GENERATIONS BANCORP NY, INC. General
Management's discussion and analysis of the financial condition and results of operations at and for the three months endedMarch 31, 2023 and 2022 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" 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 current beliefs and expectations of our management 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.
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 in 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;
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? 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
and
? 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.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for the year endedDecember 31, 2022 except as noted in Note 1 to this Form 10-Q for the adoption of the CECL accounting standard. 50 Table of Contents The information for the three months endedMarch 31, 2023 and 2022 is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months endedMarch 31, 2023 are not necessarily indicative of the results to be achieved for the remainder of the year endingDecember 31, 2023 or any other period.
Emerging Growth Company Status
The Company qualifies as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). For as long as the Company is an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies. An emerging growth company may elect 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, but must make such election when the company is first required to file a registration statement. The Company has elected to use the extended transition period described above and intends to maintain its emerging growth company status as allowed under the JOBS Act.
Comparison of Financial Condition at
Total Assets. Total assets increased$2.9 million , or 0.8%, to$389.2 million atMarch 31, 2023 from$386.3 million atDecember 31, 2022 . The increase resulted primarily from increases in net loans of$4.5 million and pension plan assets of$543,000 , partially offset by a decrease in cash and cash equivalents of$2.0 million . Net Loans. Net loans increased$4.5 million , or 1.5%, to$308.4 million atMarch 31, 2023 from$303.9 million atDecember 31, 2022 . The increase resulted from increases in one- to four-family residential real estate loans of$5.7 million , or 4.1%, manufactured home loans of$837,000 , or 1.6%, other consumer loans of$302,000 , or 4.2%, and automobile loans of$218,000 , or 0.9%, partially offset by decreases in recreational vehicle loans of$954,000 , or 3.6%, nonresidential loans of$461,000 , or 2.8%, and home equity loans and lines of credit of$343,000 , or 3.0%.
Net deferred fees decreased
Consistent with our business strategy, we intend to continue the purchase and origination of residential mortgage, automobile, and manufactured home loans. During the three months endedMarch 31, 2023 , we purchased$6.7 million of residential mortgage loans,$2.7 million of automobile loans, and$1.9 million of manufactured home loans. Pension Plan Assets. Pension plan assets increased$543,000 , or 5.1%, to$11.2 million atMarch 31, 2023 from$10.7 million atDecember 31, 2022 . The increase resulted from estimated returns on pension assets of$397,000 and employer contributions of$361,000 , partially offset by estimated benefits paid of$63,000 and interest costs of$152,000 . Cash and Cash Equivalents. Cash and cash equivalents decreased$2.0 million , or 24.5%, to$6.0 million atMarch 31, 2023 from$8.0 million atDecember 31, 2022 as a result of increased loan originations along with repayments of our FHLB advances. Deposits. Deposits increased$19.4 million , or 6.1%, to$337.0 million atMarch 31, 2023 from$317.7 million atDecember 31, 2022 . Interest-bearing accounts increased$21.4 million , or 8.2%, to$284.5 million atMarch 31, 2023 from$263.1 million atDecember 31, 2022 . The largest increase in interest-bearing deposits was in certificates of deposit which increased$29.5 million , or 27.8%, to$135.3 million atMarch 31, 2023 from$105.8 million atDecember 31, 2022 as customers shifted funds from lower yielding core deposit accounts into higher yielding certificate of deposit specials. Interest-bearing checking accounts decreased$2.9 million , or 7.7%, to$35.2 million atMarch 31, 2023 from$38.1 million atDecember 31, 2022 . Savings accounts decreased$2.7 million , or 2.9%, to$90.0 million atMarch 31, 2023 from$92.6 million atDecember 31, 2022 . Money market accounts decreased$2.4 million , or 9.0%, to$24.1 million atMarch 31, 2023 from$26.5 million atDecember 31, 2022 . Noninterest-bearing deposits decreased$2.1 million , or 3.8%, to$52.5 million atMarch 31, 2023 from$54.6 million atDecember 31, 2022 . 51 Table of Contents Municipal deposits held atGenerations Commercial Bank increased$1.1 million , or 14.9%, to$8.8 million atMarch 31, 2023 from$7.6 million atDecember 31, 2022 . Federal Home Loan Bank Advances.Short-term Federal Home Loan Bank advances decreased$14.3 million , or 88.0%, to$1.9 million atMarch 31, 2023 from$16.2 million atDecember 31, 2022 as a result of repayments.Long-term Federal Home Loan Bank advances decreased$2.0 million , or 19.1%, to$8.4 million atMarch 31, 2023 from$10.3 million atDecember 31, 2022 as a result of repayments. Total Equity. Total equity increased$193,000 , or 0.5%, to$37.5 million atMarch 31, 2023 from$37.3 million atDecember 31, 2022 . The increase was primarily due to a decrease in accumulated other comprehensive loss of$360,000 as a result of an increase in the fair market value of our investment securities available-for-sale, offset in part by a net loss of$152,000 during the three months endedMarch 31, 2023 .
