Orange County Bancorp, Inc. — Q2 2023 Form 10-Q
Business context and period. The unaudited filing covers the quarter and six months ended June 30, 2023, with comparisons to 2022. Orange County Bancorp is a New York-focused bank holding company with community banking and wealth-management businesses. Amounts below are in millions of dollars unless otherwise indicated.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $29.7 | $18.5 | $56.1 | $35.8 |
| Interest expense | $7.1 | $1.0 | $12.4 | $1.9 |
| Net interest income | $22.6 | $17.5 | $43.7 | $33.8 |
| Net interest margin | 3.81% | 3.14% | 3.80% | 3.11% |
| Provision for loan credit losses | $0.2 | $5.5 | $1.6 | $6.4 |
| Noninterest income | $3.3 | $3.0 | $6.5 | $6.0 |
| Noninterest expense | $14.4 | $12.5 | $28.5 | $24.3 |
| Net income | $9.1 | $2.1 | $12.3 | $7.4 |
| Diluted earnings per share | $1.61 | $0.38 | $2.19 | $1.32 |
- Balance sheet at June 30: Total assets were $2,493.9 million, up 9.0% from year-end 2022. Loans were $1,713.1 million, up 9.2%; deposits were $2,138.2 million, up 8.3%; and stockholders’ equity was $148.2 million, up 7.3%.
- Loan mix and credit: Commercial real estate loans were $1,213.1 million, or 70.8% of loans. The allowance for credit losses was $24.8 million, or 1.45% of loans, versus $21.8 million and 1.39% at year-end. Nonperforming loans declined to $5.4 million (0.32% of loans) from $8.5 million (0.54%).
- Funding and liquidity: Cash and due from banks was $178.6 million; available-for-sale securities were $503.2 million. Noninterest-bearing deposits were $715.6 million. Uninsured deposits, net of fully collateralized municipal relationships, were $819 million, approximately 38% of deposits. FHLB advances totaled $166.5 million; subordinated notes, net, were $19.5 million.
- Cash flows, six months: Operating activities provided $17.6 million; investing activities used $121.0 million; financing activities provided $196.0 million. Cash and cash equivalents increased $92.5 million to $178.6 million.
- Other measures: The efficiency ratio was 56.7% for both Q2 and the first half, compared with 61.0% for the corresponding 2022 periods. Wealth-management assets under management and/or administration were $1.44 billion, up from $1.15 billion a year earlier.
Material changes versus prior periods
- Q2 net income increased $7.0 million year over year, reflecting higher net interest income and a substantially smaller loan-loss provision. The 2022 quarter included a large provision related to syndicated loan relationships, so the comparison benefited from that prior-period charge.
- Higher interest rates and loan growth lifted interest income, but funding costs rose sharply: Q2 interest expense increased to $7.1 million from $1.0 million. Average interest-bearing deposit cost was 1.32% versus 0.20% a year earlier; FHLB borrowing also added expense.
- Loans grew principally in commercial real estate and construction. Deposits increased, including growth in certificates of deposit and brokered funding as the company sought additional liquidity amid industry stress.
- Available-for-sale securities fair value was $503.2 million against $578.5 million amortized cost, with $75.3 million of gross unrealized losses. Accumulated other comprehensive loss was $66.5 million, net of tax.
Outlook, commentary, risks and unusual items
- Management said it anticipated further interest-rate increases over the next several quarters. It described the company as asset-sensitive, with a steeper yield curve and higher rates potentially benefiting net interest income; a flat curve at lower rates could be adverse. This is commentary, not quantified earnings guidance.
- Management stated that liquidity was monitored daily and that it anticipated sufficient funds for current commitments. At June 30, the company reported $340.6 million of additional FHLB borrowing capacity, a $2.6 million Federal Reserve line and $25.0 million of discretionary lines, all with no outstanding balances on the stated lines. It also reported $106.4 million of collateral available under the Bank Term Funding Program.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $1.4 million and added $0.5 million for off-balance-sheet exposures; the total cumulative retained-earnings adjustment was $1.6 million net of tax.
- A $5.0 million credit loss on a Signature Bank corporate bond was provided for in the first quarter and the bond was written off in Q2. Management attributed unrealized losses on the broader securities portfolio mainly to interest rates, spreads, volatility and liquidity conditions, and said it did not intend, and was not more likely than not required, to sell securities before recovery.
- Key risks identified include deposit competition and funding access, effects of interest rates on margins and securities values, potential credit deterioration, commercial and residential real-estate conditions, industry confidence following bank failures, regulatory changes, and cybersecurity and operational risks. The filing reports no material legal proceedings and no loans modified for borrowers experiencing financial difficulty in the period.
- The Bank exceeded regulatory capital requirements and was classified as well capitalized. At June 30, its total risk-based capital ratio was 13.47%, CET1 ratio 12.22%, and Tier 1 leverage ratio 8.86%.
Important facts for investors to verify
- Track deposit mix, uninsured balances, brokered and reciprocal funding, and the cost and availability of liquidity as funding competition evolves.
- Assess the concentration of commercial real estate lending, loan performance and collateral values, classified assets, and the assumptions underlying the CECL allowance.
- Monitor net interest margin and deposit repricing against management’s rate-sensitivity commentary, including the effect of FHLB advances.
- Review securities portfolio marks and accumulated other comprehensive loss, including any changes in management’s ability or intent to hold securities through recovery.
- Distinguish recurring earnings trends from the prior-year syndicated-loan provision and the 2023 Signature Bank bond loss; the filing provides no numerical full-year earnings guidance.