RHINEBECK BANCORP, INC. General
Management's discussion and analysis of financial condition and results of operations atJune 30, 2020 andDecember 31, 2019 and for the three and six months endedJune 30, 2020 and 2019 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;
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? 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;
? 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;
? the imposition of tariffs or other domestic or international governmental polices impacting the value of the agricultural or other products of our borrowers;
? 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 when and how the economy may be fully reopened. 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 high 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 have to be increased 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;
as the result of the decline in the
? funds rate to near 0%, the yield on our assets may decline to a greater extent
than the decline in our cost of interest-bearing liabilities, reducing our net
interest margin and spread and reducing net income;
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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 face litigation, regulatory enforcement and reputation risk as a result
? of our participation in the
Participation Program ("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 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 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, 2019 , filed with theSecurities and Exchange Commission . As ofJune 30, 2020 , 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 endedDecember 31, 2019 .
Impact of COVID-19
The COVID-19 pandemic inthe United States is expected 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.
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 have led to a broad curtailment of economic activity beginning inMarch 2020 . On that date, 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 are 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 remain limited, including that in-door dining and malls remain closed and many people still engage in limited activities. As a result of the pandemic, the state has experienced an increase in unemployment levels from an average of 3.7% in December of 2019 to 15.7% as ofJune 30, 2020 .
Policy and Regulatory Developments.
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
? The
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? OnMarch 27, 2020 ,President Trump signed the CARES Act, which established a$2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a$349 billion loan program (later increased to$660 billion ) administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. ? OnApril 7, 2020 , federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications that meet certain criteria as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19-related loan modifications as TDRs. ? OnApril 9, 2020 , theFederal Reserve announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19. TheFederal Reserve announced theMain Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and mid-sized businesses: (1) the Main Street New Loan Facility ("MSNLF'), and (2) the Main Street Expanded Loan Facility ("MSELF"). MSNLF loans are unsecured term loans originated on or afterApril 8, 2020 , while MSELF loans are provided as upsized tranches of existing loans originated beforeApril 8, 2020 . The combined size of the program will be up to$600 billion . The program is designed for businesses with up to 10,000 employees or$2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. TheFederal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio.
Pandemic Operational Preparations & Status.
Since mid-March, the Company and the Bank have felt the impact of this global pandemic. In response to the state of emergency, the Bank had temporarily suspended lobby services, which were re-opened onJune 1, 2020 . Drive-thru, mobile, and online banking had become the Bank's primary channels of serving customers during that time and remain important channels asNew York State starts to move through phases of reopening. Various operational measures remain in effect to encourage social distancing and enhanced cleaning and sanitizing procedures continue at all office, drive-thru locations and ATM terminals. A Work Place Safety Program was established in May to demonstrate the Bank's commitment to providing employees a safe and healthy work place. A phased/staggered return of non-branch staff began in June and will continue over the next several months. The wearing of face masks is now mandatory in all Bank locations and employee wellness is monitored daily. 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.
Effects on Our Business.
We currently expect that the COVID-19 pandemic and the specific developments
referred to above could have a significant negative impact on our business. In
particular, we anticipate that a significant portion of the Bank's borrowers in
the hotel, restaurant and retail industries will continue to endure significant
economic distress, which has caused, and may continue to cause, them to draw on
their existing lines of credit and adversely affect their ability to repay
existing indebtedness, and is expected to adversely impact the value of
collateral. These developments, together with economic conditions generally, are
also expected to impact our commercial real estate portfolio, particularly with
respect to real estate with exposure to these industries, and the value of
certain collateral securing our loans. As a result, we anticipate that our
financial condition, capital levels and results of operations will be adversely
affected, as described in further detail below.
