RHINEBECK BANCORP, INC. General
Management's discussion and analysis of financial condition and results of operations atSeptember 30, 2021 andDecember 31, 2020 and for the three and nine months endedSeptember 30, 2021 and 2020 is intended to assist in understanding the financial condition and results of operations of the Company and the Bank. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect," "intend," "predict," "forecast," "improve," "continue," "will," "would," "should," "could," "may" and words of similar meaning. These forward-looking statements include, but are not limited to:
? statements of our goals, intentions and expectations;
? statements regarding our business plans, prospects, growth and operating strategies;
? statements regarding the quality of our loan and investment portfolios; and
? estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Forward looking statements, by their nature, are subject to risks and uncertainties.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
? general economic conditions, either nationally or in our market area, that are worse than expected;
? changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;
? our ability to access cost-effective funding;
? fluctuations in real estate values and both residential and commercial real estate market conditions;
? demand for loans and deposits in our market area;
? our ability to continue to implement our business strategies;
? competition among depository and other financial institutions;
? inflation and changes in market interest rates that reduce our margins and
yields, reduce the fair value of financial instruments or reduce our volume of
loan originations, or increase the level of defaults, losses and prepayments on
loans we have made and make whether held in portfolio or sold in the secondary
market;
37
? adverse changes in the securities markets;
? changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
? negative financial impact from unfavorable regulatory penalties and/or
settlement;
? our ability to manage interest rate risk, market risk, credit risk and operational risk;
? our ability to enter new markets successfully and capitalize on growth opportunities;
? our ability to successfully integrate into our operations any assets, liabilities or systems we may acquire, as well as new management personnel or customers, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
? changes in consumer spending, borrowing and savings habits;
? changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, theFinancial Accounting Standards Board , theSecurities and Exchange Commission or thePublic Company Accounting Oversight Board ;
? our ability to retain key employees;
? our compensation expense associated with equity allocated or awarded to our employees; and
? changes in the financial condition, results of operations or prospects of issuers of securities that we own.
Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
? demand for our products and services may decline, making it difficult to grow
assets and income;
if the economy is unable to substantially reopen, and higher levels of
? unemployment continue for an extended period of time, loan delinquencies,
problem assets, and foreclosures may increase, resulting in increased charges
and reduced income;
? collateral for loans, especially real estate, may decline in value, which could
cause loan losses to increase;
? our allowance for loan losses may increase if borrowers experience financial
difficulties, which will adversely affect our net income;
? the net worth and liquidity of loan guarantors may decline, impairing their
ability to honor commitments to us;
? our cyber security risks are increased as the result of an increase in the
number of employees working remotely;
38
?
costs; and
we may face litigation, regulatory enforcement and reputation risk as a result
? of our participation in the SBA PPP and the risk that the SBA may not fund some
or all PPP loan guaranties.
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K under the heading "Risk Factors." Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Accordingly, you should not place undue reliance on such statements.
Critical Accounting Policies
For a detailed disclosure regarding the Company's critical accounting policies, see Part 2, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission . As ofSeptember 30, 2021 , the critical accounting policies of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020, with the exception of an additional disclosure for derivative financial instruments as stated below.
Derivative Financial Instruments
Derivative financial instruments are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value, if material.
Loan Level Interest Rate Swaps
The Company enters into interest rate swaps with commercial loan customers to synthetically convert the customer's loan from a variable rate to a fixed rate. These swaps are matched in offsetting terms to swaps that the Company enters into with an outside third party. The swaps are reported at fair value in other assets and other liabilities. The Company's swaps qualify as derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other non-interest income.
Recent Events
OnMarch 12, 2021 , the Bank acquired two branches located inOrange County, New York fromConnectOne Bank , the wholly-owned subsidiary of ConnectOne Bancorp, Inc., as well as$33.9 million of deposits and other assets and liabilities. We also opened two new branches inOrange County, New York , as a de novo locations. Previously stated as a geographical part of our service territory that we wished to develop, theMiddletown branch became fully operational during the second quarter of 2021 and ourNewburgh branch became fully operational during the third quarter of 2021. 39 Impact of COVID-19 While significant progress has been made to combat the COVID-19 pandemic, the pandemic is not over and is expected to continue to have a complex and significant adverse impact on the economy, the banking industry and the Company in future periods, all subject to a high degree of uncertainty, particularly if new variants of the virus continue to emerge.
