ORANGE COUNTY BANCORP, INC. The following discussion and analysis of our financial condition and results of operations for the years endedDecember 31, 2022 and 2021 should be read in conjunction with our 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 inMiddletown, New York and registered under the BHC Act. Through our wholly owned subsidiaries,Orange Bank & Trust Company andHudson 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 theLower Hudson Valley region, theNew York metropolitan area and nearby markets inConnecticut andNew Jersey . By combining the high-touch service and relationship- based focus of a community bank with the extensive suite of financial products and services offered by our larger competitors, we believe we can capitalize on the substantial growth opportunities available in our market areas. We also offer a variety of deposit accounts to businesses and consumers, including checking accounts and a full line of municipal banking accounts through our business banking platform. These activities, together with our 15 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 throughOrange Bank & Trust Private Banking, a division ofOrange Bank & Trust Company , and provide trust and wealth management services throughOrange Bank & Trust Company's trust services department and HVIA, which combined has$1.3 billion in assets under management atDecember 31, 2022 . As ofDecember 31, 2022 , our assets, loans, deposits and stockholders' equity totaled$2.3 billion ,$1.6 billion ,$2.0 billion and$138.1 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 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.
We anticipate that interest rates will continue to rise in 2023. 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 (losses) 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 expense, professional fees, directors' fees and expenses, computer software expense, Federal deposit insurance assessment, advertising expenses, advisor expenses related to trust income and other expenses. In evaluating our level of noninterest expense we closely monitor our efficiency ratio. The efficiency ratio is calculated by dividing noninterest expense to net interest income plus noninterest income. We continue to seek to identify ways to streamline our business and operate more efficiently. Credit Quality. We have well established loan policies and underwriting practices that have resulted in very low levels of charge-offs and nonperforming assets. 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 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 , theState 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:
Allowance for Loan Losses. Management believes that the determination of the
allowance for loan 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 provision for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectability may not be assured,
the existence and estimated fair value of any underlying collateral and
guarantees securing the loans, and current economic and market conditions.
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Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and change. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to record additional provisions for loan 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 theState 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 may experience adverse economic conditions. Future adjustments to the provision for loan losses and allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Bank's control.
Discussion and Analysis of Financial Condition
Summary Financial Condition. The following table sets forth a summary of the material categories of our balance sheet at the dates indicated:
Change
December 31, 2022
vs.
As of December 31, As of December 31, December 31, 2021
2022 2021 Amount ($) Percentage (%)
(Dollars in thousands)
Assets 2,287,334 2,142,583 144,751 6.8 %
Cash and due from banks 86,081 306,179 (220,098) (71.9) %
Loans, net 1,547,598 1,273,767 273,831 21.5 %
Investment securities, available for sale 533,461
464,797 68,664 14.8 %
Deposits 1,974,387 1,914,384 60,003 3.1 %
FHLB advances, short term 131,500 - 131,500 100.0 %
Note payable - 3,000 (3,000) (100.0) %Subordinated notes, net of issuance costs 19,447
19,376 71 0.4 %
Stockholders' Equity 138,138 182,836 (44,698) (24.4) %
Assets. Our total assets were $2.3 billion at December 31, 2022 , an increase of
$144.8 million from $2.1 billion at December 31, 2021 . The increase was
primarily due to increased net loan growth of approximately $273.8 million , or
21.5%, and supported by $60.0 million , or 3.1%, in deposit growth. There was
also an increase in FHLB short term borrowings of $131.5 million during 2022 as
compared to no borrowings in 2021. During the 2022 fiscal year, investment
securities increased by $68.7 million , or 14.8%, in order to increase earnings
during a period of rising interest rates. These increases reflected the strong
growth of our loans particularly commercial real estate and continued deposit
growth.
Cash and due from banks. Cash and due from banks decreased $220.1 million , or
71.9%, to $86.1 million at December 31, 2022 from $306.2 million at December 31,
2021 . The decrease resulted primarily from our loan growth, coupled with
increased investment activities, which outpaced deposit growth during the year.
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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,
2022 2021
Amount Percent Amount Percent
(Dollars in thousands)
Commercial and industrial $ 257,184 16.39 % $ 230,394 17.84 %
Commercial real estate 1,098,054 69.97 % 852,707 66.03 %
Commercial real estate construction 109,570 6.98 % 72,250 5.59 %
Residential real estate 74,277 4.73 % 65,248 5.05 %
Home equity 12,329 0.79 % 13,638 1.06 %
Consumer 16,299 1.04 % 19,077 1.48 %
PPP loans 1,717 0.11 % 38,114 2.95 %
Total loans 1,569,430 100.00 % 1,291,428 100.00 %
Allowance for loan losses 21,832 17,661
Total loans, net $ 1,547,598 $ 1,273,767
Net loans increased $273.8 million , or 21.5%, to $1.6 billion at December 31,
2022 from $1.3 billion at December 31, 2021 primarily due to increases in
commercial real estate loans and commercial real estate construction loans.
