Executive Summary / Key Takeaways

• Orange County Bancorp (NASDAQ: OBT) is a regional bank holding company with a dual focus on traditional commercial and consumer banking and a growing wealth management segment, strategically positioned in the Lower Hudson Valley and New York metropolitan area.
• The Wealth Management segment, recently unified under the "Orange Wealth Management" brand, is a significant growth driver, with noninterest income increasing 19.2% year-over-year in Q1 2025 and assets under management exceeding $1.70 billion, providing a valuable fee-based revenue stream.
• Strong deposit growth, particularly in interest-bearing demand, money market, and savings accounts, allowed the company to strategically pay down higher-cost FHLB borrowings, contributing significantly to a 31 basis point expansion in the net interest margin to 3.95% in Q1 2025.
• While net income decreased year-over-year in Q1 2025 primarily due to a non-recurring investment recovery in the prior year, underlying performance showed robust growth in net interest income (up 9.4%) and noninterest income (up 18.2%).
• The company maintains a strong liquidity position and is well-capitalized, but faces competitive challenges from larger, more technologically advanced institutions and manages credit risk, including a notable non-performing commercial real estate loan participation currently in litigation.

Setting the Scene: A Community Bank with a Growing Wealth Footprint

Orange County Bancorp, Inc. stands as a regional financial institution rooted in a history stretching back to 1892. Founded by 14 individuals, the company has evolved from its community origins to operate a network of 16 offices and one loan production office across key counties in the Lower Hudson Valley and New York metropolitan area. This extensive branch network forms the backbone of its traditional banking segment, offering commercial and consumer lending and deposit services with a focus on relationship-based banking.

The company's strategic trajectory expanded significantly with the 2012 acquisition of Hudson Valley Investment Advisors (HVIA). This move marked a deliberate push into wealth management, aiming to complement traditional spread-based income with a consistent, fee-based revenue stream. This segment, now unified with trust and private banking under the "Orange Wealth Management" brand as of January 2025, targets small businesses, middle-market enterprises, local municipal governments, and affluent individuals. The strategic realignment under Managing Director David P. Dineen is designed to offer a more comprehensive suite of services, integrating investment guidance, estate planning, and personal banking, positioning the company to capitalize on the significant "Great Wealth Transfer" trend.

In a competitive landscape dominated by larger regional players like NBT Bancorp (NBTB), Valley National Bancorp (VLY), M&T Bank Corporation (MTB), and KeyCorp (KEY), OBT differentiates itself through its deep community ties and personalized service model. While these larger competitors often leverage greater scale and advanced technology for efficiency and broader reach, OBT's historical presence and local focus aim to foster stronger customer loyalty, particularly within its core geographic markets and with entrepreneurial clients who value integrated business and personal financial services. The banking industry overall is experiencing trends towards digital transformation and consolidation, alongside opportunities presented by demographic shifts like the wealth transfer.

Business Segments and Strategic Focus

OBT operates through two primary reportable segments: Banking and Wealth Management. The Banking segment encompasses the core lending and deposit-gathering activities, including commercial real estate, construction, commercial and industrial, residential real estate, home equity, and consumer loans, alongside various deposit products and cash management services. This segment generated $23.6 million in net interest income and $916 thousand in noninterest income for the three months ended March 31, 2025.

The Wealth Management segment, comprising HVIA and the Bank's trust services, focuses on investment management, personal trust services, and advisory offerings. This segment is purely fee-based, contributing $3.4 million in noninterest income in Q1 2025. The strategic importance of this segment is underscored by its robust revenue growth (up 19.2% year-over-year) and increasing assets under management, which exceeded $1.70 billion as of March 31, 2025. The recent unification into "Orange Wealth Management" is a strategic initiative to enhance service delivery and capture greater wallet share among target client demographics, particularly business owners.

