Orange County Bancorp, Inc. /DE/ (OBT) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. 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 for the years ended December 31, 2024 and 2023 should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Item 1A-Risk Factors” and elsewhere in this Annual Report on Form 10-K, 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.
Overview
We are a bank holding company headquartered in Middletown, New York and registered under the BHC 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 branches and one loan production office, generate a stable source of low- cost core deposits and a diverse loan portfolio with attractive risk-adjusted yields. We also offer private banking services through Orange Bank & Trust Private Banking, a division of Orange Bank & Trust Company, and provide trust and wealth management services through Orange Bank & Trust Company’s trust services department and HVIA, which combined has $1.8 billion in assets under management at December 31, 2024. As of December 31, 2024, our assets, loans, deposits and stockholders’ equity totaled $2.5 billion, $1.8 billion, $2.2 billion and $185.5 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 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 FRB’s 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.
Interest rates experienced some volatility during 2024. Based on our asset sensitivity, a steepened yield curve and higher interest rates generally could have a beneficial impact on our net interest income. Conversely, a flat yield curve at lower rates would be expected to have an adverse impact on our net interest income.
Noninterest Income. Noninterest income is also a contributor to our net income. Noninterest income consists primarily of our investment advisory income and trust income generated by HVIA and our trust department. In addition, noninterest income is also impacted by net gains on the sale of investment securities, service charges on deposit accounts, earnings on bank owned life insurance and other fee income consisting primarily of debit card fee income, checkbook fees and rebates and safe deposit box rental income.
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Noninterest Expense. Noninterest expense includes salaries, employee benefits, occupancy, furniture and equipment expenses, 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.
Concentration of Credit Risk. Most of the Company’s business activity is with customers located within the New York counties of Orange, Westchester, Bronx and Rockland. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in these counties. The Company’s largest loan segment remains non-owner occupied commercial real estate. Property types within this segment include: multi-family properties, retail properties, and general construction loans. Regionally, commercial real estate loans are concentrated within the Company’s primary operating footprint, including Orange, Westchester, Rockland and Bronx counties. Commercial and industrial loans are concentrated in Orange County, New York and outside of the Company’s core market. While industry exposure is widely dispersed, the Company does have a significant concentration of commercial and industrial loans within the healthcare and social assistance industry.
Credit Quality. We have well established loan policies and underwriting practices that have resulted in low historical levels of charge-offs and nonperforming assets. We strive to generate 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 and 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.
Critical Accounting Estimates
A summary of our accounting policies is described in Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting estimates 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 and their application are periodically reviewed with the Audit Committee and the board of directors.
Management believes that the most critical accounting estimate, which involves the most complex or subjective decisions or assessments, is as follows:
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Allowance for Credit Losses. Management believes that the determination of the allowance for credit losses (“ACL”) 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 Orange County Bancorp’s results of operations.
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 individual 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. The ACL model considers the effects of past events, current conditions, as well as reasonable and supportable forecasts when estimating the required level. Some of the components relied upon in determining the amount of the ACL, which require judgment, include, but are not limited to, segmentation requirements, qualitative factor attributes, peer group selection, regression models, and default probability assumptions. Each of these, and other qualitative characteristics could impact the determination of the ACL. 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.
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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 | |||
| | | | | | | December 31, 2024 | |||
| | | | | | | vs. | |||
| | | As of December 31, | | As of December 31, | | December 31, 2023 | |||
| | 2024 | 2023 | Amount ($) | Percentage (%) | |||||
| | | (Dollars in thousands) | |||||||
| Assets | 2,509,927 | 2,485,468 | 24,459 | 1.0 | % | ||||
| Cash and due from banks | 150,334 | 147,383 | 2,951 | 2.0 | % | ||||
| Loans, net | 1,789,674 | 1,721,880 | 67,794 | 3.9 | % | ||||
| Investment securities, available for sale | 443,775 | 489,948 | (46,173) | (9.4) | % | ||||
| Deposits | 2,153,359 | 2,038,749 | 114,610 | 5.6 | % | ||||
| FHLB advances, short term | | 113,500 | | 224,500 | | (111,000) | | (49.4) | % |
| FHLB advances, long term | 10,000 | 10,000 | — | — | % | ||||
| Subordinated notes, net of issuance costs | | 19,591 | | 19,520 | | 71 | | 0.4 | % |
| Stockholders’ Equity | 185,531 | 165,376 | 20,155 | 12.2 | % |
Assets. Our total assets were $2.5 billion at December 31, 2024, an increase of $24.5 million from December 31, 2023. The increase was primarily due to increased net loan growth of approximately $67.8 million, or 3.9%, during the year. The increase in assets also included an increase in cash and due from banks of $3.0 million, or 2.0%. During 2024, investment securities decreased by $46.2 million, or 9.4%. This decrease represents management’s continued focus on increased liquidity as the maturities of securities were primarily used to enhance the Bank’s cash position and pay down borrowings.
Cash and due from banks. Cash and due from banks increased $3.0 million, or 2.0%, to $150.3 million at December 31, 2024 from $147.4 million at December 31, 2023. The increase was primarily driven by a strategic focus to increase cash balances, while paying down borrowings in order to maintain continued strong cash levels while ensuring that contingent liquidity sources are available.
Loans. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
| | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | At December 31, | | | | At December 31, | | ||||||
| | | 2024 | | | | 2023 | | ||||||
| | Amount | Percent | | | Amount | Percent | |||||||
| | | (Dollars in thousands) | |||||||||||
| Commercial and industrial | | $ | 242,220 | 13.34 | % | | | $ | 273,347 | 15.65 | % | ||
| Commercial real estate | | 1,362,054 | 75.01 | % | | | 1,259,356 | 72.08 | % | ||||
| Commercial real estate construction | | 80,993 | 4.46 | % | | | 85,725 | 4.91 | % | ||||
| Residential real estate | | 74,973 | 4.13 | % | | | 78,321 | 4.48 | % | ||||
| Home equity | | 17,365 | 0.96 | % | | | 13,546 | 0.78 | % | ||||
| Consumer | | 37,976 | 2.09 | % | | | 36,552 | 2.09 | % | ||||
| PPP loans | | 170 | 0.01 | % | | | 215 | 0.01 | % | ||||
| Total loans | | 1,815,751 | 100.00 | % | | | 1,747,062 | 100.00 | % | ||||
| Allowance for credit losses | | 26,077 | | | | 25,182 | | | |||||
| Total loans, net | | $ | 1,789,674 | | | | | $ | 1,721,880 | | | |
Net loans increased $67.8 million, or 3.9%, to $1.8 billion at December 31, 2024 from $1.7 billion at December 31, 2023 primarily due to increases in commercial real estate loans as well as increases in home equity loans and consumer loans. Commercial real estate loans increased $102.7 million, or 8.2%, to $1.4 billion at December 31, 2024 from $1.3 billion at December 31, 2023 primarily as a result of continued loan demand by our commercial real estate customers and developers, along with our strategy to expand commercial real estate lending in our market area. Consumer loans increased $1.4 million, or 3.9%, to $38.0 million at December 31, 2024 from $36.6 million at December 31, 2023. Home
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equity loans increased $3.8 million, or 28.2%, to $17.4 million at December 31, 2024. Commercial and industrial loans decreased $31.1 million, or 11.4% to $242.2 million at December 31, 2024 from $273.4 million at December 31, 2023.