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Table of Contents Loan Composition & Activity. The following table provides information with respect to our commercial and industrial and commercial real estate loans by type atJune 30, 2020 (dollars in thousands). June 30, 2020 Commercial loans: Number of Loans Balance Percent (unaudited) Accommodation and Food Services 154$ 23,799 5.20 %
Administrative and Support and Waste Management and Remediation Services
111 7,213 1.58 %
Agriculture, Forestry, Fishing and Hunting 25 5,481 1.20 %
Arts, Entertainment and Recreation 48 8,738 1.91 %
Construction 280 27,895 6.09 %
Educational Services 15 5,558 1.21 %
Finance and Insurance 24 1,651 0.36 %
Health Care and Social Assistance 142 21,553 4.71 %
Information 15 1,471 0.32 %
Loans to Individuals 365 63,767 13.93 %
Management of Companies and Enterprises 1 1,609 0.35 %
Manufacturing 103 20,036 4.38 %
Mining 4 229 0.05 %
Other Services 134 12,604 2.74 %
Professional, Scientific and Technical Services 113 11,312 2.47 %
Real Estate and Rental and Leasing 447 208,831 45.62 %
Retail Trade 135 22,259 4.86 %
Transportation and Warehousing 50 2,953 0.65 %
Wholesale Trade 34 10,844 2.37 %
Total loans 2,200 $ 457,803 100.00 %
As part of the CARES Act, the PPP Loan Program allocated$660 billion in funds to assist small businesses.Rhinebeck Bank , as a qualified SBA lender, is an authorized participant in this program. To meet customer demand, a bank-wide team was formed to provide communications to our customer base, establish procedures and documentation to accept loan applications under the PPP program, evaluate potential automated system solutions to process the loan applications, allocate resources to underwrite the loans, submit applications to the SBA for approval, develop new documents for the loans, and close, fund, and book the loans. As ofJune 29, 2020 , we had received 673 applications for approximately$90.2 million of loans under the PPP. We received SBA approval for 651 applications totaling$89.3 million . By that date we had funded 647 loans for$88.7 million . As ofJune 30, 2020 , we stopped accepting new PPP applications. To fund this additional loan demand, the Bank became a participant in theFederal Reserve's Paycheck Protection Program Lending Facility which allowed us to present these loans as collateral for 100% principal funding at theFederal Reserve's discount window. The term of these loans mirrored the actual maturity of the underlying collateral and has a fixed interest rate of 0.35%. During the second quarter, we received$70.1 million in funding and atJune 30, 2020 , had paid back all but$12.1 million .
COVID-19 Loan Forbearance Programs
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 39
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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.
As ofJune 29, 2020 , the Bank had received 2,289 deferral requests from 1,986 customers. Of these, 155 are mortgages serviced for investors with$28.1 million in outstanding balances. The remaining 2,134 accounts have a total principal of$125.0 million and a weighted average rate of 5.41%. Although the actual amount of payments deferred is not known until the deferral application is completed by collections staff, approximately$4.9 million of payments have been deferred as ofJune 29, 2020 .
Details with respect to the Bank owned deferral requests as of
Number of Loans Balance Weighted Rate
Commercial real estate loans: (unaudited)
Non-residential 65 $ 63,703 4.4 %
Multi-family 4 2,724 4.4 %
Residential real estate loans 18 4,912 4.7 %
Commercial and industrial loans 156 17,032 5.1 %
Consumer loans:
Indirect automobile 1,798 34,823 7.6 %
Home equity 11 620 3.8 %
Other consumer 82 1,176 6.6 %
Total loans 2,134 $ 124,990 5.4 %
Comparison of Financial Condition at
Total Assets. Total assets were$1.1 billion atJune 30, 2020 , representing an increase of$154.4 million , or 15.9%, compared to$973.9 million atDecember 31, 2019 . The increase was primarily related to increases in loans, cash and the establishment of the right-of-use lease asset of$6.5 million included in other assets. Cash and Due from Banks. Cash and due from banks increased$62.6 million , or 522.6%, to$74.6 million atJune 30, 2020 from$12.0 million atDecember 31, 2019 primarily due to an increase in deposits held at theFederal Reserve Bank of New York . Investment Securities Available for Sale. Investment securities available for sale decreased$9.7 million , or 8.4%, to$105.1 million atJune 30, 2020 from$114.8 million atDecember 31, 2019 . This decrease was primarily due to principal pay-downs of$15.1 million and sales and calls of$7.0 million offset by purchases of mortgage backed securities of$10.1 million and an unrealized gain of$2.3 million . Net Loans. Total net loans receivable were$887.3 million atJune 30, 2020 , an increase of$93.8 million , or 11.8%, as compared to$793.5 million atDecember 31, 2019 . The increase was primarily due to$86.4 million of net outstanding SBA PPP loan balances. The increase in net commercial real estate loans totaled$14.0 million , or 5.2%, as compared toDecember 31, 2019 . Our net indirect auto loan balances increased$4.9 million or 1.3% over the first six months of 2020. During the same period our allowance for loan losses increased$2.6 million , or 44.0%, to reflect the growth in our portfolio and the significant negative impact of the change in the qualitative factors due to the COVID-19 pandemic.
