Company Quick10K Filing
Rhinebeck Bancorp
Price10.50 EPS0
Shares11 P/E28
MCap117 P/FCF16
Net Debt-18 EBIT12
TEV99 TEV/EBIT8
TTM 2019-09-30, in MM, except price, ratios
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RBKB 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10 - K Summary
EX-23.1 rbkb-20201231ex231edb37f.htm
EX-31.1 rbkb-20201231ex311aed2cb.htm
EX-31.2 rbkb-20201231ex31259f39b.htm
EX-32 rbkb-20201231xex32.htm

Rhinebeck Bancorp Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
95076057038019002016201720182020
Assets, Equity
2.11.71.30.80.40.02016201720182020
Rev, G Profit, Net Income
35193-13-29-452016201720182020
Ops, Inv, Fin

10-K 1 rbkb-20201231x10k.htm 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


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

For the Fiscal Year Ended December 31, 2020

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

(I.R.S. Employer

incorporation or organization)

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

Securities Registered Pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO

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 twelve 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 (§232.405 of this chapter) 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, or a smaller reporting company. See the definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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 March 1, 2021, there were 11,133,290 shares issued of the Registrant’s Common Stock of which 6,345,975 are owned by Rhinebeck Bancorp, MHC.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on at the end of the most recently completed second quarter was $27,601,220.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s definitive proxy statement, in connection with its 2021 annual meeting of stockholders, to be filed within 120 days of December 31, 2020, are incorporated by reference into Part III of this Annual Report on Form 10-K.


TABLE OF CONTENTS

PART I

Item 1.

Business

1

Item 1A.

Risk Factors

32

Item 1B.

Unresolved Staff Comments

43

Item 2.

Properties

43

Item 3.

Legal Proceedings

43

Item 4.

Mine Safety Disclosures

43

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

43

Item 6.

Selected Financial Data

44

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

47

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

61

Item 8.

Financial Statements and Supplementary Data

61

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

62

Item 9A.

Controls and Procedures

62

Item 9B.

Other Information

62

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

63

Item 11.

Executive Compensation

63

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

63

Item 13.

Certain Relationships and Related Transactions, and Director Independence

63

Item 14.

Principal Accounting Fees and Services

63

PART IV

64

Item 15.

Exhibits and Financial Statement Schedules

64

Item 16.

Form 10-K Summary

65

Signatures

i


EXPLANATORY NOTE

Rhinebeck Bancorp, Inc. (the “Company,” “we” or “our”) was formed to serve as the mid-tier stock holding company for Rhinebeck Bank in connection with the reorganization of Rhinebeck Bank and its mutual holding company, Rhinebeck Bancorp, MHC, into the two-tier mutual holding company structure. The reorganization was completed on January 16, 2019. Prior to January 16, 2019, the Company had no assets or liabilities and had not conducted any business activities other than organizational activities. Accordingly, the unaudited financial statements and other financial information contained in this annual report on Form 10-K relate solely to the consolidated financial results and financial position of Rhinebeck Bancorp, MHC and Rhinebeck Bank for any period prior to January 16, 2019.

Forward Looking Statements

This annual report on Form 10-K 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 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, including as a result of the ongoing coronavirus pandemic;
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;

ii


adverse changes in the securities markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, Federal Deposit Insurance Corporation premiums and capital requirements;
our ability to manage market risk, credit risk and operational risk;
our ability to enter new markets successfully and capitalize on growth opportunities;
the imposition of tariffs or other domestic or international governmental polices impacting the value of the agricultural or other products of our borrowers;
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;
system failures or cybersecurity threats against our informational technology and those of our third party providers and vendors;
the failure to maintain current technologies and to successfully implement future information technology enhancements;
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 future 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 high 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 have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;

iii


the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin, spread and net income;
our investment advisory fees may decline with continuing market turmoil;
our cyber security risks are increased as the result of an increase in the number of employees working remotely;
Federal Deposit Insurance Corporation (“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 U.S. Small Business Administration (“SBA”) Paycheck Participation Program (“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.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please also see “Item 1A. Risk Factors.”

iv


PART I

Item 1.      Business

Rhinebeck Bancorp, Inc.

Rhinebeck Bancorp, Inc., (the “Company”) a Maryland corporation, was incorporated in August 2018. On January 16, 2019, the Company became the holding company for Rhinebeck Bank (the “Bank”), when it closed its stock offering in connection with the completion of the reorganization of the Company and the Bank into a two-tier mutual holding company form of organization. The Company sold 4,787,315 shares of common stock at a price of $10.00 per share, for net proceeds of  $46.0 million, and issued 6,345,975 shares to Rhinebeck Bancorp, MHC in exchange for certain assets (including all of the stock of its subsidiary trust and associated subordinated debentures) and its interest in the Bank. Prior to January 16, 2019, the Company had engaged in organizational activities only. The Company is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the New York State Department of Financial Services (the “NYSDFS”). The consolidated financial results contained herein reflect the consolidated accounts of the Company and the Bank at and for periods after January 16, 2019.

At December 31, 2020, the Company had consolidated total assets of  $1.13 billion, total deposits of $929.4 million and stockholders’ equity of  $116.5 million. The Company’s executive offices are located at 2 Jefferson Plaza, Poughkeepsie, New York 12601. The telephone number at this address is (845) 454-8555. Our website address is www.Rhinebeckbank.com. Information on this website is not and should not be considered a part of this report.

Rhinebeck Bancorp, Inc. files interim, quarterly and annual reports with the Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers such as Rhinebeck Bancorp, Inc. that file electronically with the SEC. All filed SEC reports and interim filings can also be obtained from the Bank’s website (www.Rhinebeckbank.com), on the “Investor Relations” page, without charge from Rhinebeck Bancorp, Inc.

Rhinebeck Bancorp, MHC

Rhinebeck Bancorp, MHC is a mutual holding company that owns 57% of the outstanding common stock of Rhinebeck Bancorp, Inc. Prior to the completion of the reorganization and stock offering on January 16, 2019, the Bank was the wholly-owned subsidiary of Rhinebeck Bancorp, MHC. The consolidated financial results contained herein reflect the consolidated accounts of Rhinebeck Bancorp, MHC and the Bank for periods prior to January 16, 2019.

Rhinebeck Bank

Rhinebeck Bank is a New York-chartered stock savings bank that was organized in 1860. Rhinebeck Bank reorganized into the mutual holding company form of organization in 2004 by becoming a wholly-owned subsidiary of Rhinebeck Bancorp, MHC and converting to a stock savings bank as part of the reorganization. The Bank provides a full range of banking and financial services to consumer and commercial customers through its 11 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 Bank’s primary business activity is accepting deposits from the general public and using those funds, primarily to originate indirect automobile loans (automobile loans referred to us by automobile dealerships), commercial real estate loans (which includes multi-family real estate loans and commercial construction loans), commercial business loans and one- to four-family residential real estate loans, and to purchase investment securities. The Bank is subject to regulation and examination by the NYSDFS and by the FDIC.

