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Orange County Bancorp, Inc. Announces First Quarter 2023 Results
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Net Interest Income increased $4.8 million, or 29.4%, to $21.1 million for the quarter ended March 31, 2023 from $16.3 million for the quarter ended March 31, 2022
Total Assets grew $167.0 million, or 7.3%, to $2.5 billion at March 31, 2023 as compared to $2.3 billion at year-end 2022.
Loans grew $93.9 million, or 6.0%, to $1.7 billion at March 31, 2023 from $1.6 billion at December 31, 2022
Total Deposits rose by $51.5 million, or 2.6%, to $2.0 billion at March 31, 2023 as compared to $1.9 billion at year-end 2022.
Book value per share increased $1.79, or 7.3%, to $26.27 at March 31, 2023 from $24.48 at December 31, 2022
Non-performing loans decreased from 0.54% at December 31, 2022 to 0.48% at March 31, 2023
Trust and asset advisory business revenue remained level at approximately $2.4 million, for Q1 2023 and 2022, respectively, reflecting the company's continued strength in the business line despite market challenges.
Based on historical and projected criteria, the market capitalization of the company exceeds the minimum requirements to be included in the Russell 2000 Index when 2023 reconstitution is completed.
MIDDLETOWN, NY / ACCESSWIRE / May 1, 2023 / Orange County Bancorp, Inc. (the "Company" - Nasdaq:OBT), parent company of Orange Bank & Trust Co. (the "Bank") and Hudson Valley Investment Advisors, Inc. ("HVIA"), today announced net income of $3.2 million, or $0.57 per basic and diluted share, for the three months ended March 31, 2023. This compares with net income of $5.3 million, or $0.95 per basic and diluted share, for the three months ended March 31, 2022. The decrease in earnings per share, basic and diluted, was due to the recognition of a $5 million loss related to subordinated debt of Signature Bank, which was closed by its regulator on March 12, 2023. Absent this one-time charge, earnings per share, basic and diluted, would have been $1.28.
Book value per share increased $1.79, or 7.3%, during the period, from $24.48 at December 31, 2022 to $26.27 at March 31, 2023. Tangible book value per share also increased $1.79, or 7.7%, from $23.29 at December 31, 2022 to $25.08 at March 31, 2023 (see "Non-GAAP Financial Measure Reconciliation" below for additional detail).These increases represent a combination of changes in market value associated with a decrease in unrealized loss in the available-for-sale investment portfolio, and the effect of earnings during the quarter. The Bank maintains its entire investment portfolio within the available-for-sale category.
"This quarter saw continuation of the Federal Reserve's efforts to combat inflation with rising interest rates and industry-wide reductions in liquidity," said Company President and CEO Michael Gilfeather. "As previously discussed, these policies have made loan origination and deposit gathering more challenging, with the recent - and very rapid - failure of financial institutions further amplifying the volatile and uncertain operating environment.
We, unfortunately, held $5 million of Signature Bank investment grade subordinated debt within our nearly $540 million investment portfolio, which resulted in the recognition of a loss following the bank's failure in March. As closely as we monitor our investment portfolio, it is virtually impossible to anticipate such rapid - and highly unusual - deterioration of investment grade debt. For the quarter, we earned $3.2 million or $0.57 per basic and diluted share, down $2.1 million from $5.3 million or $0.95 per basic and diluted share we earned in Q1 2022. Adding back this one-time charge would have resulted in earnings of approximately $7.2 million or $1.28 per basic and diluted share (see "Non-GAAP Financial Measure Reconciliation" below for additional detail).
Our diligent commitment to knowing and responding to the needs and concerns of our customers, however, once again proved critical to successfully navigating this volatile period. For the quarter, our average loan portfolio grew $353.4 million, or 27.9%, to over $1.6 billion from $1.3 billion for Q1 2022. Additionally, while Commercial Real Estate (CRE) remains our largest single loan category, our portfolio composition in the sector is well diversified and includes virtually no exposure to major urban office space, which has become a recent point of market concern. Approximately 8% of our CRE exposure falls within the category, with these loans related to properties outside major markets and tied primarily to medical office space.