Non-accrual loans increased
Total Liabilities. Total liabilities increased$150.6 million , or 17.4%, to$1.0 billion atJune 30, 2020 , primarily due to an increase in deposits of$136.7 million , an increase in the FRB borrowings of$12.1 million , a$3.3 million increase in mortgagors' escrow accounts, the establishment of the lease liability included in accrued expenses and other liabilities of$6.5 million and was offset by a decrease of$7.3 million in FHLB advances. 40
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Deposits. Deposits increased$136.7 million , or 17.7%, to$910.0 million atJune 30, 2020 . Interest bearing accounts grew$68.1 million , or 11.5%, to$662.2 million while non-interest bearing balances increased$68.6 million , or 38.3%, finishing the second quarter at$247.8 million . The increase in deposits was primarily due to the inflow of cash from PPP loans and an apparent flight to safety as investors fled the stock market's volatility. Borrowed Funds. Advances from the FHLB decreased$7.3 million from$66.3 million atDecember 31, 2019 to$59.0 million atJune 30, 2020 . AtJune 30, 2020 , FRB borrowings increased$12.1 million used specifically to support funding for loans made under the PPP program. Stockholders' Equity. Stockholders' equity increased$3.8 million to$113.7 million , primarily due to net income of$2.4 million and a net unrealized gain of$1.3 million on available for sale securities. AtJune 30, 2020 , the Company's book value per share was$10.21 . AtJune 30, 2020 , the Company's ratio of stockholders' equity-to-total assets was 10.1%. Unearned common stock held by the Bank's employee stock ownership plan was$4.0 million atJune 30, 2020 .
Comparison of Operating Results for the Three and Six Months Ended
Net Income. Net income for the three months endedJune 30, 2020 increased$127,000 , or 10.4%, to$1.3 million , or$0.13 per basic and diluted share, compared to net income of$1.2 million for the three months endedJune 30, 2019 . Interest and dividend income increased$1.1 million , or 10.8%, interest expense increased$37,000 , or 1.7%, the provision for loan losses increased$1.5 million or 189.1%, noninterest income increased$317,000 , or 22.1%, while other expenses and taxes decreased$229,000 , or 3.1%, between comparable quarters. For the six months endedJune 30, 2020 , net income was$2.4 million , or$0.23 per basic and diluted share, compared to$2.1 million for the six months endedJune 30, 2019 . Interest income increased by$2.5 million , or 12.7%, and noninterest income increased$613,000 , or 22.7%, between the two six-month periods. These revenue gains were partially offset by a$668,000 , or 16.8%, increase in interest expense, a$1.9 million , or 121.5%, increase in provision for loan losses, and a$234,000 , or 1.6%, increase in other noninterest and tax expenses during the equivalent timeframes. Net Interest Income. Net interest income increased$1.1 million , or 13.3%, to$9.0 million for the three months endedJune 30, 2020 compared to the quarter endedJune 30, 2019 . The ratio of average interest-earning assets to average interest-bearing liabilities improved 2.4% to 139.72% while our net interest margin declined by 34 basis points to 3.41% when comparing the second quarter of 2020 to the same period in 2019. The decline in the net interest margin was primarily due to lower earning asset yields which have fallen due to the significant decline in the interest rate environment and the addition of lower yielding PPP loans. For the six months endedJune 30, 2020 , net interest income increased$1.8 million , or 11.7%, to$17.3 million from$15.5 million for the comparable 2019 period. Overall there was a 26 basis point decline in net interest margin to 3.51%, when comparing the respective six month periods, while the ratio of average interest-earning assets to average interest-bearing liabilities improved 0.2% to 137.89%.