Commercial real estate loans increased $245.3 million , or 28.8%, to $1.10
billion at December 31, 2022 from $852.7 million at December 31, 2021 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. Commercial real estate construction loans increased $37.3
million , or 51.7%, to $109.6 million at December 31, 2022 from $72.3 million at
December 31, 2021 reflecting the strength of development within our primary
market areas as well as the timing of funding certain projects. PPP loans
decreased $36.4 million , or 95.5%, to $1.7 million at December 31, 2022 from
$38.1 million at December 31, 2021 due to loan forgiveness by the SBA throughout
2022.
Loan Portfolio Maturities. The following table sets forth the contractual
maturities of our total loan portfolio at December 31, 2022 . 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
Real Estate Home Equity Consumer Total
(Dollar in thousands)
One year or less $ 59,392 $ 38,299 $ 79,091 $ 5,748 $ 109 $ 209 $ 182,848
More than one year to
five years 118,696 253,647 30,479 5,218 61 12,746 420,847
More than five years to
fifteen years 77,503 736,286 - 8,897 690 3,292 826,668
After fifteen years 3,310 69,822 -
54,414 11,469 52 139,067
Total $ 258,901 $ 1,098,054 $ 109,570 $ 74,277 $ 12,329 $ 16,299 $ 1,569,430
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The following table sets forth the principal balance of fixed and
adjustable-rate loans at December 31, 2022 that are contractually due after
December 31, 2023 :
Due After December 31, 2023
Fixed Adjustable Total
(In thousands)
Commercial and industrial $ 93,681 $ 105,827 $ 199,508
Commercial real estate 481,095 578,660 1,059,755
Commercial real estate construction 5,121 25,358 30,479
Residential real estate 54,549 13,980 68,529
Home equity 319 11,901 12,220
Consumer 11,926 4,165 16,091
Total loans $ 646,691 $ 739,891 $ 1,386,582 At
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,
2022 2021
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 $ 1,497 $ 1,583 $ 2,854 $ 541 $ 1,519 $ 720
Commercial real estate 563 - 952 - 2,873 1,161
Commercial real estate
construction - - - - - -
Residential real estate 2 - 1,188 26 - 578
Home equity - - - - 58 50
Consumer 584 634 476 1,134 292 212
Total $ 2,646 $ 2,217 $ 5,470 $ 1,701 $ 4,742 $ 2,721
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,
2022 2021
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 DueCommercial and industrial 0.58 % 0.62 % 1.11 % 0.23 % 0.66 % 0.31 % Commercial real estate 0.05 % - % 0.09 % - 0.34 % 0.14 % Commercial real estate construction - - -
- - -
Residential real estate 0.00 % - 1.60 % 0.04 % - 0.89 %
Home equity - - - - 0.43 % 0.37 %
Consumer 3.58 % 3.89 % 2.92 % 5.94 % 1.53 % 1.11 %
Total 0.17 % 0.14 % 0.35 % 0.13 % 0.37 % 0.21 %
Non-performing Assets
Management determines that a loan is impaired or non-performing 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 impaired, the measurement of the loan
in the allowance for loan losses is based on present value of expected future
cash flows, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. 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
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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 loan 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. A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower's financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes 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. 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-accrual loans include non-accruing troubled debt restructurings of$6.1 million and$4.6 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. No PPP loans were considered non-performing atDecember 31, 2022 orDecember 31, 2021 . At December 31, At December 31, 2022 2021 (Dollars in thousands) Non-accrual loans: Commercial and industrial $ 1,003 $ - Commercial real estate 3,882 3,928
Commercial real estate construction -
-
Residential real estate 1,188 578
Home equity 51 50
Consumer - 4
Total non-accrual loans 6,124 4,560
Accruing loans 90 days or more past due:
Commercial and industrial 1,850 720
Commercial real estate - 465
Commercial real estate construction -
-
Residential real estate - -
Home equity - -
Consumer 477 208Total accruing loans 90 days or more past due 2,327 1,393 Total non-performing loans 8,451 5,953 Other real estate owned - - Other non-performing assets - - Total non-performing assets $ 8,451 $ 5,953
Ratios:
Total non-performing loans to total loans 0.54 % 0.46 % Total non-performing loans to total assets 0.37 % 0.28 % Total non-performing assets to total assets 0.37 % 0.28 % Non-performing loans atDecember 31, 2022 totaled$8.5 million and consisted of$3.9 million of commercial real estate loans,$2.9 million of commercial and industrial loans and$1.2 million of residential real estate loans. We had no other real estate owned atDecember 31, 2022 . 51
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Non-performing assets increased$2.5 million , or 42.0%, to$8.5 million , or 0.37% of total assets, atDecember 31, 2022 from$6.0 million , or 0.28% of total assets, atDecember 31, 2021 . The increase in non- performing assets atDecember 31, 2022 compared toDecember 31, 2021 was primarily due to the increase in commercial and industrial loans driven mainly by the one remaining nationally syndicated relationship described above combined with the increase in residential real estate. 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 new troubled debt restructurings during the years endedDecember 31, 2022 orDecember 31, 2021 . Troubled debt restructurings may be considered to be non-performing and if so are placed on non-accrual, except for those that have established a sufficient performance history under the terms of the restructured loan. AtDecember 31, 2022 , the Bank had$3.3 million of non-accruing troubled debt restructured loans which are included in non-performing loans. This represented 0.21% of total loans atDecember 31, 2022 and represents a slight decrease when compared with$3.6 million atDecember 31, 2021 . AtDecember 31, 2022 , there were eight loans with aggregate balances of$14.1 million were considered troubled debt restructurings, but were performing in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status. AtDecember 31, 2021 , eight loans with aggregate balances of$14.5 million were considered troubled debt restructurings but were performing in accordance with their restructured terms for the requisite period of time to be returned to accrual status. Classified Assets. Federal regulations provide that loans and other assets of lesser quality should be classified as "substandard", "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that we will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. We designate an asset as "special mention" if the asset has a potential weakness that warrants management's close attention. The following table summarizes classified assets of all portfolio types at the dates indicated: At December 31, At December 31, 2022 2021 (Dollars in thousands) Classification of Assets: Substandard $ 18,433 $ 29,593 Doubtful - - Loss - - Total Classified Assets $ 18,433 $ 29,593 Special Mention $ 7,974 $ 4,885 On the basis of management's review of our assets, we classified$18.4 million of our assets atDecember 31, 2022 as substandard compared to$29.6 million atDecember 31, 2021 . We designated$8.0 million of our assets atDecember 31, 2022 as special mention compared to$4.9 million designated as special mention atDecember 31, 2021 . Allowance for Loan Losses
Please see "- Critical Accounting Estimates - Allowance for Loan Losses" for additional discussion.
