RHINEBECK BANCORP, INC. This discussion and analysis reflects information contained in our audited consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited consolidated financial statements contained within this Form 10-K.
Overview
Net Interest Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income we earn on our loans and investments, and interest expense, which is the interest we pay on our deposits and borrowings.
Provision for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased through charges to the provision for loan losses. Loans are charged against the allowance when management believes that the collectability of the principal loan amount is not probable. Recoveries on loans previously charged-off, if any, are credited to the allowance for loan losses when realized.
Non-interest Income. Our primary sources of non-interest income are mortgage banking income, service charges on deposit accounts, investment advisory income and net gains in the cash surrender value of bank owned life insurance and other income.
Non-Interest Expenses. Our non-interest expenses consist of salaries and
employee benefits, net occupancy and equipment, data processing, professional
fees, marketing expenses, premium payments we make to the
Income Tax Expense. Our income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized.
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Business Strategy
Based on an extensive review of the current opportunities in our primary market area as well as our resources and capabilities, we are pursuing the following business strategies:
Maintain our indirect automobile loan portfolio. We originate automobile loans
through a network of 95 automobile dealerships (63 in the
and 32 in
portfolio. Our indirect automobile loan portfolio totaled
46.2% of our total loan portfolio and 34.2% of total assets, at
? 2022 as compared to
29.8% of total assets, at
portfolio totaled
originate such loans, we plan to slow the growth of our indirect automobile
loan portfolio by decreasing loan originations through increased pricing and
limiting risk selections. Current management's risk appetite limits our total
indirect automobile loan portfolio to 45% of total assets.
Focus on commercial real estate, multi-family real estate and commercial
business lending. We believe that commercial real estate, multi-family real
estate and general commercial business lending offer opportunities to invest in
our community, while helping to increase the overall yield earned on our loan
portfolio and assisting in managing interest rate risk. We intend to continue
? to increase our originations of these types of loans in our primary market area
and may consider hiring additional lenders as well as originating loans secured
by properties located in areas that are contiguous to our current market area.
We also occasionally participate in commercial real estate loans originated in
areas in which we do not have a market presence. The purchase of loan pools may
be considered in the event our organic loan production does not meet our
expectations.
Increase core deposits, including demand deposits. Deposits are our primary
source of funds for lending and investment. We intend to focus on expanding our
core deposits (which we define as all deposits except for certificates of
deposit), particularly non-interest-bearing demand deposits, because they have
no cost and are less sensitive to withdrawal when interest rates fluctuate.
? Core deposits represented 80.9% of our total deposits at
compared to 85.8% at
increasing our core deposits by increasing our commercial lending activities
and enhancing our relationships with our retail customers. We are also working
to continue to increase our market share in
opened four new branches in the county in 2021.
Continue expense control. Management continues to focus on controlling our
level of non-interest expense and identifying cost savings opportunities, such
? as reducing our staffing levels, renegotiating key third-party contracts and
reducing other operating expenses. Our non-interest expense was
and
Manage credit risk to maintain a low level of non-performing assets. We
believe that strong asset quality is a key to long-term financial success. Our
strategy for credit risk management focuses on an experienced team of credit
? professionals, well-defined and implemented credit policies and procedures,
conservative loan underwriting criteria and active credit monitoring. Our ratio
of non-performing loans to total assets was 0.33% at
decreased from 0.52% at
Grow the balance sheet. During 2021 we opened four new branches in
County: two in
Bank, and two in
on developing
the business decision to permanently close the
The branch location and sheer number of financial institutions in the market
? made it difficult to gain any meaningful traction. We believe that the
remaining offices, and the Bank overall, will continue to benefit from a large
customer base that prefers doing business with a local institution and may be
reluctant to do business with larger institutions. By providing our customers
with quality service, coupled with a home-town ambience, we expect to continue
our strong organic growth. Also, as the pandemic retreats, we expect that the
pent- up demand of commercial activity will return to a more normal pace
providing renewed growth opportunities for our loan portfolio.
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Terms of Critical Accounting Policies
Our most significant accounting policies are described in Note 1 to the consolidated financial statements. Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities, and we consider these policies to be our critical accounting estimates. The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.
The following accounting policies materially affect our reported earnings and financial condition and require significant judgments and estimates.
Allowance for loan losses
The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance in those future periods.
In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for unanticipated changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific impaired loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. Consideration is given to a variety of factors in establishing the allowance including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.
The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan and using applicable historical loss experience plus qualitative factors including, but not limited to, delinquency trends, general economic conditions and geographic and industry concentrations.
The allowance represents management's best estimate, but worsening loan quality and economic conditions could result in an additional allowance. Likewise, external events could potentially improve loan quality and economic conditions, which may allow a reduction in the required allowance. In either instance, unanticipated and unforeseeable changes could have a significant impact on results of operations.
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Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results. In addition, our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. Our banking regulators may require us to recognize adjustments to the allowance based on judgments about information available to them at the time of its examination.
The Company is adopting Accounting Standards Update ("ASU") No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments effective
The Company's CECL implementation efforts are continuing to focus on model
validation, developing new disclosures, establishing formal policies and
procedures and other governance and control documentation. Based on the
Company's portfolio balances and forecasted economic conditions as of
Our methodology for estimating lifetime expected credit losses for our loan portfolios will include the following key components:
a. Segmentation of loans into pools that share common risk characteristics;
b. An economic forecast period based on the relation of losses with key economic
variables for each portfolio segment;
c. Reversion period to historical loss experience using a straight-line method;
d. Inclusion of qualitative adjustments to consider factors that have not been
accounted for;
e. Discounted cash flow method to measure credit impairment on each of our loan
portfolio segments;
Credit losses for loans that do not share similar risk characteristics are
estimated on an individual basis. The lifetime losses for individuallyf. measured loans are estimated based on one of several methods, including the
estimated fair value of the underlying collateral, observable market value of
similar debt or the present value of expected cash flows; and
The estimation methodology for credit losses on unfunded lending-relatedg. commitments is similar to the process for estimating credit losses for loans,
although with the addition of a probability of draw estimate that is applied
to each loan portfolio segment.
As noted above, we consider a number of variables in our evaluation of the
adequacy of the allowance for loan losses. One of the most significant variables
being portfolio growth, evaluated for the changing historical loss trends within
the specific business segments. As of
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The assets (including identifiable intangible assets) and liabilities acquired
in a business combination are recorded at fair value at the date of acquisition.
The determination of fair values is based on valuations using management's assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. In evaluating whether it is more likely than not that the fair value is less than its carrying amount, management assessed seven qualitative factors including, but not limited to, macroeconomic conditions, industry and market considerations, overall financial performance and other relevant company-specific events.
Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financial statements. A prolonged economic downturn or deterioration in the economic outlook may lead management to conclude that an interim quantitative impairment test of our goodwill is required prior to the annual impairment test. Based on our impairment tests, no impairment was recorded in 2022 or 2021.
Income Taxes
We are subject to the income tax laws of
In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.
If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carryback declines, or if we project lower levels of future taxable income. Such a valuation allowance would be established through a charge to income tax expense which would adversely affect our operating results.
Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution.
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