Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-40711
Orange County Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware
26-1135778
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification Number)
212 Dolson Avenue
Middletown, New York 10940
(Address of Principal Executive Offices)
(845) 341-5000
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading symbol
Name of Exchange on which registered
Common Stock, par value $0.50 per share
OBT
The Nasdaq Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non-accelerated filer
☒
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 6, 2023, there were 5,650,458 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
Page
Part I
Financial Information
Item 1.
Financial Statements
3
Condensed Consolidated Statements of Condition as of September 30, 2023 (Unaudited) and December 31, 2022
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 (Unaudited)
4
Condensed Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended September 30, 2023 and 2022 (Unaudited)
5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (Unaudited)
6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (Unaudited)
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
52
Item 4.
Controls and Procedures
Part II
Other Information
Legal Proceedings
Item 1A.
Risk Factors
53
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
Exhibit Index
54
Signatures
2
PART I —FINANCIAL INFORMATION
Item 1. Financial Statements
ORANGE COUNTY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
(Dollar amounts in thousands except per share data)
September 30, 2023
December 31, 2022
ASSETS
Cash and due from banks
$
158,708
86,081
Investment securities – available-for-sale(amortized cost $569,978, net of allowance for credit losses of $0 at September 30, 2023 and $609,954, net of allowance for credit losses of $0 at December 31, 2022)
478,708
533,461
Restricted investment in bank stocks
10,992
9,562
Loans
1,707,729
1,569,430
Allowance for credit losses (1)
(25,775)
(21,832)
Loans, net
1,681,954
1,547,598
Premises and equipment, net
16,073
14,739
Accrued interest receivable
6,332
6,320
Bank owned life insurance
41,188
40,463
Goodwill
5,359
Intangible assets
1,178
1,392
Other assets
46,779
42,359
TOTAL ASSETS
2,447,271
2,287,334
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest bearing
726,627
723,228
Interest bearing
1,378,404
1,251,159
Total deposits
2,105,031
1,974,387
FHLB advances, short term
146,000
131,500
FHLB advances, long term
10,000
—
Subordinated notes, net of issuance costs
19,502
19,447
Accrued expenses and other liabilities
22,820
23,862
TOTAL LIABILITIES
2,303,353
2,149,196
STOCKHOLDERS’ EQUITY
Common stock, $0.50 par value; 15,000,000 shares authorized; 5,683,304 issued; 5,650,458 and 5,642,621 outstanding, at September 30, 2023 and December 31, 2022, respectively
2,842
Surplus
120,367
120,107
Retained Earnings
100,536
84,635
Accumulated other comprehensive income (loss), net of taxes
(78,693)
(68,196)
Treasury stock, at cost; 32,846 and 40,683 shares at September 30, 2023 and December 31, 2022, respectively
(1,134)
(1,250)
TOTAL STOCKHOLDERS’ EQUITY
143,918
138,138
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
Nine Months Ended
September 30,
2023
2022
INTEREST INCOME
Interest and fees on loans
24,682
18,113
70,398
48,319
Interest on investment securities:
Taxable
3,150
2,848
9,570
6,735
Tax exempt
564
621
1,721
1,655
Interest on Federal funds sold and other
1,703
1,259
4,514
1,886
TOTAL INTEREST INCOME
30,099
22,841
86,203
58,595
INTEREST EXPENSE
Savings and NOW accounts
3,506
1,099
9,081
2,320
Time deposits
1,954
55
3,893
194
FHLB advances
1,907
6,295
Note payable
42
126
Subordinated notes
231
230
692
TOTAL INTEREST EXPENSE
7,598
1,426
19,961
3,332
NET INTEREST INCOME
22,501
21,415
66,242
55,263
Provision for credit losses- investments
5,000
Provision for credit losses (1)
837
2,084
2,406
8,517
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
21,664
19,331
58,836
46,746
NONINTEREST INCOME
Service charges on deposit accounts
210
182
588
511
Trust income
1,266
1,176
3,707
3,569
Investment advisory income
1,333
1,085
3,819
3,385
Investment securities gains, net
107
Earnings on bank owned life insurance
243
240
725
709
Other
168
250
730
741
TOTAL NONINTEREST INCOME
3,220
2,933
9,676
8,915
NONINTEREST EXPENSE
Salaries
6,135
5,863
18,606
16,631
Employee benefits
1,752
1,483
4,258
Occupancy expense
1,180
1,063
3,614
3,391
Professional fees
799
766
3,512
2,885
Directors’ fees and expenses
295
249
682
754
Computer software expense
1,233
1,276
3,714
3,629
FDIC assessment
463
384
1,023
1,006
Advertising expenses
364
372
1,074
1,127
Advisor expenses related to trust income
30
28
89
186
Telephone expenses
184
192
534
505
Intangible amortization
71
214
1,084
808
3,644
2,322
TOTAL NONINTEREST EXPENSE
13,590
12,555
42,065
36,908
Income before income taxes
11,294
9,709
26,447
18,753
Provision for income taxes
2,256
1,856
5,093
3,460
NET INCOME
9,038
7,853
21,354
15,293
Basic and diluted earnings per share
1.61
1.40
3.79
2.72
Weighted average shares outstanding
5,629,642
5,623,172
5,628,036
5,619,897
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Net Income
Other comprehensive income/(loss):
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) arising during the period
(15,982)
(21,201)
(19,670)
(75,262)
Credit loss expense
Reclassification adjustment for (gains) included in net income
(107)
Tax effect
(3,356)
(4,452)
(3,104)
(15,805)
Net of tax
(12,626)
(16,749)
(11,673)
(59,457)
Defined benefit pension plans:
Net gain/(loss) arising during the period
500
1,500
720
Reclassification adjustment for amortization of prior service cost and net gains included in net periodic pension cost
(7)
(21)
105
49
315
147
395
198
1,185
594
Deferred compensation liability:
Unrealized loss
(4)
(11)
(1)
(2)
(3)
(9)
Total other comprehensive loss
(12,234)
(16,554)
(10,497)
(58,872)
Total comprehensive income/(loss)
(3,196)
(8,701)
10,857
(43,579)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Other
Common
Retained
Comprehensive
Treasury
Stock
Earnings
Income (Loss)
Total
Balance, July 1, 2023
120,272
92,795
(66,459)
(1,279)
148,171
Net income
Other comprehensive loss, net of taxes
Cash dividends declared ($0.23 per share)
(1,297)
Treasury stock purchased (2,922 shares)
(127)
Restricted stock expense
9
Stock-based compensation (8,076 shares)
86
272
358
Balance, September 30, 2023
Balance, January 1, 2023
Cumulative effect adjustment for adoption of ASU 2016-13
(1,561)
Balance, January 1, 2023 (as adjusted for change in accounting principle)
83,074
136,577
Other comprehensive income, net of taxes
Cash dividends declared ($0.69 per share)
(3,892)
Treasury stock purchased (8,725 shares)
(424)
45
Stock-based compensation (16,562 shares)
215
540
755
Balance, July 1, 2022
119,946
70,131
(45,761)
(1,435)
145,723
Cash dividends declared ($0.20 per share)
(1,124)
Treasury stock purchased (3,035 shares)
(119)
Stock-based compensation (9,637 shares)
289
378
Balance, September 30, 2022
120,068
76,860
(62,315)
(1,265)
136,190
Balance, January 1, 2022
119,825
64,941
(3,443)
(1,329)
182,836
Cash dividends declared ($0.60 per share)
(3,374)
Treasury stock purchased (7,652 shares)
(308)
133
Stock-based compensation (12,397 shares)
110
482
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
7,406
Depreciation
1,286
1,150
Accretion on loans
(2,127)
(2,298)
Amortization of intangibles
Amortization of subordinated notes issuance costs
Investment securities (gains) losses
Stock-based compensation
Net amortization of investment premiums
960
1,339
(725)
(709)
Net change in:
(12)
1,089
433
(1,230)
Other liabilities
(1,049)
(799)
Net cash from operating activities
28,488
23,236
Cash flows from investing activities
Purchases of investment securities available-for-sale
(6,327)
(210,589)
Proceeds from sales of investment securities available-for-sale
7,296
Proceeds from paydowns of investment securities available-for-sale
32,254
46,360
Proceeds from maturities and calls of investment securities available-for-sale
3,774
5,154
Purchase of restricted investment in bank stocks
(41,418)
(1,189)
Proceeds from redemptions of restricted investment in bank stocks
39,988
24
Net increase in loans
(139,636)
(257,268)
Purchase of premises and equipment
(3,055)
(1,145)
Disposal of premises and equipment
435
Net cash used by investing activities
(106,689)
(418,653)
Cash flows from financing activities
Net increase in deposits
130,644
273,169
Net change in FHLB advances, short term
14,500
Proceeds from FHLB advances, long term
Cash dividends paid
Purchases of treasury stock
Net cash from financing activities
150,828
269,487
Net change in cash and cash equivalents
72,627
(125,930)
Beginning cash and cash equivalents
306,179
Ending cash and cash equivalents
180,249
Supplemental cash flow information:
Interest paid
19,551
3,550
Income taxes paid
6,472
4,596
Supplemental noncash disclosures:
Lease liabilities arising from obtaining right-of-use assets
1,050
1,299
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation: The unaudited consolidated financial statements include Orange County Bancorp, Inc., a Delaware bank holding company (“Orange County Bancorp”) and its wholly owned subsidiaries: Orange Bank & Trust Company, a New York trust company (the “Bank”) and Hudson Valley Investment Advisors (“HVIA”), a Registered Investment Advisor, together referred to as the “Company.” Intercompany transactions and balances are eliminated in consolidation.
The Company provides commercial and consumer banking services to individuals, small businesses and local municipal governments as well as trust and investment services through the Bank and HVIA. The Company is headquartered in Middletown, New York, with eight locations in Orange County, New York, seven in Westchester County, New York, two in Rockland County, New York, and one in Bronx County, New York. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial real estate, commercial and residential mortgage loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the areas in which they operate.
Assets held by the Company in an agency or fiduciary capacity for its customers are excluded from the consolidated financial statements since they do not constitute assets of the Company. Assets held by the Company in an agency or fiduciary capacity for its customers amounted to $1.4 billion and $1.3 billion at September 30, 2023 and December 31, 2022, respectively.
