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, 2024
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 7, 2024, there were 5,674,126 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, 2024 (Unaudited) and December 31, 2023
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2024 and 2023 (Unaudited)
4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2024 and 2023 (Unaudited)
5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2024 and 2023 (Unaudited)
6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023 (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
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
53
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
Exhibit Index
Signatures
54
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, 2024
December 31, 2023
ASSETS
Cash and due from banks
$
160,872
147,383
Investment securities – available-for-sale(amortized cost $529,161, net of allowance for credit losses of $0 at September 30, 2024 and $560,994, net of allowance for credit losses of $0 at December 31, 2023)
469,532
489,948
Restricted investment in bank stocks
8,267
14,525
Loans
1,796,094
1,747,062
Allowance for credit losses
(31,023)
(25,182)
Loans, net
1,765,071
1,721,880
Premises and equipment, net
14,287
16,160
Long-lived assets held for sale
1,337
—
Accrued interest receivable
10,007
5,934
Bank owned life insurance
41,993
41,447
Goodwill
5,359
Intangible assets
892
1,107
Other assets
41,482
41,725
TOTAL ASSETS
2,519,099
2,485,468
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest bearing
690,419
699,203
Interest bearing
1,449,604
1,339,546
Total deposits
2,140,023
2,038,749
FHLB advances, short term
82,000
224,500
BTFP borrowings, short term
50,000
FHLB advances, long term
10,000
Subordinated notes, net of issuance costs
19,573
19,520
Accrued expenses and other liabilities
24,409
27,323
TOTAL LIABILITIES
2,326,005
2,320,092
STOCKHOLDERS’ EQUITY
Common stock, $0.50 par value; 15,000,000 shares authorized; 5,683,304 issued; 5,674,126 and 5,651,311 outstanding, at September 30, 2024 and December 31, 2023, respectively
2,842
Surplus
120,874
120,392
Retained Earnings
124,174
107,361
Accumulated other comprehensive income (loss), net of taxes
(54,386)
(64,108)
Treasury stock, at cost; 9,178 and 31,993 shares at September 30, 2024 and December 31, 2023, respectively
(410)
(1,111)
TOTAL STOCKHOLDERS’ EQUITY
193,094
165,376
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,
2024
2023
INTEREST INCOME
Interest and fees on loans
26,375
24,682
78,767
70,398
Interest on investment securities:
Taxable
2,645
3,150
8,976
9,570
Tax exempt
573
564
1,722
1,721
Interest on Federal funds sold and other
1,843
1,703
5,556
4,514
TOTAL INTEREST INCOME
31,436
30,099
95,021
86,203
INTEREST EXPENSE
Savings and NOW accounts
5,432
3,506
15,167
9,081
Time deposits
1,213
1,954
5,741
3,893
FHLB advances
1,593
1,907
4,734
6,295
Subordinated notes
230
231
691
692
TOTAL INTEREST EXPENSE
8,468
7,598
26,333
19,961
NET INTEREST INCOME
22,968
22,501
68,688
66,242
Provision for credit losses- investments
(1,900)
5,000
Provision for credit losses - loans
7,191
837
9,661
2,406
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
15,777
21,664
60,927
58,836
NONINTEREST INCOME
Service charges on deposit accounts
270
210
737
588
Trust income
1,379
1,266
4,000
3,707
Investment advisory income
1,741
1,333
4,966
3,819
Investment securities gains, net
107
Earnings on bank owned life insurance
39
243
551
725
Other
745
168
1,413
730
TOTAL NONINTEREST INCOME
4,174
3,220
11,667
9,676
NONINTEREST EXPENSE
Salaries
6,687
6,135
20,298
18,606
Employee benefits
2,269
1,752
6,695
Occupancy expense
1,222
1,180
3,547
3,614
Professional fees
1,557
799
4,330
3,512
Directors’ fees and expenses
584
295
781
682
Computer software expense
1,526
1,233
4,191
3,714
FDIC assessment
463
978
1,023
Advertising expenses
364
1,166
1,074
Advisor expenses related to trust income
30
95
89
Telephone expenses
190
184
565
534
Intangible amortization
71
214
1,237
1,084
3,884
3,644
TOTAL NONINTEREST EXPENSE
15,947
13,590
46,744
42,065
Income before income taxes
4,004
11,294
25,850
26,447
Provision for income taxes
788
2,256
5,131
5,093
NET INCOME
3,216
9,038
20,719
21,354
Basic and diluted earnings per share
0.57
1.61
3.67
3.79
Weighted average shares outstanding
5,653,904
5,629,642
5,643,591
5,628,036
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
16,218
(15,982)
11,417
(19,670)
Credit loss expense
Reclassification adjustment for (gains) included in net income
(107)
Tax effect
3,406
(3,356)
2,398
(3,104)
Net of tax
12,812
(12,626)
9,019
(11,673)
Defined benefit pension plans:
Net gain arising during the period
300
500
900
1,500
Reclassification adjustment for amortization of prior service cost and net gains included in net periodic pension cost
63
105
189
315
237
395
711
1,185
Deferred compensation liability:
Unrealized loss
(3)
(4)
(11)
(1)
(2)
(8)
(9)
Total other comprehensive income/(loss)
13,047
(12,234)
9,722
(10,497)
Total comprehensive income/(loss)
16,263
(3,196)
30,441
10,857
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Other
Common
Retained
Comprehensive
Treasury
Stock
Earnings
Income (Loss)
Total
Balance, July 1, 2024
120,602
122,262
(67,433)
(729)
177,544
Net income
Other comprehensive income, net of taxes
Cash dividends declared ($0.23 per share)
(1,304)
Treasury stock purchased (3,357 shares)
(196)
Restricted stock expense
Stock-based compensation (13,812 shares)
272
515
787
Balance, September 30, 2024
Balance, January 1, 2024
Cash dividends declared ($0.69 per share)
(3,906)
Treasury stock purchased (9,707 shares)
(489)
Stock-based compensation (32,522 shares)
477
1,190
1,667
Balance, July 1, 2023
120,272
92,795
(66,459)
(1,279)
148,171
Other comprehensive loss, net of taxes
(1,297)
Treasury stock purchased (2,922 shares)
(127)
9
Stock-based compensation (8,076 shares)
86
358
Balance, September 30, 2023
120,367
100,536
(78,693)
(1,134)
143,918
Balance, January 1, 2023
120,107
84,635
(68,196)
(1,250)
138,138
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
(3,892)
Treasury stock purchased (8,725 shares)
(424)
45
Stock-based compensation (16,562 shares)
215
540
755
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
7,761
7,406
Depreciation
1,186
1,286
Accretion on loans
(1,667)
(2,127)
Amortization of intangibles
Amortization of subordinated notes issuance costs
55
Investment securities (gains) losses
Stock-based compensation
Net amortization of investment premiums
821
960
(551)
(725)
Net change in:
(4,073)
(12)
(1,443)
433
Other liabilities
(2,917)
(1,049)
Net cash from operating activities
21,775
28,488
Cash flows from/(used) investing activities
Purchases of investment securities available-for-sale
(4,516)
(6,327)
Proceeds from sales of investment securities available-for-sale
7,296
Proceeds from paydowns of investment securities available-for-sale
26,023
32,254
Proceeds from maturities and calls of investment securities available-for-sale
9,505
3,774
Purchase of restricted investment in bank stocks
(31,042)
(41,418)
Proceeds from redemptions of restricted investment in bank stocks
37,300
39,988
Net decrease (increase) in loans
(49,285)
(139,636)
Purchase of premises and equipment
(650)
(3,055)
Disposal of premises and equipment
435
Net cash from/(used) by investing activities
(12,665)
(106,689)
Cash flows from/(used) financing activities
Net increase in deposits
101,274
130,644
Net change in FHLB advances, short term
(142,500)
14,500
Proceeds from FHLB advances, long term
Net change in FRB Borrowings
Cash dividends paid
Purchases of treasury stock
Net cash from/(used) financing activities
4,379
150,828
Net change in cash and cash equivalents
13,489
72,627
Beginning cash and cash equivalents
86,081
Ending cash and cash equivalents
158,708
Supplemental cash flow information:
Interest paid
26,743
19,551
Income taxes paid
8,509
6,472
Supplemental noncash disclosures:
Lease liabilities arising from obtaining right-of-use assets
513
1,050
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 $1.8 billion and $1.6 billion at September 30, 2024 and December 31, 2023, 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, 2023 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 29, 2024. 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, 2024, the results of operations, comprehensive income, and changes in stockholders’ equity for the three and nine months ended September 30, 2024 and 2023 and cash flow statements for the nine months ended September 30, 2024 and 2023. 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 November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, enhancing disclosure requirements for reportable segments, focusing on significant segment expenses, the identification of a segment's chief decision making officer, and the metrics used by the chief decision making officer in evaluating segment-level operating performance. The ASU is effective for fiscal years beginning after December 15, 2023. The Company will begin providing enhanced segment reporting disclosures in accordance with ASU 2023-07 for the fiscal year ending December 31, 2024, and for interim periods thereafter.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. These amendments require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5% of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax
rate). The amendments require that all entities disclose on an annual basis the following information about income taxes paid: 1) The amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes. 2) The amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5% of total income taxes paid (net of refunds received). The amendments also require that all entities disclose the following information: 1) Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and 2) Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state and foreign. ASU 2023-09 is effective for the Company beginning January 1, 2025. The Company is evaluating the effect that ASU 2023-09 will have on its consolidated financial statements.