Loan Portfolio Maturities. The following table sets forth the contractual maturities of our total loan portfolio at December 31, 2024. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.
| | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Commercial | | | | | Commercial | | | | | | | | | | | | | ||
| | | and | | Commercial | | Real Estate | | Residential | | | | | | | | | | ||||
| Time to Reprice/Mature | Industrial | Real Estate | Construction | Real Estate | Home Equity | Consumer | Total | ||||||||||||||
| | | (Dollar in thousands) | |||||||||||||||||||
| One year or less | | $ | 119,919 | | $ | 75,758 | | $ | 52,606 | | $ | 16,829 | | $ | 346 | | $ | 1,856 | | $ | 267,314 |
| More than one year to five years | | 958 | | 99 | | 932 | | 15 | | — | | — | | 2,004 | |||||||
| More than five years to fifteen years | | 119,262 | | 1,279,856 | | 24,162 | | 32,109 | | 2,114 | | 36,120 | | 1,493,623 | |||||||
| After fifteen years | | 2,251 | | 6,341 | | 3,293 | | 26,020 | | 14,905 | | — | | 52,810 | |||||||
| Total | | $ | 242,390 | | $ | 1,362,054 | | $ | 80,993 | | $ | 74,973 | | $ | 17,365 | | $ | 37,976 | | $ | 1,815,751 |
The following table sets forth the principal balance of fixed and adjustable-rate loans at December 31, 2024 that are contractually due after December 31, 2025:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Due After December 31, 2025 | |||||||
| | Fixed | Adjustable | Total | ||||||
| | | (In thousands) | |||||||
| Commercial and industrial | | $ | 84,128 | | $ | 38,343 | | $ | 122,471 |
| Commercial real estate | | 553,835 | | 732,461 | | 1,286,296 | |||
| Commercial real estate construction | | 6,500 | | 21,887 | | 28,387 | |||
| Residential real estate | | 40,751 | | 17,393 | | 58,144 | |||
| Home equity | | 499 | | 16,520 | | 17,019 | |||
| Consumer | | 32,082 | | 4,038 | | 36,120 | |||
| Total loans | | $ | 717,795 | | $ | 830,642 | | $ | 1,548,437 |
At December 31, 2024, $523.3 million, or 51.3% of our adjustable interest rate loans were at their interest rate floor.
Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | At December 31, | ||||||||||||||||
| | | 2024 | | 2023 | ||||||||||||||
| | | 30 – 59 | | 60 – 89 | | 90 Days | | 30 – 59 | | 60 – 89 | | 90 Days | ||||||
| | | Days | | Days | | or More | | Days | | Days | | or More | ||||||
| | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | ||||||||||||
| | (In thousands) | |||||||||||||||||
| Commercial and industrial | | $ | — | | $ | 128 | | $ | 150 | | $ | 229 | | $ | — | | $ | 327 |
| Commercial real estate | | 141 | | 398 | | 6,000 | | 20 | | — | | 300 | ||||||
| Commercial real estate construction | | — | | — | | — | | — | | — | | — | ||||||
| Residential real estate | | 294 | | — | | — | | — | | — | | 1,167 | ||||||
| Home equity | | — | | — | | — | | — | | — | | — | ||||||
| Consumer | | — | | — | | — | | — | | — | | — | ||||||
| Total | | $ | 435 | | $ | 526 | | $ | 6,150 | | $ | 249 | | $ | — | | $ | 1,794 |
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The following table sets forth our loan delinquencies, including non-accrual loans, at the dates indicated as a percentage of loans for the corresponding types.
| | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | At December 31, | | |||||||||||
| | | 2024 | | | 2023 | | ||||||||
| | | 30 – 59 | | 60 – 89 | | 90 Days | | | 30 – 59 | | 60 – 89 | | 90 Days | |
| | | Days | | Days | | or More | | | Days | | Days | | or More | |
| | Past Due | Past Due | Past Due | | Past Due | Past Due | Past Due | |||||||
| Commercial and industrial | — | % | 0.05 | % | 0.06 | % | | 0.08 | % | — | % | 0.12 | % | |
| Commercial real estate | 0.01 | % | 0.03 | % | 0.44 | % | | 0.00 | % | — | % | 0.02 | % | |
| Commercial real estate construction | — | — | — | | — | — | — | |||||||
| Residential real estate | 0.39 | % | — | — | % | | — | % | — | 1.49 | % | |||
| Home equity | — | — | — | | — | — | % | — | % | |||||
| Consumer | — | % | — | % | — | % | | — | % | — | % | — | % | |
| Total | 0.02 | % | 0.03 | % | 0.34 | % | | 0.01 | % | — | % | 0.10 | % |
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.
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The following table sets forth information regarding our non-performing assets. Non-performing loans aggregated approximately $6.3 million at December 31, 2024 as compared to $4.4 million at December 31, 2023.