Certain information and footnote disclosures normally included in the audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2022 for Orange County Bancorp contained in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 24, 2023. In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal and recurring accruals) necessary to present fairly the financial position as of September 30, 2023, the results of operations, comprehensive income/(loss), changes in stockholders’ equity for the three and nine months ended September 30, 2023 and 2022 and cash flow statements for the nine months ended September 30, 2023 and 2022. The results of operations for any interim period are not necessarily indicative of the results that may be expected for the full year or for any future period. Certain reclassifications have been made to the financial statements to conform with prior period presentations.
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Recent Accounting Pronouncements: In December 2022, the financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this ASU defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective upon issuance. The FASB had previously issued 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting and related amendments in 2020 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 were elective and applied to all entities that have contracts, hedging relationships, and other transactions that reference the London Inter-bank Offer Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The Company does not expect such adoption of the new ASU to have an impact on the Company’s consolidated financial instruments.
The Company adopted ASU 2016-13 on January 1, 2023 for all financial assets measured at amortized cost and off-balance sheet credit exposures using the modified retrospective method. Results for the three and nine months ended September 30, 2023 are presented under Accounting Standards Codification 326, Financial Instruments – Credit Losses, while prior period amounts continue to be reported with previously applicable GAAP and have not been restated. Effective January 1, 2023, the Company recorded a $1.9 million increase in allowance for credit losses on loans that is referred to as the current expected credit loss (“CECL”) methodology (previously allowance for loan losses), an adjustment of $1.4 million recording reserves related to loans, and a $520 thousand increase related to allowance for off balance sheet credit exposures included in other liabilities section of the consolidated statements of financial condition, which resulted in a total cumulative effect adjustment of $1.6 million, net of tax, and a decrease to retained earnings, a component of the stockholders’ equity. Further information regarding the impact of CECL can be found in Note 3 – Loans and Allowance for Credit Losses.
The Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) prospectively effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measurement of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. The Company did not have any loans that were both experiencing financial difficulties and modified during the three and nine months ended September 30, 2023.
Allowance for Credit Losses
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”), which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity securities. It also applies to off-balance sheet credit exposures (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, Accounting Standards Codification (“ASC”) 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities which management does not intend to sell or believes that it is more likely than not they will be required to sell.
The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The allowance for credit losses is reported separately as a contra-asset on the consolidated statement of financial condition. The expected credit loss for unfunded lending commitments and unfunded loan commitments is reported on the Consolidated Statement of Financial Condition in other liabilities and is recorded within the provision for credit losses.
Allowance for Credit Losses on Loans Receivable
The allowance for credit losses on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected. Expected losses are evaluated and calculated on a collective, or pooled, basis for those loans which share similar risk characteristics. If the loan does not share risk characteristics with other loans, the Company will evaluate the loan on an individual basis. Individually evaluated loans are primarily non-accrual and collateral dependent loans. Furthermore, the Company evaluates the pooling methodology at least annually to ensure that loans with similar risk characteristics are pooled appropriately. Loans are charged off against the allowance for credit losses when the Company believes the balances to be uncollectible. Expected recoveries do not
exceed the aggregate of amounts previously charged off or expected to be charged off. The Company does not estimate expected losses on accrued interest receivable on loans, as accrued interest receivable is reversed or written off when the full collection of the accrued interest receivable related to a loan becomes doubtful.
The Company has chosen to segment its portfolio consistent with the manner in which it manages credit risk. The Company calculates estimated credit losses for these loan segments using quantitative models and qualitative factors. Further information on loan segmentation and the credit loss estimation is included in Note 3 – Loans and Allowance for Credit Losses.
Individually Evaluated Loans
On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.
Allowance for Credit Losses on Off-Balance Sheet Commitments
The Company is required to include unfunded commitments that are expected to be funded in the future within the allowance calculation, other than those that are unconditionally cancelable. To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate. As noted above, the allowance for credit losses on unfunded loan commitments is included in other liabilities on the consolidated statement of financial condition and the related credit expense is recorded as provisions for credit losses in the consolidated statements of income.
Allowance for Credit Losses on Available for Sale Securities
For available for sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more than likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet the above criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost and adverse conditions related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of tax.
Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. The Company does not estimate expected losses on accrued interest receivable on investments, as accrued interest receivable is reversed or written off when the full collection of the accrued interest receivable related to an investment becomes doubtful.
10
Note 2 — Investment Securities
The amortized cost and fair value of investment securities at September 30, 2023 and December 31, 2022:
Gross
Amortized
Unrealized
ACL
Fair
Cost
Gains
Losses
Adjustment
Value
Available-for-sale September 30, 2023
U.S. government agencies and treasuries
98,539
22
(12,838)
85,723
Mortgage-backed securities - residential
264,406
(40,908)
223,498
Mortgage-backed securities - commercial
80,192
(16,271)
63,921
Corporate Securities
23,534
(3,998)
19,536
Obligations of states and political subdivisions
103,307
41
(17,318)
86,030
Total debt securities
569,978
63
(91,333)
Available-for-sale December 31, 2022
104,734
25
(11,009)
93,750
283,774
17
(34,640)
249,151
80,916
(13,152)
67,764
28,559
(2,901)
25,658
111,971
48
(14,881)
97,138
609,954
90
(76,583)
Proceeds from sales of securities and associated gains and losses for the three and nine months ended September 30, 2023 and 2022.
Three Months Ended September 30,
Nine Months Ended September 30,
Proceeds
Gross realized gains
130
Gross realized losses
23
Net gain on sales of securities
Tax provision on realized net gains and loss
20
Net gain on sales of securities, after tax
87
11
The amortized cost and fair value of debt securities as of September 30, 2023 are shown below by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-sale
Due in one year or less
7,617
7,572
Due after one through five years
24,360
22,475
Due after five through ten years
61,833
52,196
Due after ten years
131,570
109,046
225,380
191,289
Mortgage-backed securities
344,598
287,419
Securities pledged at September 30, 2023 and December 31, 2022 had a carrying amount of $386,461 and $323,674 and were pledged to secure public deposits.
At September 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the US Government and its agencies, in an amount greater than 10% of stockholders’ equity.
The following tables summarize those securities with unrealized losses for which an allowance for credit losses has not been recorded at September 30, 2023 and December 31, 2022, aggregated by major security types and length of time in a continuous unrealized loss position:
Less than 12 Months
12 Months or More
466
81,393
(12,837)
81,859
9,377
(206)
212,700
(40,702)
222,077
(57)
62,743
(16,214)
3,454
(79)
79,441
(17,239)
82,895
14,475
(343)
455,813
(90,990)
470,288
U.S. government agencies
47,064
(2,414)
41,718
(8,595)
88,782
129,352
(9,290)
118,762
(25,350)
248,114
21,190
(2,849)
46,574
(10,303)
12,503
(1,007)
13,155
(1,894)
57,287
(6,763)
32,479
(8,118)
89,766
267,396
(22,323)
252,688
(54,260)
520,084
As of September 30, 2023, the Company’s securities portfolio consisted of 274 securities, 251 of which were in an unrealized loss position. As of December 31, 2022, the Company’s securities portfolio consisted of 296 securities, 264 of which were in an unrealized
12
loss position. Unrealized losses are primarily related to the Company’s mortgage backed securities, U.S. government agency securities, and investments in obligations of states and political subdivisions as discussed below.
Available for sale securities are evaluated to determine if a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. An impairment related to credit factors would be recorded through an allowance for credit losses. The allowance is limited to the amount by which the security’s amortized cost basis exceeds the fair value. An impairment that has not been recorded through an allowance for credit losses shall be recorded through other comprehensive income, net of applicable taxes. Investment securities will be written down to fair value through the Consolidated Statements of Income when management intends to sell, or may be required to sell, the securities before they recover in value. Primarily all of the investment securities are backed by loans guaranteed by either U.S. government agencies or U.S government-sponsored entities, and management believes that default is highly unlikely given the lack of historical credit losses and governmental backing. Management believes that the unrealized losses on these securities are a function of changes in market interest rates and credit spreads, not changes in credit quality.
The Company’s available for sale debt securities portfolio includes corporate bonds and revenue bonds, among other securities. These types of securities may pose a higher risk of future impairment charges as a result of the changes in market interest rates, unpredictable nature of the U.S. economy and their potential negative effect on the future performance of the security issuers. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis. Based on a comparison of the present value of expected cash flows to the amortized cost as well as a potential market for sale, the Company determined that there was no value to its corporate bond issued by Signature Bank due to its failure. Accordingly, the Company wrote off the amount of the corporate bond totaling $5.0 million during the quarter ended June 30, 2023. The amount of the writedown was previously recorded through an allowance for credit losses. The Company also evaluated available for sale debt securities that are in an unrealized loss position as of September 30, 2023 included in the table above and has determined that the declines in fair value are mainly attributable to interest rates, credit spreads, market volatility and liquidity conditions, not credit quality or other factors. There was no impairment recognized during the three months ended September 30, 2023. Accrued interest on investments, which is excluded from the amortized cost of available for sale debt securities, totaled $2.7 million and $2.5 million at September 30, 2023 and December 31, 2022, respectively, and is presented within total accrued interest receivable on the consolidated statements of financial condition.
The Company does not intend to sell any of its available for sale debt securities in an unrealized loss position prior to recovery of their amortized cost basis, and it is more likely than not that the Company will not be required to sell any of its securities prior to recovery of their amortized cost basis.
The following table presents the activity in the allowance for credit losses associated with investment securities for the nine months ended September 30, 2023:
Allowance for credit losses -investments:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
13
Note 3 — Loans
Loans at September 30, 2023 and December 31, 2022 were as follows:
Commercial and industrial
266,997
258,901
Commercial real estate
1,225,936
1,098,054
Commercial real estate construction
91,822
109,570
Residential real estate
83,165
74,277
Home equity
12,084
12,329
Consumer
27,725
16,299
Total Loans
Allowance for credit losses
Net Loans
Included in commercial and industrial loans as of September 30, 2023 and December 31, 2022 were loans issued under the SBA’s Paycheck Protection Program (“PPP”) of $227 and $1,717, respectively.
