General
Management's discussion and analysis of financial condition and results of operations at September 30, 2022 and December 31, 2021 and for the three and nine months ended September 30, 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;
· 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 affect our margins and
· yields, the fair value of financial instruments, our volume of loan
originations, or the level of defaults, losses and prepayments on loans,
whether held in portfolio or sold in the secondary market;
39
? changes in the securities markets;
? changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, Federal Deposit Insurance Corporation premiums and capital requirements;
? negative financial impact from unfavorable regulatory penalties and/or
settlements;
? 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;
? the current or anticipated impact of military conflict, terrorism or other
geopolitical events;
changes in accounting policies and practices, as may be adopted by the bank
· regulatory agencies, the Financial Accounting Standards Board, the Securities
and Exchange Commission or the Public Company Accounting Oversight Board;
· our ability to retain key employees;
· a failure in or breach of our operational or security systems or
infrastructure, including cyberattacks;
· the failure to maintain current technologies;
· the inability to successfully implement future information technology
enhancements;
· our compensation expense associated with equity allocated or awarded to our
employees;
· changes in the financial condition, results of operations or prospects of
issuers of securities that we own; and
the effects of the COVID-19 pandemic, or any other public health emergency,
· including the impact of government and regulatory responses, changes in
consumer behavior, supply chain interruptions, loss or unavailability of
employees, and other economic effects.
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 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 ended December 31, 2021, filed with the Securities and Exchange
Commission. As of September 30, 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.
40
Comparison of Financial Condition at September 30, 2022 and December 31, 2021
Total Assets. Total assets were $1.29 billion at September 30, 2022 as compared
to $1.28 billion at December 31, 2021, reflecting an increase of $11.5 million,
or 0.9%. The increase was primarily related to increases in loans receivable of
$96.3 million and deferred tax assets of $6.9 million, offset by decreases in
cash and due from banks of $44.0 million and available for sale securities of
$51.3 million.
Cash and Due from Banks. Cash and due from banks decreased $44.0 million, or
61.0%, to $28.1 million at September 30, 2022 from $72.1 million at December 31,
2021 primarily due to a decrease in deposits held at the Federal Reserve Bank of
New York as excess cash was used to fund loan growth.
Investment Securities Available for Sale. Investment securities available for
sale decreased $51.3 million, or 18.3%, to $229.0 million at September 30, 2022
from $280.3 million at December 31, 2021, primarily due to paydowns, sales,
calls and maturities of $49.1 million and an increase of $32.0 million in
unrealized market losses, partially offset by $30.2 million in purchases. The
excess funds from the paydowns, calls and maturities of securities were used to
fund loan growth.
Net Loans. Total net loans receivable were $951.3 million at September 30, 2022,
an increase of $96.3 million, or 11.3%, as compared to $855.0 million at
December 31, 2021. The increase was primarily due to increases of $70.7 million,
or 18.5%, in indirect automobile loans and $34.1 million, or 10.9%, in
commercial real estate loans, while commercial and industrial loans decreased
$21.7 million, or 20.8%.
Non-accrual loans and non-performing assets decreased $2.0 million, or 30.2%, to
$4.7 million at September 30, 2022 from $6.7 million at December 31, 2021. The
Company had no other real estate owned at the end of either period.
Deferred Tax Assets. Deferred tax assets increased $6.9 million, or 206.0%, to
$10.3 million at September 30, 2022, primarily due to an increase in the
unrealized loss on available for sale securities, driven by the impacts of an
increasing interest rate environment on market valuations. The unrealized loss
on available for sale securities was $35.5 million at September 30, 2022 as
compared to $3.5 million at December 31, 2021.
Total Liabilities. Total liabilities increased $30.7 million, or 2.7%, to $1.19
billion at September 30, 2022, primarily due to an increase in advances from the
FHLB of $19.5 million, an increase in deposits of $8.2 million, and an increase
in accrued expenses and other liabilities of $6.2 million, the latter due to
increases in pension and swap liabilities. These increases were partially offset
by a decrease in mortgagors' escrow accounts of $3.2 million.
