Red River Bancshares, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are generally against December 31, 2018. Amounts are in U.S. dollars. Red River Bancshares is a Louisiana bank holding company operating through Red River Bank.
Financial results and condition
| Metric | Q2 / June 30, 2019 | Comparison |
|---|---|---|
| Net income | $5.54 million for Q2; $11.23 million for six months | Q2 increased 0.1% from $5.53 million; six-month income increased 4.4% from $10.76 million |
| Diluted EPS | $0.78 for Q2; $1.63 for six months | Q2 was $0.82; six-month EPS was $1.59 in 2018 (split-adjusted) |
| Net interest income | $15.65 million for Q2; $31.10 million for six months | Increased 7.4% and 9.2%, respectively |
| Net interest margin | 3.46% Q2; 3.47% six months (FTE: 3.51% and 3.52%) | FTE margin increased from 3.45% and 3.42%, respectively |
| Noninterest income / expense | $4.10 million / $12.40 million for Q2 | Income rose 11.8%; expenses rose 13.3% from Q2 2018 |
| Efficiency ratio | 62.81% Q2; 61.20% six months | Compared with 60.05% and 60.21%, respectively |
| Total assets / loans HFI | $1.893 billion / $1.393 billion | Assets up 1.7%; loans up 4.9% from year-end |
| Deposits / cash and cash equivalents | $1.635 billion / $101.6 million | Deposits down 0.7%; cash down $50.3 million from year-end |
| Stockholders’ equity | $237.9 million | Up 22.8% from year-end, including IPO proceeds and improved securities-related AOCI |
For the first six months, net cash provided by operating activities was $8.5 million, investing activities used $67.2 million, and financing activities provided $8.4 million. Cash declined by $50.3 million, primarily as loans were funded. Management cited $318.1 million of available-for-sale securities, $95 million of unused federal funds lines, and $565.8 million of net FHLB borrowing capacity as liquidity sources; there were no outstanding borrowings under these facilities at June 30.
The Bank reported total risk-based capital of 15.71%, common equity Tier 1 of 14.75%, and Tier 1 leverage of 11.18% at June 30. Management said the Bank met applicable capital requirements and was well capitalized.
Material changes and notable items
- The May IPO issued 663,320 new shares at $45 per share and generated $26.8 million in net proceeds. The stock began trading on Nasdaq under RRBI; Q2 diluted EPS was lower year over year despite nearly unchanged net income, amid a higher share count.
- Loans grew $64.7 million, while deposits declined $11.0 million. Noninterest-bearing deposits increased $29.1 million, but public deposits fell $46.3 million and NOW accounts fell $39.8 million.
- The company redeemed $6.2 million of junior subordinated debentures in June. The remaining $5.2 million was redeemed on August 8, 2019, after quarter-end. The company reported approximately $50,000 of expenses related to early redemption during Q2.
- Net unrealized losses on available-for-sale securities improved to $0.37 million from $9.5 million at year-end, contributing $7.2 million of after-tax AOCI improvement during the six-month period. Management characterized remaining securities losses as temporary and said it did not intend to sell the securities before recovery.
- Management attributed higher costs to staffing and public-company readiness, Louisiana expansion, marketing, and loan/deposit activity. Q2 included approximately $130,000 of nonrecurring Baton Rouge headquarters occupancy costs and $76,000 of nonrecurring Covington loan-development costs.
Credit quality, outlook, and risks
- Nonperforming assets rose to $13.23 million, or 0.70% of assets, from $7.15 million, or 0.38%, at year-end. Nonperforming loans were $12.15 million; the increase was driven mainly by $6.63 million of accruing loans 90 or more days past due, primarily secured commercial loans. Nonaccrual loans were $5.52 million.
- The allowance for loan losses was $13.59 million, or 0.98% of loans, versus $12.52 million at year-end. Six-month provision expense was $1.06 million; net recoveries were $12,000. Management considered the allowance adequate but warned deterioration in economic conditions, asset quality, or loan growth could require additional provision.
- Loans were concentrated in commercial real estate (35.5%), one-to-four-family residential (29.9%), and commercial and industrial (19.5%); energy-related credits were 2.5% of loans. Unfunded commitments to extend credit were $245.3 million, with $11.6 million in standby letters of credit.
- The company described its balance sheet as asset sensitive. Its model estimated that a 200-basis-point rate decline would reduce one-year net interest income by 12.0% and fair value of equity by 20.3%; actual outcomes may differ from modeled results.
- No numerical earnings or growth guidance was provided. Management discussed geographic expansion, including its Covington loan production office, with plans to move into a renovated full-service banking center expected to open in September 2019.
- Key risks include local and broader economic conditions, borrower and collateral performance, interest-rate movements, deposit retention and liquidity, competition, cybersecurity and operational risks, regulatory compliance, and the adequacy of credit-loss reserves. The company said there were no material changes to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect. It was evaluating adoption of CECL, effective for SEC registrants for fiscal years beginning after December 15, 2019.
Important facts for investors to verify
- Whether elevated 90-day past-due loans and nonperforming assets resolve, migrate to nonaccrual, or lead to charge-offs and higher provisions.
- Loan and deposit growth, especially the effects of public-deposit fluctuations, funding costs, and the rising loan-to-deposit ratio (85.23%).
- Whether operating expenses from expansion and public-company requirements moderate, and whether revenue growth supports the efficiency ratio.
- The continuing effect of the IPO, debt redemptions, and expanded share count on earnings per share, capital, and shareholder returns.
- Execution of the Covington expansion and CECL implementation, and sensitivity to changes in interest rates and securities values.