Orange County Bancorp Readies $30 Million IPO

Summary

• Orange County Bancorp has filed to raise $30 million in an IPO.
• The bank operates a network of community bank branches in New York State.
• OCB faces ultra-low interest rates and reduced net interest margins, so I'll watch the IPO from the sidelines.
• Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

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Quick Take

Orange County Bancorp (OCBI) (NASDAQ:OBT) has filed to raise $30 million in an IPO of its common stock, according to an S-1/A registration statement.

The firm operates a network of community banks in the lower Hudson Valley region of New York.

Given a challenging interest rate environment and dim prospects for much improvement in net interest margin, I'll pass on the IPO.

Company & Technology

Middletown, New York-based OCB was founded to provide full service consumer and commercial banking and lending services to individuals and businesses in New York state.

Management is headed by president and CEO Michael Gilfeather, who has been with the firm since April 2014 and was previously Chief Administrative Officer at Hudson Valley Bank.

Below is a brief overview video of the company:

(Source)

The company’s primary offerings include:

• Commercial real estate loans

• Commercial and Industrial loans

• Construction and Development loans

• Consumer loans

• Residential real estate loans

• Home Equity loans

• Deposit and private banking services

The bank seeks customer relationships with local businesses and individuals within the areas served by its 17 locations.

In 2 1/4 years, assets have grown from $1.1 billion to $1.9 billion as of March 31, 2021, an increase of nearly 73%.

Market & Competition

According to a 2021 market research report by Banking Strategist, the number of community banks with assets between $1 billion and $10 billion in New York stood at 42 as of March 31, 2021.

This represented the sixth highest number of community banks by state.

The main drivers for this expected growth are a continued consolidation of the U.S. community banking sector in the aftermath of the 2008 - 2009 financial crisis.

Also, the average community bank consolidation rate nationwide was 3.1% over the previous 12 months, with New York at the highest consolidation rate nationwide, as shown in graphic below:

(Source)

Major competitive or other industry participants include:

• Commercial and community banks

• Credit unions

• Savings & loan association

• Mortgage banking firms

• Online mortgage lenders

• Consumer finance companies

• Large national institutions

Financial Performance

OCB’s recent financial results can be summarized as follows:

• Growing total interest income

• Increasing net interest income after loan loss provisions

• Reduce net interest margin

• Lowered net charge-offs to average loans

• Reduced cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Interest Income
Period	Total Interest Income	% Variance vs. Prior
Three Mos. Ended March 31, 2021	$ 14,762,000	16.8%
2020	$ 53,461,000	11.1%
2019	$ 48,121,000
Net Interest Income After Provision For Loan Losses
Period	Net Interest Income After Provision For Loan Losses	% Variance vs. Prior
Three Mos. Ended March 31, 2021	$ 13,674,000	34.7%
2020	$ 43,326,000	5.5%
2019	$ 41,086,000
Net Interest Margin
Period	Net Interest Margin
Three Mos. Ended March 31, 2021	3.28%
2020	3.36%
2019	3.88%
Net Charge-offs To Average Loans
Period	Net Charge-offs To Average Loans
Three Mos. Ended March 31, 2021	0.00%
2020	0.15%
2019	0.17%
Cash Flow From Operations
Period	Cash Flow From Operations
Three Mos. Ended March 31, 2021	$ 2,404,000
2020	$ 11,344,000
2019	$ 13,733,000
(Glossary Of Terms)

Click to enlarge

(Source)

As of March 31, 2021, OCB had $22.3 million in borrowings.

Free cash flow during the twelve months ended March 31, 2021, was $11.5 million.

IPO Details

OCB intends to raise $30.15 million in gross proceeds from an IPO of its common stock, offering 900,000 shares at a proposed midpoint price of $33.50 per share.

The company’s stock is currently quoted on the OTCQX as “OCBI”.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO, the company’s market capitalization at IPO would approximate $181 million, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 16.7%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds of the offering to support the growth of Orange Bank & Trust Company, including providing capital to Orange Bank & Trust Company to support growth of its operations, such as the expansion of its lending and wealth management activities, to support growth in HVIA’s trust and wealth management business, to finance strategic acquisitions to the extent the opportunities arise and for other general corporate purposes, which could include other growth initiatives...

(Source)

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Piper Sandler and Stephens.

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Market Capitalization at IPO	$180,512,640
Enterprise Value	-$50,238,361
Price/Sales	3.25
EV / Revenue	-0.90
EV / EBITDA	-2.84
Earnings Per Share	$2.58
Total Debt To Equity	13.13
Float To Outstanding Shares Ratio	16.70%
Proposed IPO Midpoint Price per Share	$33.50
Net Free Cash Flow	$11,457,000
(Glossary Of Terms)

Click to enlarge

(Source)

Commentary

OCB is seeking public market investment for a variety of corporate growth initiatives.

The bank’s financials show interest income growth and net interest income growth along with lowered loan charge-offs.

However, net interest margin has continued to drop in the ultra-low interest rate environment.

Free cash flow for the twelve months ended March 31, 2021, was $11.5 million.

The market opportunity for providing commercial lending and consumer banking services in New York state is large and the industry continues to see significant consolidation in the wake of the 2008-2009 financial crisis.

Piper Sandler is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (27.2%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the continued low interest rate environment which puts downward pressure on net interest margin.

The bank would do better for its primary lending businesses if rates were able to increase somewhat, but given the pandemic-induced ultra-low interest rate environment, that may not occur any time soon.

Management expects to pay an annual dividend yield of approximately 2.4% which is slightly higher than the typical community bank yield of around 2%.

Still, the bank’s prospects for producing significant growth in net interest margin remain subdued as long as macro interest rates are so low, which will likely continue for some years ahead.

Given that challenging interest rate environment and dim prospects for much improvement any time soon, I'll pass on the IPO.

Expected IPO Pricing Date: August 4, 2021

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Investing in IPOs is an inherently volatile and opaque endeavor. My research is focused on identifying quality IPO companies at a reasonable price, but I’m wrong sometimes. I analyze fundamental company performance and my conclusions may not be relevant for first-day or early IPO trading activity, which can be highly volatile and unrelated to company fundamentals. This report is intended for educational purposes only and is not financial, legal or investment advice.