Market Area

Our primary market area encompasses Dutchess, Orange and Ulster Counties (and their contiguous counties), which are located in the Hudson Valley region of New York. Our retail banking offices are located in these three counties and serve the surrounding areas. The Hudson Valley region has a diversified economy and representative industries include

1


education, health, government, leisure and hospitality and professional business services. We also maintain a representative office in Albany County to originate indirect automobile loans. We view Orange and Albany Counties, which have larger populations than Dutchess and Ulster Counties, as primary areas for growth.

Based on published statistics, the U.S. unemployment rate was 6.7%, while the New York State unemployment rate was 8.2% as of December 31, 2020. The four counties in our primary market area each had a lower unemployment rate than New York State as a whole (Dutchess County, 5.4%; Orange County, 5.9%, Ulster County, 5.4% and Albany County, 5.5%). According to the New York State Department of Labor, for the twelve-month period ended December 31, 2020, the Hudson Valley’s private sector job growth decreased by 9.2%. Over the year, the job losses continue to reflect the impact of the COVID-19 pandemic. Based on published statistics, median household income for 2019 (the latest date for which information was available) was $81,219 in Dutchess County, $79,944 in Orange County, $64,304 in Ulster County and $66,252 in Albany County, compared to $62,843 in the U.S. and $68,486 in New York State as a whole. Based on published statistics, the 2019 population was 294,218 in Dutchess County, 384,940 in Orange County, 177,573 in Ulster County and 305,506 in Albany County.

Competition

We face significant competition for deposits and loans. Our most direct competition for deposits has historically come from the numerous financial institutions operating in our market area (including other community and commercial banks and credit unions), many of which are significantly larger than we are and have greater resources. We also face competition for investors’ funds from other sources such as brokerage firms, money market funds and mutual funds, as well as securities, such as Treasury bills, offered by the Federal Government. Based on Federal Deposit Insurance Corporation data, at June 30, 2020 (the latest date for which information is available), we had 10.86% of the FDIC-insured deposit market share in Dutchess County, which was 4th among the 15 institutions with offices in the county, 1.62% of the FDIC-insured deposit market share in Ulster County, which was 14th among the 19 institutions with offices in the county, and 0.24% of the FDIC-insured deposit market share in Orange County, which was 21st among the 24 institutions with offices in the county. In all three counties, New York City money center banks or large regional banks have a significant presence.

Our competition for loans comes primarily from the competitors referenced above and from other financial service providers, such as mortgage companies, mortgage brokers and credit unions. Competition for loans also comes from the increasing number of non-depository financial service companies participating in the mortgage market, such as insurance companies, securities companies, specialty finance firms and financial technology companies.

We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the internet and made it possible for non-depository institutions, including financial technology companies, to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our growth in the future.

We seek to meet this competition by the convenience of our branch locations, emphasizing personalized banking and the advantage of local decision-making in our banking businesses. Specifically, we promote and maintain relationships and build customer loyalty within local communities by focusing our marketing and community involvement on the specific needs of individual neighborhoods. We do not rely on any individual, group, or entity for a material portion of our deposits.

Lending Activities

General.

Loans are our primary interest-earning asset. At December 31, 2020, net loans represented 77.4% of our total assets.

2


Loan Portfolio Composition.

The following table sets forth the composition of the loan portfolio at the dates indicated.

At December 31, 

 

2020

2019

2018

2017

2016

 

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

 

(Dollars in thousands)

 

Residential Real Estate Loans(1)(2)

$

39,239

 

4.48

%  

$

43,726

 

5.54

%  

$

43,534

 

6.43

%  

$

43,300

 

7.65

%  

$

40,382

 

7.86

%  

Commercial Real Estate Loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Non-residential

 

248,349

 

28.33

%  

 

228,157

 

28.90

%  

 

197,499

 

29.17

%  

 

192,469

 

33.98

%  

 

171,563

 

33.39

%  

Multi-family

 

30,379

 

3.46

%  

 

20,129

 

2.55

%  

 

12,661

 

1.87

%  

 

13,103

 

2.31

%  

 

6,788

 

1.32

%  

Construction(3)

 

5,392

 

0.61

%  

 

20,354

 

2.58

%  

 

12,870

 

1.90

%  

 

5,621

 

0.99

%  

 

13,420

 

2.61

%  

Total

 

284,120

 

32.41

%  

 

268,640

 

34.03

%  

 

223,030

 

32.94

%  

 

211,193

 

37.28

%  

 

191,771

 

37.32

%  

Commercial Loans:(4)

 

154,016

 

17.57

%  

 

90,554

 

11.47

%  

 

83,203

 

12.29

%  

 

67,650

 

11.95

%  

 

56,871

 

11.07

%  

Consumer Loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Indirect automobile

 

376,260

 

42.92

%  

 

360,569

 

45.67

%  

 

297,144

 

43.89

%  

 

214,823

 

37.93

%  

 

195,343

 

38.02

%  

Home equity

 

14,165

 

1.62

%  

 

16,276

 

2.06

%  

 

19,269

 

2.85

%  

 

19,452

 

3.44

%  

 

20,798

 

4.05

%  

Other consumer

 

8,816

 

1.01

%  

 

9,752

 

1.23

%  

 

10,826

 

1.60

%  

 

9,929

 

1.75

%  

 

8,615

 

1.68

%  

Total

 

399,241

 

45.54

%  

 

386,597

 

48.96

%  

 

327,239

 

48.34

%  

 

244,204

 

43.12

%  

 

224,756

 

43.75

%  

Total loans receivable, gross

 

876,616

 

100.00

%  

 

789,517

 

100.00

%  

 

677,006

 

100.00

%  

 

566,347

 

100.00

%  

 

513,780

 

100.00

%  

Net deferred loan origination fees

 

8,830

 

  

 

9,908

 

  

 

8,042

 

  

 

5,288

 

  

 

4,690

 

  

Allowance for loan losses

 

(11,633)

 

  

 

(5,954)

 

  

 

(6,646)

 

  

 

(5,457)

 

  

 

(5,876)

 

  

Loans receivable, net

$

873,813

 

  

$

793,471

 

  

$

678,402

 

  

$

566,178

 

  

$

512,594

 

  


(1)Includes residential construction loans totaling $3.3 million, $4.2 million, $4.6 million, $3.0 million and $5.1 million at December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
(2)Includes loans held for sale totaling $2.7 million, $2.7 million, $888,000, $2.1 million and $482,000 at December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
(3)Represents the amounts distributed at the dates indicated.
(4)Includes $75,366 in SBA PPP loans at December 31, 2020.

Loan Portfolio Maturities.  The following tables set forth certain information at December 31, 2020 and 2019 regarding the dollar amount of loans that will mature in the given period. The tables do not include any estimate of prepayments that significantly shorten the average loan life and may cause actual repayment experience to differ from that shown below. Demand loans, which are loans having no stated repayment schedule or no stated maturity, are reported as due in one year or less.

