EDGAR 10-K Filing

Company CIK: 1823365
Filing Year: 2024
Filename: 1823365_10-K_2024_0001558370-24-004540.json

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ITEM 1. BUSINESS
ITEM 1. Business
Forward Looking Statements
NOTE ABOUT FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
● Statements of our goals, intentions and expectations;
● Statements regarding our business plans, prospects, growth and operating strategies;
● Statements regarding the asset quality of our loan and investment portfolios; and
● Estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Annual Report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
● general economic conditions, either nationally or in our market areas, that are worse than expected;
● changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
● government-imposed limitations on our ability to foreclose on or repossess collateral for our loans;
● government-mandated forbearance programs;
● the success of our consumer loan portfolio, much of which is purchased from third-party originators, and is secured by collateral outside of our market area, including in particular, automobile, recreational vehicle and manufactured home loans,
● our ability to access cost-effective funding, including by increasing core deposits and reducing reliance on wholesale funds;
● fluctuations in real estate values and both residential and commercial real estate market conditions;
● demand for loans and deposits in our market area;
● our ability to implement and change our business strategies;
● the performance and availability of purchased loans;
● competition among depository and other financial institutions;
● inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
● adverse changes in the securities or secondary mortgage markets;
● changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;
● the impact of the Dodd-Frank Act and the implementing regulations;
● changes in the quality or composition of our loan or investment portfolios;
● technological changes that may be more difficult or expensive than expected;
● the inability of third-party providers to perform as expected, including third-party loan originators;
● our ability to manage market risk, credit risk and operational risk in the current economic environment;
● our ability to enter new markets successfully and capitalize on growth opportunities;
● our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
● changes in consumer spending, borrowing and savings habits;
● changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
● our ability to retain key employees;
● our compensation expense associated with equity allocated or awarded to our employees; and
● changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
The Company’s ability to predict results or the actual effects of its plans or strategies is inherently uncertain. As such, forward-looking statements can be affected by inaccurate assumptions made or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect conditions only as of the date of this filing. The Company undertakes no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, except as required by the law.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Generations Bancorp NY, Inc.
Generations Bancorp NY, Inc. (“Generations Bancorp”) is a Maryland corporation that was organized in August 2020 to become the holding company of Generations Bank (sometimes, the “Bank”) as part of the Seneca-Cayuga Bancorp, Inc. (“Seneca-Cayuga”) conversion from the mutual holding company structure to a fully public stock holding company structure. Prior to the conversion, Generations Bank was the wholly owned subsidiary of Seneca-Cayuga, and The Seneca Falls Savings Bank, MHC (“MHC”) owned 60.1% of Seneca-Cayuga’s common stock. As part of the conversion which was consummated on January 12, 2021, Generations Bancorp sold 1,477,575 of its common stock in a stock offering, representing the MHC’s ownership interest in Seneca-Cayuga, for gross offering proceeds of $14.8 million and net proceeds of $13.2 million. In addition, existing shareholders of Seneca-Cayuga, other than the MHC, had their shares of Seneca-Cayuga exchanged for shares of Generations Bancorp pursuant to an exchange ratio. As a result of the Conversion, the MHC and Seneca-Cayuga ceased to exist and Generations Bank became the wholly owned subsidiary of Generations Bancorp.
At December 31, 2023, Generations Bancorp had total consolidated assets of $424.5 million, loans net of allowance of $333.5 million, deposits of $357.6 million, and stockholders’ equity of $37.7 million.
As a registered savings and loan holding company, Generations Bancorp is subject to comprehensive regulation and examination by the Federal Reserve Board.
Generations Bank
Generations Bank is a federal savings bank headquartered in Seneca Falls, New York. The Bank was organized in 1870 and has operated continuously since that time in the northern Finger Lakes region of New York State which is located in the central to northwestern portion of New York State.
We operate from our main office branch located in Seneca Falls, New York, in addition to eight full-service offices and one drive-through facility located in Auburn, Farmington, Geneva, Medina, Phelps, Union Springs and Waterloo, New York which are located throughout the northern Finger Lakes region of New York State, which includes parts of Cayuga, Seneca, Ontario, and Orleans counties, which are our primary deposit and lending markets. Our address at our headquarters is 20 East Bayard Street, Seneca Falls, New York 13148 and the telephone number at our headquarters is (315) 568-5855.
Our business consists primarily of taking deposits from the general public and, through our commercial bank subsidiary, Generations Commercial Bank, from New York State and County municipalities and agencies, and investing those deposits, together with borrowings and funds generated from operations, in the origination and purchase of one- to four-family residential real estate loans, including home equity loans and lines of credit. We also purchase and originate a substantial amount of consumer loans, including automobile loans, recreational vehicle loans and manufactured home loans. To a lesser extent, we originate commercial real estate and multi-family loans, commercial business loans, and residential and commercial construction loans. Most of our one- to four-family residential real estate loans are originated to borrowers in our market area. To diversify our loan portfolio more geographically, we purchase loans that have been originated outside of our market area, including automobile loans, recreational vehicle loans, and manufactured home loans which are originated throughout the United States. We also invest in securities, which currently consist primarily of corporate bonds and municipal bonds issued by states, local municipalities and schools in the Northeastern United States, and to a far lesser extent mortgage-backed securities issued by U.S. government sponsored entities, and Federal Home Loan Bank stock.
We offer a variety of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, and certificates of deposit accounts. We also utilize advances from the Federal Home Loan Bank for liquidity and for asset/liability management purposes.
In 2018, we formed Generations Commercial Bank, a New York State-chartered limited purpose commercial bank, as a subsidiary of Generations Bank. Generations Commercial Bank opened for business on January 2, 2019 and has the power to receive deposits only to the extent of funds of the United States and the State of New York and their respective agents, authorities and instrumentalities, and local governments as defined in Section 10(a)(1) of the New York General Municipal Law. At December 31, 2023, Generations Commercial Bank held $9.2 million of municipal deposits and subject to funding needs, we expect to continue to use municipal deposits in the future.
In the future we will consider converting Generations Bank to a commercial bank charter. If we were to make such a charter conversion, we would consider the merger of Generations Commercial Bank into Generations Bank.
Generations Bank and Generations Commercial Bank are subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency and the New York State Department of Financial Services (the “Department”), respectively, as their chartering agencies, and by the FDIC, as their deposit insurer.
Generations Bank’s website address is www.mygenbank.com. Our Annual Report on Form 10-K is available on our website under the “About Us” and “Investor Relations” tabs. Information on this website is not and should not be considered a part of this Annual Report on Form 10-K.
Competition
We face significant competition in originating loans and attracting deposits. Our market area and other areas in which we operate have a high concentration of financial institutions, many of which are significantly larger institutions that have greater financial resources than we have, and many of which are our competitors to varying degrees. Our competition for loans comes principally from mortgage
brokers and mortgage banking companies, commercial banks, savings banks, the U.S. Government, credit unions, leasing companies, insurance companies, real estate conduits, and other companies that provide financial services to businesses and individuals. Our most direct competition for deposits has historically come from commercial banks, savings banks, and credit unions. We face additional competition for deposits from online financial institutions and non-depository competitors such as the mutual fund industry, securities and brokerage firms, and insurance companies.
Seneca County represents our primary geographic market area for deposits. At June 30, 2023 (the latest date for which information is available), Generations Bank’s deposit market share was 23.3% of total Federal Deposit Insurance Corporation-insured deposits in Seneca County, representing the third largest market share of seven institutions with banking offices in Seneca County. This data excludes deposits held by credit unions.
Market Area
We operate from our main office branch located in Seneca Falls, New York, in addition to eight full-service offices and one drive-through facility located in Auburn, Farmington, Geneva, Medina, Phelps, Union Springs and Waterloo, New York which are located throughout the northern Finger Lakes region of New York State, which includes parts of Cayuga, Seneca, Ontario, and Orleans counties, which are our primary deposit and lending markets. We primarily serve rural, small town, and suburban communities located in the northern Finger Lakes region extending from Medina, New York in the West to Auburn, New York in the East. We will, on occasion, originate loans secured by properties located outside of our primary market area. To diversify the geographic concentration in our loan portfolio, we purchase a substantial amount of automobile loans, recreational vehicle loans and manufactured home loans secured by collateral from outside of our primary market area.
The northern Finger Lakes region is located in the central to northwestern portion of New York State between the cities of Rochester and Syracuse, New York. Seneca Falls is located six miles south of Interstate 90, the major east-west highway that runs through the state of New York.
Seneca Falls and the surrounding areas include a diverse population of low- and moderate- income neighborhoods as well as middle class and more affluent neighborhoods. The housing consists mainly of single-family residences.
The economy in our market area is stable but we believe has limited industrial development compared to more urban and suburban areas. The economy in our market area is based on a mixture of service, manufacturing, wholesale/retail trade, and state and local government. The employment base is diversified and there is no dependence on one area of the economy for continued employment. Major employers in our market area include several hospitals and healthcare providers, several correctional facilities as well as a number of large manufacturing facilities including ITT Industries. Geneva and Auburn also serve as bedroom communities for nearby Rochester and Syracuse, New York.
Our future growth opportunities will be influenced by the growth and stability of the regional, state, and national economies, other demographic trends, and the competitive environment. Based on U.S. Census Bureau data and other published statistics, median household income in our market area is somewhat below the national and New York State average. Also, while household income in our market area is continuing to grow, it is growing at rates below the comparable state and national averages.
Our market area is largely rural and has experienced a population decline in recent years. According to the United States Census Bureau, the total populations in December 2020 for Cayuga, Seneca, Ontario and Orleans counties, New York were approximately 76,000, 34,000, 112,000 and 40,000, respectively. Additionally, each of these counties, other than Ontario County (which increased by 4.2%) experienced a population decrease from 2010 through December 2020.
Lending Activities
General. Our principal lending activity has historically been originating and purchasing one- to four-family residential real estate loans, including home equity loans and lines of credit. We also purchase and originate a substantial amount of consumer loans, including automobile loans, recreational vehicle loans, and manufactured home loans. To a lesser extent, we also originate commercial real estate and multi-family loans, commercial business loans, and residential construction and commercial construction loans. We have not historically sold loans that we originate although we may decide to sell loans in the future.
We believe that originating and purchasing loans other than one- to four-family residential loans allows us to provide more comprehensive financial services to families and businesses within our community as well as manage interest rate sensitivity. Moreover, to diversify our loan portfolio more geographically, we purchase loans outside of our market area, including automobile loans, recreational vehicle loans, and manufactured home loans that have been originated throughout the United States. Subject to market conditions and our asset-liability analysis, in addition to purchasing one- to four-family residential real estate loans, we intend to continue our purchases of automobile loans in an effort to diversify our overall loan portfolio and increase the overall yield earned on our loans. In 2022, we began purchasing one- to four-family residential real estate loans from a third-party to increase our residential mortgage loan portfolio. We intend to continue purchases of one- to four-family residential real estate loans in 2024.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At December 31,
(In thousands)
Amount
Percent
Amount
Percent
Residential:
One- to four-family
$
168,387
52.4%
$
138,001
47.5%
Construction
-
0.0%
0.1%
Commercial:
Real estate - nonresidential
14,437
4.5%
16,681
5.7%
Multi-family
0.3%
0.3%
Commercial business
18,821
5.9%
11,677
4.0%
Consumer:
Home equity and junior liens
13,632
4.2%
11,562
4.0%
Manufactured homes
48,681
15.1%
50,989
17.6%
Automobile
22,424
7.0%
24,339
8.4%
Student
1,569
0.5%
1,803
0.6%
Recreational vehicle
22,915
7.1%
26,909
9.3%
Other consumer
9,555
3.0%
7,172
2.5%
Total loans receivable
321,253
100.0%
290,374
100.0%
Less:
Net deferred loan costs
15,351
16,221
FV credit and yield adjustment
(149)
(218)
Allowance for losses
(2,973)
(2,497)
Total loans receivable, net
$
333,482
$
303,880
Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2023. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2024. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.
One- to Four-
Residential
Real Estate
Commercial
Home equity
(In thousands)
Family
Construction
Nonresidential
Multi-family
Business
and junior liens
$
$
-
$
$
-
$
2,143
$
2025 to 2028
1,974
-
-
4,302
2,200
2029 to 2038
21,220
-
9,319
10,025
11,053
2039 and beyond
145,173
-
3,514
2,351
Total
$
168,387
$
-
$
14,437
$
$
18,821
$
13,632
Manufactured
Recreational
Other
homes
Automobile
Student
vehicle
consumer
Total
$
$
$
-
$
$
$
3,780
2025 to 2028
1,202
16,388
27,710
2029 to 2038
13,022
5,733
1,463
10,303
3,790
85,973
2039 and beyond
34,385
-
-
12,441
5,084
203,790
Total
$
48,681
$
22,424
$
1,569
$
22,915
$
9,555
$
321,253
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2023 that are contractually due after December 31, 2024.
