Primed for Expansion. True to Our Roots.

Primed for Expansion. True to our Roots.

O R A N G E C O U N T Y B A N C O R P, I N C .

2014 ANNUAL REPORT

Board of Directors Our Board of Directors in the board room of our first headquarters on North Street in Middletown.

Back Row: Richard Rowley, Terry Saturno, William D. Morrison, Michael Gilfeather, David A. Dewilde, Paul T. McDermott; Front Row: Susan Metzger, Louis Heimbach (Chairman), Virginia Rizzo

MEMBER Federal Reserve System Federal Home Loan Bank Federal Deposit Insurance Corporation SHARES OF ORANGE COUNTY BANCORP, INC. STOCK ARE AVAILABLE UNDER STOCK SYMBOL OCBI For information regarding stock transfers and other transactions, contact our Transfer Agent: Computershare, Inc. P.O. BOX 30170 College Station, TX 77842 1.800.368.5948 Web.queries@computershare.com For more information about purchasing stock, contact either: Stifel Nicolaus & Co. Inc. Andrew Lieb 800.342.2325 Ext. 4128 Raymond James Equity Capital Markets Timothy M. Murnane 800.800.4693 NOTICE TO SHAREHOLDERS ANNUAL DISCLOSURE STATEMENT Financial information about this Bank is available to our customers, shareholders, and the general public upon request. In accordance with the federal regulation to facilitate more informed decision-making by depositors, investors, and the general public, we will provide an ANNUAL DISCLOSURE STATEMENT containing financial information for this Bank for the previous two years. This information will be updated annually and available as of March 31, each year.

To obtain a copy of the ANNUAL DISCLOSURE STATEMENT please contact: Gerard Perri, SVP/Chief Financial Officer Orange County Trust Company 212 Dolson Avenue Middletown, New York 10940

2014 ANNUAL REPORT

3

CHAIRMAN’S MESSAGE

To Our Shareholders: I am pleased to report that your Board of Directors

To deliver on these obligations, the Company, by

had a busy and engaging year in 2014, instituting

its Board of Directors, endeavored to select a new

momentous changes, analyzing new initiatives

leader who would embrace our mission and lay out

and generally building an institution that is poised

a plan for success. In hiring Michael Gilfeather, the

for growth. Through hard work and dedication to

Board selected an experienced community banking

a true community institution, the Board of Directors

executive who knows the business, the market and

of Orange County Bancorp, Inc. (the “Company”)

the strategies necessary for achievement in the

never waivers from its mission, which is to pursue

ever-changing world of banking.

meaningful value for shareholders. Beginning at the end of 2014 and continuing through 2015, the

For Hudson Valley Investment Advisors, Inc. (“HVIA”),

Company and its subsidiaries will be making

the essential measure is Assets Under Management

significant investments in people, technology and

(“AUM”). Since the firm’s sole source of income is

traditional brick & mortar operations. Our initiatives

the fee it charges each client against AUM, it is both

in Westchester County and Rockland County are

a continuous and crucial task for the HVIA team in

the result of a tremendous amount of due diligence

Goshen to foster the expansion of current relationships

on the part of the Board of Directors and senior

and to identify and close new relationships.

management. We are confident these particular measures will produce results that align with our

As a locally managed financial institution, we have

tradition of maintaining a strong community bank.

the ability to make swift decisions and provide more customized customer solutions that truly benefit our

Only by investing in our future can we expect to

community-at-large.

benefit from the lightning fast changes that are occurring in banking, wealth management and the

This is a unique time in banking, and financial

economy, in general.

services in general. To meet the challenges, we have assembled a strong management team that is

As

the

holding

company

for

two

operating

entities, the Company is charged with overseeing an

well-positioned

to

address

and

execute

on

appropriate opportunities in the marketplace.

ever-growing, increasingly complex financial services organization. With respect to Orange County Trust

I thank my fellow directors and senior management

Company (the “Bank”), the Company focuses on

for their efforts in managing a fine institution. It is a

four critical areas; asset quality, capital, net income

pleasure working with them. Finally, I am pleased to

and share price. As you might surmise, maintaining

report that, in 2014, our Board of Directors approved

superior asset quality and a strong capital position are

cash dividends paid to the shareholders in the amount

essential to delivering the net income and a Company

of $3.2 Million.

share price you value. However, equally important is the Bank’s ability to guard against the risks it faces,

Thank you for your continued support of Orange

like all banks. By effectively managing the risk of the

County Bancorp, Inc.

current book of business, the Bank can continually focus on new business development without an undue

Sincerely,

strain on resources.

Louis Heimbach Chairman 4

O R A N G E C O U N T Y B A N C O R P, I N C .

FINANCIAL HIGHLIGHTS

FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA) 2014

2013

YEAR Interest income Interest expense Net interest income after provision for loan losses Other operating income Other operating expenses Net income Cash dividends declared Average net loans Average assets Average deposits Average equity

$

25,233 4,303 20,030 8,367 20,647 6,197 (3,209) 329,059 720,943 538,354 96,825

$

24,035 4,422 18,833 7,735 18,449 6,509 (2,310) 310,227 686,429 501,220 93,529

$

331,778 726,130 537,916 98,359

$

318,660 677,761 495,738 94,051

$

3.17 1.64 50.19

$

3.32 1.18 48.09

YEAR END Net loans Assets Deposits Equity PER SHARE Earnings Cash dividends declared Equity RATIOS 0.86% 6.40% 6.77% 12.89%

Return on average assets Return on average equity Return on average Tier 1 capital Tier 1 capital leverage ratio

Operating Revenue 2014 Other Income 11%

Distribution of Revenue 2014

Real Estate Loans 34%

Trust & Investment Division 15%

0.95% 6.96% 6.71% 13.18%

Added to Capital 14%

Interest Expense 13% Provision for Loan Loss 3%

Dividends 9%

Income Tax 5%

Other Expense 15%

Investment Securities 25%

Consumer Loans 2%

Commercial Loans 13%

Furniture & Equipment Expense 1%

2014 ANNUAL REPORT

Salaries & Benefits 34% Occupancy Expense 6%

5

PRESIDENT’S MESSAGE

2014: A Year of Renewal and Change To Our Shareholders & Friends: It is with considerable excitement that I pen this, my first introductory letter to the Orange County Bancorp, Inc. Annual Report. 2014 has been a year of great discovery for me— getting to know our customers, our employees and the community-at-large. Orange County Bancorp, Inc. (the “Company”) through its operating subsidiaries, Orange County Trust Company (the “Bank”) and Hudson Valley Investment Advisors, Inc. (“HVIA”), is a vibrant, well-known, contributing force in our region and the organization, as a whole, is poised to do great things in the year ahead and beyond.

As many of you know, 43-year employee and immediate past President, Terry Saturno, retired in 2014. Terry is associated with and knows Orange County Trust Company like few others and we are extremely fortunate to have her continue to serve the organization on the Board of Directors of both the Company and the Bank. In addition, Thomas Guarino, the founder and CEO of HVIA, also retired at the end of 2014. Like Terry, Tom is assisting in the transition to new leadership in his continuing role as a director of HVIA. For 2014, the Company earned net income of $6,197,000, a decrease of 4.79% from year-end 2013. On December 31, 2014, assets of the Company were $726 Million, an increase of 7.14% from 2013. Our loan portfolio increased to $332 Million, representing growth of 4.12%. And, deposits grew to $538 Million, up 8.51% over the Michael Gilfeather,

prior year.

President & Chief Executive Officer

6

O R A N G E C O U N T Y B A N C O R P, I N C .

PRESIDENT’S MESSAGE

Lower-than-normal loan demand in our markets,

existing customers, as well as broaden our appeal to

escalating regulatory expenses and tight interest

prospective new ones, we have identified a full suite

margins remain the primary factors affecting earnings

of cash management banking products that will help

and growth. These are challenges all community

customers run their businesses more efficiently and

banks face and, in response, we examined and have

profitably. For this 2015 initiative, we brought on Linda

subsequently engaged in strategic initiatives aimed

Lemond, a new VP and long-time banker in our market,

at expanding our market position and leveraging our

who successfully developed and deployed a similar

core strengths. Most prominently, the Bank will be

program for another bank. Finally, Christopher

expanding its footprint in 2015 with new branches in

Hayden joined as SVP and new Chief Operating

Westchester County, NY and Rockland County, NY.

Officer.

His

extensive

risk

management

and

operational background will strengthen our core Critical to any expansion, of course, are the right

operations—a function that will be tightly managed to

personnel.

support our growth plans.

Prior

to

year-end,

we

hired

an

extremely capable group of bankers to lead these new initiatives. Joseph Ruhl will be our first Regional

With all these strategic initiatives underway, the

President for Westchester. Mr. Ruhl is an attorney

prospects for 2015 are exciting, to say the least. We

whose reach within the professional market is

know from experience the implementation of such

unrivaled in the NYC metropolitan area. John

efforts requires hard work and, I can assure you, my

Bartolotta is the Regional President for Rockland

team is enthusiastically committed to the challenge.

County, NY. A true “Lender’s Lender,” John has 30+

Further, we will continue to invest in people, offices

years of commercial banking experience, which will

and new products with a view toward making

help us hit the ground running… fast. Also, to broaden

Orange County Trust the very best version of what a

the Trust Department business line, Kathryn Maloney

community bank represents.

joined as SVP and Director of Trust Services, adding her extensive contacts in the Hudson Valley and NYC

While this plan will have minimal impact on our

metro areas to our platform.

capital position, I believe it is important to let you know the expenses associated with our growth

Besides being outstanding bankers, each of these

strategy will likely result in lower profits for the next two

new Orange County Trust professionals has a great

years. However, we are confident these initiatives will

customer following which will help us acquire new

result in increased earnings beginning in 2017 and

business quickly.

going forward. Again, these are only projections, but it is our best estimate of our future financial condition

With a growing loan portfolio, we determined

and you, as a stockholder, should be so apprised.

it would be prudent to strengthen our credit capabilities by creating a distinct, high-level credit

On behalf of the Directors of the Company and the

officer position. In November 2014, we were

Bank, and my fellow employees, I thank you, our

fortunate to add a seasoned, local banker—Roland

stockholders and customers for your ongoing support

Newkirk—to the team as VP and Senior Credit

of our institution, a community institution.