Comparison of Operating Results for the Three Months Ended
General. Net loss for the three months endedMarch 31, 2023 was$152,000 as compared to net income of$396,000 for the three months endedMarch 31, 2022 , a decrease of$548,000 , or 138.4%. The decrease was due to a$371,000 decrease in net interest income and a$40,000 decrease in noninterest income along with a$237,000 increase in noninterest expense and a$15,000 increase in provision for credit losses, partially offset by a$115,000 decrease in income tax expense. Interest and Dividend Income. Interest and dividend income increased$523,000 , or 16.1%, to$3.8 million for the three months endedMarch 31, 2023 from$3.2 million for the three months endedMarch 31, 2022 . This increase was primarily attributable to a$398,000 increase in interest on loans receivable, a net increase of$66,000 in interest on investment securities, and an increase in interest on interest-earning deposits of$29,000 . The average balance of loans increased$30.4 million , or 11.0%, to$307.2 million for the three months endedMarch 31, 2023 from$276.8 million for the three months endedMarch 31, 2022 .
The average yield on loans increased 10 basis points to 4.36% for the three
months ended
The
average balance of investment securities decreased$4.4 million , or 11.2%, to$34.8 million for the three months endedMarch 31, 2023 from$39.2 million for the three months endedMarch 31, 2022 . The average yield on investment securities increased 111 basis points to 3.91% for the 2023 period from 2.80% for the 2022 period due to rising interest rates and lower premium amortization expense during the three months endedMarch 31, 2023 . Interest Expense. Total interest expense increased$894,000 , or 252.5%, to$1.2 million for the three months endedMarch 31, 2023 from$354,000 for the three months endedMarch 31, 2022 . Interest expense on total interest-bearing deposits increased$845,000 , or 305.1%, to$1.1 million for the three months endedMarch 31, 2023 from$277,000 for the three months endedMarch 31, 2022 . The increase was attributable to an increase of$49.9 million , or 64.8%, in the average balance of certificate of deposit accounts to$127.0 million for the three months endedMarch 31, 2023 from$77.1 million for the three months endedMarch 31, 2022 , in addition to an increase in the average cost of 250 basis points to 3.12% for the three months endedMarch 31, 2023 from 0.62% for the same period in 2022. Interest expense on borrowings increased$49,000 , or 63.6%, to$126,000 for the three months endedMarch 31, 2023 from$77,000 for the three months endedMarch 31, 2022 , as a result of an increase in the average borrowing costs of 115 basis points to 3.01% for the three months endedMarch 31, 2023 from 1.86% for the three months endedMarch 31, 2022 due to rising interest rates. The average balance of borrowings increased$199,000 , or 1.2%, to$16.8 million for the three months endedMarch 31, 2023 from$16.6 million for the three months endedMarch 31, 2022 . Net Interest Income. Net interest income decreased$371,000 , or 12.8%, to$2.5 million for the three months endedMarch 31, 2023 from$2.9 million for the three months endedMarch 31, 2022 . Our net interest rate spread decreased 75 basis points to 2.63% for the three months endedMarch 31, 2023 from 3.38% for the three months endedMarch 31, 2022 . Our net interest margin decreased 56 basis points to 2.90% for the three months endedMarch 31, 2023 from 3.46% for the same period in 2022. Net interest rate spread and net interest margin were affected primarily by the increase in the cost of our interest-bearing liabilities between the comparable periods. 52
