Red River Bancshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Red River Bancshares is a Louisiana bank holding company operating Red River Bank, with 25 banking centers and a loan and deposit production office. Results reflect the COVID-19 environment and the bank’s expansion into Acadiana.
Financial performance and condition
| Metric | Q3 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $17.3 million | Up 6.8% from Q3 2019 |
| Noninterest income | $6.4 million | Up 46.4% from Q3 2019 |
| Provision for loan losses | $1.6 million | $378,000 in Q3 2019 |
| Operating expenses | $13.3 million | Up 11.5% from Q3 2019 |
| Net income / diluted EPS | $7.3 million / $0.99 | Net income up 6.4%; diluted EPS was $0.93 in Q3 2019 |
| Net interest margin (FTE) | 3.02% | 3.55% in Q3 2019; 3.12% in Q2 2020 |
| Return on average assets / equity | 1.20% / 10.50% | 1.42% / 11.20% in Q3 2019 |
- For the nine months, net income was $20.9 million, up 15.5%; diluted EPS was $2.84 versus $2.57. Net interest income rose 6.4% to $50.3 million, while noninterest income rose 44.1% to $17.0 million.
- Mortgage loan income reached a record $2.9 million in Q3, up 184.4% year over year. Nine-month mortgage income was $5.7 million, up 161.7%. Securities-sale gains contributed $125,000 in Q3 and $1.3 million for nine months.
- At September 30, assets were $2.49 billion, up 25.3% from year-end 2019. Loans held for investment were $1.65 billion, up 14.6%; deposits were $2.19 billion, up 27.5%; and stockholders’ equity was $278.1 million, up 10.4%.
- Cash and cash equivalents were $270.9 million, versus $133.3 million at year-end. Nine-month cash flows were $8.6 million provided by operations, $342.4 million used in investing, and $471.4 million provided by financing; cash increased $137.6 million.
- There were no borrowings outstanding at quarter-end. The company reported $709.1 million in combined available borrowing capacity; the $50 million short-term FHLB borrowing used to fund PPP lending was repaid in May. The loans-to-deposits ratio was 75.17%, and noninterest-bearing deposits were 42.08% of deposits.
- Red River Bank’s total risk-based capital ratio was 16.62% and Tier 1 leverage ratio was 10.24%. Management said the bank met applicable capital requirements.
Material changes and operating developments
- Deposits grew substantially, with management citing stimulus funds, PPP proceeds, new account activity, higher commercial balances, and a large temporary deposit received late in September. Noninterest-bearing deposits rose 57.8% from year-end. The filing does not quantify the portion of total deposit growth attributable to the temporary deposit.
- Loans included $193.5 million of PPP loans, net of deferred fees, equal to 11.7% of loans held for investment. Excluding PPP loans, loans were $1.46 billion, up 1.2% from year-end.
- Active COVID-related payment deferrals fell to $23.3 million, or 1.6% of non-PPP loans, from $152.8 million, or 10.7%, at June 30. As of October 31, active deferrals were $12.4 million.
- The allowance for loan losses was $16.2 million, or 0.98% of total loans and 1.11% of non-PPP loans. Nine-month net charge-offs were $1.4 million, primarily reflecting an energy credit charge-off.
- Nonperforming assets were $5.2 million, or 0.21% of assets, down from $6.5 million at year-end; however, they increased $921,000 during Q3. Substandard loans were $17.0 million, compared with $13.0 million at year-end.
- The efficiency ratio improved to 55.88% from 57.75% in Q3 2019. Personnel expenses increased 15.3% in Q3, partly due to expansion and mortgage commissions; nine-month legal and professional expenses also increased, including costs associated with operating as a public company.
Outlook, risks and unusual items
- Management expected FTE net interest margin to decrease slightly in Q4 2020 as low rates continued to pressure asset yields. Q3 FTE margin was 3.02%, down from 3.55% a year earlier. PPP loan income was $1.4 million in Q3; excluding PPP income, Q3 net interest income was $15.9 million, down 1.8% year over year.
- Management said it was monitoring credit quality and could adjust loan-loss provisions in Q4 given pandemic-related economic uncertainty and Louisiana natural disasters. COVID-19, borrower repayment capacity, collateral values, rate movements, deposit retention, liquidity, and operational and cybersecurity issues were identified as risks.
- Hurricane Laura caused significant damage in southwest Louisiana, but the bank reported no significant damage to its locations and no employee injuries. Hurricane Delta also caused no significant damage to bank locations.
- The company began accepting PPP forgiveness applications September 14. At September 30, 20.6% of PPP customers had applied; by October 31, 37.0% had applied. Management noted SBA rule changes and potential litigation, regulatory, and guarantee risks relating to PPP origination and forgiveness.
- The board authorized up to $3.0 million of share repurchases through August 27, 2021; 2,824 shares were repurchased in Q3 for $122,000. The quarterly dividend was $0.06 per share.
- A purported class action filed in Louisiana in August alleges improper multiple nonsufficient-funds fees on a single item. The company and bank deny the allegations; potential exposure could not be estimated at this stage.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during Q3. CECL adoption is scheduled for January 1, 2023; the company was evaluating implementation.
Key facts for investors to verify
- How much of deposit growth, particularly the late-September temporary deposit, persisted after quarter-end.
- Whether the decline in payment deferrals continues and whether pandemic- or hurricane-related borrower stress leads to higher delinquencies, charge-offs, or provisions.
- PPP forgiveness progress, fee recognition, and any SBA, legal, or regulatory exposure.
- Whether mortgage income and securities gains are repeatable, and how low interest rates affect underlying net interest margin and earnings.
- The status and potential financial impact of the nonsufficient-funds class action.
- Whether planned expansion and higher staffing and technology costs translate into sustainable revenue growth.