Red River Bank - SEC Filing

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rrbi-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2022


☐			Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-38888


			Red River Bancshares, Inc.
			(Exact name of registrant as specified in its charter)


Louisiana						72-1412058
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification Number)


1412 Centre Court Drive, Suite 501, Alexandria, Louisiana						71301
(Address of Principal Executive Offices)						(Zip Code)

Registrant’s telephone number, including area code: (318) 561-5028

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	RRBI	The Nasdaq Stock Market, LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2022, the registrant had 7,183,915 shares of common stock, no par value, issued and outstanding.

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		Page
Glossary of Terms		3
Cautionary Note Regarding Forward-Looking Statements		5

PART I	Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	7
	Consolidated Statements of Income	8
	Consolidated Statements of Comprehensive Income	9
	Consolidated Statements of Changes in Stockholders’ Equity	10
	Consolidated Statements of Cash Flows	12
	Notes to Unaudited Consolidated Financial Statements	14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4.	Controls and Procedures	60

PART II	Other Information
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	62
	Signatures	63

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GLOSSARY OF TERMS

Unless the context indicates otherwise, references in this filing to “we,” “our,” “us,” “the Company,” and “our company” refer to Red River Bancshares, Inc., a Louisiana corporation and bank holding company, and its consolidated subsidiaries. All references in this filing to “Red River Bank,” “the bank,” and “the Bank” refer to Red River Bank, our wholly owned bank subsidiary.

Other abbreviations or acronyms used in this filing are defined below.


ABBREVIATION OR ACRONYM						DEFINITION
AFS						Available-for-sale
AOCI						Accumulated other comprehensive income or loss
ASC						Accounting Standards Codification
ASU						Accounting Standards Update
Basel III						Basel Committee’s 2010 Regulatory Capital Framework (Third Accord)
BOLI						Bank-owned life insurance
bp(s)						Basis point(s)
CARES Act						Coronavirus Aid, Relief, and Economic Security Act, as amended
CBLR						Community bank leverage ratio
CCB						Capital conservation buffer
CECL						Current Expected Credit Losses, related to ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
COVID-19						Coronavirus Disease 2019
CRA						Community Reinvestment Act
Director Compensation Program						Amended and Restated Director Compensation program, which allows directors of the Company and the Bank an opportunity to select how to receive their annual director fees.
Economic Aid Act						Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
Economic Growth Act						Economic Growth, Regulatory Relief, and Consumer Protection Act
EPS						Earnings per share
Exchange Act						Securities Exchange Act of 1934, as amended
FDIC						Federal Deposit Insurance Corporation
Federal Reserve						Board of Governors of the Federal Reserve System
FOMC						Federal Open Market Committee
FHLB						Federal Home Loan Bank of Dallas
FTE						Fully taxable equivalent basis
GAAP						Generally Accepted Accounting Principles in the United States of America
HFI						Held for investment
HFS						Held for sale
HTM						Held-to-maturity
LDPO						Loan and deposit production office
LIBOR						London Interbank Offered Rate
MSA						Metropolitan statistical area
NOW						Negotiable order of withdrawal
NPA(s)						Nonperforming asset(s)
OFI						Office of Financial Institutions
OTTI						Other-than-temporary impairment
Policy Statement						Federal Reserve’s Small Bank Holding Company Policy Statement
PPP						Paycheck Protection Program
Report						Quarterly Report on Form 10-Q
SBA						Small Business Administration

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ABBREVIATION OR ACRONYM						DEFINITION
SBIC						Small Business Investment Company
Securities Act						Securities Act of 1933, as amended
SEC						Securities and Exchange Commission
TDR(s)						Troubled debt restructuring(s)

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” and “outlook,” or the negative version of those words, or such other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

•business and economic conditions generally and in the financial services industry, nationally and within our local market areas;

•the impact of COVID-19 (including the emergence of multiple COVID-19 variants) on our business, the communities where we have our banking centers, the state of Louisiana, and the United States, related to the economy and overall financial stability;

•government and regulatory responses to the COVID-19 pandemic;

•government intervention in the U.S. financial system, including the effects of recent and future legislative, tax, accounting, and regulatory actions and reforms, including the CARES Act, the American Rescue Plan Act of 2021, and the Economic Aid Act, which established the SBA PPP, the Inflation Reduction Act of 2022, and other stimulus legislation or changes in banking, securities, accounting, and tax laws and regulations, and their application by our regulators;

•changes in management personnel;

