improbable.

Loans classified as loss are considered uncollectible and charged-off to the allowance for loan losses.

Loans HFI are summarized below by risk category:

December 31, 2022

(dollars in thousands) Pass Special

Mention Substandard Doubtful Loss Total

Commercial real estate $ 786,394 $ 5,759 $ 2,570 $ — $ — $ 794,723

One-to-four family residential 542,112 62 1,337 — — 543,511

Construction and development 157,355 — 9 — — 157,364

Commercial and industrial 297,152 11,428 1,473 — — 310,053

SBA PPP, net of deferred income 14 — — — — 14

Tax-exempt 83,166 — — — — 83,166

Consumer 27,298 — 138 — — 27,436

Loans classified as loss are considered uncollectible and charged-off to the ACL.

The following table summarizes loans HFI by risk rating:

December 31, 2023 December 31, 2022

(dollars in thousands) Amount Percent Amount Percent

Pass $ 1,968,575 98.8 % $ 1,893,491 98.8 %

Special Mention 19,429 1.0 % 17,249 0.9 %

Substandard 4,854 0.2 % 5,527 0.3 %

Total loans HFI $ 1,992,858 100.0 % $ 1,916,267 100.0 %

% of loans HFI 98.8 % 0.9 % 0.3 % — % — % 100.0 %

Allowance for Loan Losses

The allowance for loan losses is established for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date.

It is maintained at a level estimated to be adequate to absorb potential losses through periodic changes to loan losses.

In connection with the review of the loan portfolio, risk elements attributable to particular loan types or categories are considered in assessing the quality of individual loans.

Some of the risk elements considered include:

• for commercial real estate loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements);

operating results of the owner in the case of owner occupied properties;

the loan-to-value ratio;

the age and condition of the collateral;

and the volatility of income, property value, and future operating results typical of properties of that type;

• for one-to-four family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability;

the loan-to-value ratio;

and the age, condition, and marketability of the collateral;

• for construction and development loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease;

the quality and nature of contracts for presale or prelease, if any;

experience and ability of the developer;

and the loan-to-value ratio;

• for commercial and industrial loans, the debt service coverage ratio;

the operating results of the commercial, industrial, or professional enterprise;

the borrower’s business, professional, and financial ability and expertise;

the specific risks and volatility of income and operating results typical for businesses in that category;

the value, nature, and marketability of collateral;

and the financial resources of the guarantor(s), if any.

As of December 31, 2022, the allowance for loan losses was $20.6 million, or 1.08%, of loans HFI.

As of December 31, 2021, the allowance for loan losses was $19.2 million, or 1.14%, of loans HFI.

The $1.5 million increase in the allowance for loan losses for the year ended December 31, 2022, was due to $1.8 million from the provision for loan losses, partially offset by $298,000 of net charge-offs.

The provision for loan losses for the year ended December 31, 2022, was $1.8 million, a decrease of $150,000 from $1.9 million for the year ended December 31, 2021.

The provision for loan losses for 2022 was due to the current inflationary environment, changing monetary policy, and loan growth.

The provision for loan losses in 2021 was due to the anticipated adverse effects of the COVID-19 pandemic at that time.

Net charge-offs for the year ended December 31, 2022, were $298,000, a decrease of $377,000 from $675,000 for the year ended December 31, 2021.

The ratio of net charge-offs to average loans HFI was 0.02% and 0.04% for the years ended December 31, 2022 and 2021, respectively.

The 2022 results were primarily due to the charge-off of $433,000 of consumer overdrafts.

The 2021 results were primarily due to the charge-off of $515,000 of nonaccrual loans.

CECL was effective for us on January 1, 2023.

The CECL allowance model, prescribed by ASU No.

2016-13 , requires measurement of expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts.

This model replaced the incurred loss model.

We expect the adoption of CECL on January 1, 2023, to result in a combined 3.5% increase in our allowance for credit losses and allowance for unfunded commitments.

There were no loans classified as doubtful or loss as of December 31, 2023 or 2022.

Allowance for Credit Losses

On January 1, 2023, we adopted ASC 326 , as amended, using the modified retrospective method.

For reporting periods beginning on or after January 1, 2023, we maintain an ACL on all loans that reflects management’s best estimate of expected credit losses to be recognized over the lifetime of the loans.

The determination of the amount of allowance involves a high degree of judgement and subjectivity.

Refer to “Item 8.

Financial Statements and Supplementary Data - Note 1 - Significant Accounting Policies - Recent Accounting Pronouncements” for more information on ASU No.

