Rhinebeck Bancorp, Inc. quarterly report, Q1 FY2021

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Business context and reporting period

Rhinebeck Bancorp, Inc. is the holding company for Rhinebeck Bank, a New York community bank serving consumer and commercial customers in the Hudson Valley. This unaudited Form 10-Q covers the quarter ended March 31, 2021; income and cash flow comparisons are with the quarter ended March 31, 2020, while balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Financial performance and condition

  • Profit: Net income was $3.32 million, up 209% from $1.08 million; basic and diluted EPS were $0.31 versus $0.10. Income before taxes was $4.14 million. The effective tax rate was 19.8%, down from 22.2%.
  • Interest income and margins: Interest and dividend income rose 2.9% to $11.05 million. Net interest income increased 17.6% to $9.78 million, as interest expense fell 47.5% to $1.27 million. Net interest margin was 3.65%, versus 3.62%; net interest spread was 3.44%, versus 3.24%.
  • Credit provision and other income: The company recorded a $69,000 credit to the loan-loss provision, compared with a $1.20 million provision in Q1 2020. Noninterest income grew 43.7% to $2.24 million, including $1.06 million in loan-sale gains and a $195,000 life-insurance gain.
  • Expenses: Noninterest expense rose 9.0% to $7.95 million, including higher salaries and benefits, occupancy, data processing, and professional fees. The company attributed much of the increase to staffing and costs associated with new and acquired branches.
  • Cash flow: Operating activities provided $2.62 million, versus $3.76 million. Investing activities used $35.66 million, including substantial securities purchases, and financing activities provided $29.39 million. Cash and due from banks ended the quarter at $89.83 million, down from $93.49 million.
  • Balance sheet and funding: Total assets rose 6.0% to $1.197 billion. Deposits increased 8.5% to $1.008 billion, while net loans declined 0.6% to $868.7 million and available-for-sale securities increased 70.5% to $175.5 million. FHLB advances fell to $36.5 million from $50.7 million; subordinated debt remained $5.2 million. Stockholders’ equity was $118.9 million, book value per share was $10.68, and equity-to-assets was 9.93%.
  • Liquidity and capital: Management reported $89.8 million of cash and cash equivalents, $10.2 million of securities maturing within one year, and access to a secured FHLB line of up to $598.4 million. Certificates of deposit totaling $150.4 million mature within one year. The Bank was categorized as well capitalized; at quarter-end, total risk-based capital was 14.38%, common equity Tier 1 was 13.13%, and Tier 1 leverage was 9.88%.
  • Asset quality: Nonaccrual loans were $6.3 million and nonperforming assets were $6.4 million. The allowance for loan losses was $11.3 million, down from $11.6 million at year-end. Net charge-offs were $303,000.

Material changes versus comparable periods

  • Quarterly net income rose substantially, benefiting from lower funding costs, a much lower loan-loss provision, higher loan-sale gains, and a $195,000 insurance gain. Higher operating expenses partly offset these factors.
  • Average interest-earning assets increased 17.7% year over year to $1.088 billion, while their average yield declined 55 basis points to 4.12%. The average cost of interest-bearing liabilities fell 75 basis points to 0.68%.
  • On March 12, 2021, the Bank completed its purchase of two ConnectOne branches in Orange County, New York, assuming $33.9 million in deposits and recording $825,000 of goodwill and a $330,000 core deposit intangible. The transaction contributed to deposit, asset, and expense changes.
  • Available-for-sale securities increased by $72.6 million from year-end; the net unrealized securities position shifted from a $993,000 gain in accumulated other comprehensive income to a $177,000 loss. Management attributed unrealized losses principally to market interest-rate changes and said it did not expect to sell the securities before recovery.

Outlook, commentary, risks, and unusual items

  • No quantitative earnings or financial guidance is provided. Management expected two newly approved Orange County branches to be fully operational by mid-year 2021.
  • Management said the improved economic outlook contributed to the Q1 provision credit, but warned that renewed deterioration could require additional provision expense. The pandemic could also weaken borrowers, collateral values, loan demand, and future interest income.
  • At March 31, 73 loans totaling $34.8 million remained under COVID-related payment deferrals; management reported that all were performing in accordance with their contractual terms. The Bank granted 111 new deferrals totaling $1.7 million during the quarter.
  • PPP loans outstanding were $92.1 million at quarter-end. The Bank received approval for 338 second-round PPP applications totaling $46.6 million and had funded 318 totaling $45.2 million by quarter-end.
  • Key stated risks include credit quality and allowance estimates, funding costs and deposit retention, real estate values, competition, interest-rate changes, pandemic effects, operational and cybersecurity risks, regulation, and successful integration of acquired operations. The filing identifies no material change to previously disclosed risk factors and no pending legal proceeding believed to have a material adverse effect.
  • Interest-rate modeling estimated that the Bank’s economic value of equity would decline 27.0% under a 100-basis-point rate decrease. Management cautioned that the model relies on assumptions and is not a precise forecast.

Important facts for investors to verify

  1. Whether the acquired branches and planned new branches deliver expected deposit retention, growth, and operating efficiency, and whether integration costs remain elevated.
  2. Whether nonaccrual loans, deferrals, PPP exposures, charge-offs, and the allowance indicate any emerging credit deterioration as pandemic support changes.
  3. Deposit stability and repricing, particularly the $150.4 million of certificates of deposit due within one year, and the Bank’s reliance on FHLB funding capacity.
  4. The sustainability of reported earnings after considering lower provision expense, loan-sale gains, and the one-time insurance gain, alongside higher operating costs.
  5. The effect of interest-rate movements on net interest margin, securities valuations, and economic value of equity, including the assumptions behind management’s sensitivity analysis.