Effects on Our Market Areas.
Our commercial and consumer banking products and services are offered primarily in theHudson Valley ofNew York , where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning inMarch 2020 . Last year, the Governor announced a statewide stay-at-home order, also known as the "NYS on PAUSE Program," with a mandate that all non-essential workers work from home and only businesses declared as essential by the program were allowed to stay open. As cases of COVID-19 declined,New York began a phased-in reopening with theHudson Valley reaching Phase 1 reopening onMay 26, 2020 and reaching the final Phase 4 onJuly 7, 2020 . Even with the Phase 4 reopening business operations remained limited and many people still engaged in limited activities. As vaccines became available in 2021, more pandemic related restrictions eased andNew York is gradually returning to normal. Statewide unemployment levels have decreased but remain higher than pre-pandemic levels, from an average of 3.7% inDecember 2019 to 10.0% inSeptember 2020 to 7.1% inSeptember 2021 .
Policy and Regulatory Developments.
Federal, state and local governments and regulatory authorities have enacted a
range of policy responses to the COVID-19 pandemic. The Coronavirus Aid, Relief
and Economic Security ("CARES") Act was signed into law at the end of March 2020
as a $2 trillion legislative package. The goal of the CARES Act was to curb the
economic downturn through various measures, including direct financial aid to
American families and economic stimulus to significantly impacted industry
sectors through programs like the PPP. In December 2020 , many provisions of the
CARES Act were extended through the end of 2021. On September 5, 2021 , several
federal unemployment benefit programs expired as per federal law. As the
Coronavirus rate in New York had fallen below the rate established by the
federal government, many of these benefits were lessened or expired in August
2021 . In addition to the general impact of COVID-19, certain provisions of the
CARES Act as well as other recent legislative and regulatory relief efforts have
had a material impact on the Company's 2020 and 2021 operations and could
continue to impact operations going forward.
Pandemic Operational Preparations & Status.
Various operational measures remain in effect to encourage social distancing and enhanced cleaning and sanitizing procedures continue at all offices, drive-thru locations and ATM terminals. We maintain a workplace safety program to provide employees a safe and healthy workplace. AtSeptember 30, 2021 , the majority of our employees have returned to the office. OnSeptember 6, 2021 ,New York GovernorKathy Hochul announced the designation of COVID-19 as an airborne infectious disease under theNew York Health and Essential Rights Act ("HERO Act"). This designation requires all private employers to implement workplace safety plans. The key change to current safety protocol followed by the Bank is that all employees, regardless of vaccination status must be masked while in common areas. We continue to watch the latest COVID-19 developments and are following guidance provided by theCenters for Disease Control , as well as federal, state and local agencies. 40 Effects on Our Business. With regard to ourSeptember 30, 2021 financial condition and results of operations, improving conditions around COVID-19 had a material impact on our provision for loan losses as the provision is significantly impacted by changes in economic conditions. Given that the economic conditions have improved significantly sinceDecember 31, 2020 , we recorded a credit to the provision for loan losses during the three and nine months endedSeptember 30, 2021 . Should economic conditions worsen as a result of a resurgence in the virus and resulting measures to curtail its spread, we could experience increases in our required provision and record an additional expense. The Company's interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted.