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. Periodically, certain substandard loans may be downgraded according to policy guidelines but will exhibit characteristics which do not require individual evaluation. The related allowance for those loans would be based on the pooling methodology in determining the appropriate reserve. 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.
Note 2 — Investment Securities
The amortized cost and fair value of investment securities at September 30, 2024 and December 31, 2023:
Gross
Amortized
Unrealized
ACL
Fair
Cost
Gains
Losses
Adjustment
Value
Available-for-sale September 30, 2024
U.S. government agencies and treasuries
87,725
(7,011)
80,768
Mortgage-backed securities - residential
236,899
106
(23,567)
213,438
Mortgage-backed securities - commercial
78,001
27
(14,511)
63,517
Corporate Securities
23,514
(4,144)
19,370
Obligations of states and political subdivisions
103,022
133
(10,716)
92,439
Total debt securities
529,161
320
(59,949)
Available-for-sale December 31, 2023
96,736
21
(9,690)
87,067
257,804
(30,931)
226,918
79,589
(16,286)
63,303
23,529
(4,253)
19,276
103,336
91
(10,043)
93,384
560,994
157
(71,203)
10
Proceeds from sales of securities and associated gains and losses for the three and nine months ended September 30, 2024 and 2023.
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
The amortized cost and fair value of debt securities as of September 30, 2024 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
12,639
12,671
Due after one through five years
24,748
23,393
Due after five through ten years
57,261
49,768
Due after ten years
119,613
106,745
214,261
192,577
Mortgage-backed securities
314,900
276,955
Securities pledged at September 30, 2024 and December 31, 2023 had a carrying amount of $402,711 and $317,855 and were pledged to secure public deposits.
At September 30, 2024 and December 31, 2023, 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.
11
The following tables summarize those securities with unrealized losses for which an allowance for credit losses has not been recorded at September 30, 2024 and December 31, 2023, aggregated by major security types and length of time in a continuous unrealized loss position:
Less than 12 Months
12 Months or More
1,288
74,798
(7,010)
76,086
3,440
(40)
202,303
(23,527)
205,743
62,263
330
80,298
(10,715)
80,628
5,058
(42)
439,032
(59,907)
444,090
U.S. government agencies
438
83,003
(9,689)
83,441
9,169
(171)
215,301
(30,760)
224,470
1,223
(10)
62,080
(16,276)
83,470
(10,041)
83,983
11,343
(184)
463,130
(71,019)
474,473
As of September 30, 2024, the Company’s securities portfolio consisted of 272 securities, 231 of which were in an unrealized loss position. As of December 31, 2023, the Company’s securities portfolio consisted of 276 securities, 243 of which were in an unrealized 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 U.S. government agencies and treasuries, mortgage-backed securities, corporate bonds, and obligations of states and political subdivisions, as well as other securities. These types of securities may include a 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. Management reviewed the collectability of these securities, taking into consideration such factors as financial condition of the issuers, credit ratings when available, reported capital ratios of the issuers, among other pertinent factors. Management also evaluated the credit quality, the ability and intent to hold these securities to maturity, and the impact of interest rates on the respective fair values of the securities.
12
Based on that review and evaluation, it was determined that any change in fair value was temporary and did not result in impairment. Accordingly, no impairment was recognized during the nine months ended September 30, 2024. Accrued interest on investments, which is excluded from the amortized cost of available for sale debt securities, totaled $2.5 million and $2.3 million at September 30, 2024 and December 31, 2023, 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, 2024:
Allowance for credit losses -investments:
Beginning balance
Charge-offs
Recoveries
1,900
Ending balance
The recovery reflected in the table above represents the sale of the Signature Bank subordinated debt during the nine months ended September 30, 2024. Additionally, management evaluated the requirement for an allowance for credit losses associated with the corporate securities portfolio. It was determined that ACL-investments was not required and, accordingly, the amount of the recovery was adjusted as a credit to the provision for credit losses.
Note 3 — Loans
Loans at September 30, 2024 and December 31, 2023 were as follows:
Commercial and industrial
251,484
273,562
Commercial real estate
1,334,580
1,259,356
Commercial real estate construction
78,227
85,725
Residential real estate
74,462
78,321
Home equity
16,064
13,546
Consumer
41,277
36,552
Total Loans
Net Loans
Included in commercial and industrial loans as of September 30, 2024 and December 31, 2023 were loans issued under the SBA’s Paycheck Protection Program (“PPP”) of $181 and $215, respectively.
13
Allowance for Credit Losses
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 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.
14
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.
During the three months ended September 30, 2024, the Company experienced a significant increase in provision for credit losses as well as charge-off specifically associated with participation of a CRE office loan. The process to determine expected credit losses associated with this loan followed Bank policies and utilized analytic tools and judgement and are 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. In order to arrive at the estimated amount of the specific reserve and related charge-off, management considers available information from internal and external sources, including payment trends, current borrower conditions, and incorporates reasonable and supportable forecasts. Management also evaluates a variety of factors including available published market and economic information in arriving at its estimate. Although management uses the best information available, the level of the allowance for credit losses and any specific reserves remain an estimate, which is subject to significant judgment and short-term change. 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 following tables present the activity in the allowance by portfolio segment for each of the three and nine months ended September 30, 2024 and 2023: (Note: The activity presented does not include provisions recorded to support the reserve associated with off balance sheet commitments.)
Three Months Ended September 30, 2024
Commercial
And
Real Estate
Residential
Home
Industrial
Construction
Equity
Allowance for credit losses:
4,548
20,962
652
1,088
51
514
27,815
Provision for credit losses*
(148)
7,323
(22)
(130)
134
7,190
(3,959)
(33)
(3,993)
4,402
24,326
630
958
656
31,023
* The provision for credit losses on the income statement also includes approximately ($0) associated with off balance sheet ACL.