Due After December 31, 2024
(In thousands)
Fixed
Adjustable
Total
Residential:
One- to four-family
$
144,953
$
23,414
$
168,367
Commercial:
Real estate - nonresidential
8,024
5,516
13,540
Multi-family
Commercial business
11,767
4,911
16,678
Consumer:
Home equity and junior liens
13,062
13,308
Manufactured homes
48,609
-
48,609
Automobile
22,121
-
22,121
Student
1,569
-
1,569
Recreational vehicle
22,911
-
22,911
Other consumer
9,522
9,538
Total loans receivable
$
282,940
$
34,533
$
317,473
Loan Approval Procedures and Authority. Pursuant to federal law, the aggregate amount of loans that Generations Bank is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Generations Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2023, based on the 15% limitation, Generations Bank’s loans-to-one-borrower limit was $5.9 million. At December 31, 2023, Generations Bank had no borrowers with outstanding balances in excess of this amount. At December 31, 2023, our largest loan outstanding with one borrower was $2.2 million, secured by commercial real estate and business assets, and was performing in accordance with its original repayment terms on that date.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our Board of Directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements, and tax returns. One- to four-family residential real estate loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming loans.”
Under our loan policy, the individual sponsoring an application is responsible for ensuring that all documentation is obtained prior to the submission of the application to an independent underwriter and/or officer for approval. In addition, an underwriting and/or approving officer verifies that the application meets our underwriting guidelines described below. Also, each application file is reviewed to assure its accuracy and completeness. Our quality control process includes reviews of underwriting decisions, appraisals and documentation. We are currently using the services of an independent company to perform the underwriting quality control reviews of residential mortgages.
Our senior officers and chief underwriter have approval authority for one- to four-family residential loans for up to $600,000. One- to four-family residential real estate loans over $600,000 to $750,000 require the approval of Generations Bank’s Chief Executive Officer. Multi-family, commercial real estate, and commercial business loans up to $750,000 require the approval of Generations Bank’s Chief Executive Officer. Consumer loans to a single related borrower that aggregate over $250,000 to $1.0 million, or non-consumer loans to a single related borrower that aggregate over $750,000 to $1.0 million, require approval by the Chief Executive Officer and Chief of Consumer and Residential Lending. Generally, all loans in excess of $1.0 million need approval of the Lending Committee, which is comprised of the Chief Executive Officer, Chief Banking Officer, and two Board members, and any loan in excess of our in-house limit requires the approval of the full Board of Directors.
Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance to protect the property securing its interest when the property is located in a Special Flood Hazard Area designated by the Federal Emergency Management Agency (“FEMA”) and is participating in the National Flood Insurance Program.
One- to Four-Family Residential Real Estate Lending. Historically, we have emphasized the origination of one- to four-family residential real estate loans. At December 31, 2023, we had $168.4 million of loans secured by one- to four-family residential real estate, representing 52.4% of our total loan portfolio. We originate both fixed-rate and adjustable-rate residential mortgage loans. At December 31, 2023, the one- to four-family residential mortgage loans held in our portfolio due after December 31, 2024 were comprised of 86.1% fixed-rate loans and 13.9% adjustable-rate loans. At that date, the average outstanding one- to four-family residential real estate loan balance was $119,000 and the largest outstanding residential loan had a principal balance of $824,000. Virtually all of the one- to four-family residential real estate loans we originate are secured by properties located in our market area or surrounding counties. Due to consumer demand in the low interest rate environment, in recent years most of our originations are fixed-rate loans secured by one- to four-family residential real estate. See “− Originations, Sales and Purchases of Loans.”
In 2022, we engaged a third-party to assist in the origination of one- to four-family residential real estate loans. Utilizing a third party to originate these loans will likely result in slightly lower average yields on our one-to four-family residential real estate loans as we will be required to pay the originator a fee at the time of purchase.
We expect to continue to purchase one- to four-family, owner-occupied residential real estate loans from a third-party originator. These loans adhere to all of our credit, underwriting, and loan policy criteria and are comprised of conventional conforming loans and/or our product offerings to low- and moderate-income borrowers and/or to first time home buyers and are secured by homes located in central and western New York. The purchase price of these loans is the loan’s principal balance plus a purchase fee based on the loan’s principal balance. The loans are non-recourse to the seller (except for certain contractual representations) and the contractual agreement prohibits re-solicitation by the seller for a defined period of time. After purchase, we provide all servicing and collections activities. The note, collateral, and loan documentation are transferred by assignment. Although we believe that we have procedures in place to review and assess the risks of this third-party vendor relationship, because these parties are not our employees, we assume risks associated with unsatisfactory origination procedures, including compliance with federal, state, and local laws.
We generally originate both fixed-rate and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae. We also originate loans above this lending limit, which are referred to as “jumbo loans.”
Our one- to four-family residential real estate loans typically have terms of up to 30 years, with non-owner occupied loans limited to a maximum term of 20 years. Our adjustable-rate one- to four-family residential real estate loans have fixed rates for initial terms of five or seven years, and adjust thereafter at that interval at a margin. In recent years, this margin has generally been 2.25% over the weekly average yield on U.S. treasury securities adjusted to a constant maturity of one year. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 5% over the initial
interest rate of the loan. We retain and service all adjustable-rate one- to four-family residential real estate loans that we originate. We make such loans at rates and terms in accordance with market and competitive factors.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on our adjustable-rate loans do not adjust for five or seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates. At December 31, 2023, $23.4 million, or 13.9% of our one- to four-family residential loans, had adjustable rates of interest.
We do not offer “interest only” or “balloon” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan or in the case of “balloon” mortgages, the principal balance does not fully amortize over the loan’s term). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. Generally, we do not offer “subprime loans” on one- to four-family residential real estate loans (i.e., generally loans with credit scores less than 660), except for loans originated with the backing of a state or federal mortgage agency or for sale in the secondary market.
We generally limit the loan-to-value ratios of our owner-occupied one- to four-family residential mortgage loans to 95% of the purchase price or appraised value, whichever is lower. For state and federal agency-backed residential mortgages, loan to value ratios may exceed 95% up to the respective agency’s maximum loan to value limit. Non-owner occupied one- to four-family residential mortgage loans are limited to an 80% loan-to-value ratio.
Our residential mortgage loans customarily include due-on-sale clauses giving us the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the property subject to the mortgage and the loan is not repaid.
In November 2023, we changed our lending approach and shifted to exclusively purchasing one- to four-family residential real estate loans in an effort to reduce overhead costs.
Commercial Real Estate and Multi-family Lending. Our commercial real estate loans are secured primarily by office buildings, hotels and motels, wineries, manufacturing facilities, churches, retail and mixed-use properties, and light industrial properties located in our primary market area. Our multi-family loans are secured primarily by five or more-unit residential buildings. At December 31, 2023, we had $14.4 million in commercial real estate loans and $832,000 in multi-family real estate loans, representing 4.5% and 0.3% of our total loan portfolio, respectively.
Our commercial real estate and multi-family loans generally have a maximum term of 20 years and fixed or adjustable rates based upon indexes from the Federal Home Loan Bank and the Constant Maturity Treasury Bill Index, plus a margin. Most rates adjust annually after a three, five, or seven-year initial fixed-rate period. These loans are generally made in amounts of up to 75% of the lesser of the appraised value or the purchase price of the property with a projected debt service coverage ratio of at least 120%.
Appraisals on properties securing commercial real estate and multi-family loans are performed by an independent appraiser with a second review of the completed appraisal by a second independent appraiser and are also reviewed by Generations Bank’s management. Our underwriting procedures include considering the borrower’s expertise and require verification of the borrower’s credit history, income and financial statements, banking relationships, references, and income projections for the property. Generally, we obtain personal guarantees on these loans.
A commercial real estate or multi-family borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews, and periodic face-to-face meetings with the borrower. We generally require these commercial borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to the individual guarantors as well as any other business guarantors of our commercial borrowers. We also generally require borrowers with
rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable.
At December 31, 2023, our largest commercial real estate loan outstanding had a balance of $2.2 million. This loan was originated in 2015 and is secured by commercial real estate. At December 31, 2023, our largest multi-family loan had a balance of $402,000 and is secured by a mixed-use building. At December 31, 2023, these loans were performing in accordance with their repayment terms.
Commercial real estate and multi-family loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate and multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. At December 31, 2023 we had one commercial real estate loan with an aggregate principal balance of $29,000 which was 90 days or more delinquent.
The following table sets forth information regarding our nonresidential real estate loans at December 31, 2023.
Collateral Type
Number of Loans
Balance
(In thousands)
Auto Dealership
$
1,446
Church
1,339
Hospitality
Manufacturing
Professional Services Building
3,605
Recreational
1,626
Retail
2,105
Retail Rental
3,604
Total
$
14,437
We consider a number of factors in originating commercial real estate and multi-family loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability, and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property, and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property, and the debt service coverage ratio (the ratio of net operating income to debt service). All commercial real estate and multi-family loans are appraised by outside independent appraisers approved by the Board of Directors. Personal guarantees are generally obtained from the principals of nonresidential and multi-family real estate borrowers.
Commercial Business Loans. We make primarily secured loans to professionals, sole proprietorships, and small businesses for commercial, corporate, and business purposes. Commercial business loan products include term loans and revolving lines of credit. Such loans are often used for working capital purposes or for purchasing equipment, inventory, or furniture. Our commercial business loans are made with either adjustable or fixed rates of interest. Adjustable rates are based on the prime rate, as published in The Wall Street Journal, or Federal Home Loan Bank, or U.S. Treasury indexes, plus a margin. Fixed-rate commercial business loans are primarily set at a margin above the prime rate or the applicable Federal Home Loan Bank’s amortizing index. At December 31, 2023, $18.8 million, or 5.9% of our total loan portfolio, was comprised of commercial business loans, of which $2,000 were PPP loans guaranteed by the SBA, described below.
When making commercial business loans, we consider the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. Commercial business loans are generally secured by accounts receivable, inventory, and equipment. Depending on the amount of the loan and the collateral used to secure the loan, commercial loans are made in amounts of up to 80% of the value of the collateral securing the loan.
Commercial business loans generally have a greater credit risk than one- to four-family residential real estate loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the economy in which it operates (including today’s recessionary economy). Further, the collateral securing the loans may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards.
At December 31, 2023, our largest commercial business loan outstanding had a principal balance of $1.8 million and was secured by farmland. At this date, these loans were performing in accordance with their repayment terms.
The CARES Act established the PPP through the SBA, which allowed us to lend money to small businesses to maintain employee payrolls through the Covid-19 crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. PPP loans have a fixed interest rate of 1.00% and a maturity date of either two or five years. Such loans totaled $2,000 at December 31, 2023.
In 2023, we began purchasing loans from a third-party to assist in the origination of commercial business loans. We are required to pay the originator a fee at the time of purchase resulting in an lower average yield, however, these loans typically carry higher interest rates when compared to other types of loans in our loan portfolio.
Manufactured Home Lending. In recent years, the largest portion of our consumer loan portfolio has been manufactured home loans. These loans are considered consumer loans and not one- to four-family residential real estate loans because they are not secured by the underlying real estate. Since 2006, we have accepted manufactured home loan applications obtained by a third party. The loans are secured by the manufactured homes that are affixed to a third-party leased pad site and are located generally in New York, New Jersey, Pennsylvania, Connecticut, and Massachusetts, primarily in retirement communities. The loans are underwritten and approved by Generations Bank underwriters according to our lending policy, which provides for a maximum loan-to-value of 90% and takes into consideration the applicant’s previous credit history and an assessment of the applicant’s ability to make the proposed payments. If home transportation, set-up, and insurance costs or origination fees are financed, the loan-to-value may exceed 100%.
If Generations Bank funds the loan, the third party is paid a lump sum referral and servicing fee for each loan. The third-party seller’s servicing is limited to certain collection services in the event the loan becomes delinquent. Generations Bank provides all remaining services. A portion of the fee paid, which is deferred and amortized over the life of the loan, is placed into an escrow account to be used to reimburse the Bank for any losses incurred under the program and for the refund of any unearned fees which result from loan prepayments or foreclosures.
Additionally, in 2019 we began purchasing manufactured home loans from a second vendor which are originated throughout the United States. Should we discontinue any of these relationships or otherwise be unable to use these vendors in the future, our ability to acquire manufactured home loans that meet our guidelines may be disrupted. Moreover, because these loans are originated by third parties which are not our employees, we assume risks associated with unsatisfactory origination procedures, including compliance with federal, state, and local laws. Finally, although we believe that we have procedures in place to review and assess the risks of these third-party vendor relationships, one of these relationships is new or “unseasoned,” and the purchased loans have not been outstanding for a sufficient period of time to demonstrate performance and indicate the potential risks in the loan portfolio.
