Orange County Bancorp, Inc. — Q2 2022 Form 10-Q
Business and period. The company is a New York-focused bank holding company operating Orange Bank & Trust Company and Hudson Valley Investment Advisors. It provides commercial and consumer banking, trust, and wealth-management services. This unaudited report covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
- Q2 earnings: Net income was $2.1 million, down 59.4% from $5.2 million a year earlier; diluted EPS was $0.38 versus $1.16. For the first half, net income was $7.4 million, down 27.2% from $10.2 million; EPS was $1.32 versus $2.28.
- Revenue and margins: Q2 net interest income rose 19.7% to $17.5 million; first-half net interest income increased 19.3% to $33.8 million. Net interest margin was 3.14% in Q2 versus 3.09% and 3.11% for the first half versus 3.18%. Noninterest income was $3.0 million in Q2, down 1.7%, and $6.0 million for the half, up 1.1%.
- Credit costs and expenses: Provision for loan losses was $5.5 million in Q2 and $6.4 million for the first half, versus $0.8 million and $0.9 million, respectively, in 2021. Noninterest expense rose 19.9% to $12.5 million in Q2 and 17.2% to $24.3 million for the half. The efficiency ratio was 60.85% for Q2 and 60.98% for the half, compared with 58.90% and 57.01%.
- Assets and lending: Total assets were $2.392 billion, up 11.6% from year-end. Loans were $1.472 billion, up 14.0% gross (net loans rose 13.7% to $1.448 billion); growth was concentrated in commercial real estate and construction lending. The allowance was $23.6 million, or 1.61% of loans.
- Credit quality: Nonperforming loans increased to $20.4 million, or 1.39% of loans, from $6.0 million, or 0.46%, at year-end. The increase primarily reflected two nationally syndicated commercial-and-industrial relationships totaling $14.2 million; $13.6 million was classified doubtful. Management recorded the higher provision for these exposures and loan growth.
- Funding and liquidity: Deposits rose 15.1% to $2.203 billion; 96.7% were core deposits, excluding certificates of deposit. Cash and due from banks was $271.4 million, and available-for-sale securities were $561.7 million. The company reported no outstanding FHLB advances and borrowing capacity of $483.6 million, plus other available credit lines. First-half operating cash flow was $10.5 million; investing activities used $331.8 million and financing activities provided $286.6 million. Cash declined $34.7 million over the half.
- Debt and capital: The balance sheet included a $3.0 million note payable and $19.4 million of subordinated notes. The note payable has a balloon maturity in November 2022. The Bank remained “well capitalized”; at June 30, its total risk-based capital ratio was 13.17%, CET1 ratio 11.92%, and Tier 1 leverage ratio 8.09%.
- Equity and securities: Stockholders’ equity fell 20.3% to $145.7 million, primarily as accumulated other comprehensive loss increased to $45.8 million from $3.4 million at year-end. The company attributed securities valuation declines mainly to interest rates, reported no other-than-temporary impairment, and stated it did not intend or expect to be required to sell the securities before recovery.
Changes, outlook, and risks
- Higher average earning-asset balances drove interest-income and net-interest-income growth; lower deposit costs also supported results. The first-half margin nevertheless declined year over year. Management said loans originated during the first half had not fully reflected the Federal Reserve’s rate increases.
- Management expects interest rates to continue rising 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; a flatter curve at lower rates could hurt it. Management also expects loan growth to continue, citing strategic execution, customer acquisition, and industry consolidation. These are expectations, not formal earnings guidance.
- Management cited continued investment in growth, including staffing, benefits, technology, occupancy, and costs for newer Bronx and Nanuet locations. Wealth-management income was affected by declines in asset values; reported assets under management and/or administration were approximately $1.15 billion at June 30.
- Key risks include the two impaired syndicated loan relationships, commercial real-estate concentration and local economic conditions, interest-rate and securities-value changes, deposit competition and funding costs, and the company’s ability to maintain credit quality as lending grows. Loan commitments were $412.3 million and standby letters of credit were $11.1 million at quarter-end.
- The company plans to adopt the expected-credit-loss standard, CECL (ASU 2016-13), on January 1, 2023 and was developing models and running parallel analyses during 2022. No material change to previously disclosed risk factors was reported. The company reported no material legal proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- Updates on repayment, collateral, classification, and reserve adequacy for the two $14.2 million syndicated loan relationships and the resulting nonperforming-loan trend.
- How CECL adoption in 2023 may affect the allowance, earnings, and capital.
- The securities portfolio’s interest-rate sensitivity and potential effects of unrealized losses on equity and liquidity, including whether securities might need to be sold.
- Deposit retention, deposit pricing, loan growth, and the effect of rising rates on net interest margin and funding costs.
- Repayment or refinancing of the $3.0 million note due in November 2022, and the conversion of loan commitments into funded loans.