•increased competition in the financial services industry, particularly from regional and national institutions;

•volatility and direction of market interest rates;

•our ability to maintain important deposit customer relationships and our reputation, and to otherwise avoid liquidity risks;

•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers, and the success of construction projects that we finance, including any loans acquired in acquisition transactions;

•changes in the value of collateral securing our loans;

•risks associated with system failures or failures to protect against cybersecurity threats, such as breaches of our network security;

•deterioration of our asset quality;

•the adequacy of our reserves, including our allowance for loan losses;

•operational risks associated with our business;

•natural disasters and adverse weather, acts of terrorism, pandemics, an outbreak of hostilities, including the ongoing military conflict between Russia and Ukraine, or other international or domestic calamities, and other matters beyond our control;

•our ability to prudently manage our growth and execute our strategy;

•compliance with the extensive regulatory framework that applies to us;

•the cessation of LIBOR effective June 30, 2023, and the impact of any replacement alternatives on our business;

•changes in the laws, rules, regulations, interpretations, or policies relating to financial institution, accounting, tax, trade, monetary, and fiscal matters; and

•the risk factors found in “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as in “Part II - Item 1A. Risk Factors” of this Report and other reports and documents we file from time to time with the SEC.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. Additional information on these and other risk factors can be found in “Part II - Item 1A. Risk Factors” of this Report and in “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by applicable law. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot

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assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RED RIVER BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)




(in thousands, except share amounts)	September 30, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	39,465	$	23,143
Interest-bearing deposits in other banks	261,608		761,721
Total Cash and Cash Equivalents	301,073		784,864
Securities available-for-sale, at fair value	609,748		659,178
Securities held-to-maturity, at amortized cost	154,736		—
Equity securities, at fair value	—		7,846
Nonmarketable equity securities	3,460		3,450
Loans held for sale	1,536		4,290
Loans held for investment	1,879,669		1,683,832
Allowance for loan losses	(19,953)		(19,176)
Premises and equipment, net	52,820		48,056
Accrued interest receivable	7,782		6,245
Bank-owned life insurance	28,594		28,061
Intangible assets	1,546		1,546
Right-of-use assets	4,262		3,743
Other assets	34,405		12,775
Total Assets	$	3,059,678	$	3,224,710
LIABILITIES
Noninterest-bearing deposits	$	1,172,157	$	1,149,672
Interest-bearing deposits	1,624,337		1,760,676
Total Deposits	2,796,494		2,910,348

Accrued interest payable	1,194		1,310
Lease liabilities	4,377		3,842
Accrued expenses and other liabilities	14,200		11,060
Total Liabilities	2,816,265		2,926,560
COMMITMENTS AND CONTINGENCIES	—		—
STOCKHOLDERS’ EQUITY
Preferred stock, no par value: Authorized - 1,000,000 shares; None Issued and Outstanding	—		—
Common stock, no par value: Authorized - 30,000,000 shares; Issued and Outstanding - 7,183,915 and 7,180,155 shares, respectively	60,050		60,233
Additional paid-in capital	2,014		1,814
Retained earnings	265,093		239,876
Accumulated other comprehensive income (loss)	(83,744)		(3,773)
Total Stockholders’ Equity	243,413		298,150
Total Liabilities and Stockholders’ Equity	$	3,059,678	$	3,224,710

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands, except per share data)	2022		2021		2022		2021
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	19,740	$	16,993	$	54,543	$	50,509
Interest on securities	3,572		2,220		10,210		6,247
Interest on federal funds sold	317		20		458		67
Interest on deposits in other banks	1,238		202		2,160		432
Dividends on stock	19		7		22		9
Total Interest and Dividend Income	24,886		19,442		67,393		57,264
INTEREST EXPENSE
Interest on deposits	1,798		1,333		4,428		4,317