Interest Income. Interest income increased
For the six months endJune 30, 2020 , interest income increased$2.5 million , or 12.7%, to$22.0 million from$19.5 million for the six months endedJune 30, 2019 . The average balance of interest-earning assets increased by$162.6 million , or 19.6%, to$991.2 million while the average yield declined by 29 basis points to 4.45% when comparing the six-month periods endedJune 30, 2020 and 2019.
In both comparable periods, interest income increases were mostly driven by higher average earning assets, primarily loans, that were offset by lower earning asset yields due to the addition of lower yielding PPP loans and the significant decline in the interest rate environment.
Interest Expense. Interest expense increased$37,000 , or 1.7%, to$2.2 million for the three months endedJune 30, 2020 over the comparable 2019 period. The average balance of total interest-bearing liabilities increased by$135.7 41
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million, or 21.8%, to
For the six months endedJune 30, 2020 , interest expense grew$668,000 , or 16.8%, to$4.7 million from$4.0 million for the comparable 2019 period, as the average balance of total interest-bearing liabilities increased by$116.9 million , or 19.4%, year over year. The increase in the interest expense was partially offset by a decrease in the overall cost of average interest-bearing liabilities by 4 basis points to 1.30% for the first half of 2020 from the first half of 2019. Provision for Loan Losses. We recorded a provision for loan losses of$2.3 million for the three months endedJune 30, 2020 as compared to$780,000 for the comparable prior year period. Net charge-offs for the quarter endedJune 30, 2020 totaled$303,000 compared to$105,000 for the respective period in 2019. We recorded a$3.5 million provision for loan losses through the first six months of 2020 as compared to$1.6 million for the same six months in 2019, an increase of 121.5% period over period. For the six-month period endedJune 30, 2020 , net charge-offs were$837,000 , an increase of$489,000 , or 140.5%, when compared to the comparative 2019 period. The increase in the provision was mainly attributable to the significant negative impact of the change in qualitative factors reflecting the diminished economic environment resulting from the COVID-19 pandemic and the resultant risk the pandemic poses for the Bank's borrowers, which will likely lead to credit quality deterioration. The amount of increase in our loan loss allowance related to the economic environment was based, in part, on the amount of loans to borrowers that had their loan payments deferred because they had been negatively impacted by the pandemic. Non-Interest Income. Non-interest income totaled$1.8 million for the three months endedJune 30, 2020 ; an increase of$317,000 , or 22.1%, from the comparable period in the prior year. Net gain on the sale of loans increased$690,000 , or 274.9%, which was offset by a$219,000 decrease in service charges on deposit accounts, a$79,000 decrease in investment advisory income and a$110,000 decrease in other non-interest income. Non-interest income increased$613,000 , or 22.7%, to$3.3 million for the six months endedJune 30, 2020 . In the six months endedJune 30, 2020 , net gain on the sale of loans increased$989,000 , or 237.2% while investment advisory income increased$20,000 to$562,000 . These increases were offset by a$265,000 decrease in service charges on deposit accounts and a$124,000 decrease in other non-interest income affected primarily by increased amortization of mortgage servicing rights. Non-Interest Expense. For the second quarter of 2020, non-interest expense decreased$283,000 , or 4.0%, to$6.8 million over the comparable 2019 period. The decrease was primarily due to decreased automobile loan expenses as automobile lending volumes decreased as a result of COVID-19. Fees such as dealer loan fees, appraisal and loan review fees were all substantially lower during the second quarter of 2020.
