GENERATIONS BANCORP NY, INC. 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 F-2 of this Annual Report on Form 10-K.
Overview
Generations Bancorp is the successor toSeneca-Cayuga Bancorp as the holding company forGenerations Bank .Like Seneca-Cayuga Bancorp ,Generations Bancorp conducts its operations primarily throughGenerations Bank andGenerations 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 2023 on growth in our originations and purchases of one-to four-family residential real estate loans, and to a lesser extent purchases of automobile and manufactured home 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 2022,
purchased one- to four-family residential real estate loans were the primary
? source of our loan growth. We have also added employees focused on one-to
four-family residential real estate loans to increase our in-house production.
At
one- to four-family residential real estate loans.
Continuing our purchases and originations of automobile and manufactured home
loans in 2023. In recent years we have increased our emphasis on the purchase
and origination of automobile, recreational vehicle, and manufactured home
loans. At
? our total loan portfolio. For the years ended
purchased
and manufactured home loans. We significantly decreased our recreational
vehicle purchases in 2022 as compared to 2021 and plan to further reduce purchases in 2023.
Automobile, recreational vehicle and manufactured home lending can increase
? loan yields with shorter repricing terms than one- to four-family residential
real estate loans. At
automobile, recreational vehicle, and manufactured home loans was 6.83%.
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
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on these loans has been satisfactory. See "Business of
Lending Activities - Manufactured Home Lending and "- Automobile Lending" and "-
Other Consumer Lending."
Increasing our "core" deposit base. We seek to increase our core deposit base,
particularly checking accounts. Core deposits include 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
? million, or 10.4%, from
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.
Implementing a managed growth strategy without undue risk. We intend to pursue
a growth strategy for the foreseeable future, with the goal of improving the
profitability of our business through increased net interest income and retail
? deposit growth. Subject to market conditions, we intend to grow our one- to
four-family residential fixed-rate, automobile, recreational vehicle, and
manufactured home loan portfolios. To a lesser extent we intend to grow our
commercial real estate and multi-family home loan portfolios.
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
portion 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 withU.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. 38
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The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction of loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable is charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Consumer loans not secured by residential real estate are generally charged off no later than 90 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying amount of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, automobile loans identified in pools by product and underwriting standards, as well as smaller balance homogeneous consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative risk factors. These qualitative risk factors include: ? Asset quality trends
? The trend in loan growth and portfolio mix
? Regional and local economic conditions
? Historical loan loss experience
? Underlying credit quality
Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation.
The risk characteristics within the loan portfolio vary depending on the loan
segment. Consumer loans generally are repaid from personal sources of income.
Risks associated with consumer loans primarily include general economic risks
such as declines in the local economy creating higher rates of unemployment.
Those conditions may also lead to a decline in collateral values should we be
required to repossess the collateral securing consumer loans. These economic
risks also impact the commercial loan segment, however commercial loans are
considered to have greater risk than consumer loans as the primary source of
repayment is from the cash flow of the business customer. Loans secured by real
estate provide the best collateral protection and thus significantly reduce the
inherent risk in the portfolio.
A loan is considered impaired when, based on current information and events, it
is probable that we will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified
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as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans, by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance for loan losses is established for an impaired loan if its carrying amount exceeds its estimated fair value. The estimated fair values of substantially all of our impaired loans are measured based on the estimated fair value of the loan's collateral. For commercial loans secured by real estate, including those in construction, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal, and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial business loans secured by non-real estate collateral, such as accounts receivable, inventory, and equipment, estimated fair values are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement. Loans whose terms are modified are classified as troubled debt restructurings if we grant such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan's stated maturity date. Loans classified as troubled restructurings are designated as impaired. The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for all loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified as special mention have potential weaknesses that deserve management's close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as loss are considered uncollectible and are charged to the allowance for loans losses. Loans not classified are rated as pass. In addition, federal regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and may have judgments different than management's, and we may determine to increase our allowance as a result of these regulatory reviews. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Beginning
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
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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.
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.
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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$2.0 million and$1.6 million for the years endedDecember 31, 2022 and 2021, respectively.