Officer. In addition, as we seek to better serve our Sincerely,

Michael Gilfeather President and Chief Executive Officer 2014 ANNUAL REPORT

7

New Leaders

to Broaden Our Appeal to Existing and New Customers

Christopher Hayden, Senior Vice President and Chief Operating Officer (left); Linda LeMond, Vice President, Cash Management and Treasury Officer (right).

8

O R A N G E C O U N T Y B A N C O R P, I N C .

Expanding into new markets and introducing new products requires a solid set of strategies, not the least of which is an investment in people. In 2014, two seasoned banking and finance professionals joined our team to help lead our Bank’s new initiatives to help our customers achieve more operational efficiency and improved profitability.

Christopher Hayden joined our team

Linda

LeMond

as Senior Vice President and Chief

October as our Vice President, Cash

Operating Officer in July. Chris heads the

Management and Treasury Officer.

operational departments and is responsible for

Her charge: assess, plan and manage the

overall enterprise risk management.

efficient utilization of cash management

came

on

board

in

products and financial services in a manner He comes to us with more than 25 years

consistent with the Bank’s objectives.

in the banking and finance industry, most recently as a Vice President with Hudson

Like Chris, Linda comes to us with more

Valley Bank where he created and managed

than 25 years in the banking and finance

the enterprise risk management platform. His

industry, most recently as a Senior Vice

broad banking experience, extensive project

President

management and proven leadership skills will

There, she directed a team of professionals

be significant contributors to the Bank as we

meant to solidify the bank’s position by

continue to grow.

providing strategic planning, sales tools,

with

Sterling

National

Bank.

operational support and market data. She in Chris

founded

not-for-profit

“The

a

turn, implemented and managed the Business

providing

Leaders Council which was comprised of an

NeighborHerd,”

organization

healthy, locally raised food to School Lunch Programs in northern Westchester.

elite group of top clients.

Linda’s extensive background working with businesses in developing cash management solutions will be a significant contributor to us as we continue to grow. Linda has served on the board of the March of Dimes local chapter, and she was the Walk Chair for the Rockland March for Babies. She has also served as a director of the Rockland Business Association.

2014 ANNUAL REPORT

9

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

Excellence

in Orange at Work for Our Customers As we broaden our footprint to other regions, we continue to deliver unparalleled service, never losing sight of our founding principles that demand a customer-first approach to banking. That is how we live EXCELLENCE IN ORANGE, every day.

Med Banking Med-Banking is a total banking and financial program to serve the practice and personal needs of medical and health professionals. From investment management to deposit and credit services, Med-Banking is designed to provide superior service and expertise to medical and health professionals by helping them maximize efficiencies and minimize costs. This allows them to focus on what they do best—provide top-quality health care services.

Deposit Services Lending Services Customer Relationship Team Personalized Investment Management Services* Customized Lines of Credit *Investment management services provided by Hudson Valley Investment Advisors, Inc., an affiliate of Orange County Trust Company

10

O R A N G E C O U N T Y B A N C O R P, I N C .

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

Mary Ellen Rogulski, SVP Senior Lending Officer (left); Michael DiSalvo, VP Commercial Loan Officer (right)

2014 ANNUAL REPORT

11

From left to right: Thomas P. Clarke, Esq. (Counsel to the Bank -MacVean, Lewis, Sherwin & McDermott, P.C.); Linda LeMond, Vice President, Cash Management and Treasury Officer; Joseph Ruhl, Regional President-White Plains; Kathryn Maloney, Trust Services Director 12

O R A N G E C O U N T Y B A N C O R P, I N C .

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

Esquire Banking As trusted advisors, attorneys must deliver a level of service to their clients that meets very high expectations. In recognition of an attorney’s deep client focus, Orange County Trust Company has built Esquire Banking, a suite of banking products specifically designed for attorneys—whose need to focus on the practice of law commands a solution that will not distract these professionals from attending to the requirements of their clients.

Escrow Management Lines of Credit for the Practice Case Financing Outsourced Trust & Estate Administration Firm & Client Investment Management*

In the spring of 2015 we’re proud to launch Escrow Funds Management our newest Esquire Banking product. It’s designed to help attorneys simplify and streamline accounting and reduce operating costs.

*Investment management services provided by Hudson Valley Investment Advisors, Inc., an affiliate of Orange County Trust Company

2014 ANNUAL REPORT

13

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

Municipal Banking The relationships we have with the communities in our market; villages, towns, counties, fire and school districts, are an expression of what it means to be a community bank. Helping municipalities manage their financial affairs is critical for the overall welfare of a community and Orange County Trust has devoted significant resources to its Municipal Banking business.

Bond Anticipation Notes Collateralized Deposits Insured Sweep Deposit Product

Kevin Kean, SVP Branch Administrator (left); John Fracasse, VP Branch Manager and Municipal Specialist (right).

14

O R A N G E C O U N T Y B A N C O R P, I N C .

Lending SWIFT AND DEAL-FOCUSED We offer custom-designed commercial and consumer loans and, with processing and underwriting done in-house, we can deliver approvals and schedule closings expeditiously.

Orange County Trust Company has a full, in-house loan operations department with a combined experience of over 100 years.

BUSINESS LOANS Short Term Lines of Credit • Equipment Lines of Credit Power Line of Credit • Term Loans • Commercial Real Estate Loans PERSONAL LOANS Home Mortgages • Home Equity • Auto

From Left to Right: Ryan Dowling, Portfolio Manager; Christopher Earl, Loan Review/Credit Analyst; Roland Newkirk(sitting), VP/Sr. Credit Officer; Cynthia Weiss, Credit Analyst; Adam Schmalz, Portfolio Manager 2014 ANNUAL REPORT

15

Glenn G. Wassermann, SVP & Senior Trust Officer (left); Kathryn M. Maloney, SVP & Trust Services Director (right).

16

O R A N G E C O U N T Y B A N C O R P, I N C .

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

Trust Department Legacy is a word that touches on the traditions, achievements and core principles that define the Trust Department of Orange County Trust Company. Established in 1892 solely as a trust company, our Bank has provided discreet and attentive fiduciary services for generations. Hosting one of the only resident trust departments in the Hudson Valley, Orange County Trust has established itself as a leader among attorneys, accountants and other trust and estate practitioners providing expert, professional services including: Trust and Estate Administration Custody of Assets Special Needs Trusts Charitable Trusts

2014 ANNUAL REPORT

17

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

Hudson Valley Investment Advisors, Inc. a Registered Investment Advisor (RIA) and affiliate of Orange County Trust. As an RIA we are independent in our recommendations and are required by law to act in a fiduciary capacity for our clients. HVIA is dedicated to helping clients achieve their goals based on the timeline and level of risk with which they are comfortable. Whether you are an individual, family or business, we make it our mission to provide our clients with the highest level of service and financial advice to help them meet their goals.

With our disciplined investment process, our clients get high quality, well diversified portfolios specifically designed to meet their investment goals. Education is important to us and we are dedicated to excellent communication with our clients—ensuring that they understand the investment strategies, process, and expected results we will pursue on their behalf.

Our customized, investment portfolio services are competitively priced and offered with a personalized approach to our roster of clients, including: • Pension Funds & Profit Sharing Plans • Foundations & Endowments • Corporations or other business entities • Individual Retirement Accounts (IRAs) • Individuals, including high net worth individuals • Trusts, estates and charitable organizations

Trusts, securities, and insurance products are not FDIC insured or insured by any Federal Government entity. Not bank guaranteed. Not a deposit. May lose value.

18

O R A N G E C O U N T Y B A N C O R P, I N C .

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

2014 ANNUAL REPORT

19

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

Hon. Dan Depew Hon. Dan Depew is a Town Supervisor who thinks like a CEO. He loves challenges, sets goals, likes working with teams, and values partnerships. When the Town of Wallkill was consolidating their banking, Dan’s team was looking for a great relationship but also, superior customer service and sustained community involvement.

They found it in Orange County Trust and branch manager Deb Weaver. Dan says that Deb’s willingness to always be there and follow through is just one example of Orange County Trust’s commitment to reliability and customer service.

They always find a competitive edge,” Dan says, “because they are all about customer service, all the time.”

20

O R A N G E C O U N T Y B A N C O R P, I N C .

Franco Fidanza Franco Fidanza started with a pizza parlor in Middletown and now owns Planet Wings with six restaurants and 25 more owned by franchisees. He attributes his success to dedication, hard work, constantly reinventing the business, and his relationship with Orange County Trust.

After years with national banks he moved to Orange County Trust because he wanted a relationship with a local bank committed to the community. He credits Mary Ellen Rogulski, the Bank’s SVP/Senior Lending Officer, with providing guidance and analysis, understanding where he was and where he wanted to go and helping him to make his dreams come true.

“They’re a great partner,” Franco says, “because I believe in them and they believe in me.

2014 ANNUAL REPORT

21

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

Father Mark Connell Father Mark Connell is Executive Director of Newburgh’s San Miguel Academy, bringing superior educational opportunity to children in one of New York’s most challenging environments. He expects and delivers excellence to find the “greatness” in each of San Miguel’s students. To do that he relies on meaningful teacher engagement, extended school days and his two resident pet dogs. He also relies on the integrity he sees in Orange County Trust to handle San Miguel’s investments. Father Mark counts on Newburgh branch manager Jerry Stuit to provide a high standard of service to make transactions painless.

Support—that is what stands out,” says Father Mark, “San Miguel exists because of support and Orange County Trust is a great supporter.”

22

O R A N G E C O U N T Y B A N C O R P, I N C .

EXCELLENCE IN ORANGE AT WORK FOR OUR CUSTOMERS

2014 ANNUAL REPORT

23

PRESIDENT’S MESSAGE

Excellence

in Orange at Work for Our Community A community bank like ours only thrives when our customers and communities do as well. Taking care of our customers and looking out for the best interest of their community is engrained in the way we conduct our business each and every day.

Food Bank of the Hudson Valley We rallied around The Food Bank of the Hudson Valley in October as a sponsor of their Annual Walk to Fight Hunger. The Food Bank serves Orange, Dutchess, Putnam, Ulster, Sullivan and Rockland counties and works to alleviate hunger and prevent food waste.