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Provision for Credit Losses. Based on management's analysis of the allowance for credit losses described in Note 6 of our interim consolidated financial statements "Allowance for Credit Losses," we recorded a provision for credit losses of$165,000 for the three months endedMarch 31, 2023 as compared to a provision for loan losses of$150,000 for the three months endedMarch 31, 2022 . The allowance for credit losses was$2.7 million , or 0.90%, of total loans atMarch 31, 2023 as compared to$2.5 million , or 0.86%, of total loans atDecember 31, 2022 . The increase in provision for credit losses for the 2023 period was primarily due to overall growth in the loan portfolio. Noninterest Income. Noninterest income decreased$40,000 , or 6.5%, to$576,000 for the three months endedMarch 31, 2023 from$616,000 for the three months endedMarch 31, 2022 . The decrease was primarily due to a decrease in insurance commissions, partially offset by increases in change in fair value on equity securities and other charges, commissions, and fees. Insurance commissions decreased$68,000 , or 34.5%, to$129,000 for the three months endedMarch 31, 2023 from$197,000 for the three months endedMarch 31, 2022 as a result of the Management Agreement with Northwoods whereby Northwoods assumed customer service responsibilities forGenerations Insurance Agency, Inc. effectiveApril 1, 2022 . Change in fair value on equity securities increased$20,000 , or 166.7%, to$8,000 for the three months endedMarch 31, 2023 from a loss of$12,000 for the three months endedMarch 31, 2022 due to an increase in the fair market value of our equity securities. Other charges, commissions, and fees increased$19,000 , or 95.0%, to$39,000 for the three months endedMarch 31, 2023 from$20,000 for the three months endedMarch 31, 2022 primarily due to a gain recognized on the sale of a foreclosed property. Noninterest Expense. Noninterest expense increased$237,000 , or 8.2%, to$3.1 million for the three months endedMarch 31, 2023 from$2.9 million for the three months endedMarch 31, 2022 primarily due to an increase in compensation and benefits. Compensation and benefits increased$173,000 , or 14.0%, to$1.4 million for the three months endedMarch 31, 2023 from$1.2 million for the three months endedMarch 31, 2022 as a result of annual merit increases for our employees as well as a decrease in pension expense benefit. Income Taxes. Income tax expense decreased$115,000 , or 153.3%, to an income tax benefit of$40,000 for the three months endedMarch 31, 2023 as compared to income tax expense of$75,000 for the three months endedMarch 31, 2022 . The effective tax rate was 20.8% for the three months endedMarch 31, 2023 as compared to 15.9% for the three months endedMarch 31, 2022 . The statutory tax rate was impacted by the benefits derived from tax-exempt bond income, as well as income received on bank-owned life insurance. The increase in the current quarter's effective tax rate was a result of an increase in permanent tax differences and state tax expense proportional to total income, which was a loss for the three months endedMarch 31, 2023 . 53
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Average Balances and Yields. The following table sets forth average balance sheets, average yield 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$482,000 and$443,000 for the three months endedMarch 31, 2023 and 2022, respectively. Three Months Ended March 31, 2023 2022 Average Average Balance Balance Outstanding Interest Yield/ Rate Outstanding Interest Yield/ Rate Interest-earning assets: Loans$ 307,222 $ 3,348 4.36 %$ 276,800 $ 2,950 4.26 % Securities 34,803 340 3.91 39,201 274 2.80 Interest-earning deposits 5,356 45 3.36 17,392 16 0.37 Other 1,287 39 12.12 1,384 9 2.60 Total interest-earning assets 348,668 3,772 4.33 334,777 3,249 3.88 Non-interest-earning assets 41,013 41,549 Total assets$ 389,681 $ 376,326 Interest-bearing liabilities: Demand deposits$ 32,999 $ 25 0.30 %$ 46,352 $ 14 0.12 % Money market accounts 25,401 22 0.35 32,007 28 0.35 Savings accounts 91,735 86 0.37 112,171 115 0.41 Certificates of deposit 127,010 989 3.12 77,076 120 0.62
Total interest-bearing deposits 277,145 1,122 1.62 267,606 277 0.41 Borrowings 16,768 126 3.01 16,569 77 1.86 Total interest-bearing liabilities 293,913 1,248 1.70 284,175 354 0.50 Other non-interest bearing liabilities 58,499
49,153
Total liabilities 352,412 333,328
Equity 37,269 42,998
Total liabilities and equity $ 389,681 $ 376,326
Net interest income $ 2,524 $ 2,895
Interest rate spread 2.63 % 3.38 %
Net interest-earning assets $ 54,755 $ 50,602
Net interest margin 2.90 % 3.46 %
Average interest-earning assets to average
interest-bearing liabilities 118.63 % 117.81 %
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Loan and Asset Quality and Allowance for Credit Losses. The following table
represents information concerning the aggregate amount of non-performing assets
at the indicated dates:
At March 31, At December 31,
(In thousands) 2023 2022
Non-accrual loans:
Residential:
One- to four-family $ 1,703 $ 2,605
Commercial:Real estate - nonresidential 412
416
Commercial business 537
587
Consumer:
Home equity and junior liens 129
172 Manufactured homes 368 368 Automobile 40 21 Student 59 68 Recreational vehicle 275 135 Other consumer 35 - Total non-accrual loans $ 3,558 $ 4,372 Real estate owned: Residential: One- to four-family $ 152 $ 12 Total real estate owned $ 152 $ 12
Total non-performing assets $ 3,710 $
4,384
Ratios:
Total non-performing loans to total loans 1.20%
1.51%
Total non-performing loans to total assets 0.91%
1.13%
Total non-performing assets to total assets 0.95%
1.13%
Non-performing assets include non-accrual loans, non-accruing TDRs (prior toJanuary 1, 2023 ), and foreclosed real estate. The Company generally places a loan on non-accrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. AtMarch 31, 2023 there were no loans that were past due 90 days or more and still accruing interest. As indicated in the table above, non-performing assets were$3.7 million atMarch 31, 2023 and$4.4 million atDecember 31, 2022 . AtMarch 31, 2023 , the Bank had 29 non-performing one- to four-family residential mortgage loans for$1.7 million , two non-performing nonresidential loans for$412,000 , three non-performing commercial business loans for$537,000 , six home equity loans and lines of credit for$129,000 , three non-performing manufactured home loans for$368,000 , four non-performing automobile loans for$40,000 , five non-performing student loans for$59,000 , five non-performing recreational vehicle loans for$275,000 , and two non-performing other consumer loans for$35,000 . AtDecember 31, 2022 , the Bank had 37 non-performing one- to four-family residential mortgage loans for$2.6 million , two non-performing nonresidential loans for$416,000 , four non-performing commercial business loans for$587,000 , eight home equity loans and lines of credit for$172,000 , three non-performing manufactured home loans for$368,000 , two non-performing automobile loans for$21,000 , six non-performing student loans for$68,000 , and two non-performing recreational vehicle loans for$135,000 . The Bank had$152,000 in real estate owned atMarch 31, 2023 and$12,000 in real estate owned atDecember 31, 2022 . The allowance for credit losses represents management's estimate of losses inherent in the loan portfolio as of the date of the consolidated statement of financial condition. The allowance for credit losses was$2.7 million atMarch 31, 2023 and$2.5 million atDecember 31, 2022 . The Company reported an increase in the ratio of the allowance for 55
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credit losses to gross loans to 0.90% atMarch 31, 2023 as compared to 0.86% atDecember 31, 2022 . Management performs a quarterly evaluation of the allowance for credit losses based on quantitative and qualitative factors and has determined that the current level of the allowance for credit losses is adequate to absorb the losses in the loan portfolio as ofMarch 31, 2023 .
The Company had no loans which were deemed to be impaired at
Management has identified potential credit problems which may result in the borrowers not being able to comply with the current loan repayment terms and which may result in it being included in future impaired loan reporting. Management has identified potential problem loans totaling$9.8 million as ofMarch 31, 2023 as compared to$11.0 million atDecember 31, 2022 . These loans have been internally classified as special mention or substandard, yet are not currently considered impaired. The decrease of$1.2 million was primarily driven by a decrease in residential mortgage loans classified as substandard as a result of loan upgrades and loan payoffs. Based on current information available atMarch 31, 2023 , these loans were re-evaluated for their range of potential losses and reclassified accordingly. Liquidity and Capital Resources. Liquidity is the ability to meet 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. The Bank's primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from the sale or maturities of securities. In addition, the Bank may borrow from the FHLB. AtMarch 31, 2023 , the Bank had$10.3 million outstanding in advances from the FHLB and had the ability to borrow approximately$58.3 million based on our collateral capacity. AtMarch 31, 2023 , the Bank had an additional$15.5 million in lines of credit available with other financial institutions and as such no advances received can exceed 50% of the Bank's capital. AtMarch 31, 2023 andDecember 31, 2022 , there were no outstanding advances on these lines. OnMarch 12, 2023 , in response to liquidity concerns in the banking system, theFederal Deposit Insurance Corporation ,Federal Reserve Board , andU.S. Department of Treasury , collaboratively approved certain actions with a stated intention to reduce stress across the financial system, support financial stability, and minimize any impact on businesses, households, taxpayers, and the broader economy. Among other actions, theFederal Reserve Board has created a new Bank Term Funding Program ("BTFP") to make additional funding available to eligible depository institutions to help ensure institutions can meet the needs of their depositors. Eligible institutions may obtain liquidity against a wide range of collateral. BTFP advances can be requested through at leastMarch 11, 2024 . The Company has not requested funding through the BTFP as ofMarch 31, 2023 , but has an established relationship with theFederal Reserve to take advantage of this program. 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 equity and available-for-sale investments. 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 used in operating activities was$377,000 for the three months endedMarch 31, 2023 and$596,000 for the three months endedMarch 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$4.6 million for the three months endedMarch 31, 2023 and net cash provided by investing activities was$2.2 million for the three months endedMarch 31, 2022 . Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was$3.0 million for the three months endedMarch 31, 2023 and$1.1 million for the three months endedMarch 31, 2022 .
We are committed to maintaining a satisfactory 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.
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Generations Bancorp is a separate corporate entity fromGenerations 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 fromGenerations Bank .Generations Bank paid a dividend of$1.0 million toGenerations Bancorp during the three months endedMarch 31, 2023 .Generations Bank paid a dividend of$1.3 million toGenerations Bancorp for the year endedDecember 31, 2022 . AtMarch 31, 2023 ,Generations Bancorp (on an unconsolidated, stand-alone basis) had cash and investment securities totaling$2.7 million . AtMarch 31, 2023 andDecember 31, 2022 ,Generations Bank exceeded all its regulatory capital requirements and was categorized as well capitalized. See Note 9 to the interim condensed consolidated financial statements. Management is unaware of any conditions or events since the most recent notification that would change our category.
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