Total Interest Expense	1,798		1,333		4,428		4,317
Net Interest Income	23,088		18,109		62,965		52,947
Provision for loan losses	600		150		1,000		1,750
Net Interest Income After Provision for Loan Losses	22,488		17,959		61,965		51,197
NONINTEREST INCOME
Service charges on deposit accounts	1,488		1,258		4,205		3,457
Debit card income, net	934		1,094		2,926		3,344
Mortgage loan income	624		1,770		2,643		7,009
Brokerage income	870		851		2,536		2,491
Loan and deposit income	502		413		1,283		1,281
Bank-owned life insurance income	181		176		533		473
Gain (Loss) on equity securities	—		(41)		(447)		(100)
Gain (Loss) on sale and call of securities	16		—		(59)		193
SBIC income	231		136		401		616
Other income (loss)	21		(14)		107		57
Total Noninterest Income	4,867		5,643		14,128		18,821
OPERATING EXPENSES
Personnel expenses	8,853		7,956		25,879		24,087
Occupancy and equipment expenses	1,531		1,412		4,496		4,019
Technology expenses	653		734		2,118		2,144
Advertising	316		282		841		691
Other business development expenses	436		283		1,079		889
Data processing expense	604		528		1,484		1,445
Other taxes	650		527		1,933		1,584
Loan and deposit expenses	164		325		479		773
Legal and professional expenses	553		453		1,446		1,189
Regulatory assessment expenses	280		251		781		665
Other operating expenses	1,001		933		3,037		2,753
Total Operating Expenses	15,041		13,684		43,573		40,239
Income Before Income Tax Expense	12,314		9,918		32,520		29,779
Income tax expense	2,128		1,780		5,795		5,337
Net Income	$	10,186	$	8,138	$	26,725	$	24,442
EARNINGS PER SHARE
Basic	$	1.42	$	1.12	$	3.72	$	3.35
Diluted	$	1.42	$	1.12	$	3.71	$	3.34

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Net income	$	10,186	$	8,138	$	26,725	$	24,442
Other comprehensive income (loss):
Unrealized net gain (loss) on securities arising during period	(25,847)		(1,416)		(102,802)		(8,645)
Tax effect	5,428		297		21,589		1,815
(Gain) Loss on sale and call of securities included in net income	(16)		—		59		(193)
Tax effect	3		—		(13)		41
Amortization of unrealized net gain (loss) on securities transferred to held-to-maturity	623		—		1,513		—
Tax effect	(131)		—		(317)		—
Total other comprehensive income (loss)	(19,940)		(1,119)		(79,971)		(6,982)
Comprehensive Income (Loss)	$	(9,754)	$	7,019	$	(53,246)	$	17,460

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


(dollars in thousands, except per share amounts)	Common Shares Issued	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
Balance as of December 31, 2020	7,325,333	$	68,055	$	1,545	$	208,957	$	6,921	$	285,478
Net income	—	—		—		8,065		—		8,065
Stock incentive plan	—	—		93		—		—		93

Issuance of shares of common stock as board compensation	1,075	56		—		—		—		56
Repurchase of common stock under stock repurchase program	(19,661)	(1,018)		—		—		—		(1,018)
Cash dividend - $0.07 per share	—	—		—		(511)		—		(511)
Other comprehensive income (loss)	—	—		—		—		(7,252)		(7,252)
Balance as of March 31, 2021	7,306,747	$	67,093	$	1,638	$	216,511	$	(331)	$	284,911
Net income	—	—		—		8,239		—		8,239
Stock incentive plan	—	—		54		—		—		54
Forfeiture of restricted shares of common stock	(100)	—		—		—		—		—
Repurchase of common stock under stock repurchase program	(21,653)	(1,159)		—		—		—		(1,159)
Cash dividend - $0.07 per share	—	—		—		(510)		—		(510)
Other comprehensive income (loss)	—	—		—		—		1,389		1,389
Balance as of June 30, 2021	7,284,994	$	65,934	$	1,692	$	224,240	$	1,058	$	292,924
Net income	—	—		—		8,138		—		8,138
Stock incentive plan	—	—		59		—		—		59
Issuance of restricted shares of common stock through stock incentive plan, net	7,400	—		—		—		—		—
Repurchase of common stock under stock repurchase program	(15,994)	(804)		—		—		—		(804)
Cash dividend - $0.07 per share	—	—		—		(510)		—		(510)
Other comprehensive income (loss)	—	—		—		—		(1,119)		(1,119)
Balance as of September 30, 2021	7,276,400	$	65,130	$	1,751	$	231,868	$	(61)	$	298,688

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED) (UNAUDITED)


(dollars in thousands, except per share amounts)	Common Shares Issued	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
Balance as of December 31, 2021	7,180,155	$	60,233	$	1,814	$	239,876	$	(3,773)	$	298,150
Net income	—	—		—		7,392		—		7,392
Stock incentive plan	—	—		63		—		—		63
Issuance of shares of common stock as board compensation	675	35		—		—		—		35
Repurchase of common stock under stock repurchase program	(4,465)	(218)		—		—		—		(218)
Cash dividend - $0.07 per share	—	—		—		(502)		—		(502)
Other comprehensive income (loss)	—	—		—		—		(40,046)		(40,046)
Balance as of March 31, 2022	7,176,365	$	60,050	$	1,877	$	246,766	$	(43,819)	$	264,874
Net income	—	—		—		9,147		—		9,147
Stock incentive plan	—	—		63		—		—		63