Section 1102 of the CARES Act created the PPP, a program administered by theSmall Business Administration ("SBA") to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. We have participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first ten months of the loan term. The PPP commenced onApril 3, 2020 and was available to qualified borrowers throughAugust 8, 2020 . No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees. During 2020, we received SBA approval for 674 applications totaling$92.0 million all of which were funded. As ofDecember 31, 2020 , there were$75.4 million of PPP loans outstanding. OnDecember 27, 2020 ,President Trump signed into law the Consolidated Appropriations Act, 2021 (the "CAA"). The CAA, among other things, extends the life of the PPP, creating a second round of PPP loans for eligible businesses. We participated in the CAA's second round of PPP lending. The second round PPP program began accepting new loan applications onJanuary 11, 2021 and ended onMay 5, 2021 , when the SBA announced that general funds for the program were depleted. During the nine months endedSeptember 30, 2021 , we received SBA approval for 376 applications totaling$48.2 million and all had been funded. AtSeptember 30, 2021 , we had$44.1 million of PPP loans outstanding.
COVID-19 Loan Forbearance Program.
Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP. In addition, theOffice of the Comptroller of the Currency ("OCC") in coordination with other federal agencies and in consultation with state financial regulators, issued OCC Bulletin 2020-35, which provided more limited circumstances in which a loan modification is not subject to classification as a TDR. For consumer borrowers, the Bank is providing deferment of payments for indirect and direct automobile loans for up to sixty (60) days and an additional thirty (30) days, if needed. We are also providing forbearance to our residential real estate borrowers, which allows them to defer their principal and interest payments for up to ninety (90) days with an option for an additional ninety (90) days, if needed. In addition, for commercial borrowers we are providing deferment and forbearance options that include interest-only and tax escrow only payments. Some borrowers meeting the Bank's underwriting criteria have been granted working capital loans to provide financial assistance. These deferrals are maintained within the CARES Act guidance and have not exceeded twelve consecutive months of deferred payment. As ofSeptember 30, 2021 , we had 19 loans totaling$22.9 million of remaining deferrals outstanding, all of which were performing in accordance with their contractual terms. 41
Details with respect to the active outstanding deferrals as of
Number
of Accrued
Loans Balance Weighted Rate InterestCommercial non-residential real estate loans 7$ 18,328 3.98 %$ 340 Commercial and industrial loans 9 4,477
5.43 % 126 Indirect automobile loans 3 51 8.82 % - Total loans 19$ 22,856 4.28 %$ 466
Comparison of Financial Condition at
Total Assets. Total assets were$1.26 billion atSeptember 30, 2021 , representing an increase of$133.9 million , or 11.9%, compared to$1.13 billion atDecember 31, 2020 . The increase was primarily related to an increase of available for sale securities and cash and due from banks, offset by a decrease in net loans receivable. Cash and Due from Banks. Cash and due from banks increased$21.1 million , or 22.6%, to$114.6 million atSeptember 30, 2021 from$93.5 million atDecember 31, 2020 primarily due to an increase in deposits held at theFederal Reserve Bank of New York as cash from deposit growth exceeded asset growth. Investment Securities Available for Sale. Investment securities available for sale increased$137.5 million , or 133.5%, to$240.4 million atSeptember 30, 2021 from$102.9 million atDecember 31, 2020 . This increase was primarily due to purchases of treasury and mortgage-backed securities of$181.9 million with excess liquidity, partially offset by principal pay-downs, calls and maturities of$42.2 million and the reversal of a net unrealized gain of$1.3 million to a net unrealized loss of$758,000 . Net Loans. Total net loans receivable were$833.8 million atSeptember 30, 2021 , a decrease of$40.0 million , or 4.6%, as compared to$873.8 million atDecember 31, 2020 . The decrease was primarily due to a decline in our commercial and industrial loan balances of$36.3 million , including a decrease in outstanding SBA PPP loan balances of$31.5 million and a decrease in our non-residential commercial real estate loans of$12.1 million . These decreases were primarily due to higher than expected pay-offs and production short-falls. These decreases were partially offset by an increase in multi-family real estate loans of$10.9 million . Non-accrual loans decreased$132,000 , or 2.1%, to$6.2 million atSeptember 30, 2021 , while non-performing assets decreased$182,000 , or 2.8%, to$6.3 million atSeptember 30, 2021 , as we disposed of other real estate owned valued at$50,000 in 2021.