Operational Performance and Technology Investment

Operational efficiency is a key focus, reflected in the company's efficiency ratio, which improved to 58.90% in Q1 2025 from 60.50% in Q1 2024. Noninterest expenses totaled $16.5 million in Q1 2025, an increase of 7.7% year-over-year. This increase was attributed to continued investment in company growth, including higher salaries and benefits, occupancy expense, and notably, a significant increase in computer software expense (up 60.5% to $2.0 million).

While specific proprietary technologies or quantifiable technological advantages are not detailed, the increase in computer software expense signals ongoing investment in information technology. This investment is crucial in the competitive banking landscape where rivals like MTB and KEY are leveraging digital tools and AI for faster processing and enhanced efficiency. OBT's strategic response appears to involve bolstering its technological infrastructure to support growth initiatives and maintain competitiveness, although specific performance metrics or differentiated capabilities of this technology are not disclosed.

Financial Performance Analysis

For the three months ended March 31, 2025, OBT reported net income of $8.7 million, or $0.77 per basic and diluted share. This represents a decrease of 6.3% compared to net income of $9.3 million, or $0.82 per share, in the same period of 2024. This year-over-year decrease in net income was primarily influenced by a non-recurring $1.9 million recovery from the sale of Signature Bank subordinated debt recorded in Q1 2024.

Excluding this one-time item, the underlying financial performance showed strength. Net interest income increased by $2.0 million, or 9.4%, reaching $23.6 million in Q1 2025. This improvement was driven by a combination of disciplined loan pricing, which increased the average yield on interest-earning assets by 9 basis points to 5.33%, and managed funding costs. The average rate paid on interest-bearing liabilities decreased by 31 basis points to 2.05%, primarily due to a strategic reduction in higher-cost FHLB borrowings. This favorable dynamic resulted in a 40 basis point expansion of the net interest rate spread to 3.28% and a 31 basis point increase in the net interest margin to 3.95%.

Noninterest income saw significant growth, increasing by $670 thousand, or 18.2%, to $4.4 million. This was largely propelled by the Wealth Management division, where trust and investment advisory income rose by $553 thousand, or 19.2%, reflecting increased fees and growth in asset values. The provision for credit losses on loans decreased to $202 thousand in Q1 2025 from $260 thousand in Q same period 2024, influenced by updated ACL methodology and loan portfolio composition. The effective tax rate increased to 22.9% in Q1 2025 from 20.0% in Q1 2024, reflecting a higher proportion of pre-tax income relative to non-taxable revenue.

Asset Quality and Risk Management

OBT's loan portfolio totaled $1.85 billion at March 31, 2025, showing growth of $38.5 million, or 2.1%, since December 31, 2024. Growth was primarily concentrated in commercial real estate (up $19.7 million), commercial real estate construction (up $16.7 million), and commercial and industrial loans (up $4.9 million). The portfolio remains diversified, with a significant concentration in commercial real estate (74.5% of total loans).

Asset quality metrics remained relatively stable. Non-performing loans totaled $6.2 million at March 31, 2025, a slight decrease from $6.3 million at December 31, 2024. This level of non-performing loans is primarily attributable to one non-accrual commercial real estate office space loan participation, which was written down in Q3 2024 and remains at approximately $6.0 million. The company has filed a civil complaint against the lead lender of this participation, seeking damages and repurchase of the loan amount. Classified assets increased, with substandard assets rising to $59.8 million at March 31, 2025, from $44.0 million at December 31, 2024, due to trends and delinquencies within certain loans. Special mention assets also increased to $28.2 million.

The allowance for credit losses (ACL) on loans stood at $26.4 million, or 1.42% of total loans, at March 31, 2025, compared to $26.1 million, or 1.44% of total loans, at December 31, 2024. The company updated its CECL estimation methodology in Q1 2025, including expanding its peer group and adopting a scorecard approach for qualitative adjustments, though the net impact was not material. The ACL is intended to cover expected credit losses based on quantitative models and qualitative factors.