The following table displays activity in the allowance for loan losses for the periods shown:

Financial Statements and Supplementary Data - Note 1.

Significant Accounting Policies - Securities” and “- Loans Held for Investment” in this Report for more information regarding our ACL methodologies.

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.

For reporting periods prior to January 1, 2023, the ALL was established for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio.

It was maintained at a level estimated to be adequate to absorb potential losses through periodic changes to loan losses.

As of December 31, 2023, the ACL was $21.3 million, or 1.07% of loans HFI.

As of December 31, 2022, the ALL was $20.6 million, or 1.08% of loans HFI.

The $708,000 increase in the ACL for the year ended December 31, 2023, was due to the $278,000 increase in ACL from the adoption of ASC 326 and $735,000 from the provision for credit losses, partially offset by $305,000 of net charge-offs.

The provision for credit losses for the year ended December 31, 2023, was $735,000, a decrease of $1.0 million from $1.8 million for the year ended December 31, 2022.

The primary drivers of the decrease were the current inflationary environment, changing monetary policy, current economic forecasts, and lower loan growth.

Net charge-offs for the year ended December 31, 2023, were $305,000, an increase of $7,000 from $298,000 for the year ended December 31, 2022.

The ratio of net charge-offs to average loans HFI was 0.02% for the years ended December 31, 2023 and 2022.

The following table displays activity in the ACL for December 31, 2023, and the ALL for December 31, 2022:

As of and for the Years Ended December 31,

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Average loans $ 1,943,381 $ 1,816,538

Allowance for loan losses at beginning of period $ 19,176 $ 17,951

Provision for loan losses 1,750 1,900

Commercial real estate — (450)

Allowance at beginning of period $ 20,628 $ 19,176

Impact of adopting ASC 326

Provision expense 735 1,750

One-to-four family residential (23) —

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Net (charge-offs)/recoveries (305) (298)

Allowance for loan losses at end of period $ 20,628 $ 19,176

Allowance for loan losses to loans HFI

Allowance at end of period $ 21,336 $ 20,628

ACL to loans HFI

1.07 % 1.08 %

Allowance for loan losses to nonaccrual loans 872.59 % 6,848.57%

We believe the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above.

Future provisions for loan losses are subject to ongoing evaluations of the factors and loan portfolio risks described above, including economic pressures related to inflation, labor market and supply chain constraints, and natural disasters affecting the state of Louisiana.

A decline in market area economic conditions, deterioration of asset quality, or growth in portfolio size could cause the allowance to become inadequate, and material additional provisions for loan losses could be required.

The following table displays the allocation of the allowance for loan losses among the loan classifications as of the dates indicated.

ACL to nonaccrual loans 1,089.13 % 872.59%

Net charge-offs to average loans 0.02 % 0.02%

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.

The following table displays the allocation of the ACL and ALL among the loan classifications as of the dates indicated.

The allocations shown below should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in the future will necessarily occur in these amounts or in the indicated proportions.

The total allowance for loan losses is available to absorb losses from any loan classification.

The total ACL is available to absorb losses from any loan classification.

(dollars in thousands) Amount Percent Amount Percent

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Commercial and industrial 2,553 12.0 % 4,350 21.1 %

SBA PPP, net of deferred income — 0.0 % 25 0.1 %

Tax-exempt 575 2.7 % 751 3.6 %

Consumer 297 1.4 % 471 2.3 %

Total allowance for loan losses

Total allowance for credit losses

$ 21,336 100.0 % $ 20,628 100.0 %

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Commercial and industrial —% —%

SBA PPP, net of deferred income —% —%

Tax-exempt —% —%

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We do not have any internet-sourced or brokered deposits.

Total deposits decreased $111.4 million, or 3.8%, to $2.80 billion as of December 31, 2022, from $2.91 billion as of December 31, 2021.

The decrease in deposits was primarily a result of expected customer deposit account activity and customer response to the changing interest rate environment.

Noninterest-bearing deposits decreased $59.1 million, or 5.1%, during 2022 to $1.09 billion as of December 31, 2022.

Total deposits were consistent at $2.80 billion as of December 31, 2023 and 2022.

In 2023, there was a deposit mix shift between deposit categories as customers moved funds from noninterest-bearing and lower yielding categories to higher yielding categories.

Noninterest-bearing deposits decreased $174.1 million, or 16.0%, during 2023 to $916.5 million as of December 31, 2023.

Noninterest-bearing deposits as a percentage of total deposits were 32.71% as of December 31, 2023, compared to 38.96% as of December 31, 2022.