Our manufactured home loans are typically originated at somewhat higher fixed rates than one- to four-family residential real estate loans and are fully amortizing with contractual maturities generally of up to 20 years. At December 31, 2023, $48.7 million, or 15.1% of our total loan portfolio, were manufactured home loans, and the loss escrow was $3.1 million. At December 31, 2023, we had four manufactured home loans with an aggregate principal balance of $323,000 which were 90 days or more delinquent.
Because manufactured home loans may be based on the cost of the manufactured housing as well as improvements and because manufactured homes may decline in value due to wear and tear following their initial sale, the value of the collateral securing a manufactured home loan may be less than the loan balance. As a result, such loans generally carry a higher degree of credit risk and may be more vulnerable to today’s adverse economic conditions than our one- to four-family residential real estate loans.
Automobile Lending. We originate automobile loans through our branch network and also accept automobile applications from automobile dealerships with approved indirect lending agreements with us. Beginning in 2016, we have materially grown our automobile loan portfolio through the purchase of such loans through one loan broker with loans made throughout the Northeast and in 2020 we entered into a relationship with a second auto loan broker and we expect to continue purchases of automobile loans in the future. Under the agreements, loan applications are obtained by the auto dealership and forwarded to Generations Bank for consideration. Generations Bank funds the loan if the proposed loan meets our underwriting standards. When considering whether to approve the loan, we review the collateral, the applicant’s credit history, and the applicant’s income as compared to all debt payments, including the proposed loan.
Our automobile loans have fixed rates with contractual maturities of up to 84 months, depending upon the age of the vehicle. The maximum loan is limited to 125% of the Manufacturer’s Suggested Retail Price for new vehicles and NADA’s clean retail value for used vehicles. For dealer-referred indirect lending, a fee is paid to the dealership, which is deferred and amortized over the life of the loan, for each loan that is funded, in addition to dealer reserves. See “− Purchased Automobile, Recreational Vehicle Loans, and Other Consumer Loans” for discussion. At December 31, 2023, we had $22.4 million, or 7.0% of total loans, of automobile loans outstanding. At this date, six automobile loans with an aggregate principal balance of $120,000 were 90 days or more delinquent.
Automobile loans are subject to many of the same risks discussed with respect to other consumer loans, including that the value of the collateral, which tends to depreciate quickly, may become less than the loan amount. Also, such loans are more vulnerable to changes in the overall economy.
Additionally, there are risks associated with the reliance on third parties to originate these loans. Should we discontinue any of these third-party vendor relationships or otherwise be unable to use these vendors in the future, our ability to acquire automobile loans that meet our guidelines may be disrupted. Moreover, because these loans are originated by third parties which are not our employees, we assume risks associated with unsatisfactory origination procedures, including compliance with federal, state, and local laws. Finally, although we believe that we have procedures in place to review and assess the risks of these third-party vendor relationships, one of these relationships is new or “unseasoned,” and the purchased loans have not been outstanding for a sufficient period of time to demonstrate performance and indicate the potential risks in the loan portfolio.
Home Equity Loans and Lines of Credit. We originate fixed-rate home equity loans and both fixed-rate and adjustable-rate home equity lines of credit secured by a lien on the borrower’s residence. Our home equity products are limited to 95% of the property value less any other third-party mortgages. We use the same underwriting standards for home equity lines and loans as we use for one- to four-family residential real estate loans. The fixed-rate for home equity loans and lines of credit are generally determined as a percentage over the prime rate. The variable interest rates for home equity lines of credit float at a stated margin over the highest prime rate published in The Wall Street Journal and may not exceed 15.00% over the life of the loan. We currently offer home equity loans with terms of up to 15 years with principal and interest paid monthly from the closing date. The home equity lines provide for an initial revolving draw period of up to 10 years. At the end of the initial 10-year draw period, the outstanding balance is then converted to a fully amortizing loan with a repayment term of 15 years. At December 31, 2023, we had $13.6 million, or 4.2% of total loans, of home equity loans and outstanding advances under home equity lines and an additional $11.2 million of funds committed, but not advanced, under home equity lines of credit. At December 31, 2023, three home equity loans with an aggregate principal balance of $85,000 were 90 days or more delinquent. Home equity lending is subject to many of the same risks as one- to four-family residential loans except that home equity loans tend to have higher loan-to-value ratios and higher household debt and thus may be more vulnerable to adverse economic conditions.
Student Loans. We offered student loans to both in-school (full or part-time) students and out of school students. This program was closed to new student loan originations beginning in December 2021, however, we will still continue to maintain our existing portfolio. For out of school students and their caregivers who borrowed for their education, our loan program allows the borrower to consolidate both federal and private student loans. There are no prepayment penalties. At December 31, 2023, $1.6 million, or 0.5% of our total loan portfolio, was student loans. At December 31, 2023, three student loans with an aggregate principal balance of $25,000 were 90 days or more delinquent.
Recreational Vehicle Loans. We originate recreational vehicle loans through our office network. Beginning in 2020, we have materially grown our recreational vehicle loan portfolio through the purchase of such loans through one loan broker with loans made throughout New York State, excluding New York City and Long Island. Under the agreement, loan applications are obtained by the loan broker and forwarded to Generations Bank for consideration. Generations Bank funds the loan if the proposed loan meets our underwriting standards. When considering whether to approve the loan, we review the collateral, the applicant’s credit history, and the applicant’s income as compared to all debt payments, including the proposed loan.
Our recreational vehicle loans have fixed rates with contractual maturities of up to 240 months, depending upon the age of the collateral. The maximum loan is limited to 135% of the Manufacturer’s Suggested Retail Price for new units or NADA’s clean retail value for used units. A fee is paid to the loan broker, which is deferred and amortized over the estimated life of the loan, for each loan that is funded. In addition, a loss escrow is established for each loan purchased. See “− Purchased Automobile, Recreational Vehicle Loans, and Other Consumer Loans.” At December 31, 2023, we had $22.9 million, or 7.1% of total loans, of recreational vehicle loans outstanding. At this date, four recreational vehicle loans with an aggregate principal balance of $291,000 were 90 days or more delinquent.
Recreational vehicle loans are subject to many of the same risks discussed with respect to other consumer loans, including that the value of the collateral, which tends to depreciate quickly, may become less than the loan amount. Also, such loans are more vulnerable to changes in the overall economy.
Additionally, there are risks associated with the reliance on third parties to originate these loans as discussed above in “Automobile Loans.”
Other Consumer Lending. Although most of our consumer loans are secured by collateral, including boats and savings deposits, we also make a limited amount of unsecured personal loans. We currently originate substantially all of our other consumer loans within New York State (outside of New York City and Long Island). We also purchase loans secured by boats and other collateral from a third-party. Other consumer loans were $9.6 million, representing 3.0% of the total loan portfolio, at December 31, 2023.
The terms of other types of other consumer loans vary according to the type of collateral, length of contract, and creditworthiness of the borrower. The underwriting standards employed for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of the borrower’s ability to meet payments on the proposed loan along with his or her existing obligations. In addition to the creditworthiness of the applicant, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Unsecured personal loans are available to creditworthy borrowers for a variety of personal needs and have been extended on a limited basis.
Other consumer loans may entail greater risk than residential mortgage loans, as they are typically unsecured or secured by rapidly depreciable assets. In such cases, any repossessed collateral for defaulted consumer loans may not provide adequate sources of repayment for the outstanding loan balances 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. Also, such loans are more vulnerable to changes in the overall economy than are residential loans. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. At December 31, 2023, two consumer loans with an aggregate principal balance of $71,000 were 90 days or more delinquent.
Construction Loans. To a limited extent, we make construction loans to individuals for the construction of their primary residences and loans to builders and commercial borrowers. On an extremely limited basis, we have made land loans primarily to complement our construction lending activities, as such loans are generally secured by lots that will be used for residential development. Land loans also include loans secured by land purchased for other uses such as hunting and fishing. At December 31, 2023, we had no construction loans outstanding.
Loans to individuals for the construction of their residences are typically originated as construction/permanent loans, with a construction phase for up to nine months. Upon completion of the construction phase, the loan automatically becomes a permanent loan. These construction loans have rates and terms comparable to one- to four-family residential loans offered by us. During the construction phase, the borrower pays interest only. The maximum loan-to-value ratio of owner-occupied, one- to four- -family construction loans is generally 85%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Land loans are generally offered for terms of up to 10 years. The maximum loan-to-value ratio of land loans is 65% for undeveloped land/lots and 75% for land/lots developed with utilities and roads.
Purchases and Sales. Lending activities are conducted primarily by our loan personnel operating at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both fixed- and adjustable-rate loans. Our ability to originate fixed- or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. In November 2023, we changed our lending approach and shifted to exclusively purchasing one- to four-family residential real estate loans in an effort to reduce overhead costs. We generally originated
conforming one- to four-family residential real estate loans that could be sold in the secondary market (with or without servicing retained). However, since 2008, we have not sold any loans that we originated and we do not intend to sell loans in the future.
Manufactured Home Loan Purchases. We purchase manufactured home loans originated by an established national third-party lender. Loans are originated in 43 states and are generally located in the Southeast, southern Midwest and southern Western states. The loans are secured by a first lien position on the manufactured homes which are placed on third-party leased pad sites within a community of manufactured homes. These manufactured home loans are not secured by the underlying real estate. At December 31, 2023, the principal balances of our manufactured home loans ranged from $1,000 to $399,000, and at this date the median principal balance of our manufactured home loans was $66,000.
Underwriting and approval is completed by the third-party according to our lending policy and all applicable federal and state governing rules. The underwriting takes into consideration the applicant’s credit history, home value, and an assessment of the applicant’s ability to make the proposed payments. If home transportation, set-up, and insurance costs or origination fees are financed, the loan-to-value may exceed 100%. The note, collateral, and loan documentation are taken by assignment. All submitted purchase requests are reviewed by a Generations Bank underwriter to ensure all established criteria of Generations Bank have been met prior to purchase. If they are not, we may choose to refuse the purchase. The seller provides all servicing and collection activity. There are no dollar volume purchase requirements and the program can be terminated by Generations Bank with contractual notification.
For each purchased manufactured home loan, the third-party seller is paid a lump sum referral fee and a monthly servicing fee. A portion of the fee paid, which is deferred and amortized over the estimated life of the loan, is placed into an escrow account to be used to reimburse Generations Bank for any credit losses incurred under the program and for the refund of any unearned fees which result from loan prepayments.
Our manufactured home loans are typically originated at somewhat higher fixed rates than one- to four-family residential real estate loans and are fully amortizing with contractual maturities generally of up to 25 years. During the years ended December 31, 2023 and 2022, we purchased $5.3 million and $9.6 million manufactured home loans.
Purchased Automobile, Recreational Vehicle Loans, and Other Consumer Loans. We purchase automobile loans from two third-party originators. From one of those originators we also purchase loans secured by recreational vehicles and, to a lesser extent, other loans secured by boats and personal property. The loans are primarily originated within New York, Pennsylvania, and the New England states. The loans are underwritten and approved by the third-party according to Generations Bank’s credit policy and all applicable federal and state regulations. The underwriting takes into consideration the applicant’s credit history, collateral value, and an assessment of the applicant’s ability to make the proposed payments. If extended warranties, other add-ons, and sales tax are financed, the loan-to-value may exceed 100%. Prior to purchase, a Generations Bank underwriter reviews all purchase submittals to ensure all of Generations Bank’s criteria have been met. If they are not, we may choose to refuse the purchase. For one third-party seller there is a minimum monthly aggregate dollar purchase of $250,000. There is no monthly minimum purchase amount for the second third-party seller. Both contractual agreements can be terminated by either party with required notification. The note, collateral, and loan documentation are taken by assignment.
Our purchased automobile and recreational vehicle loans have fixed rates of interest with contractual maturities of up to 84 months for automobiles and 240 months for recreational vehicles, depending upon the age of the collateral. The maximum loan is limited to 135% of the manufacturer’s suggested retail price for new vehicles or NADA’s clean retail value for used vehicles. For loans purchased from one seller, Generations Bank provides all servicing and collection activities while the second seller, after loan purchase, provides all servicing and collections activities for Generations Bank. If we purchase a loan, we pay a lump sum referral fee and a monthly servicing fee (as applicable) for each loan. A portion of the fee paid, which is deferred and amortized over the life of the loan, is placed into an escrow account to be used to reimburse Generations Bank for any credit losses incurred under the program and for the refund of any unearned fees which result from loan prepayments.as defined in the contractual agreements. Where the seller provides servicing of the loans purchased, a separate monthly servicing fee is paid on the applicable outstanding loan balances.