15
Nine Months Ended September 30, 2024
and
Allowance for loan losses:
4,819
17,873
772
1,081
586
25,182
(436)
10,412
(142)
(29)
9,861
(94)
(4,094)
47
74
* The provision for credit losses on the income statement also includes approximately ($200) associated with off balance sheet ACL.
Three Months Ended September 30, 2023
5,155
17,119
1,060
992
46
476
24,848
869
82
(59)
(93)
807
(76)
160
196
5,961
17,361
1,001
995
406
25,775
* The provision for credit losses on the income statement also includes approximately ($30) associated with off balance sheet ACL.
Nine Months Ended September 30, 2023
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
(227)
(17)
(129)
1,428
718
1,087
(243)
877
110
2,554
(36)
(446)
173
163
407
* The provision for credit losses on the income statement also includes approximately ($148) associated with off balance sheet ACL.
16
The following tables present the balance in the allowance for credit losses and the amortized cost in loans by portfolio segment and based on impairment method as of September 30, 2024 and December 31, 2023:
Ending balance:
individually evaluated for impairment
321
5,800
6,121
collectively evaluated for impairment
4,081
18,526
24,902
Total ending allowance balance
Loans:
2,734
36,742
39,626
248,750
1,297,838
74,399
41,190
1,756,468
Total ending loans balance
308
94
559
4,662
17,565
987
24,623
556
21,210
1,239
23,099
273,006
1,238,146
77,082
36,458
1,723,963
Included in the commercial and industrial loans collectively evaluated for impairment are PPP loans of $181 and $215 as of September 30, 2024 and December 31, 2023, respectively. PPP loans receivable are guaranteed by the SBA and have no allocation in the allowance.
Individually Analyzed Loans
Effective January 1, 2023, the Company began analyzing loans on an individual basis when management determined that the loan no longer exhibited risk characteristics consistent with the risk characteristics existing in its designated pool of loans, under the Company's CECL methodology. Loans individually analyzed include certain nonaccrual commercial, as well as certain accruing loans previously identified under prior troubled debt restructuring (TDR) guidance.
As of September 30, 2024, the Company held $10.9 million in non-accrual balances and a related ACL of approximately $5.6 million. Within the non-accrual balances, $37 thousand of these loans had no ACL associated to them. As of December 31, 2023, the
17
Company had $4.4 million in non-accrual loans and related ACL of approximately $351 thousand. Within the non-accrual balances, $3.3 million of these loans had no ACL associated related to them.
As of December 31, 2023, the amortized cost basis of individually analyzed loans was $16.8 million and a related ACL of approximately $194 thousand. For collateral dependent loans where the borrower is experiencing financial difficulty and repayment is likely to be substantially provided through the sale or operation of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan, at measurement date. Certain assets held as collateral may be exposed to future deterioration in fair value, particularly due to changes in real estate markets or usage.
The following table presents the amortized cost basis and related allowance for credit loss of individually analyzed loans considered to be collateral dependent as of September 30, 2024 and December 31, 2023:
At September 30, 2024
At December 31, 2023
Principal Balance
Related Allowance
Commercial real estate (1)
31,238
5,575
15,594
100
Residential real estate (2)
132
31,370
16,833
194
(1) Commercial real estate – secured by various types of commercial real estate
(2) Residential real estate – secured by residential real estate
The following table presents the amortized cost in non-accrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2024 and December 31, 2023.
Non-Accrual
with No Allowance
Loans Past Due Over 90 Days
for Credit Loss
Non-accrual
Still Accruing
29
285
199
2,391
10,725
2,692
591
1,179
37
3,267
10,932
4,427
18
As of September 30, 2024, the Company held $10.9 million in non-accrual balances and a related ACL for approximately $5.6 million. Within the non-accrual balances, $37 thousand of these loans had no ACL associated with 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 and nine months ended September 30, 2024 and 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 within the scope of the Company’s internal underwriting policy.
The following table presents the aging of the amortized cost in past-due loans as of September 30, 2024 and December 31, 2023 by class of loans:
30-59 Days
60-89 Days
Greater Than
Past Due
90 Days
Not Past Due
266
251,218
159
10,726
10,885
1,323,695
209
41,068
10,992
11,360
1,784,734
229
327
1,259,035
1,167
77,155
249
1,794
2,043
1,745,019
As of September 30, 2024 and December 31, 2023, loans in the process of foreclosure were $15,432 and $1,840 respectively, of which $0 and $1,504 were secured by residential real estate.
Credit Quality Indicators: 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:
19
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.
The following tables summarize the Company’s loans by year of origination and internally assigned credit risk at September 30, 2024 and December 31, 2023 and gross charge-offs for the nine months ended September 30, 2024 and the year ended December 31, 2023:
Revolving
Loans to
2022
2021
2020
Prior
Term Loans
Pass
26,554
44,806
36,520
34,998
33,309
55,236
231,423
Special Mention
80
3,333
4,287
150
7,850
Substandard
3,599
422
7,198
170
136
686
12,211
Total Commercial and industrial
30,153
45,308
47,051
39,455
33,445
56,072
Current period gross charge-offs
99,740
197,288
329,806
225,069
156,583
272,035
5,325
1,285,846
790
6,291
11,339
18,420
626
20,970
8,718
30,314
Total Commercial real estate
198,078
330,432
252,330
292,092
3,931
28
3,959
15,369
28,113
24,545
10,200
Total Commercial real estate construction
4,661
20,620
12,388
8,471
19,596
74,454
Total Residential real estate
19,604
48
14,418
1,551
Total Home Equity
9,744
23,671
1,412
77
6,284
Total Consumer
164
159,667
315,837
414,418
310,456
200,158
367,980
26,027
Gross charge-offs
122
4,094
2019
46,009
56,896
48,103
44,329
26,500
39,953
261,790
7,521
225
7,846
408
384
729
842
1,563
3,926
46,517
64,801
48,832
45,171
41,741
510
439
597
1,569
197,300
328,445
237,198
162,619
88,322
202,800
3,298
1,219,982
9,957
2,959
12,042
24,958
430
6,133
5,462
14,416
247,585
165,010
97,414
220,304
11,116
26,876
37,326
10,407
19,196
17,810
8,825
9,253
4,475
17,583
77,142
589
590
5,064
18,173
68
57
11,595
1,763
28,930
1,789
22
5,646
25
1
303,107
438,008
342,583
231,630
129,057
280,375
20,539
464
598
1,606
Loans to certain directors and principal officers of the Company, including their immediate families and companies in which they are affiliated, amounted to $16,502 and $16,475 at September 30, 2024 and December 31, 2023, 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
16,640
2,730
Total securities available-for-sale
466,802
There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2024. The Level 3 amount reflects the fair value of certain subordinated notes with limited availability of market pricing and determined based on discounted cash flows and other market value indicators.
December 31,
290,221
16,541
2,735
487,213
There were no transfers between Level 1 and Level 2 during 2023. The Level 3 amount reflects the fair value of certain subordinated notes with limited availability of market pricing and determined based on discounted cash flows and other market value indicators. During 2023, there was a transfer from Level 2 to Level 3 related to subordinated debt of one entity with limited availability of market pricing.
