Rhinebeck Bancorp, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2019; results are unaudited. Rhinebeck Bancorp is the holding company for Rhinebeck Bank, serving consumer and commercial customers through 11 branches and two representative offices in New York. The company was formed in a reorganization completed January 16, 2019; 2018 comparative results relate to Rhinebeck Bancorp, MHC and the Bank before that date. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
- Q3 earnings: Net income was $2.09 million, up 6.5% from $1.96 million; basic and diluted EPS were $0.20. For the first nine months, net income was $4.22 million versus $3.16 million, and EPS was $0.39. 2018 EPS is not applicable because the company had not yet been formed and had no shares outstanding.
- Revenue and margins: Q3 net interest income rose 9.5% to $8.46 million; nine-month net interest income rose 14.7% to $23.96 million. Net interest margin declined 25 basis points year over year to 3.85% in Q3 and nine basis points to 3.80% for the nine-month period. Growth in loan interest income was partly offset by sharply higher deposit and borrowing costs.
- Credit costs: Q3 provision for loan losses was $0.45 million, down from $0.53 million; nine-month provision was $2.01 million, up from $1.58 million. Nine-month net charge-offs were $0.75 million, compared with $0.72 million in 2018.
- Other income and expenses: Q3 noninterest income declined 2.6% to $1.46 million, while noninterest expense rose 5.5% to $6.83 million. Nine-month noninterest income increased 14.5% to $4.16 million and noninterest expense increased 8.1% to $20.80 million. Higher compensation and public-company professional costs contributed to expenses. Effective tax rates were 20.8% for Q3 and 20.4% year to date.
- Assets and lending: Total assets were $946.0 million, up 7.2% from year-end 2018. Net loans were $759.0 million, up 11.9%; indirect auto loans increased $55.7 million to $354.4 million, and commercial real estate loans also grew. Available-for-sale securities were $115.7 million, up 14.2%.
- Credit quality: Allowance for loan losses was $7.90 million, compared with $6.65 million at year-end. Nonaccrual loans increased 54.7% to $8.77 million, and management reported nonperforming assets up 39.7% to year-end. Impaired loans totaled $8.77 million. Three troubled debt restructurings totaling $1.69 million were performing under modified terms; no new TDRs were reported in the first nine months.
- Funding, debt and capital: Deposits rose 12.5% to $770.0 million, including a $23.2 million estate deposit in September. FHLB advances were $47.9 million, up $16.3 million from year-end; subordinated debt was $5.16 million. Stockholders’ equity was $108.3 million, including offering proceeds; equity-to-assets was 11.4%, and book value per share was $9.72. The Bank reported a 13.44% total risk-based capital ratio and was classified as well capitalized.
- Cash flow and liquidity: Nine-month operating cash flow was $7.17 million; investing cash outflow was $94.62 million, principally reflecting loan and securities activity; financing cash inflow was $55.22 million. Cash and due from banks fell to $18.36 million, primarily reflecting returned unfulfilled stock-offering subscriptions. The Bank had access to $472.9 million in FHLB credit, subject to collateral requirements.
Changes, outlook, risks and unusual items
- Loan growth and securities purchases expanded earning assets, but interest-bearing liability costs increased: nine-month interest expense rose 76.3%, while the margin narrowed. Management attributed earnings growth principally to increased interest income and noninterest income, partly offset by funding costs, credit provision, expenses and taxes.
- Management reported no specific earnings or financial guidance. It said it believed liquidity was adequate and expected a significant portion of certificates of deposit to renew, while noting that replacement funding could cost more. Certificates of deposit totaling $173.0 million were due within one year; $15.6 million of FHLB advances were due within 12 months. Loan commitments and standby letters of credit totaled $88.7 million.
- Key stated risks include changing interest rates and margins, loan delinquencies and charge-offs, real-estate values, funding costs and deposit demand, competition, regulatory changes, and broader economic conditions. Management’s interest-rate model estimated a 19.4% decline in economic value of equity under an immediate 400-basis-point rate increase; management stated modeled changes were within board policy limits and cautioned that actual outcomes could differ.
- Management said unrealized securities losses were primarily interest-rate related and not other-than-temporary; unrealized losses declined to $0.48 million from $3.27 million at year-end. No goodwill impairment was recorded in 2019; a $0.095 million impairment had been recorded in 2018. The 2018 nine-month comparison also included a $0.387 million OREO write-down.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the period. It reported no pending legal proceeding believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether rapid indirect-auto and commercial real estate loan growth is matched by sustained credit quality; track nonaccruals, charge-offs, criticized loans and allowance adequacy.
- Whether deposit growth persists after the $23.2 million estate deposit, and how the $173.0 million of certificates maturing within one year affects funding costs and liquidity.
- Whether asset yields can offset rising deposit and borrowing costs and the continued pressure on net interest margin.
- How much of reported earnings and equity trends reflect the January 2019 reorganization and stock offering, given the different corporate structure in the 2018 comparative periods.
- Progress and eventual impact of adopting the expected-credit-loss (CECL) standard and lease-accounting guidance; the filing says assessment was ongoing and does not provide a quantified adoption impact.