Orange County Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; financial comparisons are with Q3 and the first nine months of 2022, or with December 31, 2022 for balance-sheet measures. Amounts are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context
The company provides commercial and consumer banking, trust and wealth-management services in the Lower Hudson Valley and nearby markets. At September 30, 2023, it reported $2.45 billion in assets and $1.44 billion in assets under management or administration. The filing presents unaudited interim results.
Financial performance and condition
| Metric | Q3 2023 / September 30, 2023 | Comparable period / date |
|---|---|---|
| Net interest income | $22.5 million; +5.1% | $21.4 million in Q3 2022 |
| Net interest margin | 3.78% | 3.70% in Q3 2022 |
| Net interest income, nine months | $66.2 million; +19.9% | $55.3 million in 2022 |
| Net interest margin, nine months | 3.79% | 3.32% in 2022 |
| Noninterest income | $3.2 million; +9.8% | $2.9 million in Q3 2022 |
| Noninterest expense | $13.6 million; +8.2% | $12.6 million in Q3 2022 |
| Net income | $9.0 million; +15.1%; EPS $1.61 | $7.9 million; EPS $1.40 in Q3 2022 |
| Net income, nine months | $21.4 million; +39.6%; EPS $3.79 | $15.3 million; EPS $2.72 in 2022 |
| Total assets | $2.45 billion | $2.29 billion at December 31, 2022 |
| Loans, gross / net | $1.71 billion / $1.68 billion | Gross loans +8.8% from year-end 2022 |
| Deposits | $2.11 billion; +6.6% from year-end | $1.97 billion at December 31, 2022 |
| Stockholders’ equity | $143.9 million | $138.1 million at December 31, 2022 |
| Allowance for credit losses | $25.8 million; 1.51% of loans | $21.8 million at year-end; 1.39% of loans |
Cash flow and liquidity: For the first nine months, operating cash flow was $28.5 million, investing cash flow was negative $106.7 million, and financing cash flow was positive $150.8 million. Cash and due from banks ended the period at $158.7 million, up from $86.1 million at year-end. The company had $156.0 million in FHLB advances outstanding and reported $367.8 million of additional FHLB borrowing capacity. It also reported $104.2 million of collateral pledged and available under the Bank Term Funding Program, with no FRB borrowings outstanding.
Debt and capital: In addition to FHLB advances, the company had $19.5 million of subordinated notes, net of issuance costs. The Bank’s regulatory capital ratios were 13.93% total capital to risk-weighted assets, 12.68% Tier 1 and common equity Tier 1, and 9.26% Tier 1 capital to average assets; the company said the Bank exceeded requirements to be considered well capitalized.
Margins and efficiency: Q3 net interest margin rose, but net interest rate spread declined to 3.11% from 3.55% a year earlier as deposit and borrowing costs rose. The average rate paid on interest-bearing deposits increased to 1.56% from 0.33%. The efficiency ratio was 52.8% for Q3, versus 51.6%; for the first nine months it improved to 55.4% from 57.5%.
Material changes versus prior periods
- Loan growth was led by commercial real estate, up $127.9 million, or 11.6%, from year-end 2022. Commercial real estate represented 71.8% of gross loans at September 30.
- Deposit growth included a substantial increase in certificates of deposit, alongside higher interest-bearing deposit costs. The company cited increased brokered funding and borrowing as part of its strategy to maintain liquidity amid industry-wide volatility.
- Available-for-sale securities had a fair value of $478.7 million versus $533.5 million at year-end. Gross unrealized losses were $91.3 million, compared with $76.6 million at year-end; accumulated other comprehensive loss was $78.7 million, versus $68.2 million.
- Nonperforming loans increased to $9.5 million, or 0.56% of loans, from $8.5 million, or 0.54%, at year-end. Management attributed the increase primarily to payment timing and delays near quarter-end.
- Net income increased in both comparison periods, supported by higher loan balances and yields. Interest expense rose sharply as rates and deposit competition increased.
Outlook, commentary, risks and unusual items
- Outlook: No specific earnings or financial guidance was provided. Management anticipated further interest-rate increases over the next several quarters and said higher rates and a steeper yield curve could benefit net interest income given the company’s asset sensitivity. It also noted that a flatter yield curve at lower rates could be adverse.
- Credit and real estate risk: The loan portfolio is concentrated in New York real estate, particularly commercial real estate. Management warned that repayment and collateral values are sensitive to local real estate and broader economic conditions. Nonperforming assets were 0.39% of total assets.
- Interest-rate and securities risk: Management attributed most securities unrealized losses to interest rates, credit spreads, volatility and liquidity conditions, rather than credit quality, and said it did not intend or expect to be required to sell loss-position securities before recovery. The filing reports a $5.0 million loss on a Signature Bank-issued corporate bond, written off in Q2 2023 after the bank’s failure.
- Accounting change: The company adopted CECL on January 1, 2023. The adoption resulted in a $1.6 million after-tax reduction to retained earnings; the filing notes that the new methodology involves significant judgment and estimates.
- Other risks: The filing highlights deposit outflows and funding costs, recession and credit deterioration, changing regulation and FDIC assessments, competition, cybersecurity, and market volatility affecting wealth-management activity. Management reported effective disclosure controls and no material legal proceeding as of September 30, 2023.
Important facts for investors to verify
- Whether deposit growth and liquidity remain sustainable as brokered funding, certificates of deposit and FHLB borrowing carry higher costs; monitor deposit mix, uninsured deposits and available borrowing capacity.
- Commercial real estate concentration, credit migration, delinquencies and nonperforming loans, including the performance of loans reported past due but still accruing.
- The potential effect of the $91.3 million gross unrealized securities losses and related AOCI on capital, liquidity and future results if securities must be sold.
- How CECL assumptions, the allowance, and subsequent credit-loss experience develop, and whether the Signature Bank bond write-off has any further implications.
- Whether net interest income growth continues to exceed the impact of deposit repricing, borrowing costs and higher operating expenses.