Cash Surrender Value of Life Insurance. Cash surrender value of life insurance
increased
Total Liabilities. Total liabilities increased
Deposits. Deposits increased$158.0 million , or 17.0%, to$1.09 billion atSeptember 30, 2021 . Interest bearing accounts grew$85.8 million , or 12.5%, to$770.9 million while non-interest bearing balances increased$72.2 million , or 29.5%, finishing the first nine months of 2021 at$316.5 million . The increase in deposits was primarily due to the acquisition of$33.9 million in deposits from the acquisition of two branches fromConnectOne Bank inMarch 2021 , the addition of two de novo branches, an accumulation of liquidity by customers in response to government stimulus actions, as well as organic growth in deposits. 42 Borrowed Funds. Advances from the FHLB decreased$30.5 million , or 60.3%, from$50.7 million atDecember 31, 2020 to$20.1 million atSeptember 30, 2021 , as the Company was able to utilize increased deposits to fund asset growth. Stockholders' Equity. Stockholders' equity increased$7.7 million to$124.2 million atSeptember 30, 2021 , primarily due to net income of$8.6 million partially offset by a$1.6 million reversal from a net unrealized gain to a net unrealized loss on available for sale securities. AtSeptember 30, 2021 , the Company's book value per share was$10.99 . AtSeptember 30, 2021 , the Company's ratio of stockholders' equity-to-total assets was 9.84%. Unearned common stock held by the Bank's employee stock ownership plan was$3.8 million atSeptember 30, 2021 .
Comparison of Operating Results for the Three and Nine Months Ended
Net Income. Net income for the three months endedSeptember 30, 2021 increased$1.5 million , or 133.5%, to$2.7 million , or$0.25 per diluted share, compared to net income of$1.2 million , or$0.10 per diluted share, for the three months endedSeptember 30, 2020 . Interest and dividend income increased$185,000 , or 1.7%, interest expense decreased$846,000 , or 45.8%, the provision for loan losses decreased$3.2 million , or 142.4%, non-interest income decreased$457,000 , or 21.8%, while other expenses and taxes increased$2.2 million , or 29.0%, between comparable quarters. For the nine months endedSeptember 30, 2021 , net income was$8.6 million , or$0.79 per diluted share, compared to$3.6 million , or$0.33 per diluted share, for the nine months endedSeptember 30, 2020 . Interest and dividend income decreased by$479,000 , or 1.5%, interest expense decreased$3.1 million , or 48.0%, and the provision for loan losses decreased$7.9 million , or 138.1%, resulting in a$10.5 million increase, or 51.0%, in net interest income after the provision for loan losses. Non-interest income increased$330,000 , or 6.1% while other non-interest and tax expense increased$5.9 million , or 26.1%, during the equivalent nine month timeframes. Net Interest Income. Net interest income increased$1.0 million , or 11.4%, to$10.1 million for the three months endedSeptember 30, 2021 , compared to$9.0 million for the quarter endedSeptember 30, 2020 . The ratio of average interest-earning assets to average interest-bearing liabilities improved 1.6% to 145.46% while our net interest margin increased by 2 basis points to 3.42% when comparing the third quarter of 2021 to the same period in 2020. For the nine months endedSeptember 30, 2021 , net interest income increased$2.6 million , or 10.0%, to$29.0 million from$26.3 million for the comparable 2020 period. Overall there was a 3 basis point decrease in the net interest margin to 3.44%, when comparing the respective nine month periods, while the ratio of average interest-earning assets to average interest-bearing liabilities improved 3.4% to 144.42%. Interest Income. Interest income increased$185,000 , or 1.7%, to$11.1 million for the three months endedSeptember 30, 2021 from$10.9 million for the comparable 2020 period. The average yield decreased by 33 basis points to 3.76%, which was offset by an increase in the average balances of interest-earning assets of$110.8 million , or 10.5%, to$1.17 billion . For the nine months endedSeptember 30, 2021 , interest income decreased$479,000 , or 1.5%, to$32.3 million from$32.8 million for the nine months endedSeptember 30, 2020 . The average yield declined by 49 basis points when comparing