The Company engaged a third-party vendor to assist in the CECL calculation and internal governance framework to oversee the quarterly estimation process for the allowance for credit losses (“ACL”). The ACL calculation methodology relies on regression-based discounted cash flow (“DCF”) models that correlate relationships between certain financial metrics and external market and macroeconomic variables. The Company uses Probability of Default (“PD”) and Loss Given Default (“LGD”) with quantitative factors and qualitative considerations in the calculation of the allowance for credit losses for collectively evaluated loans. The Company uses a reasonable and supportable period of one year, at which point loss assumptions revert back to historical loss information by means of a one-year reversion period. Following are some of the key factors and assumptions that are used in the Company’s CECL calculations:
• methods based on probability of default and loss given default which are modeled based on macroeconomic scenarios;
• a reasonable and supportable forecast period determined based on management’s current review of macroeconomic environment;
• a reversion period after the reasonable and supportable forecast period;
• estimated prepayment rates based on the Company’s historical experience and future macroeconomic environment;
• estimated credit utilization rates based on the Company’s historical experience and future macroeconomic environment; and
• incorporation of qualitative factors not captured within the modeled results. The qualitative factors include but are not limited to
changes in lending policies, business conditions, changes in the nature and size of the portfolio, portfolio concentrations, and
external factors such as competition.
Allowance for Credit Losses are aggregated for the major loan segments, with similar risk characteristics, summarized below. However, for the purposes of calculating the reserves, these segments may be further broken down into loan classes by risk characteristics that include but are not limited to regulatory call codes, industry type, geographic location, and collateral type.
Residential real estate loans involve certain risks such as interest rate risk and risk of non-repayment. Adjustable-rate residential real estate loans decrease the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying properties may be adversely affected by
14
higher interest rates. Repayment risk may be affected by a number of factors including, but not necessarily limited to, job loss, divorce, illness and personal bankruptcy of the borrower.
Commercial and multi-family real estate lending entails additional risks as compared with residential family property lending. Such loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans is typically dependent on the successful operation of the real estate project. The success of such projects is sensitive to changes in supply and demand conditions in the market for commercial real estate as well as general economic conditions.
Construction lending is generally considered to involve a high risk due to the concentration of principal in a limited number of loans and borrowers and the effects of the general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not necessarily pre-sold and thus pose a greater potential risk to the Bank than construction loans to individuals on their personal residence.
Commercial and industrial lending, including lines of credit, is generally considered higher risk due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on the business. Commercial business loans are primarily secured by inventories and other business assets. In many cases, any repossessed collateral for a defaulted commercial business loans will not provide an adequate source of repayment of the outstanding loan balance.
Home equity lending entails certain risks such as interest rate risk and risk of non-repayment. The marketability of the underlying property may be adversely affected by higher interest rates, decreasing the collateral value securing the loan. Repayment risk can be affected by job loss, divorce, illness and personal bankruptcy of the borrower. Home equity line of credit lending entails securing an equity interest in the borrower’s home. In many cases, the Bank’s position in these loans is as a junior lien holder to another institution’s superior lien. This type of lending is often priced on an adjustable rate basis with the rate set at or above a predefined index. Adjustable-rate loans decrease the interest rate risk to the Bank that is associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default.
Consumer loans generally have more credit risk because of the type and nature of the collateral and, in certain cases, the absence of collateral. Consumer loans generally have shorter terms and higher interest rates than other lending. In addition, consumer lending collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. In many cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan.
The following tables present the activity in the allowance by portfolio segment for each of the three and nine months ended September 30, 2023 and 2022: (Note: The activity presented does not include provisions recorded to support the reserve associated with off balance sheet commitments.)
Three Months Ended September 30, 2023
Commercial
And
Real Estate
Residential
Home
Industrial
Construction
Equity
Allowance for credit losses:
5,155
17,119
1,060
992
46
476
24,848
Provision for credit losses
869
82
(59)
(93)
807
(76)
160
196
5,961
17,361
1,001
995
51
406
25,775
15
Nine Months Ended September 30, 2023
and
Beginning balance, prior to adoption of ASC 326
5,510
14,364
1,252
345
298
21,832
Impact of adopting ASC 326
72
1,737
(8)
(227)
(17)
(129)
1,428
718
1,087
(243)
877
2,554
(410)
(36)
(446)
173
163
407
Three Months Ended September 30, 2022
Allowance for loan losses:
9,332
12,303
1,318
299
68
322
23,642
573
1,110
279
60
1
61
(2,817)
(70)
(2,887)
26
7,110
13,439
1,597
359
69
314
22,888
Nine Months Ended September 30, 2022
4,901
11,183
964
80
261
17,661
5,066
2,230
633
138
461
(2,894)
(51)
(449)
(3,394)
37
104
16
The following tables present the balance in the allowance and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2023 and December 31, 2022:
Ending balance:
individually evaluated for impairment
1,282
311
1,593
collectively evaluated for impairment
4,679
17,050
24,182
Total ending allowance balance
Loans:
1,538
22,790
1,244
97
25,714
265,459
1,203,146
81,921
12,039
27,628
1,682,015
Total ending loans balance
653
380
1,033
4,857
13,984
20,799
1,003
22,956
1,254
25,368
257,898
1,075,098
73,023
12,278
16,195
1,544,062
Included in the commercial and industrial loans collectively evaluated for impairment are PPP loans of $227 and $1,717 as of September 30, 2023 and December 31, 2022, respectively. PPP loans receivable are guaranteed by the SBA and have no allocation in the allowance.
The following tables present loans individually evaluated for impairment recognized by class of loans as of September 30, 2023 and December 31, 2022:
Unpaid
Allowance for
Principal
Recorded
Credit Losses
Balance
Investment
Allocated
With no related allowance recorded
Commercial and industrial (1)
Commercial real estate (2)
17,764
17,331
Residential real estate (3)
1,257
Home equity (4)
19,169
18,717
With an allowance recorded:
1,916
5,497
5,459
Consumer (5)
7,413
6,997
Loan Losses
17,884
17,316
19,205
18,621
1,011
5,665
5,640
6,780
6,747
18
The following tables present the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans for the three and nine months ended September 30, 2023 and 2022:
September 30, 2022
Average
Interest
Income
Recognized(1)
17,767
154
17,553
158
578
714
1,283
98
19,157
156
19,414
164
6,771
78
18,599
303
2,259
108
7,074
20,966
83
18,007
465
17,549
719
983
100
19,404
471
19,110
494
7,011
238
9,264
157
308
2,292
7,319
11,666
251
19
The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2023 and December 31, 2022:
Loans Past Due Over 90 Days
Non-accrual
Still Accruing
200
1,850
4,130
3,882
895
1,513
1,182
1,188
477
6,895
6,124
2,611
2,327
As of September 30, 2023, the Company held $6.9 million in non-accrual balances and a related ACL for approximately $1.4 million. Within the non-accrual balances, $5.1 million of these loans had no ACL associated to them.
The Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measurement of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty. The Company did not have any loans that were both experiencing financial difficulties and modified during the three months or nine months ended September 30, 2023.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
The following tables present the aging of the recorded investment in past-due loans as of September 30, 2023 and December 31, 2022 by class of loans:
30-59 Days
60-89 Days
Greater Than
Past Due
90 Days
Not Past Due
389
1,291
1,680
265,317
278
3,055
1,196
4,529
1,221,407
90,309
1,167
81,983
27,720
280
3,459
5,170
8,909
1,698,820
1,497
1,583
2,854
5,934
252,967
563
952
1,515
1,096,539
1,190
73,087
584
634
1,694
14,605
2,646
2,217
5,470
10,333
1,559,097
As of September 30, 2023 and December 31, 2022, loans in the process of foreclosure were $2,962 and $2,016 respectively, of which $1,167 and $578 were secured by residential real estate.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $350 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well- defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.
21
The following table summarizes the Company’s loans by year of origination and internally assigned credit risk at September 30, 2023 and gross charge-offs for the nine months ended September 30, 2023:
Revolving
Loans to
2021
2020
2019
Prior
Term Loans
Pass
40,026
62,445
54,155
47,945
26,500
33,783
264,854
Special Mention
221
Substandard
385
150
446
854
1,835
Total Commercial and industrial
62,917
48,095
26,946
34,858
Current period gross charge-offs
360
410
156,570
331,938
238,553
165,685
94,391
211,980
3,920
1,203,037
6,904
7,339
334
2,445
6,207
6,574
15,560
Total Commercial real estate
332,272
238,988
168,130
100,598
225,458
5,905
22,559
52,028
11,330
Total Commercial real estate construction
17,188
20,211
12,083
9,486
4,565
18,450
589
593
Total Residential real estate
19,043
338
70
9,853
1,691
Total Home Equity
1,736
20,259
1,906
29
64
5,360
Total Consumer
161
36
240,286
438,039
357,270
238,947
132,798
279,520
19,133
Gross charge-offs
Based on the analysis performed as of December 31, 2022, the risk category of loans by class of loans is as follows:
Special
Mention
Doubtful
Loss
256,939
575
1,387
1,074,952
7,399
15,703
73,089
1,543,023
7,974
18,433
Loans to certain directors and principal officers of the Company, including their immediate families and companies in which they are affiliated, amounted to $16,854 and $16,891 at September 30, 2023 and December 31, 2022, respectively.
Note 4 — Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Individually Evaluated, or Collateral Dependent Loans and Other Real Estate Owned: The fair value of collateral dependent loans that are individually evaluated for impairment is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach and resulted in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral dependent loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.
Appraisals are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by a third-party appraisal management company that the Company has engaged in accordance with internal vendor management policies and approval of the Company’s Board of Directors. Once received, the appraisal review function is conducted by the appraisal management company and consists of a review of the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Through this review, the appraisal management company evaluates the validity of the appraised value and the strength of the conclusions; which are subsequently confirmed by a member of the Credit Department. Discounts to the appraised value are then applied to recognize the carrying costs incurred until disposition, realtor fees, deterioration in the quality of the asset, and the age of the appraisal. The net effect of these adjustments were included in the charge-off to the allowance upon acquisition of the foreclosed property and/or upon partial charge-off of the collateral dependent loan. The most recent analysis of property appraisals including the appropriate discount rates are incorporated into the allowance methodology for the respective loan portfolio segments.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using:
Quoted Prices in
Active Markets
Significant Other
Significant
Total at
for Identical
Observable
Unobservable
Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Corporate securities
Total securities available-for-sale
There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2023.