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The allowance for loan losses is maintained at levels considered adequate by
management to provide for probable incurred loan losses inherent in the loan
portfolio as of the consolidated balance sheet reporting dates. The allowance
for loan losses is based on management's assessment of various factors affecting
the loan portfolio, including portfolio composition, delinquent and non-accrual
loans, national and local business conditions and loss experience and an overall
evaluation of the quality of the underlying collateral. The amount and adequacy
of the allowance is based on management's evaluation of the collectability of
the loan portfolio. Specifically, management uses specific and general
components to determine the appropriate allowance level. The specific component
relates to loans individually evaluated for impairment. Allowances for impaired
loans are generally determined based on collateral values or the present value
of the estimated cash flows.
The allowance is increased through provisions charged against current earnings
and offset by recoveries of previously charged-off loans. Loans which are
determined to be uncollectible are charged against the allowance. Management
uses available information to recognize probable and reasonably estimable loan
losses, but future loss provisions may be necessary based on changing economic
conditions. As a result of the COVID-19 pandemic, during the year ended
December 31, 2020 , we increased certain qualitative loan portfolio risk factors
relating to local and national economic conditions as well as industry
conditions and concentrations as a result of the effects of the COVID-19
pandemic. During 2021, certain qualitative factors associated with changing
risks related to local and national economic conditions as well as industry
concentrations were also affected. Recent improvement in economic conditions, as
well as the strong underlying performance of the loan portfolio, have prompted a
reversion to normalized, pre-COVID levels for these qualitative risk factors,
partially offset by continued increases in the allowance attributable to
concentrated growth in commercial real estate loans. The allowance for loan
losses is maintained at a level that represents management's best estimate of
incurred losses inherent in the loan portfolio. In addition, the FRB and the
NYSDFS, as an integral part of their examination process, periodically review
our allowance for loan losses and could require us to increase our allowance for
loan losses.
This analysis process is inherently subjective, as it requires us to make
estimates that are susceptible to revisions as more information becomes
available. Although we believe that we have established the allowance at a level
to absorb probable and estimable losses, additions may be necessary if economic
or other conditions in the future differ from the current environment.
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The following table sets forth activity in our allowance for loan losses for the
years indicated:
At or for the Year Ended
December 31,
2022 2021
(Dollars in thousands)
Balance at beginning of year $ 17,661 $ 16,172
Charge-offs:
Commercial and industrial 4,962 942
Commercial real estate - -Commercial real estate construction -
-
Residential real estate 65 11
Home equity - -
Consumer 479 314
PPP loans - -
Total charge-offs 5,506 1,267
Recoveries:
Commercial and industrial 66 220
Commercial real estate 52 75Commercial real estate construction -
-
Residential real estate - -
Home equity - -
Consumer 42 33
Total recoveries 160 328
Net charge-offs (recoveries) 5,346 939
Provision for loan losses 9,517 2,428
Balance at end of period $ 21,832 $ 17,661
Ratios:Net charge-offs to average loans outstanding 0.37 %
0.08 % Allowance for loan losses to non-performing loans at end of year
258.34 % 296.67 %
Allowance for loan losses to total loans at end of
year 1.39 % 1.37 % Allowance for loan losses to total loans (excluding PPP Loans) at end of year
1.39 % 1.41 %
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,
2022 2021
Net charge-offs to average loans outstanding 0.37%
0.08%
Broken down by loan type as follows, excluding PPP: Commercial and Industrial
0.34% 0.06%
Commercial real estate 0.00%
(0.01)%
Commercial real estate construction 0.00%
0.00%
Residential real estate 0.00% 0.00%
Home equity 0.00% 0.00%
Consumer 0.03% 0.02%
The allowance for loan losses increased by$4.2 million , or 23.6%, to$21.8 million , or 1.39% of total loans atDecember 31, 2022 from$17.7 million , or 1.37% of total loans (or 1.41% of total loans, excluding PPP loans), atDecember 31, 2021 . The increase in the allowance for loan losses for 2022 was driven by growth in our commercial real 54
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estate and commercial real estate construction loan segments, as well as the impact of two syndicated loans which were charged-off during 2022 due to COVID-19 pandemic related effects.