It collects large donations of food from the hospitality industry and distributes it to food pantries, soup kitchens and other charitable agencies feeding the hungry. In 2013, the Food Bank of the Hudson Valley distributed over 12 million pounds of food to more than 400 member agencies.

24

O R A N G E C O U N T Y B A N C O R P, I N C .

EXCELLENCE IN ORANGE AT WORK FOR OUR COMMUNITY YMCA of Middletown’s Save the Last Lap Capital Campaign YMCA

of

Middletown

has

been

an

integral part of this city for over 60 years.

When they launched their Save the Last Lap Capital Campaign in July for a muchneeded pool improvement, we jumped in with a $50,000 commitment.

The

upgrade

presents

an

opportunity

that will enable YMCA to teach more children to swim, add a variety of new aquatic programs, and increase the use of the pool for rehabilitation purposes.

June

we

sponsored

Orange County Community College As part of our five year pledge to support the SUNY Orange Foundation, and Orange County Community College, we contributed $20,000 in July. Funds are designated towards scholarships, the existing Orange

Habitat for Humanity, Newburgh In

SUNY Orange Foundation and

a

Habitat

for

Humanity Builder’s Blitz breakfast, providing meals for 75 on-site volunteers in Newburgh.

Our employees attended the event and helped serve the meal. In partnership with the

County Trust Scholarship Endowment Fund, and for capital equipment to enhance the nursing simulation laboratory on the Middletown Campus. This gift will also help generate much needed scholarships for students and state-of-the-art equipment for the new Health Professions Inter-professional Education Center, anticipated to open in 2015.

Builders Association of the Hudson Valley, Habitat for Humanity built two houses in just five days with donated materials and labor from local construction industry professionals.

“This pledge is enhancing our nursing curriculum to the benefit of our students and the greater Orange County community.”

— VINNIE CAZZETTA, VICE PRESIDENT FOR INSTITUTIONAL ADVANCEMENT, SUNY ORANGE

Orange County Trust Company Sponsors Youth Lacrosse Clinic We were a proud sponsor of the 2014 Trilogy Lacrosse Clinic on the Chris Hawkins Indoor Field at the Newburgh Armory Unity Center (NAUC). The NAUC organization fosters collaborative relationships between the City of Newburgh and Newburgh Enlarged City School District, focusing on opportunities in education, athletics, health and wellness.

The two day event included instruction for children in grades 3-12. Led by coaches who have played at professional and collegiate levels, the Trilogy Lacrosse program teaches the kids how to improve their skills and shows them new techniques to improve their game.

Trilogy Lacrosse Founder and all-time Major League Lacrosse points leader Ryan Boyle 2014 ANNUAL REPORT

25

Tel: 717-233-8800 Fax: 717-233-8801 www.bdo.com

945 East Park Drive Suite 103 Harrisburg, PA 17111

Independent Auditor’s Report Board of Directors Orange County Bancorp, Inc. Middletown, New York We have audited the accompanying consolidated financial statements of Orange County Bancorp, Inc. and its Subsidiaries, which comprise the consolidated statements of condition as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO is the brand name for the BDO network and for each of the BDO Member Firms.

26

O R A N G E C O U N T Y B A N C O R P, I N C .

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orange County Bancorp, Inc. and its Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Harrisburg, Pennsylvania April 28, 2015

2014 ANNUAL REPORT

27

CONSOLIDATED STATEMENTS OF CONDITION CONSOLIDATED STATEMENTS OF CONDITION DECEMBER 31, 2014 AND 2013 December 31, 2014 and 2013 (in thousands except for share data) 2014

2013

ASSETS $

Cash and due from banks Investment securities - available-for-sale Restricted investment in bank stocks Loans Allowance for loan losses Loans, net Premises and equipment Other real estate owned Accrued interest receivable Cash surrender value of bank-owned life insurance Goodwill Intangible Assets Other assets TOTAL ASSETS

9,520 320,543 3,754

$

10,287 286,442 4,039

336,563 (4,785) 331,778

322,645 (3,985) 318,660

13,788 2,304 2,497 24,414 5,359 3,677 8,496

14,117 674 2,481 23,675 5,359 3,963 8,064

$

726,130

$

677,761

$

104,419 433,497 537,916

$

85,335 410,403 495,738

LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing Interest bearing Total deposits Short-term borrowings Long-term debt Accrued expenses and other liabilities TOTAL LIABILITIES

73,261 16,594

4,000 73,305 10,667

627,771

583,710

STOCKHOLDERS' EQUITY Common stock, $0.50 par value; 2,000,000 shares authorized; 1,994,850 and 2,000,000 issued; 1,959,780 and 1,955,630 outstanding at December 31, 2014 and 2013 respectively Surplus Undivided profits Accumulated other comprehensive loss, net of taxes Treasury stock, at cost; 35,070 and 44,370 shares at December 31, 2014 and 2013, respectively TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.

28

O R A N G E C O U N T Y B A N C O R P, I N C .

$

998 70,533 30,529 (2,280)

1,000 70,620 27,541 (3,307)

(1,421) 98,359

(1,803) 94,051

726,130

$

677,761

CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME

YEARS31,ENDED DECEMBER 31, 2014 AND 2013 Years Ended December 2014 and 2013

(in thousands except for share and per share data)

2014

INTEREST INCOME Interest and fees on loans Interest on investment securities: Taxable Tax exempt Interest on Federal funds sold and other

$

2013 16,553

$

15,678

5,347 3,297 36

4,573 3,772 12

TOTAL INTEREST INCOME

25,233

24,035

INTEREST EXPENSE Interest on savings and NOW accounts Interest on time deposits Interest on short-term borrowings Interest on long-term debt TOTAL INTEREST EXPENSE

628 599 2 3,074 4,303

649 686 12 3,075 4,422

20,930

19,613

900

780

20,030

18,833

1,158 5,203 667 728 611 8,367

1,365 4,238 1,028 738 366 7,735

8,581 3,184 2,008 447 1,409 576 503 502 443 293 586 286 1,829 20,647

7,469 3,325 1,935 503 1,232 513 429 468 401 278 46 286 1,564 18,449

7,750

8,119

NET INTEREST INCOME Provision for loan losses NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES OTHER OPERATING INCOME Service charges on deposit accounts Trust and investment division income Investment securities gains Earnings on bank-owned life insurance Other TOTAL OTHER OPERATING INCOME OTHER OPERATING EXPENSES Salaries Employee benefits Occupancy expense Furniture and equipment expense Professional fees Directors' fees and expenses Computer software expense FDIC assessment Advertising expenses Telephone expenses Net expenses from other real estate owned Intangible amortization Other TOTAL OTHER OPERATING EXPENSES Income before income taxes Provision for income taxes NET INCOME

$

1,553 6,197

$

1,610 6,509

Basic earnings per share

$

3.17

$

3.32

Cash dividends declared per share

$

1.64

$

1.18

1,956,760

Weighted average shares outstanding

1,957,880

See accompanying notes to consolidated financial statements.

2014 ANNUAL REPORT

29

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME Years OF Ended December 31, 2014 and 2013 YEARS ENDED DECEMBER 31, 2014 AND 2013 (in thousands)

2014

Net Income

$

Other Comprehensive Income (Loss), Net of Tax Securities available for sale: Gross unrealized holding gains (losses) arising during the year (net of tax of $2,584 and $(4,607), respectively) Adjustment for gains realized in net income (net of tax of $(265) and $(408), respectively)(1) (3) Benefit plans: Amortization of pension net loss, transition asset and prior (2)(3) service credit (net of tax of $65 and $201, repectively) Unrecognized pension net gain (loss) (net of tax of $(1,740) and $1,644, respectively) Change in deferred compensation plan (net of tax of $31 and $140, respectively)

2013 6,197

$

3,926

(7,054)

(402)

(620)

100

305

(2,644)

2,497

47

213

1,027

Total other comprehensive income (loss) $

Total comprehensive income

6,509

7,224

(4,659) $

1,850

(1) Gross amounts are included in investment securities gains on the consolidated statements of income in total other operating income.

(2) Gross amounts are included in the computation of net periodic benefit cost and are included in employee benefits on the consolidated statements of income in total other operating expenses.

(3) Income tax amounts are included in provision for income taxes on the consolidated statements of income.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

ORANGE COUNTY 30

B A N C O R P, I N C .

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY YEARS IN ENDED DECEMBER 31, 2014 AND 2013 CONSOLIDATED STATEMENTS OF CHANGES STOCKHOLDERS' EQUITY Years Ended December 31, 2014 and 2013

(in thousands except for share and per share data)

Common Stock

Balance, January 1, 2013

$

Net income Other comprehensive loss, net of taxes Cash dividends declared ($1.18 per share) Treasury stock purchased (8,000 shares) Balance, December 31, 2013 Net income Other comprehensive income, net of taxes Cash dividends declared ($1.64 per share) Treasury stock retired (6,050 shares) Treasury stock sold (3,370 shares) Treasury stock purchased (120 shares) Vested restricted shares at $40 (900 shares), including compensation expense of $153 Balance, December 31, 2014

$

1,000

Undivided Profits

Surplus $

70,620

-

-

1,000

70,620

(3) -

(239) -

1

152

998

$

Accumulated Other Comprehensive Income (Loss)

70,533

$

23,342

$

1,352

$

(1,484)

6,509 (2,310) -

(4,659) -

(319)

27,541

(3,307)

(1,803)

6,197 (3,209) -

1,027 -

$

Treasury Stock

30,529

(2,280)

$

94,051 6,197 1,027 (3,209) 145 (5)

$

(1,421)

94,830 6,509 (4,659) (2,310) (319)

242 145 (5)

$

Total

153 $

98,359

See accompanying notes to consolidated statements.

See accompanying notes to consolidated statements.