Interest-bearing deposits decreased $52.3 million, or 3.0%, during 2022 to $1.71 billion as of December 31, 2022, with the largest decrease in money market accounts.

Interest-bearing deposits increased $177.0 million, or 10.4%, during 2023 to $1.89 billion as of December 31, 2023, with the largest increase in time deposits.

Red River Bank has a granular, diverse deposit portfolio with customers in a variety of industries throughout Louisiana.

As of December 31, 2023, the average deposit account size was approximately $28,000, compared to $30,000 as of December 31, 2022.

In 2022, we implemented the IntraFi Network Insured Cash Sweep and related reciprocal balance programs for qualified commercial customers.

The IntraFi Network Insured Cash Sweep program provides our customers a demand deposit sweep account that has a competitive interest rate as well as full FDIC insurance coverage.

As of December 31, 2023, we had $129.1 million swept off our balance sheet.

The related reciprocal program brings deposit balances back on to our balance sheet as interest-bearing demand deposit accounts.

As of December 31, 2023, we had $138.4 million of interest-bearing demand deposit accounts.

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

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We also consider the potential interest rate risk caused by extended maturities of time deposits when adjusting deposit rates.

Our average deposit balance was $2.85 billion for the year ended December 31, 2022, an increase of $258.3 million, or 10.0%, from $2.59 billion for the year ended December 31, 2021.

Our average deposit balance was $2.72 billion for the year ended December 31, 2023, a decrease of $128.2 million, or 4.5%, from $2.85 billion for the year ended December 31, 2022.

For 2023, average public entity deposits were 7.9% of average total deposits.

The average cost of interest-bearing deposits and total deposits for 2023 was 1.86% and 1.18%, respectively, compared to 0.46% and 0.27% for 2022, respectively.

The increase in the average cost of interest-bearing deposits and total deposits in 2022 as compared to 2021 was due to rate competition for deposits that began in the second half of 2022.

The increase in the average cost of interest-bearing deposits and total deposits in 2023 as compared to 2022 was due to rate competition for deposits that began in the second half of 2022 and continued into 2023.

Also, as of December 31, 2023, 6.1% of interest-bearing transaction deposits had floating rates, which adjust with market rates.

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Total average deposits $ 2,723,888 1.18 % $ 2,852,087 0.27 %

Our uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $975.1 million and $1.22 billion at December 31, 2022 and 2021, respectively.

As of December 31, 2023, our estimated uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $887.8 million, or 31.7% of total deposits, compared to $975.1 million, or 34.8% of total deposits, as of December 31, 2022.

These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

Also, as of December 31, 2023, our estimated uninsured deposits, excluding collateralized public entity deposits, were approximately $643.6 million, or 23.0% of total deposits, compared to $786.9 million, or 28.1% of total deposits, as of December 31, 2022.

As of December 31, 2023, our cash and cash equivalents of $305.4 million combined with our available borrowing capacity of $1.46 billion equaled 198.4% of our estimated uninsured deposits and 273.7% 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:

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As of December 31, 2023 and 2022, our total FHLB of Dallas line availability was $934.1 million and $875.8 million, respectively.

This line is secured by a blanket floating lien on selected Red River Bank loans that meet FHLB of Dallas collateral requirements.

This line is secured by a blanket lien on selected Red River Bank loans that meet FHLB of Dallas collateral requirements.

At various times, we may obtain letters of credit from the FHLB of Dallas as collateral for our public entity deposits.

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As of December 31, 2023 and 2022, we had net borrowing capacity of $829.2 million and $774.9 million, respectively, under this arrangement.

As of June 30, 2023, we had $60.0 million in short-term advances at an interest rate of 5.49% from the FHLB of Dallas under the existing line of credit.

The $60.0 million advance matured and was repaid in July 2023.

As of December 31, 2023 and 2022, we had no outstanding borrowings under these agreements.

Federal Reserve Bank’s Discount Window .

In the third quarter of 2023, we pledged securities to have borrowing access to the Federal Reserve Bank’s Discount Window facility.

As of December 31, 2023, our borrowing capacity through this facility was $45.5 million;

however, we had no outstanding borrowings under this facility.

As of December 31, 2022, we had no borrowing capacity through this facility as collateral had not been pledged.

Other Borrowings.

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As of December 31, 2023 and 2022, we had $95.0 million in federal funds lines available from these funding sources.

We had no outstanding balances on these lines during 2022 or 2021.

We had no outstanding balances on these lines as of December 31, 2023 or 2022.

Hancock Whitney Bank Line of Credit.

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Stockholders’ Equity

Total stockholders’ equity as of December 31, 2022, was $265.8 million, compared to $298.2 million as of December 31, 2021, a decrease of $32.4 million, or 10.9%.