Total deposits increased $51.5 million from year end 2022 to $2.03 billion at March 31, 2023 from $1.97 billion at December 31, 2022. Given the uncertain economic environment and out of an abundance of caution, we added approximately $45 million of brokered deposits during the quarter, but also saw core deposit growth of over $9 million. While the composition of our deposit base shifted modestly in response to recent market volatility, I am pleased to report we didn't lose a single major customer or see the closure of any significant accounts.
As long as the Fed continues to fight inflation with higher interest rates and restrictive liquidity policy, we expect loan and deposit growth to remain challenged. We have responded with strategies aimed at retaining and growing core deposits. These initiatives have already begun to yield benefits and we believe our strong reputation and regional commitment will provide additional opportunities for deposit and lending growth and new relationships going forward.
As we work to offset the impact of certain Fed policies, others are tougher to counter. Net Interest Margin, for example, fell 34 basis points, or 8.3%, during the quarter from 4.12% in Q4 2022 to 3.78% in Q1 2023. This still represents high performance within the industry. In light of the aforementioned uncertainty and prudent risk management, we also increased borrowings at the Bank by $107.5 million during the quarter. This strategic move impacted margin but was important to maintain the liquidity position of the Bank. Meanwhile, cash, available borrowings, and unencumbered assets also currently cover approximately 80% of uninsured deposits, net of municipal deposits, which are fully collateralized by law.
Our Wealth Management division, which includes all Trust, Investment Management and Private Bank activities, also continued to be a steady performer. Revenues remained stable at $2.4 million in Q1 2023 versus the same period last year. Given that these revenues correlate to broad market returns, which were notably volatile during the period, this group's performance is particularly commendable.
As is evident from my remarks, this quarter is one we in the banking industry are happy to have behind us, though challenges and uncertainty remain. Fortunately, we have invested considerable time and attention over many years to cultivate a loyal and informed customer base that knows us nearly as well as we know them. This relationship and our proactive management style enabled us to assess and respond to changing circumstances, identify business opportunities, and present an attractive alternative to clients seeking to move or diversify their banking relationships. We will, as always, continue to run the Bank conservatively, as evidenced by capital ratios, which exceed regulatory standards for well capitalized institutions. We also remain committed to identifying and pursuing opportunities to better serve existing clients and attract new ones, especially in times of turmoil. Our focus on core deposits and relationship banking provides the strategy and foundation to continue building a high performing, stable, and reliable banking organization for our customers and the communities we serve. And I'll conclude, once again, with thanks to our employees, who are the heart and soul of the Company and continue to drive its success despite whatever challenges we encounter."
First Quarter 2023 Financial Review
Net Income
Net income for the first quarter of 2023 was $3.2 million, a decrease of $2.1 million, or 39.4%, from net income of $5.3 million for the first quarter of 2022. The decline in net income reflected the impact of a $5.0 million charge-off of subordinated debt due to the regulatory closure of Signature Bank offset by significant net interest income growth.
Net Interest Income
For the three months ended March 31, 2023 net interest income increased $4.8 million, or 29.4%, to $21.1 million, versus $16.3 million during the same period last year. The increase was driven primarily by a $6.8 million increase in interest and fees on loans during the period.
Total interest income rose $9.1 million, or 52.7%, to $26.4 million for the three months ended March 31, 2023, compared to $17.3 million for the three months ended March 31, 2022. The increase was primarily due to interest and fees associated with loan growth, as well as an approximately 87.6% increase in interest income from taxable investment securities. The securities related increase represents management's focus on strategically deploying excess liquidity in 2022 to generate incremental investment earnings.
Total interest expense increased $4.3 million in the first quarter of 2023, to $5.2 million, as compared to $931 thousand in the first quarter of 2022. The increase was driven primarily by interest expense associated with FHLB advances drawn during the quarter as a preventative measure during the industry's liquidity crisis. Additionally, the rising interest rate environment created an increase in interest expense on savings and NOW accounts, which totaled $2.4 million during the first quarter of 2023 as compared to $570 thousand during the first quarter of 2022.