For the six months ended
Income Taxes. Income taxes increased by$54,000 for the three months endedJune 30, 2020 as compared to the comparable period in 2019 as our income before income taxes increased. Our effective tax rate for the three months endedJune 30, 2020 was 21.0% compared to 20.0% for the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , income taxes increased$136,000 , or 25.7%, to$666,000 in the first half of 2020 from$530,000 for the comparable 2019 period. Our effective tax rate for the six months endedJune 30, 2020 was 21.6% as compared to 19.9% for the six months endedJune 30, 2019 . 42
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Average Balance Sheets for the Three and Six 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
2020 2019
Average Interest and Average Interest and
Balance Dividends Yield/Cost Balance Dividends Yield/Cost
(unaudited)
Assets:
Interest bearing depository accounts $ 66,351 $ 13 0.08 % $ 1,403 $ 6 1.72 %
Loans(1) 876,809 10,569 4.85 % 731,075 9,401 5.16 %
Available for sale securities 114,405 631 2.22 % 115,448 713 2.48 %
Total interest-earning assets 1,057,565 11,213 4.26 % 847,926 10,120 4.79 %
Non-interest-earning assets 61,092 52,040
Total assets $ 1,118,657 $ 899,966
Liabilities and equity:
NOW accounts $ 107,062 $ 61 0.23 % $ 98,201 $ 79 0.32 %
Money market accounts 164,676 417 1.02 % 133,054 436 1.31 %
Savings accounts 136,898 89 0.26 % 120,498 106 0.35 %
Certificates of deposit 232,056 1,265 2.19 % 181,778 994 2.19 %
Total interest-bearing deposits 640,692 1,832 1.15 % 533,531 1,615 1.21 %
Escrow accounts 9,526 27 1.14 % 8,732 26 1.19 %
Federal Home Loan Bank advances 101,564 336 1.33 % 73,840 498 2.71 %
Subordinated debt 5,155 41 3.20 % 5,155 60 4.67 %
Other interest-bearing liabilities 116,245 404 1.40 % 87,727 584 2.67 %
Total interest-bearing liabilities 756,937 2,236 1.19 % 621,258 2,199 1.42 %
Non-interest-bearing deposits 230,116 164,911
Other non-interest-bearing liabilities 16,868 9,901
Total liabilities 1,003,921 796,070
Total stockholders' equity 114,736 103,896
Total liabilities and stockholders' equity $ 1,118,657 $ 899,966
Net interest income $ 8,977 $ 7,921
Interest rate spread 3.07 % 3.37 %
Net interest margin(2) 3.41 % 3.75 %
Average interest-earning assets to average
interest-bearing liabilities 139.72 % 136.49 %
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For the Six Months Ended
2020 2019
Average Interest and Average Interest and
Balance Dividends Yield/Cost Balance Dividends Yield/Cost
(Dollars in thousands)
Assets:
Interest bearing depository accounts $ 35,345 $ 24 0.14 % $ 3,716 $ 41 2.22 %
Loans(1) 839,973 20,615 4.94 % 713,530 18,116 5.12 %
Available for sale securities 115,850 1,314 2.28 % 111,330 1,321 2.39 %
Total interest-earning assets 991,168 21,953 4.45 % 828,576 19,478 4.74 %
Non-interest-earning assets 59,968 52,292
Total assets $ 1,051,136 $ 880,868
Liabilities and equity:
NOW accounts $ 102,775 $ 119 0.23 % $ 96,165 $ 152 0.32 %
Money market accounts 159,940 913 1.15 % 134,409 851 1.28 %
Savings accounts 130,571 169 0.26 % 121,113 212 0.35 %
Certificates of deposit 229,030 2,629 2.31 % 172,843 1,764 2.06 %
Total interest-bearing deposits 622,316 3,830 1.24 % 524,530 2,979 1.15 %
Escrow accounts 8,086 46 1.14 % 7,548 44 1.18 %
Federal Home Loan Bank advances 83,275 688 1.66 % 64,283 853 2.68 %
Subordinated debt 5,155 91 3.55 % 5,583 111 4.01 %
Other interest-bearing liabilities 96,516 825 1.72 % 77,414 1,008 2.63 %
Total interest-bearing liabilities 718,832 4,655 1.30 % 601,944 3,987 1.34 %
Non-interest-bearing deposits 202,986 163,182
Other non-interest-bearing liabilities 15,841 16,715
Total liabilities 937,659 781,841
Total stockholders' equity 113,477 99,027
Total liabilities and stockholders' equity $ 1,051,136 $ 880,868
Net interest income $ 17,298 $ 15,491
Interest rate spread 3.15 % 3.40 %
Net interest margin(2) 3.51 % 3.77 %
Average interest-earning assets to average
interest-bearing liabilities 137.89 % 137.65 %
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(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.