This decrease was attributable to a $67.4 million, net of tax, market adjustment to AOCI related to securities, $2.0 million in cash dividends, and the repurchase of 4,465 shares of common stock for $218,000, partially offset by $36.9 million of net income for the year ended December 31, 2022, and $274,000 of stock compensation.

During the second quarter of 2022, we reclassified certain securities from AFS to HTM.

Such transfers are made at fair value on the date of transfer.

The net unrealized holding loss on the date of transfer is retained, net of tax, in AOCI, with no immediate change to the total balance in AOCI.

The unrealized holding loss will be amortized over the remaining life of the securities.

At the date of transfer, the net unamortized, unrealized loss on the transferred securities included in the consolidated balance sheets totaled $17.9 million, of which $14.2 million, net of tax, was included in AOCI.

Total stockholders’ equity as of December 31, 2023, was $303.9 million, compared to $265.8 million as of December 31, 2022, an increase of $38.1 million, or 14.3%.

This increase was attributable to $34.9 million of net income for the year ended December 31, 2023, a $10.7 million, net of tax, market adjustment to AOCI related to securities, and $404,000 of stock compensation, partially offset by the repurchase of 101,298 shares of common stock for $5.0 million, $2.3 million in cash dividends, and a $569,000, net of tax, adjustment to retained earnings related to the adoption of CECL.

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 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 December 31, 2023, the net unamortized, unrealized loss remaining on the transferred securities included in the consolidated balance sheets totaled $14.4 million, of which $11.4 million, net of tax, was included in AOCI.

On February 4, 2022, our board of directors approved the renewal of the stock repurchase program that was completed in the fourth quarter of 2021 after reaching the purchase limit.

The renewed repurchase program, the 2022 Program, authorized us to purchase up to $5.0 million of our outstanding shares of common stock from February 4, 2022 through December 31, 2022.

For the year ended December 31, 2022, we repurchased 4,465 shares of our common stock at an aggregate cost of $218,000.

On November 4, 2022, our board of directors approved the renewal of the 2022 stock repurchase program that expired on December 31, 2022.

The 2023 stock repurchase program authorized us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2023 through December 31, 2023.

For the year ended December 31, 2023, we repurchased 101,298 shares of our common stock at an aggregate cost of $5.0 million, and reached the 2023 stock repurchase program purchase limit.

Repurchases were made from time to time in the open market at prevailing prices and based on market conditions.

On November 4, 2022, our board of directors approved the renewal of the 2022 Program that expired on December 31, 2022.

The renewed repurchase program, the 2023 Program, authorizes us to purchase up to $5.0 million of our outstanding shares of common stock from January 1, 2023 through December 31, 2023.

As of December 31, 2023, there were no available funds remaining under the 2023 stock repurchase program.

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 2024 stock repurchase program has similar terms to the 2023 stock repurchase program and 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.

Repurchases may be 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.

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.

We did not have a material impact to our financial condition or results of operations in 2023 as a result of the excise tax.

On January 1, 2023, we adopted the CECL methodology for estimating credit losses.

In the first quarter of 2023, the implementation of CECL resulted in a $720,000 adjustment to the ACL and reserve for unfunded commitments, and a $569,000, net of tax, adjustment to retained earnings.

Regulatory Capital Requirements

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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 8.

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Regulatory Capital Requirements.”

Red River Bank is subject to various capital requirements administered by the FDIC, including Basel III capital guidelines.

It is management’s belief that, as of December 31, 2022 and 2021, the Bank met all capital adequacy requirements.

The Economic Growth Act, which was signed into law in May 2018, provides, among other items, certain targeted modifications to prior financial services reform regulatory requirements.

One of the Economic Growth Act’s highlights, with implications for us, was the asset threshold under the Policy Statement being increased from $1.0 billion to $3.0 billion, which benefits bank holding companies by, among various other items, allowing for an 18-month safety and soundness examination cycle as opposed to a 12-month examination cycle, changing to scaled biannual regulatory reporting requirements as opposed to quarterly regulatory reporting requirements, and not subjecting bank holding companies to capital adequacy guidelines on a consolidated basis.

Because we had less than $3.0 billion in assets as of each of the June 30 th measurement dates starting with the Economic Growth Act’s enactment and going through June 30, 2021, we have received benefits under the Policy Statement through 2022, except with regard to the timing of the Red River Bank safety and soundness exam by the FDIC and the OFI.

Due to the timing of the asset balance determination for the Red River Bank safety and soundness examination, a 12-month examination cycle began in the second half of 2022.