Year Ended
2022 2021
Average Average
Balance Balance
(In thousands) Outstanding Interest Yield/ Rate Outstanding Interest Yield/ Rate
Assets
Interest-earning assets:
Loans $ 284,088 $ 12,023 4.23 % $ 284,841 $ 12,576 4.42 %
Securities 35,862 1,136 3.17 % 35,258 923 2.62 % Interest-earning deposits
11,318 84 0.74 % 14,330 23 0.16 %
Other 1,433 61 4.26 % 1,693 81 4.78 % Total interest-earning assets
332,701 13,304 4.00 % 336,122 13,603 4.05 %
Non-interest-earning assets 41,861 41,788
Total assets $ 374,562 $ 377,910
Liabilities and equity
Interest-bearing liabilities:
Demand deposits $ 34,994 66 0.19 % $ 49,071 59 0.12 %
Money market accounts 31,249 111 0.36 % 29,488 105 0.36 %
Savings accounts 108,571 448 0.41 % 109,317 448 0.41 %
Certificates of deposit 79,013 849 1.07 % 80,453 648 0.81 % Total interest-bearing deposits
253,827 1,474 0.58 % 268,329 1,260 0.47 %
Borrowings 18,833 460 2.44 % 22,214 424 1.91 % Total interest-bearing liabilities
272,660 1,934 0.71 % 290,543 1,684 0.58 % Other non-interest bearing liabilities
61,546 46,051
Total liabilities 334,206 336,594
Equity 40,356 41,316
Total liabilities and equity $ 374,562 $ 377,910
Net interest income $ 11,370 $ 11,919
Interest rate spread 3.29 % 3.47 %
Net interest-earning assets $ 60,041 $ 45,579
Net interest margin 3.42 % 3.55 %
Average interest-earning assets to average
interest-bearing liabilities 122.02 % 115.69 %
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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,
2022 vs. 2021
Increase (Decrease) Due to Total
Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans $ (33) $ (520) $ (553)
Securities 16 197 213
Interest-earning deposits (5) 66 61
Other (12) (8) (20)
Total interest-earning assets (34) (265) (299)
Interest-bearing liabilities:
Demand deposits (17) 24 7
Savings deposits 6 - 6
Money market deposits (3) 3 -
Certificates of deposit (12) 213 201Total interest-bearing deposits (26) 240
214
Borrowings (65) 101
36
Total interest-bearing liabilities (91) 341
250
Change in net interest income $ 57 $ (606) $ (549) Comparison of Financial Condition at
Total Assets. Total assets increased$7.3 million , or 1.9%, to$386.3 million atDecember 31, 2022 from$378.9 million atDecember 31, 2021 . The increase resulted primarily from an increase in net loans of$25.8 million , partially offset by decreases in cash and cash equivalents of$13.0 million , investment securities available-for-sale of$3.9 million , and bank-owned life insurance of$539,000 . Net Loans. Net loans increased$25.8 million , or 9.3%, to$303.9 million atDecember 31, 2022 from$278.1 million atDecember 31, 2021 . The increase resulted primarily from increases in one- to four-family residential real estate loans of$24.9 million , or 22.1%, manufactured home loans of$3.3 million , or 6.9%, home equity loans and lines of credit of$1.9 million , or 19.2%, other consumer loans of$1.7 million , or 30.6%, and automobile loans of$1.7 million , or 7.4%, partially offset by decreases in nonresidential loans of$4.8 million , or 22.3%, recreational vehicle loans of$2.6 million , or 8.7%, and commercial business loans of$851,000 , or 6.8%. Net deferred loan costs increased$631,000 , or 4.0%, during the year endedDecember 31, 2022 , representing primarily fees paid for purchased loans which are amortized over the estimated loan lives. AtDecember 31, 2022 , we had outstanding commitments to originate loans of$6.4 million and unfunded lines of credit of$14.8 million . We anticipate that we will have sufficient funds available to meet our current lending commitments. Consistent with our business strategy, we intend to increase internal originations and maintain purchase levels of one-to four-family residential real estate loans, and to continue to purchase to a lesser extent, automobile and manufactured home loans. During the year endedDecember 31, 2022 , we purchased$32.7 million of one-to four-family residential real estate loans,$12.4 million of automobile loans, and$9.6 million of manufactured home loans. 43 Table of Contents
Cash and Cash Equivalents. Cash and cash equivalents decreased
Investment Securities . Securities available-for-sale decreased$3.9 million , or 10.6%, to$33.1 million atDecember 31, 2022 from$37.0 million atDecember 31, 2021 . The decrease in securities available-for-sale resulted from a decrease in market value of$5.2 million and bond maturities and principal repayments of$2.2 million , partially offset by bond purchases of$3.7 million .
Bank-owned Life Insurance. Bank-owned life insurance decreased
Deposits. Deposits increased$5.6 million , or 1.8%, to$317.7 million atDecember 31, 2022 from$312.0 million atDecember 31, 2021 . Interest-bearing accounts increased$8.6 million , or 3.4%, to$263.1 million atDecember 31, 2022 from$254.5 million atDecember 31, 2021 . The largest increase in interest-bearing deposits was in certificates of deposit which increased$30.1 million , or 39.7%, to$105.8 million atDecember 31, 2022 from$75.7 million atDecember 31, 2021 . Certificates of deposit that are scheduled to mature in one year or less fromDecember 31, 2022 totaled$89.2 million . Interest-bearing checking accounts increased$968,000 , or 2.6%, to$38.1 million atDecember 31, 2022 from$37.2 million atDecember 31, 2021 . Savings accounts decreased$17.6 million , or 16.0%, to$92.6 million atDecember 31, 2022 from$110.3 million atDecember 31, 2021 . Money market accounts decreased$4.9 million , or 15.6%, to$26.5 million atDecember 31, 2022 from$31.3 million atDecember 31, 2021 .