the nine-month periods endedSeptember 30, 2021 and 2020 to 3.84% for the nine months endedSeptember 30, 2021 , which was offset by an increase in the average balance of interest-earning assets of$113.3 million , or 11.2%, to$1.13 billion . The decrease was mostly driven lower earning asset yields due to lower yielding PPP loans and lower yielding debt securities due to the significant decline in the interest rate environment, partially offset by higher average earning asset balances. Interest Expense. Interest expense decreased$846,000 , or 45.8%, from$1.8 million for the quarter endedSeptember 30, 2020 , to$1.0 million for the quarter endedSeptember 30, 2021 . Interest rates on interest-bearing liabilities decreased 50 basis points to an average of 0.49% for the quarter endedSeptember 30, 2021 , which was offset by an increase in the average balance of total interest-bearing liabilities of$64.5 million , or 8.7%, to$803.2 million as the increase in the average balance of deposits was offset by a decrease in the average balance of FHLB advances. 43 For the nine months endedSeptember 30, 2021 , interest expense decreased$3.1 million , or 48.0%, to$3.4 million from$6.5 million for the comparable 2020 period, as the average yield on interest-bearing liabilities decreased by 62 basis points from the first nine months of 2020 to 0.58% for the first nine months of 2021. The decrease in overall cost was partially offset by an increase of$54.7 million , or 7.5%, in the average balances of interest-bearing liability accounts as the increase in the average balance of deposits was offset by a decrease in the average balance of FHLB advances. Provision for Loan Losses. The provision for loan losses decreased by$3.2 million , or 142.4%, from$2.3 million for the quarter endedSeptember 30, 2020 , to a credit of$954,000 for the current quarter. The provision decreased by$7.9 million , or 138.1%, from$5.7 million atSeptember 30, 2020 to a credit of$2.2 million for the nine months endedSeptember 30, 2021 . The provision increased in 2020 as a result of the onset of the COVID-19 pandemic and related economic conditions. The credit for both the three months and nine months of 2021 was primarily attributable to a decline in loan balances, exclusive of multi-family commercial real estate loans, an improvement in credit quality and an improvement in the general economy as our customers show signs of recovering from the pandemic. Net charge-offs for the quarter endedSeptember 30, 2021 totaled$138,000 compared to$259,000 for the respective period in 2020. For the nine-month period endedSeptember 30, 2021 , net charge-offs were$428,000 , a decrease of$668,000 , or 60.9%, when compared to$1.1 million in the comparative 2020 period. The decrease was primarily due to an improvement in the overall economic environment and pricing gains on the sales of repossessed vehicles as used car prices have risen significantly. Non-Interest Income. Non-interest income totaled$1.6 million for the three months endedSeptember 30, 2021 ; a decrease of$457,000 , or 21.8%, from the comparable period in the prior year, due primarily to a decrease in the net gain on sales of loans resulting from a decline in loan volume. Loans sold totaled$16.3 million for the three months endedSeptember 30, 2021 compared to$19.7 million for the three months endedSeptember 30, 2020 . An increase in service charges on deposit accounts of$106,000 , or 19.0%, was driven primarily by the increase in transaction volume related to our acquisitions, as well as growth in the volume of our legacy deposit accounts. Investment advisory income decreased$143,000 , or 37.6%, as sales of annuities decreased. Non-interest income increased$330,000 , or 6.1%, to$5.7 million for the nine months endedSeptember 30, 2021 . In the nine months endedSeptember 30, 2021 , we recorded a gain related to the collection of life insurance proceeds of$195,000 . Increased transaction volume resulted in an increase in service charges on deposit accounts of$186,000 , or 10.9%. The cash surrender value of life insurance increased$122,000 , or 42.1%, and various other non-interest income items increased$167,000 . These increases were partially offset by a decrease in the net gain on sales of loans of$203,000 , or 8.5%, and