At December 31, 2020

    

Residential

    

Commercial

    

    

    

Real Estate

Real Estate

Commercial

Consumer

Total

Loans

Loans

Loans

Loans

Loans

(In thousands)

Amounts due in:

One year or less

$

3,287

$

4,542

$

32,706

$

4,700

 

$

45,235

More than one year through two years

 

 

6,831

 

76,129

 

18,086

 

 

101,046

More than two years through three years

 

233

 

2,197

 

9,512

 

46,790

 

 

58,732

More than three years through five years

 

465

 

18,224

 

20,631

 

200,218

 

 

239,538

More than five years through ten years

 

3,590

 

48,193

 

14,263

 

117,369

 

 

183,415

More than ten years through 15 years

 

5,187

 

41,779

 

417

 

3,157

 

 

50,540

More than 15 years

 

26,477

 

162,354

 

358

 

8,921

 

 

198,110

Total

$

39,239

$

284,120

$

154,016

$

399,241

 

$

876,616

3


At December 31, 2019

    

Residential

    

Commercial

    

    

    

Real Estate

Real Estate

Commercial

Consumer

Total

Loans

Loans

Loans

Loans

Loans

(In thousands)

Amounts due in:

One year or less

$

4,215

$

23,741

$

35,133

$

4,480

 

$

67,569

More than one year through two years

 

39

 

1,218

 

5,361

 

15,475

 

 

22,093

More than two years through three years

 

 

6,025

 

7,850

 

35,896

 

 

49,771

More than three years through five years

 

922

 

15,643

 

21,940

 

179,750

 

 

218,255

More than five years through ten years

 

4,328

 

39,283

 

19,172

 

136,843

 

 

199,626

More than ten years through 15 years

 

4,457

 

53,327

 

544

 

4,190

 

 

62,518

More than 15 years

 

29,765

 

129,403

 

554

 

9,963

 

 

169,685

Total

$

43,726

$

268,640

$

90,554

$

386,597

 

$

789,517

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2020 that are contractually due after December 31, 2021. The amounts shown below exclude unearned loan origination fees.

    

    

Floating or

    

Fixed

Adjustable

 

Rates

Rates

Total

(In thousands)

Residential real estate loans

$

19,252

$

16,700

$

35,952

Commercial real estate loans

 

33,385

 

246,193

 

279,578

Commercial loans

 

108,833

 

12,477

 

121,310

Consumer loans

 

380,927

 

13,614

 

394,541

Total

$

542,397

$

288,984

$

831,381

Indirect Automobile Loans.

We have been in the business of providing indirect financing of automobile purchases since 1999. At December 31, 2020, indirect automobile loans totaled $376.3 million, or 42.9% of our total loan portfolio. We acquire our indirect automobile loans from 91 automobile dealerships located in the Hudson Valley region and 55 dealers located in the Albany area, either under an arrangement where the dealer receives a flat fee for referring the loan to us or receives a portion of the finance charge which is known as dealer participation or dealer reserve. We typically pay 70% of the reserve to the dealer at the time of loan closing and retain the remainder to cover potential future prepayments. 48.9% of the aggregate principal balance of our indirect automobile loan portfolio as of December 31, 2020 was for the purchase of new vehicles and the remainder, 51.1%, was for used vehicles. The weighted average original term to maturity of our indirect automobile loan portfolio at December 31, 2020 was five years and nine months.

Each dealer that originates automobile loans makes representations and warranties with respect to our security interests in the related financed vehicles in a separate dealer agreement with us. These representations and warranties do not relate to the creditworthiness of the borrowers or the collectability of the loan. The dealers are also responsible for ensuring that our security interest in the financed vehicles is perfected. Each automobile loan requires the borrower to keep the financed vehicle fully insured against loss or damage by fire, theft and collision. The dealer agreements require the dealers to represent that adequate physical damage insurance (collision and comprehensive) was in effect at the time the related loan was originated and financed by us. In addition, we have the right to “force place” insurance coverage (supplemental insurance taken out by Rhinebeck Bank) if the required physical damage insurance on an automobile is not maintained by the borrower. Nevertheless, there can be no assurance that each borrower will maintain physical damage insurance for a financed vehicle during the entire term of an automobile loan. Vendors Single Interest Insurance, which is included on every automobile loan originated, protects the Bank against losses for physical damage to repossessed automobiles.

Each dealer submits loan applications directly to us, and the borrower’s creditworthiness is the most important criterion we use in determining whether to approve the loan. Each credit application generally requires that the borrower

4


provide current information regarding their employment history, indebtedness, and other factors that bear on creditworthiness. We also obtain a credit report from a major credit reporting agency summarizing the borrower’s credit history and paying habits, including such items as open accounts, delinquent payments, bankruptcies, repossessions, lawsuits and judgments.

Each borrower’s credit score is the principal factor we use in determining the appropriate interest rate on a loan. Our underwriting procedures evaluate the credit information relative to the value of the vehicle to be financed. At times, our underwriters may also verify a borrower’s employment income and/or residency and, where appropriate, verify a borrower’s payment history directly with the borrower’s creditors. Based on these procedures, a credit decision is considered. We basically follow the same underwriting guidelines in originating direct automobile loans.

We generally finance up to the full sales price of the vehicle plus sales tax, dealer preparation fees, license fees and title fees, plus the cost of service and warranty contracts (amounts in addition to the sales price are collectively referred to as the “additional vehicle costs”). In addition, we also may finance the negative equity related to the vehicle traded in by the borrower in connection with a prior financing. Accordingly, the amount we finance may exceed, depending on the borrower’s credit score, in the case of new vehicles, the aggregate of the dealer’s invoice price of the financed vehicle and the additional vehicle costs, or in the case of a used vehicle, the aggregate of the vehicle’s value and the additional vehicle costs. The maximum amount that can be borrowed for an automobile loan by borrowers with our lowest risk rating generally may not exceed 135% of the full sales price of a new vehicle, or the vehicle’s “wholesale” value in the case of a used vehicle. The vehicle’s value is determined by using one of the standard reference sources for dealers of used cars. We regularly review the quality of the loans we purchase from the dealers and periodically conduct quality control audits to ensure compliance with our established policies and procedures.

At December 31, 2020, our automobile loans to borrowers with credit scores of 639 or less at origination totaled $44.6 million, or 11.9% of our total indirect automobile loan portfolio. We typically will not originate these types of loans with loan-to-value ratios greater than 100% of the sales price of the automobile or debt-to-income ratios greater than 40%.

Commercial Real Estate Loans.

At December 31, 2020, non-residential commercial real estate loans were $248.3 million, or 28.3%, of our total loan portfolio. Our commercial real estate loans are generally secured by properties used for business purposes, such as office buildings, industrial facilities and retail facilities. At December 31, 2020, $109.7 million of our commercial real estate portfolio was owner-occupied real estate and $174.4 million was secured by income producing, non-owner occupied real estate. At December 31, 2020, substantially all of our commercial real estate loans were secured by properties located in our market area. However, occasionally we will originate commercial real estate loans on properties located outside this area based on an established relationship with a strong borrower. We had $11.3 million of such loans at December 31, 2020.

We originate a variety of commercial real estate loans with terms and amortization periods generally up to 25 years, for large newly constructed commercial developments, including retail plazas and up to 20 years for almost all other commercial properties. The interest rate on commercial real estate loans is generally adjustable and based on a margin over an index, typically The Wall Street Journal Prime Rate or the U.S. Constant Maturity Treasury Rate. Commercial real estate loans are generally originated in amounts up to 75% of the appraised value or the purchase price of the property securing the loan, whichever is lower.