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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 June 30, 2020 Six Months Ended June 30, 2020
Compared to Three Months Ended Compared to Six Months Ended
June 30, 2019 June 30, 2019
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
(unaudited) (unaudited)
Interest income:
Interest bearing depository
accounts $ 7 $ - $ 7 $ (19) $ 2 $ (17)
Loans receivable 1,672 (504) 1,168 3,137 (638) 2,499
Marketable securities (7) (75) (82) 46 (53) (7)
Total interest-earning
assets 1,672 (579) 1,093 3,164 (689) 2,475
Interest expense:
Deposits (62) 280 218 792 61 853
Escrow accounts 2 (1) 1 3 (2) 1
Federal Home Loan Bank
advances 458 (621) (163) 582 (748) (166)
Subordinated debt - (19) (19) (8) (12) (20)
Total interest-bearing
liabilities 398 (361) 37 1,369 (701) 668
Net increase in net interest
income $ 1,274 $ (218) $ 1,056 $ 1,795 $ 12 $ 1,807
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 established a management-level
Asset/Liability Management Committee (the "ALCO"), which takes initial
responsibility for reviewing the 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. This committee also implements any changes in strategies and reviews
the performance of any specific asset/liability management actions that have
been implemented.
We try to 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.
Net Economic Value Simulation. We analyze our 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 EVE under scenarios where interest rates
increase 100,
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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 our EVE that would result from changes in market interest rates atJune 30, 2020 . All estimated changes presented in the table are within the policy limits approved by our Board of Directors (dollars in thousands). Net Economic Value as Percent of Net Economic Value of Assets Dollar Dollar Percent EVE Percent Basis Point Change in Interest Rates Amount Change Change Ratio Change (unaudited) 400$ 76,998 $ (18,462) (19.3) % 7.48 % (10.7) % 300 82,964 (12,496) (13.1) % 7.86 % (6.1) % 200 89,269 (6,191) (6.5) % 8.23 % (1.6) % 100 95,225 (235) (0.2) % 8.55 % (2.1) % 0 95,460 - - % 8.37 % - % (100)$ 75,166 $ (20,294) (21.3) % 6.46 % (22.8) % 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, and 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. AtJune 30, 2020 ,$74.6 million of our assets were held in cash and cash equivalents. Short-term investment securities (maturing in one year or less) totaled$175,000 atJune 30, 2020 . As ofJune 30, 2020 , we had$59.0 million of structured borrowings outstanding from the FHLB, of which$36.8 million is due within the next 12 months. We have access to FHLB advances of up to$564.1 million . As ofJune 30, 2020 , we had$12.1 million of structured borrowings from the FRB under the PPP Lending Facility, which was paid in full onJuly 2, 2020 . AtJune 30, 2020 , we had$95.9 million in loan commitments outstanding, which included$6.6 million in undisbursed construction loans,$10.5 million in unused home equity lines of credit,$61.5 million in commercial lines of credit,$11.7 million in future loan commitments and$5.6 million in standby letters of credit. Certificates of deposit due within one year ofJune 30, 2020 totaled$174.6 million , or 75.0% 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 beforeJune 30, 2021 . We believe, however, based on past 46
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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. 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$2.5 million and$3.5 million for the six months endedJune 30, 2020 and 2019, 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$84.7 million and$67.5 million in the six months endedJune 30, 2020 and 2019, respectively, principally reflecting our loan and investment security activities in the respective periods. Net increase in loan balances outstanding had the most significant effect, as net cash used amounted to$96.2 million and$58.7 million in the six months endedJune 30, 2020 and 2019, respectively. Deposit and borrowing cash flows have traditionally comprised most of our financing activities which resulted in net cash provided of$144.7 million and$25.4 million for the six months endedJune 30, 2020 and 2019, respectively. For the six months endedJune 30, 2020 , interest-bearing deposits increased$68.1 million , while non-interest-bearing deposits increased$68.6 million over year-end 2019. For the six months endedJune 30, 2019 , deposit and borrowing cash flows were primarily offset by the return of unfulfilled offering subscriptions of$41.1 million related to our initial stock offering. 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 withUnited States generally accepted accounting principles ("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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