Rhinebeck Bancorp, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2019. Rhinebeck Bancorp became the holding company for Rhinebeck Bank on January 16, 2019, following a mutual holding company reorganization and stock offering. The 2018 comparative financial information represents Rhinebeck Bancorp, MHC and the Bank before the reorganization, so the reporting entity changed during 2019. The company is a community bank serving New York’s Hudson Valley and Albany areas through 11 branches and two representative offices.
The January 2019 offering sold 4.79 million shares at $10 per share for approximately $46.0 million in net proceeds. Rhinebeck Bancorp, MHC held 57% of the outstanding shares at year-end.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Interest and dividend income | $41.0 million | $33.7 million |
| Net interest income | $32.2 million | $28.4 million |
| Noninterest income | $5.6 million | $5.2 million |
| Net income | $6.0 million | $4.4 million |
| Basic and diluted earnings per share | $0.56 | Not applicable; no shares outstanding before the reorganization |
| Net interest margin | 3.76% | 3.87% |
| Return on average assets | 0.65% | 0.55% |
| Return on average equity | 5.73% | 7.82% |
Net interest income growth reflected higher average loan balances and yields, partly offset by rising deposit and borrowing costs. Interest expense increased 64.3% to $8.7 million; the average cost of interest-bearing liabilities rose to 1.40% from 0.96%. Noninterest expense increased 6.9% to $27.9 million, including higher compensation, public-company professional fees and data processing costs. The efficiency ratio improved to 73.73% from 77.76%.
At December 31, 2019, total assets were $973.9 million, up 10.4%; net loans were $793.5 million, up 17.0%; deposits were $773.3 million, up 13.0%; and stockholders’ equity was $109.9 million. Asset growth was principally loan-funded, while equity increased substantially due to the offering and retained earnings. Reported year-end equity-to-assets was 11.28%, affected by the offering and reorganization.
Loan growth was led by indirect automobile loans, up 21.3% to $360.6 million, and commercial real estate loans, up 20.5% to $268.6 million. Indirect auto loans made up 45.7% of gross loans and 37.0% of assets. Commercial real estate, multifamily, construction and commercial business lending together represented 45.5% of the loan portfolio.
Credit metrics weakened year over year: nonperforming loans increased to $8.9 million, or 1.13% of loans, from $5.7 million, or 0.84%. The allowance for loan losses was $6.0 million, equal to 0.75% of loans and 66.74% of nonperforming loans, versus 0.98% and 117.17%, respectively, in 2018. Net charge-offs rose to $3.2 million from $0.9 million; two commercial real estate loans were partially charged off in the fourth quarter. Other real estate owned was $1.4 million.
Operating cash flow was $9.0 million versus $8.6 million. Investing activities used $129.0 million, principally reflecting loan growth and securities purchases; financing activities provided $81.4 million. Cash and due from banks fell to $12.0 million from $50.6 million, partly because unfilled offering subscriptions were returned.
Deposits were $773.3 million, including $218.6 million of certificates of deposit (CDs), compared with $684.4 million and $155.7 million, respectively, in 2018. Noninterest-bearing deposits were $179.2 million. FHLB advances were $66.3 million, up from $31.6 million; subordinated debt was $5.2 million. The Bank had $486.9 million of available FHLB borrowing capacity. CDs totaling $185.0 million matured within one year. The Bank was categorized as well capitalized; its year-end total risk-based capital ratio was 12.83% and leverage ratio was 10.84%.
Changes, outlook, risks and unusual items
- Management’s strategy is to grow indirect auto lending, commercial lending, core deposits and the balance sheet while controlling expenses and credit risk. Current policy limits indirect auto loans to 45% of assets. The company was considering up to three additional branches in Orange County over the next few years.
- Core deposits, defined by the company as deposits other than CDs, declined to 71.7% of deposits from 77.3%. Management identified a $23.2 million estate deposit received in September 2019 as a significant influence on money-market balances.
- Management reported that its updated allowance-analysis software changed the allocation of reserves between loan categories, particularly increasing the allocation to indirect auto, but did not materially change the total allowance. The provision for loan losses was $2.46 million in 2019, compared with $2.10 million in 2018.
- The filing identifies COVID-19 as a significant subsequent-event uncertainty. The pandemic’s potential effects on customers, operations, credit quality, markets and results could not be reasonably estimated when the report was filed on March 26, 2020. The company did not carry business interruption insurance.
- Interest-rate, local economic, real estate, credit, funding, competition, cybersecurity, regulatory and key-personnel risks are highlighted. Management’s rate-sensitivity model estimated a 24.4% decline in economic value of equity under an immediate 400-basis-point rate increase; the filing cautions that model results are estimates, not forecasts.
- The company expects no cash dividends in the foreseeable future, citing the mutual holding company’s dividend-waiver restrictions and its intent to retain earnings. The filing also identifies the transition from LIBOR as a risk for certain loans and trust preferred securities.
- No goodwill impairment was recorded in 2019; a $95,000 impairment was recorded in 2018. No other-than-temporary impairment on securities was recorded in either year. The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls because the company was an emerging growth company.
Important facts for investors to verify
- Whether the rise in nonperforming loans and charge-offs, including commercial real estate losses, continues and whether the allowance remains adequate.
- Auto portfolio credit performance and concentration, given indirect automobile lending’s 45.7% share of loans and management’s stated growth strategy.
- Deposit stability, especially the renewal of $185.0 million of CDs due within one year and the effect of the large estate deposit on reported balances.
- COVID-19’s actual effects on borrowers, collateral values, liquidity, credit costs and earnings, which were not quantifiable at filing date.
- Execution and cost of planned growth, including Orange County branches, and the company’s ability to improve margins while deposit and borrowing costs rise.
- Capital, liquidity and shareholder policies, including reliance on FHLB funding, the practical constraints on dividends, and the control held by Rhinebeck Bancorp, MHC.