The investment securities portfolio, primarily available-for-sale, totaled $443.8 million at March 31, 2025. The portfolio holds significant unrealized losses ($66.2 million) primarily due to changes in market interest rates. However, management believes these losses are temporary and not credit-related, particularly for government-backed securities. The company does not intend to sell these securities prior to recovery and believes it is not likely to be required to do so.

Liquidity and Capital Strength

OBT maintains a strong liquidity position, with cash and cash equivalents increasing by $13.8 million to $164.2 million at March 31, 2025. Total assets reached $2.56 billion. Deposit growth was a key driver of liquidity, increasing by $128.3 million, or 6.0%, to $2.28 billion. This growth was concentrated in lower-cost interest-bearing demand, money market, and savings accounts, reflecting a strategic focus on business account activity. Certificates of deposit also increased, partly due to growth in brokered deposits, a strategic decision to manage funding costs.

The strong deposit inflows allowed the company to significantly reduce higher-cost FHLB short-term advances by $93.0 million, lowering total FHLB borrowings to $30.5 million. This strategic funding management contributed to the improved net interest margin. OBT retains substantial unused borrowing capacity from the FHLB ($524.6 million), the Federal Reserve Bank ($91.0 million collateralized), and correspondent banks ($20.0 million discretionary lines), providing ample contingent liquidity.

Stockholders' equity increased by $15.8 million, or 8.5%, to $201.3 million at March 31, 2025. This increase was primarily driven by net income and a decrease in unrealized losses on investment securities recorded in accumulated other comprehensive income (AOCI), net of taxes. The Bank remains well-capitalized, exceeding all regulatory minimum requirements at March 31, 2025, with a Total Capital to Risk Weighted Assets ratio of 15.42% and a Tier 1 Leverage Ratio of 10.41%.

Outlook and Key Considerations

While specific quantitative earnings guidance was not provided, management commentary suggests that potential future interest rate reductions by the Federal Reserve could have a beneficial impact on net interest income, given the company's relatively neutral asset sensitivity. The strategic reduction in FHLB borrowings and focus on lower-cost deposit growth positions OBT favorably to potentially benefit from a declining rate environment by reducing funding costs faster than asset yields decline.

The company's strategic focus on growing its Wealth Management segment is expected to continue contributing to noninterest income growth, leveraging the recent realignment and investment in the business unit. The ongoing litigation related to the non-performing CRE loan participation represents a potential variable, though the financial impact of the loan has already been largely addressed through write-downs and ACL allocation.

Key risks include the impact of general economic conditions on credit quality, particularly within the commercial real estate portfolio, and continued competition from larger, more technologically advanced financial institutions. The increase in classified assets warrants monitoring. Regulatory changes and cybersecurity threats also remain pertinent risks for the banking industry. A recent development in June 2025 was the announcement and pricing of an underwritten public offering of common stock, a move that could impact share count and potentially provide capital for future growth initiatives or balance sheet management.

Conclusion

Orange County Bancorp presents an investment narrative centered on its established community banking franchise complemented by a strategically growing wealth management business. The company's recent performance highlights successful execution in attracting lower-cost deposits and optimizing its funding structure, leading to notable net interest margin expansion in Q1 2025. The Wealth Management segment continues to demonstrate strong growth, providing a valuable and increasing source of fee income that diversifies the revenue base.

While facing competitive pressures from larger institutions and managing specific credit quality challenges within its loan portfolio, OBT maintains a solid capital position and ample liquidity. The strategic realignment of its wealth management services and ongoing investment in technology signal efforts to enhance its competitive standing and capitalize on market opportunities. The potential for lower interest rates could further benefit net interest income, supporting the company's profitability outlook. Investors should weigh the company's strengths in relationship banking and wealth management growth against the challenges posed by the competitive landscape and macroeconomic factors impacting credit quality and interest rates.