Provision for Credit Losses
As of January 1, 2023, the Company adopted the current expected credit losses methodology ("CECL") accounting standard, which includes loans individually evaluated, as well as loans evaluated on a pooled basis to assess the adequacy of the allowance for credit losses as well as evaluating investment securities held by the Bank. Management performs an ongoing assessment of the adequacy of the allowance for credit losses based on the CECL methodology. The Bank seeks to estimate the lifetime losses in its loan and investment portfolio by using expected discounted cash flows, supplemental qualitative considerations, including relevant economic considerations, portfolio concentrations, and other external factors.
The Company recognized a provision for credit losses of $6.4 million for the three months ended March 31, 2023, as compared to $923 thousand for the three months ended March 31, 2022. As required under the CECL framework, the increased provision is primarily driven by the recorded loss related to $5 million of Signature Bank subordinated debt as well as the continued growth of the loan portfolio. Additionally, the Bank recognized a $1.9 million one-time implementation adjustment, of which $520 thousand reflected the addition of an allowance for credit losses on unfunded commitments. The allowance for credit losses to total loans was 1.51% as of March 31, 2023 versus 1.39% as of December 31, 2022.
Non-Interest Income
Non-interest income increased $165 thousand, or 5.5%, to $3.2 million for the three months ended March 31, 2023 as compared to $3.0 million for the three months ended March 31, 2022. The primary driver of this growth was the recognition of gains on the sale of certain investment securities during the quarter ended March 31, 2023. The Company also experience income growth in several categories, including service charges on deposit accounts and earnings from the BOLI investment during the quarter.
Non-Interest Expense
Non-interest expense was $14.0 million for the first quarter of 2023, reflecting an increase of $2.2 million, or 18.7%, as compared to $11.8 million for the same period in 2022. The increase in non-interest expense for the three month period was due to continued investment in overall Company growth. This investment consists primarily of increases in compensation, occupancy, information technology, and deposit insurance costs. Our efficiency ratio improved to 57.7% for the three months ended March 31, 2023, from 61.1% for the same period in 2022.
Income Tax Expense
Our provision for income taxes for the three months ended March 31, 2023 was $696 thousand, compared to $1.3 million for the same period in 2022. The decrease was primarily due to lower income before income taxes. Our effective tax rate for the three month period ended March 31, 2023 was 17.7% as compared to 19.2% for the same period in 2022.
Financial Condition
Total consolidated assets increased $167.0 million, or 7.3%, from $2.3 billion at December 31, 2022 to $2.5 billion at March 31, 2023. The increase was mainly driven by growth in loans and cash during the quarter.
Total cash and due from banks increased from $86.1 million at December 31, 2022, to $165.3 million at March 31, 2023, an increase of approximately $79.2 million, or 92.0%. This increase resulted primarily from increases in deposit balances as well as increased borrowings. The increase in borrowings was strategic and considered the liquidity stress within the industry which bolstered cash positions.
Total investment securities declined $2.3 million, or 0.4%, from $543.0 million at December 31, 2022 to $540.7 million at March 31, 2023. The decrease resulted primarily from the sale of securities during the quarter and the impact of a write down in value for Signature Bank subordinated debt resulting from the bank's failure. There were no additional purchases of securities during the quarter.
Total loans increased $93.9 million, or 6.0%, from $1.6 billion at December 31, 2022 to $1.7 billion at March 31, 2023. The increase was due primarily to $94.4 million of commercial real estate loan growth and $6.5 million of commercial real estate construction loan growth. PPP loans remain level at $1.7 million at March 31, 2023 and December 31, 2022. The majority of the remaining PPP loan balance is subject to forgiveness.
Total deposits increased $51.5 million, to $2.1 billion at March 31, 2023, from $2.0 billion at December 31, 2022. This increase was driven by a $9 million growth in core deposits as well as the effect of approximately $42 million of growth in time deposits associated with wholesale funding, which the Company increased as a precautionary measure to bolster cash during the March liquidity crisis within the banking industry. Despite sector challenges, the Bank's deposit composition at March 31, 2023 included 50.7% in demand deposit accounts (including NOW accounts). Uninsured deposits, net of fully collateralized municipal relationships, remain stable and represent approximately 43% of total deposits as of March 31, 2023 and December 31, 2022, respectively.