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | At December 31, | | At December 31, | | ||
| | 2024 | 2023 | |||||
| | | (Dollars in thousands) | |||||
| Non-accrual loans: | | | | | | | |
| Commercial and industrial | | $ | 293 | | $ | 556 | |
| Commercial real estate | | 6,000 | | 2,692 | | ||
| Commercial real estate construction | | — | | — | | ||
| Residential real estate | | 6 | | 1,179 | | ||
| Home equity | | — | | — | | ||
| Consumer | | — | | — | | ||
| Total non-accrual loans | | 6,299 | | 4,427 | | ||
| Accruing loans 90 days or more past due: | | | | ||||
| Commercial and industrial | | — | | — | | ||
| Commercial real estate | | — | | — | | ||
| Commercial real estate construction | | — | | — | | ||
| Residential real estate | | — | | — | | ||
| Home equity | | — | | — | | ||
| Consumer | | — | | — | | ||
| Total accruing loans 90 days or more past due | | — | | — | | ||
| Total non-performing loans | | 6,299 | | 4,427 | | ||
| Other real estate owned | | — | | — | | ||
| Other non-performing assets | | — | | — | | ||
| Total non-performing assets | | $ | 6,299 | | $ | 4,427 | |
| Ratios: | | | | ||||
| Total non-performing loans to total loans | | 0.35 | % | 0.25 | % | ||
| Total non-performing loans to total assets | | 0.25 | % | 0.18 | % | ||
| Total non-performing assets to total assets | | 0.25 | % | 0.18 | % |
Non-performing loans at December 31, 2024 totaled $6.3 million and consisted mainly of $6.0 million related to commercial real estate loans and $293 thousand of commercial and industrial loans as well as $6 thousand of residential real estate loans. We had no other real estate owned at December 31, 2024 or 2023, respectively.
Non-performing assets increased $1.9 million, or 42.3%, to $6.3 million, or 0.25% of total assets, at December 31, 2024 from $4.4 million, or 0.18% of total assets, at December 31, 2023. The increase in non- performing assets at December 31, 2024 compared to December 31, 2023 was primarily due to one commercial real estate loan participation which defaulted during 2024 and is currently recorded at $6.0 million.
From time to time, as part of our loss mitigation strategy, we may renegotiate loan terms based on certain economic and legal reasons related to the borrower’s financial situation. There were no loans modified due to financial difficulties during the year ended December 31, 2024 and during the year ended December 31, 2023.
Classified Assets. Federal regulations provide that loans and other assets of lesser quality should be classified as “substandard”, “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. We designate an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention.
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The following table summarizes classified assets of all portfolio types at the dates indicated:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | At December 31, | | At December 31, | ||
| | 2024 | | 2023 | |||
| | | (Dollars in thousands) | ||||
| Classification of Assets: | | | | | | |
| Substandard | | $ | 43,981 | | $ | 19,615 |
| Doubtful | | — | | — | ||
| Loss | | — | | — | ||
| Total Classified Assets | | $ | 43,981 | | $ | 19,615 |
| Special Mention | | $ | 20,851 | | $ | 32,804 |
On the basis of management’s review of our assets, we classified $44.0 million of our assets at December 31, 2024 as substandard compared to $19.6 million at December 31, 2023. We designated $20.9 million of our assets at December 31, 2024 as special mention compared to $32.8 million designated as special mention at December 31, 2023.
Allowance for Credit Losses
Please see “— Critical Accounting Estimates — Allowance for Credit Losses” for additional discussion.
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 an individual 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.
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The following table sets forth activity in our allowance for credit losses for the years indicated:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | At or for the Year Ended | | ||||
| | | December 31, | | ||||
| | 2024 | 2023 | |||||
| | | (Dollars in thousands) | |||||
| Balance at beginning of year | | $ | 25,182 | | $ | 21,832 | |
| Adoption of ASC 326 | | | — | | | 1,483 | |
| Charge-offs: | | | | | | | |
| Commercial and industrial | | 10 | | 1,569 | |||
| Commercial real estate | | 8,685 | | — | |||
| Commercial real estate construction | | — | | — | |||
| Residential real estate | | 94 | | — | |||
| Home equity | | 33 | | — | |||
| Consumer | | 1 | | 37 | |||
| PPP loans | | — | | — | |||
| Total charge-offs | | 8,823 | | 1,606 | |||
| Recoveries: | | | | | | | |
| Commercial and industrial | | 53 | | 75 | |||
| Commercial real estate | | — | | 173 | |||
| Commercial real estate construction | | — | | — | |||
| Residential real estate | | — | | — | |||
| Home equity | | — | | — | |||
| Consumer | | 79 | | 211 | |||
| Total recoveries | | 132 | | 459 | |||
| Net charge-offs (recoveries) | | 8,691 | | 1,147 | |||
| Provision for credit losses | | 9,586 | | 3,014 | |||
| Balance at end of year | | $ | 26,077 | | $ | 25,182 | |
| Ratios: | | | | | | | |
| Net charge-offs to average loans outstanding | | 0.49 | % | 0.07 | % | ||
| Allowance for credit losses to non-performing loans at end of year | | 413.99 | % | 568.83 | % | ||
| Allowance for credit losses to total loans at end of year | | 1.44 | % | 1.44 | % | ||
| | | | | | | | |
The following table presents the summary of net charge-offs (recovery) to average loans outstanding by loan type for the years presented:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Years ended December 31, | ||||
| | 2024 | | 2023 | |||
| | | | | | | |
| Net charge-offs to average loans outstanding | | | 0.49% | | | 0.07% |
| Broken down by loan type as follows, excluding PPP: | | | | | | |
| Commercial and Industrial | | 0.00% | | 0.09% | ||
| Commercial real estate | | 0.48% | | 0.00% | ||
| Commercial real estate construction | | 0.00% | | 0.00% | ||
| Residential real estate | | 0.01% | | 0.00% | ||
| Home equity | | 0.00% | | 0.00% | ||
| Consumer | | 0.00% | | -0.01% |
The allowance for credit losses increased by $895 thousand, or 3.6%, to $26.1 million, or 1.44% of total loans at December 31, 2024 from $25.2 million, or 1.44% of total loans, at December 31, 2023. The increase in the allowance for credit losses for 2024 was driven mainly by a provision of $8.7 million for one nonaccrual loan participation of a
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commercial real estate transaction and growth in our commercial real estate loan segment. This loan also was the primary reason for increased charge-offs during 2024.
The following tables set forth the allowance for credit losses allocated by loan category at the dates indicated.