2014 ANNUAL REPORT

31

CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2014 2013 Years EndedAND December 31, 2014 and 2013 (dollars in thousands) 2014 OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Depreciation and amortization Amortization of intangibles Deferred income tax benefit Investment securities gains Restricted stock expense Net loss (gain) on sale of other real estate owned, including writedowns Net amortization (accretion) of investment premiums Net earnings on bank-owned life insurance (Increase) decrease in accrued interest receivable Increase in other assets Increase in other liabilities

$

2013

6,197

$

6,509

900 609 286 (1,015) (667) 153 444 164 (728) (16) (92) 1,786

780 717 286 (729) (1,028) (23) (54) (738) 367 (2,585) 4,974

8,021

8,476

INVESTING ACTIVITIES Purchases of investment securities available-for-sale Proceeds from sales, maturities and calls of investment securities available-for-sale Redemptions (purchases) of restricted investment in bank stocks Net increase in loans Purchases of premises and equipment Proceeds from sale of other real estate owned Purchase of bank-owned life insurance

(87,561) 59,806 285 (16,218) (280) 126 (11)

(83,386) 83,814 (153) (23,792) (438) 153 (917)

NET CASH USED IN INVESTING ACTIVITIES

(43,853)

(24,719)

FINANCING ACTIVITIES Net increase in deposits Net (decrease) increase in short-term borrowings Repayments of long-term debt Cash dividends paid Net sales (purchases) of treasury stock

42,178 (4,000) (44) (3,209) 140

13,912 4,000 (41) (2,310) (319)

NET CASH PROVIDED BY FINANCING ACTIVITIES

35,065

15,242

NET CASH PROVIDED BY OPERATING ACTIVITIES

(767)

NET DECREASE IN CASH AND CASH EQUIVALENTS

(1,001)

10,287

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

11,288

CASH AND CASH EQUIVALENTS AT END OF YEAR

$

9,520

$

10,287

Supplementary Cash Flow Information Interest paid Income taxes paid

$

4,323 2,620

$

4,454 1,621

$

2,200

$

594

Supplementary Schedule of Non Cash Investing Activities Loans transfered to other real estate owned See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

32

O R A N G E C O U N T Y B A N C O R P, I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Nature of Operations Orange County Bancorp, Inc. (the Parent Company) provides full-service commercial and consumer banking to individuals, small businesses and local municipal governments as well as trust and investment services through its wholly-owned subsidiary, Orange County Trust Company (the Bank). On November 16, 2012, the Parent Company purchased Hudson Valley Investment Advisors (HVIA), a Registered Investment Advisor, to compliment the trust and investment services offered through the Bank. Collectively, these entities are referred to herein as the “Company.”

The Company is headquartered in Middletown, New York with nine locations in Orange County, New York and one in Dutchess County, New York.

Basis of Financial Statements The consolidated financial statements have been prepared, in all material respects, in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of the Parent Company, the Bank, and, HVIA. All significant intercompany accounts and transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of other than temporary impairment on investment securities and the valuation of goodwill.

Assets held by the Bank’s Trust & Investment Division in an agency or fiduciary capacity for its customers are excluded from the consolidated financial statements since they do not constitute assets of the Company. Assets held by the Trust & Investment Division amounted to $274,202,000 and $259,695,000 at December 31, 2014 and 2013, respectively. Income from fiduciary activities is recognized on the accrual method.

Certain amounts previously reported have been reclassified, when necessary, to conform to the current year’s consolidated financial statement presentation. The reclassifications had no effect on net income or total stockholders’ equity.

The Company has evaluated events and transactions occurring subsequent to the consolidated statement of condition date of December 31, 2014 for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through April 28, 2015 the date these consolidated financial statements were available to be issued. With the exception of the matter discussed in Note 13, there were no material subsequent events that required additional disclosure in these financial statements.

Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, balances due from banks, and federal funds sold, all of which mature within ninety days.

Investment Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in other comprehensive loss.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the securities, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) management does not expect to recover the entire amortized cost basis. GAAP specifies that (a) if an entity does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income (loss). Gains and losses on the sale of individual securities are recorded on the trade date and are determined using the specific identification method.

Restricted Investment in Bank Stocks Restricted investment in bank stocks which represents required investments in the common stock of correspondent banks is carried at cost as of December 31, 2014 and 2013 and consists primarily of the common stock of the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank.

Management evaluates the restricted investment in bank stocks for impairment in accordance with Accounting Standard Codification (ASC) Topic 942, Financial Services – Depository and Lending. Management’s determination of whether these investments are impaired is based on the assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a

2014 ANNUAL REPORT

33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted; (2) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the correspondent bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the correspondent bank.

Management believes no impairment charge was necessary related to the restricted investment in bank stocks during 2014 or 2013. However, security impairment analysis is completed quarterly and the determination that no impairment has occurred during those years is no assurance that impairment may not occur in future periods.

Loans and Allowance for Loan Losses The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in Orange County. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of an allowance for loan losses and any deferred cost or fees. Interest on loans is accrued as income based on outstanding principal balances. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The loan portfolio is segmented into commercial, residential real estate, home equity, and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate and commercial real estate construction.

The accrual of interest on commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. The accrual of interest on residential real estate loans and home equity loans is discontinued at the time the loan is 180 days past due unless the credit is well-secured and in the process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued, but not collected, for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (allowance) represents management’s estimate of losses inherent in the loan portfolio as of the consolidated statement of condition date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of condition. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements.

The allowance for loan losses is established as losses are estimated to have occurred in the loan portfolio. The allowance for loan losses is recorded through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan. The general component covers non-classified loans and is based on historical loss rates, adjusted for qualitative factors. These qualitative factors include:

• • • • • • • • •

34

changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; changes in international, national, regional and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; changes in the nature and volume of the portfolio and in the terms of loans; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans; changes in the quality of the Bank’s loan review system; changes in the value of underlying collateral for collateral-dependent loans; the existence and effect of any concentrations of credit, and changes in the level of such concentration; and, the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

O R A N G E C O U N T Y B A N C O R P, I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in a narrative accompanying the allowance for loan loss calculation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Commercial and Industrial Lending – The Bank originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Bank and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.

In underwriting commercial and industrial loans, an analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower is performed. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Bank’s analysis.

Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

Commercial Real Estate Lending – The Bank engages in commercial real estate lending in its primary market area and surrounding areas. The Bank’s commercial loan portfolio is secured primarily by commercial retail space and office buildings. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.

In underwriting these loans, the Bank performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Bank are performed by independent appraisers.

Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

Commercial Real Estate Construction Lending – The Bank engages in commercial real estate construction lending in its primary market area and surrounding areas. The Bank’s commercial real estate construction lending consists of commercial and residential site development loans as well as commercial building construction and residential housing construction loans.

The Bank’s commercial real estate construction loans are generally secured with the subject property. Terms of construction loans depend on the specifics of the project such as, estimated absorption rates, estimated time to complete, etc.

In underwriting commercial real estate construction loans, the Bank performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc.

Appraisals on properties securing commercial real estate construction loans originated by the Bank are performed by independent appraisers.

Commercial real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and uncertainties of construction costs.

Residential Real Estate Lending – One- to four-family residential mortgage loan originations are generated by the Bank’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within the Bank’s market area or with customers primarily from the market area.

The Bank offers fixed-rate loans with terms up to a maximum of 30 years for both permanent structures and those under construction. The Bank’s one- to four-family residential real estate loan originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Bank’s residential real estate loans originate with a loan-to-value of 80% or less. Loans in excess of 80% are required to have private mortgage insurance.

In underwriting one- to four-family residential real estate loans, the Bank evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Properties securing real estate loans made by the Bank are appraised by independent appraisers. The Bank generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Bank has not engaged in sub-prime residential mortgage originations.

Residential real estate loans generally present a lower level of risk than other types of loans because they are secured by the borrower’s primary residence.

2014 ANNUAL REPORT

35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Home Equity Lending – The Bank originates home equity lines of credit and closed-end loans primarily within the Bank’s market area or with customers primarily from the market area.

Home equity lines and loans are secured by the borrower’s primary residence with a maximum loan-to-value of 85% and a maximum term of 15 years on home equity loans and a 10-year draw period followed by a 15-year repayment period for home equity lines.

In underwriting home equity lines and loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay shall be determined by the borrower’s employment history, current financial conditions, and credit background. The analysis is based primarily on the customer’s ability to repay and secondarily on the collateral or security.

Home equity lines and loans generally present a lower level of risk than other types of consumer loans because they are secured by the borrower’s primary residence.

The subordinate nature of some home equity lines and loans may make these loans of higher risk than other residential real estate loans.

Consumer Lending – The Bank offers a variety of secured and unsecured consumer loans, including vehicle, loans secured by savings deposits as well as other types of consumer loans.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay shall be determined by the borrower’s employment history, current financial conditions, and credit background.

Consumer loans may entail greater credit risk than do residential real estate loans particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

A specific allocation within the allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value.

The estimated fair values of substantially all of the Bank’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values of collateral are determined primarily through third-party appraisals. When real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging reports, equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

Large groups of smaller balance homogeneous loans, including commercial and commercial real estate loans not considered individually impaired, are collectively evaluated for impairment.

Loans whose terms are modified are classified as troubled debt restructurings if the Bank grants such borrowers concessions that it would not otherwise consider and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, continuance of a below market interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

The allowance calculation methodology includes further segregation of loan classes into credit quality rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are generally evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.

36

O R A N G E C O U N T Y B A N C O R P, I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

In addition, federal regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for losses is adequate at December 31, 2014 and 2013.

Off-Balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under commercial lines of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Bank Premises and Equipment Land is carried at cost. Bank premises and equipment, including leasehold improvements, are carried at cost net of accumulated depreciation and amortization. Depreciation is computed on the straight-line and double declining balance methods over the estimated useful lives of the assets.

Leasehold improvements are amortized over the terms of the leases or the estimated useful lives of the assets, whichever is shorter. Occupancy expense includes repairs and maintenance and all other expenses related to the operation of the premises.

Other Real Estate Owned Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are adjusted to their fair value, less costs to sell as necessary, but shall not exceed their cost basis. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.

Cash Surrender Value of Bank-Owned Life Insurance The Bank maintains nonqualified compensation plans for selected Directors and Officers. To fund the benefits under these plans, the Bank is the owner of single premium life insurance policies on participants in the nonqualified retirement plans. Investment in bank-owned life insurance policies was used to finance the nonqualified compensation plans and to provide tax-exempt income to the Company. This life insurance investment is carried at the cash surrender value of the underlying policies. Income from the increase in cash surrender value is included in other operating income on the consolidated statement of income.

