Orange County Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. The company provides commercial and consumer banking, trust and wealth management services in the Lower Hudson Valley and nearby markets.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $22.8 million | $16.9 million | $58.6 million | $47.3 million |
| Net interest income | $21.4 million | $15.9 million | $55.3 million | $44.3 million |
| Provision for loan losses | $2.1 million | $1.0 million | $8.5 million | $1.9 million |
| Net income | $7.9 million | $5.6 million | $15.3 million | $15.8 million |
| Diluted EPS | $1.40 | $1.06 | $2.72 | $3.33 |
| Net interest margin | 3.70% | 3.16% | 3.32% | 3.17% |
- Q3 net income increased 40.8%, supported by higher net interest income; nine-month net income declined 3.2%, as higher loan-loss provisions and operating expenses offset much of the revenue growth.
- Noninterest income was nearly flat year over year: $2.9 million for Q3 and $8.9 million for the nine-month period. Noninterest expense rose 14.4% in Q3 and 16.2% over nine months. Efficiency ratios improved to 51.6% and 57.5%, respectively.
- At September 30, total assets were $2.37 billion, loans $1.55 billion, deposits $2.19 billion, and stockholders’ equity $136.2 million. Loans grew 19.7% and deposits 14.3% from year-end 2021.
- Available-for-sale securities were $547.3 million, with $76.7 million of gross unrealized losses. After-tax AOCI declined to negative $62.3 million, largely from rising interest rates; this contributed to a 25.5% fall in reported equity from December 31, 2021.
- Nine-month operating cash flow was $23.2 million; investing cash outflow was $418.7 million, mainly reflecting loan growth and securities purchases; financing cash inflow was $269.5 million, primarily deposit growth. Cash and due from banks ended at $180.2 million, down from $306.2 million at year-end.
- Debt included a $3.0 million note payable and $19.4 million in subordinated notes. The note payable is due in November 2022; the company reported no FHLB advances and $508 million of available FHLB borrowing capacity.
- The Bank exceeded regulatory minimums and was classified as well capitalized: total risk-based capital ratio 13.60%, Tier 1 risk-based ratio 12.35%, and leverage ratio 8.48%.
Changes, outlook and risks
- Growth was concentrated in commercial real estate and construction lending. Commercial real estate loans reached $1.06 billion, about 68% of total loans; construction loans were $132.9 million.
- Management attributed higher interest income and margin to loan and securities growth and rising rates. It expected rates to continue rising over the next several quarters and said the company’s asset sensitivity could benefit net interest income; management also noted that a flat yield curve at lower rates could be adverse. This is commentary, not quantified earnings guidance.
- The allowance for loan losses rose to $22.9 million, or 1.48% of loans, from $17.7 million at year-end. The increase reflected portfolio growth and specific reserves related to syndicated commercial and industrial lending. Nonperforming loans rose to $10.2 million, or 0.66% of loans, from $6.0 million; management cited one nationally syndicated relationship as a principal factor. Net charge-offs for nine months were $3.3 million.
- Management cited potential effects from inflation, interest rates, local and national economic conditions, real estate values, funding costs, competition, credit quality, securities markets, regulation and cybersecurity. Most loans are secured by real estate, and repayment depends partly on regional economic and property-market conditions.
- The company planned to adopt the current expected credit loss standard (CECL) on January 1, 2023 and was developing and validating its models; the filing does not provide a clear estimate of the adoption’s financial impact.
- At quarter-end, loan commitments were $397.7 million and standby letters of credit were $13.0 million. Management stated it expected sufficient funds to meet current funding commitments. No material legal proceedings or material change in previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether subsequent credit performance, especially in the syndicated loan exposures and commercial real estate portfolio, supports the allowance and reported asset-quality trends.
- How deposit pricing, funding mix and loan repricing evolve as interest rates change, and whether margin benefits persist.
- Whether securities unrealized losses remain attributable to rates rather than credit, and any implications if liquidity needs require securities sales.
- The eventual CECL adoption effect, including the initial allowance adjustment and ongoing provision volatility.
- The November 2022 maturity and repayment or refinancing of the $3.0 million note payable, and the timing and utilization of loan commitments.