Assets measured at fair value on a non-recurring basis as of September 30, 2024 and December 31, 2023 are summarized below:
Quoted Prices
in Active
Markets for
Identical Assets
Collateral dependent loans - Commercial Real Estate
5,151
24
Collateral dependent loans- Commercial Real Estate, Residential Real Estate
695
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 $5.6 million and $194 thousand at September 30, 2024 and December 31, 2023, 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, 2024 and December 31, 2023:
Fair Value
Range
Valuation Technique
Unobservable Input
(Weighted Average)
Appraisal of collateral (1)
Appraisal and liquidation
20%
adjustments (2)
(20%)
Collateral dependent loans - Commercial Real Estate, Residential Real Estate
20-64%
(57%)
(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, 2024 and December 31, 2023:
Carrying
Amount
Level 1
Level 2
Level 3
Financial assets:
1,691,019
2,531
7,476
NA
Financial liabilities:
Deposits
2,139,384
1,998,091
141,293
81,829
BTFP borrowing, short term
50,008
10,067
24,854
Accrued interest payable
1,634,581
2,343
3,591
2,037,798
1,817,232
220,566
223,982
9,914
25,490
2,113
Note 5 — Deposits
A summarized analysis of the Bank’s deposits at September 30, 2024 and December 31, 2023:
Non-interest bearing demand accounts
Interest-bearing demand accounts
342,306
304,892
Money market accounts
707,065
584,976
Savings accounts
258,302
228,161
Certificates of Deposit
141,931
221,517
Time deposits that meet or exceed the FDIC insurance limit of $250 thousand at September 30, 2024 and December 31, 2023 were $11.8 million and $11.3 million, respectively.
26
Scheduled maturities of time deposits for the next five years as of September 30, 2024, are as follows:
111,375
2025
26,741
2026
1,876
2027
1,939
Deposits of executive officers, directors and principal officers of the Company, including their immediate families and companies in which they are affiliated, amounted to $16.5 million and $10.6 million at September 30, 2024 and December 31, 2023, 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, 2024 and 2023 are as follows:
Service cost
Interest cost
269
279
Expected return on plan assets
(479)
(411)
(1,438)
(1,233)
Amortization of transition cost
Amortization of net loss
70
221
Net periodic benefit cost/(income)
(136)
(62)
(186)
The Company has a time based restricted stock plan. For the three months ended September 30, 2024 and 2023, the Company’s recognized stock-based compensation costs were $0 and $9, respectively. For the nine months ended September 30, 2024 and 2023 the Company’s recognized stock-based compensation costs of $5 and $45, 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, 2024 and 2023. The grants generally vest at the rate of 33% per year with full vesting on the third anniversary date of the grant. There was no unamortized expense at September 30, 2024.
A summary of the Company’s restricted stock awards activity for the nine months ended September 30, 2024 is presented below:
Weighted
Average Fair
Shares
Non-vested at beginning of period
3,528
28.75
Granted
Vested
(3,528)
Forfeited
Non-vested at end of period
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, 2024:
Restricted Stock Units
Non-vested RSUs at beginning of period
72,513
46,092
(34,772)
(601)
Non-vested RSUs at end of period
83,232
Note 7 — Accumulated Other Comprehensive Income (Loss)
The following is changes in the accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended September 30, 2024 and 2023.
Gains and
Losses on
Deferred
Available-for-
Defined Benefit
Compensation
Sale Securities
Pension Items
Liability
(59,920)
(7,618)
Other comprehensive income/(loss) before reclassification, net
Less amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income/(loss)
(47,108)
(7,381)
103
(56,127)
(8,092)
111
Other comprehensive income/(loss) before reclassification
(59,477)
(7,099)
117
(72,103)
(6,704)
114
(60,430)
(7,889)
123
(16,586)
(15,410)
(87)
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, 2024 and 2023:
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
Credit Loss Expense
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)
Total reclassifications for the period, net of tax
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, 2024 and 2023.
Noninterest Income
Overdraft fees
412
294
113
104
325
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, 2024
For the nine months ended September 30, 2024
Banking
Wealth Management
Total Segments
Net interest income
Noninterest income
1,054
3,120
2,701
8,966
Provision for credit loss - investments
Provision for credit loss
(7,191)
(9,661)
Noninterest expenses
(13,769)
(2,178)
(15,947)
(40,193)
(6,551)
(46,744)
Income tax expense
(590)
(198)
(788)
(4,624)
(507)
(5,131)
2,472
744
18,811
1,908
Total assets
2,509,447
9,652
For the three months ended September 30, 2023
For the nine months ended September 30, 2023
621
2,599
2,150
7,526
Provision for credit loss- investments
(5,000)
(837)
(2,406)
(11,777)
(1,813)
(13,590)
(36,266)
(5,799)
(42,065)
(2,090)
(166)
(2,256)
(4,730)
(363)
(5,093)
8,418
620
19,990
1,364
2,438,565
8,706
2,447,271
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.
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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, 2024 and at December 31, 2023 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, 2024 and December 31, 2023 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
279,742
14.89
%
150,282
8.00
185,504
9.875
187,853
10.00
Tier 1 (Core) capital to risk weighted assets
256,174
13.64
112,712
6.00
147,934
7.875
Common Tier 1 (CET1) to risk weighted assets
84,534
4.50
119,756
6.375
122,104
6.50
Tier 1 (Core) Capital to average assets
10.06
101,834
4.00
N/A
127,292
5.00
262,598
14.16
148,398
183,178
185,497
239,398
12.91
111,298
146,079
83,474
118,254
120,573
9.42
101,640
127,049
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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, 2024 and December 31, 2023 and for the three months and nine months ended September 30, 2024 and 2023 should be read in conjunction with our audited consolidated financial statements and the accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2023. 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 16 offices and one loan production office, continue to produce 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 $1.8 billion in assets under management at September 30, 2024. As of September 30, 2024, our assets, loans, deposits and stockholders’ equity totaled $2.5
34
billion, $1.8 billion, $2.1 billion and $193.1 million, respectively.
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.
Considering the impact of the FRB’s rate reduction during third quarter 2024, we expect that interest rates may continue to drop during the next several quarters. Although our asset sensitivity is relatively neutral, this movement could have a beneficial 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, 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 relatively low levels of loan 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.
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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. A summary of our accounting policies, included the Allowance for Credit Losses, is included in the Company’s Annual Report on Form 10-K. There were no significant changes to the critical accounting estimates during the three months and nine months ended September 30, 2024 as disclosed in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2024.
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)
33,631
1.4
9.2
43,191
2.5
Investment securities, available for sale
(20,416)
(4.2)
5.0
(63.5)
100.0
0.3
Stockholders’ Equity
27,718
16.8
Assets. Our total assets were $2.5 billion at September 30, 2024, an increase of $33.6 million, or 1.4%, from December 31, 2023. The increase was primarily driven by increases of $43.2 million in loans, net and $13.5 million in cash and due from banks, partially offset by a decrease of $20.4 million in investment securities, available for sale.
Cash and due from banks. Cash and due from banks increased $13.5 million, or 9.2%, to $160.9 million at September 30, 2024, from $147.4 million at December 31, 2023. The increase was mainly the result of management’s focus on using deposit growth during the period to maintain a strong liquidity position while paying down borrowings.
36
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
251,303
13.99
273,347
15.65
74.30
72.08
4.36
4.91
4.15
4.48
0.89
0.78
2.30
2.09
PPP loans
181
0.01
Total loans
100.00
Total loans, net
Net loans increased $43.2 million, or 2.5%, to $1.8 billion at September 30, 2024 from December 31, 2023 primarily due to growth of $75.2 million related to commercial real estate loans as well as $4.7 million increase in consumer loans offset by decreases in all other loan categories. Commercial real estate loans increased by $75.2 million, or 6.0%, to $1.3 billion at September 30, 2024. Consumer loans increased $4.7 million, or 12.9%, to $41.3 million at September 30, 2024 from $36.6 million at December 31, 2023. Commercial and industrial loans experienced a decrease of $22.0 million, or 8.1%, to $251.3 million at September 30, 2024 from $273.3 million at December 31, 2023. Residential real estate loans decreased $3.9 million, or 4.9%, to $74.5 million at September 30, 2024 from $78.3 million at December 31, 2023. The overall diversification within the commercial real estate portfolio continues to provide stability while we remained focused on loan originations to new and existing customers during the nine months ended September 30, 2024 as well as our continued commitment to geographic expansion in our market area.
