Orange County Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless otherwise stated. The company provides commercial and consumer banking and trust and wealth-management services in the Lower Hudson Valley and nearby markets. Amounts below are in U.S. dollars; financial-statement figures are generally presented in millions.
Financial performance and condition
- Profit: Net income rose 6.1% to $5.33 million from $5.03 million in Q1 2021. Diluted EPS fell to $0.95 from $1.12, while weighted-average shares increased to 5.63 million from 4.48 million.
- Interest income and margin: Net interest income grew 18.9% to $16.34 million. Average interest-earning assets increased 26.7%, but net interest margin declined to 3.08% from 3.28%; net interest-rate spread fell to 2.97% from 3.13%.
- Other income and expenses: Noninterest income rose 3.9% to $3.01 million. Noninterest expense increased 14.6% to $11.82 million, reflecting investment in staffing, branches, technology and growth. Provision for loan losses was $923,000 versus $66,000; the effective tax rate was 19.2% versus 19.6%.
- Assets and lending: Total assets increased 6.5% to $2.28 billion. Loans grew 3.3% to $1.33 billion, led by commercial real estate construction, commercial real estate, and commercial and industrial lending. Commercial real estate represented about 65% of loans.
- Credit quality: The allowance for loan losses was $18.43 million, or 1.38% of loans. Nonperforming loans were $6.81 million, or 0.51% of loans, versus $5.95 million and 0.46% at year-end. Special-mention assets increased to $10.14 million from $4.89 million; substandard assets were $29.13 million, slightly lower than year-end.
- Deposits, liquidity and debt: Deposits grew 8.3% to $2.07 billion; core deposits were 96.3% of deposits. Cash was $356.3 million and available-for-sale securities were $504.1 million. Total liabilities included $3.0 million of note payable and $19.4 million of subordinated notes. There were no FHLB advances outstanding; stated additional FHLB borrowing capacity was $405.4 million.
- Cash flow: Operating activities provided $3.12 million; investing activities used $110.96 million; financing activities provided $157.99 million. Cash increased $50.15 million to $356.33 million.
- Capital and equity: Bank regulatory capital exceeded well-capitalized thresholds: total risk-based capital was 13.65%, and common Tier 1 was 12.40%. Stockholders’ equity fell 10.0% to $164.55 million, primarily because of a $22.4 million after-tax unrealized loss on available-for-sale securities, partly offset by earnings.
Material changes and unusual items
- Available-for-sale securities increased in carrying value to $504.1 million, but their net unrealized loss widened materially as interest rates rose. Gross unrealized losses were $30.2 million at March 31. Management attributed the declines primarily to interest rates and liquidity, reported no other-than-temporary impairment, and said it did not intend to sell and was not likely to be required to sell before recovery.
- Q1 comprehensive loss was $17.07 million, compared with comprehensive income of $647,000 in Q1 2021, largely reflecting securities-related other comprehensive loss.
- The provision for credit losses rose amid loan growth, higher commercial real estate construction exposure, and modest deterioration in nonaccrual and delinquency trends. Net charge-offs were $157,000, compared with net recoveries of $45,000 in Q1 2021.
- Wealth-management assets under management and/or administration were approximately $1.26 billion, up from $1.23 billion a year earlier. Trust and investment-advisory income totaled $2.37 million.
Outlook, commentary and risks
- Management anticipated interest rates would rise over the next several quarters and said a steeper yield curve and higher rates could benefit net interest income given the company’s asset sensitivity. It also noted that a flat curve at lower rates could be adverse and that competitive conditions could continue to pressure margins.
- Management expected loan growth to continue through strategic execution and customer acquisition. It cited deposit growth, particularly municipal, business and attorney trust accounts, as a source of funding.
- Key risks include local and national economic conditions, real estate values and concentrations, loan delinquencies and allowance estimates, deposit funding costs and retention, interest-rate and securities-market movements, competition, regulation, cybersecurity, and lingering or residual COVID-19 effects. The company said the future effects of COVID-19 were uncertain and not currently estimable.
- Loan commitments outstanding were $410.5 million and standby letters of credit were $11.4 million. These off-balance-sheet commitments carry credit and interest-rate risk.
- The company planned to adopt the current expected credit loss standard (ASU 2016-13) on January 1, 2023 and was developing models and running parallel analysis during 2022; the filing did not provide a quantified adoption impact.
- No material change to the risk factors in the prior Form 10-K was reported. The company reported no material legal proceeding, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- How rising rates affect net interest margin, deposit costs and the market value of the securities portfolio.
- Whether securities unrealized losses remain temporary and whether liquidity needs could require sales before recovery.
- Trends in commercial real estate and construction exposure, special-mention assets, delinquencies, nonperforming loans and required loan-loss provisions.
- The durability and concentration of deposit growth, including municipal, business, attorney trust and reciprocal deposits.
- How expense growth compares with revenue growth and whether loan and wealth-management expansion produces improved operating efficiency.
- The eventual effect of CECL adoption and the funding or credit exposure represented by outstanding commitments.