The following tables set forth the allowance for loan losses allocated by loan category at the dates indicated.
At December 31,
2022 2021
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(1) $ 5,510 25.24 % 16.50 % $ 4,901 27.75 % 20.79 %
Commercial real estate 14,364 65.79 % 69.97 % 11,183 63.32 % 66.03 %
Commercial real estate construction 1,252 5.73 % 6.98 % 964 5.46 % 5.59 % Residential real estate 345 1.58 % 4.73 % 272 1.54 % 5.05 % Home equity 63 0.29 % 0.79 % 80 0.45 % 1.06 % Consumer 298 1.36 % 1.04 % 261 1.48 % 1.48 %
Total allowance for loan losses 21,832 100.00 % 100.00 % 17,661 100.00 % 100.00 %
PPP loans are included within this portfolio; however, no allowance for loan (1) losses have been recorded on these loans due to the SBA guarantee of 100% of
the loans.
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, 2022 At December 31, 2021
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
(Dollars in thousands)
Available for sale securities:
U.S. government agencies and treasuries $ 104,734 $ 93,750 $80,596$ 79,706 Mortgage-backed securities 364,690 316,915 272,931 270,432 Corporate securities 28,559 25,658 20,081 20,211 Obligations of states and political subdivisions 111,971 97,138 92,545 94,448 Total$ 609,954 $ 533,461 $ 466,153 $ 464,797
Available for sale securities increased$68.7 million , or 14.8%, to$533.5 million atDecember 31, 2022 from$464.8 million atDecember 31, 2021 , as mortgage-backed securities increased$46.5 million , municipal securities increased$2.7 million ,U.S. Government agency securities increased$14.0 million , and corporate securities increased$5.4 million . This overall increase was primarily the result of strategic deployment of cash into investments during a period of rising interest rates into mortgage-backed securities, government agencies, corporate securities, and municipal securities.
We did not have held-to-maturity investments at
We review the investment portfolio on a quarterly basis to determine the cause,
magnitude and duration of declines in the fair value of each security. In
estimating other-than-temporary impairment (OTTI), we consider many factors
including: (1) the length of time and extent that fair value has been less than
cost, (2) the financial condition and near term prospects of the issuer, (3)
whether the market decline was affected by macroeconomic conditions, and (4)
whether we have the intent to sell the security or more likely than not will be
required to sell the security before its anticipated recovery. If either of the
criteria regarding intent or requirement to sell is met, the entire difference
between amortized cost and fair value is recognized as impairment through
earnings. For debt securities that do not meet the aforementioned criteria, the
amount of impairment is split into two components as follows: (1) OTTI related
to credit loss, which must be recognized in the income statement and (2) OTTI
related to other factors, which is recognized in other comprehensive
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income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether any other than temporary decline exists may involve a high degree of subjectivity and judgment and is based on the information available to management at a point in time. We evaluate securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
No impairment charges were recorded for the years ended
Deposits
The following table sets forth our total deposit account balances, by account type, at the dates indicated:
At December 31, 2022 At December 31, 2021
Average Average
Amount Percent Rate Amount Percent Rate
(Dollars in thousands)
Noninterest-bearing demand deposits $ 723,228 36.63 % - $ 701,645 36.65 % -
Interest bearing demand deposits 284,747 14.42 % 0.31 %
301,596 15.75 % 0.11 %
Money market deposits 615,149 31.16 % 0.97 % 615,111 32.13 % 0.26 %
Savings deposits 258,230 13.08 % 0.72 % 213,592 11.16 % 0.14 %
Certificates of deposit 93,033 4.71 % 1.74 % 82,440 4.31 % 0.46 %
Total $ 1,974,387 100.00 % 0.52 % $ 1,914,384 100.00 % 0.14 %
Total deposits increased $60.0 million , or 3.1%, to $2.0 billion at December 31,
2022 from $1.9 billion at December 31, 2021 . We experienced increases in all
deposit categories except interest bearing demand deposits, as
noninterest-bearing demand deposits increased $21.6 million , savings deposits
grew $44.6 million , and certificates of deposit increased $10.6 million .
Interest bearing demand deposits decreased $16.9 million due to certain
seasonality of municipal deposit relationships, as well as the impact of the
overall interest rate environment. The increase in overall deposits was
primarily driven by strategic focus 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.
Certificates of deposit increased $10.6 million , or 12.8% to $93.0 million at
December 31, 2022 from $82.4 million at December 31, 2021 , primarily by
increased broker deposits to support loan growth. We held approximately $33.0
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, 2022 and no brokered deposits at December 31,
2021 . Our reciprocal deposits obtained through the CDARS and ICS networks
totaled $12.5 million and $40.9 million , respectively, at December 31, 2022 . At
December 31, 2022 , our core deposits (which includes all deposits except for
certificates of deposit) totaled $1.9 billion , or 95.3% of our total deposits.