In underwriting commercial real estate loans, we consider a number of factors, including the projected net cash flows to the loan’s debt service requirement (generally requiring a minimum of 1.20x), the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. Where appropriate, we also require corporate guarantees and/or personal guarantees. We monitor borrowers’ and guarantors’ financial information on an ongoing basis by requiring periodic financial statement updates.

5


At December 31, 2020, our largest commercial real estate loan had an outstanding balance of $8.8 million and was secured by a retail shopping center located in Wappingers Falls, New York. At December 31, 2020, this loan was performing according to its original terms.

Commercial Business Loans.

We originate commercial business loans and lines of credit to a variety of small- and medium-sized businesses in our market area. Our commercial business borrowers include professional organizations, family-owned businesses, and not-for-profit organizations. These loans are generally secured by business assets and we may require support of this collateral with liens on real property. At December 31, 2020, commercial business loans were $154.0 million, or 17.6% of our total loan portfolio. At December 31, 2020, commercial business loans included $75.4 million of SBA PPP loans. We encourage our commercial business borrowers to maintain their primary deposit accounts with us, many of which are non-interest-bearing, which improves our overall interest rate spread and profitability.

Our commercial business loans include term loans and revolving lines of credit. Commercial loans and lines of credit are made with either variable or fixed rates of interest. Variable interest rates are based on a margin over an index we select, typically The Wall Street Journal Prime Rate or the U.S. Constant Maturity Treasury Rate. Commercial business loans typically have shorter terms to maturity and higher interest rates than commercial real estate loans, but may involve more credit risk because of the type of collateral and our reliance primarily on the success of a borrower’s business for the repayment of the loan.

When making commercial business loans, we consider the financial history of the borrower, our lending experience with the borrower, the debt service capabilities and global cash flows of the borrower and other guarantors, and the value of the collateral, such as accounts receivable, inventory and equipment. Depending on the collateral used to secure the loans, commercial business loans are made in amounts up to 90% of the value of the collateral securing the loan. We require commercial business loans extended to closely held businesses to be guaranteed by the principals, as well as other appropriate guarantors, when personal assets are in joint names or a principal’s net worth is not sufficient to support the loan.

Commercial business loans include participations we purchase from a single, board-approved third party in leveraged lending transactions. Leveraged lending transactions are generally used to support a merger- or acquisition-related transaction, to back a recapitalization of a company’s balance sheet or to refinance debt. When considering a participation in the leveraged lending market, we will participate only in first lien senior secured term loans and lines of credit that are more closely aligned to middle market transactions. To further minimize risk, based on our current capital levels and loan portfolio, we have limited the total amount of leveraged loans to $1.0 million with a single obligor while maintaining that the total of all leveraged loans cannot exceed more than 15% of our risk-based capital. We also monitor industry and customer concentrations. At December 31, 2020, our leverage loans totaled $5.1 million, all of which were performing in accordance with their contractual terms.

At December 31, 2020, our largest commercial business loan had an outstanding balance of $3.4 million and was secured by accounts receivable and inventory. At December 31, 2020, this loan was performing according to its original terms.

Residential Mortgage and Residential Construction Loans.

Our one- to four-family residential loan portfolio consists of mortgage loans that enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the borrower. At December 31, 2020, one- to four-family residential real estate loans totaled $39.2 million, or 4.5% of our total loan portfolio, and consisted of $22.5 million of fixed-rate loans and $16.7 million of adjustable-rate loans. Most of these one- to four-family residential properties are located in our primary market area. We will consider originating one- to four-family residential real estate loans secured by properties located outside our normal lending area on a case by case basis, preferably to preexisting customers with a relationship of one year or longer, and provided the property is located in New York.

6


We offer fixed-rate and adjustable-rate residential mortgage loans with maturities up to 30 years. The one- to four-family residential mortgage loans that we originate are generally underwritten according to Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” Loans to be sold to other approved investors or secondary market sources are underwritten to their specific requirements. We originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits. To a lesser extent, we also originate loans above the conforming limits, which are referred to as “jumbo loans.” We usually underwrite jumbo loans, whether originated or purchased, in a manner similar to conforming loans.

Generally, we sell all of the fixed-rate residential mortgage loans that we originate to reduce our interest rate risk exposure and generate fee income. The majority of mortgage loans we originate are sold to Freddie Mac on a servicing rights retained basis. We also originate State of New York Mortgage Agency (“SONYMA”) loans, which are sold on a servicing released basis. We may retain in our portfolio certain high quality fixed-rate mortgages with terms up to 30 years if we believe the interest rates on the mortgages are favorable or acceptable relative to market interest rates. We sold $95.0 million and $48.2 million of fixed-rate residential mortgages during the years ended December 31, 2020 and 2019, respectively. At December 31, 2020, we serviced $300.7 million of one- to four-family residential mortgage loans for others. We generated $591,000 and $605,000 in loan servicing fee income during the years ended December 31, 2020 and 2019, respectively.

We will originate one- to four-family residential mortgage loans with loan-to-value ratios of up to 80% of the appraised value, depending on the size of the loan. Our conforming mortgage loans may be for up to 97% of the appraised value of the property provided the borrower obtains private mortgage insurance. Additionally, mortgage insurance is required for all mortgage loans that have a loan-to-value ratio greater than 80%. The required coverage amount varies based on the loan-to-value ratio and term of the loan. We only permit borrowers to purchase mortgage insurance from companies that have been approved by Freddie Mac or Fannie Mae. We maintain wholesale broker relationships that give us a wider range of products to better serve our existing customers and to attract new customers for our mortgage loan products. These wholesale relationships provide us access to government-backed loan programs such as Federal Housing Administration and Department of Veterans Affairs financing.

We do not offer “interest only” mortgage loans on one- to four-family residential properties or loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. Additionally, we do not offer “subprime loans” (loans that are made with low down-payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).

We originate loans to finance the construction of one- to four-family residential properties. We also originate rehabilitation loans, enabling the borrower to partially or totally refurbish an existing structure, which are structured as construction loans and monitored in the same manner. At December 31, 2020, residential construction loans totaled $3.3 million, or 8.4% of our residential mortgage loan portfolio. Most of these loans are secured by properties located in our primary market area.

Our residential land and acquisition loans are generally structured as two-year interest-only balloon loans. The interest rate is generally a fixed rate based on an index rate, plus a margin. Our construction-to-permanent loans are generally structured as interest-only, one-year, fixed-rate loans during the construction phase. Construction loan-to-value ratios for one- to four-family residential properties generally will not exceed 80% of the appraised value on a completed basis or the cost of completion, whichever is less, during the construction phase of the mortgage. Once the construction project is satisfactorily completed, we provide permanent financing or sell the permanent mortgage to an investor like Freddie Mac.

