RHINEBECK BANCORP, INC. General
Management's discussion and analysis of financial condition and results of operations atMarch 31, 2022 andDecember 31, 2021 and for the three months endedMarch 31, 2022 and 2021 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, including as a result of the ongoing coronavirus pandemic;
? 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;
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? 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;
? adverse changes in the securities markets;
? changes in laws or government regulations or policies affecting financial
institutions, including changes in regulatory fees,
? 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 continuing impact of the COVID-19 pandemic on our business. 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;
? the net worth and liquidity of loan guarantors may decline, impairing their
ability to honor commitments to us;
? 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;
? our investment advisory fees may decline with continuing market turmoil;
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? our cyber security risks are increased as the result of an increase in the
number of employees working remotely;
?
costs; and
? we may experience loss or unavailability of employees, executive officers or
directors.
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, 2021 , filed with theSecurities and Exchange Commission . As ofMarch 31, 2022 , 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, 2021.
Comparison of Financial Condition at
Total Assets. Total assets were
Cash and Due from Banks. Cash and due from banks decreased$4.7 million , or 6.6%, to$67.4 million atMarch 31, 2022 from$72.1 million atDecember 31, 2021 primarily due to an decrease in deposits held at theFederal Reserve Bank of New York as excess funds were used to purchase securities. Investment Securities Available for Sale. Investment securities available for sale decreased$3.2 million , or 1.2%, to$277.0 million atMarch 31, 2022 from$280.3 million atDecember 31, 2021 . This decrease was primarily due to calls and maturities of$16.5 million and an increase of$13.8 million in unrealized market losses, partially offset by$27.2 million in purchases. Net Loans. Total net loans receivable were$860.2 million atMarch 31, 2022 , an increase of$5.2 million , or 0.6%, as compared to$855.0 million atDecember 31, 2021 . The increase was primarily due to increases of$22.5 million , or 5.9%, in indirect automobile loans and$3.4 million , or 1.4%, in non-residential commercial real estate loans, while commercial loans and multi-family loans decreased$13.7 million and$7.0 million , respectively. Non-accrual loans and non-performing assets increased$47,000 , or 0.7%, to$6.7 million atMarch 31, 2022 . We had no other real estate owned in at the end of either period. Total Liabilities. Total liabilities increased$9.0 million , or 0.8%, to$1.16 billion atMarch 31, 2022 , primarily due to an increase in deposits of$10.6 million and an increase in accrued expenses and other liabilities of$1.9 million , partially offset by a decrease in advances from the FHLB of$2.1 million and a decrease in mortgagors' escrow accounts of$1.4 million . Deposits. Deposits increased$10.6 million , or 1.0%, to$1.11 billion atMarch 31, 2022 . Interest bearing accounts grew$20.8 million , or 2.6%, to$808.0 million while non-interest bearing balances decreased$10.2 million , or 3.2%, finishing the first three months of 2022 at$304.6 million . Of the interest bearing accounts, transaction accounts including NOW, savings and money market accounts increased$35.2 million , which was partially offset by a decrease
in
time
38
deposits of
Borrowed Funds. Advances from the FHLB decreased$2.1 million , or 11.7%, from$18.0 million atDecember 31, 2021 to$15.9 million atMarch 31, 2022 , as the Company was able to utilize increased deposits to fund asset growth. Stockholders' Equity. Stockholders' equity decreased$8.7 million to$117.3 million atMarch 31, 2022 , primarily due to an increase in the net unrealized loss on available for sale securities of$10.9 million partially offset by$2.1 million in net income. AtMarch 31, 2022 , the Company's book value per share was$10.38 and the Company's ratio of stockholders' equity-to-total assets was 9.15%. Unearned common stock held by the Bank's employee stock ownership plan was$3.7 million atMarch 31, 2022 .
