Rhinebeck Bancorp, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, with comparison to 2017. This is not a standalone fourth-quarter report. Although filed by Rhinebeck Bancorp, Inc., the audited financial statements cover Rhinebeck Bancorp, MHC and Rhinebeck Bank: the new Inc. holding company had no assets or liabilities and conducted only organizational activities at year-end. The reorganization and stock offering closed January 16, 2019.
Business context
Rhinebeck Bank is a New York community bank serving the Hudson Valley and Albany area through 11 branches and two representative offices. It gathers deposits and lends principally through indirect automobile, commercial real estate, commercial business, and residential mortgage lending. Its strategy emphasizes growth in auto and commercial lending, core deposits, and measured expansion in Orange County.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets at year-end | $882.4 million | $742.1 million |
| Total deposits at year-end | $684.4 million | $650.1 million |
| Gross loans at year-end | $677.0 million | $566.3 million |
| Net interest income | $28.4 million | $24.6 million |
| Provision for loan losses | $2.1 million | $0.9 million |
| Noninterest income | $5.2 million | $8.1 million |
| Noninterest expense | $26.1 million | $25.1 million |
| Net income | $4.4 million | $3.0 million |
| Net interest margin | 3.87% | 3.68% in MD&A; 3.69% in selected data |
| Efficiency ratio | 77.35% | 76.10% |
| Cash and due from banks at year-end | $50.6 million | $10.5 million |
- Profitability: Net income rose 45.1%. The effective tax rate fell to 19% from 55%, substantially reflecting the lower federal corporate tax rate and the 2017 deferred-tax remeasurement. Return on average assets was 0.55%; return on average equity was 7.82%.
- Revenue and margins: Interest and dividend income increased 21.0% to $33.7 million; interest expense rose 61.2% to $5.3 million as deposit and borrowing costs increased. Net interest income grew 15.5%. The reported net interest margin comparison contains a small internal discrepancy, as shown above.
- Cash flow: Operating activities provided $8.6 million; investing activities used $104.1 million, principally reflecting $115.5 million of net loan growth; financing activities provided $135.6 million. Financing included $79.1 million in offering subscriptions recorded before the 2019 closing.
- Debt and liquidity: Year-end borrowings included $31.6 million of FHLB advances, $5.2 million of subordinated debt, and $5.0 million of other borrowings. The bank reported access to $441.1 million of FHLB borrowing capacity. Certificates of deposit totaling $102.3 million matured within one year. Cash was elevated partly because of the pending stock offering.
- Capital and credit: Rhinebeck Bank was classified as well capitalized. Its year-end total risk-based capital ratio was 11.07%, common equity Tier 1 ratio 10.16%, and Tier 1 leverage ratio 8.80%. Nonperforming loans were $5.7 million, or 0.84% of loans, versus $9.4 million, or 1.65%, in 2017. The allowance was $6.6 million, or 0.98% of loans.
Material changes versus 2017
- Assets increased 18.9%; gross loans grew 19.5%, led by indirect auto loans, up $82.3 million (38.3%). Commercial business loans grew $15.6 million, while commercial real estate loans grew $11.8 million.
- Deposits increased 5.3%. Noninterest-bearing demand deposits rose $14.0 million; certificates of deposit rose $13.5 million. Average deposit and borrowing cost increased to 0.96% from 0.65%.
- Noninterest income fell 35.7%, mainly because 2017 included a $1.8 million gain on sale of an insurance subsidiary and $1.5 million in insurance-related income that did not recur.
- The provision for loan losses increased by $1.2 million to $2.1 million. Net charge-offs were $0.9 million, down from $1.3 million in 2017.
- Nonperforming assets declined to $7.4 million from $11.6 million. Other real estate owned was $1.7 million, consisting of three properties being marketed; further losses were possible.
Outlook, risks, contingencies, and unusual items
- Management expects moderate growth in assets and deposits, continued indirect auto and commercial lending, and increased core deposits. Auto lending is subject to an internal limit of 45% of total assets; indirect autos were 33.7% of assets at year-end. Management was considering up to three Orange County branches over the following three years.
- Concentrations merit attention: indirect auto loans were 43.9% of the loan portfolio, while commercial real estate and commercial business loans together were 45.2%. The filing cites borrower credit, collateral depreciation, local economic conditions, and commercial property cash flows as material credit risks.
- Interest-rate modeling estimated that a parallel 400-basis-point increase would reduce economic value of equity by $4.4 million, or 14.2%. The filing cautions that the model depends on assumptions and is not a precise forecast.
- The company recorded a $95,000 goodwill impairment related to Rhinebeck Asset Management, citing expected revenue loss. It also reported a $387,000 write-down of other real estate owned.
- In 2018, the bank sold two securities previously designated held-to-maturity, recognized a $4,000 loss, and reclassified the remaining held-to-maturity securities as available-for-sale. The entire securities portfolio was available-for-sale at year-end. Unrealized available-for-sale losses were $3.3 million; management did not consider them other-than-temporary.
- The filing reported no pending legal proceedings believed likely to have a material adverse effect. It identified no material off-balance-sheet arrangements beyond normal-course loan commitments and standby letters of credit, which totaled $81.5 million.
- Following year-end, Rhinebeck Bancorp, Inc. sold 4,787,315 shares at $10 per share, receiving $46.1 million net proceeds, and issued shares to Rhinebeck Bancorp, MHC in the reorganization. The MHC owned 57% of Inc. after closing. The net proceeds included $27.7 million downstreamed to the bank, $14.1 million retained, and $4.4 million used to fund the ESOP loan.
Most important facts for investors to verify
- Confirm the 2018 financial statements are for Rhinebeck Bancorp, MHC and the bank, and assess post-January 2019 results and capitalization of the public holding company separately.
- Review auto-loan growth, underwriting performance, delinquency trends, charge-offs, and the effect of the portfolio’s concentration and internal asset limit.
- Track whether deposit pricing and funding costs continue to rise, particularly as the $102.3 million of certificates of deposit due within one year renew or leave.
- Reconcile the reported net interest margin figures and evaluate earnings excluding the 2017 subsidiary-sale and insurance-related income and the tax-rate effects.
- Assess the adequacy of the allowance and the potential future effect of CECL, which the filing said was expected to apply beginning in 2021.
- Verify the use of offering proceeds, capital ratios after the reorganization, branch-expansion spending, and the consequences of mutual holding company control and limited expected dividend capacity.