At December 31, 2023, $21.8 million, or 6.8% of our total loan portfolio, were purchased automobile loans, $22.9 million, or 7.1% of our total loan portfolio, were purchased recreational vehicle loans and $8.6 million, or 2.7% of our total loan portfolio, were purchased other consumer loans. Of the automobile loans, $18.7 million were purchased from one vendor with no loss escrow reserves held at December 31, 2023. Of the other consumer loans, $2.8 million were purchased from one vendor with no loss escrow reserves held at December 31, 2023. The remaining $3.1 million of purchased automobile loans, the $22.9 million of recreational vehicle loans, and
$5.8 million of other consumer loans were purchased from another vendor, and at December 31, 2023, we had a loss escrow of $319,000 for these $31.8 million of loans. During the years ended December 31, 2023 and 2022, we purchased $8.4 million and $12.4 million of automobile loans, respectively, $0 and $2.1 million of recreational vehicle loans, respectively, and $3.6 million and $2.2 million of other consumer loans, respectively. Consistent with our business plan, we expect to continue to purchase automobile loans.
Purchased One- to Four-Family, Owner-Occupied Residential Real Estate Loans. In 2022, we began purchasing one- to four-family, owner-occupied residential real estate loans from a third-party originator. These loans adhere to all of Generations Bank’s credit, underwriting, and loan policy criteria and are comprised of conventional conforming loans and/or Generations Bank’s product offerings to low- and moderate-income borrowers and/or to first time home buyers and were for homes located in central and western New York. There is no minimum monthly purchase requirement and the contractual agreement is cancellable upon agreed upon notice. The purchase price is the loan’s principal balance plus a margin of the loan’s principal balance. The loans are non-recourse to the seller (except for certain contractual representations) and the contractual agreement prohibits re-solicitation by the seller for a defined period of time. After purchase, Generations Bank provides all servicing and collections activities. The note, collateral, and loan documentation are taken by assignment. During the years ended December 31, 2023 and 2022, we purchased $35.3 million and $32.7 million, respectively, of one- to four-family, owner-occupied residential real estate loans.
The following table sets forth our loan origination, purchase, and principal repayment activity during the periods indicated. There were no loans sales during the comparative periods.
At December 31,
(In thousands)
Total loans, at beginning of period
$
290,374
$
264,658
Loans originated:
Residential:
One- to four-family
8,492
7,929
Construction
-
Commercial:
Real estate - nonresidential
-
1,030
Multi-family
-
Commercial business
1,224
1,027
Consumer:
Home equity and junior liens
1,312
Automobile
Other consumer
Total loans originated
11,430
12,924
Loans purchased:
Residential:
One- to four-family
35,318
32,689
Commercial:
Commercial business
8,206
-
Consumer:
Manufactured homes
5,252
9,572
Automobile
8,446
12,424
Recreational vehicle
-
2,149
Student
-
Other consumer
3,551
2,171
Total loans purchased
60,773
59,118
Principal repayments and charge offs
(41,324)
(46,326)
Net loan activity
30,879
25,716
Total loans, at end of period
$
321,253
$
290,374
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required payment on a loan, we attempt to cause the delinquency to be cured by contacting the borrower. A late notice is generated and is sent to all mortgage loans 15 days delinquent and to all consumer loans 10 days delinquent. The borrower is contacted by the collections officer 20 days after the due date of all loans. Another late notice along with any required demand letters as set forth in the loan contract are sent 30 days after the due date. Additional written and verbal contacts may be made with the borrower between 30 and 60 days after the due date.
If the delinquency is not cured by the 60th day, the customer is normally provided 30 days written notice that the account will be referred to counsel for collection and foreclosure, if necessary. If it becomes necessary to foreclose, the property is sold at public sale and we may bid on the property to protect our interest. The decision to foreclose is made by the collections officer in our organization.
All loan charge offs are recommended by the collections officer and approved by either the President or the Chief Financial Officer. Our procedure for repossession and sale of collateral are subject to various requirements under New York State consumer protection laws.
When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure it is classified as foreclosed real estate until it is sold. The real estate is recorded at estimated fair value less estimated selling costs at the date of acquisition, and any resulting write-down is charged to the allowance for loan losses. Subsequent decreases in the value of the property are charged to operations through the creation of a valuation allowance. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent the estimated fair value, less estimated costs to sell, exceed its carrying amount.
For manufactured home loans, when a borrower is 10 days delinquent, a late notice is generated and sent. In addition, a copy of the delinquency notice is sent to the third-party that originates manufactured home loans. The third-party performs all other collection related activities to bring the loan current. The third-party determines whether to repossess the collateral. Any losses incurred by Generations Bank are reimbursed to us from the loan escrow account held at Generations Bank in accordance with the purchase agreement.
Delinquent Loans. The following table sets forth our loan delinquencies by type at the dates indicated.
At December 31, 2023
30-89 Days
90 Days and Over
Total
(In thousands)
Past Due
Past Due
Past Due
Total Loans
Residential mortgage loans:
One- to four-family
$
6,888
$
2,277
$
9,165
6,888
2,277
9,165
Commercial loans:
Real estate - nonresidential
-
Multi-family
-
Commercial business
Consumer loans:
Home equity and junior liens
Manufactured homes
1,004
Automobile
Student
Recreational vehicle
1,563
1,854
Other consumer
3,205
4,120
Total loans
$
10,938
$
3,262
$
14,200
At December 31, 2022
30-89 Days
90 Days and Over
Total
(In thousands)
Past Due
Past Due
Past Due
Total Loans
Residential mortgage loans:
One- to four-family
$
4,496
$
2,605
$
7,101
4,496
2,605
7,101
Commercial loans:
Real estate - nonresidential
Commercial business
Consumer loans:
Home equity and junior liens
Manufactured homes
1,020
1,388
Automobile
Student
-
Recreational vehicle
1,334
1,469
Other consumer
-
3,389
4,153
Total loans
$
8,268
$
3,943
$
12,211
One - to four-family residential mortgage loans 30-89 days past due increased $2.4 million, or 53.2% to $6.9 million at December 31, 2023 from $4.5 million at December 31, 2022 as a result of 71 past due loans in 2023 as compared to 58 past due loans in 2022. Multi-family loans 30-89 days past due increased to $384,000 at December 31, 2023 due to the delinquency of one loan in 2023. Commercial business loans 30-89 days past due increased $332,000, or 257.4%, to $461,000 at December 31, 2023 from $129,000 at December 31, 2022 as a result of three past due loans in 2023 as compared to one past due loan in 2022. Recreational vehicles 30-89 days increased $229,000, or 17.2%, to $1.6 million at December 31, 2023 from $1.3 million at December 31, 2022 as a result of 52 past due loans in 2023 as compared to 42 past due loans in 2022. Home equity and junior liens 30-89 days past due increased $135,000, or 48.6%, to $413,000 at December 31, 2023 from $278,000 at December 31, 2022 as a result of 12 past due loans in 2023 as compared to nine past due loans in 2022.
Nonresidential real estate loans 90 days and over past due decreased $387,000, or 93.0%, to $29,000 at December 31, 2023 from $416,000 at December 31, 2022 as a result of a loan payoff of $383,000. Commercial business loans 90 days and over past due decreased $117,000, or 74.1%, to $41,000 at December 31, 2023 from $158,000 at December 31, 2022 as a result of two loan payoffs totaling $113,000.
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency (“OCC”) to be of lesser quality, as “substandard,” “doubtful,” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports with the OCC and in accordance with our asset classification policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.
On the basis of this review of our assets, our classified or special mention assets (presented gross of allowance) at the dates indicated were as follows:
At December 31,
(In thousands)
Classification of assets:
Special mention assets
$
4,344
$
6,249
Substandard assets
5,683
4,787
Doubtful assets
-
-
Loss assets
-
-
Total classified assets
$
10,027
$
11,036
Substandard assets increased $896,000, or 18.7%, to $5.7 million at December 31, 2023 from $4.8 million at December 31, 2022 primarily due to the downgrade of a commercial loan from special mention as a result of the Company’s most recent annual review. This loan was subsequently paid in full in February 2024.
Non-Performing Assets. We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days delinquent unless the loan is well-secured and in the process of collection. Loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until the loan qualifies for return to accrual. Generally, loans are restored to accrual status when all the principal and interest amounts contractually due are brought current, and future payments are reasonably assured. Loans are moved to non-accrual status in accordance with our policy, which is typically after 90 days of non-payment.
The following table sets forth information regarding our non-performing assets.
Except as disclosed in the foregoing tables, there were no other loans at December 31, 2023 that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
At December 31,
At December 31,
(In thousands)
Non-accrual loans:
Residential:
One- to four-family
$
2,277
$
2,605
Commercial:
Real estate - nonresidential
Commercial business
Consumer:
Home equity and junior liens
Manufactured homes
Automobile
Student
Recreational vehicle
Other consumer
-
Total non-accrual loans
$
3,618
$
4,372
Real estate owned:
Residential:
One- to four-family
$
$
Total real estate owned
$
$
Total non-performing assets
$
3,736
$
4,384
Ratios:
Total non-performing loans to total loans
1.13%
1.51%
Total non-performing loans to total assets
0.85%
1.13%
Total non-performing assets to total assets
0.88%
1.13%
Loan Modifications. Prior to the adoption of CECL on January 1, 2023, the Company was required to disclose certain activities related to Troubled Debt Restructuring (“TDR”) in accordance with accounting guidance. Certain loans were modified in a TDR where economic concessions have been granted to a borrower who is experiencing, or is expected to experience, financial difficulties. These economic concessions could include a reduction in the loan interest rate, extension of payment terms, reduction of principal amortization, or other actions that the Company would not otherwise consider for a new loan with similar risk characteristics. The recorded investment for each TDR loan is determined by the outstanding balance less the allowance associated with the loan.
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a certain loan by providing multiple types of
concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.
There were no loans that had been modified as a TDR during the year ended December 31, 2022.
At December 31, 2022, the Company had seven TDR loans, with an outstanding balance of $2.5 million, in the portfolio that had been modified by making concessions to maturity dates and, in some cases, lowering the interest rate from the original contract. At January 1, 2023, as part of the adoption of the CECL standard, two of these loans totaling $270,000 were returned to the general pool to be collectively reviewed as a result of making regularly scheduled payments as agreed. The remaining five loans totaling $2.2 million will continue to be individually reviewed although regularly scheduled payments have been made as agreed. There were no loans modified to borrowers experiencing financial difficulties during the year ended December 31, 2023.
Allowance for Credit Losses
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.
Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio. The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is included in the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments: multi-family, commercial business, nonresidential real estate, manufactured homes, home equity loans, home equity lines of credit, residential real estate, commercial lines of credit, direct automobile, indirect automobile, other consumer, other consumer lines of credit, recreational vehicles, student loans, and residential construction loans. The Company utilizes a reasonable and supportable forecast period of 3 - 10 years depending on the portfolio segment. Subsequent to this forecast period the Company reverts, on a straight-line basis over the applicable segment period, to historical loss experience to inform its estimate of losses for the remaining contractual life of each portfolio.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and included adjustments for volume and loan mix, economics, and delinquency and loan quality. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is
experiencing financial difficulty, the expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs as appropriate.
Allowance for Credit Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.
At December 31,
(In thousands)
Allowance at beginning of period
$
2,497
$
1,841
Provision for loan losses
Charge offs:
Residential:
One- to four-family
(167)
(37)
Commercial:
Commercial business
-
(14)
Consumer:
Home equity and junior liens
(32)
(10)
Automobile
(142)
(59)
Student
(36)
(29)
Recreational vehicle
(173)
(1)
Other consumer
(9)
(2)
Total charge-offs
(559)
(152)
Recoveries:
Residential:
One- to four-family
Commercial:
Commercial business
Consumer:
Automobile
Student
Recreational vehicle
-
Other consumer
Total recoveries
Net (charge-offs) recoveries
(451)
Allowance at end of period
$
2,973
$
2,497
Allowance to non-performing loans
82.17%
57.11%
Allowance to total loans outstanding at the end of the period
0.93%
0.86%
Net charge-offs to average loans outstanding during the period
(0.14)%
0.01%
Residential mortgage net charge-offs to average loans outstanding
(0.05)%
(0.01)%
Commercial loan net charge-offs to average loans outstanding
0.02%
0.00%
Consumer loan net charge-offs to average loans outstanding
(0.11)%
0.02%
Allocation of Allowance for Credit Losses. The following table sets forth the allowance for credit losses allocated by loan category, the percentage of allowance in each category to total allocated allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At December 31,
Percent of
Percent of
Allowance
Percent of
Allowance
Percent of
in Category
Loans in
in Category
Loans in
Allowance
to Total
Each
Allowance
to Total
Each
for Loan
Allocated
Category to
for Loan
Allocated
Category to
(In thousands)
Losses
Allowance
Total Loans
Losses
Allowance
Total Loans
Residential:
One- to four-family
$
1,184
39.9%
52.4%
$
31.5%
47.5%
Construction
-
0.0%
0.0%
0.1%
0.1%
Commercial:
Real estate - nonresidential
16.7%
4.5%
12.8%
5.7%
Multi-family
-
0.0%
0.3%
0.2%
0.3%
Commercial business
6.9%
5.9%
9.9%
4.0%
Consumer:
Home equity and junior liens
3.4%
4.2%
2.6%
4.0%
Manufactured homes
-
0.0%
15.1%
4.4%
17.6%
Automobile
8.1%
7.0%
5.4%
8.4%
Student
0.4%
0.5%
2.2%
0.6%
Recreational vehicle
12.4%
7.1%
25.9%
9.3%
Other consumer
12.2%
3.0%
5.0%
2.5%
Total allocated allowance
$
2,973
100.0%
100.0%
$
2,497
100.0%
100.0%
At December 31, 2023, our allowance for credit losses represented 0.93% of total loans and 82.2% of nonperforming loans. Nonperforming loans decreased $754,000, or 17.2%, to $3.6 million at December 31, 2023 from $4.4 million at December 31, 2022. The decrease resulted primarily from decreases in nonresidential, one- to four-family residential real estate, and commercial business loans. Nonresidential loans decreased $387,000 as a result of a foreclosure of a nonresidential property. One- to four-family residential real estate loans decreased $328,000 primarily due to seven loan payoffs totaling $551,000, six foreclosures totaling $396,000, and six loan upgrades to accrual status totaling $272,000, partially offset by 14 loans being downgraded to nonaccrual status totaling $1.0 million. Commercial business loans decreased $190,000 primarily due to one foreclosure totaling $73,000, loan amortization of $77,000, and one loan payoff for $40,000.