December 31,
316,915
There were no transfers between Level 1 and Level 2 during 2022.
Assets measured at fair value on a non-recurring basis as of September 30, 2023 and December 31, 2022 are summarized below:
Quoted Prices
in Active
Markets for
Identical Assets
Individually Evaluated Loans - Commercial Real Estate
Impaired loans - Commercial Real Estate
204
The fair value amounts shown in the above table are individually evaluated loans net of reserves allocated to said loans. The total reserves allocated to these loans were $100 and $112 at September 30, 2023 and December 31, 2022, respectively.
The following table presents additional quantitative information about level 3 fair value measured at fair value on a non-recurring basis at September 30, 2023 and December 31, 2022:
Fair Value
Range
Valuation Technique
Unobservable Input
(Weighted Average)
Appraisal of collateral (1)
Appraisal and liquidation
20%
adjustments (2)
(20%)
(1) Fair value is generally determined through independent appraisals of the underlying collateral that generally include various level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
The carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value are as follows at September 30, 2023 and December 31, 2022:
Carrying
Amount
Level 1
Level 2
Level 3
Financial assets:
1,598,599
2,686
3,646
NA
Financial liabilities:
Deposits
2,103,675
1,923,672
180,003
145,663
9,641
23,560
Accrued interest payable
642
1,503,543
2,448
3,872
1,972,387
1,881,354
91,033
131,255
19,682
267
Note 5 — Deposits
A summarized analysis of the Bank’s deposits at September 30, 2023 and December 31, 2022:
Non-interest bearing demand accounts
Interest-bearing demand accounts
339,444
284,747
Money market accounts
627,467
615,149
Savings accounts
229,916
258,230
Certificates of Deposit
181,577
93,033
Time deposits that meet or exceed the FDIC insurance limit of $250 thousand at September 30, 2023 and December 31, 2022 were $12.3 million and $17.0 million, respectively.
Uninsured deposits, net of fully collateralized municipal relationships, as of September 30, 2023 and December 31, 2022 totaled $788 million and $871 million, respectively.
Scheduled maturities of time deposits for the next five years as of September 30, 2023, are as follows:
143,216
2024
27,960
2025
8,898
2026
1,503
Deposits of executive officers, directors and principal officers of the Company, including their immediate families and companies in which they are affiliated, amounted to $7.8 million and $15.6 million at September 30, 2023 and December 31, 2022, respectively.
Note 6 — Pension Plan and Stock Compensation
The Bank has a funded noncontributory defined benefit pension plan that covers substantially all employees meeting certain eligibility requirements. The pension plan was closed to new participants and benefit accruals were frozen as of December 31, 2015. The plan provides defined benefits based on years of service and final average salary.
The components of net periodic benefit cost for the Company’s noncontributory defined benefit pension plan for the three and nine months ended September 30, 2023 and 2022 are as follows:
Service cost
Interest cost
202
606
Expected return on plan assets
(411)
(496)
(1,233)
(1,489)
Amortization of transition cost
Amortization of net loss
Net periodic benefit cost/(income)
(62)
(301)
(186)
(904)
The Company has a time based restricted stock plan. For the three months ended September 30, 2023 and 2022, the Company’s recognized stock-based compensation costs were $9 and $33, respectively. For the nine months ended September 30, 2023 and 2022 the Company’s recognized stock-based compensation costs of $45 and $133, respectively. The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock awards. Compensation cost is recognized over the vesting period of the award using the straight line method. There were no restricted stock grants made during the three and nine months ended September 30, 2023 and 2022. The grants generally vest at the rate of 33% per year with full vesting on the third anniversary date of the grant. Unamortized expense at September 30, 2023 was $13.
A summary of the Company’s restricted stock awards activity for the nine months ended September 30, 2023 is presented below:
Weighted
Average Fair
Shares
Non-vested at beginning of period
11,677
29.24
Granted
Vested
(7,569)
29.50
Forfeited
(580)
28.75
Non-vested at end of period
3,528
27
On September 22, 2021 restricted stock units (RSUs) were granted in the amount of 48,004 from the Company’s 2019 Equity Incentive Plan to officers of the Bank and HVIA and directors of the Company in connection with the successful completion of the Company’s initial public stock offering, listing on the NASDAQ Capital Market and the recent past years’ success experienced by the Bank. Non-employee directors received 16,500 restricted stock units while officers received 31,504 restricted stock units. The restricted stock units granted to officers will vest over three years in approximately 33% increments on the first, second and third anniversary of the date of grant. The restricted stock units granted to nonemployee directors are 100% vested as of the date of grant and are settled in shares of Company common stock upon separation from service. In addition, the Company made a discretionary contribution of $200,000 to the Company’s KSOP Trust and purchased shares of the Company’s common stock in the open market for the benefit of all eligible non-highly compensated employees who remain employed by the Company, Bank or HVIA as of December 31, 2021.
The following table summarizes the activity of RSUs during the nine months ended September 30, 2023:
Restricted Stock Units
Non-vested RSUs at beginning of period
59,747
35,628
(16,562)
(4,967)
Non-vested RSUs at end of period
73,846
Note 7 — Accumulated Other Comprehensive Income (Loss)
The following is a summary of changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30, 2023 and 2022:
Gains and
Losses on
Deferred
Available-for-
Defined Benefit
Compensation
Sale Securities
Pension Items
Liability
(59,477)
(7,099)
117
Other comprehensive income/(loss) before reclassification, net
Less amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income/(loss)
(72,103)
(6,704)
114
(60,430)
(7,889)
123
Other comprehensive income/(loss) before reclassification
(16,586)
(15,410)
(87)
(43,780)
(2,110)
129
206
(16,546)
(60,529)
(1,912)
(1,072)
(2,506)
135
618
(58,848)
The following reflects significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022:
Affected Line Item
Amount Reclassified from Accumulated Other Comprehensive Income
in the Statement where
Net Income is Presented
Details about Accumulated Other Comprehensive Income Components
Unrealized gains and losses on available-for-sale securities
Realized gains on securities available-for-sale
Investment security gains (losses)
Total before tax
Amortization of defined benefit pension items
Transition asset
Other expense
Actuarial gains (losses)
(24)
-
Total reclassifications for the period, net of tax
Also included in accumulated other comprehensive income (loss) as of September 30, 2023, is a credit loss expense which was recorded as provision for credit loss investments during the year.
Note 8 — Revenue from Contracts with Customers
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following table presents the Company’s gross sources of noninterest income for the three and nine months ended September 30, 2023 and 2022.
Noninterest Income
Overdraft fees
106
93
294
239
Investment securities gains (losses)(a)
Earnings on bank owned life insurance(a)
Other(b)
Total Noninterest Income
The Company earns wealth management fees, which includes trust income and investment advisory income, from its contracts with trust and brokerage customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on a tiered scale of the market value of the assets under management at month-end or quarter-end.
Note 9 — Segment Information
The reportable segments are determined by the products and services offered by the Company, primarily distinguished between banking and wealth management. Loans, investments, and deposits provide the revenues in the banking operation, and trust fees and investment management fees provide the revenues in wealth management. All operations are domestic.
Significant segment totals are reconciled to the financial statements as follows:
For the three months ended September 30, 2023
For the nine months ended September 30, 2023
Banking
Wealth Management
Total Segments
Net interest income
Noninterest income
2,599
2,150
7,526
Provision for credit loss - investments
(5,000)
Provision for credit loss
(837)
(2,406)
Noninterest expenses
(11,777)
(1,813)
(13,590)
(36,266)
(5,799)
(42,065)
Income tax expense
(2,090)
(166)
(2,256)
(4,730)
(363)
(5,093)
8,418
620
19,990
1,364
Total assets
2,438,565
8,706
For the three months ended September 30, 2022
For the nine months ended September 30, 2022
672
2,261
1,961
6,954
Provision for loan loss
(2,084)
(8,517)
(10,893)
(1,662)
(12,555)
(31,532)
(5,376)
(36,908)
(1,730)
(126)
(1,856)
(3,129)
(331)
(3,460)
7,380
473
14,046
1,247
2,360,897
7,473
2,368,370
31
Note 10 — Regulatory Capital Matters
The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and prompt corrective regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by regulators. Failure to meet the minimum capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, (Basel III rules), became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer.” The capital conservation buffer is 2.5%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion and capital restoration plans are required. Capital levels at September 30, 2023 and at December 31, 2022 exceeded the regulatory minimum levels for the Bank to be considered well capitalized under the prompt corrective action regulations.
Actual and required capital amounts and ratios are presented below at September 30, 2023 and December 31, 2022 for the Bank.
To be Well Capitalized
For Capital Adequacy
under Prompt
Actual
Purposes
Purposes with Capital Buffer
Corrective Action Provisions
Ratio
Total capital to risk weighted assets
255,225
13.93
%
146,582
8.00
180,937
9.875
183,227
10.00
Tier 1 (Core) capital to risk weighted assets
232,298
12.68
109,936
6.00
144,292
7.875
Common Tier 1 (CET1) to risk weighted assets
82,452
4.50
116,807
6.375
119,098
6.50
Tier 1 (Core) Capital to average assets
9.26
100,358
4.00
N/A
125,447
5.00
235,346
13.95
134,986
166,624
168,733
214,243
12.70
101,240
132,877
75,930
107,567
109,677
9.09
94,250
117,813
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations at September 30, 2023 and December 31, 2022 and for the three months and nine months ended September 30, 2023 and 2022 should be read in conjunction with our audited consolidated financial statements and the accompanying notes in our Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “attribute,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements include, but are not limited to:
These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Overview
We are a bank holding company headquartered in Middletown, New York and registered under the Bank Holding Company Act. Through our wholly owned subsidiaries, Orange Bank & Trust Company and Hudson Valley Investment Advisors, Inc., we offer full-service commercial and consumer banking products and services and trust and wealth management services to small businesses, middle-market enterprises, local municipal governments and affluent individuals in the Lower Hudson Valley region, the New York metropolitan area and nearby markets in Connecticut and New Jersey. By combining the high-touch service and relationship-based focus of a community bank with the extensive suite of financial products and services offered by our larger competitors, we believe we can capitalize on the substantial growth opportunities available in our market areas. We also offer a variety of deposit accounts to businesses and consumers, including checking accounts and a full line of municipal banking accounts through our business banking platform. These activities, together with our 15 offices and one loan production office, generate a stable source of low- cost core deposits and a diverse loan portfolio with attractive risk-adjusted yields. We also offer private banking services through Orange Bank & Trust Private Banking, a division of Orange Bank & Trust Company, and provide trust and wealth management services through Orange Bank & Trust Company’s trust services department and HVIA, which combined had $1.4 billion in assets under management at September 30, 2023. As of September 30, 2023, our assets, loans, deposits and stockholders’ equity totaled $2.5 billion, $1.7 billion, $2.1 billion and $143.9 million, respectively.