As of June 30, 2022, the last applicable measurement date, we had more than $3.0 billion in assets.

Therefore, effective January 1, 2023, we expect to no longer receive any benefits under the Policy Statement and will be subject to the same Basel III minimum capital requirements on a consolidated basis that Red River Bank is subject to.

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.

The following table presents our regulatory capital ratios, as well as those for Red River Bank, as of the dates indicated:

December 31, 2022 December 31, 2021

(dollars in thousands) Amount Ratio Amount Ratio

Red River Bancshares, Inc.

Total Risk-Based Capital $ 356,001 17.39 % $ 319,553 17.83 %

Tier I Risk-Based Capital $ 335,373 16.38 % $ 300,377 16.76 %

Common Equity Tier I Capital $ 335,373 16.38 % $ 300,377 16.76 %

Tier I Leverage Capital $ 335,373 10.71 % $ 300,377 9.67 %

Red River Bank

Total Risk-Based Capital $ 344,867 16.85 % $ 305,771 17.06 %

Tier I Risk-Based Capital $ 324,239 15.84 % $ 286,595 15.99 %

Common Equity Tier I Capital $ 324,239 15.84 % $ 286,595 15.99 %

Tier I Leverage Capital $ 324,239 10.35 % $ 286,595 9.23 %

Another significant provision of the Economic Growth Act was the directive that federal bank regulatory agencies adopt a threshold for a CBLR framework.

As part of the directive under the Economic Growth Act, in September 2019, the FDIC and other federal bank regulatory agencies approved the CBLR framework.

This optional framework became effective January 1, 2020, and is available as an alternative to the Basel III risk-based capital framework.

The CBLR framework provides for a simple measure of capital adequacy for certain community banking organizations.

Specifically, depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a Tier I leverage ratio of greater than 9.00% (subsequently temporarily reduced to 8.00% for 2020 and 8.50% for 2021 as a COVID-19 relief measure), are considered qualifying community banking organizations and are eligible to opt into the CBLR framework and replace the applicable Basel III risk-based capital requirements.

As of December 31, 2022, the Company and the Bank qualify for the CBLR framework.

Management does not intend to utilize the CBLR framework.

LIQUIDITY AND ASSET-LIABILITY MANAGEMENT

Liquidity involves our ability to raise funds to support asset growth and potential acquisitions or to reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements, and otherwise to operate on an ongoing basis and manage unexpected events.

As of December 31, 2023, we had sufficient liquid assets available and $1.46 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 years ended December 31, 2023 and 2022, liquidity needs were primarily met by core deposits, security and loan maturities, and cash flows from amortizing security and loan portfolios.

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therefore, these cash flows are monitored regularly.

Our most liquid assets are cash and short-term investments that include both interest-earning demand deposits and securities AFS.

The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

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 of Dallas and the Federal Reserve Bank of Atlanta are also available.

Purchased funds from correspondent banks and overnight advances can be utilized to meet funding obligations, although we do not generally rely on these external funding sources.

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 deposits at other banks or at the Federal Reserve, federal funds sold, securities, or other short-term liquid investments until the deposits are needed to fund loan growth or other obligations.

Our average deposits increased $258.3 million, or 10.0%, for the year ended December 31, 2022, compared to the average deposits for the year ended December 31, 2021.

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 decreased $128.2 million, or 4.5%, for the year ended December 31, 2023, compared to the average deposits for the year ended December 31, 2022.

The decrease in average total deposits was primarily the result of the changing interest rate environment impacting customer deposit movement and activity.

Our average total loans increased $126.8 million, or 7.0%, for the year ended December 31, 2023, compared to average total loans for the year ended December 31, 2022.

Core deposits, which are total deposits excluding time deposits greater than $250,000, are a major source of funds used to meet cash flow needs.

Maintaining the ability to acquire these funds as needed in each of our markets is vital to assuring our liquidity.

Our securities AFS portfolio is an alternative source for meeting liquidity needs and was our second-largest component of assets as of December 31, 2022.

Securities generate cash flow through principal repayments, calls, and maturities, and they generally have readily available markets that allow for their conversion to cash.

As of December 31, 2022, securities AFS totaled $614.4 million, or 19.9% of assets, compared to $659.2 million, or 20.4% of assets as of December 31, 2021.

However, certain investments within our securities AFS portfolio are also used to secure specific deposit types, such as public entity deposits, which impacts their liquidity.

As of December 31, 2022, securities AFS with a carrying value of $156.7 million, or 25.5% of the securities AFS portfolio, were pledged to secure public entity deposits as compared to securities AFS with a carrying value of $118.6 million, or 18.0% of the securities AFS portfolio, similarly pledged as of December 31, 2021.