Investment Activities
General. The goals of our investment policy are to provide and maintain liquidity to meet day-to-day, cyclical, and long-term liquidity needs, to help mitigate interest rate and market risk within the parameters of our interest rate risk policy, and to generate a dependable flow of earnings within the context of our interest rate and credit risk objectives. Subject to loan demand and our interest rate risk analysis, we may increase the balance of our investment securities portfolio when we have excess liquidity.
Our investment policy was adopted and is reviewed at least annually by the Board of Directors. All investment decisions require the approval of the Chief Executive Officer or Chief Financial Officer. The Chief Financial Officer provides an investment schedule detailing the investment portfolio which is reviewed at least monthly by the Bank’s asset-liability committee and the Board of Directors.
Our current investment policy permits, with certain limitations, investments in United States Treasury securities, securities issued by the United States Government and its agencies or government sponsored enterprises including mortgage-backed securities and collateralized mortgage obligations (“CMO”) issued by Fannie Mae, Ginnie Mae, and Freddie Mac, equity securities, corporate bonds and obligations, debt securities of states and municipalities, commercial paper, certificates of deposits in other financial institutions, and bank-owned life insurance.
At December 31, 2023, our investment portfolio consisted of securities and obligations issued by State and local municipalities, corporate bonds, structured certificates of deposit, equity securities consisting of mutual funds, and to a lesser extent mortgage-backed securities. At December 31, 2023, we owned $1.6 million of Federal Home Loan Bank stock. As a member of the Federal Home Loan Bank of New York, we are required to purchase stock in the Federal Home Loan Bank of New York, which stock is carried at cost and classified as restricted equity securities.
Corporate Bonds. Generations Bank invests in corporate debt instruments with fixed and variable rates. At December 31, 2023, this portfolio consisted of $5.7 million of variable rate instruments and $9.3 million in fixed rate instruments, of which $6.7 million will become variable rate in the future. The bonds with variable rates reprice periodically based on the differential spread between intermediate Treasury bond yields and long-term Treasury bond yields and a fixed hurdle of 25-50 basis points, or a fixed spread over Prime or a predetermined index. All the bonds are callable except for one $79,000 bond. $9.4 million of the corporate bond portfolio are perpetual bonds with no terminal maturity dates; however, we anticipate these bonds will be called based the on the relative coupons and rate structures and upon anticipated changes in regulations pertaining to the securities. We maintain this portfolio for regular cash flow and providing protection over higher rates.
Management believes the credit risk on its corporate debt instruments portfolio is low. The securities are issued by entities with significant markets and strong balance sheets. Management receives quarterly updates on the issuing entities and evaluates their performance based on rating services and peers with the assistance of a third-party investment management service.
State and Political Subdivision Securities. Generations Bank and its subsidiary Generations Commercial Bank purchase state and political subdivision securities in order to: (i) generate positive interest rate spread with minimal administrative expense; (ii) lower credit risk as a result of purchasing general obligations which are subject to the levy of ad valorem taxes within the municipalities’ jurisdiction; (iii) increase liquidity, (iv) provide low cost funding to the local communities within our market area, and (v) serve as collateral for municipal deposits in excess of FDIC limits. State and political subdivision securities purchased within New York State are exempt from Federal income tax and are zero apportionment for New York State income tax purposes. As a result, the yields on these securities as reported within the financial statements, are lower than would be attained on other investment options. The portfolio consists of either short-term obligations, due within one year, or are serial or statutory installment bonds which require semi-annual or annual payments of principal and interest. We believe that the prepayment risk on these securities is low as most of the bonds are newly issued in a historically low interest rate environment.
Management believes that credit risk on its state and political subdivision securities portfolio is low. Management analyzes each security prior to purchase and closely monitors these securities by obtaining data collected from the New York State Comptroller’s office when published annually. Management also reviews any underlying ratings of the securities in its assessment of credit risk.
Mortgage-Backed Securities. At December 31, 2023, we had mortgage-backed securities with a carrying value of $824,000. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multi-family mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Generations Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed securities are backed by either Freddie Mac, Ginnie Mae, or Fannie Mae, which are government-sponsored enterprises.
Residential mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Portfolio Maturities and Yields. The composition and maturities of our investment securities portfolio at December 31, 2023 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Weighted average yield is calculated by multiplying the amortized cost of the individual securities in a security type by their respective interest rates and then dividing the total interest income calculated for the security type by the total amortized cost of the security type. No tax-equivalent yield adjustments were made, as the effect thereof was not material.
More than One Year
More than Five Years
One Year or Less
through Five Years
through Ten Years
More than Ten Years
Total
Weighted
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Fair
Average
(In thousands)
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Value
Yield
Securities available for sale:
Residential mortgage-backed- US agency and GSEs
$
-
0.00%
$
5.63%
$
-
0.00%
$
5.26%
$
$
5.32%
Corporate bonds
5.10%
4.87%
2,270
3.84%
13,928
6.03%
17,242
15,047
5.68%
State and political subdivisions
1.62%
3,336
2.16%
3,415
2.05%
10,451
3.03%
17,588
16,235
2.64%
Total available for sale
$
1,221
$
3,548
$
5,685
$
24,396
$
34,850
$
31,302
Securities held to maturity:
Structured certificates of deposit
$
-
0.00%
$
-
0.00%
$
-
0.00%
$
2.31%
$
$
2.31%
Residential Mortgage-backed- US agency and GSEs
-
0.00%
-
0.00%
6.59%
3.57%
3.63%
Total
$
-
$
-
$
$
1,439
$
1,454
$
1,226
Sources of Funds
General. Deposits have traditionally been the primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, funds are derived from scheduled loan payments, investment maturities, loan prepayments, retained earnings, and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions, and levels of competition.
Deposits. Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit, and the interest rate. In recent years we have emphasized, subject to market conditions, demand, interest-bearing checking, and savings accounts. Also, we participate in reciprocal deposit services for our customers through the Certificate Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep networks, which are currently considered by the bank regulators, to be brokered deposits. At December 31, 2023, we participated out approximately $59.9 million of our certificates of deposit, representing 16.7% of our total deposits, through these reciprocal deposit services. At December 31, 2023, these certificates of deposit had an average term to maturity of 5.6 months. Early withdrawal of these deposits is not permitted, which makes these accounts a more stable source of funds.
Interest rates paid, maturity terms, service fees, and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors, and growth goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of Generations Bank in the community to attract and retain deposits.
The flow of deposits is influenced significantly by general economic conditions, changes in interest rates, and competition. Our ability to gather deposits is affected by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products.
Generations Commercial Bank (the “Commercial Bank”), a New York State chartered limited-purpose commercial bank, formed expressly to enable local municipalities to deposit public funds with the Commercial Bank, opened for business on January 2, 2019. At December 31, 2023, the Commercial Bank deposits were $9.2 million, and none were in reciprocal deposit balances.
The following table sets forth the distribution of our average total deposit accounts, by account type, for the periods indicated.
At December 31,
(In thousands)
Average Balance
Percent
Weighted Average Rate
Average Balance
Percent
Weighted Average Rate
Deposit type:
Non-interest-bearing checking
$
39,186
11.0%
0.00
%
$
57,452
18.5%
0.00
%
Interest-bearing checking
63,859
17.9%
1.05
%
34,994
11.2%
0.20
%
Money market
21,902
6.1%
1.69
%
31,249
10.0%
0.35
%
Savings
86,799
24.3%
0.88
%
108,571
34.9%
0.38
%
Time deposits
145,367
40.7%
4.53
%
79,013
25.4%
2.49
%
Total deposits
$
357,113
100.0%
$
311,279
100.0%
The Bank has significant (defined as a deposit relationship above $250,000) exposure to businesses or organizations operating across the following industries: Municipalities (Libraries, Schools, Towns and Villages, etc.), Mortgage Brokers, Insurance Agencies, Wineries, Estates and Trusts, Housing Developments and Agencies, as well as various other not for profit entities. At December 31, 2023, these relationships accounted for approximately $34.0 million of the Bank’s total deposit base. As of December 31, 2023 and 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to $250,000 which is the maximum amount for federal deposit insurance) was $35.9 million and $35.3 million, respectively. In addition, as of December 31 2023 and 2022, the aggregate amount of all our uninsured certificates of deposit was $7.0 million and $7.1 million, respectively. The following table sets forth the maturity of those certificates.
At December 31,
(In thousands)
Maturity Period:
Three months or less
$
1,096
$
1,597
Over three months through six months
2,366
Over six months through twelve months
5,087
2,583
Over twelve months
Total
$
7,015
$
7,087
Borrowings. We may obtain advances from the Federal Home Loan Bank by pledging as security our capital stock in the Federal Home Loan Bank and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile. At December 31, 2023, we had $23.6 million of Federal Home Loan Bank advances. In addition to funding portfolio loans, we sometimes use Federal Home Loan Bank advances for short-term funding needs.
Generations Bank also has a $10.0 million line of credit with a correspondent bank. At December 31, 2023, there were no outstanding advances on this line. Generations Bank has two additional Fed funds lines of credit with other financial institutions totaling $10.5 million. These lines are unsecured. At December 31, 2023, there were no outstanding advances on these lines.
Employees
At December 31, 2023, we had 71 full-time employees and three part-time employees. Management believes that we have a good working relationship with our employees.
SUPERVISION AND REGULATION
General
Generations Bank is a federally chartered savings bank and Generations Commercial Bank is a New York-chartered bank. The Federal Deposit Insurance Corporation (“FDIC”) through the Deposit Insurance Fund insures their deposit accounts up to applicable limits. Generations Bank and Generations Commercial Bank are subject to extensive regulation by the Office of the Comptroller of the Currency (the “OCC”) and the New York State Department of Financial Services (the “Department”), respectively, as their chartering agencies, and by the FDIC, as their deposit insurer. Generations Bank and Generations Commercial Bank are required to file reports with, and are periodically examined by the OCC and the Department, respectively, as well as the FDIC concerning their activities and financial condition, and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other banking institutions. Generations Bank is a member of the Federal Home Loan Bank of New York and is subject to certain regulations by the Federal Home Loan Bank System. Generations Bancorp, a savings and loan holding company, is subject to regulation and examination by, and is required to file reports with, the Federal Reserve Board.
Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as Generations Bank or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.
In addition to its requirement to comply with the rules and regulations of the Federal Reserve Board, Generations Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Any future laws or regulations, whether enacted by Congress or implemented by the FDIC, the OCC, the Department or the Federal Reserve Board, could have a material adverse impact on Generations Bank, Generations Commercial Bank or Generations Bancorp.
Certain of the regulatory requirements applicable to Generations Bank, Generations Commercial Bank and Generations Bancorp are referred to below or elsewhere herein.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Generations Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Generations Bank may also establish subsidiaries that may engage in certain activities not otherwise permissible for Generations Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the Accumulated Other Comprehensive Income opt-out have it incorporated into common equity Tier 1 capital (including unrealized gains and losses on investment securities available-for-sale). Generations Bank and Generations Commercial Bank have exercised this one-time opt-out and therefore do not include AOCI in their regulatory capital determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
At December 31, 2023, Generations Bank’s capital exceeded all applicable requirements.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. At December 31, 2023, Generations Bank complied with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings bank, Generations Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Generations Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
Generations Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended. This test generally requires a savings association to have at least 75% of its deposits held by the public and earn at least 25% of its income from loans and U.S. government obligations. Alternatively, a savings association can satisfy this test by maintaining at least 60% of its assets in cash, real estate loans and U.S. Government or state obligations.
