Red River Bancshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018 unless noted. Figures are unaudited and in millions of dollars except per-share data and ratios. The company operates Red River Bank, a Louisiana-based commercial and retail bank with 24 banking centers.
Financial performance and condition
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $6.85 million; diluted EPS $0.93 | Q3 2018: $6.14 million; $0.91 |
| Nine-month net income | $18.08 million; diluted EPS $2.57 | Nine months 2018: $16.91 million; $2.50 |
| Net interest income | Q3: $16.19 million; nine months: $47.30 million | Q3 2018: $15.30 million; nine months 2018: $43.77 million |
| Net interest margin (FTE) | Q3: 3.55%; nine months: 3.53% | Q3 2018: 3.54%; nine months 2018: 3.46% |
| Total assets | $1,938.9 million | $1,860.6 million |
| Loans held for investment | $1,413.2 million | $1,328.4 million |
| Total deposits | $1,676.9 million | $1,645.6 million |
| Cash and cash equivalents | $106.3 million | $151.9 million |
| Stockholders’ equity | $245.4 million | $193.7 million |
| Long-term debt | None outstanding | $11.3 million in junior subordinated debentures |
- Q3 net income rose 11.5% year over year; nine-month net income rose 7.0%. Q3 net interest income increased 5.9%, while nine-month net interest income increased 8.0%.
- Q3 return on average assets was 1.42%, return on average equity 11.20%, and efficiency ratio 57.75%. For the first nine months, these were 1.28%, 10.91%, and 60.00%, respectively.
- Q3 provision for loan losses was $378,000, down 28.1% year over year; the nine-month provision was $1.43 million, down 2.2%. The allowance was $13.91 million, or 0.98% of loans, versus 0.94% at year-end 2018.
- Net cash from operations was $19.38 million for the first nine months. Investing used $110.45 million, principally reflecting loan growth and securities purchases; financing provided $45.49 million, including IPO proceeds and deposit growth. Cash declined $45.58 million over the period.
- Deposits increased 1.9%; noninterest-bearing deposits grew 12.3% and reached 36.7% of deposits. The loans-to-deposits ratio was 84.27%. The bank reported $95 million of available federal funds lines and $584.5 million of net FHLB borrowing capacity, with no outstanding borrowings under either source.
- The Bank’s regulatory capital ratios included 15.95% total risk-based capital, 14.99% Tier 1 risk-based capital, and 11.39% Tier 1 leverage capital. Management said the Bank met applicable requirements and was well capitalized.
Material changes and management commentary
- The company completed its IPO in May 2019, issuing 663,320 shares for net proceeds of $26.8 million. The offering contributed to a 26.7% increase in stockholders’ equity. Shares outstanding were 7,306,221 at September 30.
- Using part of the IPO proceeds, the company redeemed all $11.3 million of junior subordinated debentures in June and August. Management said the payoff supported net interest margin; the company had no outstanding long-term debt at quarter-end.
- Loans grew 6.4% from year-end, led by commercial real estate and construction and development lending. Management described origination activity as normal, with newer markets experiencing the most growth. The company opened a full-service Covington banking center in late September; loans in the Northshore market were $21.1 million.
- Nonperforming assets were $7.97 million (0.41% of assets), down from $13.2 million at June 30, partly after $5.1 million of payoffs on loans reported past due in the second quarter. Compared with year-end, NPAs increased from $7.15 million, mainly due to foreclosed real estate. Nonperforming loans were 0.47% of loans.
- The securities portfolio’s net unrealized gain was $347,000 at quarter-end, compared with a $9.5 million unrealized loss at year-end. Management considered remaining unrealized losses temporary, attributed them to interest-rate movements, and said it did not intend to sell the affected securities before recovery.
- Q3 noninterest income increased 11.3% year over year, mainly from mortgage and brokerage income and equity-security valuation changes. Nine-month operating expenses rose 9.3%, including increased personnel, occupancy, advertising, and loan and deposit costs; the company also reported higher state bank stock taxes.
Outlook, risks, and contingencies
- The filing provides no specific earnings, growth, or margin guidance. Management noted that two Federal Reserve rate decreases partly offset margin benefits from debt redemption. Its interest-rate simulations described the balance sheet as asset-sensitive: a modeled parallel 100-basis-point rate decline reduced one-year net interest income by 7.2%, and a 200-basis-point decline by 11.9%. Management cautioned that model results depend on uncertain assumptions and may differ from actual outcomes.
- Key disclosed risks include economic and competitive conditions, interest-rate volatility, deposit retention and liquidity, loan and collateral performance, asset quality and reserve adequacy, growth execution, operational and cybersecurity exposures, and regulatory or accounting changes.
- Unfunded loan commitments were $272.3 million and standby letters of credit were $12.7 million at September 30. These amounts are not necessarily future cash requirements because commitments may expire undrawn. Management reported no material legal proceeding expected to adversely affect the company, while noting that unfavorable litigation outcomes could have a material effect.
- The company adopted lease accounting in 2019, recognizing $4.7 million of right-of-use assets and $4.7 million of lease liabilities at quarter-end. CECL was not yet adopted; the company was evaluating implementation, with adoption stated to be effective January 1, 2023 for the company’s smaller-reporting-company status.
- The Bank had not decided whether to elect the new community bank leverage ratio framework, effective January 1, 2020. The company reported no material change to previously disclosed risk factors and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether loan growth, particularly commercial real estate and construction lending, is matched by stable credit quality and adequate reserves.
- Whether deposit growth and funding costs remain supportive of margins, especially under further rate changes and amid lower cash balances.
- How the company sustains earnings as IPO-related effects and debt-redemption benefits compare with higher operating expenses and ongoing expansion costs.
- Whether the Covington and other newer markets generate sufficient loan and deposit growth to support expansion spending.
- Potential realization of off-balance-sheet commitments, valuation changes in AFS securities, and the eventual impact of CECL adoption.