This increase of $38.1 million, or 32.1%, was primarily the result of utilizing securities to replace FHLB of Dallas letters of credit as pledged collateral, combined with an increase in several public entity deposit accounts that occurred during 2022.

During the second quarter of 2022, we reclassified $166.3 million, or 20.5% of the securities portfolio, from AFS to HTM.

Significant limitations exist for selling debt securities classified as HTM;

therefore, they are excluded from liquidity sources.

For additional information, see “Item 8.

Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2.

Securities - Securities AFS and Securities HTM.”

As of December 31, 2023, liquid assets were $305.4 million compared to $278.4 million as of December 31, 2022.

The increase of $27.0 million, or 9.7%, was due to lower securities balances as a result of maturities and receiving principal repayments during the year, partially offset by the outflow of deposits during the first nine months of 2023.

The liquid assets to assets ratio was 9.8% as of December 31, 2023, compared to 9.0% as of December 31, 2022.

Our securities portfolio is an alternative source for meeting liquidity needs and was our second-largest component of assets as of December 31, 2023.

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 December 31, 2023, we project receipt of approximately $145.0 million of principal repayments and maturities through December 31, 2024.

As of December 31, 2023, approximately $480.4 million, or 67.3%, of the securities portfolio was available to be sold or used as collateral in borrowings as a liquidity source.

Interest-bearing deposits in other banks are our main source of meeting daily liquidity needs and were our third-largest component of assets as of December 31, 2023.

Interest-bearing deposits in other banks were $240.6 million, or 7.8% of assets, as of December 31, 2022, compared to $761.7 million, or 23.6% of assets, as of December 31, 2021.

The decrease of $521.2 million, or 68.4%, was primarily a result of deploying funds into securities and loans, combined with an outflow of deposits, during 2022.

Excess liquidity that is not being deployed into loans or securities is placed in these accounts.

We also utilize the FHLB of Dallas as needed as a viable funding source.

FHLB of Dallas advances may be used to meet short-term liquidity needs, particularly if the prevailing interest rate on an FHLB of Dallas advance compares favorably to the rates that would be required to attract the necessary deposits.

As of December 31, 2022 and 2021, our total borrowing availability from the FHLB of Dallas was $875.8 million and $748.6 million, respectively.

At various times, we may obtain letters of credit from the FHLB of Dallas as collateral for our public entity deposits.

As of December 31, 2022 and 2021, we held unfunded letters of credit in the amount of $100.9 million and $143.8 million, respectively.

FHLB of Dallas advances may be used to meet the Bank’s liquidity needs, particularly if the prevailing interest rate on an FHLB of Dallas 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 December 31, 2023 and 2022, our net borrowing capacity from the FHLB of Dallas was $829.2 million and $774.9 million, respectively.

In addition, effective the third quarter of 2023, we pledged securities to have borrowing access to the Federal Reserve Bank’s Discount Window facility.

As of December 31, 2023, our borrowing capacity through this facility was $45.5 million;

however, we had no borrowings under this facility.

As of December 31, 2022, we had no borrowing capacity through this facility as collateral had not been pledged.

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 December 31, 2023 and 2022.

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 December 31, 2022 and 2021, we had total

borrowing capacity of $101.0 million through these combined funding sources.

As of December 31, 2023 and 2022, we had total borrowing capacity of $101.0 million through these combined funding sources.

We had no outstanding balances from either of these funding sources as of December 31, 2023 or 2022.

The Federal Reserve’s Bank Term Funding Program was available from March 12, 2023 through March 11, 2024, as an additional liquidity source.

The Bank Term Funding Program gave us the option to use eligible securities as collateral for a loan of up to one year from the Federal Reserve.

We did not participate in the Bank Term Funding Program.

Off-Balance Sheet Items

In the normal course of business, we enter into certain financial instruments, such as contractual obligations, commitments to extend credit, and letters of credit, to meet the financing needs of our customers.

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.

We may also enter into contractual obligations.

For more information about our commitments to extend credit and standby letters of credit, see “Item 8.

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Leases,” and “- Note 12.

Off-Balance Sheet Contractual Obligations and Contingencies - Investment Commitment,” respectively.

Off-Balance Sheet Contractual Obligations and Contingencies,” respectively.

Interest Rate Sensitivity and Market Risk

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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 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.

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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.

We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity and the impact of changes in interest rates on other financial metrics.

