Rhinebeck Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and period. Rhinebeck Bancorp is the holding company for Rhinebeck Bank, a New York community bank serving the Hudson Valley and nearby counties through 11 branches and two representative offices. This unaudited report covers the three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in millions unless stated otherwise.
Financial results and position
- Q3 earnings: Net income was $1.15 million, down 45.0% from $2.09 million a year earlier. Diluted EPS was $0.10 versus $0.20. Net interest income rose 6.7% to $9.03 million, but provision for loan losses rose to $2.25 million from $0.45 million.
- Nine-month earnings: Net income was $3.57 million, down 15.4% from $4.22 million; diluted EPS was $0.33 versus $0.39. Net interest income increased 9.9% to $26.33 million. Noninterest income rose 30.1% to $5.41 million.
- Margins and costs: Net interest margin was 3.40% in Q3, down 45 basis points year over year, and 3.47% for the first nine months, down 33 basis points. Lower asset yields, the near-zero rate environment, and lower-yielding PPP loans weighed on margin. Nine-month noninterest expense increased 3.4% to $21.50 million.
- Assets and lending: Total assets increased 14.2% to $1.113 billion. Net loans rose 12.2% to $890.5 million; gross loans were $893.1 million, including $91.7 million of PPP loans. The allowance for loan losses increased 77.4% to $10.6 million. Nonaccrual loans declined to $5.9 million and nonperforming assets to $7.0 million from year-end levels.
- Funding and liquidity: Deposits grew 18.5% to $916.2 million, including $251.6 million of noninterest-bearing deposits. Cash and due from banks rose to $51.6 million. FHLB advances were $54.9 million, down from $66.3 million; $34.7 million was due within one year. The Bank reported access to a secured FHLB credit line of $556.2 million. Certificates of deposit totaling $135.1 million mature within one year.
- Debt and capital: Subordinated debt was $5.2 million, bearing interest at three-month LIBOR plus 2.00%. Stockholders’ equity was $115.2 million, or 10.4% of assets; book value was $10.35 per share. The Bank was reported well capitalized, with a 13.60% total risk-based capital ratio and a 9.67% Tier 1 leverage ratio.
- Cash flow: For the first nine months, operating activities provided $6.3 million, investing activities used $94.0 million, and financing activities provided $127.3 million. Cash increased $39.6 million to $51.6 million.
Material changes versus comparable periods
- Loan-loss provision increased $1.8 million year over year in Q3 and $3.7 million for the first nine months, reflecting management’s increased assessment of economic and borrower risk amid COVID-19.
- Loan-sale gains strengthened: the Bank sold $19.7 million of loans in Q3 and $66.4 million in the first nine months. Nine-month gains on loan sales rose to $2.38 million from $0.71 million.
- Deposit growth funded balance-sheet expansion and helped reduce FHLB advances. Management attributed deposit inflows partly to PPP-related cash and customers’ flight to safety.
- Q3 noninterest income increased 43.7%, while service charges on deposit accounts declined. Nine-month salaries and benefits and deposit insurance expense increased.
Outlook, risks, and unusual items
- Outlook: The filing gives no numerical earnings or margin guidance. Management warned that COVID-19’s effects remain uncertain and could adversely affect borrowers, credit quality, liquidity, capital, and results. It highlighted hotel, restaurant, and retail borrowers and related commercial real estate collateral as areas of concern.
- Deferrals and PPP: The Bank had approved 2,042 COVID-related deferrals totaling $118.0 million; 192 loans totaling $27.2 million remained deferred at September 30. The filing states that 93.6% of the Bank-owned deferred balances, totaling $115.0 million, were performing to contractual terms. These deferrals are excluded from reported nonperforming loans under applicable guidance. PPP loans totaled $91.7 million on the balance sheet; the Bank reported $3.3 million of net deferred PPP origination fees and recognized $1.2 million of amortization for the nine-month period. Management noted possible PPP guarantee, litigation, and regulatory risks.
- Other notable items: A $435,000 interest reserve was recorded for anticipated shortfalls on deferred loans. The Company adopted lease accounting in 2020, recording a $6.4 million right-of-use asset and corresponding lease liability. It reported no goodwill impairment, no material pending legal proceedings, and no material changes to disclosed risk factors. Management expects CECL adoption in 2023 and said early adoption was unlikely.
- Subsequent event: On October 26, 2020, the Bank agreed to acquire two ConnectOne Bank branches in Monroe and Warwick, New York, and assume certain associated deposits, assets, and liabilities. Closing was expected in late Q4 2020 or early Q1 2021, subject to regulatory approval and customary conditions.
- Market and execution risks: Management cited interest-rate and margin sensitivity, borrower defaults and collateral values, competition for deposits, maturing CDs, operational and cybersecurity risks, and execution risks related to acquisitions. The Bank’s interest-rate model estimated a 19.5% decline in economic value of equity under an immediate 400-basis-point rate increase and a 23.3% decline under a 100-basis-point decrease; management cautioned that model assumptions limit predictive value.
Key facts for investors to verify
- Whether remaining loan deferrals resume regular payments, and whether delinquencies, nonaccrual loans, charge-offs, or required reserves increase.
- PPP loan forgiveness timing, remaining fee recognition, and the extent of any SBA guarantee or compliance issues.
- Whether margin pressure continues as asset yields reset and deposit costs change, particularly given the $435,000 interest reserve.
- Deposit retention and pricing as $135.1 million of certificates mature within one year, alongside scheduled FHLB repayments and loan commitments of $99.8 million.
- Regulatory approval, closing terms, funding effects, and integration costs or benefits of the two-branch acquisition.