Deposits. Deposits increased $8.2 million, or 0.7%, to $1.11 billion at
September 30, 2022 from $1.10 billion at December 31, 2021. Interest bearing
accounts grew $13.7 million, or 1.7%, to $800.9 million while non-interest
bearing balances decreased $5.5 million, or 1.7%, finishing the first nine
months of 2022 at $309.3 million. Of the interest bearing accounts, transaction
accounts including NOW, savings and money market accounts increased $50.0
million, or 7.9%, which was partially offset by a decrease in time deposits of
$36.3 million, or 23.2%. The continued growth in deposits was primarily due to
the addition of four branches during the first quarter of 2021.
Stockholders' Equity. Stockholders' equity decreased $19.2 million to $106.8
million at September 30, 2022, primarily due to an increase in accumulated other
comprehensive loss of $25.9 million partially offset by $6.2 million in net
income. At September 30, 2022, the Company's book value per share was $9.46 and
the Company's ratio of stockholders' equity-to-total assets was 8.26%. At
December 31, 2021, the Company's book value per share was $11.15 and the
Company's ratio of stockholders' equity-to-total assets was 9.83%. Unearned
common stock held by the Bank's employee stock ownership plan was $3.5 million
and $3.7 million at September 30, 2022 and December 31, 2021, respectively.
41
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2022 and 2021
Net Income. Net income for the three months ended September 30, 2022 decreased $578,000, or 21.5%, to $2.1 million, or $0.19 per diluted share, compared to net income of $2.7 million, or $0.25 per diluted share, for the three months ended September 30, 2021. Interest and dividend income increased $1.5 million, or 13.5%, interest expense increased $456,000, or 45.6%, the provision for loan losses increased $1.5 million, non-interest income decreased $250,000, or 15.3%, non-interest expense increased $101,000, or 1.1%, and taxes decreased $234,000, or 28.2%, between comparable quarters. Net income for the nine months ended September 30, 2022 decreased $2.4 million, or 27.8%, to $6.2 million, or $0.56 per diluted share, compared to net income of $8.6 million, or $0.79 per diluted share, for the nine months ended September 30, 2021. Interest and dividend income increased $2.9 million, or 9.0%, interest expense decreased $190,000, or 5.6%, the provision for loan losses increased $3.3 million, or 151.2%, non-interest income decreased $1.1 million, or 19.8%, non-interest expense increased $1.9 million, or 7.2%, and taxes decreased $788,000, or 33.7%, between the comparable nine-month periods. Net Interest Income. Net interest income increased $1.0 million, or 10.3%, to $11.1 million for the three months ended September 30, 2022, compared to $10.1 million for the quarter ended September 30, 2021. The ratio of average interest-earning assets to average interest-bearing liabilities decreased 2.0% to 142.62% while our net interest margin increased by 19 basis points to 3.61% when comparing the third quarter of 2022 to the same period in 2021. Net interest income increased $3.1 million, or 10.7%, to $32.1 million for the nine months ended September 30, 2022, compared to $29.0 million for the nine months ended September 30, 2021. The ratio of average interest-earning assets to average interest-bearing liabilities decreased 0.6% to 143.50% while our net interest margin increased by 11 basis points to 3.55% for the nine months ended September 30, 2022, compared to 3.44% for the same nine month period in 2021.
Interest Income. Interest income increased $1.5 million, or 13.5%, to $12.6 million for the three months ended September 30, 2022 from $11.1 million for the comparable 2021 period. Both interest and fees on loans and interest and
dividends on securities increased as the average balances both increased. For
the three months ended September 30, 2022, the average balance of loans
increased $93.7 million, while the average balance of available for sale
securities increased $21.7 million when compared to the three months ended
September 30, 2021. The average yield on loans decreased 6 basis points, while
the average yield on available for sale securities increased 52 basis points.
