Orange County Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Orange County Bancorp is a New York-focused bank holding company operating Orange Bank & Trust Company and Hudson Valley Investment Advisors, with banking and wealth-management businesses. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 / September 30, 2021 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $2,175.2 | $1,664.9 at December 31, 2020 |
| Loans, net | $1,269.5 | $1,136.6 at December 31, 2020 |
| Total deposits | $1,951.9 | $1,489.3 at December 31, 2020 |
| Stockholders’ equity | $180.6 | $135.4 at December 31, 2020 |
| Net income | Q3: $5.6; nine months: $15.8 | Q3 2020: $2.9; nine months 2020: $8.3 |
| Diluted earnings per share | Q3: $1.06; nine months: $3.33 | Q3 2020: $0.65; nine months 2020: $1.83 |
| Net interest income | Q3: $15.9; nine months: $44.3 | Q3 2020: $12.5; nine months 2020: $35.6 |
| Net interest margin | Q3: 3.16%; nine months: 3.17% | Q3 2020: 3.22%; nine months 2020: 3.40% |
| Allowance for loan losses | $18.0; 1.40% of loans | $16.2 at December 31, 2020 |
Q3 net income rose 91.4% year over year and nine-month net income rose 91.0%. Growth in net interest income and lower loan-loss provisions contributed; higher noninterest expense and income taxes partly offset the gains. Q3 and nine-month efficiency ratios improved to 57.86% and 59.51%, respectively, from 68.43% and 68.13% in 2020.
For the nine months, operating cash flow was $14.6, investing cash outflow was $240.3, and financing cash inflow was $494.6. Cash and due from banks increased to $390.1 from $121.2 at year-end 2020. Available-for-sale securities were $422.1. The Bank reported regulatory capital ratios above well-capitalized thresholds: total capital to risk-weighted assets of 14.45%, Tier 1 of 13.20%, and leverage capital of 8.27%.
Borrowings included a $3.0 note payable and $19.4 of subordinated notes, net. The Bank had no FHLB advances outstanding and reported $368.7 of FHLB borrowing capacity. Core deposits represented 95.8% of deposits.
Material changes and drivers
- Assets increased $510.3, or 30.6%, from year-end 2020, while deposits rose $462.6, or 31.1%. Management attributed deposit growth to business and municipal accounts, PPP-related activity, and government liquidity measures.
- Net loans grew $133.0, or 11.7%; commercial real estate loans increased $142.1, or 20.4%, reflecting originations and geographic expansion. Commercial real estate represented 65.25% of reported loans.
- Available-for-sale securities increased $92.0, or 27.9%, funded by excess deposit liquidity. The portfolio had $2.8 of gross unrealized losses; management attributed losses primarily to interest rates and liquidity, not credit quality, and reported no impairment charges.
- The August 2021 IPO sold 1.15 million shares at $33.50 each, including the fully exercised overallotment, for $38.5 gross proceeds. The filing reports approximately $35.3 million net proceeds in its financial statements and discussion; the offering disclosure separately states approximately $35.5 million.
- Net interest margin declined year over year despite higher net interest income, as growth in average earning assets outweighed lower asset yields. Trust and investment advisory income increased, while 2020 securities-sale gains did not recur.
Outlook, risks, and unusual items
- Management anticipated low interest rates over the next few years. It said a steeper yield curve and higher rates could benefit net interest income given asset sensitivity, while a persistently flat curve at low rates could weigh on it. No quantified earnings or revenue guidance was provided.
- COVID-19 and the Delta variant remained risks to local economic conditions, borrower repayment, asset valuations, operations, liquidity, and results. COVID-related deferrals had fallen to two loans totaling $49,000 at September 30, 2021, from $48.8 million across 29 loans at December 31, 2020.
- Nonperforming loans were $3.1 million, or 0.24% of loans, versus $2.5 million at year-end 2020. Substandard assets increased to $31.6 million from $11.7 million, primarily reflecting three stressed relationships; the filing says the identified loans continued to perform, with collateral or other support described for the relationships.
- Management cited commercial real estate concentration, local real estate and economic conditions, competition, interest-rate and margin pressure, securities-market movements, cyber and operational risks, and regulatory changes. The allowance estimate is judgmental and could require adjustment as conditions change.
- Management expected approximately $900,000 of one-time software expense in Q4 2021 for a core processing conversion planned for November. It also expected additional costs of operating as a public company following the IPO.
- The filing reported no material legal proceedings, no material change to previously disclosed risk factors, and effective disclosure controls as of September 30, 2021.
Important facts for investors to verify
- Loan credit trends, especially the commercial real estate portfolio, the increase in substandard classifications, and the adequacy of the $18.0 million allowance.
- Whether unusually strong deposit growth and elevated cash balances persist, including the composition and stability of municipal and business deposits.
- The trajectory of net interest margin as PPP-related fees roll off, asset yields reset, and interest rates or the yield curve change.
- The actual Q4 core-conversion expense and continuing public-company costs compared with management’s expectations.
- The IPO net proceeds disclosure: approximately $35.3 million in the financial statements and MD&A versus approximately $35.5 million in the offering-proceeds section.
- Potential effects of COVID-19, changes in real estate values, and the planned January 2023 adoption of the expected-credit-loss standard.