Before making a commitment to fund a construction loan, we generally require an appraisal of the property by an independent licensed appraiser. The construction phase is carefully monitored to minimize our risk. All construction projects must be completed in accordance with approved plans and approved by the municipality in which they are

7


located. Loan proceeds are disbursed periodically in increments as construction progresses and as inspections by our approved inspectors warrant.

Multi-Family Real Estate Loans.

At December 31, 2020, multi-family real estate loans totaled $30.4 million, or 3.5%, of our total loan portfolio. Our multi-family real estate loans are generally secured by properties consisting of five to 100 rental units in our market area.

We will originate multi-family real estate loans with terms and amortization periods of up to 25 years. The interest rates on our multi-family real estate loans are generally adjustable based on a margin over an index. Multi-family real estate loans are generally originated in amounts up to 75% of the appraised value or the purchase price of the property securing the loan, whichever is lower.

In underwriting multi-family real estate loans, we consider a number of factors including the projected net cash flows to the loan’s debt service requirement (generally requiring a minimum of 1.20x), the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. Where appropriate, we also require corporate guarantees or personal guarantees. We monitor borrowers’ and guarantors’ financial information on an ongoing basis by requiring periodic financial statement updates.

At December 31, 2020, our largest multi-family real estate loan had an outstanding balance of $5.5 million and was secured by an apartment complex located in Wappingers Falls, New York. At December 31, 2020, this loan was performing according to its original terms.

Commercial Construction and Land Development Loans.

We originate loans to finance the construction of commercial properties, multi-family projects (including one- to four-family non-owner occupied residential properties) and professional complexes, or to acquire land for development for these purposes. We also originate rehabilitation loans, enabling the borrower to partially or totally refurbish an existing structure, which are structured as a construction loan and monitored in the same manner. At December 31, 2020, commercial construction and land development loans totaled $5.4 million, or 0.6% of our total loan portfolio. Most of these loans are secured by properties located in our primary market area. We also had undrawn amounts on the commercial construction loans totaling $2.5 million at December 31, 2020.

Our construction and land development loans are generally structured as two-year interest-only balloon loans. The interest rate is generally a variable rate based on an index rate, typically The Wall Street Journal Prime Rate or the U.S. Constant Maturity Treasury Rate plus a margin. We generally offer commercial construction loans with a loan-to-value ratio of up to 75% of the appraised value on a completed basis or the cost of completion, whichever is less. We offer financing to purchase land for development with a maximum loan-to-value ratio of 50%.

Before making a commitment to fund a commercial construction loan, we generally require an appraisal of the property by an independent licensed appraiser. The construction phase is carefully monitored to minimize our risk. All construction projects must be completed in accordance with approved plans and approved by the municipality in which they are located. Loan proceeds are disbursed periodically in increments as construction progresses and as inspections by our approved inspectors warrant.

At December 31, 2020, our largest construction and land development loan was a multi-family construction project located in Lagrangeville, New York, and had an outstanding balance of $2.0 million. At December 31, 2020, this loan was performing according to its original terms.

Consumer Loans.

We offer consumer loans to customers residing in our primary market area. Our consumer loans consist primarily of indirect automobile loans as discussed above. Other consumer loans consist mostly of home equity loans, lines of credit

8


and direct automobile loans. At December 31, 2020, $14.2 million of our consumer loans were home equity loans and lines of credit, and $7.5 million of our consumer loans were direct automobile loans.

Home equity loans and lines of credit are multi-purpose loans used to finance various home or personal needs, where a one- to four-family primary or secondary residence serves as collateral. We generally originate home equity loans and lines of credit of up to $150,000, with a maximum loan-to-value ratio of 80% (including any first lien position) and terms of up to 20 years. Home equity lines of credit have adjustable rates of interest that are based on the prime interest rate published in The Wall Street Journal, plus a margin, and reset monthly. Home equity lines of credit are secured by residential real estate in a first or second lien position.

The procedures for underwriting consumer loans include assessing the applicant’s payment history on other indebtedness, the applicant’s ability to meet existing obligations and payments on the proposed loan, and the loan-to-value ratio. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

Loan Underwriting Risks

Indirect Automobile and Other Consumer Loans.

Indirect automobile and other consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and any small remaining deficiency often does not warrant further substantial collection efforts against a borrower. Indirect automobile and consumer loan collections depend on a borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount we can recover on such loans.

Commercial and Multi-Family Real Estate Loans.

Loans secured by commercial and multi-family real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of a project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. If we foreclose on a commercial or multi-family real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Direct costs may be required to rehabilitate or prepare the property to be marketed. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial or multi-family real estate loans can be unpredictable and substantial.

To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide financial statements on the business operations underlying the commercial and multi-family real estate loans on an ongoing basis. In reaching a decision whether to make a commercial or multi-family real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We generally require properties securing these real estate loans to have debt service coverage ratios (the ratio of earnings before interest, taxes, depreciation, and amortization before debt service to debt service) of at least 1.20x. We obtain an environmental Phase 1 report for all loans over $1.0 million or when hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials. We obtain an environment report on all commercial real estate properties. We will also obtain a Phase 1 report if the initial environmental reports indicate that there may be an

9


environmental issue on a property. We require indemnification from our commercial real estate borrowers and/or guarantors for potential exposure to environmental issues.

Commercial Business Loans.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans have higher risk because they are made typically on the basis of the borrower’s ability to repay a loan from the cash flows of the borrower’s business and the collateral securing these loans may fluctuate in value. Our commercial business loans are underwritten and evaluated primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts receivable, inventory or equipment, or real estate. Commercial business loans to closely held businesses are also required to be personally guaranteed by the principal(s), as well as by other appropriate guarantors when personal assets are in joint names or if the principal’s net worth is insufficient by itself to support the loan. The availability of funds to repay commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Our Credit Administration Department is responsible for monitoring industry concentrations among commercial borrowers and for reporting the industries represented by commercial borrowers to senior management on at least an annual basis.

Adjustable Rate Loans.

Rising interest rates may require adjustable-rate loan borrowers to make higher monthly payments that could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate loans make our assets more responsive to changes in market interest rates, the extent of this interest rate sensitivity may be somewhat limited by the annual and lifetime interest rate adjustment limits on residential mortgage loans.

Construction Loans.

Construction lending involves additional risks when compared to permanent residential or commercial lending because funds are advanced upon the security of the project, which is of uncertain value before its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. In addition, generally during the term of a construction loan, interest may be funded by the lender or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.

Our ability to originate construction loans is dependent on the strength of the housing and commercial markets in our region. We focus our loan underwriting on the borrower’s financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations. Before making a commitment to fund a construction loan, we generally require an appraisal of the property by an independent licensed appraiser. The construction phase is carefully monitored to minimize our risk. All construction projects must be completed in accordance with approved plans and approved by the municipality in which they are located. Loan proceeds are disbursed periodically in increments as construction progresses and as inspections by our approved inspectors warrant.

10


Loan Originations and Sales.

Loan originations come from a variety of sources. The primary sources of loan originations are current customers, business development by our relationship managers, walk-in traffic, automobile dealerships, referrals from customers, and brokers.