Non-performing Assets
Management reviews a loan for 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 $11.2 million at September 30, 2024 as compared to $4.4 million at December 31, 2023.
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
11,169
Other real estate owned
Other non-performing assets
Total non-performing assets
Ratios:
Total non-performing loans to total loans
0.62
0.25
Total non-performing loans to total assets
0.44
0.18
Total non-performing assets to total assets
Non-performing loans at September 30, 2024 totaled $11.2 million and consisted of $10.7 million of commercial real estate loans, $436 thousand of commercial and industrial loans (accruing and non-accruing), and $8 thousand of residential real estate loans. The increase in non-performing loans was primarily the result of the addition of one non-accrual commercial real estate office space loan participation which was classified as non-accrual during second quarter 2024 as it was expected to become greater than 90 days delinquent. During the third quarter of 2024, this loan was written down by approximately $4.0 million from its principal balance of $14.7 million and is approximately $10.7 million as of September 30, 2024. We had no other real estate owned at September 30, 2024 and December 31, 2023.
Non-performing assets increased $6.7 million, or 152.3%, to $11.2 million, or 0.44% of total assets, at September 30, 2024 from $4.4 million, or 0.18% of total assets, at December 31, 2023. The increase in non-performing assets at September 30, 2024, compared to December 31, 2023 was primarily driven by an increase of $8.0 million in non-accrual commercial real estate loans described above offset by net-reductions in the level of non-performing loans in the residential real estate loan category and the commercial and industrial loan segment.
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, 2024.
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
38
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:
42,620
19,615
Doubtful
Loss
Total Classified Assets
26,270
32,804
On the basis of management’s review of our assets, we have classified $42.6 million of our assets at September 30, 2024 as substandard compared to $19.6 million at December 31, 2023, due to a combination of certain trends and delinquencies within those loans. There were no doubtful assets as of September 30, 2024 and December 31, 2023. We designated $26.3 million of our assets at September 30, 2024 as special mention compared to $32.8 million designated as special mention at December 31, 2023.
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.
As presented below, the allowance for credit losses increased by $5.3 million, or 20.4%, to $31.0 million, or 1.73% of total loans at September 30, 2024, from $25.8 million, or 1.51% of total loans at September 30, 2023. The increase in the allowance was primarily due to an increased reserve of $9.9 million, which included approximately $9.6 million associated with a commercial office
space participation loanas described above. The nine months ended September 30, 2024 also included charge-offs of approximately $4.1 million, including $3.9 million connected to the same commercial office space participation loan.
At or for the Nine Months Ended
Balance at beginning of year
Adoption of ASC 326
Charge-offs:
410
Total charge-offs
446
Recoveries:
Total recoveries
Net charge-offs (recoveries)
4,020
Balance at end of period
Net charge-offs to average loans outstanding
0.23
Allowance for credit losses to non-performing loans at end of period
277.76
271.14
Allowance for credit losses to total loans at end of period
1.73
1.51
For the nine months ended September 30, 2024, the increase in net charge-offs to average loans outstanding ratio was mainly the result of the charge-offs associated with commercial real estate loans specifically the previously noted commercial office space participation loan. All other categories, in the aggregate, represented less than 0.01% of the net charge-offs to average loans outstanding. For the nine months ended September 30, 2023, no category of loans had a ratio which exceeded 0.01% either individually, or in the aggregate.
Investment Securities
The following table sets forth the estimated fair value of our available-for-sale securities portfolio at the dates indicated.
Estimated
Available for sale securities:
337,393
Available for sale securities decreased $20.4 million, or 4.2%, to $469.5 million at September 30, 2024 from $489.9 million at December 31, 2023, due primarily to limited purchases as well as continued declines for all investment categories due to normal
40
amortization and cash flow during the nine month period ended September 30, 2024. During the first quarter of 2024, the Company sold and recorded a recovery of $1.9 million related to Signature Bank subordinated debt which was written-off during 2023. As part of the treatment, the Company evaluated the securities portfolio for an allowance and determined it was not necessary. Accordingly, the recovery resulted in a net credit to the ACL.
We did not have held-to-maturity securities at September 30, 2024 and December 31, 2023.
The following table sets forth our total deposit account balances, by account type, at the dates indicated:
Average
Rate
Noninterest-bearing demand deposits
32.26
34.30
Interest bearing demand deposits
16.00
0.49
14.95
Money market deposits
33.04
2.27
28.69
2.04
Savings deposits
12.07
1.39
11.19
1.19
Certificates of deposit
6.63
4.06
10.87
4.57
1.27
1.29
Total deposits increased $101.3 million, or 5.0%, to $2.1 billion at September 30, 2024 from $2.0 billion at December 31, 2023 driven by organic deposit growth which represented a continued focus on maintaining strong liquidity and commercial transaction accounts during the first nine months of 2024. Interest bearing demand deposits experienced a $37.4 million, or 12.3%, increase and money market deposits increased $122.1 million, while savings deposits increased by $30.1 million during the first nine months of 2024 primarily related to our continued strategic focus on business account activity. Non-interest-bearing demand deposits decreased $8.8 million primarily due to a shift of certain deposits into interest bearing accounts combined with normal business activity during the first nine months of 2024. At September 30, 2024, our core deposits (which includes all deposits except for certificates of deposit) totaled $2.0 billion, or 93.4% of our total deposits. Certificates of deposit decreased by $79.6 million, or 35.9%, mainly from reductions in brokered deposits during the nine month period ended September 30, 2024. We held approximately $100.0 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, 2024 as compared to $172.4 million at December 31, 2023. This decrease was the result of increased organic deposit activity during the period which allowed for maturity of the brokered deposits without replacement and reduced interest expense. Our reciprocal deposits obtained through the CDARS and ICS networks totaled $7.3 million and $95.2 million, respectively, at September 30, 2024 and the CDARS and ICS networks totaled $11.1 million and $99.5 million, respectively, at December 31, 2023. Uninsured deposits, net of fully collateralized municipal relationships, remained stable and represent approximately 39% of total deposits as of September 30, 2024 as compared to 37% of total deposits at December 31, 2023.
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 $92.0 million at September 30, 2024 and $234.5 million at December 31, 2023 as we made the strategic decision to pay down Federal Home Loan Bank advances, short term, by approximately $142.5 million. This decrease represents a continued focus by management to reduce borrowings and the related interest expense by using lower-cost deposits for funding, which experienced growth during the nine months ended September 30, 2024. We have the capacity to borrow an additional $491.6 million from the Federal Home Loan Bank of New York as of September 30, 2024.
During the first quarter of 2024, we also utilized $50 million of funding through the Bank Term Funding Program from the Federal Reserve under a one-year facility expiring in March 2025. That amount remains outstanding as of September 30, 2024.
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,
41
payable quarterly in arrears.
Stockholders’ equity increased $27.7 million, to $193.1 million, at September 30, 2024 from $165.4 million at December 31, 2023. The increase was due mainly to an increase of $20.7 million in retained earnings, partially reduced by dividends and favorably impacted by a reduction of unrealized losses of approximately $9.7 million, net of taxes 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 lower market rates.
42
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, 2024 and 2023. 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. Average deferred loan fees totaled $4.5 million and $5.0 million for the three months ended September 30, 2024 and 2023, respectively. Average deferred loan fees totaled $4.7 million and $5.2 million for the nine months ended September 30, 2024 and 2023, respectively.