As of December 31, 2022 and December 31, 2021 , 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 $1.2 billion and $1.1 billion ,
respectively. In addition, as of December 31, 2022 , the aggregate amount of all
our uninsured certificates of deposit was $17.0 million . The following table
sets forth the maturity of these uninsured certificates of deposit as of
December 31, 2022 .
At December 31, 2022
(In thousands)
Maturing period:
Three months or less $ 2,099
Over three months through six months 4,349
Over six months through twelve months 4,267
Over twelve months 6,300
Total $ 17,015
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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 available borrowing capacity
provides us with a contingent source of liquidity.
Total borrowings from the Federal Home Loan Bank of New York were $131.5 million
at December 31, 2022 and no borrowings outstanding at December 31, 2021 . We have
the capacity to borrow up to $441.5 million from the Federal Home Loan Bank of
New York at December 31, 2022 .
In September 2020 , we issued $20.0 million in aggregate principal amount of
fixed to floating subordinated notes (the "2020 Notes") to certain institutional
investors. The 2020 Notes are non-callable for five years, have a stated
maturity of September 30, 2030 , and bear interest at a fixed rate of 4.25% per
year until September 30, 2025 . From September 30, 2025 to the maturity date or
early redemption date, the interest rate will reset quarterly to a level equal
to the then current three-month SOFR plus 413 basis points, payable quarterly in
arrears.
In November 2012 , we issued an unsecured note payable to a selling shareholder
of HVIA in connection with our acquisition of HVIA. In November 2019 , we
refinanced the note payable with a remaining balance of $3.0 million into an
interest-only term loan. During November 2022 , we paid off the note payable to
the former shareholder of HVIA. The interest was payable monthly in arrears at a
fixed rate of 5.6% per year and matured with a scheduled balloon payment.
Stockholders' Equity
Total stockholders' equity decreased$44.7 million , or 24.4%, to$138.1 million atDecember 31, 2022 , from$182.8 million atDecember 31, 2021 . The decrease was primarily the result of a$64.8 million increase in accumulated other comprehensive loss due to a decrease in the fair market value of our securities available-for-sale during 2022 and dividend payments of approximately$4.7 million , partially offset by the recognition of$24.4 million in net income during the year.
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 endedDecember 31, 2022 and 2021. 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 57
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accretion and net deferred loan origination costs accounted for as yield
adjustments. Deferred loan fees totaled
For the Year
Ended
2022 2021
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 1,426,478 $ 68,405 4.80 % $ 1,162,536 $ 52,418 4.51 %
PPP loans 9,280 922 9.94 % 87,438 5,106 5.84 %
Investment securities available
for sale 522,902 11,969 2.29 % 382,391 6,444 1.69 %
Cash and due from banks and
other 257,218 2,739 1.06 % 282,804 372 0.13 %
Restricted stock 3,643 188 5.16 % 1,978 89 4.50 %
Total interest-earning assets 2,219,521 84,223 3.79 % 1,917,147 64,429 3.36 %
Noninterest-earning assets 91,830 84,465
Total assets $ 2,311,351 $ 2,001,612
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 345,550 524 0.15 % $ 286,112 333 0.12 %
Money market deposits 689,610 2,931 0.43 % 613,865 1,805 0.29 %
Savings deposits 227,938 658 0.29 % 178,551 231 0.13 %
Certificates of deposit 75,354 346 0.46 % 86,516 511 0.59 %Total interest-bearing deposits 1,338,452 4,459 0.33
% 1,165,044 2,881 0.25 % FHLB Advances and other borrowings 12,791 599 4.68 % - - - % Note payable 2,605 154 5.91 % 3,000 168 5.60 % Subordinated notes 19,410 923 4.76 % 19,517 919 4.71 % Total interest-bearing liabilities 1,373,258 6,135 0.45 % 1,187,561 3,968 0.33 % Noninterest-bearing demand deposits 761,393 639,791 Other noninterest-bearing liabilities 20,744 18,829 Total liabilities 2,155,395 1,846,181 Total stockholders' equity 155,956 155,431 Total liabilities and stockholders' equity$ 2,311,351 $ 2,001,612 Net interest income$ 78,088 $ 60,461 Net interest rate spread(1) 3.34 % 3.03 %
Net interest-earning assets(2)$ 846,263 $ 729,586 Net interest margin(3) 3.52 % 3.15 % Average interest-earning assets to interest-bearing liabilities 161.6 % 161.4 %
Net interest rate spread represents the difference between the weighted (1) average yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
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
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previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories.
