Orange County Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. The company provides commercial and consumer banking, trust and investment services in the Lower Hudson Valley and nearby markets. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $31.1 million | $26.4 million, Q1 2023 |
| Net interest income | $21.6 million | $21.1 million, Q1 2023 |
| Net interest margin | 3.64% | 3.78%, Q1 2023 |
| Noninterest income | $3.7 million | $3.2 million, Q1 2023 |
| Noninterest expense | $15.3 million | $14.0 million, Q1 2023 |
| Net income / diluted EPS | $9.3 million / $1.65 | $3.2 million / $0.57, Q1 2023 |
| Total assets | $2.45 billion | $2.49 billion, December 31, 2023 |
| Loans, net | $1.71 billion | $1.72 billion, December 31, 2023 |
| Deposits | $2.15 billion | $2.04 billion, December 31, 2023 |
| Cash and due from banks | $144.7 million | $147.4 million, December 31, 2023 |
| Stockholders’ equity | $168.7 million | $165.4 million, December 31, 2023 |
- Profit and margins: Net income increased 187.6% year over year. Net interest income rose 2.2%, but the net interest margin fell 14 basis points to 3.64%; the net interest rate spread declined 41 basis points to 2.88%. The efficiency ratio increased to 60.5% from 57.7%.
- Drivers of results: Interest income rose 17.9%, reflecting higher average earning-asset balances and yields. Interest expense increased 81.3%, driven by deposit repricing and higher funding costs. Noninterest income rose 16.3%, including growth in trust and investment advisory fees. Noninterest expense increased 9.1%, particularly salaries, benefits and professional fees.
- Cash flow: Operating activities provided $2.3 million, investing activities provided $32.5 million, and financing activities used $37.4 million. Cash and cash equivalents declined $2.7 million during the quarter.
- Funding and liquidity: Deposits increased $110.7 million, while short-term FHLB advances fell $196.5 million to $28.0 million. The company also had $10.0 million of long-term FHLB advances and $50.0 million outstanding under the Federal Reserve Bank Term Funding Program (BTFP), a one-year facility expiring in March 2025. It reported $144.7 million in cash, $476.1 million in available-for-sale securities and $476.4 million of additional FHLB borrowing capacity. Uninsured deposits, net of fully collateralized municipal relationships, were approximately 37% of deposits.
- Debt: Subordinated notes were $19.5 million, net of issuance costs. The $20 million notes carry a 4.25% fixed rate through September 2025, then reset to three-month SOFR plus 413 basis points.
- Credit quality and capital: Nonperforming loans were $5.8 million, or 0.33% of loans, up from $4.4 million, or 0.25%, at year-end; the increase primarily reflected a $2.0 million rise in nonaccrual commercial and industrial loans. The allowance for credit losses was $25.5 million, or 1.47% of loans. The Bank’s total capital ratio was 14.74%, and management said the Bank exceeded requirements to be considered well capitalized.
Material changes and unusual items
- Q1 earnings benefited from a $1.9 million recovery on the sale of Signature Bank subordinated debt that had been written off in 2023. The provision for investment credit losses was a $1.9 million recovery in Q1 2024, compared with a $5.0 million provision in Q1 2023; the loan provision was $0.3 million versus $1.4 million. These provision changes materially affect the year-over-year earnings comparison.
- Available-for-sale securities declined to $476.1 million from $489.9 million. Their fair value was $77.7 million below amortized cost, versus a $71.2 million shortfall at year-end. The company attributed unrealized losses primarily to interest rates and credit spreads, said it did not intend or expect to be required to sell the securities before recovery, and recorded no securities impairment in the quarter.
- Accumulated other comprehensive loss widened by $5.0 million during the quarter, principally from securities valuation changes. Total comprehensive income was $4.3 million, below net income of $9.3 million.
- Noninterest-bearing deposits fell $63.3 million as some balances shifted to interest-bearing accounts; total deposits nevertheless grew. Brokered deposits, excluding reciprocal deposits, increased to $198.4 million.
Outlook, commentary and risks
- Management expects interest rates to remain elevated over the next several quarters. It says a steeper yield curve and higher rates could benefit net interest income given asset sensitivity, while a flat yield curve at lower rates could be adverse. Management also anticipates continued net interest margin pressure from competition.
- Management stated it monitors liquidity daily and anticipates sufficient funds to meet current funding commitments. No quantified earnings, revenue or margin guidance was provided.
- Key disclosed risks include deposit competition and funding costs; interest-rate and securities-value changes; commercial real estate and other borrower credit deterioration; regional economic and real-estate conditions; access to cost-effective funding; securities-market effects on wealth-management fees; regulatory changes and FDIC costs; and cybersecurity and operational risks.
- The company reported $365.5 million in loan commitments and $17.0 million in standby letters of credit. It reported no material legal proceedings and no material change to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the year-over-year earnings increase reflects the unusual Signature Bank debt recovery and the different credit-provision comparisons, rather than recurring operations.
- Whether deposit growth persists and whether the deposit mix, brokered funding and borrowing costs affect margins and liquidity; confirm the BTFP repayment or refinancing plan ahead of its March 2025 expiry.
- Developments in nonaccrual commercial and industrial loans, commercial real estate concentrations, classified assets and the adequacy of the allowance for credit losses.
- Whether securities unrealized losses, reported at $77.7 million, or deposit outflows could create pressure to sell securities or rely more heavily on borrowings.
- Progress on expense growth, the efficiency ratio and wealth-management growth, including whether fee gains are sustained.