For the Three Months Ended September 30,
Outstanding
Balance
Interest
Yield/Rate(1)
Interest-earning assets:
Loans (excluding PPP loans)
1,759,989
26,372
5.94
1,697,745
24,677
5.77
186
6.40
996
1.99
Investment securities available for sale
463,347
3,252
2.78
495,803
3,466
2.77
Cash and due from banks and other
160,563
4.55
154,335
4.38
Restricted stock
7,601
(34)
(1.77)
10,299
248
9.55
Total interest-earning assets
2,391,686
5.21
2,359,178
5.06
Noninterest-earning assets
94,476
96,894
2,486,162
2,456,072
Interest-bearing liabilities:
Interest-bearing demand deposits
370,442
425
0.46
334,658
332
0.39
695,516
4,083
2.33
632,300
2,551
1.60
256,934
924
1.43
242,627
623
1.02
116,817
4.12
176,369
4.40
Total interest-bearing deposits
1,439,709
6,645
1.83
1,385,954
5,460
1.56
FHLB Advances and other borrowings
127,197
4.97
140,560
5.38
19,561
4.66
19,490
4.70
Total interest-bearing liabilities
1,586,467
2.12
1,546,004
1.95
688,138
736,313
Other noninterest-bearing liabilities
25,947
23,279
Total liabilities
2,300,552
2,305,596
Total stockholders’ equity
185,610
150,476
Total liabilities and stockholders’ equity
Net interest rate spread(2)
3.10
3.11
Net interest-earning assets(3)
805,219
813,174
Net interest margin(4)
3.81
3.78
Average interest-earning assets to interest-bearing liabilities
150.8
152.6
43
For the Nine Months Ended September 30,
Yield/Rate (1)
1,742,193
78,761
6.02
1,668,967
70,374
5.64
197
1,440
2.23
470,701
10,048
2.84
514,011
10,575
2.75
156,899
4.72
139,539
4.33
7,945
650
10.90
11,268
716
8.50
2,377,935
5.32
2,335,225
4.94
96,047
95,597
2,473,982
2,430,822
375,124
1,348
0.48
336,801
875
0.35
660,795
11,233
2.26
623,039
6,471
249,013
2,586
1.38
251,588
1,735
0.92
170,079
147,750
3.52
1,455,011
20,908
1.91
1,359,178
12,974
1.28
123,880
5.09
164,434
5.12
19,544
4.71
19,472
4.75
1,598,435
2.19
1,543,084
674,727
717,067
26,701
22,988
2,299,863
2,283,139
174,119
147,683
3.13
3.21
779,500
792,141
3.85
148.8
151.3
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.
2024 vs. 2023
Increase (Decrease) Due to
Increase
Volume
(Decrease)
932
763
1,695
3,692
4,695
8,387
(35)
(18)
(228)
(214)
(886)
359
(527)
140
631
411
1,042
(293)
(282)
(267)
201
(66)
776
561
3,135
5,683
8,818
93
143
473
371
1,161
1,532
712
4,050
4,762
301
(21)
872
851
(618)
(123)
(741)
779
1,069
1,848
(155)
1,340
1,613
6,321
7,934
Federal Home Loan Bank advances
(167)
(147)
(314)
(1,527)
(322)
1,192
870
6,279
6,372
Change in net interest income
1,098
(631)
467
3,042
(596)
2,446
Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023
Summary Income Statements. The following table sets forth the income summary for the periods indicated:
Percentage %
Interest income
4.4
10.2
Interest expense
11.5
31.9
2.1
3.7
Provision for credit losses - investments
(6,900)
(138.0)
6,354
759.1
7,255
301.5
954
29.6
1,991
20.6
Noninterest expense
2,357
17.3
4,679
11.1
(1,468)
(65.1)
0.7
(5,822)
(64.4)
(635)
(3.0)
General. Net income decreased $5.8 million, or 64.4%, to $3.2 million for the three months ended September 30, 2024 from $9.0 million for the three months ended September 30, 2023. The decrease was driven primarily by an increase of $6.4 million related to the provision for credit losses and an increase of $2.4 million in noninterest expense, partially offset by increases in net interest income of $467 thousand and noninterest income of $954 thousand during the third quarter of 2024 as compared to the same quarter in 2023. Net income for the nine months ended September 30, 2024 was $20.7 million, as compared to $21.4 million for the same period in 2023. The overall decrease was driven primarily by increased noninterest expense of $4.7 million coupled with an increase in the overall provision for credit losses of approximately $355 thousand offset by increased net interest income of $2.4 million and an increase in noninterest income of $1.9 million. The overall fluctuation of the provision for credit losses for the current nine month
period included a $1.9 million recovery associated with Signature Bank subordinated debt which was written off during 2023 and recovered during the nine month period ended September 30, 2024 as well as the additional reserve associated with the nonperforming office space participation loan as compared to the same prior year period.
Interest Income. Interest income increased $1.3 million, or 4.4%, to $31.4 million for the three months ended September 30, 2024 from $30.1 million for the three months ended September 30, 2023. This increase was primarily driven by a 15 basis points increase in the average yield of interest-earning assets which grew from 5.06% during the three months ended September 30, 2023 to 5.21% for the three months ended September 30, 2024 as a result of the higher interest rate environment during most of 2024. Over the same comparative period, the average balance of interest-earning assets increased by $32.4 million, or 1.4%, to $2.4 billion for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.
Interest income increased $8.8 million, or 10.2%, for the nine months ended September 30, 2024 reaching $95.0 million from $86.2 million for the nine months ended September 30, 2023. This increase was driven by a $42.7 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 $73.2 million, or 4.4%, between the nine months ended September 30, 2024 and September 30, 2023. In addition, the average yield of interest-earning assets increased by 38 basis points from 4.94% for the nine months ended September 30, 2023 to 5.32% for the nine months ended September 30, 2024 as a result of the higher interest rate environment through most of 2024.
Interest income on loans, net of PPP loans, increased by $1.7 million, or 6.9%, to $26.4 million during the three months ended September 30, 2024 from $24.7 million during the three months ended September 30, 2023. The increase in interest income on loans was primarily due to the increase in the average balance of loans (net of PPP loans) and an increase in the average yield on loans. The average balance of loans increased by $62.2 million, or 3.7%, to $1.8 billion for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase in the average balance of loans was due to $62.2 million of net average loan growth during the third quarter coupled with stability in commercial real estate loan balances as well as growth in our consumer loan portfolio. The average yield on loans, excluding PPP loans, increased by 17 basis points to 5.94% for the three months ended September 30, 2024 from 5.77% for the three months ended September 30, 2023 as a result of the higher interest rate environment and management’s continued focus on disciplined loan pricing.
For the nine months ended September 30, 2024, interest income on loans increased by $8.4 million, or 11.9%, reaching $78.8 million as compared to $70.4 million for the nine months ended September 30, 2023. The increase in interest income on loans represents the impact of growth in average loan balances (net of PPP loans) of $73.2 million between the nine months ended September 30, 2023 and September 30, 2024. The increase in average loans outstanding was due mainly to the third quarter increase in the commercial real estate and consumer segments of the loan portfolio. This increase in production was also coupled with an increase in average yield on loans, excluding PPP loans, for the nine month periods from 5.64% in 2023 to 6.02% in 2024. The increase in the average yield on loans was driven by the effect of the higher interest rate environment during 2023 and the majority of the first nine months of 2024 as well as management’s continued focus on disciplined loan pricing.