Year Ended December 31,
2022 vs. 2021
Total
Increase (Decrease) Due to Increase
Volume Rate (Decrease)
(Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 12,773 $ 3,214 $ 15,987
PPP loans (7,772) 3,588 (4,184)
Investment securities available for sale 3,216
2,308 5,524
Cash and due from banks (272) 2,639 2,367
Other 87 13 100
Total interest-earning assets 8,032 11,762 19,794
Interest-bearing liabilities:Interest-bearing demand deposits 90
101 191
Money market deposits 384 742 1,126
Savings deposits 143 284 427
Certificates of deposit (43) (122) (165)Total interest-bearing deposits 574
1,005 1,579
Federal Home Loan Bank
advances 599 - 599
Note payable (23) 9 (14)
Subordinated notes (4) 7 3Total interest-bearing liabilities 1,146 1,021 2,167 Change in net interest income $ 6,886 $
10,741
Results of Operations for the Years Ended
Summary Income Statements. The following table sets forth the income summary for
the year indicated:
Year Ended December 31,
Change
2022 2021 Amount ($) Percentage %
Interest income $ 84,223 $ 64,429 $ 19,794 30.7 %
Interest expense 6,135 3,968 2,167 54.6 %
Net interest income 78,088 60,461 17,627 29.2 %
Provision for loan losses 9,517 2,428 7,089 292.0 %
Noninterest income 11,996 12,102 (106) (0.9) %
Noninterest expense 50,290 43,458 6,832 15.7 %
Provision for income taxes 5,914 5,390 524 9.7 %
Net income 24,363 21,287 3,076 14.5 %
General. Net income increased$3.1 million , or 14.5%, to$24.4 million for the year endedDecember 31, 2022 from$21.3 million for the year endedDecember 31, 2021 . The increase was mainly driven by an$17.6 million increase in net interest income, partially offset by an increase in the provision for loan losses of$7.1 million and an increase in noninterest expense of$6.8 million . Interest Income. Interest income increased$19.8 million , or 30.7%, to$84.2 million for the year endedDecember 31, 2022 from$64.4 million for the year endedDecember 31, 2021 . This increase was the result of an increase in our average interest-earning assets which increased by$302.4 million , or 15.8%, to$2.2 billion for the year endedDecember 31, 2022 compared to$1.9 billion for the year endedDecember 31, 2021 . Supporting the increase in interest income 59 Table of Contents
was an increase in the average yield on interest earning assets of 43 basis
points to 3.79% during the year ended
Interest income on loans increased by$16.0 million , or 30.5%, to$68.4 million during the year endedDecember 31, 2022 from$52.4 million during the year endedDecember 31, 2021 . 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$263.9 million , or 22.7%, to$1.4 billion for the year endedDecember 31, 2022 compared to$1.2 billion for the year endedDecember 31, 2021 . The average yield on loans increased by 29 basis points from 4.51% for the year endedDecember 31, 2021 to 4.80% for the year endedDecember 31, 2022 . The increase in the average balance of loans was primarily due to our continued success in growing our commercial real estate, construction, and commercial and industrial loans, whereas the average yield on loans increased due to rising interest rates within the market for new loan originations as a result of the overall interest rate environment. Interest income on securities increased by$5.5 million , or 85.7%, to$12.0 million during the year endedDecember 31, 2022 from$6.4 million during the year endedDecember 31, 2021 . The increase in interest income on securities was due to an increase in the average balance of securities, which was also supported by an increase in the average yield on securities. The average balance of securities increased by$140.5 million , or 36.8%, to$522.9 million for the year endedDecember 31, 2022 compared to$382.4 million for the year endedDecember 31, 2021 . The increase in the average balance of securities was due to purchases of various securities during a period of rising interest rates. The average yield on securities increased by 60 basis points from 1.69% for the year endedDecember 31, 2021 to 2.29% for the year endedDecember 31, 2022 . The increase in the average yield on securities resulted from higher-yielding securities purchased during a period of increasing market interest rates. Interest income on cash and due from banks and other increased$2.4 million , or 636.3%, to$2.7 million for the year endedDecember 31, 2022 from$372,000 for the year endedDecember 31, 2021 . The increase in interest income from cash and due from banks and other was mainly attributable to an increase in the average yield earned on cash and due from banks. The average yield increased 93 basis points to 1.06% in 2022 from 0.13% in 2021 as a result of increases in short-term market interest rates during 2022. Average balances for cash and due from banks decreased to$257.2 million for the year endedDecember 31, 2022 from$282.8 million for the year endedDecember 31, 2021 , representing a decrease of$25.6 million , or 9.0%. Interest Expense. Interest expense increased$2.2 million , or 54.6%, to$6.1 million for the year endedDecember 31, 2022 from$4.0 million for the year endedDecember 31, 2021 . The increase in interest expense was a result of the increase in rates on 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 12 basis points to 0.45% during the year endedDecember 31, 2022 from 0.33% for the year endedDecember 31, 2021 . The average balance of interest-bearing liabilities increased by$185.7 million , or 15.6%, to$1.4 billion for the year endedDecember 31, 2022 compared to$1.2 billion for the year endedDecember 31, 2021 . Interest expense on interest-bearing deposits increased by$1.6 million , or 54.8%, to$4.5 million during the year endedDecember 31, 2022 from$2.9 million during the year endedDecember 31, 2021 . 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 eight basis points to 0.33% during the year endedDecember 31, 2022 . The average balance of interest-bearing deposits increased by$173.4 million , or 14.9%, to$1.3 billion for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The average cost of interest-bearing deposits increased due to the rising interest rate environment as we experienced rate pressure on savings, money market, and demand deposit accounts, while the increase in the average balance of interest-bearing deposits continues to reflect our strategy to increase commercial deposit accounts of our customers. Interest expense onFederal Home Loan Bank borrowings increased to$599 thousand for the year endedDecember 31, 2022 as compared to$0 for the year endedDecember 31, 2021 . The increase in interest expense on borrowed funds was primarily due to increasedFederal Home Loan Bank advances to support loan growth from$0 atDecember 31, 2021 compared to$131.5 million outstanding atDecember 31, 2022 . We also incurred an additional$923,000 in 60