34
Key Factors Affecting Our Business
Net Interest Income. Net interest income is the most significant contributor to our net income and is the difference between the interest and fees earned on interest-earning assets and the interest expense incurred in connection with interest-bearing liabilities. Net interest income is primarily a function of the average balances and yields/rates of these interest-earning assets and interest-bearing liabilities. These factors are influenced by internal considerations such as product mix and risk appetite as well as external influences such as economic conditions, competition for loans and deposits and market interest rates.
The cost of our deposits and short-term borrowings is primarily based on short-term interest rates, which are largely driven by the Board of Governors of the Federal Reserve System’s (the “FRB”) actions and market competition. The yields generated by our loans and securities are typically affected by short-term and long-term interest rates, which are driven by market competition and market rates often impacted by the FRB’s actions. The level of net interest income is influenced by movements in such interest rates and the pace at which such movements occur.
We anticipate that interest rates will continue to increase over the next several quarters. Based on our asset sensitivity, a steepened yield curve and higher interest rates generally could have a beneficial impact on our net interest income. Conversely, a flat yield curve at lower rates would be expected to have an adverse impact on our net interest income.
Noninterest Income. Noninterest income is also a contributor to our net income. Noninterest income consists primarily of our investment advisory income, trust income generated by HVIA and our trust department, as well as income generated by our BOLI investment earnings. In addition, noninterest income is also impacted by net gains (losses) on the sale of investment securities, service charges on deposit accounts, and other fee income consisting primarily of debit card fee income, checkbook fees and rebates and safe deposit box rental income.
Noninterest Expense. Noninterest expense includes salaries, employee benefits, occupancy, furniture and equipment expense, professional fees, directors’ fees and expenses, computer software expense, federal deposit insurance assessment, advertising expenses, advisor expenses related to trust income and other expenses. In evaluating our level of noninterest expense, we closely monitor our efficiency ratio. The efficiency ratio is calculated by dividing noninterest expense to net interest income plus noninterest income. We continue to seek to identify ways to streamline our business and operate more efficiently.
Credit Quality. We have well established loan policies and underwriting practices that have resulted in low levels of charge-offs and nonperforming assets in recent periods. We strive to originate quality loans that will maintain the credit quality of our loan portfolio. However, credit trends in the markets in which we operate are largely impacted by economic conditions beyond our control and can adversely impact our financial condition.
Competition. The industry and businesses in which we operate are highly competitive. We may see increased competition in different areas including interest rates, underwriting standards and product offerings and structure. While we seek to maintain an appropriate return on our investments, we anticipate that we will experience continued pressure on our net interest margins as we operate in this competitive environment.
Economic Conditions. Our business and financial performance are affected by economic conditions generally in the United States and more directly in the market of the Lower Hudson Valley region, the New York metropolitan area and nearby markets in Connecticut and New Jersey where we primarily operate. The significant economic factors that are most relevant to our business and our financial performance include, but are not limited to, real estate values, interest rates and unemployment rates.
Regulatory Trends. We operate in a highly regulated environment and nearly all of our operations are subject to extensive regulation and supervision. Bank or securities regulators, Congress, the State of New York, the FRB and the New York State Department of Financial Services (the “NYSDFS”) may revise the laws and regulations applicable to us, may impose new laws and regulations, increase the level of scrutiny of our business in the supervisory process, and pursue additional enforcement actions against financial institutions. Future legislative and regulatory changes such as these may increase our costs and have an adverse effect on our business, financial condition and results of operations. The legislative and regulatory trends that will affect us in the future are impossible to predict with any certainty.
35
Critical Accounting Estimates
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. These critical estimates, policies and their application are periodically reviewed with the Audit Committee and the board of directors. Management believes that the most critical accounting estimates, which involve the most complex or subjective decisions or assessments, are as follows:
Allowance for Credit Losses. Management believes that the determination of the allowance for credit losses involves a high degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact the results of operations for Orange County Bancorp.
On January 1, 2023, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and judgement and is reviewed on a quarterly basis. When management is reasonably certain that a loan balance is not fully collectable, an analysis is completed and a specific reserve may be established or a full or partial charge off could be recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in management’s judgment, should be charged off. Although management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. Furthermore, the majority of the Bank’s loans are secured by real estate in the State of New York. Accordingly, the collectability of a substantial portion of the carrying value of the Bank’s loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.
Discussion and Analysis of Financial Condition
Summary Financial Condition. The following table sets forth a summary of the material categories of our balance sheet at the dates indicated:
Change
vs.
As of September 30,
As of December 31,
Amount ($)
Percentage (%)
(Dollars in thousands)
159,937
7.0
84.4
134,356
8.7
Investment securities, available for sale
(54,753)
(10.3)
6.6
11.0
100.0
0.3
Stockholders’ Equity
5,780
4.2
Assets. Our total assets were $2.5 billion at September 30, 2023, an increase of $159.9 million, or 7.0%, from $2.3 billion at December 31, 2022. The increase was primarily driven by an increase in net loans of $134.4 million, or 8.7%. The increase in assets also included an increase in cash and due from banks of $72.6 million, or 84.4%.
Cash and due from banks. Cash and due from banks increased $72.6 million, or 84.4%, to $158.7 million at September 30, 2023, from $86.1 million at December 31, 2022. The increase continues to be driven by a strategic focus to increase cash balances, even through borrowings in order to maintain greater on-hand cash levels during a period of industry liquidity concerns.
Loans. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At September 30,
At December 31,
Percent
266,770
15.62
257,184
16.39
71.79
69.97
5.38
6.98
4.87
4.73
0.71
0.79
1.62
1.04
PPP loans
227
0.01
1,717
0.11
Total loans
100.00
Total loans, net
Net loans increased $134.4 million, or 8.7%, to $1.7 billion at September 30, 2023 from $1.5 billion at December 31, 2022 primarily due to increases in commercial real estate, commercial and industrial, residential real estate, and consumer loan categories during the first nine months of 2023. Commercial real estate loans increased $127.9 million, or 11.6%, to $1.2 billion at September 30, 2023 from $1.1 billion at December 31, 2022. Commercial and industrial loans experienced an increase of $9.6 million, or 3.7%, reaching $266.8 million at September 30, 2023 from $257.2 million at December 31, 2022. Residential real estate loans grew $8.9 million, or 12.0%, to $83.2 million at September 30, 2023 from $74.3 million at December 31, 2022. Consumer loans increased $11.4 million, or 70.1%, to $27.7 million at September 30, 2023 from $16.3 million at December 31, 2022. The growth of these categories represents diversification within the portfolio while remaining focused on loan originations to new and existing customers during the first nine months of 2023 as well as our continued commitment to geographic expansion in our market area.
Non-performing Assets
Management reviews a loan for impairment or individual evaluation when it is non-performing or when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be non-performing, the measurement of the loan in the allowance for credit losses is based on the fair value of the collateral for all collateral-dependent loans. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.
When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for credit losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. Management will consider a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due, when it is deemed appropriate based on individual borrower conditions. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.
The following table sets forth information regarding our non-performing assets. Non-performing loans aggregated approximately $9.5 million at September 30, 2023 as compared to $8.5 million at December 31, 2022. At September 30, 2023 and December 31, 2022, there were no PPP loans considered as non-performing.
Non-accrual loans:
Total non-accrual loans
Accruing loans 90 days or more past due:
Total accruing loans 90 days or more past due
Total non-performing loans
9,506
8,451
Other real estate owned
Other non-performing assets
Total non-performing assets
Ratios:
Total non-performing loans to total loans
0.56
0.54
Total non-performing loans to total assets
0.39
0.37
Total non-performing assets to total assets
38
Non-performing loans at September 30, 2023 totaled $9.5 million and consisted primarily of $5.0 million of commercial real estate loans, $1.7 million of commercial and industrial loans, $1.5 million of commercial real estate construction loans, and $1.2 million of residential real estate loans. The increase in non-performing loans was primarily the result of payment timing and delays at the end of the third quarter. We had no other real estate owned at September 30, 2023 and December 31, 2022, respectively.
Non-performing assets increased $1.1 million, or 12.5%, to $9.5 million, or 0.39% of total assets, at September 30, 2023 from $8.5 million, or 0.37% of total assets, at December 31, 2022. The increase in non-performing assets at September 30, 2023, compared to December 31, 2022 was primarily driven by an increase of $1.5 million related to accruing commercial real estate construction loans as well as an increase of $1.1 million in non-performing commercial real estate loans.
From time to time, as part of our loss mitigation strategy, we may renegotiate loan terms based on the economic and legal reasons related to the borrower’s financial difficulties. There were no loans modified due to financial difficulties during the three months and nine months ended September 30, 2023.
Classified Assets. Federal regulations provide that loans and other assets of lesser quality should be classified as “substandard”, “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. We designate an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention.
The following table summarizes classified assets of all portfolio types at the dates indicated:
Classification of Assets:
18,719
Total Classified Assets
7,647
On the basis of management’s review of our assets, we have classified $18.7 million of our assets at September 30, 2023 as substandard compared to $18.4 million at December 31, 2022, due to certain loan provisions recorded during the current nine month period. There were no doubtful assets as of September 30, 2023 and December 31, 2022, respectively. We designated $7.7 million of our assets at September 30, 2023 as special mention compared to $8.0 million designated as special mention at December 31, 2022, as a result of certain loan migration out of the special mention category during the period.