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | At December 31, | | |||||||||||||
| | | 2024 | | | 2023 | | ||||||||||
| | | | | | | | Percent of | | | | | | | | Percent of | |
| | | | | | Percent of | | Loans in | | | | | | Percent of | | Loans in | |
| | | | | | Allowance to | | Category to | | | | | | Allowance to | | Category to | |
| | Amount | Total Allowance | Total Loans | | Amount | Total Allowance | Total Loans | |||||||||
| | | (Dollars in thousands) | ||||||||||||||
| Commercial and industrial | | $ | 4,501 | 17.26 | % | 13.35 | % | | $ | 4,819 | 19.14 | % | 15.66 | % | ||
| Commercial real estate | | 19,227 | 73.73 | % | 75.01 | % | | 17,873 | 70.98 | % | 72.08 | % | ||||
| Commercial real estate construction | | 755 | 2.90 | % | 4.46 | % | | 772 | 3.07 | % | 4.91 | % | ||||
| Residential real estate | | 962 | 3.69 | % | 4.13 | % | | 1,081 | 4.29 | % | 4.48 | % | ||||
| Home equity | | 56 | 0.21 | % | 0.96 | % | | 51 | 0.20 | % | 0.78 | % | ||||
| Consumer | | 576 | 2.21 | % | 2.09 | % | | 586 | 2.33 | % | 2.09 | % | ||||
| Total allowance for loan losses | | 26,077 | 100.00 | % | 100.00 | % | | 25,182 | 100.00 | % | 100.00 | % |
Investment Securities
The following table sets forth the estimated fair value of our available-for-sale securities portfolio as of the dates indicated.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | ||||
| | | At December 31, 2024 | | At December 31, 2023 | ||||||||
| | Amortized | Estimated | | Amortized | Estimated | |||||||
| | | Cost | | Fair Value | | Cost | | Fair Value | ||||
| | (Dollars in thousands) | |||||||||||
| Available for sale securities: | | | | | | |||||||
| U.S. government agencies and treasuries | | $ | 85,464 | | $ | 76,154 | | $ | 96,736 | | $ | 87,067 |
| Mortgage-backed securities | | 307,463 | | 257,339 | | 337,393 | | 290,221 | ||||
| Corporate securities | | 23,508 | | 20,034 | | 23,529 | | 19,276 | ||||
| Obligations of states and political subdivisions | | 103,132 | | 90,248 | | 103,336 | | 93,384 | ||||
| Total | | $ | 519,567 | | $ | 443,775 | | $ | 560,994 | | $ | 489,948 |
Available for sale securities decreased $46.2 million, or 9.4%, to $443.8 million at December 31, 2024 from $489.9 million at December 31, 2023, as mortgage-backed securities decreased $32.9 million, municipal securities decreased $3.1 million, and U.S. Government agency securities decreased $10.9 million, while corporate securities increased $758 thousand. The overall decrease was primarily the result of management’s intent to increase our liquidity position and maintain the maturing investments within the cash accounts. During the first quarter of 2024, the Company recognized a net credit related to the provision for credit losses of $1.9 million. The recovery was received for proceeds from the sale of subordinated debt securities which were previously charged off during 2023. Management determined that an ACL was not required for the portfolio and the amount was reversed from the provision which reduced the ACL on investment securities to zero. The 2023 provision included the effect of a $5 million reserve associated with the write-off of an investment in Signature Bank subordinated debt.
We did not have held-to-maturity investments at December 31, 2024 or December 31, 2023.
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
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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 also evaluated available for sale debt securities that are in an unrealized loss position as of December 31, 2024 and determined that the declines in fair value are mainly attributable to interest rates, credit spreads, market volatility and liquidity conditions, not credit quality or other factors. No provision was recorded for the year ended December 31, 2024. During 2023, the Company wrote off approximately $5.0 million associated with Signature Bank subordinated notes.
Deposits
The following table sets forth our total deposit account balances, by account type, at the dates indicated:
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | At December 31, 2024 | | | At December 31, 2023 | | ||||||||||
| | | | | Average | | | Average | |||||||||
| | | Amount | | Percent | | Rate | | | Amount | | Percent | | Rate | | ||
| | (Dollars in thousands) | |||||||||||||||
| Noninterest-bearing demand deposits | | $ | 651,135 | 30.24 | % | — | | | $ | 699,203 | 34.30 | % | — | | ||
| Interest bearing demand deposits | | 331,115 | 15.38 | % | 0.42 | % | | 304,892 | 14.95 | % | 0.49 | % | ||||
| Money market deposits | | 679,082 | 31.54 | % | 2.15 | % | | 584,976 | 28.69 | % | 2.04 | % | ||||
| Savings deposits | | 271,014 | 12.59 | % | 1.25 | % | | 228,161 | 11.19 | % | 1.19 | % | ||||
| Certificates of deposit | | 221,013 | 10.26 | % | 3.97 | % | | 221,517 | 10.87 | % | 4.57 | % | ||||
| Total | | $ | 2,153,359 | 100.00 | % | 1.31 | % | | $ | 2,038,749 | 100.00 | % | 1.29 | % |
Total deposits increased $114.6 million, or 5.6%, to $2.2 billion at December 31, 2024 from $2.0 billion at December 31, 2023. Our strategic focus is to increase commercial deposit relationships through our suite of cash management products and continued attention to low-cost deposits. Our strategy remains centered on increasing business demand deposit accounts through our customer centric business development approach. Money market deposits increased $94.1 million and savings deposits increased $42.9 million while noninterest-bearing demand deposits decreased $48.1 million during 2024. Interest bearing demand deposits increased $26.2 million in 2024 due to certain seasonality of municipal deposit relationships, as well as the impact of attorney trust account growth during the year. At December 31, 2024, our core deposits (which includes all deposits except for certificates of deposit) totaled $1.9 billion, or 89.7% of our total deposits. The overall increase in deposits represented a continued strategic focus on maintaining increased liquidity during 2024. Certificates of deposit decreased $504 thousand, or 0.2% to $221.0 million at December 31, 2024 from $221.5 million at December 31, 2023, primarily due to relatively level balances of broker deposits to support loan growth. We held approximately $180.0 million in brokered deposits (excluding reciprocal deposits obtained through the Certificate Deposit Account Registry Service (CDARS) and Insured Cash Sweep (ICS) networks) at December 31, 2024 and $172.4 million in brokered deposits at December 31, 2023. Our reciprocal deposits obtained through the CDARS and ICS networks totaled $6.9 million and $92.5 million, respectively, at December 31, 2024.