ASC Topic 715, Compensation – Retirement Benefits, requires a liability to be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability is based on either the postemployment benefit cost for continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Bank’s liability is based on the post-employment benefit cost for continuing life insurance. The Bank incurred approximately $35,000 and $30,000 of expense in 2014 and 2013, respectively, related to this accounting pronouncement.

Business Combinations The Company accounts for business combinations using the purchase accounting method. Purchase accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized.

This allocation can result in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill.

Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the underlying fair value of assets acquired less liabilities assumed. The Company assesses goodwill for impairment annually as of October 1 at the reporting unit level. If certain events occur which indicate goodwill might be impaired between annual tests, goodwill must be tested for impairment when such events occur. In making this assessment, the Company considers a number of factors including operating results, business plans, economic projections, anticipated futures cash flows, current market data, etc. There are inherent uncertainties related to these factors and judgment must be used in applying them to the analysis of goodwill impairment. Changes in economic and operating conditions could result in goodwill impairment in future periods. Management determined that the fair value of the reporting unit was greater than its carrying amount, thus, no impairment of goodwill exists, as of December 31, 2014 and 2013. Intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Intangible assets are being amortized on a straight-line basis over fifteen years. Intangible amortization expense of $286,000 was recorded in 2014 and 2013, respectively.

Intangible amortization expected for the succeeding five years beginning 2015 through 2019 is estimated to be $286,000 per year and $2,247,000 in total for years after 2019.

Advertising Costs The Company follows the policy of charging the costs of advertising to expense as incurred.

2014 ANNUAL REPORT

37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes The Company accounts for income taxes in accordance with income tax accounting guidance ASC Topic 740.

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term sustained upon examination also includes resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the morelikely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

Years that remain open for potential review by taxing authorities are 2011 through 2014.

Transfers of Financial Assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Earnings per Share Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the year. The average number of shares outstanding during 2014 and 2013 was 1,960,438 and 1,957,880, respectively. The Company currently maintains a simple capital structure, thus there are no dilutive effects on earnings per share.

Accumulated Other Comprehensive Loss The components of the accumulated other comprehensive loss, net of taxes, as of December 31, 2014 and 2013 are as follows (in thousands): Unrealized Gains Accumulated (Losses) Other Pension Deferred on Comprehensive Plan Compensation Securities Liability Liability Loss $2,882 $(5,199) $37 $(2,280) Balance – December 31, 2014 Balance – December 31, 2013 $(642) $(2,655) $(10) $(3,307) Pension Plan The Bank has a non-contributory defined-benefit pension plan covering substantially all employees meeting certain eligibility requirements which provides benefits upon reaching normal retirement age. Normal retirement age is 62 for employees hired prior to October 1, 2006 and 65 for employees hired subsequently. The Bank's funding policy is to contribute annually an amount sufficient to satisfy the minimum funding requirements of ERISA, but not greater than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only benefits attributed to service to-date, but also for benefits expected to be earned in the future.

The Bank follows ASC Topic 715, Compensation - Retirement Benefits, which requires an employer to recognize an asset or liability for the overfunded or underfunded status of its defined benefit plans. The overfunded or underfunded status is to be measured solely as the difference between the fair value of plan assets and the projected benefit obligation. In addition, any change in a plan's funded status must be recognized in comprehensive income in the year in which it occurs.

The compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes.

38

O R A N G E C O U N T Y B A N C O R P, I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Investment Securities The amortized cost and fair value of investment securities at December 31, 2014 and 2013 were as follows: Gross Unrealized Gains

Amortized Cost

(in thousands) Available-for-sale December 31, 2014 U.S. government agencies Mortgage-backed securities Obligations of states and political subdivisions Total debt securities

$

$

Available-for-sale December 31, 2013 U.S. treasury securities U.S. government agencies Mortgage-backed securities Obligations of states and political subdivisions Total debt securities

$

$

78,834 149,104 87,827 315,765

4,820 79,892 106,679 96,116 287,507

$

$

$

$

1,006 1,440 3,792 6,238

498 490 3,519 4,507

Gross Unrealized Losses $

$

$

$

Fair Value

1,082 358 20 1,460

98 3,131 2,112 231 5,572

$

$

$

$

78,758 150,186 91,599 320,543

4,722 77,259 105,057 99,404 286,442

The following table shows gross unrealized losses on investment securities, segregated by category and length of time in continuous loss position, as of December 31, 2014 and 2013: Less than 12 Months Fair Unrealized Value Losses

(in thousands) Available-for-sale December 31, 2014 U.S. government agencies Mortgage-backed securities Obligations of states and political subdivisions Total debt securities Available-for-sale December 31, 2013 U.S. treasury securities U.S. government agencies Mortgage-backed securities Obligations of states and political subdivisions Total debt securities

$

$

$

$

34,117 3,824 37,941

$

4,722 57,034 71,393 1,872 135,021

$

$

$

74 19 93

98 3,131 1,953 193 5,375

12 Months or More Fair Unrealized Value Losses $

$

49,901 25,983 106 75,990

$

$

4,319 535 4,854

$

$

$

$

1,082 284 1 1,367

159 38 197

Total Fair Value $

$

49,901 60,100 3,930 113,931

$

4,722 57,034 75,712 2,407 139,875

Unrealized Losses $

$

1,082 358 20 1,460

$

98 3,131 2,112 231 5,572

Mortgage-backed securities are issued by FNMA, FHMC, and GNMA and consist of residential mortgages.

Obligations of states and political subdivisions consist of general obligations of municipalities in the state of New York.

There were no U.S. treasury securities with an unrealized loss of less than 12 months at December 31, 2014 and one at December 31, 2013. This unrealized loss related principally to changes in interest rates subsequent to the acquisition of the security. The security in this category had an unrealized loss of 2% of amortized cost at December 31, 2013.

There were no U.S. government agency securities with unrealized losses of less than 12 months at December 31, 2014 and 14 at December 31, 2013. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the securities. The securities in this category had unrealized losses of 5.5% of amortized cost at December 31, 2013.

There were 12 U.S. government agency securities with unrealized losses greater than 12 months at December 31, 2014 and none at December 31, 2013. The securities in this category had unrealized losses of 2.2% of amortized cost at December 31, 2014. These losses relate principally to changes in interest rates subsequent to the acquisition of the securities.

The total number of mortgage-backed securities with unrealized losses of less than 12 months was 8 and 15 at December 31, 2014 and 2013, respectively. The securities in this category had unrealized losses of 0.2% and 2.7% of amortized cost at December 31, 2014 and 2013, respectively. There were 7 mortgage-backed securities with an unrealized loss greater than 12 months at December 31, 2014 and one at December 31, 2013. The securities in this category had unrealized losses of 1.1% and 3.5% of amortized cost at December 31, 2014 and 2013, respectively. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the securities.

There were 17 obligation of states and political subdivisions with an unrealized loss of less than 12 months at December 31, 2014 and four at December 31, 2013. The securities in this category had unrealized losses of 0.5% and 10.3% of amortized cost at Decmber 31, 2014 and 2013, respectively. There was 1 obligation of states and political subdivisions with an unrealized loss greater than 12 months at December 31, 2014 and one at December 31, 2013. The securities in this category had an unrealized loss of 0.2% and 6.7% of amortized cost at December 31, 2014 and 2013, respectively. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of specific securities.

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At December 31, 2014, management had not identified any securities with an unrealized loss that it intended to sell, or would be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the securities, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) management does not expect to recover the entire amortized cost basis. No securities were deemed to be other-than-temporarily impaired.

The amortized cost and fair value of debt securities as of December 31, 2014 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).

2014 Available-for-sale Amortized Fair Cost Value Due in one year or less $ 18,942 $ 19,136 Due after one through five years 48,968 50,829 Due after five through ten years 93,754 94,868 Due after ten years 4,997 5,524 166,661 170,357 Mortgage-backed securities 149,104 150,186 Total debt securities $ 315,765 $ 320,543 Debt securities with a carrying value of $154,058,000 and $121,330,000 were pledged to secure public deposits at December 31, 2014 and 2013, respectively. Proceeds from sales of investments in debt securities during 2014 and 2013 were $21,614,000 and $26,705,000, respectively. Gross gains in those years were $708,000 and $1,028,000, respectively. Gross losses were $41,000 and $0 in 2014 and 2013 respectively.

2014 ANNUAL REPORT

39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Loans The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, doubtful and loss within the Company's internal risk rating system as of December 31, 2014 and 2013: (in thousands)

Special Mention

Pass December 31, 2014 Commercial and industrial Commercial real estate Commercial real estate - construction Residential real estate Home equity Consumer Total

$

$

88,515 153,106 15,541 37,225 10,195 539 305,121

$

$

(in thousands)

$

$

76,685 148,681 16,087 41,351 10,579 616 293,999

$

$

$

320 1,193 1,513

6,582 21,597 1,415 288 338 1 30,221

$

Special Mention

Pass December 31, 2013 Commercial and industrial Commercial real estate Commercial real estate - construction Residential real estate Home equity Consumer Total

784 437 1,221

Substandard

Doubtful $

7,846 18,930 278 27,054

$

-

$

Substandard $

Loss $

-

$

Doubtful

Total $

$

Loss

$

-

$

$

$

95,881 175,140 16,956 37,513 10,533 540 336,563

Total 79 79

$

$

84,930 168,804 16,365 41,351 10,579 616 322,645

The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2014 and 2013:

(in thousands) December 31, 2014 Commercial and industrial Commercial real estate Residential real estate Home equity Consumer Total December 31, 2013 Commercial and industrial Commercial real estate Residential real estate Home equity Consumer Total

Impaired loans with No Allowance Unpaid Recorded Principal Investment Balance

Impaired loans with Allowance Unpaid Recorded Principal Related Investment Balance Allowance $

$

$

$

1,932 3,874 75 1 5,882

503 1,055 122 4 1,684

$

1,948 4,450 75 1 6,474

$

$

506 1,109 123 4 1,742

$

$

$

$

$

502 592 44 1 1,139

254 64 10 4 332

$

$

$

$

2,561 11,285 288 263 14,397

5,133 15,263 177 305 20,878

$

3,050 13,199 288 356 16,893

$

$

5,573 17,882 436 382 24,273

$

The following table summarizes information relative to average impaired loans and related interest income by loan portfolio class for the years ended December 31, 2014 and 2013:

(in thousands) December 31, 2014 Commercial and industrial Commercial real estate Residential real estate Home equity Consumer Total December 31, 2013 Commercial and industrial Commercial real estate Residential real estate Home equity Consumer Total

Impaired loans with No allowance Average Recorded Interest Investment Income

Impaired loans with allowance Average Recorded Interest Investment Income $

$

$

$

1,374 3,362 49 15 2 4,802

506 1,113 122 5 1,746

$

$

63 174 237

$

$

2,744 12,809 199 284 16,036

$

$

122 746 4 18 890

$

16 59 -

$

5,619 18,299 903 394

$

58 727 17

$

75

$

25,215

$

802

The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2014 and 2013: (in thousands) $

Commercial and industrial Commercial real estate Residential real estate Home equity Consumer Total

40

$

O R A N G E C O U N T Y B A N C O R P, I N C .