Loan yields were driven lower mainly due to the reduction in the overall risk
rating of our indirect loan portfolio as both competition for higher yielding
loans and our desire to manage long term credit quality had some negative impact
on interest revenue. The average yield of interest-earning assets increased by
32 basis points to 4.08% and the average balances of interest-earning assets
increased $51.3 million, or 4.4%.
Interest income increased $2.9 million, or 9.0%, to $35.3 million for the nine
months ended September 30, 2022 from $32.3 million for the comparable 2021
period. Interest and dividends on securities and interest and fees on loans both
increased. For the nine months ended September 30, 2022, the average balance of
loans increased $35.8 million, while the average balance of available for sale
securities increased $87.4 million when compared to the nine months ended
September 30, 2021. The average yield on loans increased 3 basis points, while
the average yield on available for sale securities increased 26 basis points.
The average yield of interest-earning assets increased by 7 basis points to
3.91% while the average balances of interest-earning assets increased $80.3
million, or 7.1%.
Interest Expense. Interest expense increased $456,000, or 45.6%, from $1.0
million for the quarter ended September 30, 2021, to $1.5 million for the
quarter ended September 30, 2022. The average cost of interest-bearing
liabilities increased 19 basis points to 0.68% for the quarter ended September
30, 2022 while the average balance of total interest-bearing liabilities
increased $52.0 million, or 6.5%, to $855.2 million. For the three months ended
September 30, 2022 and 2021, the average cost of interest-bearing deposits
increased by 17 basis points. An increase of $95.4 million, or 16.1%, in the
average balance of our core deposits was partially offset by a decrease of $48.8
million, or 28.2%, in the average balance of certificates of deposit.
42
Interest expense decreased $190,000, or 5.6%, from $3.4 million for the nine
months ended September 30, 2021, to $3.2 million for the nine months ended
September 30, 2022. The average cost of interest-bearing liabilities decreased 7
basis points to 0.51% for the nine months ended September 30, 2022, which was
offset by an increase in the average balance of total interest-bearing
liabilities of $60.9 million, or 7.8%, to $841.2 million. For the nine-month
periods ended September 30, 2022 and 2021, the average cost of interest-bearing
deposits decreased by 6 basis points. An increase of $119.2 million, or 21.7%,
in the average balance of our core deposits was partially offset by a decrease
of $45.5 million, or 24.9%, in the average balance of certificates of deposit.
Provision for Loan Losses. We recorded a provision for loan losses of $545,000
for the quarter ended September 30, 2022, which represented a $1.5 million
increase from a credit of $954,000 for the prior year comparable quarter. We
recorded a provision for loan losses of $1.1 million for the nine months ended
September 30, 2022, which represented a $3.3 million increase from a credit of
$2.2 million for the nine months ended September 30, 2021. In 2021, the credits
to loan losses for the three and nine months ended September 30, 2021 were
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 economic conditions as our customers showed signs of recovering
from the pandemic. An increase in loan balances in 2022 was the primary factor
leading to the increase in the provision.
Net charge-offs increased $84,000 to $222,000 for the quarter ended September
30, 2022 from $138,000 for the comparable quarter in 2021 primarily due to
increased charge-offs in our indirect automobile portfolio as loan balances
increased. Net charge-offs for the nine months ended September 30, 2022 totaled
$179,000 compared to net charge-offs of $428,000 for the comparable period in
2021. The year-to-date decrease in 2022 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. There was a general overall improvement in loan
quality during the first nine months of 2022 as the percentage of overdue
account balances to total loans decreased to 1.45% as of September 30, 2022 from
1.58% as of December 31, 2021 and non-performing assets decreased $2.0 million.
Non-Interest Income. Non-interest income totaled $1.4 million for the three
months ended September 30, 2022, a decrease of $250,000, or 15.3%, from the
comparable period in the prior year, due primarily to a decrease in the net gain
on sales of mortgage loans as activity decreased due to fewer originations in
the increasing interest rate environment and as some higher-rate loans were
added to the portfolio. Gain on sales of mortgage loans decreased $355,000, or
70.7%, compared to the prior year quarter as the Company sold $5.1 million of
residential mortgage loans in the third quarter of 2022 as compared to $16.3
million in the third quarter of 2021. The net decrease was partially offset by
an increase in service charges on deposit accounts of $49,000, or 7.4%, as
transaction volume increased and an increase in other non-interest income of
$67,000.
For the nine months ended September 30, 2022, total non-interest income
decreased $1.1 million, or 19.8%, from the comparable period in the prior year.
The reduction between periods was mostly due to the decrease in the gain on the
sale of mortgage loans of $1.3 million, or 61.5%, the 2021 one-time gain from
the collection of a life insurance claim of $195,000 and a net realized loss in
2022 from the sale of securities of $170,000, partially offset by an increase in
service charges on deposit accounts of $234,000, an improvement in investment
advisory income of $120,000, a $69,000 increase in the cash value of life
insurance, and a net improvement of $167,000 in other income items.
Non-Interest Expense. For the third quarter of 2022, non-interest expense
totaled $9.2 million, an increase of $101,000, or 1.1%, over the comparable 2021
period. The increase was primarily due to an increase in salaries and benefits
of $195,000, or 3.8%, due to new hires, annual merit increases, production
incentives and employee benefit increases, as well as the competitive pressures
of the current job market. For the three months ended September 30, 2022,
occupancy expenses increased $37,000, or 3.5%, primarily resulting from
inflationary pressures on our service contracts. Data processing costs increased
$29,000, FDIC insurance costs increased $25,000 and marketing expense increased
by $21,000. These increases were partially offset by decreased professional fees
of $20,000 and a decrease in other non-interest expenses of $179,000, or 10.7%.
43
For the nine months ended September 30, 2022, non-interest expense totaled $27.8
million, an increase of $1.9 million, or 7.2%, over the comparable 2021
period. The increase was primarily due to an increase in salaries and benefits
of $1.6 million, or 11.1%, due to branch expansion, new hires, annual merit
increases, production incentives and employee benefit increases, as well as the
competitive pressures of the current job market. For the nine months ended
September 30, 2022, occupancy expenses increased $342,000, or 11.2%, as a result
of the additional rent, depreciation and other expenses related to branch
expansion. The addition of branches was also primarily responsible for increased
data processing costs of $152,000, increased marketing expense of $105,000 and
increased FDIC insurance costs of $60,000. These increases were partially offset
by decreased professional fees of $83,000 and a decrease in other non-interest
expenses of $357,000, or 7.8%. The decrease in other non-interest expense was
primarily due a reserve put in place in 2021 for potential consumer compliance
issues in the Bank's indirect automobile portfolio. A settlement was reached
with the New York State Department of Financial Services in October of 2022 and
no further material negative impact on earnings is expected.
Income Taxes. Income taxes decreased by $234,000 for the three months ended September 30, 2022 as compared to the same three month period in 2021 as our income before income taxes decreased. Our effective tax rate for the three months ended September 30, 2022 was 22.02% compared to 23.59% for the three months ended September 30, 2021.
Income taxes decreased by $788,000 for the nine months ended September 30, 2022
as compared to the nine months ended September 30, 2021 as our income before
income taxes decreased. Our effective tax rate for the nine months ended
September 30, 2022 was 20.04% compared to 21.44% for the nine months ended
September 30, 2021.
44
Average Balance Sheets for the Three and Nine Months Ended September 30, 2022 and 2021
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 September 30,
2022 2021
Average Interest and Average Interest and
Balance Dividends Yield/Cost(3) Balance Dividends Yield/Cost(3) Assets: Interest bearing depository accounts
$ 26,612 $ 147 2.19 % $ 90,680 $ 34 0.15 % Loans(1) 948,536 11,404 4.77 % 854,822 10,402 4.83 % Available for sale securities 244,543 1,002 1.63 % 222,851 623 1.11 % Total interest-earning assets 1,219,691 12,553 4.08 % 1,168,353 11,059 3.76 % Non-interest-earning assets 85,480 78,220 Total assets $ 1,305,171 $ 1,246,573 Liabilities and equity: NOW accounts $ 163,765 $ 59 0.14 % $ 152,578 $ 59 0.15 % Money market accounts 329,932 820 0.99 % 259,014 359 0.55 % Savings accounts 193,597 134 0.27 % 180,277 72 0.16 % Certificates of deposit 124,217 210 0.67 % 173,013 340 0.78 % Total interest-bearing deposits 811,511 1,223 0.60 % 764,882 830 0.43 % Escrow accounts 13,676 39 1.13 % 12,304 36 1.16 % Federal Home Loan Bank advances 24,870 140 2.23 % 20,858 106 2.02 % Subordinated debt 5,155 54 4.16 % 5,155 28 2.15 % Other interest-bearing liabilities 43,701 233 2.12 % 38,317 170 1.76 % Total interest-bearing liabilities 855,212 1,456 0.68 % 803,199 1,000 0.49 % Non-interest-bearing deposits 310,219 298,713 Other non-interest-bearing liabilities 25,018 20,838 Total liabilities 1,190,449 1,122,750 Total stockholders' equity 114,722 123,823 Total liabilities and stockholders' equity $ 1,305,171
$ 1,246,573 Net interest income $ 11,097 $ 10,059 Interest rate spread 3.40 % 3.27 % Net interest margin(2) 3.61 % 3.42 % Average interest-earning assets to average interest-bearing liabilities 142.62 % 145.46 %
Non-accruing loans are included in the outstanding loan balance. Deferred (1) loan fees included in interest income totaled $25 and $790 for the three
months ended September 30, 2022 and 2021.
(2) Represents the difference between interest earned and interest paid, divided
by average total interest earning assets.
(3) Annualized.
45
For the Nine Months Ended September 30,
2022 2021
Average Interest and Average Interest and
Balance Dividends Yield/Cost(3) Balance Dividends Yield/Cost(3)
(Dollars in thousands)Assets:
Interest bearing depository accounts $ 34,762 $ 210 0.81 % $ 77,632 $ 66 0.11 % Loans(1) 905,004 32,212 4.76 % 869,238 30,722 4.73 % Available for sale securities 267,266 2,844 1.42 % 179,901 1,560 1.16 % Total interest-earning assets 1,207,032 35,266 3.91 % 1,126,771 32,348 3.84 % Non-interest-earning assets 82,152 70,646 Total assets $ 1,289,184 $ 1,197,417 Liabilities and equity: NOW accounts $ 161,500 $ 172 0.14 % $ 145,830 $ 184 0.17 % Money market accounts 317,509 1,583 0.67 % 231,849 1,042 0.60 % Savings accounts 190,218 279 0.20 % 172,338 214 0.17 % Certificates of deposit 137,610 650 0.63 % 183,136 1,292 0.94 % Total interest-bearing deposits 806,837 2,684 0.44 % 733,153 2,732 0.50 % Escrow accounts 10,579 89 1.12 % 9,727 84 1.15 % FHLB and FRB advances 18,586 293 2.11 % 32,178 477 1.98 % Subordinated debt 5,155 122 3.16 % 5,155 85 2.20 % Other interest-bearing liabilities 34,320 504 1.96 % 47,060 646 1.84 % Total interest-bearing liabilities 841,157 3,188 0.51 % 780,213 3,378 0.58 % Non-interest-bearing deposits 306,748 276,508 Other non-interest-bearing liabilities 23,023 19,844 Total liabilities 1,170,928 1,076,565 Total stockholders' equity 118,256 120,852 Total liabilities and stockholders' equity $ 1,289,184
$ 1,197,417 Net interest income $ 32,078 $ 28,970 Interest rate spread 3.40 % 3.26 % Net interest margin(2) 3.55 % 3.44 % Average interest-earning assets to average interest-bearing liabilities 143.50 % 144.42 %
Non-accruing loans are included in the outstanding loan balance. Deferred (1) loan fees included in interest income totaled $1,129 and $2,007 for the nine
months ended September 30, 2022 and 2021.
(2) Represents the difference between interest earned and interest paid, divided
by average total interest earning assets.
(3) Annualized.
46
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). The
Company does not have any excludable out-of-period items or adjustments.
Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Compared to Three Months Ended Compared to Nine Months Ended
September 30, 2021 September 30, 2021
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
Interest income:
Interest bearing depository accounts $ (41) $ 154 $ 113 $ (55) $ 199 $ 144
Loans receivable 1,128 (126) 1,002 1,271 219 1,490
Available for sale securities 66 313 379 875 409 1,284
Total interest-earning assets 1,153 341 1,494 2,091 827 2,918
Interest expense:
Deposits 42 351 393 185 (230) (45)
Escrow accounts 4 (1) 3 6 (4) 2Federal Home Loan Bank advances 22 12 34 (213) 29 (184) Subordinated debt - 26 26 - 37 37 Total interest-bearing liabilities 68 388 456 (22) (168) (190)
Net increase in net interest income $ 1,085 $ (47) $ 1,038 $ 2,113 $ 995 $ 3,108
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.
47
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 September 30, 2022 (dollars in
thousands).
Net Economic Value as a
Net Economic Value Percentage of Assets
Dollar Dollar Percent EVE PercentBasis Point Change in Interest Rates Amount Change Change
Ratio Change 400 $ 164,967 $ (16,396) (9.0) % 14.13 % (1.5) % 300 170,188 (11,175) (6.2) % 14.30 % (0.3) % 200 174,494 (6,869) (3.8) % 14.38 % 0.2 % 100 178,781 (2,582) (1.4) % 14.43 % 0.6 % 0 181,363 - - % 14.34 % - % (100) 174,528 (6,835) (3.8) % 13.52 % (5.7) % (200) $ 151,106 $ (30,257) (16.7) % 11.49 % (19.9) % 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, sales and calls
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
and security 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 $16.0
million and $5.8 million for the nine-month periods ended September 30, 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 $84.3 million
and $74.1 for the nine-month periods ended September 30, 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 and the associated deposits in 2021. Cash outlays
for
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the purchase of securities decreased from $181.9 million for the nine-month period ended September 30, 2021 to $30.2 million for the period ended September 30, 2022. We had cash outflows from a net increase in loans of $101.3 million for the nine months ended September 30, 2022 compared to a cash inflow of $42.3 million for the nine months ended September 30, 2021. Deposit and borrowing cash flows have traditionally comprised most of our financing activities which resulted in net cash provided of $24.3 million in the nine months ended September 30, 2022, and $89.4 million in the comparable 2021 period.
At September 30, 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 $ 28,110
Unencumbered securities 211,716
Amount available from the Paycheck Protection Plan Loan Facility 581
Availability of borrowings:
Zions Bank line of credit 10,000
Pacific Coast Bankers Bank line of credit
50,000
Other secured FHLB credit facility
161,709
Total available sources of funds $
462,116
The following table summarizes our main contractual obligations and other
commitments to make future payments as of September 30, 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.
September 30, 2022
After One but
One Year or within Five
(In thousands) Total Less Years After 5 Years
Payments Due:
Federal Home Loan Bank advances $ 37,541 $ 37,541 $ - $ -
Operating lease agreements 8,555 854 3,139 4,562
Subordinated debt 5,155 - - 5,155
Time deposits with stated maturity dates 120,554 92,293 28,261 -
Total contractual obligations $ 171,805 $ 130,688 $ 31,400 $ 9,717
We also have obligations under our post retirement plan and other benefit plans 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 of Rhinebeck 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.
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