As of December 31, 2024, and December 31, 2023, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to $250,000, which is the maximum amount for federal deposit insurance) was $1.1 billion and $1.0 billion, respectively. In addition, as of December 31, 2024, the aggregate amount of all our uninsured certificates of deposit was $11.6 million. The following table sets forth the maturity of these uninsured certificates of deposit as of December 31, 2024.
| | | | |
|---|---|---|---|
| | | At December 31, 2024 | |
| | (In thousands) | ||
| Maturing period: | | | |
| Three months or less | | $ | 8,106 |
| Over three months through six months | | 1,253 | |
| Over six months through twelve months | | 1,667 | |
| Over twelve months | | 571 | |
| Total | | $ | 11,597 |
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Borrowings
Our borrowings consist of both short-term and long-term borrowings and provide us with one of our sources of funding. Maintaining the available borrowing capacity provides us with a contingent source of liquidity.
Total borrowings from the Federal Home Loan Bank of New York were $123.5 million at December 31, 2024 and $234.5 million at December 31, 2023. The decrease in borrowings was related to management’s focus on reducing borrowings with increased deposit levels. We have the capacity to borrow up to $512.2 million from the Federal Home Loan Bank of New York at December 31, 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 current three-month SOFR plus 413 basis points, payable quarterly in arrears.
Stockholders’ Equity
Total stockholders’ equity increased $20.2 million, or 12.2%, to $185.5 million at December 31, 2024, from $165.4 million at December 31, 2023. The increase was primarily the result of the increase of $22.6 million in retained earnings during the current year, offset in part by a $3.6 million increase in accumulated other comprehensive loss due to a decrease in the fair market value of our securities available-for-sale during 2024.
Average Balance Sheet and Related Yields and Rates
The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2024 and 2023. No tax equivalent yield adjustments have been made as the effects would be immaterial. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount
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accretion and net deferred loan origination costs accounted for as yield adjustments. Deferred loan fees totaled $4.9 million for each of the years ended December 31, 2024 and 2023, respectively.
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | For the Year Ended December 31, | |||||||||||||||
| | | 2024 | | 2023 | |||||||||||||
| | Average | | | | Average | | | | |||||||||
| | | Outstanding | | | | | Average | | Outstanding | | | | | Average | |||
| | | Balance | | Interest | | Yield/Rate | | Balance | | Interest | | Yield/Rate | |||||
| | (Dollars in thousands) | | |||||||||||||||
| Interest-earning assets: | | | | | | | |||||||||||
| Loans (excluding PPP loans) | | $ | 1,760,057 | | $ | 106,022 | 6.01 | % | $ | 1,683,232 | | $ | 96,236 | 5.72 | % | ||
| PPP loans | | 192 | | 8 | 4.16 | % | 1,133 | | 28 | 2.47 | % | ||||||
| Investment securities available for sale | | 467,145 | | 13,255 | 2.83 | % | 503,410 | | 14,055 | 2.79 | % | ||||||
| Cash and due from banks and other | | 153,634 | | 7,221 | 4.69 | % | 142,003 | | 6,498 | 4.58 | % | ||||||
| Restricted stock | | 8,218 | | 721 | 8.75 | % | 11,561 | | 953 | 8.24 | % | ||||||
| Total interest-earning assets | | 2,389,246 | | 127,227 | 5.31 | % | 2,341,339 | | 117,770 | 5.03 | % | ||||||
| Noninterest-earning assets | | 95,597 | | | | 96,259 | | | |||||||||
| Total assets | | $ | 2,484,843 | | | | | $ | 2,437,598 | | | ||||||
| Interest-bearing liabilities: | | | | | | ||||||||||||
| Interest-bearing demand deposits | | $ | 366,103 | | $ | 1,751 | 0.48 | % | $ | 331,056 | | $ | 1,284 | 0.39 | % | ||
| Money market deposits | | 670,231 | | 15,199 | 2.26 | % | 617,345 | | 9,429 | 1.53 | % | ||||||
| Savings deposits | | 254,098 | | 3,525 | 1.38 | % | 245,663 | | 2,413 | 0.98 | % | ||||||
| Certificates of deposit | | 168,202 | | 7,399 | 4.39 | % | 165,239 | | 6,393 | 3.87 | % | ||||||
| Total interest-bearing deposits | | 1,458,634 | | 27,874 | 1.91 | % | 1,359,303 | | 19,519 | 1.44 | % | ||||||
| FHLB Advances and other borrowings | | 126,149 | | 6,666 | 5.27 | % | 170,371 | | 8,938 | 5.25 | % | ||||||
| Subordinated notes | | 19,553 | | 921 | 4.70 | % | 19,481 | | 922 | 4.73 | % | ||||||
| Total interest-bearing liabilities | | 1,604,336 | | 35,461 | 2.20 | % | 1,549,155 | | 29,379 | 1.90 | % | ||||||
| Noninterest-bearing demand deposits | | 675,983 | | | | | 717,689 | | | | |||||||
| Other noninterest-bearing liabilities | | 26,440 | | | | | 23,338 | | | ||||||||
| Total liabilities | | 2,306,759 | | | | | 2,290,182 | | | ||||||||
| Total stockholders’ equity | | 178,084 | | | | | 147,416 | | | ||||||||
| Total liabilities and stockholders’ equity | | $ | 2,484,843 | | | | | $ | 2,437,598 | | | ||||||
| Net interest income | | | | | $ | 91,766 | | | $ | 88,391 | | ||||||
| Net interest rate spread(1) | | | | 3.11 | % | | | 3.13 | % | ||||||||
| Net interest-earning assets(2) | | $ | 784,910 | | | $ | 792,184 | | | ||||||||
| Net interest margin(3) | | | | 3.83 | % | | 3.78 | % | |||||||||
| Average interest-earning assets to interest-bearing liabilities | | | | | | | 148.9 | % | | | | | 151.1 | % |
| Column 1 | Column 2 |
|---|---|
| (1) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. |
| Column 1 | Column 2 |
|---|---|
| (2) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
| Column 1 | Column 2 |
|---|---|
| (3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
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| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 | Column 8 | Column 9 | Column 10 | Column 11 | Column 12 | Column 13 | Column 14 | Column 15 | Column 16 | Column 17 | Column 18 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | |
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 years indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior year’s rate); (2) changes attributable to rate (change in rate 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.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended December 31, | |||||||
| | | 2024 vs. 2023 | |||||||
| | | | | Total | |||||
| | | Increase (Decrease) Due to | | Increase | |||||
| | Volume | Rate | (Decrease) | ||||||
| | (Dollars in thousands) | ||||||||
| Interest-earning assets: | | | | ||||||
| Loans (excluding PPP loans) | | $ | 5,060 | | $ | 4,726 | | $ | 9,786 |
| PPP loans | | (39) | | 19 | | (20) | |||