2014 2,449 7,733 288 263 1 10,734

$

$

2013 3,840 9,405 299 305 4 13,853

The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2014 and 2013: Loans (in thousands) Receivable 30-59 Days 60-89 Days Greater Than Total Total Loans > 90 Days and Past Due Past Due 90 Days Past Due Current Receivable Accruing December 31, 2014 Commercial and industrial $ 4,302 $ 202 $ 1,297 $ 5,801 $ 90,080 $ 95,881 $ 41 Commercial real estate 1,104 3,117 1,149 5,370 169,770 175,140 601 Commercial real estate-construction 1,604 477 2,081 14,875 16,956 Residential real estate 146 24 691 861 36,652 37,513 266 Home equity 385 117 502 10,031 10,533 Consumer 2 1 3 537 540 Total $ 7,543 $ 3,820 $ 3,255 $ 14,618 $ 321,945 $ 336,563 $ 908 December 31, 2013 Commercial and industrial Commercial real estate Commercial real estate-construction Residential real estate Home equity Consumer Total

$

$

71 3,868 945 1 4,885

$

$

281 3,213 28 186 17 3,725

$

$

2,820 2,226 438 116 5 5,605

$

$

3,172 9,307 1,411 302 23 14,215

$

$

81,758 159,497 16,365 39,940 10,277 593 308,430

$

$

84,930 168,804 16,365 41,351 10,579 616 322,645

$

538 221 5 764

$

The following tables summarize the allowance for loan losses and recorded investment in financing receivables: (in thousands) Commercial and Industrial As of December 31, 2014 Allowance for loan losses Beginning balance January 1, 2014 $ 1,211 Charge-offs (194) Recoveries 1 Provisions 453 Ending balance $ 1,471 Ending balance: individually evaluated for impairment $ 502 Ending balance: collectively evaluated for impairment $ 969 Loans receivables Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment

Commercial Real Estate Construction

Commercial Real Estate

$

$

Residential Real Estate

$

1,771 130 620 2,521

312 (1) (59) 252

$

$

$

592

$

-

$

$

1,929

$

252

Home Equity

$

31 45 76

-

$

$

377

$

502 (25) (100) 377

$

Consumer

$

Unallocated

$

17 (22) 11 11 17

$

$

44

$

1

$

$

32

$

16

Total

141 (70) 71

$

$

3,985 (242) 142 900 4,785

-

$

1,139

$

71

$

3,646

$

95,881

$

175,140

$

16,956

$

37,513

$

10,533

$

540

$

-

$

336,563

$

4,493

$

15,159

$

-

$

288

$

338

$

1

$

-

$

20,279

$

91,388

$

159,981

$

16,956

$

37,225

$

10,195

$

539

$

-

$

316,284

$

$

$

$

141 141

$

3,713 (522) 14 780 3,985

(in thousands) As of December 31, 2013 Allowance for loan losses Beginning balance January 1, 2013 $ Charge-offs Recoveries Provisions Ending balance $ Ending balance: individually evaluated for impairment $ Ending balance: collectively evaluated for impairment $ Loans receivables Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment

1,420 9 (218) 1,211

$

1,873 (37) 1 (66) 1,771

$

$

$

218 (292) 576 502

$

32 (1) 31

$

16 (10) 4 7 17

254

$

64

$

-

$

10

$

-

$

4

$

-

$

332

957

$

1,707

$

312

$

492

$

31

$

13

$

141

$

3,653

$

84,930

$

168,804

$

16,365

$

41,351

$

10,579

$

616

$

-

$

322,645

$

5,636

$

16,318

$

-

$

299

$

305

$

4

$

-

$

22,562

$

79,294

$

152,486

$

16,365

$

41,052

$

10,274

$

612

$

-

$

300,083

$

154 (183) 341 312

$

2014 ANNUAL REPORT

$

41

The recorded investments in troubled debt restructured loans at December 31, 2014 and 2013 are as follows (in thousands): Pre-Modification Outstanding Recorded Investment $ 4,009 17,477 75 $ 21,561

December 31, 2014 Commercial and industrial Commercial real estate Home Equity December 31, 2013 Commercial and industrial Commercial real estate

$ $

4,056 17,968 22,024

Post-Modification Outstanding Recorded Investment $ 4,009 17,477 75 $ 21,561 $ $

4,056 17,968 22,024

Current Recorded Investment $ 3,236 14,474 75 $ 17,785 $ $

3,355 14,732 18,087

Troubled debt restructured loans at December 31, 2014 totaled $17,785,000. There are seven commercial and industrial, eleven commercial real estate and one home equity troubled debt restructured loans totaling $9,462,000 which are accruing and in compliance with the terms of the modification. There are three commercial and industrial and four commercial real estate troubled debt restructed loans totaling $8,323,000 which are non-accruing. There are forbearance agreements on all loans currently classified as troubled debt restructures. The terms of the forebearance agreements resulted in below-market interest rates.

Troubled debt restructured loans at December 31, 2013 totaled $18,087,000. There are five commercial and industrial and ten commercial real estate troubled debt restructured loans totaling $8,694,000 which are accruing and in compliance with the terms of the modification. There are four commercial and industrial and five commercial real estate troubled debt restructed loans totalling $9,393,000 which are non-accruing.

The following table summarizes loans whose terms have been modified resulting in troubled debt restructurings during the years ended December 31, 2014 and 2013 (in thousands): Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

2 1 1 4

$

$

9 10 19

Number of Contracts 2014 Commercial and industrial Commercial real estate Home equity

2013 Commercial and industrial Commercial real estate

$

822 634 75 1,531

$ $ $

4,056 12,137 16,193

Current Recorded Investment

$

822 634 75 1,531

$

$

780 629 75 1,484

$ $ $

4,056 12,137 16,193

$ $ $

3,355 10,017 13,372

There were no loans that defaulted within twelve months of restructure during 2014 or 2013.

Loans to certain directors and principal officers of the Bank, including their immediate families and companies in which they are principal owners (more than 10%), amounted to $645,000 and $761,000 at December 31, 2014 and December 31, 2013. Such loans were made in the ordinary course of business at normal credit terms, including interest rates and collateral requirements, and do not represent more than a normal risk of collection. Activity for these loans for the years ended December 31, 2014 and 2013 are as follows (in thousands): 2014 $

Balance, beginning of year Additions Repayments Balance, end of year

$

761 (116) 645

$

$

2013 1,015 (254) 761

Note 4. Premises and Equipment Premises and equipment at December 31, 2014 and 2013 were as follows (in thousands): $

Land Buildings and improvements Furniture and equipment Leasehold improvements Accumulated depreciation and amortization Premises and equipment, net

$

2014 3,192 10,439 4,471 4,093 22,195 (8,407) 13,788

$

$

2013 3,192 10,398 4,245 4,080 21,915 (7,798) 14,117

Depreciation and amortization included in operating expenses amounted to $609,000 in 2014 and $717,000 in 2013.

Certain premises are leased under agreements which are renewable for varying periods and are subject to minimum lease payments as well as additional rent. Rent expense for all operating leases was $431,000 in 2014 and $394,000 in 2013.

As of December 31, 2014 future minimum lease payments are as follows (in thousands): Years Ending December 31, 2015 2016 2017 2018 2019 Thereafter

$

$

476 426 379 382 175 1,529 3,367

Note 5. Deposits A summarized analysis of the Bank's deposits at December 31, 2014 and 2013 follows (in thousands):

Demand deposits of individuals, partnerships and corporations NOW accounts of individuals, partnerships and corporations Time and savings deposits of individuals, partnerships and corporations Deposits of state and political subdivisions Deposits of commercial banks and other depository institutions in the U.S. Certified and official checks Total deposits

42

O R A N G E C O U N T Y B A N C O R P, I N C .

$

$

2014 96,769 44,776 228,215 165,209 308 2,639 537,916

$

$

2013 78,693 45,719 227,570 140,272 1,184 2,300 495,738

At December 31, 2014 and 2013 the Bank had $56,058,000 and $87,206,000, respectively, of time certificates of deposit of $100,000 or more.

Scheduled maturities of time certificates of deposit at December 31, 2014, were as follows (in thousands): Years Ending December 31, 2015 2016 2017 2018 2019

$

$

74,379 10,734 4,340 89,453

Note 6. Borrowings A summary of short-term borrowings as of December 31, 2014 and 2013 is as follows (in thousands): 2014 Amount $

Federal Home Loan Bank (FHLB) Overnight line of credit

2013 Rate

-

0.00%

Amount

Rate

$

4,000

0.40%

$

2013 Amount 40,000 30,000 3,305 73,305

A summary of long-term debt as of December 31, 2014 and 2013 is as follows (in thousands): 2014 Amount 40,000 30,000 3,261 $ 73,261

FHLB fixed-rate advances maturing: 2016 2017 Note payable Total long-term debt

Rate 4.07% 4.03% 6.00% 4.14%

Rate 4.07% 4.03% 6.00% 4.14%

Short-term borrowings are primarily in the form of federal funds purchased, an overnight line of credit, or FHLB fixed-rate borrowings that mature in less than one year. During 2014 and 2013 the average short-term borrowings balance was $630,000 and $3,307,000, respectively, and the average interest rate was 0.38% and 0.38%, respectively. Long-term advances from the FHLB are in the form of fixed-rate term borrowings and convertible advances. A convertible advance allows the FHLB to convert the advance at a set future date.