On January 1, 2023, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and judgement and is reviewed on a quarterly basis. When management is reasonably certain that a loan balance is not fully collectable, an analysis is completed and a specific reserve may be established or a full or partial charge off could be recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included
39
in the allowance for credit losses are qualitative reserves that are expected, but, in management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in management’s judgment, should be charged off. Although management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. Furthermore, the majority of the Bank’s loans are secured by real estate in the State of New York. Accordingly, the collectability of a substantial portion of the carrying value of the Bank’s loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.
The allowance for credit losses increased by $3.9 million, or 18.1%, to $25.7 million, or 1.51% of total loans at September 30, 2023, from $21.8 million, or 1.39% of total loans at December 31, 2022. The increase in the allowance was primarily due to increased provision resulting from the growth in our commercial real estate loan portfolio during the nine months ended September 30, 2023 as well as the cumulative effect of the CECL adjustment recorded during the period combined with certain specific reserves recorded during the period.
At or for the Nine Months Ended
Balance at beginning of year
Adoption of ASC 326
Charge-offs:
2,894
449
Total charge-offs
3,394
Recoveries:
Total recoveries
Net charge-offs (recoveries)
3,290
Balance at end of period
Net charge-offs to average loans outstanding
0.00
0.02
Allowance for credit losses to non-performing loans at end of period
271.14
224.57
Allowance for credit losses to total loans at end of period
1.51
1.48
Allowance for credit losses to total loans (excluding PPP Loans) at end of period
40
Investment Securities
The following table sets forth the estimated fair value of our available-for-sale securities portfolio at the dates indicated.
At September 30, 2023
At December 31, 2022
Estimated
Available for sale securities:
364,690
Available for sale securities decreased $54.8 million, or 10.3%, to $478.7 million at September 30, 2023 from $533.5 million at December 31, 2022, due primarily to the sale of certain investments during a period of limited purchases as well as continued declines for all investment categories due to normal amortization and cash flow during the current nine month period. During the first quarter of 2023, the Company recorded a credit loss associated with a corporate bond issued by Signature Bank resulting in a provision for credit losses totaling $5.0 million during the nine months ended September 30, 2023. This loss was the direct result of the failure of that bank during the first quarter of 2023. The investment was written-off during the second quarter of 2023.
We did not have held-to-maturity securities at September 30, 2023 and December 31, 2022.
The following table sets forth our total deposit account balances, by account type, at the dates indicated:
Rate
Noninterest-bearing demand deposits
34.52
36.63
Interest bearing demand deposits
16.13
14.42
0.31
Money market deposits
29.81
1.71
31.16
0.97
Savings deposits
10.92
1.06
13.08
0.72
Certificates of deposit
8.63
4.28
4.71
1.74
0.52
Total deposits increased $130.6 million, or 6.6%, to $2.1 billion at September 30, 2023 from December 31, 2022. Certificates of deposit increased by $88.5 million, or 95.2%, mainly from increased brokered deposits during the nine month period ended September 30, 2023 which represented a continued strategic focus on maintaining increased liquidity during the first nine months of 2023 as a result of the liquidity volatility within the industry. Interest bearing demand deposits experienced a $54.7 million, or 19.2%, increase. Non-interest-bearing demand deposits increased $3.4 million, and money market deposits increased $12.3 million, while savings deposits decreased by $28.3 million during the first nine months of 2023 primarily related to our continued strategic focus on business account activity as well as the impact of liquidity pressure within the banking industry. At September 30, 2023, our core deposits (which includes all deposits except for certificates of deposit) totaled $1.9 billion, or 91.4% of our total deposits. We held approximately $131.4 million of brokered deposits (excluding reciprocal deposits obtained through the Certificate Deposit Account Registry Service (CDARS) and Insured Cash Sweep (ICS) networks) at September 30, 2023 as compared to $30.0 at December 31, 2022. This increase was driven by a strategic focus to increase liquidity during the current period. Our reciprocal deposits obtained through the CDARS and ICS networks totaled $11.0 million and $85.0 million, respectively, at September 30, 2023 and the CDARS and ICS networks totaled $12.5 million and $40.9 million, respectively, at December 31, 2022. Uninsured deposits, net of fully collateralized municipal relationships, remain stable and represent approximately 38% of total deposits at September 30, 2023 as compared to 43% of total deposits at December 31, 2022.
Borrowings
Our borrowings consist of both short-term and long-term borrowings and provide us with one of our sources of funding. Maintaining available borrowing capacity provides us with a contingent source of liquidity.
Total borrowings from the Federal Home Loan Bank of New York were $156.0 million at September 30, 2023 and $131.5 million at December 31, 2022. We have the capacity to borrow an additional $367.8 million from the Federal Home Loan Bank of New York as of September 30, 2023.
In September 2020, we issued $20.0 million in aggregate principal amount of fixed to floating subordinated notes (the “2020 Notes”) to certain institutional investors. The 2020 Notes are non-callable for five years, have a stated maturity of September 30, 2030, and bear interest at a fixed rate of 4.25% per year until September 30, 2025. From September 30, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month SOFR plus 413 basis points, payable quarterly in arrears.
Stockholders’ equity experienced an increase of approximately $5.8 million, to $143.9 million, at September 30, 2023 from $138.1 million at December 31, 2022. The increase was due mainly to an increase of $15.9 million in retained earnings, partially offset by a $10.5 million increase in unrealized losses on the market value of investment securities recognized within the Company’s equity as accumulated other comprehensive income(loss) (“AOCI”), net of taxes as a direct result of higher market interest rates. The Bank recognized an increase in retained earnings of approximately $15.9 million associated with net income during the first nine months of 2023, net of dividends paid. During the nine months ended September 30, 2023, the Company’s stockholders’ equity also included the effect of a cumulative adjustment of approximately $1.6 million, net of taxes, associated with the initial adjustment related to CECL implementation.
Average Balance Sheets and Related Yields and Rates
The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three month and nine month periods ended September 30, 2023 and 2022. No tax equivalent yield adjustments have been made, as the effects would be immaterial. The average balances are daily averages for loans, as presented. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments. Net deferred loan fees totaled $1.2 million and $1.6 million for the three months ended September 30, 2023 and 2022, respectively. Net deferred loan fees totaled $2.4 million and $2.9 million for the nine months ended September 30, 2023 and 2022, respectively.
For the Three Months Ended September 30,
Outstanding
Yield/Rate(1)
Interest-earning assets:
Loans (excluding PPP loans)
1,697,745
24,677
5.77
1,498,425
18,041
4.78
996
1.99
2,578
11.08
Investment securities available for sale
495,803
3,466
2.77
562,655
3,418
2.41
Cash and due from banks and other
154,335
4.38
230,077
2.17
Restricted stock
10,299
248
9.55
3,252
6.22
Total interest-earning assets
2,359,178
5.06
2,296,987
3.95
Noninterest-earning assets
96,894
90,084
2,456,072
2,387,071
Interest-bearing liabilities:
Interest-bearing demand deposits
334,658
332
352,950
0.14
632,300
2,551
1.60
738,502
811
0.44
242,627
623
1.02
234,273
162
0.27
176,369
4.40
71,859
0.30
Total interest-bearing deposits
1,385,954
5,460
1.56
1,397,584
1,154
0.33
FHLB Advances and other borrowings
140,560
3,000
5.55
19,490
4.70
19,420
Total interest-bearing liabilities
1,546,004
1.95
1,420,004
0.40
736,313
795,797
Other noninterest-bearing liabilities
23,279
19,570
Total liabilities
2,305,596
2,235,371
Total stockholders’ equity
150,476
151,700
Total liabilities and stockholders’ equity
Net interest rate spread(2)
3.11
3.55
Net interest-earning assets(3)
813,174
876,983
Net interest margin(4)
3.78
3.70
Average interest-earning assets to interest-bearing liabilities
152.6
161.8
43
For the Nine Months Ended September 30,
1,668,967
70,374
5.64
1,383,180
47,405
4.58
1,440
2.23
11,822
914
10.34
514,011
10,575
2.75
518,943
8,263
2.13
139,539
4.33
310,511
0.81
11,268
716
8.50
2,912
127
5.83
2,335,225
4.94
2,227,368
3.52
95,597
89,377
2,430,822
2,316,745
336,801
875
0.35
358,820
309
0.12
623,039
6,471
1.39
698,128
0.32
251,588
1,735
0.92
225,111
320
0.19
147,750
75,396
0.34
1,359,178
12,974
1.28
1,357,455
2,514
0.25
164,434
5.12
5.62
19,472
4.75
19,401
4.77
1,543,084
1.73
1,379,857
717,067
753,907
22,988
20,317
2,283,139
2,154,081
147,683
162,664
3.21
3.19
792,141
847,511
3.32
151.3
161.4
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest-bearing liabilities for the periods indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior period’s rate); (2) changes attributable to rate (change in rate
44
multiplied by the prior year’s volume) and (3) total increase (decrease) (the sum of the previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories.
2023 vs. 2022
Increase (Decrease) Due to
Increase
Volume
(Decrease)
2,898
3,738
6,636
12,155
10,814
22,969
(60)
(67)
(178)
(712)
(890)
(468)
516
(101)
2,413
2,312
(836)
1,280
444
(5,531)
8,159
2,628
170
197
531
58
1,757
5,501
7,258
6,876
20,732
27,608
(18)
224
566
(428)
2,168
1,740
(728)
5,508
4,780
439
183
1,232
1,415
1,158
1,899
1,912
1,787
3,699
734
3,572
4,306
1,310
9,150
10,460
Federal Home Loan Bank advances
(42)
2,641
3,531
6,172
7,478
9,024
16,629
Change in net interest income
(884)
1,970
1,086
(602)
11,708
10,979
Results of Operations for the Three Months and Nine Months Ended September 30, 2023 and 2022
Summary Income Statements. The following table sets forth the income summary for the periods indicated:
Percentage %
Interest income
31.8
47.1
Interest expense
432.8
499.1
5.1
19.9
Provision for credit losses - investments
(1,247)
(59.8)
(6,111)
(71.8)
287
9.8
761
8.5
Noninterest expense
1,035
8.2
5,157
14.0
400
21.6
1,633
47.2
15.1
6,061
39.6
General. Net income increased $1.2 million, or 15.1%, to $9.0 million for the three months ended September 30, 2023 from $7.9 million for the three months ended September 30, 2022. The increase was driven by an increase of $1.1 million in net interest income as well as a decrease in the provision for credit losses of $1.3 million during the current quarter as compared to the same quarter in 2022. The decrease in the provision for credit losses during the three months ended September 30, 2023 as compared to the same period in 2022 was mainly associated with the recognition of provision related to certain syndicated loan relationships in 2022 which were deemed impaired at that time. Net income for the nine months ended September 30, 2023 was $21.4 million, as compared to
$15.3 million for the same period in 2022. The overall increase was driven primarily by increased net interest income of $11.0 million during the nine month period ended September 30, 2023 as compared to the same prior year period.