| Investment securities available for sale | | (991) | | 191 | | (800) | |||
| Cash and due from banks | | 565 | | 158 | | 723 | |||
| Other | | (289) | | 57 | | (232) | |||
| Total interest-earning assets | | 4,306 | | 5,151 | | 9,457 | |||
| Interest-bearing liabilities: | | | | ||||||
| Interest-bearing demand deposits | | 175 | | 292 | | 467 | |||
| Money market deposits | | 1,287 | | 4,483 | | 5,770 | |||
| Savings deposits | | 123 | | 989 | | 1,112 | |||
| Certificates of deposit | | 165 | | 841 | | 1,006 | |||
| Total interest-bearing deposits | | 1,750 | | 6,605 | | 8,355 | |||
| | | | | ||||||
| Federal Home Loan Bank advances | | (2,312) | | 40 | | (2,272) | |||
| Subordinated notes | | 8 | | (9) | | (1) | |||
| Total interest-bearing liabilities | | (554) | | 6,636 | | 6,082 | |||
| Change in net interest income | | $ | 4,860 | | $ | (1,485) | | $ | 3,375 |
Results of Operations for the Years Ended December 31, 2024 and 2023
Summary Income Statements. The following table sets forth the income summary for the years indicated:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | |||||||||||
| | | | | | | | | Change | | |||
| | 2024 | 2023 | Amount ($) | Percentage % | | |||||||
| Interest income | | $ | 127,227 | | $ | 117,770 | | $ | 9,457 | 8.0 | % | |
| Interest expense | | 35,461 | | 29,379 | | 6,082 | 20.7 | % | ||||
| Net interest income | | 91,766 | | 88,391 | | 3,375 | 3.8 | % | ||||
| Provision for credit losses - Investments | | (1,900) | | 5,000 | | (6,900) | (138.0) | % | ||||
| Provision for credit losses | | | 9,610 | | 2,868 | | 6,742 | 235.1 | % | |||
| Noninterest income | | 15,972 | | 13,419 | | 2,553 | 19.0 | % | ||||
| Noninterest expense | | 65,210 | | 56,793 | | 8,417 | 14.8 | % | ||||
| Provision for income taxes | | 6,935 | | 7,671 | | (736) | (9.6) | % | ||||
| Net income | | 27,883 | | 29,478 | | (1,595) | (5.4) | % |
General. Net income decreased $1.6 million, or 5.4%, to $27.9 million for the year ended December 31, 2024 from $29.5 million for the year ended December 31, 2023. The decrease was mainly driven by an $8.4 million increase in
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noninterest expense and partially offset by an increase in net interest income of $3.4 million and an increase of $2.6 million in noninterest income.
Interest Income. Interest income increased $9.5 million, or 8.0%, to $127.2 million for the year ended December 31, 2024 from $117.8 million for the year ended December 31, 2023. This increase was the result of an increase in our average interest-earning assets which increased by $47.9 million, or 2.1%, to $2.4 billion for the year ended December 31, 2024 compared to $2.3 billion for the year ended December 31, 2023. Supporting the increase in interest income was an increase in the average yield on interest earning assets of 28 basis points to 5.31% during the year ended December 31, 2024 from 5.03% for the year ended December 31, 2023.
Interest income on loans increased by $9.8 million, or 10.2%, to $106.0 million during the year ended December 31, 2024 from $96.2 million during the year ended December 31, 2023. The increase in interest income on loans was primarily due to the increase in the average balance of loans (excluding PPP loans), combined with the effect of an increase in the average yield on loans. The average balance of loans (excluding PPP loans) increased by $76.8 million, or 4.6%, to $1.8 billion for the year ended December 31, 2024 compared to $1.7 billion for the year ended December 31, 2023. The average yield on loans increased by 29 basis points from 5.72% for the year ended December 31, 2023 to 6.01% for the year ended December 31, 2024. The increase in the average balance of loans was primarily due to our continued investment in commercial real estate, construction, and commercial and industrial loans, whereas the increase in average yield on loans was driven by a disciplined pricing approach within the market for new loan originations.
Interest income on investment securities decreased by $800 thousand, or 5.7%, to $13.3 million during the year ended December 31, 2024 from $14.1 million during the year ended December 31, 2023. The decrease in interest income on securities was due to a decrease in the average balance of securities, partially offset by an increase in the average yield on securities. The average balance of securities decreased by $36.3 million, or 7.2%, to $467.1 million for the year ended December 31, 2024 compared to $503.4 million for the year ended December 31, 2023. The decrease in the average balance of securities was due to maturity and amortization of lower yielding securities during 2024 as compared to 2023. The average yield on securities increased by four basis points from 2.79% for the year ended December 31, 2023 to 2.83% for the year ended December 31, 2024. The increase in the average yield on securities resulted from higher-yielding securities purchased during a period of increasing market interest rates combined with the maturity of lower-yielding investment securities during 2024.
Interest income on cash and due from banks and other increased $723 thousand, or 11.1%, to $7.2 million for the year ended December 31, 2024 from $6.5 million for the year ended December 31, 2023. The increase in interest income from cash and due from banks and other was attributable to an increase in the average yield earned on cash and due from banks combined with increased average balances during the year. The average yield increased 11 basis points to 4.69% in 2024 from 4.58% in 2023 as a result of increased short-term market interest rates during the first half of 2024. Average balances for cash and due from banks increased to $153.6 million for the year ended December 31, 2024 from $142.0 million for the year ended December 31, 2023, representing an increase of $11.6 million, or 8.2%.
Interest Expense. Interest expense increased $6.1 million, or 20.7%, to $35.5 million for the year ended December 31, 2024 from $29.4 million for the year ended December 31, 2023. The increase in interest expense was a result of the higher interest rate environment associated with interest-bearing liabilities, primarily deposits, coupled with an increase in the average balance of interest-bearing liabilities. The average rate paid on interest-bearing liabilities increased 30 basis points to 2.20% during the year ended December 31, 2024 from 1.90% for the year ended December 31, 2023. The average balance of interest-bearing liabilities increased by $55.2 million, or 3.6%, to $1.6 billion for the year ended December 31, 2024 compared to $1.5 billion for the year ended December 31, 2023.