a decrease in investment advisory income of$130,000 , or 13.8%. Non-Interest Expense. For the third quarter of 2021, non-interest expense totaled$9.1 million , an increase of$1.7 million , or 23.0%, over the comparable 2020 period. The increase was primarily due to an increase in salaries and benefits of$1.0 million , or 24.1%, as the Company hired additional employees for its new branches and continued expansion into theAlbany market. Occupancy expenses increased$175,000 , or 19.8%, as a result of the additional rent, depreciation, and other expenses related to the branch expansion. The addition of branches was also primarily responsible for increased data processing costs of$125,000 . Professional fees increased$59,000 , or 15.5%, as legal expense and consultant fees both increased over the third quarter of 2020. Other non-interest expenses increased$400,000 , or 31.3%, primarily due to an additional estimated reserve for potential consumer compliance issues in the Bank's indirect automobile portfolio. Additional reserves in the future may be required but cannot be estimated at this time. For the nine months endedSeptember 30, 2021 , non-interest expense increased$4.5 million , or 20.8%, to$26.0 million from$21.5 million over the comparative period in 2020. The increase was primarily due to an increase in salaries and benefits of$2.4 million , or 19.9%, due to new branch employees, market expansion, as well as annual merit increases, production incentives and employee benefit increases. Occupancy increased$439,000 , or 16.8%, and professional fees increased$320,000 , or 30.3%, while data processing increased$229,000 , or 22.0%. Other non-interest expenses increased$1.1 million , or 32.4%, and included an additional estimated reserve of$450,000 for potential consumer compliance issues in the Bank's indirect automobile portfolio. 44
Income Taxes. Income taxes increased by$537,000 for the three months endedSeptember 30, 2021 as compared to the comparable period in 2020 as our income before income taxes increased. Our effective tax rate for the three months endedSeptember 30, 2021 was 23.6% compared to 20.3% for the three months endedSeptember 30, 2020 .
For the nine months ended
45
Average Balance Sheets for the Three and Nine Months Ended
The following tables set forth average balance sheets, average yields and costs,
and certain other information for the periods indicated. All average balances
are daily average balances, the yields set forth below include the effect of
deferred fees and discounts and premiums that are amortized or accreted to
interest income (dollars in thousands).
For the Three Months Ended
2021 2020
Average Interest and Average Interest and
Balance Dividends Yield/Cost(3) Balance Dividends Yield/Cost(3) Assets: Interest bearing depository accounts
$ 90,680 $ 34 0.15 %$ 48,544 $ 12 0.10 % Loans(1) 854,822 10,402 4.83 % 898,535 10,386 4.60 % Available for sale securities 222,851 623 1.11 % 110,469 476 1.71 % Total interest-earning assets 1,168,353 11,059 3.76 % 1,057,548 10,874 4.09 % Non-interest-earning assets 78,220 61,638 Total assets$ 1,246,573 $ 1,119,186 Liabilities and equity: NOW accounts$ 152,578 $ 59 0.15 %$ 121,766 $ 73 0.24 % Money market accounts 259,014 359 0.55 % 173,703 415 0.95 % Savings accounts 180,277 72 0.16 % 146,483 85 0.23 % Certificates of deposit 173,013 340 0.78 % 222,749 945 1.69 % Total interest-bearing deposits 764,882 830 0.43 % 664,701 1,518 0.91 % Escrow accounts 12,304 36 1.16 % 12,432 35 1.13 % Federal Home Loan Bank advances 20,858 106 2.02 % 56,422 272 1.92 % Subordinated debt 5,155 28 2.15 % 5,155 21 1.61 % Other interest-bearing liabilities 38,317 170 1.76 % 74,009 328 1.77 % Total interest-bearing liabilities 803,199 1,000 0.49 % 738,710 1,846 0.99 % Non-interest-bearing deposits 298,713 248,148 Other non-interest-bearing liabilities 20,838 17,874 Total liabilities 1,122,750 1,004,732 Total stockholders' equity 123,823 114,454 Total liabilities and stockholders' equity$ 1,246,573
$ 1,119,186 Net interest income$ 10,059 $ 9,028 Interest rate spread 3.27 % 3.10 % Net interest margin(2) 3.42 % 3.40 % Average interest-earning assets to average interest-bearing liabilities 145.46 % 143.16 %
(1) Non-accruing loans are included in the outstanding loan balance.