A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2023, Generations Bank satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application with the OCC for approval of a capital distribution if:
● the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;
● the savings association would not be at least adequately capitalized following the distribution;
● the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
● the savings association is not eligible for expedited treatment of its filings, generally due to an unsatisfactory CAMELS rating or being subject to a cease and desist order or formal written agreement that requires action to improve the institution’s financial condition.
Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as Generations Bank, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution may be disapproved if:
● the federal savings association would be undercapitalized following the distribution;
● the proposed capital distribution raises safety and soundness concerns; or
● the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.
Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the OCC is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the Federal Deposit Insurance Corporation to publicly disclose their rating. Generations Bank received a “needs improvement” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with, an insured depository institution such as Generations Bank. Generations Bancorp is an affiliate of Generations Bank because of its control of Generations Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.
Generations Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
● be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
● not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Generations Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Generations Bank’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Interstate Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.
Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The applicable OCC regulations were amended to incorporate the previously mentioned increased regulatory capital standards. Under the amended regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to a regulatory order to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, ceasing receipt of deposits from correspondent banks, dismissal of directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
At December 31, 2023, Generations Bank met the criteria for being considered “well capitalized.”
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as Generations Bank. Deposit accounts in Generations Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s deposits.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Generations Bank. We cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.
Privacy Regulations. Federal regulations generally require that Generations Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Generations Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Generations Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.
USA PATRIOT Act. Generations Bank is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.
Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Other Regulations
Interest and other charges collected or contracted for by Generations Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
● Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
● Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; and
● Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of Generations Bank are also subject to, among others, the:
● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
● Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and
● Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Federal Reserve System
The Federal Reserve Board regulations require federal savings banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. In April 2020, due to a change in its approach to monetary policy, the Board of Governors of the Federal Reserve System announced an interim rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The Federal Reserve Board has indicated that it has no plans to re-impose reserve requirements, but may do so in the future if conditions warrant. At December 31, 2023, Generations Bank was in compliance with these reserve requirements.
Federal Home Loan Bank System
As a member of the Federal Home Loan Bank of New York, Generations Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank of New York provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank of New York are required to acquire and hold shares of capital stock in the Federal Home Loan Bank of New York. Generations Bank complied with this requirement at December 31, 2023. Based on redemption provisions of the Federal Home Loan Bank of New York, the stock has no quoted market value and is carried at cost. Generations Bank reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of New York stock. At December 31, 2023, no impairment had been recognized.
Holding Company Regulation
Generations Bancorp is a savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over Generations Bancorp and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Generations Bank or Generations Commercial Bank.
As a savings and loan holding company, Generations Bancorp’s activities are limited to those activities permissible by law for financial holding companies (if Generations Bancorp makes an election to be treated as a financial holding company and meets the other requirements to be a financial holding company) or multiple savings and loan holding companies. Generations Bancorp has no present intention to make an election to be treated as a financial holding company. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending and
other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, insurance and underwriting equity securities. Multiple savings and loan holding companies are authorized to engage in activities specified by federal regulation, including activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act.
Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such factors as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.
Capital Requirements. Savings and loan holding companies of under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve Board determines otherwise in particular cases.
Source of Strength. The Federal Reserve Board has promulgated regulations implementing the “source of strength” doctrine that require holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Dividends and Share Repurchases. The Federal Reserve Board has issued supervisory policies regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of capital distributions previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the Federal Reserve Board supervisory staff before redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Generations Bancorp to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Commercial Bank Regulation
Our commercial bank, Generations Commercial Bank, derives its authority primarily from the applicable provisions of the New York Banking Law and the regulations adopted under that law. Generations Commercial Bank is limited in its investments and the activities that it may engage in to those permissible under applicable state law and those permissible for national banks and their subsidiaries, unless those investments and activities are specifically permitted by the Federal Deposit Insurance Act or the FDIC determines that the activity or investment would pose no significant risk to the deposit insurance fund. We limit our commercial bank activities to accepting municipal deposits and acquiring municipal and other securities.
Under New York Banking Law, Generations Commercial Bank is not permitted to declare, credit or pay any dividends if its capital stock is impaired or would be impaired as a result of the dividend. In addition, the New York Banking Law provides that our commercial bank cannot declare or pay dividends in any calendar year in excess of “net profits” for such year combined with “retained net profits” of the two preceding years, less any required transfer to surplus or a fund for the retirement of preferred stock, without prior regulatory approval.
Our commercial bank is subject to minimum capital requirements imposed by the FDIC that are substantially similar to the capital requirements imposed on Generations Bank, discussed above. Capital requirements higher than the generally applicable minimum requirements may be established for a particular bank if the FDIC determines that a bank’s capital is, or may become, inadequate in view of the bank’s particular circumstances. Failure to meet capital guidelines could subject a bank to a variety of enforcement actions, including actions under the FDIC’s prompt corrective action regulations.
At December 31, 2023, Generations Commercial Bank met the criteria for being considered “well-capitalized.”
Federal Securities Laws
Generations Bancorp’s common stock is registered with the Securities and Exchange Commission, and Generations Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration, under the Securities Act of 1933, of the shares of common stock which were issued by Generations Bancorp in its second-step conversion and stock offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of Generations Bancorp may be resold without registration. Shares purchased by an affiliate of Generations Bancorp are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If Generations Bancorp meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Generations Bancorp that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Generations Bancorp, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, Generations Bancorp may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, a federal law, no person may acquire control of a savings and loan holding company, such as Generations Bancorp, unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with Generations Bancorp, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.
Emerging Growth Company Status
Generations Bancorp is an emerging growth company. For as long as Generations Bancorp continues to be an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company, Generations Bancorp also is not subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors review and attest as to the effectiveness of our internal control over financial reporting. We have also elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Such an election is irrevocable during the period a company is an emerging growth company. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
Generations Bancorp will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the completion of the second-step conversion; (ii) the first fiscal year after our annual gross revenues are $1.235 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million at the end of the second quarter of that fiscal year. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
TAXATION
Generations Bancorp, Generations Bank, Generations Commercial Bank, and Generations Agency are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent tax matters and is not a comprehensive description of the tax rules applicable to these entities.
Our federal and state tax returns are statutorily subject to potential audit for the years 2020 through 2023. No income tax returns are under audit as of the date of this report.
Federal Taxation
Method of Accounting. For federal income tax purposes, Generations Bancorp, Generations Bank, Generations Commercial Bank, and Generations Agency currently report their income and expenses on the accrual method of accounting and use a tax year ending December 31 for filing consolidated federal income tax returns.
Net Operating Loss Carryovers. For net operating losses incurred prior to January 1, 2018, a company may carry back those net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. For net operating losses incurred after December 31, 2017, a company may carry forward those net operating losses indefinitely to offset up to 80% of their federal taxable income. At December 31, 2023, Generations Bancorp had pre-2018 net operating loss carryforwards of approximately $860,000 which expire in years 2033-2037. Additionally, Generations Bancorp has loss carryforwards of $5.7 million with no expiration period. At December 31, 2023, Generations Bancorp had a full valuation allowance against their net operating loss carryforwards.
Capital Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five-year carryover period is not deductible. At December 31, 2023, Generations Bancorp had a capital loss carryover of $121,000 with a full valuation allowance against it.
Corporate Dividends-Received Deduction. Generations Bancorp may generally exclude from its federal taxable income 100% of dividends received from Generations Bank as a wholly owned subsidiary by filing a consolidated return. The corporate dividends received deduction is 65% when the corporation receiving the dividend owns at least 20% of the stock of the distributing corporation. The dividends received deduction is 50% when the corporation receiving the dividend owns less than 20% of the distributing corporation.
State Taxation
New York State Taxation. Generations Bancorp, Generations Bank, Generations Commercial Bank, and Generations Agency report income on a combined calendar year basis to New York State. The New York State franchise tax is imposed in an amount equal to the greater of 6.5% of Business Income, 0.1875% of average Business Capital, or a fixed dollar amount based on New York sourced gross receipts. All intercompany dividend distributions are eliminated in the calculation of Combined Business Income. Taxable income is apportioned to New York State based on the location of the taxpayer’s customers, with special rules for income from certain financial transactions. The location of the taxpayer’s offices and branches are not relevant to the determination of income apportioned to New York State. Business Income subtraction modifications are available to qualified community banks and thrift institutions based on its qualified loan portfolio. Qualified institutions are entitled to a subtraction modification based on interest income from qualifying loans that reduces the income taxable to New York State.
Maryland State Taxation. As a Maryland business corporation, Generations Bancorp is required to file an annual report with and pay franchise taxes to the State of Maryland.

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ITEM 1A. RISK FACTORS
Item 1A. RISK FACTORS
The presentation of Risk Factors is not required for smaller reporting companies like Generations Bancorp NY, Inc.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
As of December 31, 2023, the net book value of our real properties, including land, was $13.4 million. The following table sets forth information regarding our offices at December 31, 2023.
Leased or
Year Acquired
Location
Owned
or Leased
Main Office:
Corporate Headquarters, 20 E Bayard St, Seneca Falls NY 13148
Owned
Branch Offices:
19 Cayuga Street, Seneca Falls NY 13148
Owned
342 Hamilton Street, Geneva NY 14456
Owned
10 Osborne Street, Auburn NY 13021
Owned
152 Cayuga Street, Union Springs, NY 13160
Owned
89 Main Street, Phelps NY 14532
Owned
1865 North Road, Waterloo NY 13165
Owned
621 N. Seward Avenue, Auburn NY 13021
Owned
6120 State Route #96, Farmington NY 14425
Owned
11182 Maple Ridge Road, Medina NY 14103
Owned

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at December 31, 2023, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
(a)
Market, Holder, and Dividend Information
The Company’s common stock is listed on the NASDAQ Capital Market under the symbol “GBNY.” The approximate number of holders of record of the Company’s common stock as of March 11, 2024 was 246. Certain shares of the Company’s common stock are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
We do not currently pay cash dividends on our common stock and may not pay dividends in the future. Any dividends we pay would be dependent, in part, on dividends we receive from Generations Bank, because the Company has no source of income other than dividends
from Generations Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by the Company and interest payments with respect to our loan to the Employee Stock Ownership Plan. See “Item 1. Business − Supervision and Regulation − Federal Banking Regulation − Capital Distributions.”
The Federal Reserve Board has issued supervisory policies to bank holding companies and savings and loan holding companies providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Federal Reserve Board guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition. In addition, Generations Bank’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by capital rules, which may limit our ability to pay dividends to stockholders. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by regulations and policies of the Federal Reserve Board and the Office of the Comptroller of the Currency, may be paid in addition to, or in lieu of, regular cash dividends.
(b) Report of Offering of Securities and Use of Proceeds Therefrom
Not applicable.
(c)Share Repurchases During the Quarter
The Company did not repurchase any shares of its common stock during the quarter ended December 31, 2023.
The Company’s Board of Directors authorized its first stock repurchase program on March 28, 2022 to acquire up to 83,300 shares, or 3.4 %, of the Company’s then outstanding common stock. On July 25, 2022, the Board of Directors authorized a second stock repurchase program to acquire up to 87,000 shares, or approximately 3.6%, of the Company’s outstanding common stock at the conclusion of the first stock repurchase program. On May 31, 2023, the Board of Directors authorized a third stock repurchase program to acquire up to $1.0 million, or approximately 91,000 shares, or approximately 4.0%, of the Company’s outstanding common stock, based on the current trading price of the common stock. As of December 31, 2023, all of the shares authorized for repurchase under these programs had been repurchased. At this time the Company does not expect to repurchase any more shares under the third stock repurchase program.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6 [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited financial statements, which appear beginning on page of this Annual Report on Form 10-K.
Overview
Generations Bancorp, as the holding company for Generations Bank, conducts its operations primarily through Generations Bank and Generations Commercial Bank.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of banking fees and service charges, insurance commissions, unrealized gains on equity securities and gains on sales of available-for-sale securities, and income from bank owned life insurance. Noninterest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, service charges, franchise taxes, federal deposit insurance premiums, and other operating expenses.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Our current business strategy is to operate as a well-capitalized and profitable community bank dedicated to serving the needs of our consumer and business customers, and offering personalized and efficient customer service. Our goals are to increase interest income through loan portfolio growth, with a primary focus in 2024 on growth in our purchases of one-to four-family residential real estate loans, and to a lesser extent purchases of automobile loans, as well as continuing to decrease interest expense by increasing core deposits, and achieve economies of scale through managed balance sheet growth. Highlights of our current business strategy include:
● Emphasizing one- to four-family residential real estate lending. In 2023, purchased one- to four-family residential real estate loans were the primary source of our loan growth. At December 31, 2023, $168.4 million, or 52.4%, of our total loans consisted of one- to four-family residential real estate loans.