Generally, we attempt to sell all of our fixed-rate residential mortgages upon origination, to limit our interest rate risk exposure and generate fee income. Mortgage loans are usually sold to Freddie Mac on a servicing rights retained basis; however, we may sell mortgages on a servicing released basis to free up capital, maximize profitability and protect us from risk.

Loan Approval Procedures and Authority.

Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our Board of Directors and management. The Board of Directors has granted loan approval authority to certain officers up to prescribed limits, depending on the officer’s experience and the type of loan. Our policies also limit the aggregate loans to one entity that an individual officer may approve, up to prescribed limits, depending on the officer’s experience. Loan officers are not allowed to approve loans they have originated.

Loans in excess of individual officers’ lending limits require approval of our Credit Committee, which is comprised of our President and Chief Executive Officer, Chief Credit Officer, Senior Vice President-Commercial Lending Director, Senior Vice President-Commercial Lending Team Leader, Vice President-Credit Administration, and other lending officers appointed from time to time. The Credit Committee can approve individual loans of up to prescribed limits, depending on the type of loan. Officers that sit on the Credit Committee must abstain from voting on loans they have originated.

Loans in excess of the Credit Committee’s loan approval authority require the approval of the Board of Directors. Loans in excess of our internal loans-to-one borrower limitation and certain loans that involve policy exceptions also must be authorized by the Board of Directors.

Loans-to-One Borrower.

Under New York banking law, our total loans or extensions of credit to a single borrower or group of related borrowers (“loans-to-one borrower”) cannot exceed, with specified exceptions, 15% of our capital stock, surplus fund and undivided profits. We may lend additional amounts up to 10% of our capital stock, surplus and undivided profits if the loans or extensions of credit are fully secured by readily-marketable collateral.

Pursuant to our internal policies, our internal loans-to-one borrower limitation is set at 25% of Tier 1 capital (excluding the capital attributable to our $5.0 million of outstanding trust preferred securities), of which no more than 10% can be lent on an unsecured basis. This general standard is further restricted as follows:

Commercial or Multi-Family Real Estate Loans. We will not lend more than 25% of capital to any one borrower, and no more than 15% of capital to any one project or property. We may consider on a case-by-case basis requests for loans of more than 15% of capital to any one project/property. In no event will we make a commercial or multi-family real estate loan in excess of 17.5% of capital to any one project or property.
Commercial Business Loans. We will not lend more than 15% of capital to any one borrower, with only 10% of capital lent on an unsecured basis under normal policy. Our Board of Directors may make exceptions to the 10% limit for unsecured credit for borrowers with strong credit profiles.

At December 31, 2020, our regulatory limit on loans-to-one borrower and our internal loans-to-one borrower limit were $27.7 million and $25.0 million, respectively. As of December 31, 2020, we had no loans that equaled or exceeded our internal loans-to-one borrower limit or our individual regulatory loan limit.

11


At December 31, 2020, our largest lending relationship consisted of 134 loans aggregating $23.5 million, which consisted of $21.6 million secured by multiple commercial properties and $1.9 million secured by equipment, inventory and receivables. At December 31, 2020, each loan in this relationship was performing according to its original repayment terms.

Non-Performing Loans and Problem Assets

Performance of the loan portfolio is reviewed on a regular basis by Bank management. A number of factors regarding the borrower and loan, such as overall financial strength, collateral values and repayment ability, are considered in deciding what actions should be taken when determining the collectability of interest for accrual purposes.

When a loan, including a loan that is impaired, is classified as non-accrual, the accrual of interest on such a loan is discontinued. A loan is typically classified as non-accrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid accrued interest is fully reversed. Interest payments received on non-accrual loans are applied against principal.

Loans are usually restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Non-performing Loans.  At December 31, 2020, $6.3 million, or 0.7% of our total loans, were non-performing loans. The breakdown by loan classification was as follows: $1.9 million of commercial real estate, $2.6 million of residential real estate, $990,000 of indirect auto, $366,000 of commercial and $394,000 of other consumer loans. Non-performing commercial real estate loans decreased $2.4 million to $1.9 million at December 31, 2020 from $4.3 million at December 31, 2019.

Other Real Estate Owned.  At December 31, 2020, the Company had other real estate owned valued at $139,000 which consisted of two parcels of vacant land. This property is being carried on the Company’s books at fair value less estimated costs to sell. This property is being actively marketed and additional losses may occur.

Troubled Debt Restructurings.  The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider, resulting in a modified loan which is then identified as a troubled debt restructuring (“TDR”). These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for lease and loan losses.

The principal balance of TDRs at December 31, 2020 was $1.6 million, comprised of two residential loans totaling $1.5 million and one home equity loan of $98,000, all of which were on non-accrual. TDRs at December 31, 2019 totaled $1.7 million and were also in non-accrual status.

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Non-Performing Assets.  The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

At December 31, 

 

    

2020

    

2019

    

2018

    

2017

    

2016

  

(Dollars in thousands)

 

Non-accrual loans:

Residential real estate loans

$

2,641

$

2,341

$

2,208

$

2,100

$

1,953

Commercial real estate loans

 

1,944

 

4,296

 

2,507

 

5,568

 

3,345

Commercial loans

 

366

 

905

 

297

 

1,238

 

1,854

Consumer loans

 

1,384

 

1,379

 

660

 

458

 

682

Total

$

6,335

$

8,921

$

5,672

$

9,364

$

7,834

Real estate owned

 

139

 

1,417

 

1,685

 

2,234

 

2,683

Total non-performing assets

$

6,474

$

10,338

$

7,357

$

11,598

$

10,517

Troubled debt restructurings (accruing):

 

  

 

  

 

  

 

  

 

  

Consumer loans

 

 

 

 

98

 

98

Total troubled debt restructurings (accruing)

$

$

$

$

98

$

98

Total non-performing assets and total troubled debt restructurings (accruing)

$

6,474

$

10,338

$

7,357

$

11,696

$

10,615

Total non-performing loans to total loans

 

0.72

%  

 

1.13

%  

 

0.84

%  

 

1.65

%  

 

1.52

%  

Total non-performing loans to total assets

 

0.56

%  

 

0.92

%  

 

0.64

%  

 

1.26

%  

 

1.08

%  

Total non-performing assets and troubled debt restructurings (accruing) to total assets

 

0.57

%  

 

1.06

%  

 

0.83

%  

 

1.58

%  

 

1.47

%  

For the year ended December 31, 2020, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $640,000. We did not recognize any interest on these loans for 2020.

13


Delinquencies.  The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. Loans delinquent for 90 days or more are generally classified as non-accrual loans.