(2) Represents the difference between interest earned and interest paid, divided
by average total interest earning assets.
(3) Annualized.
46
For the Nine Months Ended September 30,
2021 2020
Average Interest and Average Interest and
Balance Dividends Yield/Cost(3) Balance Dividends Yield/Cost(3)
(Dollars in thousands)Assets:
Interest bearing depository accounts$ 77,632 $ 66 0.11 %$ 39,777 $ 36 0.12 % Loans(1) 869,238 30,722 4.73 % 859,636 31,001 4.82 % Available for sale securities 179,901 1,560 1.16 % 114,043 1,790 2.10 % Total interest-earning assets 1,126,771 32,348 3.84 % 1,013,456 32,827 4.33 % Non-interest-earning assets 70,646 60,529 Total assets$ 1,197,417 $ 1,073,985 Liabilities and equity: NOW accounts$ 145,830 $ 184 0.17 %$ 109,151 $ 192 0.23 % Money market accounts 231,849 1,042 0.60 % 164,561 1,328 1.08 % Savings accounts 172,338 214 0.17 % 135,914 254 0.25 % Certificates of deposit 183,136 1,292 0.94 % 226,921 3,574 2.10 % Total interest-bearing deposits 733,153 2,732 0.50 % 636,547 5,348 1.12 % Escrow accounts 9,727 84 1.15 % 9,546 81 1.13 % FHLB and FRB advances 32,178 477 1.98 % 74,258 960 1.73 % Subordinated debt 5,155 85 2.20 % 5,155 112 2.90 % Other interest-bearing liabilities 47,060 646 1.84 % 88,959 1,153 1.73 % Total interest-bearing liabilities 780,213 3,378 0.58 % 725,506 6,501 1.20 % Non-interest-bearing deposits 276,508 218,150 Other non-interest-bearing liabilities 19,844 16,524 Total liabilities 1,076,565 960,180 Total stockholders' equity 120,852 113,805 Total liabilities and stockholders' equity$ 1,197,417
$ 1,073,985 Net interest income$ 28,970 $ 26,326 Interest rate spread 3.26 % 3.13 % Net interest margin(2) 3.44 % 3.47 % Average interest-earning assets to average interest-bearing liabilities 144.42 % 139.69 %
(1) Non-accruing loans are included in the outstanding loan balance.
(2) Represents the difference between interest earned and interest paid, divided
by average total interest earning assets.
(3) Annualized.
47
Rate/Volume Analysis
The following tables present the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately based on
the changes due to rate and the changes due to volume (in thousands).
Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021
Compared to Three Months Ended Compared to Nine Months Ended
September 30, 2020 September 30, 2020
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
Interest income:
Interest bearing depository accounts $ 13 $ 9 $ 22 $ 32 $ (2) $ 30
Loans receivable (533) 549 16 343 (622) (279)
Marketable securities 392 (245) 147 772 (1,002) (230)
Total interest-earning assets (128) 313 185 1,147 (1,626) (479)
Interest expense:
Deposits 9 (697) (688) (51) (2,565) (2,616)
Escrow accounts - 1 1 2 1 3Federal Home Loan Bank advances (181) 15 (166) (607) 124 (483) Subordinated debt - 7 7 - (27) (27) Total interest-bearing liabilities (172) (674) (846) (656) (2,467) (3,123)
Net increase in net interest income $ 44
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature.
Consequently, our most significant form of market risk is interest rate risk.
Our assets, consisting primarily of loans, have longer maturities than our
liabilities, consisting primarily of deposits. As a result, a principal part of
our business strategy is to manage our exposure to changes in market interest
rates. Accordingly, the Board of Directors maintains a management-level
Asset/Liability Management Committee (the "ALCO"), which takes initial
responsibility for reviewing the Company's asset/liability management process
and related procedures, establishing and monitoring reporting systems and
ascertaining that established asset/liability strategies are being maintained.