Interest income on securities decreased by $214 thousand to $3.3 million during the three months ended September 30, 2024 from $3.5 million during the three months ended September 30, 2023. The decrease in interest income on securities was driven primarily by a decrease in the average balance of securities outstanding during the current period due to continued maturities as well as a result of the Signature Bank subordinated debt writeoff during 2023. The average balance of securities decreased by $32.5 million, or 6.6%, to $463.3 million for the three months ended September 30, 2024 compared to $495.8 million for the three months ended September 30, 2023. The average yield on investment securities was relatively flat with a one basis point increase overall from 2.77% for the three months ended September 30, 2023 to 2.78% for the three months ended September 30, 2024. The stability and slight increase in the average yield on securities reflected the continued maturity of lower yielding investments during the current period.
For the nine months ended September 30, 2024, interest income on securities decreased by $527 thousand, or 5.0%, to $10.0 million during the period from $10.6 million during the nine months ended September 30, 2023. The decrease in interest income on securities was due to a decrease in the average balance of securities during the current period. The average balance of securities decreased by $43.3 million, or 8.4%, to $470.7 million for the nine months ended September 30, 2024 compared to $514.0 million for the nine months ended September 30, 2023 due to continued maturities as well as the impact of the Signature Bank subordinated debt writeoff during 2023. The average yield on investment securities increased by nine basis points overall from 2.75% for the nine
months ended September 30, 2023 to 2.84% for the nine months ended September 30, 2024. The increase in the average yield on securities was primarily related to the maturity of lower yielding securities during 2023 and the first nine months of 2024.
Interest Expense. Interest expense increased $870 thousand, or 11.5%, to $8.5 million for the three months ended September 30, 2024 from $7.6 million for the three months ended September 30, 2023. The increased interest expense continues to be driven primarily by the continued effect of the higher interest rate environment and the impact on deposit costs as well as funding costs during the quarter. The average rate paid on interest-bearing liablities increased 17 basis points to 2.12% during the three months ended September 30, 2024 as compared to 1.95% for the three month period ended September 30, 2023. The average balance of interest-bearing liabilities increased by $40.5 million, or 2.6%, and was approximately $1.6 billion for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.
Interest expense increased $6.4million, or 31.9%, to $26.3 million for the nine months ended September 30, 2024 from $20.0 million for the nine months ended September 30, 2023. The increase in interest expense reflects the higher interest rate environment and the continuing effect on deposit and funding costs during the first nine months of 2024. The average rate paid on interest-bearing liabilities increased 46 basis points to 2.19% during the nine months ended September 30, 2024 as compared to 1.73% for the nine month period ended September 30, 2023. The average balance of interest-bearing liabilities increased by $55.4 million, or 3.6%, to $1.6 billion for the nine months ended September 30, 2024 as compared to $1.5 billion for the nine months ended September 30, 2023.
Interest expense on interest-bearing deposits increased by $1.2 million to $6.6 million for the three months ended September 30, 2024 from $5.5 million for the three months ended September 30, 2023. The increase in interest expense on interest-bearing deposits was due mainly to the continued increase in the average cost of deposits. The average cost of interest-bearing deposits increased 27 basis points to 1.83% during the three months ended September 30, 2024 as compared to 1.56% for the three months ended September 30, 2023. The average cost of interest-bearing deposits increased due to the continued impact of the higher interest rate environment on deposit accounts. The average balance of interest-bearing deposits increased by $53.8 million, or 3.9%, to $1.4 billion for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 primarily as a result of the increases in the average balances of interest-bearing demand deposits, money market accounts, and savings accounts.
During the nine months ended September 30, 2024, interest expense on interest-bearing deposits increased by $7.9 million, or 61.2%, to $20.9 million during the nine months ended September 30, 2024 from $13.0 million during the nine months ended September 30, 2023. The increase in interest expense on interest-bearing deposits for the nine month period ended September 30, 2024 as compared to the same prior year period represents the effect of the higher interest rate environment on the average cost of deposits coupled with higher average balances of interest bearing deposits. The average cost of interest-bearing deposits increased 63 basis points to 1.91% for the nine months ended September 30, 2024 as compared to 1.28% for the nine months ended September 30, 2023. The average balance of interest-bearing deposits increased by $95.8 million, or 7.1%, to $1.5 billion for the nine months ended September 30, 2024 as compared to $1.4 billion for the nine months ended September 30, 2023 primarily as a result of the increases in the average balances of certificates of deposit, interest-bearing demand deposits and money market accounts.
We also expensed a relatively level amount of approximately $230 thousand in interest expense for both the three months ended September 30, 2024 and 2023 related to the issuance in September 2020 of $20.0 million in outstanding subordinated notes, which carries an interest rate of 4.25%. In addition, we expensed approximately $691 thousand in interest expense for both the nine months ended September 30, 2024 and September 30, 2023. These flat interest costs represent the debt service required as part of the 2020 subordinated notes.
The interest expense related to borrowings in the third quarter of 2024 decreased to $1.6 million at an average cost of 4.97% as compared to interest expense of $1.9 million at an average cost of 5.38% for the same period in 2023. The third quarter 2024 average FHLB and other borrowings decreased to $127.2 million compared to $140.6 million of average FHLB and other borrowing in the same quarter of 2023. The decrease in average borrowings was the direct result of paydowns driven by increased deposits and less use of cash during the current period. Management was able to replace higher cost FHLB borrowings with lower cost borrowings as rates were adjusted lower and reduce interest expense during the current period. Although borrowings remain a potential source of strategic funding for the Company, the reduction in borrowings during the quarter reflects the ability of the Company to increase deposits and strategically reduce associated interest costs.
The interest expense related to FHLB and other borrowing for the first nine months of 2024 decreased to $4.7 million as compared to $6.3 million for the first nine months of 2023. For the nine months ended September 30, 2024, average FHLB and other
borrowings decreased to $123.9 million with an average cost of 5.09% compared to $164.4 million of average FHLB and other borrowings with an average cost of 5.12% for the same period in 2023. The decrease in average borrowings was the direct result of paydowns driven by increased deposits and less use of cash during the current period.
Net Interest Income. Net interest income increased $467 thousand, or 2.1%, to $23.0 million for the three months ended September 30, 2024 from $22.5 million for the three months ended September 30, 2023 due to the increase in income from interest earning assets outpacing the growth of interest costs associated with interest bearing liabilities. Net interest rate spread decreased slightly by one basis point to 3.10% for the three months ended September 30, 2024 from 3.11% for the three months ended September 30, 2023, reflecting a 15 basis points increase in the average yield on interest-earning assets offset by a 17 basis points increase in the average rate paid on interest-bearing liabilities. The net interest margin increased three basis points to 3.81% for the three months ended September 30, 2024 from 3.78% for the three months ended September 30, 2023 due to the tightening interest rate environment as well as the impact of managed funding and deposit costs during the period.
For the nine months ended September 30, 2024, net interest income increased $2.5 million, or 3.7%, to $68.7 million from $66.2 million for the nine months ended September 30, 2023 due primarily to an increase in net interest margin for the current period. The net interest margin increased six basis points to 3.85% for the nine months ended September 30, 2024 from 3.79% for the nine months ended September 30, 2023. Net interest rate spread decreased by eight basis points to 3.13% for the nine months ended September 30, 2024 from 3.21% for the nine months ended September 30, 2023.
Provision for Credit Losses. The Company recognized a provision for credit losses of $7.2 million for the three months ended September 30, 2024, compared to $837 thousand for the three months ended September 30, 2023. The increased provision was primarily driven by a $5.6 million reserve associated with a specific nonaccrual commercial real estate loan participation identified during the second quarter of 2024. Additionally, the provision for the quarter included the impact of the methodology associated with estimated lifetime losses and the increase in loans closed. The allowance for credit losses to total loans was 1.73% as of September 30, 2024, an increase of 29 basis points, or 20.1%, versus 1.44% as of December 31, 2023.