Contractual maturities and repricing opportunities of loans are incorporated into the model, as are prepayment assumptions and maturity data and call options within the securities portfolio.

The average life of non-maturity deposit accounts are based on assumptions developed from a non-maturity deposit decay study, which calculates average lives using historic closure rates.

In conjunction with our interest rate risk management process, on a quarterly basis, we run various simulations within a static balance sheet.

This model tests the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios.

Rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel yield curve shifts.

Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario.

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 data 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.

Bank policy regarding economic value at risk

simulations performed by our risk model currently specifies that for instantaneous parallel shifts of the yield curve, estimated fair value of equity for the subsequent one-year period should not decline by more than 20.0% for a 100 bp shift and 25.0% for a 200 bp shift.

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.

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The results above, as of December 31, 2023 and 2022, demonstrate that our balance sheet is asset sensitive, which means our assets have the opportunity to reprice at a faster pace than our liabilities, over the 12-month horizon.

We have also observed that, historically, our deposit interest rates have adjusted more slowly than the change in the federal funds rate.

This assumption is incorporated into the risk simulation model and is generally not reflected in a gap analysis, which is the process by which we measure the repricing gap between interest rate-sensitive assets versus interest rate-sensitive liabilities.

However, due to the deposit rate pressure we experienced in 2023, our deposit interest rates adjusted more quickly than the change in the federal funds rate.

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 December 31, 2023, the reported percentage of changes in net interest income and fair value of equity remained within the policy thresholds.

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In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S.

Management and the board of directors review tangible book value per share, tangible common equity to tangible assets, realized book value per share, and PPP-adjusted metrics as part of managing operating performance.

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.

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.

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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 December 31, 2023, total intangible assets were $1.5 million, which is less than 1.0% of total assets.

Tangible Common Equity to Tangible Assets .

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The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common stockholders’ equity to total assets.

As a result of previous acquisitions, we have a small amount of intangible assets.

As of December 31, 2022, total intangible assets were $1.5 million, which is less than 1.0% of total assets.

Realized Book Value Per Share.

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Tangible common equity to tangible assets (non-GAAP) 9.67 % 8.57 % 9.20 %

PPP-Adjusted Metrics

Red River Bank participated in the SBA PPP and originated 1,888 PPP loans totaling $260.8 million.

PPP loan originations were concluded in the second quarter of 2021.

Through December 31, 2022, we had received SBA forgiveness or borrower payments on all of the PPP loans originated except for $14,000.

As of December 31, 2022, PPP loans totaled $14,000 and were less than 0.1% of loans HFI.

PPP loans were implemented as a response to the COVID-19 pandemic and had characteristics that were different than the rest of our loan portfolio, including being short-term in nature (24 or 60 months or less depending on loan forgiveness timing), having a lower than market interest rate, and only being originated during specified time periods during the COVID-19 pandemic.

Because of these factors, management believes that PPP-adjusted metrics provide a more accurate portrayal of certain aspects of our financial condition and performance.

Accordingly, we believe it is important to investors to see certain of our metrics with PPP loans excluded.

The most directly comparable GAAP financial measure for PPP-adjusted metrics is total loans HFI.

The following table reconciles, as of the dates set forth below, non-PPP loans to total loans HFI:

(dollars in thousands) 2022 2021 2020

Non-PPP loans HFI

Loans HFI $ 1,916,267 $ 1,683,832 $ 1,588,446

PPP loans, net (14) (17,550) (118,447)

Non-PPP loans HFI (non-GAAP) $ 1,916,253 $ 1,666,282 $ 1,469,999

CRITICAL ACCOUNTING ESTIMATES

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Significant Accounting Policies” for details on the significant accounting principles and practices we follow.

Allowance for Loan Losses

The allowance for loan losses is established for known and inherent losses in the loan portfolio based upon management’s best assessment of the loan portfolio at each balance sheet date.

It is maintained at a level estimated to be adequate to absorb potential losses through periodic changes to loan losses.

Through December 31, 2022, Red River Bank utilized the incurred loss methodology to estimate the allowance for loan losses.

The CECL model was effective for Red River Bank on January 1, 2023.

The allowance for loan losses consists of specific and general reserves.

Each of these reserves undergoes a separate analysis in order to estimate the total allowance for loan losses.

Specific reserves relate to loans classified as impaired.

Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due in accordance with the contractual terms of the loan.

Impaired loans include TDRs and performing and nonperforming loans.

Impaired loans are reviewed individually, and a specific allowance is allocated, if necessary.

The amount of the specific allowance provided is estimated by calculating the difference between the loan value and the Bank’s exposure.