Cash dividend - $0.07 per share	—	—		—		(503)		—		(503)
Other comprehensive income (loss)	—	—		—		—		(19,985)		(19,985)
Balance as of June 30, 2022	7,176,365	$	60,050	$	1,940	$	255,410	$	(63,804)	$	253,596
Net income	—	—		—		10,186		—		10,186
Stock incentive plan	—	—		74		—		—		74
Issuance of restricted shares of common stock through stock incentive plan, net	7,550	—		—		—		—		—

Cash dividend - $0.07 per share	—	—		—		(503)		—		(503)
Other comprehensive income (loss)	—	—		—		—		(19,940)		(19,940)
Balance as of September 30, 2022	7,183,915	$	60,050	$	2,014	$	265,093	$	(83,744)	$	243,413

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Nine Months Ended September 30,
(in thousands)	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	26,725	$	24,442
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	1,516		1,409
Amortization	406		475
Share-based compensation earned	200		206
Share-based board compensation earned	59		34
(Gain) Loss on other assets owned	60		12
Net (accretion) amortization on securities AFS	278		1,888
(Gain) Loss on sale and call of securities	59		(193)
(Gain) Loss on equity securities	447		100
Provision for loan losses	1,000		1,750
Deferred income tax (benefit) expense	377		(660)
Net (increase) decrease in loans HFS	2,754		20,334
Net (increase) decrease in accrued interest receivable	(1,537)		953
Net (increase) decrease in BOLI	(533)		(473)
Net increase (decrease) in accrued interest payable	(116)		(434)
Net increase (decrease) in accrued income taxes payable	621		(96)
Other operating activities, net	3,027		323
Net cash provided by (used in) operating activities	35,343		50,070
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in securities AFS:
Sales	31,762		111,522
Maturities, principal repayments, and calls	60,292		75,143
Purchases	(313,514)		(267,191)
Activity in securities HTM:
Maturities, principal repayments, and calls	13,074		—
Sale of equity securities	7,399		—
Purchase of equity securities	—		(4,000)
Purchase of nonmarketable equity securities	(10)		(2)
Capital contribution in partnerships	(817)		(123)
Net (increase) decrease in loans HFI	(196,060)		(34,946)

Purchase of bank owned life insurance	—		(5,000)
Proceeds from sales of foreclosed assets	641		96
Purchases of premises and equipment	(6,321)		(1,917)
Net cash provided by (used in) investing activities	(403,554)		(126,418)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits	(113,854)		364,223



Repurchase of common stock	(218)		(2,981)


Cash dividends	(1,508)		(1,531)
Net cash provided by (used in) financing activities	(115,580)		359,711
Net change in cash and cash equivalents	(483,791)		283,363
Cash and cash equivalents - beginning of period	784,864		447,201
Cash and cash equivalents - end of period	$	301,073	$	730,564

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RED RIVER BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)


	For the Nine Months Ended September 30,
(in thousands)	2022		2021
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest	$	4,545	$	4,751
Income taxes	$	4,766	$	6,114

SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans	$	—	$	266
Transfers of investment securities from AFS to HTM, prior to market value adjustment	$	184,238	$	—

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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RED RIVER BANCSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with GAAP for interim financial information, general practices within the financial services industry, and instructions for Form 10-Q and Regulation S-X. Accordingly, these interim financial statements do not include all of the information or footnotes required by GAAP for annual financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the entire fiscal year. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Certain prior period amounts have been reclassified to conform to the current period presentation. These changes in presentation did not have a material impact on the Company’s financial condition or results of operations.