For the nine months ended September 30, 2024, the provision for credit losses totaled $7.8 million as compared to $7.4 million for the nine months ended September 30, 2023. The provision for the nine months ended September 30, 2024 reflected the recognition of a $1.9 million recovery associated with the 2023 write off of the Signature Bank subordinated debt in the amount of $5.0 million made during the nine months ended September 30, 2023 as well as the additional provision related to a nonaccrual commercial real estate loan participation identified during the second quarter of 2024. Total participation and syndicated loans represent approximately 7.3% of total loans at September 30, 2024.
Noninterest Income. Noninterest income information is as follows:
60
28.6
149
25.3
8.9
293
7.9
30.6
1,147
30.0
Investment securities gains
(100.0)
(204)
(84.0)
(174)
(24.0)
577
343.5
683
93.6
Total noninterest income
Noninterest income increased by $954 thousand, or 29.6%, reaching $4.2 million for the three months ended September 30, 2024 as compared to $3.2 million for the three months ended September 30, 2023. Our Wealth Management division revenues, which include our Trust and Asset Management businesses also experienced growth and represented a 20.1% increase quarter-over-quarter, to $3.1 million for the third quarter of 2024 as compared to $2.6 million for the third quarter of 2023 as a result of continued growth in asset values during the current period. During the same period, assets-under-management increased to $1.8 billion at September 30, 2024 from $1.4 billion at September 30, 2023.
For the nine months ended September 30, 2024, noninterest income increased by $2.0 million, or 20.6%, to $11.7 million as compared to $9.7 million for the nine months ended September 30, 2023. Our Wealth Management division revenues increased and represented 19.1% growth reaching $9.0 million for the nine month period ended September 30, 2024 from $7.5 million for the nine month period ended September 30, 2023 as a result of continued growth in asset values and new customers during 2024.
Noninterest Expense. Noninterest expense information is as follows:
552
9.0
1,692
9.1
517
29.5
1,336
24.9
3.6
(67)
(1.9)
758
94.9
818
23.3
289
98.0
99
14.5
23.8
12.8
(253)
(54.6)
(45)
(4.4)
92
8.6
6.7
3.3
5.8
153
14.1
240
6.6
Total noninterest expense
Non-interest expense was $16.0 million for the third quarter of 2024, reflecting an increase of approximately $2.4 million, or 17.3%, as compared to $13.6 million for the same period in 2023. The increase in non-interest expense for the current three-month period was due primarily to continued investment in overall Company growth, including increases in professional fees associated with certain corporate initiatives, salaries and benefit costs, and information technology. Our efficiency ratio was 58.8% for the three months ended September 30, 2024, from 52.8% for the same period in 2023.
Non-interest expense was $46.7 million for the first nine months of 2024, reflecting an increase of approximately $4.7 million, or 11.1%, as compared to $42.1 million for the same period in 2023. The increase in non-interest expense for the nine month period was also due to continued investment in overall Company growth, primarily, increases in salaries and benefit costs, professional fees, and information technology. For the nine months ended September 30, 2024, our efficiency ratio was 58.2% as compared to 55.4% for the same period in 2023.
Provision for Income Tax. Our provision for income taxes for the three months ended September 30, 2024 was approximately $788 thousand, compared to approximately $2.3 million for the same period in 2023. The decrease for the current period was directly related to lower income before income taxes during the quarter. Our effective tax rate for the three-month period ended September 30, 2024 was 19.7%, as compared to 20.0% for the same period in 2023. For the nine months ended September 30, 2024, our provision for income taxes was $5.1 million, approximately the same as for the nine months ended September 30, 2023. The relatively flat trend for the current period was due to similar levels of income before income taxes during the current nine month period. Our effective tax rate for the nine-month period ended September 30, 2024 was 19.9%, as compared to 19.3% for the same period in 2023. The growth of the effective tax rate for the 2024 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 2024 as compared to 2023.
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.
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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)
1,792,119
1,437,036
The market value of assets under management and/or administration at September 30, 2024 and 2023 was $1.8 billion and $1.4 billion, respectively. This includes assets held at both Orange Bank & Trust Company and HVIA at September 30, 2024 and 2023, respectively.
Our expenses related to our wealth management business segment, which we record as noninterest expense, increased $365 thousand, or 20.1%, to $2.2 million for the three months ended September 30, 2024 compared to $1.8 million for the three months ended September 30, 2023. The increase in expenses was primarily due to continued expansion of the business unit and investment in technology during the period. For the nine months ended September 30, 2024, our expenses related to our wealth management business segment increased $752 thousand or 13.0%, to $6.6 million for the nine months ended September 30, 2024 compared to $5.8 million for the nine months ended September 30, 2023. The increase in expenses was primarily due to the growth of the business unit and its related operations as well as costs associated with certain managed trust assets.
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 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.
50
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, 2024 and December 31, 2023, cash and due from banks totaled $160.9 million and $147.4 million, respectively. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $469.5 million at September 30, 2024 and $489.9 million at December 31, 2023.
Certificates of deposit due within one year of September 30, 2024 totaled $137.8 million, or 96.5% of total certificates of deposit. The largest concentration of certificates of deposit represented brokered deposits in the amount of $100.0 million for diversified funding purposes.
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, 2024, we had a total of $102.5 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, 2024, we had a total capacity of $577.6 million at the Federal Home Loan Bank of New York, of which $76.0 million was used to collateralize municipal deposits, and $10.0 million was utilized for long-term advances. At September 30, 2024, we also had a $4.5 million collateralized line of credit from the Federal Reserve Bank of New York discount window with no outstanding balance. Additionally, we utilized $50 million of funding through the Bank Term Funding Program from the FRB under a one-year facility expiring in March 2025. We also had a total of $20.0 million of discretionary lines of credit at September 30, 2024 with no outstanding balance. We have a borrowing agreement with Atlantic Community Bankers Bank (“ACBB”) to provide short-term borrowings of $5.0 million at September 30, 2024. There were no outstanding borrowings with ACBB at September 30, 2024.
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 $21.8 million and $28.5 million for the nine months ended September 30, 2024 and 2023, 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 $12.6 million and $106.7 million for the nine months ended September 30, 2024 and 2023, respectively. Net cash provided by financing activities, consisting of activity in deposit accounts and borrowings, was $4.4 million and $150.8 million for the nine months ended September 30, 2024 and 2023, respectively.
We remain committed to maintaining a strong liquidity position. We monitor and evaluate our liquidity position daily. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit growth and retention, 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, 2024 and December 31, 2023, 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, 2024 and December 31, 2023.
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, 2024, we had $429.1 million in loan commitments outstanding. We also had $15.5 million in standby letters of credit at September 30, 2024.
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, 2024 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. 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, 2024 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, 2024, the Company is not currently a named party in a legal proceeding, the outcome of which would have an adverse material effect on the financial condition or results of operations of the Company.
On October 25, 2024, the Bank filed a civil complaint in the United States District Court for the District of New Jersey against the lead lender, Valley National Bank, of the non-performing commercial real estate loan participation noted above. This action cites breach of contract and other claims related to the participation agreement with the lead lender. The lawsuit requests damages and demands repurchase by the lead lender of the participated loan amount in accordance with the rights available under the terms of the participation agreement.
Item 1A. Risk Factors
There has been no material change to Risk Factors as disclosed in the Company’s 2023 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2024.
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
During the third quarter of 2024, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.
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 13, 2024
By:
/s/ Michael J. Gilfeather
Name:
Michael J. Gilfeather
Title:
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael Lesler
Michael Lesler
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)