Interest Income. Interest income increased $7.3 million, or 31.8%, to $30.1 million for the three months ended September 30, 2023 from $22.8 million for the three months ended September 30, 2022. This increase was primarily the result of an increase in the average balance of interest-earning assets, which increased by $62.2 million, or 2.7%, to $2.4 billion for the three months ended September 30, 2023 from $2.3 billion for the three months ended September 30, 2022. Additionally, the average yield of interest-earning assets increased by 111 basis points from 3.95% for the three months ended September 30, 2022 to 5.06% for the three months ended September 30, 2023 as a result of the continued rising interest rate environment.
Interest income increased $27.6 million, or 47.1%, for the nine months ended September 30, 2023 reaching $86.2 million from $58.6 million for the nine months ended September 30, 2022. This increase was driven by a $107.9 million increase in the balance of average interest-earning assets between the two periods. Within the average balance of interest-earning assets, the average balance of loans receivable (net of PPP loans) grew $285.8 million, or 20.7%, between the nine months ended September 30, 2023 and September 30, 2022. In addition, the average yield of interest-earning assets increased by 142 basis points from 3.52% for the nine months ended September 30, 2022 to 4.94% for the nine months ended September 30, 2023 as a result of the continued rising interest rate environment.
Interest income on loans increased by $6.6 million, or 36.3%, to $24.7 million during the three months ended September 30, 2023 from $18.1 million during the three months ended September 30, 2022. The increase in interest income on loans was primarily due to the increase in the average balance of loans (net of PPP loans). The average balance of these loans increased by $199.3 million, or 13.3%, to $1.7 billion for the three months ended September 30, 2023 compared to $1.5 billion for the three months ended September 30, 2022. The average yield on loans, excluding PPP loans, increased by 99 basis points to 5.77% for the three months ended September 30, 2023 from 4.78% for the three months ended September 30, 2022. The increase in the average balance of loans was due to our continued success in growing our commercial real estate, commercial real estate construction, and commercial and industrial loans. The increase in the average yield on loans was the direct result of loans that closed during the first nine months of 2023 that included the impact of the FRB's increase to its benchmark rate during 2022 and the first nine months of 2023.
For the nine months ended September 30, 2023, interest income on loans increased by $23.0 million, or 48.5%, reaching $70.4 million as compared to $47.4 million for the nine months ended September 30, 2022. The increase in interest income on loans represents the continued impact of growth in average loan balances (net of PPP loans) from $1.4 billion for the nine months ended September 30, 2022 to $1.7 billion for the nine months ended September 30, 2023. The increase in average loans outstanding was the result of continued growth within the commercial real estate, commercial real estate construction, and commercial and industrial loan categories. This increase in production was also coupled with an increase in average yield on loans, excluding PPP loans, for the nine month periods from 4.58% in 2022 to 5.64% in 2023. The increase in the average yield on loans was driven by the level of interest rate increases during 2022 and the first nine months of 2023 and the impact on the portfolio during the period.
Interest income on securities increased by $48 thousand, or 1.4%, to $3.5 million during the three months ended September 30, 2023 from $3.4 million during the three months ended September 30, 2022. The increase in interest income on securities was driven primarily by an increase in the average yield on securities during the current period. The average yield on investment securities increased by 36 basis points overall from 2.41% for the three months ended September 30, 2022 to 2.77% for the three months ended September 30, 2023. The increase in the average yield on securities resulted primarily from the deployment of excess cash into higher-yielding securities during 2022. The average balance of securities decreased by $66.9 million, or 11.9%, to $495.8 million for the three months ended September 30, 2023 compared to $562.7 million for the three months ended September 30, 2022. The decrease in the average balance was the combined effect certain maturities had during the quarter as well as a result of the Signature Bank subordinated debt write-off earlier in the year.
For the nine months ended September 30, 2023, interest income on securities increased by $2.3 million, or 28.0%, to $10.6 million during the period from $8.3 million during the nine months ended September 30, 2022. The increase in interest income on securities was primarily the result of an increase in the average yield on securities during the current period. The average yield on investment securities increased by 62 basis points overall from 2.13% for the nine months ended September 30, 2022 to 2.75% for the nine months ended September 30, 2023. The increase in the average yield on securities resulted primarily from the deployment of excess cash into higher-yielding securities as a result of increasing market rates during 2022 and 2023.The average balance of securities decreased by $4.9 million, or 1.0%, to $514.0 million for the nine months ended September 30, 2023 compared to $518.9
million for the nine months ended September 30, 2022. The decrease in the average balance of securities was primarily due to the combined effect of certain maturities during the period as well as a result of the Signature Bank subordinated debt write-off earlier in 2023.
Interest Expense. Interest expense increased $6.2 million, or 432.8%, to $7.6 million for the three months ended September 30, 2023 from $1.4 million for the three months ended September 30, 2022. The increased interest expense was primarily the result of the increasing interest rate environment and the impact on deposit costs during the quarter. The average rate paid on interest-bearing deposits increased 123 basis points to 1.56% during the three months ended September 30, 2023 as compared to 0.33% for the three month period ended September 30, 2022. The average balance of interest-bearing deposits decreased by $11.6 million, or 0.1%, to $1.4 billion for the three months ended September 30, 2023 as compared to the average balance for the three months ended September 30, 2022.
Interest expense increased $16.6 million, or 499.1%, to $20.0 million for the nine months ended September 30, 2023 from $3.3 million for the nine months ended September 30, 2022. The increase in interest expense reflects the increasing interest rate environment and the effect on deposits during the current period. The average rate paid on interest-bearing deposits increased 103 basis points to 1.28% during the nine months ended September 30, 2023 as compared to 0.25% for the nine month period ended September 30, 2022. The average balance of interest-bearing deposits increased by $1.7 million, or 0.13%, to $1.4 billion for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Interest expense on interest-bearing deposits increased by $4.3 million to $5.5 million for the three months ended September 30, 2023 from $1.2 million for the three months ended September 30, 2022. The increase in interest expense on interest-bearing deposits was due mainly to an increase in the average cost of deposits. The average cost of interest-bearing deposits increased 123 basis points to 1.56% during the three months ended September 30, 2023 as compared to 0.33% for the three months ended September 30, 2022. The average cost of interest-bearing deposits increased due to the impact of the rising interest rate environment on deposit accounts.
During the nine months ended September 30, 2023, interest expense on interest-bearing deposits increased by $10.5 million, or 416.1%, to $13.0 million during the nine months ended September 30, 2023 from $2.5 million during the nine months ended September 30, 2022. The increase in interest expense on interest-bearing deposits for the current nine month period represents the primary impact of the increasing interest rate environment on the average cost of deposits, including competition in the market place. The average cost of interest-bearing deposits increased 103 basis points to 1.28% for the nine months ended September 30, 2023 as compared to 0.25% for the nine months ended September 30, 2022.
We also expensed a relatively level amount of approximately $231 thousand in interest expense for the three months ended September 30, 2023 and 2022 related to the issuance in September 2020 of $20.0 million in outstanding subordinated notes, which carries an interest rate of 4.25%. These flat interest costs represent the debt service required as part of the 2020 subordinated notes. For the nine months ended September 30, 2023, we expensed $692 thousand in interest expense as compared to the same amount recorded for the nine months ended September 30, 2022. These flat interest costs represent the debt service required as part of the 2020 subordinated notes.
Additionally, the third quarter 2023 included FHLB average borrowings of $140.6 million compared to virtually no borrowings in the same quarter of 2022. The interest expense related to the 2023 borrowings reached approximately $1.9 million in cost and reflected an average rate of 5.38%. For the nine months ended September 30, 2023, FHLB average borrowings of $164.4 million compared to almost no borrowings for the same period in 2022. The interest expense related to FHLB borrowing for the first nine months of 2023 reached approximately $6.4 million as compared to none for the first nine months of 2022. These increased borrowings represent the continued strategic focus to increase cash balances in response to the liquidity pressure experienced by the banking industry during the first quarter of 2023.
Net Interest Income. Net interest income increased $1.1 million, or 5.1%, to $22.5 million for the three months ended September 30, 2023 from $21.4 million for the three months ended September 30, 2022 due to an increase in net interest margin for the current period. Average total interest-earning assets increased by $62.2 million to $2.4 billion for the three months ended September 30, 2023 from $2.3 billion for the three months ended September 30, 2022. Net interest rate spread decreased by 44 basis points to 3.11% for the three months ended September 30, 2023 from 3.55% for the three months ended September 30, 2022, reflecting a 111 basis points increase in the average yield on interest-earning assets and a 123 basis points increase in the average rate paid on interest-bearing liabilities. The net interest margin increased eight basis points to 3.78% for the three months ended September 30, 2023 from 3.70%
47
for the three months ended September 30, 2022 due to the increases in overall interest rates as well as incremental growth related to deployment of funds into higher yielding loans and investments.
For the nine months ended September 30, 2023, net interest income increased $11.0 million, or 19.9%, to $66.2 million from $55.3 million for the nine months ended September 30, 2022 due mainly to an increase in net interest margin for the current period. Average total interest-earning assets increased by $107.9 million to $2.3 billion for the nine months ended September 30, 2023 from $2.2 billion for the nine months ended September 30, 2022. Net interest rate spread increased by two basis points to 3.21% for the nine months ended September 30, 2023 from 3.19% for the nine months ended September 30, 2022. The net interest margin increased 47 basis points to 3.79% for the nine months ended September 30, 2023 from 3.32% for the nine months ended September 30, 2022. This increase in net interest income for the nine months ended September 30, 2023 was mainly created by an increase in average loans during the period at higher yields of 106 basis points as compared to the same period in 2022.