Stockholders' equity experienced an increase of approximately $10.1 million during the quarter, to $148.2 million at March 31, 2023 from $138.1 million at December 31, 2022. The increase was due mainly to a $10.0 million decrease in unrealized losses on the market value of investment securities within the Company's equity as accumulated other comprehensive income (loss) ("AOCI"), net of taxes, as well as $3.2 million of net income during the period.
At March 31, 2023, the Bank maintained capital ratios in excess of regulatory standards for well capitalized institutions. The Bank's Tier 1 capital to average assets ratio was 9.07%, both common equity and Tier 1 capital to risk weighted assets were 12.35%, and total capital to risk weighted assets was 13.61%.
Loan Quality
At March 31, 2023, the Bank had total non-performing loans of $8.0 million, or 0.48% of total loans. Total non-accrual loans represented $5.6 million of loans at March 31, 2023 compared to $6.1 million at March 31, 2022.
Liquidity
Management believes that the Bank has the necessary liquidity to provide flexibility in order to meet normal business needs. The Bank uses a variety of resources to manage its liquidity position. These include short term investments, cash flows from lending and investing activities, core-deposit growth, and non-core funding sources, such as time deposits exceeding $100,000, brokered deposits, FHLBNY advances, and other borrowings. As of March 31, 2023, the Bank's cash and due from banks totaled $165.3 million. The Bank maintains an investment portfolio of securities available for sale, comprised mainly of US Government agency and treasury securities, Small Business Administration loan pools, mortgage-backed securities, and municipal bonds. Although the portfolio generates interest income for the Bank, it also serves as an available source of liquidity and funding. As of March 31, 2023, the Bank's investment in securities available for sale was $526.3 million, of which $163.1 million was not pledged as collateral. Additionally, as of March 31, 2023, the Bank's overnight advance line capacity at the Federal Home Loan Bank of New York was $613.2 million, of which $154.0 million was used to collateralize municipal deposits, and $229.0 million was utilized for overnight advances. As of March 31, 2023, the Bank's unused borrowing capacity at the FHLBNY was $230.0 million. The Bank also maintains additional borrowing capacity of $25 million with other correspondent banks. Additional funding was available to the Bank through the Bank Term Funding Program ("BTFP") and Discount Window Lending provided by the Federal Reserve. The Bank did not utilize these funding sources during the first quarter of 2023.
The Bank also considers brokered deposits to be an element of its deposit strategy. As of March 31, 2023, the Bank entered into brokered deposit arrangements with 1 month, 2 month, and 3 month terms totaling $87.3 million.
About Orange County Bancorp, Inc
Orange County Bancorp, Inc. is the parent company of Orange Bank & Trust Company and Hudson Valley Investment Advisors, Inc. Orange Bank & Trust Company is an independent bank that began with the vision of 14 founders over 125 years ago. It has grown through innovation and an unwavering commitment to its community and business clientele to more than $2.4 billion in total assets. Hudson Valley Investment Advisors, Inc. is a Registered Investment Advisor in Goshen, NY. It was founded in 1996 and acquired by the Company in 2012.
Forward Looking Statements
Certain statements contained herein are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking statements may be identified by reference to a future period or periods, or by the use of forward looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Forward looking statements are subject to numerous risks and uncertainties, including, but not limited to, those related to the real estate and economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, inflation, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. Further, given its ongoing and dynamic nature, it is difficult to predict what the continuing effects of the COVID-19 pandemic will have on our business and results of operations. The pandemic and related local and national economic disruption may, among other effects, continue to result in a material adverse change for the demand for our products and services; increased levels of loan delinquencies, problem assets and foreclosures; branch disruptions, unavailability of personnel and increased cybersecurity risks as employees work remotely.
The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions that may be made to any forward looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