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interest expense for the year endedDecember 31, 2022 as compared to$919,000 for the year endedDecember 31, 2021 due to the issuance inSeptember 2020 of$20.0 million in outstanding subordinated notes which carries an interest rate of 4.25%. Net Interest Income. Net interest income increased$17.6 million , or 29.2%, to$78.1 million for the year endedDecember 31, 2022 from$60.5 million for the year endedDecember 31, 2021 due to an increase in net interest-earning assets, coupled with increases in the net interest rate spread and net interest margin. Net interest-earning assets increased by$116.7 million to$846.3 million for the year endedDecember 31, 2022 from$729.6 million for the year endedDecember 31, 2021 . Net interest rate spread increased by 31 basis points to 3.34% for the year endedDecember 31, 2022 from 3.03% for the year endedDecember 31, 2021 , reflecting a 44 basis points increase in the average yield on interest-earnings assets, partially offset by a 12 basis points increase in the average rate paid on interest-bearing liabilities. The net interest margin increased 37 basis points to 3.52% for the year endedDecember 31, 2022 from 3.15% for the year endedDecember 31, 2021 due to the increase in interest rates as a result ofFederal Reserve policy and the rising interest rate environment. Provision for Loan Losses. Our provision for loan losses was$9.5 million for the year endedDecember 31, 2022 compared to$2.4 million for the year endedDecember 31, 2021 . The increase in the provision for loan losses primarily reflects the continued growth of the loan portfolio as well as the impact of charge-offs during 2022 representing two syndicated loan relationships affected by pandemic related effects. The allowance for loan losses was$21.8 million , or 1.39%, of loans outstanding atDecember 31, 2022 compared to$17.7 million , or 1.37%, of loans outstanding atDecember 31, 2021 .
Noninterest Income. Noninterest income information is as follows:
Year Ended December 31, Change
2022 2021 Amount Percent
(Dollars in thousands)
Service charges on deposit accounts
55 8.6 %
Trust income 4,764 4,788 (24) (0.5) %
Investment advisory income 4,537 4,853 (316) (6.5) %Investment securities gains (losses) - -
- - %
Earnings on BOLI 950 793 157 19.8 %
Other 1,052 1,030 22 2.1 %
Total noninterest income $ 11,996 $ 12,102 $ (106) (0.9) %
Noninterest income decreased by $106 thousand , or 0.9%, to $12.0 million for the
year ended December 31, 2022 from $12.1 million for the year ended December 31,
2021 . The decrease in noninterest income in the year ended December 31, 2022 was
primarily due to decreases in income from investments held in trust, and
investment advisory income, partially offset by increases in service charges on
deposit accounts and BOLI income. Trust income and investment advisory income
decreased $24 thousand and $316 thousand , respectively, primarily the result of
a challenging market and economic conditions. Service charges on deposit
accounts increased $55,000 directly related to customer activity. We had no
investment securities gains in 2022.
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Noninterest Expense. Noninterest expense information is as follows:
Year Ended December 31, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries $ 22,461 $ 19,710 $ 2,751 14.0 %
Employee benefits 5,579 3,257 2,322 71.3 %
Occupancy expense 4,467 4,058 409 10.1 %
Professional fees 4,066 3,649 417 11.4 %
Directors' fees and expenses 1,157 1,041 116 11.1 %
Computer software expense 4,803 5,168 (365) (7.1) %
FDIC assessment 1,411 1,198 213 17.8 %
Advertising expenses 1,601 1,220 381 31.2 %Advisor expenses related to trust income 215 533
(318) (59.7) %
Telephone expenses 679 556 123 22.1 %
Intangible amortization 286 285 1 0.4
Other 3,565 2,783 782 28.1 %
Total noninterest expense $ 50,290 $ 43,458 $ 6,832 15.7 %
Noninterest expense increased $6.8 million , or 15.7%, to $50.3 million during
the year ended December 31, 2022 from $43.5 million during the year ended
December 31, 2021 . The increase in noninterest expense for the year ended
December 31, 2022 as compared to the prior year was mainly due to a $2.8 million
increase in salaries, a $2.3 million increase in employee benefits, a $417
thousand increase in professional fees, a $409,000 increase in occupancy expense
and a $381,000 increase in advertising expenses.
For the year ended
Salaries increased primarily as a result of hiring additional employees in
? support of the growth, along with increased salaries in the normal course of
business and increased competition.
Employee benefits increased mainly due to escalating insurance costs as well as
? the full effect of staff additions in the prior year associated with expansion
of the Bank branch network
Professional fees continued to increase primarily due to continuing information
technology support costs relating to our core processing conversion that
? occurred in
investment portfolio and audit and accounting expenses due to enhancing audit
procedures for audited financial statements associated with the Company's
public reporting status.