30 – 89 Days

90 Days or More

Total

 

    

Number

    

Principal

    

Number

    

Principal

    

Number

    

Principal

of Loans

Balance

of Loans

Balance

of Loans

Balance

(Dollars in thousands)

At December 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Residential real estate loans

 

6

$

1,489

 

7

$

1,169

 

13

$

2,658

Commercial real estate loans

 

6

 

2,018

 

5

 

1,944

 

11

 

3,962

Commercial loans

 

8

 

2,062

 

3

 

183

 

11

 

2,245

Consumer loans

 

584

 

7,900

 

85

 

1,243

 

669

 

9,143

Total

 

604

$

13,469

 

100

$

4,539

 

704

$

18,008

At December 31, 2019

 

  

 

  

 

  

 

  

 

  

 

  

Residential real estate loans

 

6

$

543

 

6

$

780

 

12

$

1,323

Commercial real estate loans

 

4

 

1,293

 

6

 

4,296

 

10

 

5,589

Commercial loans

 

6

 

486

 

2

 

667

 

8

 

1,153

Consumer loans

 

615

 

8,270

 

92

 

1,269

 

707

 

9,539

Total

 

631

$

10,592

 

106

$

7,012

 

737

$

17,604

At December 31, 2018

 

  

 

  

 

  

 

  

 

  

 

  

Residential real estate loans

 

8

$

920

 

4

$

531

 

12

$

1,451

Commercial real estate loans

 

7

 

1,893

 

3

 

2,507

 

10

 

4,400

Commercial loans

 

4

 

207

 

1

 

4

 

5

 

211

Consumer loans

 

482

 

5,823

 

50

 

541

 

532

 

6,364

Total

 

501

$

8,843

 

58

$

3,583

 

559

$

12,426

Classified Assets.   Banking regulations and our Asset Classification Policy provide that loans and other assets considered to be of lesser quality should be classified as “Substandard,” “Doubtful” or “Loss” assets. An asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all of the weaknesses inherent in those classified Substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “Special Mention” if the asset has a potential weakness that warrants management’s close attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, thereby adversely affecting the repayment of the asset.

The table below sets forth the classified assets at the dates indicated.

At December 31, 

    

2020

    

2019

    

2018

(Dollars in thousands)

Special mention

$

10,863

$

4,882

$

7,805

Substandard

 

7,002

 

9,575

 

9,111

Total

$

17,865

$

14,457

$

16,916

At December 31, 2020, the Company classified $10.9 million of our assets as Special Mention, of which $5.5 million was commercial real estate loans and $5.4 million were commercial and industrial loans. We classified $7.0 million as Substandard, of which $2.1 million were commercial real estate loans, $2.6 million were residential loans, $873,000 were commercial and industrial loans and $1.4 million were consumer loans. At December 31, 2019, the Company classified $4.9 million of our assets as Special Mention, of which $4.3 million were commercial real estate loans and $9.6 million as Substandard, of which $4.8 million were commercial real estate loans. The loan portfolio is

14


reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.

Allowance for Lease and Loan Losses

Our allowance for lease and loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for lease and loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions among other qualitative factors. Our allowance for lease and loan losses consists of two elements: (1) an allocated allowance, which comprises specific allowances established on specific loans and general allowances based on historical loss experience and current trends, and (2) an unallocated allowance based on general economic conditions and other risk factors in our markets and portfolios. We maintain a loan review system, which allows for a periodic review (at least quarterly) of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Loan impairment is measured based on the fair value of collateral method, taking into account the appraised value, any valuation assumptions used, estimated costs to sell and trends in the market since the appraisal date. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management’s judgment and losses which are probable and reasonably estimable. The allowance is increased through provisions charged against current earnings and recoveries of previously charged-off loans. Loans that are determined to be uncollectible are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary based on changing economic conditions. Payments received on impaired loans generally are either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. The allowance for lease and loan losses is maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable.

In addition, the FDIC and the NYDFS, as an integral part of their examination process, periodically review our allowance for lease and loan losses. The banking regulators may require that we recognize additions to the allowance based on their analysis and review of information available to them at the time of their examination.

15


The following table sets forth activity in our allowance for lease and loan losses for the periods indicated.

Year Ended December 31, 

 

    

2020

    

2019

    

2018

    

2017

    

2016

 

(Dollars in thousands)

 

Allowance for loan losses at beginning of period

$

5,954

$

6,646

$

5,457

$

5,876

$

5,410

Provision for loan losses

 

7,138

 

2,460

 

2,100

 

900

 

1,200

Charge-offs:

 

  

 

  

 

  

 

  

 

  

Residential real estate loans

 

 

 

 

(78)

 

Commercial real estate loans

 

 

(1,750)

 

(303)

 

(16)

 

Commercial loans

 

(153)

 

(312)

 

(37)

 

(596)

 

(95)

Consumer loans

 

(2,354)

 

(2,215)

 

(1,673)

 

(1,724)

 

(1,853)

Total charge-offs

 

(2,507)

 

(4,277)

 

(2,013)

 

(2,414)

 

(1,948)

Recoveries:

 

  

 

  

 

  

 

  

 

  

Residential real estate loans

 

 

81

 

5

 

9

 

5

Commercial real estate loans

 

4

 

 

123

 

92

 

Commercial loans

 

15

 

18

 

122

 

2

 

243

Consumer loans

 

1,029

 

1,026

 

852

 

992

 

966

Total recoveries

 

1,048

 

1,125

 

1,102

 

1,095

 

1,214

Net charge-offs

 

(1,459)

 

(3,152)

 

(911)

 

(1,319)

 

(734)

Allowance for loan losses at end of period

$

11,633

$

5,954

$

6,646

$

5,457

$

5,876

Allowance for loan losses to non-performing loans at end of period

 

183.63

%  

 

66.74

%  

 

117.17

%  

 

58.28

%  

 

75.01

%

Allowance for loan losses to total loans outstanding at end of period

 

1.33

%  

 

0.75

%  

 

0.98

%  

 

0.96

%  

 

1.14

%

Net charge-offs to average loans outstanding during period

 

(0.17)

%  

 

(0.43)

%  

 

(0.15)

%  

 

(0.25)

%  

 

(0.15)

%

Allocation of Allowance for Lease and Loan Losses.  The following table sets forth the allowance for lease and loan losses allocated by loan category, the allocation of the allowance for loan losses by loan segment and the percent of loan balances by category at the dates indicated. The allowance for lease and loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

At December 31, 

 

2020

2019

2018

 

    

    

Percent of

    

Percent of

    

    

Percent of

    

Percent of

    

    

Percent of

    

Percent of

 

Allowance

Loans in

Allowance

Loans in

Allowance

Loans in

 

to Total

Category to

to Total

Category to

to Total

Category to

 

Amount

Allowance

Total Loans

Amount

Allowance

Total Loans

Amount

Allowance

Total Loans

 

(Dollars in thousands)

 

Residential real estate loans

$

117

 

1.01

%  

4.48

%  

$

99

 

1.66

%  

5.54

%  

$

320

 

4.81

%  

6.43

%  

Commercial real estate loans

 

5,354

 

46.02

 

32.41

 

2,009

 

33.74

 

34.03

 

1,080

 

16.25

 

32.94

Commercial loans

 

1,050

 

9.03

 

17.57

 

603

 

10.13

 

11.47

 

1,542

 

23.20

 

12.29

Consumer loans

 

5,112

 

43.94

 

45.54

 

3,243

 

54.47

 

48.96

 

3,704

 

55.74

 

48.34

Total allowance

$

11,633

 

100.00

%  

100.00

%  

$

5,954

 

100.00

%  

100.00

%  

$

6,646

 

