Orange County Bancorp, Inc. — Q1 2023 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. The company provides banking and wealth-management services in the Lower Hudson Valley and surrounding markets. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and condition
- Earnings: Net income was $3.23 million, down 39.4% from $5.33 million a year earlier; diluted earnings per share were $0.57 versus $0.95.
- Net interest: Net interest income rose 29.4% to $21.14 million. Net interest margin increased to 3.78% from 3.08%, while the net interest rate spread rose to 3.29% from 2.97%. Interest income grew 52.7% to $26.36 million, but interest expense increased to $5.23 million from $0.93 million.
- Other income and costs: Noninterest income was $3.17 million, up 5.5%. Noninterest expense rose 18.7% to $14.03 million; the efficiency ratio improved to 57.7% from 61.1%.
- Assets and loans: Total assets were $2.455 billion, up 7.3% since year-end. Gross loans reached $1.663 billion, up 6.0%, led by commercial real estate (CRE) growth; CRE represented 71.7% of loans. Available-for-sale securities had a $526.3 million fair value.
- Credit: The loan allowance was $24.73 million, or 1.49% of loans, versus $21.83 million, or 1.39%, at year-end. Nonperforming loans were $7.95 million (0.48% of loans), down from $8.45 million (0.54%). Net charge-offs were $67,000.
- Liquidity and funding: Cash and due from banks rose to $165.3 million from $86.1 million. Deposits totaled $2.026 billion, up 2.6%; core deposits were 93.3% of deposits. FHLB advances totaled $239 million ($229 million short-term and $10 million long-term), compared with $131.5 million at year-end. Subordinated notes were $19.5 million. Management reported $218 million of additional FHLB borrowing capacity.
- Cash flow: Operating activities provided $8.2 million; investing activities used $86.3 million; financing activities provided $157.4 million. Cash increased $79.2 million during the quarter.
- Capital and equity: Stockholders’ equity was $148.6 million, up from $138.1 million. The Bank remained well capitalized: total risk-based capital ratio 13.60%, CET1 ratio 12.35%, and Tier 1 leverage ratio 9.07%.
Material changes versus the comparable period
- Net income fell $2.10 million year over year despite higher net interest income. Management attributed the decline mainly to increased credit provisions and operating expenses.
- Total credit-loss provision was $6.36 million, including a $5.0 million charge for a Signature Bank corporate bond following that bank’s failure; loan credit-loss provision was $1.36 million.
- Higher rates and loan growth lifted interest income, while deposit repricing and new FHLB borrowing increased funding costs. Average cost of interest-bearing deposits rose to 0.91% from 0.21%.
- Deposits increased, including a $42.2 million rise in certificates of deposit. The company said it strategically increased liquidity amid banking-industry volatility, using brokered deposits and FHLB funding. Cash increased while AFS securities declined $7.1 million.
- Adoption of CECL on January 1, 2023 resulted in a reported $1.5 million net-of-tax reduction to retained earnings. The allowance methodology now estimates lifetime expected credit losses; prior-year results were not restated.
- Unrealized losses on AFS securities remained substantial: gross unrealized losses were $64.5 million at quarter-end, although accumulated other comprehensive loss improved to $58.2 million from $68.2 million at year-end.
Outlook, risks and other notable matters
- Management anticipated further interest-rate increases over the next several quarters. It said the company’s asset sensitivity and a steeper yield curve could benefit net interest income; a flat yield curve at lower rates could have the opposite effect. No quantified earnings guidance was provided.
- Management cited industry-wide liquidity concerns and competition for deposits. The filing warns that further bank failures or loss of depositor confidence could pressure liquidity, margins, credit costs, funding costs, and the share price.
- Other disclosed risks include inflation and rate changes, regional economic and real-estate conditions, CRE concentration, deposit and loan competition, cybersecurity, possible higher FDIC assessments, regulatory changes, and uncertainty around the federal debt ceiling and U.S. credit rating.
- The company reported no material legal proceedings and no loans modified for borrowers experiencing financial difficulty during the quarter. Management concluded disclosure controls were effective; CECL adoption led to new and modified financial-reporting controls.
Important facts for investors to verify
- Whether deposit retention, deposit pricing, brokered funding and FHLB advances remain adequate and affordable as liquidity conditions evolve.
- How CRE portfolio growth and concentration, delinquency trends, and local real-estate conditions affect future credit losses and the allowance.
- Whether the $5.0 million Signature Bank bond loss is isolated and whether further securities credit provisions are needed.
- How quickly asset yields and deposit/borrowing costs reprice, and whether margin improvement persists as rates and competition change.
- The sensitivity of tangible capital and liquidity to AFS securities’ unrealized losses and any need to sell securities before recovery.