Comparison of Operating Results for the Three Months Ended
Net Income. Net income for the three months endedMarch 31, 2022 decreased$1.3 million , or 38.2%, to$2.1 million , or$0.19 per diluted share, compared to net income of$3.3 million , or$0.31 per diluted share, for the three months endedMarch 31, 2021 . Interest and dividend income decreased$78,000 , or 0.7%, interest expense decreased$410,000 , or 32.3%, the provision for loan losses increased$290,000 , non-interest income decreased$530,000 , or 23.7%, while other expenses and taxes increased$780,000 , or 8.9%, between comparable quarters. Net Interest Income. Net interest income increased$332,000 , or 3.4%, to$10.1 million for the three months endedMarch 31, 2022 , compared to$9.8 million for the quarter endedMarch 31, 2021 . The ratio of average interest-earning assets to average interest-bearing liabilities improved 0.9% to 145.18% while our net interest margin decreased by 23 basis points to 3.42% when comparing the first quarter of 2022 to the same period in 2021. Interest Income. Interest income decreased$78,000 , or 0.7%, to$11.0 million for the three months endedMarch 31, 2022 from$11.1 million for the comparable 2021 period. An increase in interest and dividends on securities was offset by a decrease in interest and fees on loans. The average yield decreased by 41 basis points to 3.71%, which was offset by an increase in the average balances of interest-earning assets of$111.3 million , or 10.2%, to$1.20 billion . Interest Expense. Interest expense decreased$410,000 , or 32.3%, from$1.3 million for the quarter endedMarch 31, 2021 , to$860,000 for the quarter endedMarch 31, 2022 . Interest rates on interest-bearing liabilities decreased 26 basis points to an average of 0.42% for the quarter endedMarch 31, 2022 , which was offset by an increase in the average balance of total interest-bearing liabilities of$70.1 million , or 9.3%, to$826.1 million . Provision for Loan Losses. The provision for loan losses increased by$290,000 , from a credit to the provision of$69,000 for the quarter endedMarch 31, 2021 to an expense of$221,000 for the current quarter. The credit for the first quarter of 2021 was primarily attributable to a decline in loan balances, exclusive of PPP loans, a reduction in specific allocations to the allowance for loan losses and a general improvement in the economic conditions as our customers showed signs of recovering from the pandemic. The expense in the first quarter of 2022 was primarily due to growth in our indirect automobile and non-residential commercial real estate loan balances and changes to the qualitative factors impacting our multi-family real estate loan portfolio. Net charge-offs for the quarter endedMarch 31, 2022 totaled$80,000 compared to$303,000 for the comparable period in 2021. The decrease was primarily due to a$143,000 recovery of a residential mortgage loan, pricing gains on the sales of repossessed vehicles as used car prices have risen significantly, and an improvement in the overall economic environment. 39 Non-Interest Income. Non-interest income totaled$1.7 million for the three months endedMarch 31, 2022 , a decrease of$530,000 , or 23.7%, from the comparable period in the prior year, due primarily to a decrease in the net gain on sales of mortgage loans as a result of a decline in loan volume when compared to the first quarter in 2021 due to the higher interest rate environment and the lack of available housing inventory in our market area. For the quarter endedMarch 31, 2022 , the gain on sales of mortgage loans decreased$659,000 , or 62.2%, as the Company sold$10.9 million of residential mortgage loans in the first quarter of 2022 as compared to$24.7 million in the first quarter of 2021. Gains related to the collection of life insurance proceeds of$195,000 and on the disposal of premises and equipment of$17,000 , both of which only occurred in the first quarter of 2021, also contributed to the relative decrease in non-interest income. These decreases were partially offset by an increase in investment advisory income of$123,000 , or 56.7%, and an increase in service charges on deposit accounts, which increased$97,000 , or 15.9%, as transaction volume increased and the ability to charge fees increased. Non-Interest Expense. For the first quarter of 2022, non-interest expense totaled$9.1 million , an increase of$1.2 million , or 14.5%, over the comparable 2021 period. The increase was primarily due to an increase in salaries and benefits of$927,000 , or 20.2%, due to the four new branches opened in 2021 as well as annual merit increases, production incentives and employee benefit increases. Also, the competitive pressures of the local job market has contributed to general increases in wages. For the three months endedMarch 31, 2022 , occupancy expenses increased$144,000 , or 15.1%, 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$91,000 and increased marketing fees of$29,000 . These increases were partially offset by decreased professional fees of$14,000 and a decrease in other non-interest expenses of$49,000 , or 3.7%. Income Taxes. Income taxes decreased by$372,000 for the three months endedMarch 31, 2022 as compared to the comparable period in 2021 as our income before income taxes decreased. Our effective tax rate for the three months endedMarch 31, 2022 was 17.9% compared to 19.8% for the three months endedMarch 31, 2021 . 40
Average Balance Sheets for the Three 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 March 31,
2022 2021
Average Interest and Average Interest and
Balance Dividends Yield/Cost(3) Balance Dividends Yield/Cost(3) Assets: Interest bearing depository accounts
$ 49,343 $ 19 0.16 %$ 84,266 $ 19 0.09 % Loans(1) 859,810 10,081 4.76 % 880,712 10,670 4.91 % Available for sale securities 290,227 874 1.22 % 123,086 363 1.20 % Total interest-earning assets 1,199,380 10,974 3.71 % 1,088,064 11,052 4.12 % Non-interest-earning assets 78,061 57,927 Total assets$ 1,277,441 $ 1,145,991 Liabilities and equity: NOW accounts$ 158,501 $ 55 0.14 %$ 137,701 $ 60 0.18 % Money market accounts 302,634 365 0.49 % 205,663 327 0.64 % Savings accounts 185,523 69 0.15 % 161,425 67 0.17 % Certificates of deposit 150,333 236 0.64 % 192,056 548 1.16 % Total interest-bearing deposits 796,991 725 0.37 % 696,845 1,002 0.58 % Escrow accounts 7,347 20 1.10 % 6,820 19 1.13 % Federal Home Loan Bank advances 16,649 85 2.07 % 47,253 221 1.90 % Subordinated debt 5,155 30 2.36 % 5,155 28 2.20 % Other interest-bearing liabilities 29,151 135 1.88 % 59,228 268 1.84 % Total interest-bearing liabilities 826,142 860 0.42 % 756,073 1,270 0.68 % Non-interest-bearing deposits 305,329 253,365 Other non-interest-bearing liabilities 21,068 18,374 Total liabilities 1,152,539 1,027,812 Total stockholders' equity 124,902 118,179 Total liabilities and stockholders' equity$ 1,277,441
$ 1,145,991 Net interest income$ 10,114 $ 9,782 Interest rate spread 3.29 % 3.44 % Net interest margin(2) 3.42 % 3.65 % Average interest-earning assets to average interest-bearing liabilities 145.18 % 143.91 %
(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.