● Continuing our purchases and originations of automobile loans in 2024. In recent years we have increased our emphasis on the purchase and origination of automobile, recreational vehicle, and manufactured home loans. At December 31, 2023, these loans totaled $94.0 million, or 29.3% of our total loan portfolio. For the years ended December 31, 2023 and 2022, we purchased $13.7 million and $24.1 million of automobile, recreational vehicle, and manufactured home loans. We reduced our recreational vehicle purchases in 2023 to zero and do not plan on any purchases in 2024.
●We believe that we have the experience and policies and procedures in place to continue loan purchases without undue risk. We began purchasing manufactured home loans in 2006. In part based on this experience, in 2016 we began purchasing automobile loans from one vendor and began purchasing automobile, recreational vehicle, and other consumer loans from a second vendor in February 2020. Additionally, we began purchasing manufactured home loans from a second vendor in 2019. To date, our credit experience on these loans has been satisfactory. See “Business of Generations Bank - Lending Activities - Manufactured Home Lending and “- Automobile Lending” and “- Other Consumer Lending.”
● Increasing our “core” deposit base, which includes all deposit account types except certificates of deposit. Core deposits are our least costly source of funds, which improves our interest rate spread, and represent our best opportunity to develop customer relationships that enable us to cross-sell our full complement of products and services. Core deposits also contribute non-interest income from account-related fees and services and are generally less sensitive to withdrawal when interest rates fluctuate. We have continued our marketing efforts for checking accounts through digital, print, and outdoor advertising channels. Core deposits at December 31, 2023 decreased $25.5 million, or 12.0%, from December 31, 2022 resulting primarily from customers’ shifting their deposits into higher-yielding certificates of deposit in the increased interest rate environment. In addition, rising inflationary costs further decreased deposit account balances as well as customers seeking higher yields in brokerage money market accounts. In recent years, we have significantly expanded and improved the products and services we offer our retail and business deposit customers who maintain core deposit accounts and have improved our infrastructure for electronic banking services, including online banking, mobile banking, bill pay, and e-statements. The deposit infrastructure we have established can accommodate significant increases in retail and business deposit accounts without additional capital expenditure.
● Remaining a community-oriented institution and relying on high quality service to maintain and build a loyal local customer base. We were established in 1870 and have been operating continuously since that time in the northern Finger Lakes region of New York State which is located in the central to northwestern portion of New York State. Through the goodwill we have developed over years of providing timely, efficient banking services, we believe that we have been able to attract a solid base of local retail customers on which we hope to continue to build our banking business.
Summary of Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our critical accounting policies:
Allowance for Credit Losses. On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities totaled $6,000 at December 31, 2023 and was excluded from the estimate of credit losses. Management classifies the held-to-maturity portfolio into the following major security types: mortgage-backed securities or structured certificates of deposit. All the mortgage-backed securities held by the Company are issued by government-sponsored corporations. These securities are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. The structured certificates of deposit are all fully insured by the Federal Deposit Insurance Corporation as no one security exceeds the $250,000 insurance limit. As a result, no allowance for credit losses was recorded on held-to-maturity debt securities at December 31, 2023.
For available-for-sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments, and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized
cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income. Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At December 31, 2023, there was no allowance for credit loss related to the available-for-sale portfolio. Accrued interest receivable on available-for-sale debt securities totaled $297,000 at December 31, 2023 and was excluded from the estimate of credit losses.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $1.2 million at December 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments. The accrual of interest is generally discounted when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date. All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.
The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is included in the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments: multi-family, commercial business, nonresidential real estate, manufactured homes, home equity loans, home equity lines of credit, residential real estate, commercial lines of credit, direct automobile, indirect automobile, other consumer, other consumer lines of credit, recreational vehicles, student loans, and residential construction loans. The Company utilizes a reasonable and supportable forecast period of 3 - 10 years depending on the portfolio segment. Subsequent to this forecast period the Company reverts, on a straight-line basis over the applicable segment period, to historical loss experience to inform its estimate of losses for the remaining contractual life of each portfolio.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and included adjustments for volume and loan mix, economics, and delinquency and loan quality. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs as appropriate.
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans,
taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.
Income Taxes. Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating losses, capital losses, and contribution carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change. Interest and penalties are included as a component of noninterest expense if incurred. For additional information regarding the Company’s income taxes, see Note 13 to the consolidated financial statements.
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%. The terms examined and upon examination also include 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% 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 more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
Average Balance and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Net deferred loan costs amortized totaled approximately $2.1 million and $2.0 million for the years ended December 31, 2023 and 2022, respectively.
Year Ended December 31,
Average
Average
Balance
Balance
(In thousands)
Outstanding
Interest
Yield/ Rate
Outstanding
Interest
Yield/ Rate
Assets
Interest-earning assets:
Loans
$
318,414
$
14,464
4.54
%
$
284,088
$
12,023
4.23
%
Securities
33,281
1,447
4.35
35,862
1,136
3.17
Interest-earning deposits
6,298
4.35
11,318
0.74
Other
1,480
8.92
1,433
4.26
Total interest-earning assets
359,473
16,317
4.54
332,701
13,304
4.00
Non-interest-earning assets
41,020
41,861
Total assets
$
400,493
$
374,562
Liabilities and equity
Interest-bearing liabilities:
Demand deposits
$
63,859
$
0.34
%
$
69,987
$
0.09
%
Money market accounts
21,902
1.14
31,249
0.36
Savings accounts
86,799
0.65
108,571
0.41
Certificates of deposit
145,367
5,762
3.96
79,013
1.07
Total interest-bearing deposits
317,927
6,794
2.14
288,820
1,474
0.51
Borrowings
20,858
3.75
18,833
2.44
Total interest-bearing liabilities
338,785
7,577
2.24
307,653
1,934
0.63
Other non-interest bearing liabilities
25,276
26,553
Total liabilities
364,061
334,206
Equity
36,432
40,356
Total liabilities and equity
$
400,493
$
374,562
Net interest income
$
8,740
$
11,370
Interest rate spread
2.30
%
3.37
%
Net interest-earning assets
$
20,688
$
25,048
Net interest margin
2.43
%
3.42
%
Average interest-earning assets to average
interest-bearing liabilities
106.11
%
108.14
%
Rate Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the period indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There are no out-of-period items or adjustments included in the table below.
Year Ended December 31,
2023 vs. 2022
Increase (Decrease) Due to
Total
Increase
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Loans
$
1,452
$
$
2,441
Securities
(82)
Interest-earning deposits
(37)
Other
Total interest-earning assets
1,335
1,678
3,013
Interest-bearing liabilities:
Demand deposits
(6)
Savings deposits
(34)
Money market deposits
(89)
Certificates of deposit
4,203
4,913
Total interest-bearing deposits
4,739
5,320
Borrowings
Total interest-bearing liabilities
5,013
5,643
Change in net interest income
$
$
(3,335)
$
(2,630)
Comparison of Financial Condition at December 31, 2023 and December 31, 2022
Total Assets. Total assets increased $38.2 million, or 9.9%, to $424.5 million at December 31, 2023 from $386.3 million at December 31, 2022. The increase resulted primarily from increases in net loans of $29.6 million, cash and cash equivalents of $6.5 million, interest-earning time deposits in banks of $4.4 million, and pension plan assets of $2.3 million, partially offset by decreases in investment securities available-for-sale of $1.7 million, bank-owned life insurance of $1.4 million, and goodwill of $792,000.
Net Loans. Net loans increased $29.6 million, or 9.7%, to $333.5 million at December 31, 2023 from $303.9 million at December 31, 2022. The increase resulted primarily from increases in one- to four-family residential real estate loans of $30.4 million, or 22.0%, commercial business loans of $7.1 million, or 61.2%, other consumer loans of $2.4 million, or 33.2%, home equity loans and lines of credit of $2.1 million, or 17.9%, partially offset by decreases in recreational vehicle loans of $4.0 million, or 14.8%, manufactured home loans of $2.3 million, or 4.5%, nonresidential loans of $2.2 million, or 13.5%, and automobile loans of $1.9 million, or 7.9%. Net deferred loan costs decreased $870,000, or 5.4%, during the year ended December 31, 2023, representing primarily fees paid for purchased loans which are amortized over the estimated loan lives. At December 31, 2023, we had outstanding commitments to originate loans of $987,000 and unfunded lines of credit of $14.4 million. We anticipate that we will have sufficient funds available to meet our current lending commitments.
Consistent with our business strategy, we intend to continue purchases of one-to four-family residential real estate loans, and to continue to purchase to a lesser extent, automobile loans. During the year ended December 31, 2023, we purchased $35.3 million of one-to four-family residential real estate loans and $8.4 million of automobile loans. Additionally, we have discontinued purchases of recreational vehicles and do not expect to purchase these types of loans in the future.
Cash and Cash Equivalents. Cash and cash equivalents increased $6.5 million, or 81.5%, to $14.5 million at December 31, 2023 from $8.0 million at December 31, 2022 primarily due to an increase in deposits.
Interest-Earning Time Deposits in Banks. Interest-earning time deposits in banks increased to $4.4 million at December 31, 2023 from $0 at December 31, 2022. Excess cash was invested in short-term certificates of deposit at other financial institutions in order to maximize the yield on interest-earning deposits.
Pension Plan Assets. Pension plan assets increased $2.3 million, or 21.8%, to $13.0 million at December 31, 2023 from $10.7 million at December 31, 2022. The increase resulted from actual returns on pension assets of $3.0 million and employer contributions of $361,000, partially offset by benefits paid of $463,000 and interest costs of $605,000.
Investment Securities. Securities available-for-sale decreased $1.7 million, or 5.3%, to $31.3 million at December 31, 2023 from $33.1 million at December 31, 2022. The decrease in securities available-for-sale resulted from maturities and principal repayments of $5.3 million, partially offset by purchases of $2.2 million and an increase in market value of $1.4 million.
Bank-owned Life Insurance. Bank-owned life insurance decreased $1.4 million, or 19.2%, to $5.9 million at December 31, 2023 from $7.4 million at December 31, 2022. The decrease was primarily attributable to the surrender of a life insurance policy as a result of the death of our former President and Chief Executive Officer, Menzo D. Case.
Goodwill. Goodwill decreased $792,000 to $0 at December 31, 2023 from $792,000 at December 31, 2022 as a result of the sale of Generations Agency’s book of business to Northwoods on June 1, 2023.
Deposits. Deposits increased $39.9 million, or 12.6%, to $357.6 million at December 31, 2023 from $317.7 million at December 31, 2022. Interest-bearing accounts increased $43.0 million, or 16.3%, to $306.1 million at December 31, 2023 from $263.1 million at December 31, 2022. The largest increase in interest-bearing deposits was in certificates of deposit which increased $65.5 million, or 61.8%, to $171.3 million at December 31, 2023 from $105.8 million at December 31, 2022. Certificates of deposit that are scheduled to mature in one year or less from December 31, 2023 totaled $156.3 million. Interest-bearing checking accounts decreased $3.0 million, or 7.9%, to $35.1 million at December 31, 2023 from $38.1 million at December 31, 2022. Money market accounts decreased $7.3 million, or 27.6%, to $19.2 million at December 31, 2023 from $26.5 million at December 31, 2022. Savings accounts decreased $12.1 million, or 13.1%, to $80.5 million at December 31, 2023 from $92.6 million at December 31, 2022. Noninterest-bearing deposits decreased $3.1 million, or 5.6%, to $51.5 million at December 31, 2023 from $54.6 million at December 31, 2022. We may utilize Federal Home Loan Bank advances in place of the maturing time deposits.
Municipal deposits held at Generations Commercial Bank increased $1.6 million, or 20.4%, to $9.2 million at December 31, 2023 from $7.6 million at December 31, 2022.
Federal Home Loan Bank Advances. Short-term Federal Home Loan Bank advances decreased to $0 at December 31, 2023 from $16.2 million at December 31, 2022 as a result of repayments. Long-term Federal Home Loan Bank advances increased $13.2 million, or 128.1%, to $23.6 million at December 31, 2023 from $10.3 million at December 31, 2022 as a result of $18.0 million in new advances partially offset by repayments of $4.8 million. The average cost of outstanding advances from the Federal Home Loan Bank was 3.75% at December 31, 2023, as compared to our weighted average rate on deposits of 2.14% at that date.
Total Equity. Total equity increased $370,000, or 1.0%, to $37.7 million at December 31, 2023 from $37.3 million at December 31, 2022. The increase was primarily due to a decrease in accumulated other comprehensive loss of $2.2 million as a result of an increase in the fair market value of our investment securities available-for-sale and pension plans and a $341,000 decrease in stock held by Rabbi trust as a result of distributions, partially offset by a decrease of $1.1 million due to stock repurchases and a net loss of $1.6 million for the year ended December 31, 2023.
Comparison of Operating Results for the Years Ended December 31, 2023 and December 31, 2022
General. Net loss for the year ended December 31, 2023 was $1.6 million, as compared to net income of $1.1 million for the year ended December 31, 2022, a decrease of $2.7 million, or 244.2%. The decrease was primarily attributable to a $2.6 million decrease in net interest income, a $1.2 million increase in noninterest expense, and a $302,000 increase in provision for loan losses, partially offset by a $864,000 increase in noninterest income and a $641,000 decrease in income tax expense.
Interest and Dividend Income. Interest and dividend income increased $3.0 million, or 22.7%, to $16.3 million for the year ended December 31, 2023 from $13.3 million for the year ended December 31, 2022. The increase was primarily attributable to an increase of $2.4 million in interest on loans receivable, an increase of $311,000 in interest on investment securities, and an increase of $190,000 in interest-earning deposits. The average balance of loans increased $34.3 million, or 12.1%, to $318.4 million for the year ended December 31, 2023 from $284.1 million for the year ended December 31, 2022. The average yield on loans increased 31 basis points to 4.54% for the year ended December 31, 2023 from 4.23% for the year ended December 31, 2022, reflecting an increase in higher-yielding loans year over year. The average balance of investment securities decreased $2.6 million, or 7.2%, to $33.3 million for the year ended December 31, 2023 from $35.9 million for the year ended December 31, 2022. The average yield on investment securities increased 118 basis points to 4.35% for the year ended December 31, 2023 from 3.17% for the year ended December 31, 2022 due to rising interest rates and lower premium amortization expense during 2023.
Interest Expense. Interest expense increased $5.6 million, or 291.8%, to $7.6 million for the year ended December 31, 2023 from $1.9 million for the year ended December 31, 2022. Interest expense on deposits increased $5.3 million, or 360.9%, to $6.8 million for the year ended December 31, 2023 from $1.5 million for the year ended December 31, 2022, primarily due to an increase in interest expense on certificates of deposit of $4.9 million. The increase was attributable to an increase of $66.4 million, or 84.0%, in the average balance of certificate of deposit accounts to $145.4 million for the year ended December 31, 2023 from $79.0 million for the year ended December 31, 2022, in addition to an increase in the average cost of 289 basis points to 3.96% for the year ended December 31, 2023 as compared to 1.07% for the year ended December 31, 2022. Borrowing expense increased $323,000, or 70.2%, to $783,000 for the year ended December 31, 2023 from $460,000 for the year ended December 31, 2022, as a result of an increase in the average cost of borrowings of 131 basis points to 3.75% for the year ended December 31, 2023 as compared to 2.44% for the year ended December 31, 2022 due to rising interest rates. The average balance of borrowings increased $2.0 million, or 10.8%, to $20.9 million for the year ended December 31, 2023 from $18.8 million for the year ended December 31, 2022.
Net Interest Income. Net interest income decreased $2.6 million, or 23.1%, to $8.7 million for the year ended December 31, 2023 from $11.4 million for the year ended December 31, 2022. Our net interest rate spread decreased 107 basis points to 2.30% for the year ended December 31, 2023 from 3.37% for the year ended December 31, 2022. Our net interest margin decreased 99 basis points to 2.43% for the year ended December 31, 2023 from 3.42% for the year ended December 31, 2022. Net interest rate spread and net interest margin were affected primarily by the increase in the cost of our interest-bearing liabilities when comparing 2023 and 2022.
Provision for Credit Losses. Based on management’s analysis of the allowance for credit losses described in Note 2(g) of our consolidated financial statements “Summary of Significant Accounting Policies - Allowance for Credit Losses,” we recorded a provision for credit losses of $933,000 for the year ended December 31, 2023 and a provision for loan losses of $631,000 for the year ended December 31, 2022. The increased provision for credit losses in 2023 was primarily due to overall growth in the loan portfolio.
Noninterest Income. Noninterest income increased $864,000, or 40.8%, to $3.0 million for the year ended December 31, 2023 from $2.1 million for the year ended December 31, 2022. The increase was primarily due to death benefit proceeds of $733,000 received from the surrender of a bank-owned life insurance policy and a net gain of $312,000 recognized from the sale of Generations Agency’s book of business, partially offset by decreases in insurance commissions and banking fees and service charges. Insurance commissions decreased $295,000, or 65.4%, to $156,000 for the year ended December 31, 2023 from $451,000 for the year ended December 31, 2022 as a result of the Management Agreement with Northwoods whereby Northwoods assumed customer service responsibilities for Generations Insurance Agency, Inc. effective April 1, 2022 and the subsequent sale of the book of business to Northwoods on June 1, 2023. Banking fees and service charges decreased $162,000, or 10.2%, to $1.4 million for the year ended December 31, 2023 from $1.6 million for the year ended December 31, 2022 due to fewer loan recapture fees and loan prepayment penalties as well as fewer non-sufficient funds fees when comparing 2023 and 2022.
Noninterest Expense. Noninterest expense increased $1.2 million, or 10.6%, to $12.8 million for the year ended December 31, 2023 from $11.6 million for the year ended December 31, 2022. The increase was primarily attributable to increases in compensation and benefits, regulatory assessments, and other expenses, offset in part by decreases in advertising and service charges. Compensation and benefits increased $1.2 million, or 24.3%, to $6.1 million for the year ended December 31, 2023 from $4.9 million for the year ended December 31, 2022 primarily due to employment agreement expenses associated with the death of our former President and Chief Executive Officer, Menzo D. Case, in addition to a decrease in pension expense benefit. The decrease in pension expense benefit for the year ended December 31, 2023 is attributable to the amortization of certain unrecognized actuarial losses in addition to lower expected investment returns due to the Plan’s investment losses for the year ended December 31, 2022. Regulatory assessments increased $154,000, or 74.0%, to $362,000 for the year ended December 31, 2023 from $208,000 for the year ended December 31, 2022 as a result
of an increase in total assessment base in addition to an increase in the quarterly multiplier used in the payment computation. Other expenses increased $245,000, or 20.8%, to $1.4 million for the year ended December 31, 2023 from $1.2 million for the year ended December 31, 2022 as a result of an increase in directors’ fees related to changes in the market price of Generations Bancorp’s stock held in the directors’ retirement plan during 2023 as compared to 2022 along with an increase in expenses related to equity incentive plan stock awards and stock options granted in May 2022. Advertising decreased $224,000, or 52.3%, to $204,000 for the year ended December 31, 2023 from $428,000 for the year ended December 31, 2022 due to less activity when comparing 2023 to 2022. Service charges decreased $142,000, or 6.8%, to $2.0 million for the year ended December 31, 2023 from $2.1 million for the year ended December 31, 2022 as a result of discounts recognized from the renewal of our core processing contract.
Federal Income Taxes. Income tax expense decreased $641,000, or 296.8%, to a benefit of $425,000 for the year ended December 31, 2023 from $216,000 for the year ended December 31, 2022. The effective tax rate was 21.3% for the year ended December 31, 2023 as compared to 16.6% for the year ended December 31, 2022.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are monetary in nature and sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our Board of Directors.
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use to manage interest rate risk are:
● purchasing and originating consumer loans, including automobile and manufactured home loans, and commercial real estate and multi-family loans, all of which tend to have shorter terms and higher interest rates than one- to four-family residential real estate loans, and which, if originated, may generate customer relationships that can result in larger non-interest-bearing checking accounts;
● utilizing long-term Federal Home Loan Bank advances which are a closer match in duration to partially fund loan originations and purchases; and
● reducing our dependence on certificates of deposit to support lending and investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which are less interest rate sensitive than certificates of deposit.
Our Board of Directors is responsible for the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential operational staff. This committee is charged with developing and implementing an asset/liability management plan and meets monthly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank. At December 31, 2023, we had $23.6 million outstanding in advances from the Federal Home Loan Bank, and had the ability to borrow approximately $68.8 million based on our collateral capacity. At December 31, 2023, we had an additional $20.5 million in lines of credit available with other financial institutions.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $2.0 million for the year ended December 31, 2023 and $4.4 million for the year ended December 31, 2022. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from the sale of and maturing securities, was $31.8 million for the year ended December 31, 2023 and $29.8 million for the year ended December 31, 2022. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was $36.2 million for the year ended December 31, 2023 and $12.5 million for the year ended December 31, 2022.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments.
Generations Bancorp is a separate corporate entity from Generations Bank and it must provide for its own liquidity to pay any dividends to its stockholders, to repurchase any shares of its common stock, and for other corporate purposes. Generations Bancorp’s primary source of liquidity is any dividend payments it may receive from Generations Bank. Generations Bank paid dividends of $1.0 million to Generations Bancorp during the year ended December 31, 2023 and dividends of $1.3 million during the year ended December 31, 2022. See “Supervision and Regulation - Federal Banking Regulation - Capital Distributions” for a discussion of the regulations applicable to the ability of Generations Bank to pay dividends. At December 31, 2023, Generations Bancorp (on an unconsolidated, stand-alone basis) had liquid assets totaling $2.7 million.
At December 31, 2023, Generations Bank exceeded all its regulatory capital requirements and was categorized as well capitalized. See Note 16 to the Consolidated Financial Statements. Management is unaware of any conditions or events since the most recent notification that would change our category.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a description of recent accounting pronouncements that may affect our financial condition and results of operations.
Impact of Inflation and Changing Price
The consolidated financial statements and related data presented elsewhere in this annual report have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements are presented in this Annual report on Form 10-K beginning at page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. Changes in and Disagreements with Accountants on Accounting Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures
(a)An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2023. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
(b)Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s system of internal control over financial reporting is designed under the supervision of management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”) and necessarily include some amounts based on management’s best estimates and judgments. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections on any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
As of December 31, 2023, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework of 2013. Based upon its assessment, management believes that the Company’s internal control over financial reporting as of December 31, 2023 is effective using these criteria.
(c)Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company (as a smaller reporting company or an emerging growth company) to provide only management’s report in this annual report.
(d)Changes in Internal Controls
During the year ended December 31, 2023, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
During the fourth quarter of 2023, none of our directors or officers adopted or terminated any contract, instruction, or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. Directors, Executive Officers, and Corporate Governance
Generations Bancorp has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. A copy of the Code is available on the Company’s website at www.mygenbank.com under “About Us - Investor Relations - Governance.”
The information contained under the sections captioned “Proposal I - Election of Directors” in the Company’s definitive Proxy Statement for the 2024 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation
The information contained under the section captioned “Proposal I - Election of Directors - Executive Compensation” in the definitive Proxy Statement is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except for the information concerning equity compensation plans, the following information required herein is incorporated by reference from the Proxy Statement under the heading “Stock Ownership.” The following table sets out information as of December 31, 2023, about securities authorized for issuance under the Company’s 2022 Equity Incentive Plan, which has been approved by shareholders.
Number of Shares to be
Weighted-Average
Number of Shares
Issued Upon Exercise of
Exercise Price of
Available for Future
Plan Category
Outstanding Awards
Outstanding Awards
Grants
Plans approved by shareholders
132,977
$
11.61
14,780
Plans not approved by shareholders
-
-
-
Total
132,977
$
14,780

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The “Transactions with Related Persons” and “Proposal 1 - Election of Directors - Board Independence” sections of the Company’s 2024 Proxy Statement are incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. Principal Accountant Fees and Services
The “Proposal 2 - Ratification of Appointment of Independent Registered Public Accounting Firm” section of the Company’s 2024 Proxy Statement is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1)Financial Statements
The documents filed as a part of this Form 10-K are:
(A)
Reports of Independent Registered Public Accounting Firms
(B)
Consolidated Statements of Financial Condition for the years ended December 31, 2023 and 2022
(C)
Consolidated Statements of Operations for the years ended December 31, 2023 and 2022
(D)
Consolidated Statements of Comprehensive Income for the years ended December 31, 2023 and 2022
(E)
Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2023 and 2022
(F)
Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022
(G)
Notes to Consolidated Financial Statements.
(a)(2)Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(a)(3)Exhibits
3.1
Articles of Incorporation of Generations Bancorp NY, Inc.(1)
3.2
Bylaws of Generations Bancorp NY, Inc. (2)
4.1
Form of Common Stock Certificate of Generations Bancorp NY, Inc. (1)
4.2
Description of Generations Bancorp NY, Inc.’s Securities (3)
10.1
Amended and Restated Employment Agreement by and between Generations Bank and Menzo D. Case (1)
10.2
Generations Bank Amended and Restated Directors Retirement Plan (1)
10.3
Amended and Restated Supplemental Executive Retirement Plan for Menzo D. Case (1)
10.4
Amended and Restated Employment Agreement with Angela M. Krezmer (4)
Subsidiaries (3)
Consent of Independent Accounting Firm
Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Policy Relating to Recovery of Erroneously Awarded Compensation
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101)
(1) Incorporated by reference to pre-effective amendment No. 1 to the Registration Statement on Form S-1 (file no. 333-248742), filed on September 11, 2020.
(2) Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 16, 2020.
(3) Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 29, 2021.
(4) Incorporated by reference to the Current Report on Form 8-K filed on December 21, 2023.