100.00

%  

100.00

%  

16


At December 31, 

 

2017

2016

 

    

    

Percent of

    

Percent of

    

    

Percent of

    

Percent of

 

Allowance

Loans in

Allowance

Loans in

 

to Total

Category to

to Total

Category to

 

Amount

Allowance

Total Loans

Amount

Allowance

Total Loans

 

(Dollars in thousands)

 

Residential real estate loans

$

455

 

8.34

%  

7.65

%  

$

701

 

11.93

%  

7.86

%

Commercial real estate loans

 

1,305

 

23.91

 

37.28

 

1,091

 

18.57

 

37.32

Commercial loans

 

879

 

16.11

 

11.95

 

775

 

13.19

 

11.07

Consumer loans

 

2,818

 

51.64

 

43.12

 

3,309

 

56.31

 

43.75

Total allowance

$

5,457

 

100.00

%  

100.00

%  

$

5,876

 

100.00

%  

100.00

%

We use the accrual method of accounting for all performing loans. The accrual of interest income is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. When a loan is placed on non-accrual status, unpaid interest previously credited to income is reversed. Interest received on non-accrual loans is applied against principal. Generally, residential and consumer loans are restored to accrual status when the obligation is brought current in accordance with the contractual terms for a reasonable period of time and ultimate collectability of total contractual principal and interest is no longer in doubt. Commercial loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and ultimate collectability of total contractual principal and interest no longer is in doubt.

In our collection efforts, we will first attempt to cure any delinquent loan. If a real estate secured loan is placed on non-accrual status, it could be subject to transfer to other real estate owned (“OREO”) (comprised of properties acquired by or in lieu of foreclosure), upon which our credit administration department will pursue the sale of the real estate. Prior to this transfer, the loan balance will be adjusted, if necessary, to reflect its current market value less estimated costs to sell. Write downs of OREO that occur after the initial transfer from the loan portfolio and costs of holding the property are recorded as other operating expenses, except for significant improvements which are capitalized to the extent that the carrying value does not exceed estimated net realizable value.

Fair values for determining the value of collateral are estimated from various sources, such as real estate appraisals, financial statements and from any other reliable sources of available information. For those loans deemed to be impaired, collateral value is reduced for the estimated costs to sell. Reductions of collateral value are based on historical loss experience, current market data, and any other source of reliable information specific to the collateral.

This analysis is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.

Investment Activities

We have legal authority to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises, residential mortgage-backed securities and municipal securities, deposits at the Federal Home Loan Bank (the “FHLB”) of New York, certificates of deposit of federally insured institutions, investment grade corporate bonds, equity securities and Small Business Investment Companies. At December 31, 2020, our investment portfolio had a fair value of $102.9 million and consisted primarily of U.S. Government securities, U.S. Government agency securities, including residential and collateralized mortgage-backed securities, municipal securities and corporate bonds in the form of subordinated bank debt.

Our investment objectives are to maximize portfolio yield over the long term and manage our risk profile in a manner consistent with liquidity needs, pledging requirements, asset/liability strategies and safety and soundness concerns. Our current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities, as well as adjustable-rate securities, which may have a longer term to maturity. The emphasis of this approach is to increase overall investment securities yields while managing interest

17


rate risk. Our Board of Directors has overall responsibility for the investment portfolio, including reviewing and evaluating our investment policy on an annual basis. The Investment Committee of the Board of Directors, consisting of four directors, meets at least three times annually to review our portfolio’s performance, quality and composition, and provides reports to the full Board of Directors at the next monthly meeting of the full board following the meeting of the Investment Committee. The Investment Committee also reviews and discusses policy changes prior to their presentation to the full board. Our management has the overall responsibility for implementing the investment policy and supervising our investment activities and performance. Management is also responsible for providing regular reports to the Investment Committee to allow for a complete consideration of the portfolio’s composition, cash flow characteristics, quality and risk profile. The President and CEO is responsible for the overall supervision of the investment activity. The Chief Financial Officer is responsible for the implementation of the Bank’s investment policy and strategy. The Controller is responsible for the accounting and reporting requirements of the policy.

A maximum of $8.0 million in security purchases may be made in any one calendar week. Security sales are also limited to $8.0 million per week for sales relating to portfolio restructuring. These restrictions can be combined in a single week, thus allowing a total transaction amount of $16.0 million. Federal funds transactions are not included in the limitation. There is no limit on security sales executed for the purpose of providing for the cash needs of the Bank. Any exceptions require the approval of both the President and CEO and the Chief Financial Officer and must be reported to the Investment Committee which would then report it to the Board.

Our policy is that, at the time of purchase, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent. Securities that are available-for-sale or held for trading are reported at fair value, while securities held to maturity are reported at amortized cost. Currently, all securities we hold are classified as available-for-sale.

FHLB Securities.  In addition, we hold FHLB common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLB advance program. There is no market for the common stock.

The aggregate fair value of our FHLB common stock as of December 31, 2020 was $2.8 million based on its par value. No unrealized gains or losses have been recorded because we have determined that the par value of the common stock represents its fair value. We owned shares of FHLB common stock at December 31, 2020 equal to what we were required to own to maintain our membership in the Federal Home Loan Bank System and was necessary to support the balance of our advances. We are required to purchase additional stock as our outstanding advances increase. Any excess stock we own is redeemed weekly by the FHLB.

Evaluation of Securities Portfolio.  Each reporting period, we evaluate all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary. Other-than-temporary impairment (“OTTI”) is required to be recognized if (1) we intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI, resulting in a realized loss that is a charged to earnings through a reduction in our non-interest income. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes. We did not recognize any OTTI during the past five years.

18


The following table sets forth the composition of our securities portfolio (excluding FHLB-NY common stock) at the dates indicated.

At December 31, 

2020

2019

2018

    

Amortized

    

    

Amortized

    

    

Amortized

    

Cost

Fair Value

Cost

Fair Value

Cost

Fair Value

(In thousands)

Securities available-for-sale:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. government and agency obligations

 

7,013

 

7,161

 

12,049

 

12,076

 

16,919

 

16,468

U.S. Treasury securities

 

 

 

 

 

3,036

 

2,971

Mortgage-backed securities – residential

 

88,197

 

89,270

 

98,842

 

98,478

 

82,965

 

80,216

Municipal securities

 

1,445

 

1,476

 

1,384

 

1,396

 

1,228

 

1,232

Corporate Bonds

4,400

4,446

2,250

2,273

Other

 

621

 

580

 

555

 

609

 

425

 

425

Total

$

101,676

$

102,933

$

115,080

$

114,832

$

104,573

$

101,312

At December 31, 2020, we had no investments in a single issuer, other than securities issued by the U.S. government or agencies thereof, or U.S. government-sponsored enterprises, which had an aggregate book value in excess of 10% of our equity.

Portfolio Maturities and Yields.  The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2020. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. Weighted average yield calculations on investment securities available for sale do not give effect to changes in fair value that are reflected as a component of equity.

More than One Year

More than Five Years

 

One Year or Less

to Five Years

to Ten Years

More than Ten Years

Total

 

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

    

    

Weighted