Critical Accounting Policies and Estimates

There were no material changes or developments during the reporting period with respect to methodologies the Company uses when applying critical accounting policies and developing critical accounting estimates as disclosed in Note 1 of the notes to the audited consolidated financial statements for the year ended December 31, 2021, that were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Company’s financial condition, results of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the interim period presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Accounting Standards Adopted in 2022

ASU No. 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments. The guidance issued in this update addressed lessors’ concerns by amending the lease classification requirements. The amendments in this update address an issue related to a lessor’s accounting for certain leases with variable lease payments. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if two criteria are met. Those criteria are that the lease would have been classified as a sales-type lease or a direct financing lease in accordance with GAAP, and that the lessor would have otherwise recognized a day-one loss. ASU 2021-05 was adopted as of January 1, 2022, and did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 sets forth the CECL model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses. In addition, the update amends the accounting for credit losses on AFS securities. The Company does not expect a material impact due to this update. As an SEC registrant with smaller reporting company filing status as determined on June 30, 2019, CECL is effective for the Company on January 1, 2023. The Company continues to evaluate the impact of this ASU on the consolidated financial statements and disclosures. In that regard, the Company has formed a cross-functional working group and is currently working through an implementation plan. The implementation plan includes an assessment of data, model development and documentation, documentation of processes, and implementation of a third-party vendor solution to assist in the adoption of ASU 2016-13. Based upon its preliminary CECL analysis as of September 30, 2022, the Company expects the adoption of ASU 2016-13 will result in a combined 1.0% to 5.0% increase in its allowance for credit losses and allowance for unfunded commitments. This increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Also, ASU 2016-13 requires an allowance for expected credit losses for certain securities HTM. The Company currently does not hold any municipal securities HTM; therefore, it does not expect CECL to have a material impact related to securities HTM. Additionally, the adoption of ASU 2016-13 is not expected to have a significant impact on the Company’s regulatory capital ratios. The ultimate impact of adoption on January 1, 2023, could be significantly different than the Company’s current expectation as its modeling processes will be significantly influenced by the composition, characteristics, and quality of its loan and securities portfolios as well as the prevailing economic conditions and forecasts as of that date, notwithstanding any further refinements to its expected credit loss models.

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ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this update address how to determine whether a contract liability is recognized by the acquirer in a business combination. The amendment also resolves the inconsistency of post-acquisition revenue recognition by providing specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This standard will be adopted by the Company on January 1, 2023. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

ASU No. 2022-02 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance issued in this update eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, but also enhances the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The guidance requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. This standard is effective for the Company on January 1, 2023. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

2. Securities

Securities are classified as AFS, HTM, and equity securities. Total securities were $764.5 million as of September 30, 2022.

Securities AFS and Securities HTM

Securities AFS and securities HTM are debt securities. Securities AFS are held for indefinite periods of time and are carried at estimated fair value. As of September 30, 2022, the estimated fair value of securities AFS was $609.7 million. The net unrealized loss on securities AFS increased $84.8 million for the nine months ended September 30, 2022, resulting in a net unrealized loss of $89.6 million as of September 30, 2022.

During the second quarter of 2022, the Company reclassified $166.3 million, net of $17.9 million of unrealized loss, or 20.5% of the securities portfolio from AFS to HTM. The securities were transferred at fair value, which became the cost basis for the securities HTM. The net unrealized loss will be 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. Securities HTM, which the Company has the intent and ability to hold until maturity, are carried at amortized cost. As of September 30, 2022, the amortized cost of securities HTM was $154.7 million.

Investment activity for the nine months ended September 30, 2022, included $313.5 million of securities purchased, partially offset by $31.8 million in sales and $73.4 million in maturities, principal repayments, and calls. There were no purchases or sales of securities HTM for the same period.

The amortized cost and estimated fair values of securities AFS and securities HTM are summarized in the following tables:


	September 30, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities AFS:
Mortgage-backed securities	$	295,166	$	—	$	(37,623)	$	257,543
Municipal bonds	220,078		1		(44,780)		175,299
U.S. Treasury securities	176,500		—		(6,631)		169,869
U.S. agency securities	7,596		—		(559)		7,037
Total Securities AFS	$	699,340	$	1	$	(89,593)	$	609,748

Securities HTM:
Mortgage-backed securities	$	153,826	$	—	$	(20,785)	$	133,041
U.S. agency securities	910		—		(114)		796
Total Securities HTM	$	154,736	$	—	$	(20,899)	$	133,837

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	December 31, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities AFS:
Mortgage-backed securities	$	386,874	$	1,112	$	(8,460)	$	379,526
Municipal bonds	227,248		3,665		(942)		229,971
U.S. Treasury securities	41,770		—		(154)		41,616
U.S. agency securities	8,062		61		(58)		8,065
Total Securities AFS	$	663,954	$	4,838	$	(9,614)	$	659,178

Securities HTM:
Mortgage-backed securities	$	—	$