On at least a quarterly basis, the ALCO reviews and reports asset/liability
management outcomes from various modeling scenarios. This committee also
implements any changes in strategies and reviews the performance of any specific
asset/liability management actions that have been implemented.
We manage our interest rate risk to minimize the exposure of our earnings and
capital to changes in market interest rates. We have implemented the following
strategies to manage our interest rate risk: originating loans with adjustable
interest rates or with shorter terms, promoting core deposit products, and
adjusting the interest rates and maturities of funding sources, as necessary. By
following these strategies, we believe that we are better positioned to react to
changes in market interest rates.
48
Net Economic Value Simulation. We analyze the Bank's sensitivity to changes in
interest rates through a net economic value of equity ("EVE") model. EVE
represents the present value of the expected cash flows from our assets less the
present value of the expected cash flows arising from our liabilities adjusted
for the value of off-balance sheet contracts. The EVE ratio represents the
dollar amount of our EVE divided by the present value of our total assets for a
given interest rate scenario. EVE attempts to quantify our economic value using
a discounted cash flow methodology while the EVE ratio reflects that value as a
form of capital ratio. We estimate what our EVE would be at a specific date. We
then forecast what the EVE might be at the same date throughout a series of
interest rate scenarios representing immediate and permanent, parallel shifts in
the yield curve. We currently calculate the EVE under scenarios where interest
rates increase 100, 200, 300 and 400 basis points from current market rates and
where interest rates decrease 100 basis points from current market rates.
The following table presents the estimated changes in the Bank's EVE that would
result from changes in market interest rates at September 30, 2021 (dollars
in
thousands).
Net Economic
Value as Percent of
Net Economic Value of Assets
Dollar Dollar Percent EVE PercentBasis Point Change in Interest Rates Amount Change Change
Ratio Change 400$ 112,150 $ (9,967) (8.2) % 9.72 % 0.2 % 300 115,132 (6,985) (5.7) % 9.78 % 0.8 % 200 117,924 (4,193) (3.4) % 9.80 % 1.1 % 100 121,065 (1,052) (0.9) % 9.84 % 1.4 % 0 122,117 - - % 9.70 % - % (100)$ 98,100 $ (24,017) (19.7) % 7.63 % (21.3) % Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest-sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and will likely differ from actual results.
Liquidity and Capital Resources
We maintain liquid assets at levels we consider adequate to meet both our short-term and long-term liquidity needs. We adjust our liquidity levels to fund deposit outflows, repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives. Our primary sources of liquidity are deposits, loan sales, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, earnings and funds provided from operations, as well as access to FHLB advances and other borrowings. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan sales and prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits. A portion of our liquidity consists of cash and cash equivalents and borrowings, which are a product of our operating, investing and financing activities. AtSeptember 30, 2021 ,$114.6 million of our assets were held in cash and cash equivalents. We had$12.9 million in short-term investment securities (maturing in one year or less) atSeptember 30, 2021 . As ofSeptember 30, 2021 , we had$20.1 million of structured borrowings outstanding from the FHLB, of which$17.6 million is due within the next 12 months. We had access to FHLB advances of up to$631.3 million as ofSeptember 30, 2021 . 49 AtSeptember 30, 2021 , we had$100.9 million in loan commitments outstanding, which included$2.7 million in undisbursed construction loans,$10.8 million in unused home equity lines of credit,$72.1 million in commercial lines of credit,$12.2 million in future loan commitments and$3.1 million in standby letters of credit. Certificates of deposit due within one year ofSeptember 30, 2021 totaled$137.3 million , or 81.6% of certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or beforeSeptember 30, 2022 . We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. We also have obligations under our post retirement plan as described in Note 9 to the consolidated financial statements. The post retirement benefit payments represent actuarially determined future payments to eligible plan participants. We froze our pension plan in 2012.
Impact of Inflation and Changing Prices
The financial statements and related notes ofRhinebeck Bancorp, Inc. have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
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