? Occupancy expense increased as a result of the full year effect of branch
offices opened during 2021.
Advertising and other noninterest expense increased mainly as a result of
? increased operating costs associated with our growth and development of brand
awareness.
Income Tax Expense. We recorded an income tax expense of$5.9 million for the year endedDecember 31, 2022 , reflecting an effective tax rate of 19.5%. For the year endedDecember 31, 2021 , we recorded an income tax expense of$5.4 million , reflecting an effective tax rate of 20.2%. The increased tax expense was reflective of the growth of pre-tax net income.
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 throughOrange 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 throughHVIA andOrange Bank & Trust Company that provides trust and 62
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investment management fee income in our wealth management business segment. For further information, see Note 20 of the Notes to the Audited Consolidated Financial.
The following tables presents 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,
2022 2021
Wealth Total Wealth Total
Banking Management Segments Banking Management Segments
(Dollars in thousands)
Net Interest Income $ 78,088 $ - $ 78,088 $ 60,461 $ - $ 60,461
Noninterest income 2,695 9,301 11,996 2,461 9,641 12,102
Provision for loans
loss (9,517) - (9,517) (2,428) - (2,428)
Noninterest expenses (42,898) (7,392) (50,290) (36,736) (6,722) (43,458) Income tax expense
(5,513) (401) (5,914) (4,777) (613) (5,390)
Net income $ 22,855 $ 1,508 $ 24,363 $ 18,981 $ 2,306 $ 21,287
Assets under management
and/or administration
(AUM) (market value) $ - $ 1,272,498 $ 1,272,498 $ - $ 1,325,894 $ 1,325,894
Total assets $ 2,279,469 $ 7,865 $ 2,287,334 $
2,133,440
Comparison at or for the years endedDecember 31, 2022 and 2021. The market value of assets under management and/or administration atDecember 31, 2022 and 2021 was approximately$1.3 billion , respectively, at each date. This includes assets held at bothOrange Bank & Trust Company and HVIA atDecember 31, 2022 and 2021, respectively. This slight decrease was due to successful acquisition of new assets under management combined with a decrease in the market value of assets under management. Our income related to our wealth management business segment, which we record as noninterest income, decreased$340 thousand , or 3.5%, to$9.3 million for the year endedDecember 31, 2022 compared to$9.6 million for the year endedDecember 31, 2021 . The decrease was mainly due to the economic conditions within the marketplace and the impact of equity markets and the interest rate environment. Our expenses related to our wealth management business segment, which we record as noninterest expense, increased$670 thousand , or 10.0%, to$7.4 million for the year endedDecember 31, 2022 compared to$6.7 million for the year endedDecember 31, 2021 . The increase was due to the continued growth in our operations and compensation.
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. AtDecember 31, 2022 andDecember 31, 2021 , cash and due from banks totaled$86.1 million and$306.2 million , respectively. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled$533.5 million atDecember 31, 2022 and$464.8 million atDecember 31, 2021 . 63 Table of Contents Certificates of deposit due within one year ofDecember 31, 2022 totaled$80.7 million , or 86.8% of total certificates of deposit. AtDecember 31, 2022 , total certificates of deposit were$93.0 million or 4.7% of total deposits. We participate in IntraFi Network, allowing us to provide access to multi-million-dollarFDIC 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. AtDecember 31, 2022 , we had a total of$48.5 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 theFederal Home Loan Bank of New York . AtDecember 31, 2022 , we had$131.5 million in advances and the ability to borrow up to$441.5 million . AtDecember 31, 2022 , we had a$2.9 million collateralized line of credit from theFederal Reserve Bank of New York with no outstanding balance. Additionally, we had a total of$25.0 million of discretionary lines of credit atDecember 31, 2022 . We also have a borrowing agreement withAtlantic Community Bankers Bank ("ACBB") to provide short-term borrowings of$2.5 million atDecember 31, 2022 . There were no outstanding borrowings with ACBB atDecember 31, 2022 . 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$30.6 million and$20.3 million for the year endedDecember 31, 2022 and the year endedDecember 31, 2021 , 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$434.1 million and$291.3 million for the year endedDecember 31, 2022 and the year endedDecember 31, 2021 , respectively. Net cash provided by financing activities, consisting of activity in deposit accounts and borrowings, was$183.5 million and$456.0 million for the year endedDecember 31, 2022 and the year endedDecember 31, 2021 , respectively. We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience, current pricing strategy and regulatory restrictions, we 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 theFederal Reserve andNew York State Department of Financial Services . AtDecember 31, 2022 andDecember 31, 2021 , 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 atDecember 31, 2022 andDecember 31, 2021 .
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. AtDecember 31, 2022 , we had$389.1 million in loan commitments outstanding. We also had$13.5 million in standby letters of credit atDecember 31, 2022 . AtDecember 31, 2021 , we had$373.3 million in loan commitments outstanding. We also had$11.5 million in standby letters of credit atDecember 31, 2021 . 64
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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 inthe 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.
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