The note payable is payable in monthly installments of $20,000 of principal and interest, is unsecured, and matures with a balloon payment in November 2019.

The Bank maintains a line of credit program with the FHLB with a maximum borrowing capacity of $88 million as of December 31, 2014. To secure this line of credit, as well as other FHLB borrowings, the Bank is required to own stock in the FHLB and to pledge certain qualifying collateral, primarily in the form of securities and residential mortgages, under a security agreement and master repurchase agreement. The Bank owned $3,624,000 and $3,978,000 of FHLB stock as of December 31, 2014 and 2013, respectively.

At December 31, 2014 and 2013, the Bank may also borrow up to $5 million under a line of credit with another correspondent bank on an unsecured basis. There were no advances under this line of credit at December 31, 2014 or 2013.

Note 7. Income Taxes The provision for income taxes was as follows for the years ended December 31, 2014 and 2013 (in thousands): Current tax expense: Federal State Total current tax expense Deferred tax benefit Total provision for income taxes

2014 $

$

1,840 728 2,568 (1,015) 1,553

2013 $

$

1,681 658 2,339 (729) 1,610

The following is a reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate of 34% to income before income taxes (in thousands): 2014 2013 Tax expense at statutory rate $ 2,635 $ 2,760 Increase (decrease) in taxes resulting from: Tax-exempt municipal bond income (1,121) (1,283) State income tax, net of federal tax benefit 363 373 Net earnings on bank-owned life insurance (248) (251) Interest expense disallowed as a result of carrying tax-exempt bonds 10 14 Other (86) (3) Total provision for income tax $ 1,553 $ 1,610 Components of deferred tax assets and liabilities at December 31, 2014 and 2013 were as follows (in thousands): 2014 Deferred tax assets: Allowance for loan losses Reserve for unfunded commitments and other real estate owned Deferred loan fees Deferred compensation Alternative minimum tax Organization costs - holding company Organization costs - HVIA Available for sale securities Defined benefit plan

$

Deferred tax liabilities: Intangible amortization Accumulated depreciation Accretion Available for sale securities $

Net deferred tax asset

1,745 191 315 2,478 19 26 47 3,213 8,034 (149) (325) (79) (1,897) (2,450) 5,584

2013 $

$

1,427 32 261 2,253 19 30 51 423 1,100 5,596 (7) (386) (41) (434) 5,162

The Company's net deferred tax asset at December 31, 2014 and 2013 is included in other assets on the consolidated statement of condition.

The Company did not have any uncertain tax positions at December 31, 2014 and 2013. The Company's policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income.

2014 ANNUAL REPORT

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Fair Value of Financial Instruments Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes direction on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

This guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2014 and 2013 are as follows (in thousands):

U.S. government agencies Mortgage-backed securities Obligations of states and political subdivisions Total securities available for sale

$

$

U.S. treasury securities U.S. government agencies Mortgage-backed securities Obligations of states and political subdivisions Total securities available for sale

$

$

Fair Value Measurements at December 31, 2014 Total Level 1 Level 2 Level 3 78,758 $ $ 78,758 $ 150,186 150,186 91,599 91,599 320,543 $ $ 320,543 $

-

Fair Value Measurements at December 31, 2013 Total Level 1 Level 2 4,722 $ 4,722 77,259 $ 77,259 $ 105,057 105,057 99,404 99,404 286,442 $ $ 286,442 $

-

Level 3

For financial assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2014 and 2013 are as follows (in thousands):

$

Impaired loans Other real estate owned

Impaired loans

$

Fair Value Measurements at December 31, 2014 Total Level 1 Level 2 Level 3 4,743 $ $ $ 4,743 1,800 1,800 Fair Value Measurements at December 31, 20132 Total Level 1 Level 2 Level 3 2,073 $ $ $ 2,073

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs have been used to determine fair value (in thousands): Fair Value December 31, 2014 Estimate Valuation Technique Unobservable Input Range Impaired loans $ 4,743 Appraisal of collateral (1) 0-20% Appraisal and liquidation adjustments (2) Other real estate owned

December 31, 2013 Impaired loans

(1) (2)

1,800 Fair Value Estimate $ 2,073

Appraisal of collateral (1)

Appraisal and liquidation adjustments (2)

Valuation Technique Appraisal of collateral (1)

Unobservable Input Appraisal and liquidation adjustments (2)

18%

Range 0-20%

Fair value is generally determine through independent appraisals of the underlying collateral that generally include various level 3 inputs which are not identifiable.

Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments and pension plan assets at December 31, 2014 and 2013: Cash and Cash Equivalents (Carried at Cost) The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.

44

O R A N G E C O U N T Y B A N C O R P, I N C .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investment Securities Available for Sale and Pension Plan Assets The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the security’s relationship to other benchmark quoted prices. The Company uses an independent service provider to provide matrix pricing. The Company did not have any Level 3 investment securities or pension plan assets at December 31, 2014 and 2013.

Loans (Carried at Cost) The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate risk inherent in the loans.

Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayment, and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value) Loans for which the Company has measured impairment are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less the valuation allowance.

Restricted Investment in Bank Stocks (Carried at Cost) The carrying amount of restricted investment in bank stocks approximates fair value and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost) The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposits (Carried at Cost) The fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (e.g., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings (Carried at Cost) The carrying amounts of short-term borrowings approximate their fair values.

Long-Term Debt (Carried at Cost) Fair values of Federal Home Loan Bank (FHLB) advances and other notes payable are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-Balance Sheet Credit-Related Instruments Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The following presents the carrying amount, fair value, and placement in the fair value heirarchy of the Company's financial instruments at December 31, 2014 (in thousands): December 31, 2014 Carrying Amount Financial assets: Cash and due from banks Investment securities available for sale Net loans Accrued interest receivable Restricted investment in bank stocks

$

Financial liabilities: Deposits Long-term debt Accrued interest payable

Fair Value

9,520 320,543 331,778 2,497 3,754

$

Level 1

9,520 320,543 340,183 2,497 3,754

$

Level 2

9,520 -

$

Level 3

320,543 2,497 3,754

$

340,183 -

537,916 73,261 489

538,153 77,526 489

-

538,153 77,526 489

-

-

-

-

-

-

Off-balance sheet financial instruments

The following presents the carrying amount and fair value of the Company's financial instruments at December 31, 2013 (in thousands): December 31, 2013 Carrying Amount Financial assets: Cash and due from banks Investment securities available for sale Net loans Accrued interest receivable Restricted investment in bank stocks Financial liabilities: Deposits Short term borrowings Long-term debt Accrued interest payable Off-balance sheet financial instruments

$

Fair Value

10,287 286,442 318,660 2,481 4,039

$

Level 1

10,287 286,442 321,628 2,481 4,039

$

Level 2

10,287 -

495,738 4,000 73,305 509

495,936 4,000 79,589 509

-

-

-

2014 ANNUAL REPORT

$

Level 3

286,442 2,481 4,039

$

321,628 -

-

-

495,936 4,000 79,589 509

-

-

-

-

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Employee Benefit Plans Pension Plan The following is a summary of changes in the projected benefit obligations and plan assets for the pension plan as of December 31, 2014 and 2013 (in thousands): 2014 Change in projected benefit obligation: Beginning of year Service cost Interest cost Benefits paid Actuarial loss (gain) End of year

$

$

Change in fair value of assets: Beginning of year Contributions Actual return on plan assets Benefits paid and expenses End of year

$

2013

21,143 926 1,053 (1,076) 4,725 26,771

$

$

22,941 919 926 (985) (2,658) 21,143

$

18,370 1,521 (1,102) 18,789

$

16,040 827 2,507 (1,004) 18,370

$

2014 (7,982)

$

2013 (2,772)

$

The funded status of the pension plan recognized in the Bank's balance sheet was as follows (in thousands): Funded status at year end, included in other liabilities Amounts recognized in accumulated other comprehensive loss (in thousands): Total net actuarial loss Transition asset Prior service credit Total included in accumulated other comprehensive loss (pretax)

$

$

2014 (9,075) 362 90 (8,623)

$

$

2013 (4,915) 410 102 (4,403)

The estimated costs that will be amortized from accumulated other comprehensive loss into net periodic pension cost during the next fiscal year are as follows (in thousands): $

Amortization of net loss Amortization of transition asset Amortization of prior service credit

501 (48) (12) 441

$

The components of the net periodic pension cost were as follows (in thousands): 2014 Service cost Interest cost Expected return on plan assets Amortization of transition cost Amortization of prior service credit Amortization of net loss Net periodic benefit cost

$

Net loss (gain) Amortization of transition asset Amortization of prior service credit Amortization of net loss Total amount recognized in other comprehensive loss (income)

$

$

$

$

4,384 48 12 (225) 4,219

(4,142) 48 12 (565) (4,647)

$

5,210

$

(3,302)

$

Total recognized in net periodic benefit cost and other comprehensive loss (income)

2013

926 1,053 (1,154) (48) (12) 225 990

$

919 926 (1,005) (48) (12) 565 1,345

Assumptions used to determine the net periodic pension cost were as follows: Discount rate Expected long-term rate of return on plan assets Rate of compensation increase

2014 5.13% 6.50% 3.00%

2013 4.14% 6.50% 3.00%

2014 4.04% 3.00%

2013 5.13% 3.00%

Assumptions used to determine the benefit obligations at December 31 were as follows: Discount rate Rate of compensation increase

For the year ended December 31, 2013 the mortality assumptions were derived using the RP-2000 Annuitant/Non-Annuitant Mortality Tables with Projection Scale AA. For the year ended December 31, 2014 the mortality assumptions were derived using the RP-2000 Annuitant/Non-Annuitant Mortality Tables with Projection Scale BB. The impact on the benefit obligation for the mortality assumption change in 2014 was an increase of $807,000.

