Rhinebeck Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited consolidated results for the company and Rhinebeck Bank. Dollar amounts below are in millions unless stated otherwise. Prior-year comparisons are with Q1 2019 for income and cash flows, and December 31, 2019 for balance-sheet amounts.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparison |
|---|---|---|
| Net interest income | $8.32 | Up 9.9% year over year |
| Net interest margin | 3.62% | Down 17 basis points year over year |
| Provision for loan losses | $1.20 | Up from $0.78 |
| Noninterest income | $1.56 | Up 23.4% |
| Noninterest expense | $7.30 | Up from $6.92 |
| Net income | $1.08; $0.10 per basic and diluted share | Up 18.0% from $0.91; $0.09 per share |
| Total assets | $1,007.3 | Up 3.4% from year-end |
| Net loans | $810.4 | Up 2.1% from year-end |
| Deposits | $784.7 | Up 1.5% from year-end |
| FHLB advances | $79.6 | Up from $66.3 at year-end |
| Stockholders’ equity | $113.9; 11.3% of assets | Up $4.0 from year-end |
- Interest and dividend income rose 14.8% to $10.74 million, reflecting growth in average earning assets; interest expense rose 35.3% to $2.42 million. Management attributed higher income primarily to increased indirect auto and commercial lending.
- The allowance for loan losses increased to $6.62 million from $5.95 million. The quarter included $0.54 million of net charge-offs, compared with $0.24 million a year earlier. Nonaccrual loans were $8.24 million, down 7.7% from year-end; management reported nonperforming-loan and nonperforming-asset ratios of 1.02% and 0.95%, respectively.
- Operating cash flow was $3.76 million, investing cash flow was negative $17.55 million, and financing cash flow was positive $23.61 million. Cash and due from banks ended the quarter at $21.80 million, up $9.82 million.
- Liquidity sources include deposits, loan and securities cash flows, and FHLB borrowing capacity of $503.5 million. At quarter-end, $43.2 million of FHLB advances were due within 12 months; $197.3 million of certificates of deposit matured within one year. Loan commitments and standby letters of credit totaled $90.0 million.
- The Bank reported a 10.68% Tier 1 leverage ratio and 12.04% Tier 1 risk-based and common equity Tier 1 ratios, and was categorized as well capitalized. The company’s book value per share was $10.23.
Material changes and unusual items
- Net income increased despite higher credit provisioning and funding costs. Net interest margin declined, and the interest-rate spread fell to 3.24% from 3.44%.
- Net loans grew $16.9 million. Commercial real estate loans increased $12.6 million; indirect auto balances also grew. The allowance increase reflected portfolio growth and COVID-19-related deterioration in economic assumptions.
- Available-for-sale securities were $115.1 million. Their unrealized position improved substantially: accumulated other comprehensive income for these securities moved from a $0.2 million loss at year-end to a $2.4 million gain at March 31. Management attributed reported unrealized losses to market-rate changes and did not consider them other-than-temporary.
- Adoption of lease accounting on January 1, 2020 added approximately $6.7 million of right-of-use assets and a corresponding lease liability; this was a balance-sheet recognition change, not a reported operating gain.
- Federal Reserve rate cuts in March brought the federal funds target range to 0.00%–0.25%, increasing pressure on asset yields and future net interest income.
Outlook, management commentary and risks
- Management warned that COVID-19 and the related economic contraction could adversely affect financial condition, capital, liquidity and results; the extent and duration were uncertain. Risks include borrower distress, rising delinquencies and charge-offs, weaker collateral values, reduced fee income, lower net interest margins, and increased cybersecurity exposure from remote work.
- Management highlighted exposure to hotels, restaurants, retail and related commercial real estate borrowers, as well as indirect auto lending. It stated that the pandemic’s potential credit losses could be material but were not then reliably estimable. No specific earnings or financial guidance was provided.
- As of April 28, after quarter-end, the Bank had received SBA approval for 566 PPP applications totaling $83.3 million and had funded 331 loans totaling $70.1 million. None were funded at March 31. As of that date, the Bank reported $57.1 million of related Federal Reserve facility funding received and another $8.7 million submitted.
- As of April 24, the Bank had received 1,868 payment-deferral requests from 1,565 customers. The reported 1,729 loan accounts in the detailed table totaled $85.8 million; approximately $3.1 million of payments had been deferred. These are subsequent-period figures, not March 31 balances.
- Interest-rate sensitivity modeling estimated a 33.0% decline in economic value of equity under an immediate 400-basis-point rate increase and a 0.8% decline under a 100-basis-point decrease; management said modeled changes were within board policy limits and cautioned that results are not a precise forecast.
- Management reported no pending legal proceeding expected to have a material adverse effect and no material goodwill or intangible-asset write-down at March 31. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Subsequent-quarter credit performance, including actual utilization and repayment outcomes for PPP lending and COVID-19 payment deferrals.
- Whether the higher loan-loss provision proves sufficient as pandemic-related borrower stress, delinquencies and charge-offs develop.
- Loan concentration and collateral exposure in commercial real estate and indirect auto lending, including the condition of borrowers in affected industries.
- Deposit retention and funding costs as certificates mature, and liquidity needs as lending commitments are drawn.
- Net interest margin and earnings sensitivity to near-zero rates, alongside capital ratios and liquidity capacity.