The loan value is determined based on either the fair value of the collateral underlying the loan, if the loan is collateral dependent, or the present value of the loan’s future cash flows calculated using the loan’s existing interest rate.

Either of these determinations are highly subjective and based on information available at the time of valuation.

General reserves relate to the remainder of the loan portfolio, including overdrawn deposit accounts.

General reserves are estimated using historical loss rates adjusted for qualitative risk factors both internal and external to us.

The qualitative factors considered include changes in economic conditions that impact loan portfolio repayment and collateral values, changes in the quality and composition of the loan portfolio, changes in lending policies and procedures, and other relevant factors.

The qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in our historic loss rates.

For purposes of determining the general reserves, the loan portfolio, less cash secured loans and impaired loans, is multiplied by our historical loss rates adjusted for qualitative risk factors.

The determination of the allowance for loan losses is, in a large part, based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

Because of the uncertainties associated with economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of loan losses in the loan portfolio and the amount of the allowance needed may change in the future.

Allowance for Credit Losses

On January 1, 2023, the Company adopted ASC 326 , which created changes to the ALL critical accounting policy that existed as of December 31, 2022.

The ALL critical accounting policy was replaced with the ACL critical accounting policy.

The ACL is a valuation account that is deducted from the amortized cost basis of loans HFI to present management’s best estimate of the expected credit losses to be recognized over the lifetime of the loans.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

This reasonable and supportable forecast period is currently one year and incorporates the Company’s and its peer’s historical losses.

After the forecast period, the Company reverts to an average historical loss rate over a two-year period.

The determination of the amount of allowance involves a high degree of judgement and subjectivity.

The ACL is available to absorb losses on loans HFI, and the reserve for unfunded commitments is a liability established to absorb credit losses for the expected life of the contractual term of off-balance sheet exposures as of the date of the

determination.

The process and methodology employed to establish an ACL consist of two components:

(1) a component involving individual loans that do not share similar risk characteristics with other loans and the measurement of expected credit losses for such individual loans and (2) a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

Management establishes an allowance for individual loans that do not share similar risk characteristics with other loans based on the amount of expected credit losses calculated on those individual loans and any amounts determined to be uncollectible.

Factors considered in measuring the extent of expected credit losses include payment status, collateral value, borrower financial condition, guarantor support, and the probability of collecting scheduled principal and interest payments when due.

For loans evaluated on an individual bases that are collateral dependent, the specific allowance is estimated by calculating the difference between the fair value of the underlying collateral less estimated selling costs and the Bank’s exposure.

If the loan is not collateral dependent, the discounted cash flow methodology is used.

In estimating an allowance for loans that share similar risk characteristics, loans are segmented into pools based on regulatory call report codes that are considered to share similar risk characteristics or areas of risk concentration.

Expected credit losses are estimated using the cohort loss rate and remaining life loss rate methodologies.

The cohort loss rate methodology tracks a closed pool of loans over their remaining lives to determine their loss behavior.

Once the losses have been tracked, the results are averaged together to determine the average remaining life loss rate to be applied to the current loans in the cohort and are adjusted for reasonable and supportable forecast periods, which is not to exceed a two-year period.

Additionally, a lookback period and delay period are established for each pool, which affects the average remaining life loss rate.

The lookback period defines how many quarterly cohort periods will be averaged together to form the average remaining life loss rate and varies by pool in order to capture the performance of cohorts under a variety of different conditions, both internal and external.

The delay period defines the most recent cohort that will be used in the historical average and varies by pool due to the differing terms and remaining lives that may exist in different pools.

The remaining life loss rate methodology takes the calculated loss rate and applies that rate to a pool of loans on a periodic basis based on the remaining life expectation of that pool and further adjusts for current conditions and for reasonable and supportable forecast periods.

Additionally, for loans that share similar risk characteristics, the ACL considers factors for each loan pool to adjust for differences between the historical period and expected conditions over the remaining lives of the loans in the portfolio related to:

• Lending policies and procedures;

• International, national, regional, and local economic business conditions;

• The nature of the loan portfolio, including the volume of the portfolio and terms of the loans;

• The experience, depth, and ability of our lending management;

• The volume and severity of past due loans and other similar conditions;

• The quality of the loan review and process;

• The value of underlying collateral for collateral dependent loans;

• The existence and effect of any concentrations of credit and changes in the level of such concentrations;

• The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the existing portfolio.

These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in the historical loss experience for these expectations.

Management considers the appropriateness of these critical assumptions as part of its allowance review and believes the ACL level is appropriate based on information available through the financial statement date.

RECENT ACCOUNTING PRONOUNCEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis