United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2021

or

☐   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from               to               

Commission File No. 001-38779

Rhinebeck Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland	83-2117268
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
2 Jefferson Plaza, Poughkeepsie, New York	12601
(Address of Principal Executive Offices)	(Zip Code)

(845) 454-8555

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	RBKB	The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

Yes     ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes     ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer  ☐	Accelerated filer  ☐
Non-accelerated filer   ☒	Smaller reporting company   ☒
	Emerging growth company   ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     ☐    No   ☒

As of November 1, 2021, there were 11,296,770 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Statements of Financial Condition at September 30, 2021 and December 31, 2020	1
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50
PART II. OTHER INFORMATION		51
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
	SIGNATURES	53

PART I — FINANCIAL INFORMATION

ITEM 1.

Rhinebeck Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition (Unaudited)

(In thousands, except share and per share data)

	September 30,		December 31,
	2021		2020
Assets
Cash and due from banks	$	114,587	$	93,485
Available for sale securities (at fair value)		240,389		102,933
Loans receivable (net of allowance for loan losses of $9,034 and $11,633, respectively)		833,841		873,813
Federal Home Loan Bank stock		1,417		2,787
Accrued interest receivable		3,743		3,819
Cash surrender value of life insurance		28,971		18,877
Deferred tax assets (net of valuation allowance of $1,694 and $1,760, respectively)		3,548		3,703
Premises and equipment, net		19,164		18,839
Other real estate owned		89		139
Goodwill		2,235		1,410
Intangible assets, net		460		199
Other assets		14,261		8,825
Total assets	$	1,262,705	$	1,128,829
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Non-interest bearing	$	316,521	$	244,344
Interest bearing		770,866		685,020
Total deposits		1,087,387		929,364
Mortgagors’ escrow accounts		4,264		8,494
Advances from the Federal Home Loan Bank		20,145		50,674
Subordinated debt		5,155		5,155
Accrued expenses and other liabilities		21,550		18,643
Total liabilities		1,138,501		1,012,330
Stockholders’ Equity
Preferred stock (par value $0.01 per share; 5,000,000 authorized, no shares issued)		—		—
Common stock (par value $0.01; authorized 25,000,000; issued and outstanding 11,296,770 at September 31, 2021 and 11,303,059 at December 31, 2020, respectively)		112		111
Additional paid-in capital		46,468		46,038
Unearned common stock held by the employee stock ownership plan ("ESOP")		(3,764)		(3,928)
Retained earnings		86,640		78,069
Accumulated other comprehensive loss:
Net unrealized (loss) gain on available for sale securities, net of taxes		(598)		993
Defined benefit pension plan, net of taxes		(4,654)		(4,784)
Total accumulated other comprehensive loss		(5,252)		(3,791)
Total stockholders’ equity		124,204		116,499
Total liabilities and stockholders’ equity	$	1,262,705	$	1,128,829

See accompanying notes to consolidated financial statements

1

Rhinebeck Bancorp, Inc. and Subsidiary

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest and Dividend Income
Interest and fees on loans	$	10,402	$	10,386	$	30,722	$	31,001
Interest and dividends on securities		623		476		1,560		1,790
Other income		34		12		66		36
Total interest and dividend income		11,059		10,874		32,348		32,827
Interest Expense
Interest expense on deposits		866		1,553		2,816		5,429
Interest expense on borrowings		134		293		562		1,072
Total interest expense		1,000		1,846		3,378		6,501
Net interest income		10,059		9,028		28,970		26,326
(Credit to) provision for loan losses		(954)		2,250		(2,171)		5,705
Net interest income after (credit to) provision for loan losses		11,013		6,778		31,141		20,621
Non-interest Income
Service charges on deposit accounts		664		558		1,891		1,705
Net realized loss on sales and calls of securities		—		—		—		(29)
Net gain on sales of loans		502		976		2,179		2,382
Increase in cash surrender value of life insurance		158		97		412		290
Net gain from sale of other real estate owned		—		42		2		42
Gain on disposal of premises and equipment		—		13		17		13
Gain on life insurance		—		—		195		—
Investment advisory income		237		380		812		942
Other		78		30		228		61
Total non-interest income		1,639		2,096		5,736		5,406
Non-interest Expense
Salaries and employee benefits		5,162		4,158		14,749		12,305
Occupancy		1,060		885		3,052		2,613
Data processing		450		325		1,269		1,040
Professional fees		439		380		1,375		1,055
Marketing		119		95		353		320
FDIC deposit insurance and other insurance		201		248		542		613
Other real estate owned expense		4		54		7		80
Amortization of intangible assets		27		11		69		32
Other		1,676		1,276		4,551		3,438
Total non-interest expense		9,138		7,432		25,967		21,496
Income before income taxes		3,514		1,442		10,910		4,531
Provision for income taxes		829		292		2,339		958
Net income	$	2,685	$	1,150	$	8,571	$	3,573
Earnings per common share:
Basic	$	0.25	$	0.10	$	0.80	$	0.33
Diluted	$	0.25	$	0.10	$	0.79	$	0.33
Weighted average shares outstanding, basic		10,774,038		10,732,321		10,755,342		10,726,867
Weighted average shares outstanding, diluted		10,946,935		10,732,321		10,914,429		10,726,867

See accompanying notes to consolidated financial statements

2

Rhinebeck Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands, except share and per share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net Income	$	2,685	$	1,150	$	8,571	$	3,573
Other Comprehensive (Loss) Income:
Unrealized holding (losses) gains arising during the period		(597)		(545)		(2,014)		2,006
Reclassification adjustment for losses included in net realized loss on sales and calls of securities on the consolidated statements of income		—		—		—		29
Net unrealized (losses) gains on available for sale securities		(597)		(545)		(2,014)		2,035
Tax effect (a)		125		114		423		(429)
Unrealized (losses) gains on available for sale securities, net of tax		(472)		(431)		(1,591)		1,606
Defined benefit pension plan:
Actuarial (losses) gains arising during the period		(152)		806		(105)		(291)
Reclassification adjustment for amortization of net actuarial losses (b)		90		71		269		214
Total		(62)		877		164		(77)
Tax effect (c)		13		(184)		(34)		16
Defined benefit pension plan (losses) gains, net of tax		(49)		693		130		(61)
Other comprehensive (loss) income		(521)		262		(1,461)		1,545
Total Comprehensive Income	$	2,164	$	1,412	$	7,110	$	5,118

(a) Includes $(6) for the nine months ended September 30, 2020, for tax effect of realized losses which are included in the provision for income taxes on the consolidated statements of income.

(b) Included in other non-interest expense on the consolidated statements of income.

(c) Includes $19 and $56 for the three and nine months ended September 30, 2021, respectively, and $15 and $45 for the three and nine months ended September 30, 2020, respectively, for tax effect of amortization of net actuarial loss included in the provision for income taxes on the consolidated statements of income.

See accompanying notes to consolidated financial statements

3

Rhinebeck Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share and per share data)

					Unearned				Accumulated
			Additional		Common				Other
	Common		Paid-in		Stock Held		Retained		Comprehensive
	Stock		Capital		by the ESOP		Earnings		Loss		Total
Balance at December 31, 2019	$	111	$	45,869	$	(4,146)	$	72,152	$	(4,104)	$	109,882
Net income		—		—		—		1,075		—		1,075
Other comprehensive income		—		—		—		—		2,885		2,885
ESOP shares committed to be allocated		—		—		55		—		—		55
Balance at March 31, 2020	$	111	$	45,869	$	(4,091)	$	73,227	$	(1,219)	$	113,897
Net income		—		—		—		1,348		—		1,348
Other comprehensive income		—		—		—		—		(1,602)		(1,602)
ESOP shares committed to be allocated		—		(17)		54		—		—		37
Balance at June 30, 2020	$	111	$	45,852	$	(4,037)	$	74,575	$	(2,821)	$	113,680
Net income		—		—		—		1,150		—		1,150
Other comprehensive income		—		—		—		—		262		262
ESOP shares committed to be allocated		—		(18)		55		—		—		37
Share-based compensation expense		—		61		—		—		—		61
Balance at September 30, 2020	$	111	$	45,895	$	(3,982)	$	75,725	$	(2,559)	$	115,190
Balance at December 31, 2020	$	111	$	46,038	$	(3,928)	$	78,069	$	(3,791)	$	116,499
Net income		—		—		—		3,321		—		3,321
Other comprehensive loss		—		—		—		—		(1,169)		(1,169)
ESOP shares committed to be allocated		—		(3)		55		—		—		52
Share-based compensation expense		—		153		—		—		—		153
Balance at March 31, 2021	$	111	$	46,188	$	(3,873)	$	81,390	$	(4,960)	$	118,856
Net income		—		—		—		2,565		—		2,565
Other comprehensive income		—		—		—		—		229		229
ESOP shares committed to be allocated		—		3		54		—		—		57
Share-based compensation expense		—		155		—		—		—		155
Balance at June 30, 2021	$	111	$	46,346	$	(3,819)	$	83,955	$	(4,731)	$	121,862
Net income		—		—		—		2,685		—		2,685
Other comprehensive income		—		—		—		—		(521)		(521)
ESOP shares committed to be allocated		—		4		55		—		—		59
Share-based compensation expense		—		156		—		—		—		156
Exercise of options		—		39		—		—		—		39
Share redemption for tax withholding on restricted stock vesting		1		(77)		—		—		—		(76)
Balance at September 30, 2021	$	112	$	46,468	$	(3,764)	$	86,640	$	(5,252)	$	124,204

See accompanying notes to consolidated financial statements

4

Rhinebeck Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(In thousands, except share and per share data)

	Nine Months Ended September 30,
	2021		2020
Cash Flows from Operating Activities
Net income	$	8,571	$	3,573
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion of premiums and discounts on investments, net		216		542
Net realized loss on sales and calls of securities		—		29
Net realized gain on sale of other real estate owned		(2)		(42)
(Credit to) provision for loan losses		(2,171)		5,705
Loans originated for sale		(56,534)		(65,974)
Proceeds from sale of loans		58,518		68,745
Net gain on sale of loans		(2,179)		(2,382)
Amortization of intangible assets		69		32
Depreciation and amortization		1,111		1,014
Gain from disposal of premises and equipment		(17)		(13)
Deferred income tax expense (benefit)		543		(1,474)
Increase in cash surrender value of insurance		(412)		(290)
Decrease (increase) in accrued interest receivable		76		(994)
Expense of earned ESOP shares		168		129
Share-based compensation expense		464		61
Increase in other assets		(5,426)		(8,315)
Increase in accrued expenses and other liabilities		2,818		5,914
Net cash provided by operating activities		5,813		6,260
Cash Flows from Investing Activities
Proceeds from sales and calls of securities		2,000		6,997
Proceeds from maturities and principal repayments of securities		40,238		28,142
Purchases of securities		(181,924)		(25,210)
Net redemptions of FHLB Stock		1,370		460
Net decrease (increase) in loans		42,337		(104,977)
Purchases of bank owned life insurance		(10,023)		(41)
Purchases of bank premises and equipment		(1,305)		(1,548)
Net proceeds from life insurance		341		—
Net cash received from acquisition (Note 2)		32,767		—
Net increase of other real estate owned		—		(31)
Proceeds from sale of other real estate owned		50		2,221
Net cash used in investing activities		(74,149)		(93,987)
Cash Flows from Financing Activities
Net increase in demand deposits, NOW, money market and savings accounts		156,442		151,023
Net decrease in time deposits		(32,281)		(8,171)
Decrease in mortgagors' escrow accounts		(4,230)		(4,075)
Net decrease in short-term debt		(15,030)		(2,223)
Net decrease in long-term debt		(15,499)		(9,224)
Proceeds from exercise of stock options		36		—
Net cash provided by financing activities		89,438		127,330
Net increase in cash and due from banks		21,102		39,603
Cash and Due from Banks
Beginning balance		93,485		11,978
Ending balance	$	114,587	$	51,581
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Cash paid for interest	$	3,464	$	6,650
Cash (received) paid for income taxes	$	(40)	$	2,897
Noncash Investing Activities
Transfer of loans to other real estate owned	$	—	$	1,858
Fair value of assets acquired	$	1,277	$	—
Fair value of liabilities assumed	$	34,044	$	—

See accompanying notes to consolidated financial statements

5

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

1.    Nature of Business and Significant Accounting Policies

The financial statements include accounts of Rhinebeck Bancorp, Inc. (the “Company”), a stock holding company, and its wholly-owned subsidiary, Rhinebeck Bank (the “Bank”), a New York chartered stock savings bank. The primary purpose of the Company is to act as a holding company for the Bank. The Bank provides a full range of banking and financial services to consumer and commercial customers through its fifteen branches and two representative offices located in Dutchess, Ulster, Orange, and Albany counties. Financial services, including investment advisory and financial product sales, are offered through a division of the Bank doing business as Rhinebeck Asset Management (“RAM”).

The unaudited consolidated financial statements reflect all adjustments, which in the opinion of management, are necessary for a fair presentation of the results of the interim periods and are of a normal and recurring nature. Operating results for the three or nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or for any other period.

The unaudited financial statements and other financial information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements, and related notes, of Rhinebeck Bancorp, Inc. at and for the year ended December 31, 2020 contained in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 25, 2021.

For more information regarding the Company’s significant accounting policies, see the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission. As of September 30, 2021, 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, 2020, with the exception of an additional disclosure for derivative financial instruments contained herein.

Basis of Financial Statements Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, as of the date of the consolidated statements of financial condition and reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of securities, the evaluation of investment securities for other-than-temporary impairment, the evaluation of goodwill for impairment, the valuation of deferred tax assets and the determination of pension obligations.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

On March 12, 2021, the Bank completed a branch purchase and assumption transaction with ConnectOne Bank. Management concluded that the acquisition represented a business combination, which is accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition date. For additional information, see Note 2.

6

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

Reclassifications

Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year’s presentation.

COVID-19

Significant progress has been made to combat the outbreak of COVID-19; however, the global pandemic has adversely impacted a broad range of industries in which the Company's customers operate and could still impair their ability to fulfill their financial obligations to the Company. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.  If there is a resurgence in the virus or variant strains of the virus increase, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. It is not possible to know the full extent of the impact of COVID-19 and the effects it will have on the Company's future operations.

Impact of Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 on “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires credit losses on most financial assets be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. The measurement of expected credit losses is based upon relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. On October 16, 2019, the FASB approved a delay for conversion to the CECL methodology to January 2023 for smaller reporting companies, other public business entities, private companies and non-profits. The Company is currently assessing the effect of ASU No. 2016-13 and has engaged with a software vendor to assist in its efforts.

Emerging Growth Company Status

As an emerging growth company, the Company may delay adoption of new or revised financial accounting standards until such date that the standards are required to be adopted by non-issuer companies. If such standards would not apply to non-issuer companies, no deferral would be applicable. The Company is taking advantage of the benefits of the extended transition periods allowed under the Jumpstart Our Business Startups Act.

Accordingly, the Company’s consolidated financial statements may not be comparable to those of public companies that adopt new or revised financial accounting standards as of an earlier date. The effective dates of the recent accounting standards reflect those that relate to non-issuer companies.

7

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

2.    Acquisition

On October 26, 2020, the Bank entered into a branch purchase and assumption agreement with ConnectOne Bank, the wholly-owned subsidiary of ConnectOne Bancorp, Inc., to acquire two branches located in Orange County, New York, as well as certain deposits and other assets and liabilities. The transaction closed on March 12, 2021 with the transfer of $33,863 of deposits. Management concluded that the acquisition represented a business combination, which is accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition date.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the March 12, 2021 transaction with ConnectOne, and reflects all adjustments made to the fair value of the opening balance sheet through September 30, 2021:

	March 12,
Fair value of consideration transferred, assets acquired and liabilities assumed	2021
Total cash received on acquisition	$	32,767
Assets acquired
Fixed assets		113
Reimbursed expenses		9
Core deposit intangible(1)		330
Total assets acquired		452
Liabilities assumed
Deposits		33,863
Mark-to-market adjustment		181
Total liabilities assumed		34,044
Net liabilities acquired		(33,592)
Goodwill recognized	$	825

_____________________________

(1) The core deposit intangible was determined to have an estimated life of approximately 13 years.

The Company incurred $71 in expenses related to the acquisition during the nine months ended September 30, 2021. Acquisition expenses, including professional fees, are included in the total non-interest expense line item in the condensed consolidated statement of income.

8

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

3.    Investment Securities

The amortized cost, gross unrealized gains and losses and fair values of available for sale securities are as follows:

	September 30, 2021
			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	40,397	$	1	$	(209)	$	40,189
U.S. government agency mortgage-backed securities–residential		157,595		706		(1,404)		156,897
U.S. government agency securities		26,810		107		(39)		26,878
Municipal securities(1)		7,005		32		(27)		7,010
Corporate bonds		8,700		107		(32)		8,775
Other		640		—		—		640
Total	$	241,147	$	953	$	(1,711)	$	240,389

	December 31, 2020
			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value
U.S. government agency mortgage-backed securities–residential	$	88,197	$	1,350	$	(277)	$	89,270
U.S. government agency securities		7,013		148		—		7,161
Municipal securities(1)		1,445		31		—		1,476
Corporate bonds		4,400		49		(3)		4,446
Other		621		—		(41)		580
Total	$	101,676	$	1,578	$	(321)	$	102,933

⁽¹⁾ The issuers of municipal securities are all within New York State.

The following table presents the fair value and unrealized losses of the Company’s available for sale securities with gross unrealized losses aggregated by the length of time the individual securities have been in a continuous unrealized loss position:

	September 30, 2021
	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasury securities	$	30,169	$	(209)	$	—	$	—	$	30,169	$	(209)
U.S. government agency mortgage-backed securities-residential		103,868		(1,186)		11,974		(218)		115,842		(1,404)
U.S. government agency securities		14,719		(39)		—		—		14,719		(39)
Municipal Securities		2,339		(27)		—		—		2,339		(27)
Corporate Bonds		3,474		(26)		244		(6)		3,718		(32)
Total	$	154,569	$	(1,487)	$	12,218	$	(224)	$	166,787	$	(1,711)

9

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

	December 31, 2020
	Less Than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. government agency mortgage-backed securities-residential	$	30,243	$	(269)	$	293	$	(8)	$	30,536	$	(277)
Corporate Bonds		747		(3)		—		—		747		(3)
Other		522		(41)		—		—		522		(41)
Total	$	31,512	$	(313)	$	293	$	(8)	$	31,805	$	(321)

At September 30, 2021, the Company had 119 individual available-for-sale securities in an unrealized loss position with unrealized losses totaling $1,711 with an aggregate depreciation of 1.03% from the Company’s amortized cost.

Management believes that none of the unrealized losses on available for sale securities are other-than-temporary because substantially all of the unrealized losses in the Company’s investment portfolio relate to market interest rate changes on debt and mortgage-backed securities issued either directly by the government or from government sponsored enterprises. The Company does not intend to sell the securities and it is not likely that the Company will be required to sell the securities before recovery of their amortized cost basis, which may be maturity; therefore, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2021.

The amortized cost and fair value of available for sale debt securities at September 30, 2021 and December 31, 2020, by contractual maturities, are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary:

	September 30, 2021				December 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity:
Within 1 year	$	12,916	$	12,915	$	102	$	102
After 1 but within 5 years		48,948		48,832		2,155		2,155
After 5 but within 10 years		20,903		20,961		9,946		10,162
After 10 years		145		145		655		664
Total Maturities		82,912		82,853		12,858		13,083
Mortgage-backed securities		157,595		156,896		88,197		89,270
Other		640		640		621		580
Total	$	241,147	$	240,389	$	101,676	$	102,933

At September 30, 2021 and December 31, 2020, available for sale securities with a carrying value of $11,679 and $18,123, respectively, were pledged to secure Federal Home Loan Bank of New York (“FHLB”) borrowings. In addition, at September 30, 2021 and December 31, 2020, $1,053 and $1,059 of available for sale securities were pledged to secure borrowings at the Federal Reserve Bank of New York (“FRB”), respectively.

During the nine months ended September 30, 2021, there was $2,000 in proceeds from the call of available for sale securities with no gross gains or losses realized.  

10

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

4.    Loans and Allowance for Loan Losses

A summary of the Company’s loan portfolio is as follows:

	September 30,		December 31,
	2021		2020
Commercial real estate loans:
Construction	$	5,682	$	5,392
Non-residential		236,240		248,349
Multi-family		41,233		30,379
Residential real estate loans		35,830		39,239
Commercial and industrial loans(1)		117,755		154,016
Consumer loans:
Indirect automobile		377,116		376,260
Home equity		12,253		14,165
Other consumer		8,240		8,816
Total gross loans		834,349		876,616
Net deferred loan costs		8,526		8,830
Allowance for loan losses		(9,034)		(11,633)
Total net loans	$	833,841	$	873,813

⁽¹⁾ Includes $44,080 and $75,366 in U.S. Small Business Administration (“SBA”), paycheck protection program (“PPP”) loans at September 30, 2021 and December 31, 2020, respectively.

At September 30, 2021 and December 31, 2020, the unpaid principal balances of loans held for sale, included in the residential real estate category above, were $2,912 and $2,718, respectively.

The following tables present the classes of the loan portfolio summarized by the pass category and the criticized and classified categories of special mention and substandard within the internal risk system:

	September 30, 2021
	Pass		Special Mention		Substandard		Total
Commercial real estate:
Construction	$	5,682	$	—	$	—	$	5,682
Non-residential		228,816		5,189		2,235		236,240
Multifamily		41,233		—		—		41,233
Residential real estate		33,347		—		2,483		35,830
Commercial and industrial		111,685		5,047		1,023		117,755
Consumer:
Indirect automobile		376,639		—		477		377,116
Home equity		12,029		—		224		12,253
Other consumer		8,193		—		47		8,240
Total	$	817,624	$	10,236	$	6,489	$	834,349

11

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

	December 31, 2020
	Pass		Special Mention		Substandard		Total
Commercial real estate:
Construction	$	5,392	$	—	$	—	$	5,392
Non-residential		240,778		5,468		2,103		248,349
Multifamily		30,379		—		—		30,379
Residential real estate		36,597		—		2,642		39,239
Commercial and industrial		147,748		5,395		873		154,016
Consumer:
Indirect automobile		375,270		—		990		376,260
Home equity		13,819		—		346		14,165
Other consumer		8,768		—		48		8,816
Total	$	858,751	$	10,863	$	7,002	$	876,616

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The past due status of all classes of loans is determined based on contractual due dates for loan payments.

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans:

	September 30, 2021
							Greater Than
			30-59 Days		60-89 Days		90 Days Past		Total Loans
	Current		Past Due		Past Due		Due		Receivable		Non-accrual
Commercial real estate:
Construction	$	5,682	$	—	$	—	$	—	$	5,682	$	—
Non-residential		232,909		—		1,243		2,088		236,240		2,088
Multifamily		41,233		—		—		—		41,233		—
Residential real estate		34,561		58		—		1,211		35,830		2,483
Commercial and industrial		116,418		409		186		742		117,755		884
Consumer:
Indirect automobile		371,303		4,576		790		447		377,116		477
Home equity		11,868		214		45		126		12,253		224
Other consumer		8,051		107		35		47		8,240		47
Total	$	822,025	$	5,364	$	2,299	$	4,661	$	834,349	$	6,203

12

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

	December 31, 2020
							Greater Than
			30-59 Days		60-89 Days		90 Days Past		Total Loans
	Current		Past Due		Past Due		Due		Receivable		Non-accrual
Commercial real estate:
Construction	$	5,392	$	—	$	—	$	—	$	5,392	$	—
Non-residential		244,387		1,985		33		1,944		248,349		1,944
Multifamily		30,379		—		—		—		30,379		—
Residential real estate		36,581		1,351		138		1,169		39,239		2,641
Commercial and industrial		151,771		1,551		511		183		154,016		366
Consumer:
Indirect automobile		367,929		6,321		1,063		947		376,260		990
Home equity		13,506		310		101		248		14,165		346
Other consumer		8,663		98		7		48		8,816		48
Total	$	858,608	$	11,616	$	1,853	$	4,539	$	876,616	$	6,335

The following tables summarize information regarding impaired loans by loan portfolio class:

	September 30, 2021
	Recorded		Unpaid Principal		Related		Average Recorded
	Investment		Balance		Allowance		Investment
With no related allowance recorded:
Commercial real estate:
Non-residential	$	2,088	$	3,148	$	—	$	2,096
Multifamily		—		—		—		—
Residential real estate		2,483		3,025		—		2,561
Commercial and industrial		884		1,156		—		589
Consumer:
Indirect automobile		197		257		—		232
Home equity		224		225		—		357
Other consumer		47		48		—		38
Total	$	5,923	$	7,859	$	—	$	5,873
With an allowance recorded:
Commercial and industrial	$	—	$	—	$	—	$	153
Consumer:
Indirect automobile		280		287		68		337
Other consumer		—		—		—		12
Total	$	280	$	287	$	68	$	502
Total:
Commercial real estate:
Non-residential	$	2,088	$	3,148	$	—	$	2,096
Multifamily		—		—		—		—
Residential real estate		2,483		3,025		—		2,561
Commercial and industrial		884		1,156		—		742
Consumer:
Indirect automobile		477		544		68		569
Home equity		224		225		—		357
Other consumer		47		48		—		50
Total	$	6,203	$	8,146	$	68	$	6,375

13

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

	December 31, 2020
	Recorded		Unpaid Principal		Related		Average Recorded
	Investment		Balance		Allowance		Investment
With no related allowance recorded:
Commercial real estate:
Non-residential	$	1,944	$	2,973	$	—	$	3,086
Multifamily		—		—		—		184
Residential real estate		2,641		3,086		—		2,554
Commercial and industrial		345		586		—		426
Consumer:
Indirect automobile		397		467		—		293
Home equity		346		351		—		449
Other consumer		—		—		—		21
Total	$	5,673	$	7,463	$	—	$	7,013
With an allowance recorded:
Commercial real estate:
Commercial and industrial	$	21	$	21	$	11	$	30
Consumer:
Indirect automobile		593		613		135		591
Other consumer		48		49		7		13
Total	$	662	$	683	$	153	$	634
Total:
Commercial real estate:
Non-residential	$	1,944	$	2,973	$	—	$	3,086
Multifamily		—		—		—		184
Residential real estate		2,641		3,086		—		2,554
Commercial and industrial		366		607		11		456
Consumer:
Indirect automobile		990		1,080		135		884
Home equity		346		351		—		449
Other consumer		48		49		7		34
Total	$	6,335	$	8,146	$	153	$	7,647

A loan is considered impaired when based on current information and events it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans and loans modified as troubled debt restructurings (“TDRs”). Loan modifications, which resulted in these loans being considered TDRs, are primarily in the form of rate concessions and extensions of maturity dates that are made specifically due to hardships experienced by the customer. The Company does not generally recognize interest income on a loan in an impaired status. At September 30, 2021 and December 31, 2020, three loans totaling $1,468 and $1,571, included in impaired loans, were identified as TDRs. There were no new TDRs in 2020 or the first nine months of 2021. At September 30, 2021 and December 31, 2020, all TDR loans were performing in accordance with their restructured terms. At September 30, 2021 and December 31, 2020, the Company had no commitments to advance additional funds to borrowers under TDR loans.

14

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying statements of financial condition. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At September 30, 2021 and December 31, 2020, the Company was servicing loans for participants aggregating $4,050 and $4,291, respectively.

Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $946 and $636 at September 30, 2021 and December 31, 2020, respectively.

The Company services certain loans that it has sold without recourse to third parties. The aggregate balances of loans serviced for others were $313,037 and $300,700 as of September 30, 2021 and December 31, 2020, respectively.

The balances of capitalized servicing rights, included in other assets at September 30, 2021 and December 31, 2020, were $2,639 and $2,390, respectively. Fair value exceeds carrying value, and thus, no impairment charges related to servicing rights were recognized during the period ended September 30, 2021 or the year ended December 31, 2020.

The following tables summarize the segments of the loan portfolio and the allowance for loan losses, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment and the activity in the allowance for loan losses for the periods then ended:

	Commercial				Commercial
	Real Estate		Residential		and Industrial		Indirect		Consumer		Totals
	Three months ended September 30, 2021
Allowance for loan losses:
Beginning balance	$	4,833	$	120	$	759	$	4,071	$	343	$	10,126
Provision for (credit to) loan losses		(792)		(67)		491		(294)		(292)		(954)
Loans charged-off		—		—		(12)		(527)		(5)		(544)
Recoveries		—		—		1		390		15		406
Ending balance	$	4,041	$	53	$	1,239	$	3,640	$	61	$	9,034

	Commercial		Residential		Commercial
	Real Estate		Real Estate		and Industrial			Indirect	Consumer		Totals
	Three months ended September 30, 2020
Allowance for loan losses:
Beginning balance	$	2,673	$	125	$	859	$	4,779	$	136	$	8,572
Provision for loan losses		1,217		4		366		653		10		2,250
Loans charged-off		—		—		(88)		(499)		(3)		(590)
Recoveries		4		—		(3)		325		5		331
Ending balance	$	3,894	$	129	$	1,134	$	5,258	$	148	$	10,563

15

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

	Commercial		Residential		Commercial
	Real Estate		Real Estate		and Industrial		Indirect		Consumer		Totals
	Nine months ended September 30, 2021
Allowance for loan losses:
Beginning balance	$	5,354	$	117	$	1,050	$	4,974	$	138	$	11,633
(Credit to) provision for loan losses		(1,313)		(67)		113		(803)		(101)		(2,171)
Loans charged-off		—		—		(13)		(1,644)		(14)		(1,671)
Recoveries		—		3		89		1,113		38		1,243
Ending balance	$	4,041	$	53	$	1,239	$	3,640	$	61	$	9,034
Ending balance:
Loans deemed impaired	$	—	$	—	$	—	$	68	$	—	$	68
Loans not deemed impaired	$	4,041	$	53	$	1,239	$	3,572	$	61	$	8,966
Loan receivables:
Ending balance	$	283,155	$	35,830	$	117,755	$	377,116	$	20,493	$	834,349
Ending balance:
Loans deemed impaired	$	2,088	$	2,483	$	884	$	477	$	271	$	6,203
Loans not deemed impaired	$	281,067	$	33,347	$	116,871	$	376,639	$	20,222	$	828,146

	Commercial		Residential		Commercial
	Real Estate		Real Estate		and Industrial			Indirect	Consumer		Totals
	Nine months ended September 30, 2020
Allowance for loan losses:
Beginning balance	$	2,009	$	99	$	603	$	3,117	$	126	$	5,954
Provision for loan losses		1,881		30		651		3,114		29		5,705
Loans charged-off		—		—		(127)		(1,688)		(21)		(1,836)
Recoveries		4		—		7		715		14		740
Ending balance	$	3,894	$	129	$	1,134	$	5,258	$	148	$	10,563
Ending balance:
Loans deemed impaired	$	—	$	—	$	24	$	204	$	2	$	230
Loans not deemed impaired	$	3,894	$	129	$	1,110	$	5,054	$	146	$	10,333
Loan receivables:
Ending balance	$	284,862	$	40,605	$	170,663	$	372,863	$	24,147	$	893,140
Ending balance:
Loans deemed impaired	$	1,291	$	2,684	$	422	$	900	$	561	$	5,858
Loans not deemed impaired	$	283,571	$	37,921	$	170,241	$	371,963	$	23,586	$	887,282

16

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

	Commercial		Residential		Commercial
	Real Estate		Real Estate		and Industrial		Indirect		Consumer		Totals
	December 31, 2020
Allowance for loan losses:
Ending balance:
Loans deemed impaired	$	—	$	—	$	11	$	135	$	7	$	153
Loans not deemed impaired	$	5,354	$	117	$	1,039	$	4,839	$	131	$	11,480
Loan receivables:
Ending balance	$	284,120	$	39,239	$	154,016	$	376,260	$	22,981	$	876,616
Ending balance:
Loans deemed impaired	$	1,944	$	2,641	$	366	$	990	$	394	$	6,335
Loans not deemed impaired	$	282,176	$	36,598	$	153,650	$	375,270	$	22,587	$	870,281

In the normal course of business, the Company grants loans to officers, directors and other related parties. Balances and activity of such loans during the periods presented were not material.  

17

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

5.    Goodwill and Intangible Assets

The changes in the carrying value of goodwill are as follows:

	Nine Months		Year Ended
	Ended September 30,		December 31,
	2021		2020
Beginning balance	$	1,410	$	1,410
Acquisition activity		825		—
Ending balance	$	2,235	$	1,410
Accumulated impairment	$	1,116	$	1,116

The Company evaluated goodwill and determined that no write-down was required for the first nine months of 2021 or the year ended December 31, 2020.

The changes in the carrying value of the customer list and core deposit intangibles are as follows:

	Nine Months		Year Ended
	Ended September 30,		December 31,
	2021		2020
Beginning balance	$	199	$	241
Acquisition activity		330		—
Amortization		(69)		(42)
Ending balance	$	460	$	199
Accumulated amortization and impairment	$	817	$	748

Core deposit intangibles represent the estimated fair value of acquired customer deposit relationships on the date of acquisition and are amortized over their estimated useful lives.

The values assigned to customer lists or core deposit intangibles is based upon the application of the income approach. The intangibles are expected to have useful lives of approximately 13 years. The Company recognized $69 and $32 of amortization expense related to its intangible assets for the nine months ended September 30, 2021 and 2020, respectively. The Company recognized $27 and $11 of amortization expense for the three months ended September 30, 2021 and 2020, respectively.

At September 30, 2021, based upon a review of the intangibles, the Company determined that the fair value of the amortizable intangible assets exceeded their carrying values.

As of September 30, 2021, the future amortization expense for amortizable intangible assets for the respective years is as follows:

2021	$	26
2022		99
2023		88
2024		80
2025		61
Thereafter		106
Total	$	460

18

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

6.    Premises and Equipment

Premises and equipment are summarized as follows:

	September 30,		December 31,
	2021		2020
Land	$	3,732	$	3,732
Buildings and improvements		26,651		26,431
Furniture, fixtures and equipment		13,762		13,042
Construction in process		589		93
Total		44,734		43,298
Less accumulated depreciation		(25,570)		(24,459)
Net	$	19,164	$	18,839

7.    Deposits

Deposits balances are summarized as follows:

	September 30,		December 31,
	2021		2020
Non-interest bearing demand deposits	$	316,521	$	244,344
Interest bearing accounts:
NOW		156,330		141,580
Savings		178,913		157,414
Money market		267,261		185,383
Time certificates of deposit		168,362		200,643
Total interest bearing accounts		770,866		685,020
Total deposits	$	1,087,387	$	929,364

Included in time certificates of deposit at September 30, 2021 and December 31, 2020 were reciprocal deposits totaling $19,568 and $30,012, respectively, with original maturities of one to three years. Time certificates of deposit in denominations of $250 or greater were $28,252 and $34,565 as of September 30, 2021 and December 31, 2020, respectively.

Contractual maturities of time certificates of deposit at September 30, 2021 are summarized below:

	September 30,
	2021
Within 1 year	$	137,305
1 – 2 years		12,740
2 – 3 years		8,754
3 – 4 years		8,537
4 – 5 years		1,026
Total	$	168,362

19

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

8.    Long-Term Debt and FHLB Stock

FHLB Borrowings and Stock

The Bank is a member of the FHLB. At September 30, 2021 and December 31, 2020, the Bank had access to a preapproved secured line of credit with the FHLB of $631,297 and $564,330, respectively. Borrowings under this line require collateralization through the pledge of specific loans and securities. At September 30, 2021 and

December 31, 2020, the Bank had pledged assets of $170,587 and $175,011, respectively.

The outstanding principal amounts and the related terms and rates at September 30, 2021 were as follows:

Term	Principal		Maturity	Rate		Due in one year		Long term
3 year amortizing	$	2,571	May 16, 2022	2.49	%	$	2,571		—
3 year bullet		10,000	May 16, 2022	2.44	%		10,000		—
3 year amortizing		7,574	February 28, 2023	1.32	%		5,033		2,541
Total	$	20,145	Weighted Average Rate	2.03	%	$	17,604	$	2,541

The Bank is required to maintain an investment in capital stock of the FHLB, as collateral, in an amount equal to a certain percentage of its outstanding debt. FHLB stock is considered restricted stock and is carried at cost. The Bank evaluates FHLB stock for impairment based on the ultimate recovery ability of the cost. No impairment was recognized at either September 30, 2021 or December 31, 2020.

Subordinated Debt

In addition to the Bank, the Company has one other wholly-owned subsidiary, RSB Capital Trust I (the “Trust”). In 2005, the Trust issued $5,000 of pooled trust preferred securities in a private placement and issued 155 shares of common stock at $1 par value per share, now owned by the Company. The Trust, which has no independent assets or operations, was formed in 2005 for the sole purpose of issuing trust preferred securities and investing the proceeds thereof in an equivalent amount of junior subordinated debentures. The proceeds from the issuance of the trust preferred securities were down-streamed to the Bank and are currently considered Tier 1 capital for purposes of determining the Bank’s capital ratios. The trust securities bear interest at 3-month LIBOR plus 2.00%. The duration of the Trust is 30 years.

The subordinated debt securities of $5,155 are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the subordinated debt securities and the declaration of trust governing the Trust, including its obligations to pay costs, expenses, debts and liabilities, provides a full and unconditional guarantee of amounts on the capital securities. The subordinated debentures, which bear interest at 3-month LIBOR plus 2.00% (2.13% at September 30, 2021 and 2.21% at December 31, 2020) mature on May 23, 2035.

As it is anticipated that LIBOR will be discontinued after 2021, the Company is reviewing the agreements for the above debt to determine alternative reference rates and does not anticipate there will be a significant financial statement impact.

Other Borrowings

The Bank also has an unsecured, uncommitted $10,000 line of credit with Zions Bank. There were no advances outstanding under this line of credit at either September 30, 2021 or December 31, 2020.

20

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

9.  Employee Benefits

Pension Plan

The Bank maintains a noncontributory defined benefit pension plan covering substantially all of its employees 21 years of age or older who had completed at least one year of service as of September 30, 2012, the effective date on which the Board of Directors of the Bank voted to freeze the defined benefit plan.

The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated statements of financial condition:

	September 30,		December 31,
	2021		2020
Projected and accumulated benefit obligation	$	(23,367)	$	(23,964)
Plan assets at fair value		22,199		22,634
Funded status included in accrued expenses and other liabilities	$	(1,168)	$	(1,330)

The net periodic pension cost and amounts recognized in other comprehensive income are as follows:

	Nine months ended September 30,
	2021		2020
Interest cost	$	442	$	502
Expected return on plan assets		(708)		(639)
Amortization of unrecognized loss		269		214
Net periodic cost (benefit)	$	3	$	77

The expected long-term rate of return on plan assets has been determined by applying historical average investment returns from published indexes relating to the current allocation of assets in the plan. Plan assets are invested in pooled separate accounts consisting of underlying investments in ten diversified investment funds.

As of September 30, 2021, the investment funds included seven equity funds and three fixed income bond funds, each with its own investment objectives, investment strategies and risks, as detailed in the Company’s investment policy statement. The Company determines the appropriate strategic asset allocation versus plan liabilities, as governed by the investment policy statement.

The assets of the plan are invested under the supervision of the Company’s investment committee in accordance with the investment policy statement. The investment options of the plan are chosen in a manner consistent with generally accepted standards of fiduciary responsibility. The investment performance of the Company’s individual investment managers, with the assistance of the Company’s investment consultant, is monitored on a quarterly basis and is reviewed at least annually relative to the objectives and guidelines as stated in the Company’s investment policy statement.

The Company did not make a contribution to the plan in the first nine months of 2021 or 2020.

21

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

The fair value of the Company’s pension plan assets, by fair value hierarchy, are as follows:

	September 30, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Investment in separate accounts
Fixed income	$	15,560	$	—	$	—	$	15,560
Equity		6,639		—		—		6,639
Total assets at fair value	$	22,199	$	—	$	—	$	22,199

	December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Investment in separate accounts
Fixed income	$	15,189	$	—	$	—	$	15,189
Equity		6,206		—		—		6,206
Other		1,239		—		—		1,239
Total assets at fair value	$	22,634	$	—	$	—	$	22,634

The pooled separate accounts are valued at the net asset per unit based on either the observable net asset value of the underlying investment or the net asset value of the underlying pool of securities. Net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities and then divided by the number of shares outstanding.

For a detailed disclosure on the Bank’s pension and employee benefits plans, please refer to Note 8 of the Company’s Consolidated Financial Statements for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K.

Defined Contribution Plan

The Company sponsors a 401(k) defined contribution plan. Participants are permitted, in accordance with the provisions of Section 401(k) of the Internal Revenue Code, to contribute up to 25% of their earnings (as defined) into the plan with the Company matching up to 6%, subject to Internal Revenue Service limitations. The Company’s contributions charged to operations amounted to $798 and $732 for the nine months ended September 30, 2021 and 2020, respectively.

22

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

Deferred Compensation Arrangements

Directors’ Plan

The Bank’s Deferred Compensation Plan for Fees of Directors, as amended and restated effective January 1, 2005 (the “Directors’ Plan”), covers Directors who elect to defer receipt of all or a portion of their fees until separation from service. Upon resignation, retirement, or death, the participant’s total deferred compensation, including earnings thereon, will be paid out. At September 30, 2021 and December 31, 2020, total amounts due of $2,749 and $2,483, respectively, are included in accrued expenses and other liabilities. Total expenses related to the Directors’ Plan were $106 and $131 for the nine months ended September 30, 2021 and 2020, respectively, which were included in other non-interest expense in the consolidated statements of income.

Executive Long-Term Incentive and Retention Plan

The Bank maintains an Executive Long-Term Incentive and Retention Plan (the “Executive Plan”). Participation in the Executive Plan is limited to officers of the Company designated as participants by the Board of Directors and who filed a properly completed and executed participation agreement in accordance with the terms of the Executive Plan. Under the Executive Plan, the Board of Directors may grant annual incentive awards equal to a percentage of a participant’s base salary at the rate in effect on the last day of the Plan year, as determined by the Board of Directors based on the attainment of criteria established annually by the Board of Directors. Incentive awards under the Executive Plan are credited to the participant’s incentive benefit account as of the last day of the Executive Plan year to which the award relates and earn interest at a rate determined annually by the Board of Directors. Participants vest in their benefit accounts in accordance with the vesting schedule approved by the Board of Directors, which ranges from one to five years of service. At September 30, 2021 and December 31, 2020, $1,359 and $1,312, respectively, is included in accrued expenses and other liabilities, which represents the cumulative amounts deferred and earnings thereon. The Company recognized expenses of $392 and $419 for the nine months ended September 30, 2021 and 2020, respectively, related to this plan and which are included in salaries and employee benefits expense in the consolidated statements of income.

Group Term Replacement Plan

Under the terms of the “Group Term Replacement Plan”, the Company provides postretirement life insurance benefits to certain officers. The liability related to these postretirement benefits is being accrued over the individual participants’ service period and aggregated $1,419 and $1,387, at September 30, 2021 and December 31, 2020, respectively. The Company recognized expenses of $32 and $43 for the nine-month periods ended September 30, 2021 and September 30, 2020, respectively, related to this plan, which are included in salaries and employee benefits expense in the consolidated statements of income.

Other Director and Officer Postretirement Benefits

The Company has individual fee continuation agreements with certain directors and a supplemental retirement agreement with an executive officer which provide for fixed postretirement benefits to be paid to the directors and the officer, or their beneficiaries, for periods ranging from 15 to 20 years. In addition, the Company has agreements with certain directors which provide for certain postretirement life insurance benefits. The liability related to these postretirement benefits is being accrued over the individual participants’ service period and aggregated $1,977 and $2,148 at September 30, 2021 and December 31, 2020, respectively. The Company recognized expenses of $56 and $65 for the nine months ended September 30, 2021 and 2020, respectively, related to these benefits, which are included in other non-interest expenses in the consolidated statements of income.

23

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

Employee Stock Ownership Plan

On January 1, 2019, the Bank established an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified retirement plan for the benefit of Bank employees. On January 16, 2019, the Company granted a loan to the ESOP for the purchase of 436,425 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company is payable annually over 20 years at a rate per annum equal to the Prime Rate, reset annually on January 1st (3.25% at January 1, 2021). Loan payments are funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. The balance of the ESOP loan at September 30, 2021 was $4,087. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released annually is 21,821 through 2039.

Shares held by the ESOP include the following:

	Nine months ended	Year ended
	September 30,	December 31,
	2021	2020
Allocated	43,642	21,821
Committed to be allocated	16,362	21,821
Unallocated	376,421	392,783
Paid out to participants	(68)	(68)
Total shares	436,357	436,357

The fair value of unallocated shares was $4,103 at September 30, 2021.

Total compensation expense recognized in connection with the ESOP for the nine months ended September 30, 2021 and 2020 was $168 and $129, respectively.

Share-Based Compensation Plan

On May 26, 2020, stockholders of the Company approved the 2020 Equity Incentive Plan (the “EIP”).  The  EIP authorizes the issuance or delivery to participants of up to 763,743 shares of Rhinebeck Bancorp common stock pursuant to grants of incentive and non-qualified stock options, restricted stock awards and restricted stock units.  Of this number, the maximum number of shares of Rhinebeck Bancorp common stock that may be issued under the EIP pursuant to the exercise of stock options is 545,531 shares, and the maximum number of shares of Rhinebeck Bancorp common stock that may be issued as restricted stock awards or restricted stock units is 218,212 shares.  These amounts represent 4.90% and 1.96%, respectively, of the number of shares of common stock issued in the stock offering of Rhinebeck Bancorp, including the shares issued to Rhinebeck Bancorp, MHC.

Pursuant to terms of the EIP, on August 25, 2020, the Board of Directors granted restricted stock and stock options to employees and directors. All of the awards vest annually over a three-year period from the date of the grant and the term of each option is ten years. As of September 30, 2021, there were 97,146 stock options and 48,443 restricted stock awards that remain available for future grants.

24

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

The fair value of each option granted under the EIP is estimated on the date of grant using the Black-Scholes Option-Pricing Model. The expected volatility is based on the historical volatility of a peer group of comparable SEC-reporting bank holding companies. The dividend yield assumption is based on the Company’s expectation of dividend payouts. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the date of grant. The Company has elected to recognize forfeitures as they occur.

A summary of options under the 2020 EIP as of September 30, 2021 is presented below:

		Weighted -		Weighted-Average
	Number of	Average		Remaining Contractual
	Shares	Exercise Price		Term (in Years)
Options outstanding at beginning of year	448,385	$	6.61	9.66
Options granted	-		-	-
Options exercised	(5,455)		6.57	-
Forfeited	-		-	-
Options outstanding at September 30, 2021	442,930	$	6.62	8.92
Options exercisable at September 30, 2021	138,997		6.57	8.91

At September 30, 2021, the aggregate intrinsic value of the shares outstanding, which fluctuates based on changes in the fair market value of the Company’s stock, was $1,898. The aggregate intrinsic value represents the total pre-tax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of period and the weighted-average exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on September 30, 2021.

As of September 30, 2021, there was $476 of unrecognized compensation cost related to the nonvested stock options granted under the 2020 EIP. The cost is expected to be recognized over a remaining period of 1.91 years.

The following table summarizes the Company’s restricted stock activity for the nine months ended September 30, 2021:

			Weighted-Average
	Number		Grant Date
	of Shares		Fair Value per Share
Non-vested restricted stock at beginning of year	169,769	$	6.57
Granted	-		-
Vested	(56,582)		6.57
Forfeited	-		-
Non-vested restricted stock at September 30, 2021	113,187	$	6.57

As of September 30, 2021, there was $706 of unrecognized compensation cost related to the nonvested restricted stock awards granted under the 2020 EIP. The cost is expected to be recognized over a remaining period of 1.90 years.

For the nine months ended September 30, 2021, share-based compensation under the plan was $464.

25

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

10.  Leases

As of September 30, 2021, the Company leases real estate for eight branch offices and two administrative offices under various lease agreements. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated statements of financial condition. With the adoption of Accounting Standards Update 2016-02, Leases (Topic 842), operating lease agreements are required to be recognized on the consolidated statements of financial condition as a right-of-use (“ROU”) asset and a corresponding lease liability.

The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s leases have maturities which range from 2021 to 2041, some of which include lessee options to extend the lease term. If the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The weighted average remaining life of the lease terms for these leases was 12.7 years as of September 30, 2021. As most of our leases do not provide an implicit rate, the Company used its incremental borrowing rate, the rate of interest to borrow on a collateralized basis for a similar term, at the lease commencement date. The Company utilized a weighted average discount rate of 2.56% in determining the lease liability as of September 30, 2021.

For the nine months ended September 30, 2021, total operating lease costs were $539 and were included in occupancy and other expense. Deferred rent liability was $152 at September 30, 2021 and $176 at December 31, 2020. The right-of-use asset, included in other assets, was $7,586 and the corresponding lease liability, included in accrued expenses and other liabilities, was $7,586 as of September 30, 2021.

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2021 were as follows:

Years ending December 31:
2021	$	198
2022		754
2023		732
2024		729
2025		743
Thereafter		5,822
Total future minimum lease payments		8,978
Amounts representing interest		(1,392)
Present Value of Net Future Minimum Lease Payments	$	7,586

26

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

11.  Commitments and Contingencies and Derivatives

Legal Matters

The Company is involved in various legal proceedings which have arisen in the normal course of business. Management believes that resolution of these matters will not have a material effect on the Company’s financial condition or results of operations.

Employment Agreements

The Company has entered into employment agreements with certain officers. The agreements provide for base salaries and incentive compensation based on performance criteria outlined in the agreements. The agreements also provide for insurance and various other benefits.

Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include standby letters of credit and commitments to extend credit, which include new loan commitments and undisbursed portions of construction loans and other lines of credit. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The contractual amounts of commitments to extend credit represent the amounts of potential loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral become worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Financial instruments whose contract amounts represent off-balance sheet credit risk are as follows:

	September 30,		December 31,
	2021		2020
Commitments to extend credit summarized as follows:
Future loan commitments	$	12,236	$	14,356
Undisbursed construction loans		2,693		3,493
Undisbursed home equity lines of credit		10,834		10,686
Undisbursed commercial and other line of credit		72,089		63,911
Standby letters of credit		3,050		5,681
Total	$	100,902	$	98,127

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

27

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include residential and commercial property, deposits and securities.

Interest Rate Swaps

The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate loan agreement to a fixed-rate loan agreement. Under these agreements, the Company simultaneously enters into a variable-rate loan and interest rate swap agreements with a customer. The Company then enters into a corresponding and offsetting swap agreement with a third party to hedge its exposure created by the customer agreements. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, Derivatives and Hedging, and are marked to market through earnings. The fair values of the swaps are recorded as both an asset and a liability, in other assets and other liabilities, respectively, in equal amounts for these transactions.  The accrued interest receivable and payable of $9 and $0 related to our swaps is recorded in other assets and other liabilities as of September 30, 2021 and 2020, respectively.

Summary information regarding these derivatives is presented below:

	September 30,			December 31,
	2021			2020
Notational amount	$	9,018		$	1,875
Fair value	$	143		$	41
Weighted average pay rates		3.51	%		3.10	%
Weighted average receive rates		2.29	%		2.22	%
Weighted average maturity (in years)		9.61			9.92
Number of Contracts		5			1

28

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

12.  Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The final rules implementing the BASEL Committee on Banking Supervisor’s Capital Guidance for U.S. Banks (BASEL III) became effective for the Bank on January 1, 2016. Compliance with the requirements was phased in over a four year period with full compliance as of January 1, 2019. All presented capital ratios are calculated using BASEL III rules.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the tables below) of total, common equity Tier 1 and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2021 and December 31, 2020, that the Bank met all capital adequacy requirements to which they are subject.

The most recent notification from the Federal Deposit Insurance Corporation (“FDIC”) categorized the Bank as “well capitalized” under the regulatory framework. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, common equity Tier 1, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since then, which management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios were:

									To be Well Capitalized under
					For Capital Adequacy				Prompt Corrective Action
	Actual				Purposes				Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	September 30, 2021
Rhinebeck Bank
Total capital (to risk-weighted assets)	$	128,554	14.12	%	$	72,810	8.00	%	$	91,012	10.00	%
Tier 1 capital (to risk-weighted assets)		119,520	13.13	%		54,607	6.00	%		72,810	8.00	%
Common equity tier one capital (to risk weighted assets)		119,520	13.13	%		40,955	4.50	%		59,158	6.50	%
Tier 1 capital (to average assets)		119,520	9.58	%		49,922	4.00	%		62,403	5.00	%

	December 31, 2020
Rhinebeck Bank
Total capital (to risk-weighted assets)	$	121,604	13.97	%	$	69,614	8.00	%	$	87,018	10.00	%
Tier 1 capital (to risk-weighted assets)		110,717	12.72	%		52,211	6.00	%		69,614	8.00	%
Common equity tier one capital (to risk weighted assets)		110,717	12.72	%		39,158	4.50	%		56,562	6.50	%
Tier 1 capital (to average assets)		110,717	9.95	%		44,529	4.00	%		55,662	5.00	%

29

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

13.  Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.

Cash and Due from Banks

The carrying amount is a reasonable estimate of fair value.

Available for Sale Securities

Where quoted prices are available in an active market for identical securities, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include marketable equity securities and U.S. Treasury obligations. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency bonds, mortgage-backed securities and municipal bonds. Level 3 securities include securities for which significant unobservable inputs are utilized. Available for sale securities are recorded at fair value on a recurring basis.

FHLB Stock

The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB.

Loans

Loans receivable are carried at cost. For variable rate loans which reprice frequently carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using the year end rates, estimated using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect partial write-downs based on the observable market price or current appraised value of collateral.

Other Real Estate Owned

Other real estate owned represents real estate acquired through foreclosure and is carried at fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. These assets are included as Level 3 fair values, based upon the lowest level of input that is utilized in the fair value measurements.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated future net servicing income. Mortgage servicing rights are carried at the lower of amortized cost or estimated fair value and are included in other assets on the consolidated statements of financial condition.

30

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

Deposits

Deposit liabilities are carried at cost. The fair value of NOW, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of time certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities estimated using local market data to a schedule of aggregated expected maturities on such deposits.

Mortgagors’ escrow account

The fair value is estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposited escrow accounts of similarly expected maturities.

Advances from the FHLB

The fair value of the advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances.

Subordinated Debt

Based on the floating rate characteristic of these instruments, the carrying value is considered to approximate fair value.

Off-Balance-Sheet Instruments

Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. Such amounts are not significant.

Loan level interest rate Swaps

The fair value is based on settlement values adjusted for credit risks associated with the counterparties and the Company and observable market interest rate curves.

31

Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

The following tables detail the assets that are carried at fair value on a recurring basis as of the periods shown and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

			Quoted Prices in
			Active Markets		Significant		Significant
			for Identical		Observable		Unobservable
	Balance		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
	September 30, 2021
Assets:
U.S. Treasury securities	$	40,189	$	40,189	$	—	$	—
U.S. government agency mortgage-backed securities-residential		156,897		—		156,897		—
U.S. government agency securities		26,878		—		26,878		—
Municipal securities		7,010		—		6,865		145
Corporate Bonds		8,775		—		8,775		—
Other		640		—		640		—
Total available for sale securities		240,389		40,189		200,055		145
Loan level interest rate swaps		143		—		143		—
Total assets	$	240,532	$	40,189	$	200,198	$	145
Liabilities:
Loan level interest rate swaps		143		—		143		—
Total liabilities	$	143	$	—	$	143	$	—

	December 31, 2020
Assets:
U.S. government agency mortgage-backed securities – residential	$	89,270	$	—	$	89,270	$	—
U.S. government agency securities		7,161		—		7,161		—
Municipal securities		1,476		—		1,316		160
Corporate Bonds		4,446		—		4,446		—
Other		580		—		580		—
Total available for sale securities		102,933		—		102,773		160
Loan level interest rate swaps		41		—		41		—
Total assets	$	102,974	$	—	$	102,814	$	160
Liabilities:
Loan level interest rate swaps		41		—		41		—
Total liabilities	$	41	$	—	$	41	$	—

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Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

The following tables detail the assets carried at fair value and measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

			Quoted Prices in
			Active Markets		Significant		Significant
			for Identical		Observable		Unobservable
	Balance		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
	September 30, 2021
Impaired loans, with specific reserves	$	212	$	—	$	—	$	212
Other real estate owned		89		—		—		89
Total	$	301	$	—	$	—	$	301

	December 31, 2020
Impaired loans, with specific reserves	$	509	$	—	$	—	$	509
Other real estate owned		139		—		—		139
Total	$	648	$	—	$	—	$	648

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans

had recorded investments of $280 and $662 with valuation allowances of $68 and $153, resulting fair values of $212 and $509 at September 30, 2021 and December 31, 2020, respectively. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

	Quantitative Information About Level 3 Fair Value Measurements
	Fair Value		Valuation		Unobservable		Range
	Estimate		Techniques		Input		(Weighted Average)
	September 30, 2021
Impaired loans	$	212	Appraisal of collateral	(1)	Liquidation expenses	(3)	0% to 6%
					Appraisal adjustments	(2)	0% to 20%
Other real estate owned		89	Appraisal of collateral	(1)	Liquidation expenses	(3)	0% to 6%
					Appraisal adjustments	(2)	0% to 20%
	December 31, 2020
Impaired loans	$	509	Appraisal of collateral	(1)	Liquidation expenses	(3)	0% to 6%
					Appraisal adjustments	(2)	0% to 20%
Other real estate owned		139	Appraisal of collateral	(1)	Liquidation expenses	(3)	0% to 6%
					Appraisal adjustments	(2)	0% to 20%

(1) Fair value is generally through independent appraisals of the underlying collateral that generally include various level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraised value.

(3) Estimated costs to sell.

The Company discloses fair value information about financial instruments, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

The estimated fair value amounts for 2021 and 2020 have been measured as of their respective reporting dates and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at each year-end.

The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

As of the following dates, the carrying value and fair values of the Company’s financial instruments were:

	September 30,				December 31,
	2021				2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and due from banks (Level 1)	$	114,587	$	114,587	$	93,485	$	93,485
Available for sale securities (Level 1)		40,189		40,189		—		—
Available for sale securities (Level 2)		200,055		200,055		102,773		102,773
Available for sale securities (Level 3)		145		145		160		160
Loan level interest rate swaps (Level 2)		143		143		41		41
FHLB stock (Level 2)		1,417		1,417		2,787		2,787
Loans, net (Level 3)		833,841		830,263		873,813		876,699
Mortgage servicing rights (Level 3)		2,639		4,486		2,390		3,569
Financial Liabilities:
Deposits (Level 2)		1,087,387		1,077,152		929,364		941,460
Mortgagors' escrow accounts (Level 2)		4,264		4,269		8,494		8,501
FHLB advances (Level 2)		20,145		20,349		50,674		51,468
Subordinated debt (Level 2)		5,155		5,155		5,155		5,155
Loan level interest rate swaps (Level 2)		143		143		41		41

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Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

14.  Accumulated Other Comprehensive Loss

The activity in accumulated other comprehensive loss for the three and nine months ended September 30, 2021 and 2020 is as follows:

	Accumulated Other Comprehensive Loss(1)
			Unrealized (losses)
			gains on
	Defined Benefit		available for sale
	Pension Plan		securities		Total
Balance at June 30, 2021	$	(4,605)	$	(126)	$	(4,731)
Other comprehensive loss before reclassifications		(120)		(472)		(592)
Amounts reclassified from accumulated other comprehensive loss		71		—		71
Period change		(49)		(472)		(521)
Balance at September 30, 2021	$	(4,654)	$	(598)	$	(5,252)
Balance at June 30, 2020	$	(4,663)	$	1,842	$	(2,821)
Other comprehensive gain (loss) before reclassifications		637		(431)		206
Amounts reclassified from accumulated other comprehensive loss		56		—		56
Period change		693		(431)		262
Balance at September 30, 2020	$	(3,970)	$	1,411	$	(2,559)

(1)   All amounts are net of tax. Related income tax expense or benefit is calculated using an income tax rate of 21.0%.

	Accumulated Other Comprehensive Loss(1)
			Unrealized gains
			(losses) on
	Defined Benefit		available for sale
	Pension Plan		securities		Total
Balance at December 31, 2020	$	(4,784)	$	993	$	(3,791)
Other comprehensive loss before reclassifications		(83)		(1,591)		(1,674)
Amounts reclassified from accumulated other comprehensive loss		213		—		213
Period change		130		(1,591)		(1,461)
Balance at September 30, 2021	$	(4,654)	$	(598)	$	(5,252)
Balance at December 31, 2019	$	(3,909)	$	(195)	$	(4,104)
Other comprehensive (loss) gain before reclassifications		(230)		1,583		1,353
Amounts reclassified from accumulated other comprehensive loss		169		23		192
Period change		(61)		1,606		1,545
Balance at September 30, 2020	$	(3,970)	$	1,411	$	(2,559)

(1)   All amounts are net of tax. Related income tax expense or benefit is calculated using an income tax rate of 21.0%.

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Rhinebeck Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share data)

15.  Earnings Per Share

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents (such as options) were issued during the period. Unearned ESOP shares are not deemed outstanding for earnings per share calculations. There were no potentially dilutive common stock equivalents for the three or nine months ended September 30, 2020.

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021			2020
Net income applicable to common stock	$	2,685	$	1,150	$	8,571	$	3,573
Average number of common shares outstanding		11,153,186		11,133,290		11,139,944		11,133,290
Less: Average unearned ESOP shares		379,148		400,969		384,602		406,423
Average number of common shares outstanding used to calculate basic earnings per common share		10,774,038		10,732,321		10,755,342		10,726,867
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share		61,444		—		64,311		—
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		111,453		—		94,776		—
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		10,946,935		10,732,321		10,914,429		10,726,867
Earnings per Common share:
Basic	$	0.25	$	0.10	$	0.80	$	0.33
Diluted	$	0.25	$	0.10	$	0.79	$	0.33

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Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of financial condition and results of operations at September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020 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;

● negative financial impact from unfavorable regulatory penalties and/or settlement;

● 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;

● 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;

● 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 whether the gradual reopening of businesses will result in a meaningful increase in economic activity. 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 higher 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 increase 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;

● our cyber security risks are increased as the result of an increase in the number of employees working remotely;

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● FDIC premiums may increase if the agency experiences additional resolution costs; and

● we may face litigation, regulatory enforcement and reputation risk as a result of our participation in the SBA 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 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 ended December 31, 2020, filed with the Securities and Exchange Commission. As of September 30, 2021, 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, 2020, with the exception of an additional disclosure for derivative financial instruments as stated below.

Derivative Financial Instruments

Derivative financial instruments are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value, if material.

Loan Level Interest Rate Swaps

The Company enters into interest rate swaps with commercial loan customers to synthetically convert the customer’s loan from a variable rate to a fixed rate. These swaps are matched in offsetting terms to swaps that the Company enters into with an outside third party. The swaps are reported at fair value in other assets and other liabilities. The Company’s swaps qualify as derivatives, but are not designated as hedging instruments, thus any net gain or loss resulting from changes in the fair value is recognized in other non-interest income.

Recent Events

On March 12, 2021, the Bank acquired two branches located in Orange County, New York from ConnectOne Bank, the wholly-owned subsidiary of ConnectOne Bancorp, Inc., as well as $33.9 million of deposits and other assets and liabilities.

We also opened two new branches in Orange County, New York, as a de novo locations.  Previously stated as a geographical part of our service territory that we wished to develop, the Middletown branch became fully operational during the second quarter of 2021 and our Newburgh branch became fully operational during the third quarter of 2021.

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Impact of COVID-19

While significant progress has been made to combat the COVID-19 pandemic, the pandemic is not over and is expected to continue 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, particularly if new variants of the virus continue to emerge.

Effects on Our Market Areas.

Our commercial and consumer banking products and services are offered primarily in the Hudson Valley of New York, where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. Last year, 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 were allowed to stay open. As cases of COVID-19 declined, New York began a phased-in reopening with the Hudson Valley reaching Phase 1 reopening on May 26, 2020 and reaching the final Phase 4 on July 7, 2020. Even with the Phase 4 reopening business operations remained limited and many people still engaged in limited activities. As vaccines became available in 2021, more pandemic related restrictions eased and New York is gradually returning to normal. Statewide unemployment levels have decreased but remain higher than pre-pandemic levels, from an average of 3.7% in December 2019 to 10.0% in September 2020 to 7.1% in September 2021.

Policy and Regulatory Developments.

Federal, state and local governments and regulatory authorities have enacted a range of policy responses to the COVID-19 pandemic. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act was to curb the economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the PPP. In December 2020, many provisions of the CARES Act were extended through the end of 2021. On September 5, 2021, several federal unemployment benefit programs expired as per federal law. As the Coronavirus rate in New York had fallen below the rate established by the federal government, many of these benefits were lessened or expired in August 2021. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s 2020 and 2021 operations and could continue to impact operations going forward.

Pandemic Operational Preparations & Status.

Various operational measures remain in effect to encourage social distancing and enhanced cleaning and sanitizing procedures continue at all offices, drive-thru locations and ATM terminals. We maintain a workplace safety program to provide employees a safe and healthy workplace. At September 30, 2021, the majority of our employees have returned to the office. On September 6, 2021, New York Governor Kathy Hochul announced the designation of COVID-19 as an airborne infectious disease under the New York Health and Essential Rights Act (“HERO Act”). This designation requires all private employers to implement workplace safety plans. The key change to current safety protocol followed by the Bank is that all employees, regardless of vaccination status must be masked while in common areas. We continue to watch the latest COVID-19 developments and are following guidance provided by the Centers for Disease Control, as well as federal, state and local agencies.   

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Effects on Our Business.

With regard to our September 30, 2021 financial condition and results of operations, improving conditions around COVID-19 had a material impact on our provision for loan losses as the provision is significantly impacted by changes in economic conditions. Given that the economic conditions have improved significantly since December 31, 2020, we recorded a credit to the provision for loan losses during the three and nine months ended September 30, 2021. Should economic conditions worsen as a result of a resurgence in the virus and resulting measures to curtail its spread, we could experience increases in our required provision and record an additional expense.

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company continues to work with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees continue to accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, the related loans would be placed on nonaccrual status and interest income and fees accrued would be reversed. In such a scenario, interest income in future periods could be negatively impacted.

U.S. Small Business Administration Paycheck Protection Program.

Section 1102 of the CARES Act created the PPP, a program administered by the Small Business Administration (“SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. We have participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first ten months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees. During 2020, we received SBA approval for 674 applications totaling $92.0 million all of which were funded. As of December 31, 2020, there were $75.4 million of PPP loans outstanding.

On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the “CAA”). The CAA, among other things, extends the life of the PPP, creating a second round of PPP loans for eligible businesses. We participated in the CAA’s second round of PPP lending. The second round PPP program began accepting new loan applications on January 11, 2021 and ended on May 5, 2021, when the SBA announced that general funds for the program were depleted. During the nine months ended September 30, 2021, we received SBA approval for 376 applications totaling $48.2 million and all had been funded. At September 30, 2021, we had $44.1 million of PPP loans outstanding.

COVID-19 Loan Forbearance Program.

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, the Office of the Comptroller of the Currency (“OCC”) in coordination with 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.

For consumer borrowers, the Bank is providing deferment of payments for indirect and direct automobile loans for up to sixty (60) days and an additional thirty (30) days, if needed. We are also providing forbearance to our residential real estate borrowers, which allows them to defer their principal and interest payments for up to ninety (90) days with an option for an additional ninety (90) days, if needed. In addition, for commercial borrowers we are providing deferment and forbearance options that include interest-only and tax escrow only payments. Some borrowers meeting the Bank’s underwriting criteria have been granted working capital loans to provide financial assistance. These deferrals are maintained within the CARES Act guidance and have not exceeded twelve consecutive months of deferred payment. 

As of September 30, 2021, we had 19 loans totaling $22.9 million of remaining deferrals outstanding, all of which were performing in accordance with their contractual terms.

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Details with respect to the active outstanding deferrals as of September 30, 2021 are as follows (dollars in thousands):

	Number of Loans	Balance		Weighted Rate		Accrued Interest
Commercial non-residential real estate loans	7	$	18,328	3.98	%	$	340
Commercial and industrial loans	9		4,477	5.43	%		126
Indirect automobile loans	3		51	8.82	%		—
Total loans	19	$	22,856	4.28	%	$	466

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total Assets. Total assets were $1.26 billion at September 30, 2021, representing an increase of $133.9 million, or 11.9%, compared to $1.13 billion at December 31, 2020. The increase was primarily related to an increase of available for sale securities and cash and due from banks, offset by a decrease in net loans receivable.

Cash and Due from Banks. Cash and due from banks increased $21.1 million, or 22.6%, to $114.6 million at September 30, 2021 from $93.5 million at December 31, 2020 primarily due to an increase in deposits held at the Federal Reserve Bank of New York as cash from deposit growth exceeded asset growth.

Investment Securities Available for Sale. Investment securities available for sale increased $137.5 million, or 133.5%, to $240.4 million at September 30, 2021 from $102.9 million at December 31, 2020. This increase was primarily due to purchases of treasury and mortgage-backed securities of $181.9 million with excess liquidity, partially offset by principal pay-downs, calls and maturities of $42.2 million and the reversal of a net unrealized gain of $1.3 million to a net unrealized loss of $758,000.

Net Loans. Total net loans receivable were $833.8 million at September 30, 2021, a decrease of $40.0 million, or 4.6%, as compared to $873.8 million at December 31, 2020. The decrease was primarily due to a decline in our commercial and industrial loan balances of $36.3 million, including a decrease in outstanding SBA PPP loan balances of $31.5 million and a decrease in our non-residential commercial real estate loans of $12.1 million. These decreases were primarily due to higher than expected pay-offs and production short-falls. These decreases were partially offset by an increase in multi-family real estate loans of $10.9 million.

Non-accrual loans decreased $132,000, or 2.1%, to $6.2 million at September 30, 2021, while non-performing assets decreased $182,000, or 2.8%, to $6.3 million at September 30, 2021, as we disposed of other real estate owned valued at $50,000 in 2021.

Cash Surrender Value of Life Insurance. Cash surrender value of life insurance increased $10.1 million, or 53.5%, as the Bank purchased $10.0 million in split-dollar life insurance policies for key employees.

Total Liabilities. Total liabilities increased $126.2 million, or 12.5%, to $1.14 billion at September 30, 2021, primarily due to an increase in deposits of $158.0 million, partially offset by a decrease in advances from the FHLB of $30.5 million.

Deposits. Deposits increased $158.0 million, or 17.0%, to $1.09 billion at September 30, 2021. Interest bearing accounts grew $85.8 million, or 12.5%, to $770.9 million while non-interest bearing balances increased $72.2 million, or 29.5%, finishing the first nine months of 2021 at $316.5 million. The increase in deposits was primarily due to the acquisition of $33.9 million in deposits from the acquisition of two branches from ConnectOne Bank in March 2021, the addition of two de novo branches, an accumulation of liquidity by customers in response to government stimulus actions, as well as organic growth in deposits.

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Borrowed Funds. Advances from the FHLB decreased $30.5 million, or 60.3%, from $50.7 million at December 31, 2020 to $20.1 million at September 30, 2021, as the Company was able to utilize increased deposits to fund asset growth.

Stockholders’ Equity. Stockholders' equity increased $7.7 million to $124.2 million at September 30, 2021, primarily due to net income of $8.6 million partially offset by a $1.6 million reversal from a net unrealized gain to a net unrealized loss on available for sale securities. At September 30, 2021, the Company’s book value per share was $10.99. At September 30, 2021, the Company’s ratio of stockholders’ equity-to-total assets was 9.84%. Unearned common stock held by the Bank’s employee stock ownership plan was $3.8 million at September 30, 2021.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2021 and September 30, 2020

Net Income. Net income for the three months ended September 30, 2021 increased $1.5 million, or 133.5%, to $2.7 million, or $0.25 per diluted share, compared to net income of $1.2 million, or $0.10 per diluted share, for the three months ended September 30, 2020. Interest and dividend income increased $185,000, or 1.7%, interest expense decreased $846,000, or 45.8%, the provision for loan losses decreased $3.2 million, or 142.4%, non-interest income decreased $457,000, or 21.8%, while other expenses and taxes increased $2.2 million, or 29.0%, between comparable quarters.

For the nine months ended September 30, 2021, net income was $8.6 million, or $0.79 per diluted share, compared to $3.6 million, or $0.33 per diluted share, for the nine months ended September 30, 2020. Interest and dividend income decreased by $479,000, or 1.5%, interest expense decreased $3.1 million, or 48.0%, and the provision for loan losses decreased $7.9 million, or 138.1%, resulting in a $10.5 million increase, or 51.0%, in net interest income after the provision for loan losses. Non-interest income increased $330,000, or 6.1% while other non-interest and tax expense increased $5.9 million, or 26.1%, during the equivalent nine month timeframes.  

Net Interest Income. Net interest income increased $1.0 million, or 11.4%, to $10.1 million for the three months ended September 30, 2021, compared to $9.0 million for the quarter ended September 30, 2020.  The ratio of average interest-earning assets to average interest-bearing liabilities improved 1.6% to 145.46% while our net interest margin increased by 2 basis points to 3.42% when comparing the third quarter of 2021 to the same period in 2020.

For the nine months ended September 30, 2021, net interest income increased $2.6 million, or 10.0%, to $29.0 million from $26.3 million for the comparable 2020 period.  Overall there was a 3 basis point decrease in the net interest margin to 3.44%, when comparing the respective nine month periods, while the ratio of average interest-earning assets to average interest-bearing liabilities improved 3.4% to 144.42%.

Interest Income. Interest income increased $185,000, or 1.7%, to $11.1 million for the three months ended September 30, 2021 from $10.9 million for the comparable 2020 period. The average yield decreased by 33 basis points to 3.76%, which was offset by an increase in the average balances of interest-earning assets of $110.8 million, or 10.5%, to $1.17 billion.

For the nine months ended September 30, 2021, interest income decreased $479,000, or 1.5%, to $32.3 million from $32.8 million for the nine months ended September 30, 2020. The average yield declined by 49 basis points when comparing the nine-month periods ended September 30, 2021 and 2020 to 3.84% for the nine months ended September 30, 2021, which was offset by an increase in the average balance of interest-earning assets of $113.3 million, or 11.2%, to $1.13 billion. The decrease was mostly driven lower earning asset yields due to lower yielding PPP loans and lower yielding debt securities due to the significant decline in the interest rate environment, partially offset by higher average earning asset balances.

Interest Expense. Interest expense decreased $846,000, or 45.8%, from $1.8 million for the quarter ended September 30, 2020, to $1.0 million for the quarter ended September 30, 2021. Interest rates on interest-bearing liabilities decreased 50 basis points to an average of 0.49% for the quarter ended September 30, 2021, which was offset by an increase in the average balance of total interest-bearing liabilities of $64.5 million, or 8.7%, to $803.2 million as the increase in the average balance of deposits was offset by a decrease in the average balance of FHLB advances.

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For the nine months ended September 30, 2021, interest expense decreased $3.1 million, or 48.0%, to $3.4 million from $6.5 million for the comparable 2020 period, as the average yield on interest-bearing liabilities decreased by 62 basis points from the first nine months of 2020 to 0.58% for the first nine months of 2021. The decrease in overall cost was partially offset by an increase of $54.7 million, or 7.5%, in the average balances of interest-bearing liability accounts as the increase in the average balance of deposits was offset by a decrease in the average balance of FHLB advances.

Provision for Loan Losses. The provision for loan losses decreased by $3.2 million, or 142.4%, from $2.3 million for the quarter ended September 30, 2020, to a credit of $954,000 for the current quarter. The provision decreased by $7.9 million, or 138.1%, from $5.7 million at September 30, 2020 to a credit of $2.2 million for the nine months ended September 30, 2021. The provision increased in 2020 as a result of the onset of the COVID-19 pandemic and related economic conditions. The credit for both the three months and nine months of 2021 was primarily attributable to a decline in loan balances, exclusive of multi-family commercial real estate loans, an improvement in credit quality and an improvement in the general economy as our customers show signs of recovering from the pandemic.

Net charge-offs for the quarter ended September 30, 2021 totaled $138,000 compared to $259,000 for the respective period in 2020.  For the nine-month period ended September 30, 2021, net charge-offs were $428,000, a decrease of $668,000, or 60.9%, when compared to $1.1 million in the comparative 2020 period. The decrease was primarily due to an improvement in the overall economic environment and pricing gains on the sales of repossessed vehicles as used car prices have risen significantly.

Non-Interest Income. Non-interest income totaled $1.6 million for the three months ended September 30, 2021; a decrease of $457,000, or 21.8%, from the comparable period in the prior year, due primarily to a decrease in the net gain on sales of loans resulting from a decline in loan volume. Loans sold totaled $16.3 million for the three months ended September 30, 2021 compared to $19.7 million for the three months ended September 30, 2020. An increase in service charges on deposit accounts of $106,000, or 19.0%, was driven primarily by the increase in transaction volume related to our acquisitions, as well as growth in the volume of our legacy deposit accounts.  Investment advisory income decreased $143,000, or 37.6%, as sales of annuities decreased.

Non-interest income increased $330,000, or 6.1%, to $5.7 million for the nine months ended September 30, 2021.  In the nine months ended September 30, 2021, we recorded a gain related to the collection of life insurance proceeds of $195,000. Increased transaction volume resulted in an increase in service charges on deposit accounts of $186,000, or 10.9%.  The cash surrender value of life insurance increased $122,000, or  42.1%, and various other non-interest income items increased $167,000. These increases were partially offset by a decrease in the net gain on sales of loans of $203,000, or 8.5%, and a decrease in investment advisory income of $130,000, or 13.8%.

Non-Interest Expense. For the third quarter of 2021, non-interest expense totaled $9.1 million, an increase of $1.7 million, or 23.0%, over the comparable 2020 period. The increase was primarily due to an increase in salaries and benefits of $1.0 million, or 24.1%, as the Company hired additional employees for its new branches and continued expansion into the Albany market. Occupancy expenses increased $175,000, or 19.8%, as a result of the additional rent, depreciation, and other expenses related to the branch expansion. The addition of  branches was also primarily responsible for increased data processing costs of $125,000. Professional fees increased $59,000, or 15.5%, as legal expense and consultant fees both increased over the third quarter of 2020. Other non-interest expenses increased $400,000, or 31.3%, primarily due to an additional estimated reserve for potential consumer compliance issues in the Bank’s indirect automobile portfolio. Additional reserves in the future may be required but cannot be estimated at this time.

For the nine months ended September 30, 2021, non-interest expense increased $4.5 million, or 20.8%, to $26.0 million from $21.5 million over the comparative period in 2020. The increase was primarily due to an increase in salaries and benefits of $2.4 million, or 19.9%, due to new branch employees, market expansion, as well as annual merit increases, production incentives and employee benefit increases. Occupancy increased $439,000, or 16.8%, and professional fees increased $320,000, or 30.3%, while data processing increased $229,000, or 22.0%. Other non-interest expenses increased $1.1 million, or 32.4%, and included an additional estimated reserve of $450,000 for potential consumer compliance issues in the Bank’s indirect automobile portfolio.

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Income Taxes. Income taxes increased by $537,000 for the three months ended September 30, 2021 as compared to the comparable period in 2020 as our income before income taxes increased. Our effective tax rate for the three months ended September 30, 2021 was 23.6% compared to 20.3% for the three months ended September 30, 2020.

For the nine months ended September 30, 2021, income taxes increased $1.4 million, or 144.2%, to $2.3 million in the first nine months of 2021 from $958,000 for the comparable 2020 period. Our effective tax rate for the nine months ended September 30, 2021 was 21.4% as compared to 21.1% for the nine months ended September 30, 2020.

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Average Balance Sheets for the Three and Nine Months Ended September 30, 2021 and 2020

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,
	2021						2020
	Average		Interest and				Average		Interest and
	Balance		Dividends		Yield/Cost(3)		Balance		Dividends		Yield/Cost(3)
Assets:
Interest bearing depository accounts	$	90,680	$	34	0.15	%	$	48,544	$	12	0.10	%
Loans(1)		854,822		10,402	4.83	%		898,535		10,386	4.60	%
Available for sale securities		222,851		623	1.11	%		110,469		476	1.71	%
Total interest-earning assets		1,168,353		11,059	3.76	%		1,057,548		10,874	4.09	%
Non-interest-earning assets		78,220						61,638
Total assets	$	1,246,573					$	1,119,186
Liabilities and equity:
NOW accounts	$	152,578	$	59	0.15	%	$	121,766	$	73	0.24	%
Money market accounts		259,014		359	0.55	%		173,703		415	0.95	%
Savings accounts		180,277		72	0.16	%		146,483		85	0.23	%
Certificates of deposit		173,013		340	0.78	%		222,749		945	1.69	%
Total interest-bearing deposits		764,882		830	0.43	%		664,701		1,518	0.91	%
Escrow accounts		12,304		36	1.16	%		12,432		35	1.13	%
Federal Home Loan Bank advances		20,858		106	2.02	%		56,422		272	1.92	%
Subordinated debt		5,155		28	2.15	%		5,155		21	1.61	%
Other interest-bearing liabilities		38,317		170	1.76	%		74,009		328	1.77	%
Total interest-bearing liabilities		803,199		1,000	0.49	%		738,710		1,846	0.99	%
Non-interest-bearing deposits		298,713						248,148
Other non-interest-bearing liabilities		20,838						17,874
Total liabilities		1,122,750						1,004,732
Total stockholders’ equity		123,823						114,454
Total liabilities and stockholders’ equity	$	1,246,573					$	1,119,186
Net interest income			$	10,059					$	9,028
Interest rate spread					3.27	%					3.10	%
Net interest margin(2)					3.42	%					3.40	%
Average interest-earning assets to average interest-bearing liabilities					145.46	%					143.16	%

⁽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.

⁽³⁾ Annualized.

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	For the Nine Months Ended September 30,
	2021						2020
	Average		Interest and				Average		Interest and
	Balance		Dividends		Yield/Cost(3)		Balance		Dividends		Yield/Cost(3)
	(Dollars in thousands)
Assets:
Interest bearing depository accounts	$	77,632	$	66	0.11	%	$	39,777	$	36	0.12	%
Loans(1)		869,238		30,722	4.73	%		859,636		31,001	4.82	%
Available for sale securities		179,901		1,560	1.16	%		114,043		1,790	2.10	%
Total interest-earning assets		1,126,771		32,348	3.84	%		1,013,456		32,827	4.33	%
Non-interest-earning assets		70,646						60,529
Total assets	$	1,197,417					$	1,073,985
Liabilities and equity:
NOW accounts	$	145,830	$	184	0.17	%	$	109,151	$	192	0.23	%
Money market accounts		231,849		1,042	0.60	%		164,561		1,328	1.08	%
Savings accounts		172,338		214	0.17	%		135,914		254	0.25	%
Certificates of deposit		183,136		1,292	0.94	%		226,921		3,574	2.10	%
Total interest-bearing deposits		733,153		2,732	0.50	%		636,547		5,348	1.12	%
Escrow accounts		9,727		84	1.15	%		9,546		81	1.13	%
FHLB and FRB advances		32,178		477	1.98	%		74,258		960	1.73	%
Subordinated debt		5,155		85	2.20	%		5,155		112	2.90	%
Other interest-bearing liabilities		47,060		646	1.84	%		88,959		1,153	1.73	%
Total interest-bearing liabilities		780,213		3,378	0.58	%		725,506		6,501	1.20	%
Non-interest-bearing deposits		276,508						218,150
Other non-interest-bearing liabilities		19,844						16,524
Total liabilities		1,076,565						960,180
Total stockholders’ equity		120,852						113,805
Total liabilities and stockholders’ equity	$	1,197,417					$	1,073,985
Net interest income			$	28,970					$	26,326
Interest rate spread					3.26	%					3.13	%
Net interest margin(2)					3.44	%					3.47	%
Average interest-earning assets to average interest-bearing liabilities					144.42	%					139.69	%

⁽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.

⁽³⁾ Annualized.

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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 September 30, 2021						Nine Months Ended September 30, 2021
	Compared to Three Months Ended						Compared to Nine Months Ended
	September 30, 2020						September 30, 2020
	Increase (Decrease)						Increase (Decrease)
	Due to						Due to
	Volume		Rate		Net		Volume		Rate		Net
Interest income:
Interest bearing depository accounts	$	13	$	9	$	22	$	32	$	(2)	$	30
Loans receivable		(533)		549		16		343		(622)		(279)
Marketable securities		392		(245)		147		772		(1,002)		(230)
Total interest-earning assets		(128)		313		185		1,147		(1,626)		(479)
Interest expense:
Deposits		9		(697)		(688)		(51)		(2,565)		(2,616)
Escrow accounts		—		1		1		2		1		3
Federal Home Loan Bank advances		(181)		15		(166)		(607)		124		(483)
Subordinated debt		—		7		7		—		(27)		(27)
Total interest-bearing liabilities		(172)		(674)		(846)		(656)		(2,467)		(3,123)
Net increase in net interest income	$	44	$	987	$	1,031	$	1,803	$	841	$	2,644

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 initial 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.

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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, 2021 (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
400	$	112,150	$	(9,967)	(8.2)	%	9.72	%	0.2	%
300		115,132		(6,985)	(5.7)	%	9.78	%	0.8	%
200		117,924		(4,193)	(3.4)	%	9.80	%	1.1	%
100		121,065		(1,052)	(0.9)	%	9.84	%	1.4	%
0		122,117		—	—	%	9.70	%	—	%
(100)	$	98,100	$	(24,017)	(19.7)	%	7.63	%	(21.3)	%

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, 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. At September 30, 2021, $114.6 million of our assets were held in cash and cash equivalents. We had $12.9 million in short-term investment securities (maturing in one year or less) at September 30, 2021. As of September 30, 2021, we had $20.1 million of structured borrowings outstanding from the FHLB, of which $17.6 million is due within the next 12 months. We had access to FHLB advances of up to $631.3 million as of September 30, 2021.

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At September 30, 2021, we had $100.9 million in loan commitments outstanding, which included $2.7 million in undisbursed construction loans, $10.8 million in unused home equity lines of credit, $72.1 million in commercial lines of credit, $12.2 million in future loan commitments and $3.1 million in standby letters of credit. Certificates of deposit due within one year of September 30, 2021 totaled $137.3 million, or 81.6% 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 before September 30, 2022. We believe, however, based on past 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.

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 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.

Item 3.          Quantitative and Qualitative Disclosures About Market Risk

For information regarding market risk, see “Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operation- Management of Market Risk.”

Item 4.           Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2021. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the three months ended September 30, 2021, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.           Legal Proceedings

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. At September 30, 2021, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A.        Risk Factors

There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.           Defaults Upon Senior Securities

None.

Item 4.           Mine Safety Disclosures

Not applicable.

Item 5.           Other Information

None.

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Item 6.           Exhibits

3.1	Articles of Incorporation of Rhinebeck Bancorp, Inc. (Incorporated by reference to the Registration Statement on Form S-1 of Rhinebeck Bancorp, Inc. (File no. 333-227266), originally filed with the Securities and Exchange Commission on September 10, 2018.)
3.2	Bylaws of Rhinebeck Bancorp, Inc. (Incorporated by reference to the Current Report on Form 8-K of Rhinebeck Bancorp, Inc. (File no. 333-227266), filed with the Securities and Exchange Commission on September 27, 2019.)
4.0	Form of Common Stock Certificate of Rhinebeck Bancorp, Inc. (Incorporated by reference to the Registration Statement on Form S-1 of Rhinebeck Bancorp, Inc. (File no. 333-227266), originally filed with the Securities and Exchange Commission on September 10, 2018.)
31.1	Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0	The following materials for the period ended September 30, 2021, formatted in inline XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements
104.0	The cover page from Rhinebeck Bancorp’s Form 10-Q for the quarterly period ended September 30, 2021, formatted in inline XBRL (contained in Exhibit 101.0)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	RHINEBECK BANCORP, INC.
Date: November 10, 2021		/s/ Michael J. Quinn
		Michael J. Quinn President and Chief Executive Officer
Date: November 10, 2021		/s/ Michael J. McDermott
		Michael J. McDermott Chief Financial Officer

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