Pension benefits expected to be paid in each year from 2015 to 2019 are $1,116,000, $1,171,000, $1,274,000, $1,313,000, and $1,336,000, respectively. The aggregate pension benefits expected to be paid in the five years from 2020 to 2024 are $7,393,000. The accumulated benefit obligation for the pension plan was $24,304,000 as of December 31, 2014 and $19,202,000 as of December 31, 2013.

The investment strategy and investment policy for the retirement plan is to target the plan assets to contain 0-20% cash equivalents, 40-60% equity securities and 40-60% fixed income investments.

The pension plan weighted-average asset allocation at December 31, 2014 and 2013, by asset category were as follows: 2014 Asset category: Cash equivalents Equity securities Fixed income Total

46

8.74% 48.20% 43.06% 100.00%

O R A N G E C O U N T Y B A N C O R P, I N C .

2013 5.50% 50.60% 43.90% 100.00%

Fair value measurements at December 31, 2014 are as follows: (in thousands) Level 1 Cash equivalents: Foreign currencies Government Issues Short term investment funds

$

Equities: Common Stock Depository Receipts Commingled pension trust funds Exchange traded funds Preferred Stock Fixed income securities: Auto Loan Receivable Collateralized mortgage obligations Commingled pension trust funds Corporate Bonds Federal Home Loan Mortgage Corp Federal National Mortgage Assoc Government National Mortgage Assoc II Government Issues Other asset backed Other securities $

Total investments

Level 2 8 8

$

Level 3

62 1,573 1,635

$

Total -

$

8 62 1,573 1,643

3,662 46 2,628 35 6,371

2,685 2,685

-

3,662 46 2,685 2,628 35 9,056

-

82 169 5,241 738 18 485 31 1,278 40 8 8,090 12,410

-

82 169 5,241 738 18 485 31 1,278 40 8 8,090 18,789

6,379

$

$

$

Fair value measurements at December 31, 2013 are as follows: (in thousands) Level 1 Cash equivalents: Foreign currencies Government Issues Short term investment funds

$

Equities: Common Stock Depository Receipts Preferred Stock Real Estate Investment Trust Fixed income securities: Auto Loan Receivable Collateralized mortgage obligations Corporate Bonds Federal Home Loan Mortgage Corp Federal National Mortgage Assoc Government National Mortgage Assoc I Government National Mortgage Assoc II Government Issues Municipals Total investments

$

Level 2 26 26

$

Level 3 266 710 976

$

Total -

$

26 266 710 1,002

9,120 88 43 27 9,278

27 27

-

9,120 115 43 27 9,305

9,304

66 2,013 2,164 251 866 61 27 2,555 60 8,063 9,066

-

66 2,013 2,164 251 866 61 27 2,555 60 8,063 18,370

$

$

$

The Company contributed $261,000 to the pension plan in 2015 and has not yet determined if any additional contributions will be made in 2015.

Supplemental Executive Retirement Plan The Bank maintains a Supplemental Executive Retirement Plan for two former Chief Executive Officers to restore pension benefits that are limited due to Internal Revenue Service regulations. The benefits accrued under this plan were $826,000 and $945,000 as of December 31, 2014 and 2013. The Bank recorded income of $55,000 and expense of $36,000 in 2014 and 2013 in relation to this plan.

Supplemental benefits expected to be paid in each year from 2015 to 2019 are $79,000, $79,000, $79,000, $79,000, $79,000, respectively. The aggregate supplemental benefits expected to be paid in the five years from 2020 to 2024 are $396,000.

Deferred Directors' Fee Plan The Bank and the Parent Company maintain unfunded Deferred Director’s Fee Plans within which each director may defer the receipt of meeting fees. The benefits accrued under these plans totaled $3,058,000 and $2,673,000 at December 31, 2014 and 2013. The Bank and the Parent Company recorded an expense of $455,000 and $442,000 in 2014 and 2013 in relation to these plans.

Deferred Compensation Plan The Bank and HVIA maintain unfunded Deferred Compensation Plans for certain officers. The benefits accrued under these plans totaled $1,178,000 and $947,000 at December 31, 2014 and 2013. The Bank and HVIA recorded an expense of $371,000 and $131,000 in 2014 and 2013.

Deferred Incentive Retirement Plan The Bank maintains an unfunded Deferred Incentive Retirement Plan for certain executive officers. The benefits accrued under this plan totaled $1,028,000 and $1,047,000 at December 31, 2014 and 2013. The Bank recorded an expense of $52,000 in 2014 and 2013.

401(k) Savings Plan The Bank and HVIA have a 401(k) Plan (Plan) to provide retirement and incidental benefits for its employees. Employees may contribute up to 100% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. The Plan provides for discretionary contributions as determined by the Board of Directors.

Such contributions are allocated among eligible participants in the proportion of their salaries to the total salaries of the participants. There were no discretionary contributions to the Plan in 2014 and 2013.

Restricted Stock Grants 4,250 restricted shares of common stock were granted in 2014 to an executive officer of the Bank at a price of $40.00 per share. 50% or 2,125 shares will vest in 2015, 25% or 1,062 shares will vest in 2016 and 25% or 1,063 shares will vest in 2017. 1,800 restricted shares of common stock were granted in 2013 to 5 executive officers of the Bank at a price of $40.00 per share. 50% of the shares will vest in 2016 with the remaining shares to vest in 2017. 2 of the executives retired in 2014 and the vesting of those 900 shares were accelerated into 2014.

Of the remaining 900 shares, 450 will vest in 2016 and 450 will vest in 2017.

2014 ANNUAL REPORT

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

48

O R A N G E C O U N T Y B A N C O R P, I N C .

2014 FINANCIAL INFORMATION

NET LOANS ($ Millions)

TOTAL ASSETS ($ Millions)

632.9

663.8

677.8

331.8

726.1 318.7

565.6 296.2 288.0 277.2

2010

2011

2012

2013

2014

2010

2011

2014

($ Millions)

($ Millions)

481.8

2013

STOCKHOLDERS' EQUITY

TOTAL DEPOSITS

447.8

2012

495.7

98.4

537.9

94.8

94.1

2012

2013

92.2

385.0 84.7

2010

2011

2012

2013

2014

2010

2014

EARNINGS PER SHARE

CASH DIVIDENDS PER SHARE

$3.86

$1.90 $1.64 $1.36

2011

$1.44

$3.96

$3.61

$1.18

$3.32 $3.16

2010

2011

2012

2013

2014

2010

2014 ANNUAL REPORT

2011

2012

2013

2014

49

BANK OFFICERS

ORANGE COUNTY BANCORP, INC. AND ORANGE COUNTY TRUST COMPANY BOARD OF DIRECTORS Louis Heimbach, Chairman David A. Dewilde Michael Gilfeather

David Garlinghouse

Assistant Vice President

Edwin Estrada

Assistant Vice President

Catherine Hunter

Assistant Vice President

Gina Stellato

Assistant Vice President

Jerry Stuit

Assistant Vice President

Heather Tancredi

Assistant Vice President

Debra Weaver

Paul T. McDermott

Assistant Vice President

Nancy Colacicco

William D. Morrison

Assistant Secretary

Haydee Furman

Susan Metzger Virginia Rizzo Richard Rowley

Assistant Secretary

Lynn Predmore

Assistant Secretary

Alana Moissett

BSA/OFAC Officer & Financial Privacy Officer

Terry R. Saturno John Morrison III, Director Emeritus

OFFICERS – ORANGE COUNTY BANCORP, INC. Michael Gilfeather Gerard Perri Timothy McCausland

President & CEO

TRUST DEPARTMENT Kathryn M. Maloney

Senior Vice President, Trust Services Director

Glenn G. Wassermann

Senior Vice President, Senior Trust Officer

Senior Vice President, CFO

Eileen V. Osterby

Senior Vice President, CSO and Corporate Secretary

Stacey L. Nelson

Vice President, Trust Officer

Andrea Pecorale

Trust Officer

Trust Operations Officer

OFFICERS – ORANGE COUNTY TRUST COMPANY Michael Gilfeather Gerard Perri Christopher Hayden

Kevin L. Kean

Timothy McCausland

Mary Ellen Rogulski

President and CEO Senior Vice President and CFO

John Fracasse

Vice President

Tracy Stein Kathy Bauer

Vice President, Human Resources Vice President Vice President & Compliance Officer Vice President Assistant Vice President, Controller Assistant Vice President

Patience Calderon Assistant Vice President,

Loan Administration & Fair Lending Officer 50

Peter Larkin Michael Markhoff Jonathan Rouis

Senior Vice President, Senior Loan Officer & CRA Officer Vice President

Diane Passaro

Thomas Guarino

Senior Vice President, CSO and Corporate Secretary

Michael DiSalvo

Jayne Rzeczkowski

Michael Gilfeather

Senior Vice President and Branch Administrator

Vice President

Marianne Rickers

Lou Heimbach, Chairman

Senior Vice President, COO and Audit & Compliance Liaison

Marjorie Buckley

Pamela A. Jones

HVIA BOARD OF DIRECTORS:

OFFICERS - Hudson Valley Investment Advisors, Inc. Thomas Guarino

President

Michael Rundle

Vice President, Portfolio Manager

Thomas McGimpsey

Vice President, Portfolio Manager

Sherri Danny

Vice President, Relationship Manager

Mark Lazarczyk

Vice President, Chief Compliance Officer

Melissa Mineau

Vice President

Timothy McCausland

Corporate Secretary

O R A N G E C O U N T Y B A N C O R P, I N C .

BANK LOCATIONS

CHESTER

MIDDLETOWN

VAILS GATE

91 Brookside Avenue

212 Dolson Avenue

376 Windsor HWY (rt 32)

75 North Street FISHKILL

33 Trust Way

NEW CITY 49 Maple Avenue

701 Route 9 MONTGOMERY GOSHEN

2093 State Route 208

HUDSON VALLEY INVESTMENT ADVISORS

146 North Church Street NEWBURGH

117 Grand Street

78 North Plank Road

Goshen, NY

FUTURE WHITE PLAINS BRANCH 42 Waller Avenue Architects: Degraw & Dehaan

2014 ANNUAL REPORT

51

O R A N G E C O U N T Y B A N C O R P, I N C .

O R A N G E C O U N T Y T R U S T. C O M