Red River Bancshares, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless noted. The company is a Louisiana bank holding company operating through Red River Bank. It reported 23 banking centers and a loan production office, with a new Covington-area office opened in April 2019.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $5.696 million | $5.231 million, Q1 2018; up 8.9% |
| Diluted EPS | $0.85 | $0.77, Q1 2018; up 10.4% (2018 split-adjusted) |
| Net interest income | $15.452 million | $13.910 million, Q1 2018; up 11.1% |
| Net interest margin, FTE | 3.50% | 3.37%, Q1 2018 |
| Noninterest income | $3.296 million | $3.157 million, Q1 2018; up 4.4% |
| Operating expenses | $11.158 million | $10.307 million, Q1 2018; up 8.3% |
| Efficiency ratio | 59.52% | 60.39%, Q1 2018 |
| Return on average assets / equity | 1.24% / 11.69% | 1.22% / 11.88%, Q1 2018 |
| Total assets | $1.922 billion | $1.861 billion; up 3.3% |
| Loans held for investment | $1.349 billion | $1.328 billion; up 1.6% |
| Deposits | $1.691 billion | $1.646 billion; up 2.8% |
| Stockholders’ equity | $202.2 million | $193.7 million; up 4.4% |
| Cash and cash equivalents | $178.0 million | $151.9 million at year-end |
- Income and margins: Higher net interest income reflected growth in average interest-earning assets and a higher FTE margin. Average earning assets rose 6.9%; the average yield on earning assets increased to 4.03% from 3.75%, while deposit cost increased to 0.57% from 0.40%. Provision for loan losses was $526,000, versus $411,000 in Q1 2018. Income tax expense was $1.368 million, with a 19.4% effective rate.
- Cash flow: Operating activities provided $9.7 million; investing activities used $28.0 million, including $20.7 million of net loan growth and $23.8 million of securities purchases; financing activities provided $44.3 million, mainly from deposit growth. Cash and cash equivalents increased by $26.1 million.
- Debt and liquidity: The company reported $11.341 million of junior subordinated debentures, no other borrowings, and $4.856 million of lease liabilities recognized under the new lease standard. The Bank had no outstanding federal funds-line or FHLB borrowings; available federal funds lines totaled $95 million and reported net FHLB borrowing capacity was $509 million. The loans-to-deposits ratio was 79.91%.
- Capital and credit: The Bank’s total risk-based capital ratio was 15.75%, common equity Tier 1 ratio 14.80%, and leverage ratio 10.93%; management said the Bank met applicable capital requirements and was well capitalized. Nonperforming assets were $6.575 million, or 0.34% of assets, down from $7.145 million and 0.38% at year-end. The allowance for loan losses was $13.101 million, or 0.97% of loans, versus $12.524 million and 0.94% at year-end. Net charge-offs were zero as a percentage of average loans.
Material changes and notable items
- Growth in assets was funded primarily by a $45.6 million increase in deposits. Commercial deposits rose $60.4 million, while public deposits fell $31.7 million. Management attributed part of the quarter-end cash increase to a large, temporary NOW-account deposit tied to a legal settlement; withdrawals were expected shortly after quarter-end.
- Deposit service-charge income fell $174,000 (14.5%) year over year following a late-2018 overdraft-processing system change. Management said it was evaluating other fees to offset the decline. Mortgage loan income rose $168,000 (48.6%).
- Operating expenses increased $851,000, primarily from personnel costs, which rose $498,000, and occupancy costs, which rose $96,000. Staffing increased by 12 full-time equivalents, including support for growth, public-company readiness, and Covington expansion.
- Loans grew by $20.7 million from year-end. Management cited normal origination activity, stronger growth in newer markets, and payoff of a substandard energy loan; energy-related credits declined to 2.6% of loans from 2.9%.
- Adoption of lease accounting on January 1, 2019 added approximately $4.9 million each of right-of-use assets and lease liabilities; management said the income-statement impact was not material. CECL implementation remained in progress, with a cross-functional team and third-party vendor solution under evaluation.
- After quarter-end, the company began Nasdaq trading on May 3, 2019 and completed an IPO on May 7 at $45 per share. The company sold 663,320 shares and received approximately $26.8 million in net proceeds; selling shareholders sold an additional 26,680 shares. Management anticipated using part of the proceeds to redeem Trust II and Trust III in June 2019 and FBT CT I in August 2019; the filing does not establish that these redemptions had occurred.
Outlook, risks and contingencies
- The filing provides no formal earnings or financial guidance. Management described plans to expand in Covington, including remodeling a permanent banking center, with completion expected in Q3 2019; these plans are forward-looking.
- Management reported an asset-sensitive balance sheet. Its March 31 interest-rate simulation projected net interest income down 7.0% under a 100-basis-point rate decline and down 15.6% under a 200-basis-point decline; fair value of equity was projected down 6.5% and 16.7%, respectively. The 200-basis-point NII decline is beyond the stated internal policy limit of 15%. Management cautioned that model results depend on uncertain assumptions and may differ from actual outcomes.
- Key disclosed risks include local and broader economic conditions, borrower and collateral performance, asset quality and allowance adequacy, deposit retention and liquidity, interest-rate volatility, competition, regulatory and accounting changes, cybersecurity and operational risks, and natural disasters. Management warned that portfolio deterioration or growth could require additional loan-loss provisions.
- Unfunded loan commitments were approximately $235.8 million and standby letters of credit approximately $14.0 million at March 31. Management stated that commitments may expire unused. It did not expect pending legal matters to have a material adverse effect, while noting litigation can be costly and outcomes could adversely affect a period.
Important facts for investors to verify
- Whether the temporary quarter-end deposit inflow reversed as expected, and how deposit mix and funding costs subsequently changed.
- Whether IPO proceeds were used to redeem the three floating-rate subordinated-debt issues as planned, and the resulting effect on interest expense and capital.
- Management’s response to the modeled 15.6% NII decline under a 200-basis-point rate decrease, relative to its stated 15% internal limit.
- Subsequent trends in deposit service-charge revenue, operating expenses, loan growth, criticized credits, nonperforming assets, and allowance adequacy.
- Progress and estimated financial impact of CECL implementation; the filing does not provide a clear quantified estimate of the adoption impact.