Rhinebeck Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unless stated otherwise, financial amounts below are in millions of dollars. The filing explains that the reorganization was not complete at September 30, 2018, and Rhinebeck Bancorp, Inc. itself had no assets, liabilities, or business activity beyond organization. The reported financial statements are for Rhinebeck Bancorp, MHC and Rhinebeck Bank.
Financial performance and position
- Third-quarter results: Net interest income was $7.73 million, up 23.4% year over year; provision for loan losses was $0.53 million; noninterest income was $1.50 million; and noninterest expense was $6.47 million. Net income declined 25.1% to $1.96 million from $2.62 million.
- Nine-month results: Net interest income rose 14.7% to $20.89 million. Net income fell 25.4% to $3.16 million from $4.23 million. Provision for loan losses increased to $1.58 million from $0.68 million.
- Margins and funding costs: Net interest margin increased to 4.10% for the quarter from 3.68%, and to 3.89% for nine months from 3.66%. Nine-month average cost of interest-bearing liabilities increased to 0.88% from 0.64%; management attributed funding-cost increases to market rates and additional borrowing.
- Balance sheet at September 30: Total assets were $819.7 million, up 10.5% from year-end 2017. Net loans were $652.1 million, up 15.2%; deposits were $691.7 million, up 6.4%; and stockholders’ equity was $57.0 million, up 3.7%.
- Liquidity and debt: Cash and due from banks totaled $12.6 million, and available-for-sale securities totaled $102.4 million. Federal Home Loan Bank advances were $53.6 million, up from $14.9 million at year-end, including $17.5 million in overnight borrowings. Subordinated debt was $5.2 million. The Bank reported access to FHLB and Federal Reserve borrowing facilities, subject to collateral and availability.
- Cash flow, nine months: Operating activities provided $6.8 million; investing activities used $81.2 million, largely reflecting $89.2 million of net loan growth; and financing activities provided $76.6 million. Cash increased $2.1 million to $12.6 million.
- Credit quality: Nonperforming loans decreased to $8.5 million, or 1.30% of loans, from $9.4 million, or 1.65%, at year-end 2017. The allowance for loan losses was $6.31 million, approximately 0.97% of gross loans. Management considered it adequate, while noting estimates are judgmental and subject to change.
- Capital: Rhinebeck Bank’s September 30 total risk-based capital ratio was 10.31%, and its Tier 1 leverage ratio was 8.24%. The filing states the Bank remained “well capitalized” under prompt-corrective-action rules.
Material changes and unusual items
- Loan growth was concentrated in indirect automobile lending, up $58.1 million from year-end, and commercial and industrial lending, up $11.4 million. Management cited a new Albany lending team and a strategic shift toward loans to improve asset yields.
- Interest income increased, but higher deposit rates and substantially greater FHLB borrowing costs also raised interest expense. The filing says borrowings were added because loan growth exceeded deposit growth.
- Year-over-year noninterest income comparisons were affected by the 2017 sale of the insurance subsidiary, which generated a $1.83 million gain and related insurance income in the prior-year period. The sale also reduced 2018 commissions and expenses. A new deposit fee structure introduced in May 2018 increased service-charge income.
- For nine months, reported noninterest income also included a $0.39 million write-down of foreclosed real estate; noninterest expense included a $0.10 million goodwill impairment tied to Rhinebeck Asset Management’s lost expected revenue.
- In the third quarter, two securities designated held to maturity were sold as part of a portfolio swap. The sale triggered reclassification of remaining held-to-maturity securities to available for sale; the filing says the entire investment portfolio is now available for sale. Unrealized securities losses rose to $5.37 million from $2.94 million at year-end, primarily attributed by management to higher market interest rates, not credit deterioration.
- The filing identifies $0.60 million of interest recognized after three nonaccrual commercial loans totaling $2.2 million were paid off in the third quarter.
- A $0.39 million write-down of residential foreclosed property contributed to the lower other-real-estate-owned balance. A $0.57 million pension contribution was made in August; the pension plan’s reported funded deficit narrowed to $0.02 million from $1.61 million at year-end.
Outlook, risks and contingencies
- No numerical earnings or growth guidance is provided. Management states interim results are not necessarily indicative of full-year results.
- The June 2018 reorganization plan contemplated a public stock offering at $10 per share, subject to regulatory and depositor approvals. The plan proposed that the MHC retain 55% ownership, with 43% offered to eligible members and others, and 2% allocated to a charitable foundation. The reorganization had not been completed at September 30; $0.47 million of related costs had been incurred and would be charged to operations if the transaction failed. The filing reports a $1.75 million capital contribution to the Bank on November 7, 2018.
- Key stated risks include interest-rate and margin pressure, loan and real-estate credit quality, local economic conditions, competition, deposit retention and access to cost-effective funding. The filing’s interest-rate model estimates net portfolio value would decline 18% under an immediate 400-basis-point increase and 6% under a 100-basis-point decrease; management cautions that model assumptions limit predictive value.
- Certificates of deposit totaling $107.6 million mature within one year. The Company also reported $90.7 million of contractual off-balance-sheet commitments, including loan commitments, undisbursed lines and standby letters of credit; amounts may not be fully drawn.
- Management said ordinary-course legal proceedings were not expected to have a material effect and reported effective disclosure controls, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reorganization and offering’s final terms, approvals, completion date, ownership structure, and treatment of deferred costs.
- Review subsequent loan growth and performance, especially indirect auto and commercial lending, and track delinquency, nonaccrual, charge-off, and allowance trends.
- Assess whether deposit growth and funding costs can support continued loan growth without further reliance on higher-cost FHLB advances.
- Evaluate the sustainability of margins and earnings apart from prior-year insurance-sale gains, the 2018 tax-planning benefit, and interest recognized on paid-off nonaccrual loans.
- Monitor unrealized securities losses, their duration and valuation, and the implications of the full portfolio’s available-for-sale classification.
- Check the filing’s reporting-status representations: the cover page marks “NO” for having filed all required reports during the preceding 12 months, while the new registrant’s reorganization was still pending.