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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 March 31, 2022
Compared to Three Months Ended
March 31, 2021
Increase (Decrease)
Due to
Volume Rate Net
Interest income:Interest bearing depository accounts$ (10) $ 10 $
- Loans receivable (250) (339) (589) Marketable securities 503 8 511 Total interest-earning assets 243 (321) (78) Interest expense: Deposits 46 (322) (276) Escrow accounts 1 - 1
Federal Home Loan Bank advances (155) 19
(136)
Subordinated debt - 1
1
Total interest-bearing liabilities (108) (302)
(410)
Net increase in net interest income
332 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 primary
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.
42
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 March 31, 2022 (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$ 161,330 $ (5,814) (3.5) % 13.68 % 4.7 % 300 164,243 (2,901) (1.7) % 13.66 % 4.5 % 200 166,106 (1,038) (0.6) % 13.55 % 3.6 % 100 167,736 592 0.4 % 13.39 % 2.5 % 0 167,144 - - % 13.07 % - % (100)$ 138,713 $ (28,431) (17.0) % 10.62 % (18.7) % 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 Management
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. As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing, or financing cash flows. Net cash provided by operating activities was$7.5 million and$2.6 million for the three-month periods endedMarch 31, 2022 and 2021, respectively. These amounts differ from our net income because of a variety of cash receipts and disbursements that did not affect net income for the respective periods. Net cash used for investing activities was$19.4 million and$35.7 for the three-month periods endedMarch 31, 2022 and 2021, respectively, principally reflecting our investment security and loan activities in the respective periods. We also received$32.8 million in cash from the acquisition of two branches in 2021. Cash outlays for the purchase of securities 43 decreased from$88.4 million for the three-month period endedMarch 31, 2021 to$27.2 million for the period endedMarch 31, 2022 . Cash proceeds from principal repayments, maturities and sales of investment securities amounted to$16.5 million and$14.4 million in the three months endedMarch 31, 2022 and 2021, respectively. We had cash flows from a net increase in loans of$8.2 million for the three months endedMarch 31, 2022 compared to a net decrease of$4.9 million for the three months endedMarch 31, 2021 . Deposit and borrowing cash flows have traditionally comprised most of our financing activities which resulted in net cash provided of$7.1 million in the three months endedMarch 31, 2022 , and$29.4 million in comparable 2021 period. AtMarch 31, 2022 , we had the following main sources of availability of liquid funds and borrowings: (In thousands) Total Available liquid funds: Cash and due from banks$ 67,365 Unencumbered securities 270,713 Amount available from the Paycheck Protection Plan Loan Facility 13,756 Availability of borrowings:Zions Bank line of credit
10,000
Pacific Coast Bankers Bank line of credit
50,000
Other secured FHLB credit facility
159,430
Total available sources of funds $
571,264
The following table summarizes our main contractual obligations and other commitments to make future payments as ofMarch 31, 2022 . The amount of the obligations presented in the table reflect principal amounts only and exclude the amount of interest we are obligated to pay. Also excluded from the table are a number of obligations to be settled in cash. These excluded items are reflected in our consolidated balance sheet and include deposits with no stated maturity, trade payables, and accrued interest payable. March 31, 2022 After One but One Year within Five (In thousands) Total or Less Years After 5 Years Payments Due:
Federal Home Loan Bank advances$ 15,928 $ 15,928 $
- $ -
Operating lease agreements 8,982 640 3,272 5,070
Subordinated debt 5,155 - - 5,155Time deposits with stated maturity dates 142,501 107,282 35,219 - Total contractual obligations$ 172,566 $ 123,850 $
38,491
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. 44
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