Provision for Credit Losses. The Company recognized a provision for credit losses of $837 thousand for the three months ended September 30, 2023, compared to $2.1 million for the three months ended September 30, 2022. The decreased provision for the three months ended September 30, 2023 as compared to the same period in 2022 reflected the recognition of impairments of two relationships within the syndicated loan portfolio during 2022. Syndicated loans represent approximately 2.9% of total loans at September 30, 2023. For the nine months ended September 30, 2023, the provision for credit losses totaled $7.4 million as compared to $8.5 million for the nine months ended September 30, 2022. The provision for the nine months ended September 30, 2023 also reflected the recognition of credit losses associated with the write off of the Signature Bank subordinated debt in the amount of $5.0 million as well as the additional provision related to the growth of the Company’s loan portfolio. The allowance for credit losses to total loans was 1.51% as of September 30, 2023, an increase of 12 basis points, or 8.6%, versus 1.39% as of December 31, 2022.
Noninterest Income. Noninterest income information is as follows:
15.4
77
7.7
3.9
22.9
434
12.8
Investment securities gains
1.3
2.3
(82)
(32.8)
(1.5)
Total noninterest income
Noninterest income increased by $287 thousand, or 9.8%, reaching $3.2 million for the three months ended September 30, 2023 as compared to $2.9 million for the three months ended September 30, 2022. Our Wealth Management division revenues, which include our Trust and Asset Management businesses also experienced growth and represented a 13.5% increase quarter-over-quarter, to $2.6 million for the third quarter of 2023 as compared to $2.3 million for the third quarter of 2022 as a result of growth in asset values during the current period. During the same period, assets-under-management for the Trust and Asset Management group increased to $1.4 billion at September 30, 2023 from $1.2 billion at September 30, 2022.
For the nine months ended September 30, 2023, noninterest income increased by $761 thousand, or 8.5%, to $9.7 million as compared to $8.9 million for the nine months ended September 30, 2022. Our Wealth Management division revenues increased and represented an 8.2% increase reaching $7.5 million for the nine month period ended September 30, 2023 from $7.0 million for the nine month period ended September 30, 2022.
Noninterest Expense. Noninterest expense information is as follows:
4.6
1,975
11.9
269
18.1
1,101
25.9
223
4.3
627
21.7
18.5
(72)
(9.5)
(43)
(3.4)
85
79
20.6
1.7
(2.2)
(53)
(4.7)
7.1
(97)
(52.2)
(4.2)
5.7
276
34.2
1,322
56.9
Total noninterest expense
Non-interest expense was $13.6 million for the third quarter of 2023, reflecting an increase of approximately $1.0 million, or 8.2%, as compared to $12.6 million for the same period in 2022. The increase in non-interest expense for the current three-month period was due to continued investment in overall Company growth, including increases in salaries and benefit costs, occupancy costs, information technology, and deposit insurance. Our efficiency ratio was 52.8% for the three months ended September 30, 2023, from 51.6% for the same period in 2022.
Non-interest expense was $42.1 million for the first nine months of 2023, reflecting an increase of approximately $5.2 million, or 14.0%, as compared to $36.9 million for the same period in 2022. The increase in non-interest expense for the current nine month period was also due to continued investment in overall Company growth, including increases in salaries and benefit costs, occupancy costs, and information technology. For the nine months ended September 30, 2023, our efficiency ratio was 55.4% as compared to 57.5% for the same period in 2022.
Provision for Income Tax. Our provision for income taxes for the three months ended September 30, 2023 was approximately $2.3 million, compared to approximately $1.9 million for the same period in 2022. The increase for the current period was due to an increase in income before income taxes during the quarter. Our effective tax rate for the three-month period ended September 30, 2023 was 20.0%, as compared to 19.1% for the same period in 2022. For the nine months ended September 30, 2023, our provision for income taxes was $5.1 million, as compared to $3.5 million for the nine months ended September 30, 2022. The increase for the current period was also due to the increase in income before income taxes during the current nine month period. Our effective tax rate for the nine-month period ended September 30, 2023 was 19.3%, as compared to 18.5% for the same period in 2022. The increase in the effective tax rates on the 2023 third quarter and nine month period was due to the increase in proportion of pre-tax income compared with non-taxable revenue (tax-exempt interest income and earnings on bank owned life insurance) during 2023 as compared to 2022.
Financial Position and Results of Operations of our Wealth Management Business Segment
We conduct our business through two business segments: (1) our banking business segment, which involves the delivery of loan and deposit products to our customers through Orange Bank & Trust Company; and (2) our wealth management business segment, which includes asset management and trust services to individuals and institutions through HVIA and Orange Bank & Trust Company that provides trust and investment management fee income.
The following tables present the statements of income and total assets for our reportable business segments for the periods indicated:
Wealth
Management
Segments
Net Interest Income
At or for the Nine Months Ended September 30,
Assets under management and/or administration (AUM) (market value)
1,437,036
1,157,837
The market value of assets under management and/or administration at September 30, 2023 and 2022 was $1.4 billion and $1.2 billion, respectively. This includes assets held at both Orange Bank & Trust Company and HVIA at September 30, 2023 and September 30, 2022.
Our expenses related to our wealth management business segment, which we record as noninterest expense, increased $150 thousand, or 9.0%, to $1.8 million for the three months ended September 30, 2023 compared to $1.7 million for the three months ended September 30, 2022. The increase in expenses was primarily due to continued growth of the business unit and investment in technology during the period. For the nine months ended September 30, 2023, our expenses related to our wealth management business segment increased $422 thousand or 7.9%, to $5.8 million for the nine months ended September 30, 2023 compared to $5.4 million for the nine months ended September 30, 2022. The increase in expenses was primarily attributable to the growth of the business unit and its related operations.
Liquidity and Capital Resources
Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization
50
of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
Our most liquid assets are cash and due from banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2023 and December 31, 2022, cash and due from banks totaled $158.7 million and $86.1 million, respectively. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $478.7 million at September 30, 2023 and $533.5 million at December 31, 2022.
Certificates of deposit due within one year of September 30, 2023 totaled $170.8 million, or 94.1% of total certificates of deposit. At September 30, 2023, total certificates of deposit were $181.6 million, or 8.6% of total deposits. The largest concentration of certificate of deposits represented brokered deposits in the amount of approximately $142.3 million and were increased strategically due to the liquidity pressures within the banking industry during the first quarter of 2023. Certificates of deposit due within one year of December 31, 2022 totaled $80.7 million, or 86.8% of total certificates of deposit. At December 31, 2022, total certificates of deposit were $93.0 million, or 4.7% of total deposits.
We participate in IntraFi Network, allowing us to provide access to multi-million-dollar FDIC deposit insurance protection on deposits for customers, businesses and public entities. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. At September 30, 2023, we had a total of $96.0 million of IntraFi Network deposits, all of which were repurchased as reciprocal deposits from the IntraFi Network.
Although customer deposits remain our preferred source of funds, maintaining back up sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the Federal Home Loan Bank of New York and the Federal Reserve Bank of New York (“FRB”) as well as other correspondent banks. At September 30, 2023, we had a total capacity of $608.8 million at the Federal Home Loan Bank of New York, of which $85.0 million was used to collateralize municipal deposits, and $156.0 million was utilized for advances, overnight and long-term. At September 30, 2023, we also had a $2.5 million collateralized line of credit from the Federal Reserve Bank of New York with no outstanding balance. Additionally, we had a total of $25.0 million of discretionary lines of credit at September 30, 2023 with no outstanding balance. We also have a borrowing agreement with Atlantic Community Bankers Bank (“ACBB”) to provide short-term borrowings of $5.0 million at September 30, 2023. There were no outstanding borrowings with ACBB at September 30, 2023. Additional funding was available to the Bank through the Bank Term Funding Program (“BTFP”). We currently have $104.2 million of collateral pledged to the FRB under the BTFP and available for borrowing. As of September 30, 2023, we had no outstanding borrowings with the FRB.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $28.5 million and $23.2 million for the nine months ended September 30, 2023 and 2022, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on securities, was $106.7 million and $418.7 million for the nine months ended September 30, 2023 and 2022, respectively. Net cash provided by financing activities, consisting of activity in deposit accounts and borrowings, was $150.8 million and $269.5 million for the nine months ended September 30, 2023 and 2022, respectively.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience, current pricing strategy and regulatory restrictions, we have the ability to retain and increase a substantial portion of maturing time deposits, and we can supplement our funding with borrowings in the event that we allow these deposits to run off at maturity.
Capital Resources. We are subject to various regulatory capital requirements administered by the FRB and the NYSDFS. At September 30, 2023 and December 31, 2022, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines. See Note 10 to the Notes to the Unaudited Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q for actual and required capital amounts and ratios at September 30, 2023 and December 31, 2022.
Off-Balance Sheet Arrangements
Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
At September 30, 2023, we had $456.0 million in loan commitments outstanding. We also had $17.3 million in standby letters of credit at September 30, 2023.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information related to this item.
Item 4. Controls and Procedures
An Evaluation of disclosure controls and procedures. As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures as of September 30, 2023 the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.
Internal control over financial reporting. Effective January 1, 2023, the Company adopted the CECL accounting guidance under ASU 2016-13 and ASC 326. The Company designed new controls and modified existing controls as part of this adoption to ensure compliance with the revised accounting and disclosure requirements. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. Other than as described above, there were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2023, the Company is not currently a named party in a legal proceeding, the outcome of which would have a material effect on the financial condition or results of operations of the Company.
Item 1A. Risk Factors
In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents a material update and addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.
Recent events involving the failure of financial institutions may adversely affect our business, and the market price of our common stock.
Recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank and First Republic Bank that resulted in the failure of those institutions have resulted in decreased confidence in banks among depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These events and developments could materially and adversely impact our business or financial condition, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses. These recent events and developments have, and could continue to, adversely impact the market price and volatility of our common stock. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our businesses. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
EXHIBIT INDEX
ExhibitNo.
Description
31.1†
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2†
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2†
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS†
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH†
XBRL Taxonomy Extension Schema Document
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†
XBRL Taxonomy Extension Label Linkbase Document
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document
104†
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
† Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: November 14, 2023
By:
/s/ Michael J. Gilfeather
Name:
Michael J. Gilfeather
Title:
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael Lesler
Michael Lesler
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)