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Interest expense on interest-bearing deposits increased by $8.4 million, or 42.8%, to $27.9 million during the year ended December 31, 2024 from $19.5 million during the year ended December 31, 2023. The increase in interest expense on interest-bearing deposits was due to an increase in the average cost of deposits combined with an increase in the average balance of interest-bearing deposits. The average cost of interest-bearing deposits increased 47 basis points to 1.91% during the year ended December 31, 2024. The average balance of interest-bearing deposits increased by $99.3 million, or 7.3%, to $1.5 billion for the year ended December 31, 2024 compared to the year ended December 31, 2023 due to increases in the average balances of all deposit categories. The average cost of interest-bearing deposits increased due to the higher interest rate environment as we continued to experience rate pressure on all interest-bearing deposit categories, demand deposit accounts, savings, money market, and certificates of deposit accounts.
Interest expense on Federal Home Loan Bank borrowings decreased to $6.7 million for the year ended December 31, 2024 as compared to $8.9 million for the year ended December 31, 2023. The decrease in interest expense on borrowed funds was primarily due to reduced Federal Home Loan Bank advances as a result of increased deposit levels during the year which supported loan growth. The average balance of Federal Home Loan Bank advances decreased from $170.4 million for the year ended December 31, 2023 to an average balance of $126.1 million for the year ended December 31, 2024. In addition, the average rate of Federal Home Loan Bank advances remained relatively stable and only increased two basis points from 5.25% for the year ended December 31, 2023 to 5.27% for the year ended December 31, 2024. We also incurred $921 thousand in interest expense for the year ended December 31, 2024 as compared to $922 thousand for the year ended December 31, 2023 due to the issuance in September 2020 of $20.0 million in outstanding subordinated notes which carries an interest rate of 4.25%.
Net Interest Income. Net interest income increased $3.4 million, or 3.8%, to $91.8 million for the year ended December 31, 2024 from $88.4 million for the year ended December 31, 2023 due primarily to an increase in net interest margin. The net interest margin increased five basis points to 3.83% for the year ended December 31, 2024 from 3.78% for the year ended December 31, 2023 due to stability within the interest rate policy by the FRB which did not decrease rates until September 2024 coupled with a focus on managing interest costs associated with deposits and borrowings. Net interest-earning assets decreased by $7.3 million to $784.9 million for the year ended December 31, 2024 from $792.2 million for the year ended December 31, 2023. Net interest rate spread decreased by two basis points to 3.11% for the year ended December 31, 2024 from 3.13% for the year ended December 31, 2023, reflecting a 30 basis points increase in the average rate paid on interest-bearing liabilities, partially offset by a 28 basis points increase in the average yield on interest-earning assets.
Provision for Credit Losses. Our provision for credit losses was $7.7 million for the year ended December 31, 2024 compared to $7.9 million for the year ended December 31, 2023. The decrease in the provision for credit losses primarily reflected the impact of a net recovery during 2024 associated with the previously charged-off Signature Bank subordinated debt and offset by provisions related to one nonaccrual loan participation of a commercial real estate transaction. The provision for the year ended December 31, 2024 included the recognition of credit losses associated with the participation as well as the additional provision related to the growth of the Company’s loan portfolio. The allowance for credit losses was $26.1 million, or 1.44%, of loans outstanding at December 31, 2024 compared to $25.2 million, or 1.44%, of loans outstanding at December 31, 2023.
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Noninterest Income. Noninterest income information is as follows:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | Change | ||||||||||
| | 2024 | 2023 | Amount | Percent | ||||||||
| | | (Dollars in thousands) | ||||||||||
| Service charges on deposit accounts | | $ | 1,015 | | $ | 809 | | $ | 206 | 25.5 | % | |
| Trust income | | 5,511 | | 5,098 | | 413 | 8.1 | % | ||||
| Investment advisory income | | 6,738 | | 5,241 | | 1,497 | 28.6 | % | ||||
| Investment securities gains (losses) | | — | | 107 | | (107) | — | % | ||||
| Earnings on BOLI | | 815 | | 984 | | (169) | (17.2) | % | ||||
| Other | | 1,893 | | 1,180 | | 713 | 60.4 | % | ||||
| Total noninterest income | | $ | 15,972 | | $ | 13,419 | | $ | 2,553 | 19.0 | % |
Noninterest income increased by $2.6 million, or 19.0%, to $16.0 million for the year ended December 31, 2024 from $13.4 million for the year ended December 31, 2023. The increase in noninterest income in the year ended December 31, 2024 was primarily due to increases in income from investment advisory income and trust income. Investment advisory income and trust income increased $1.5 million and $413 thousand, respectively, primarily the result of asset growth and the impact of equity markets and the interest rate environment. Service charges on deposit accounts increased $206 thousand directly related to customer activity. We had no investment securities gains in 2024 and $107 thousand in gains associated with investment securities for 2023.
Noninterest Expense. Noninterest expense information is as follows:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | Change | ||||||||||
| | 2024 | 2023 | Amount | Percent | ||||||||
| | | (Dollars in thousands) | ||||||||||
| Salaries | | $ | 27,475 | | $ | 24,747 | | $ | 2,728 | 11.0 | % | |
| Employee benefits | | 8,938 | | 7,439 | | 1,499 | 20.2 | % | ||||
| Occupancy expense | | 4,790 | | 4,761 | | 29 | 0.6 | % | ||||
| Professional fees | | 5,931 | | 4,753 | | 1,178 | 24.8 | % | ||||
| Directors’ fees and expenses | | 1,053 | | 1,451 | | (398) | (27.4) | % | ||||
| Computer software expense | | 5,952 | | 5,050 | | 902 | 17.9 | % | ||||
| FDIC assessment | | 1,308 | | 1,403 | | (95) | (6.8) | % | ||||
| Advertising expenses | | 1,575 | | 1,657 | | (82) | (4.9) | % | ||||
| Advisor expenses related to trust income | | 113 | | 120 | | (7) | (5.8) | % | ||||
| Telephone expenses | | 746 | | 712 | | 34 | 4.8 | % | ||||
| Intangible amortization | | 286 | | 285 | | 1 | 0.4 | | ||||
| Other | | 7,043 | | 4,415 | | 2,628 | 59.5 | % | ||||
| Total noninterest expense | | $ | 65,210 | | $ | 56,793 | | $ | 8,417 | 14.8 | % |
Noninterest expense increased $8.4 million, or 14.8%, to $65.2 million during the year ended December 31, 2024 from $56.8 million during the year ended December 31, 2023. The increase in noninterest expense for the year ended December 31, 2024 as compared to the prior year was mainly due to a $2.7 million increase in salaries, a $1.5 million increase in employee benefits, a $1.2 million increase in professional fees, a $902 thousand increase in computer software expense and a $2.6 million increase in other expenses.
For the year ended December 31, 2024 compared to the year ended December 31, 2023:
•Salaries increased primarily as a result of employee hiring costs necessary to support the growth of the Company, along with increased salaries in the normal course of business and increased competition.
•Employee benefits increased mainly due to continued escalations of insurance costs.
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•Professional fees increased mainly due to continued costs associated with legal, audit and accounting expenses due to enhanced requirements associated with the Company’s public reporting status as well as certain costs associated with certain Company initiatives.
•Other expenses increased mainly from the recognition of increased costs associated with a nonperforming loan participation and certain costs related to a fraudulent incident within one of our branches.
Income Tax Expense. We recorded an income tax expense of $6.9 million for the year ended December 31, 2024, reflecting an effective tax rate of 19.9%. For the year ended December 31, 2023, we recorded an income tax expense of $7.7 million, reflecting an effective tax rate of 20.6%. The decreased tax expense was reflective of the reduction in pre-tax income during 2024.
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 that provides revenues in our banking business segment; 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 in our wealth management business segment. For further information, see Note 20 of the Notes to the Audited Consolidated Financial Statements.
The following tables present the statements of income and total assets for our reportable business segments at or for the years indicated:
| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | At or for the Year Ended December 31, | |||||||||||||||||
| | | 2024 | | 2023 | ||||||||||||||
| | | | | | Wealth | | Total | | | | | Wealth | | Total | ||||
| | Banking | Management | Segments | Banking | Management | Segments | ||||||||||||
| | | (Dollars in thousands) | ||||||||||||||||
| Net Interest Income | | $ | 91,766 | | $ | — | | $ | 91,766 | | $ | 88,391 | | $ | — | | $ | 88,391 |
| Noninterest income | | 3,723 | | 12,249 | | 15,972 | | 3,080 | | 10,339 | | 13,419 | ||||||
| Provision for credit loss - investments | | | 1,900 | | | — | | | 1,900 | | | (5,000) | | | — | | | (5,000) |
| Provision for credit loss | | (9,610) | | — | | (9,610) | | (2,868) | | — | | (2,868) | ||||||
| Noninterest expenses | | (56,071) | | (9,139) | | (65,210) | | (49,015) | | (7,778) | | (56,793) | ||||||
| Income tax expense | | (6,282) | | (653) | | (6,935) | | (7,133) | | (538) | | (7,671) | ||||||
| Net income | | $ | 25,426 | | $ | 2,457 | | $ | 27,883 | | $ | 27,455 | | $ | 2,023 | | $ | 29,478 |
| Assets under management and/or administration (AUM) (market value) | | $ | — | | $ | 1,782,866 | | $ | 1,782,866 | | $ | — | | $ | 1,579,900 | | $ | 1,579,900 |
| Total assets | | $ | 2,499,898 | | $ | 10,029 | | $ | 2,509,927 | | $ | 2,476,610 | | $ | 8,858 | | $ | 2,485,468 |
Comparison at or for the years ended December 31, 2024 and 2023. The market value of assets under management and/or administration at December 31, 2024 and 2023 was approximately $1.8 billion at December 31, 2024, and $1.6 billion at December 31, 2023. This includes assets held at both Orange Bank & Trust Company and HVIA at December 31, 2024 and 2023, respectively. This increase was due to continued acquisition of new assets under management combined with an increase in the market value of assets under management.
Our income related to our wealth management business segment, which we record as noninterest income, increased $1.9 million, or 18.5%, to $12.2 million for the year ended December 31, 2024 compared to $10.3 million for the year ended December 31, 2023. The increase was mainly due to the impact of equity markets and the interest rate environment during the year.
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Our expenses related to our wealth management business segment, which we record as noninterest expense, increased $1.4 million, or 17.5%, to $9.1 million for the year ended December 31, 2024 compared to $7.8 million for the year ended December 31, 2023. The increase was due to the continued growth in our operations and compensation as well as an investment in technology and staffing to support the future growth of the wealth management segment.
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.
We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest earning deposits and short- and intermediate-term securities.
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 December 31, 2024 and December 31, 2023, cash and due from banks totaled $150.3 million and $147.4 million, respectively. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $443.8 million at December 31, 2024 and $490.0 million at December 31, 2023.
Certificates of deposit due within one year of December 31, 2024 totaled $216.8 million, or 98.1% of total certificates of deposit. At December 31, 2024, total certificates of deposit were $221.0 million or 10.3% of total deposits.
We continue to participate in the 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 December 31, 2024, we had a total of $99.4 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. At December 31, 2024, we had $123.5 million in advances and the ability to borrow up to an additional $398.7 million. At December 31, 2024, we had a $93.2 million collateralized line of credit from the Federal Reserve Bank of New York with no outstanding balance. Additionally, we had a total of $20.0 million of discretionary lines of credit at December 31, 2024. We also have a borrowing agreement with Atlantic Community Bankers Bank (“ACBB”) to provide short-term borrowings of $2.5 million at December 31, 2024. There were no outstanding borrowings with ACBB at December 31, 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 $34.6 million and $44.5 million for the year ended December 31, 2024 and the year ended December 31, 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 $29.4 million and $144.9 million for the year ended December 31, 2024 and the year ended December 31, 2023, respectively. Net cash used by financing activities, consisting of activity in deposit accounts and borrowings, was $2.2 million for the year ended December 31, 2024 and net cash provided by financing activities for the year ended December 31, 2023, was $161.7 million.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience
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and growth in 2024, current pricing strategy and regulatory restrictions, we anticipate that a substantial portion of maturing time deposits will be retained, and that 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 New York State Department of Financial Services. At December 31, 2024 and December 31, 2023, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines. See Note 13 to the Notes to the Consolidated Audited Financial Statements appearing elsewhere in this Annual Report on Form 10-K for actual and required capital amounts and ratios at December 31, 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 December 31, 2024, we had $390.6 million in loan commitments outstanding. We also had $15.5 million in standby letters of credit at December 31, 2024. At December 31, 2023, we had $409.5 million in loan commitments outstanding. We also had $17.3 million in standby letters of credit at December 31, 2023.
For further information, see Note 16 to the Notes to the Consolidated Audited Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data included in this Annual Report on Form 10-K 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.