Noninterest-bearing deposits decreased
Municipal deposits held atGenerations Commercial Bank increased$1.3 million , or 21.2%, to$7.6 million atDecember 31, 2022 from$6.3 million atDecember 31, 2021 . Federal Home Loan Bank Advances.Short-term Federal Home Loan Bank advances increased to$16.2 million atDecember 31, 2022 as a result of increased loan originations during 2022.Long-term Federal Home Loan Bank advances decreased$7.4 million , or 41.8%, to$10.3 million atDecember 31, 2022 from$17.8 million atDecember 31, 2021 . The average cost of outstanding advances from theFederal Home Loan Bank was 2.44% atDecember 31, 2022 , as compared to our weighted average rate on deposits of 0.58% at that date. Total Equity. Total equity decreased$6.2 million , or 14.1%, to$37.3 million atDecember 31, 2022 from$43.5 million atDecember 31, 2021 . The decrease was primarily due to an increase in accumulated other comprehensive loss of$5.5 million as a result of a decrease in the fair market value of our investment securities available-for-sale and pension plans as well as a decrease of$1.9 million due to stock repurchases, offset in part by net income of$1.1 million for the year endedDecember 31, 2022 .
Comparison of Operating Results for the Years Ended
General. Net income for the year endedDecember 31, 2022 was$1.1 million , as compared to$1.4 million for the year endedDecember 31, 2021 , a decrease of$326,000 , or 23.1%. The decrease was primarily attributable to a$609,000 decrease in noninterest income, a$549,000 decrease in net interest income, and a$91,000 increase in provision for loan losses, partially offset by a$856,000 decrease in noninterest expense and a$67,000 decrease in income tax expense. Interest and Dividend Income. Interest and dividend income decreased$299,000 , or 2.2%, to$13.3 million for the year endedDecember 31, 2022 from$13.6 million for the year endedDecember 31, 2021 . The decrease was primarily attributable to a decrease of$553,000 in interest on loans receivable, partially offset by an increase of$213,000 in interest on investment securities and an increase of$61,000 in interest-earning deposits. The average yield on loans decreased 19 basis points to 4.23% for the year endedDecember 31, 2022 from 4.42% for the year endedDecember 31, 2021 , reflecting a decrease in higher-yielding loans in addition to an increase in amortization of deferred loan costs year over year. Interest Expense. Interest expense increased$250,000 , or 14.9%, to$1.9 million for the year endedDecember 31, 2022 from$1.7 million for the year endedDecember 31, 2021 . Interest expense on deposits increased$214,000 , or 17.0%, to$1.5 million for the year endedDecember 31, 2022 from$1.3 million for the year endedDecember 31, 2021 , primarily due to an increase in interest expense on certificates of deposit of$201,000 . The average cost of certificates of deposit increased 26 basis points to 1.07% for the year ended 44
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December 31, 2022 as compared to 0.81% for the year endedDecember 31, 2021 as a result of increases in short-term interest rates. Borrowing expense increased$36,000 , or 8.5%, due to an increase in the average cost of borrowings of 53 basis points to 2.44% for the year endedDecember 31, 2022 as compared to 1.91% for the year endedDecember 31, 2021 as a result of increases in short-term interest rates. Net Interest Income. Net interest income decreased$549,000 , or 4.6%, to$11.4 million for the year endedDecember 31, 2022 from$11.9 million for the year endedDecember 31, 2021 . Our net interest rate spread decreased 18 basis points to 3.29% for the year endedDecember 31, 2022 from 3.47% for the year endedDecember 31, 2021 . Our net interest margin decreased 13 basis points to 3.42% for the year endedDecember 31, 2022 from 3.55% for the year endedDecember 31, 2021 . Net interest rate spread and net interest margin were affected primarily by the increase in cost of funds when comparing 2022 and 2021. Provision for Loan Losses. Based on management's analysis of the allowance for loan losses described in Note 2(g) of our consolidated financial statements "Summary of Significant Accounting Policies - Allowance for Loan Losses," we recorded a provision for loan losses of$631,000 for the year endedDecember 31, 2022 and a provision for loan losses of$540,000 for the year endedDecember 31, 2021 . The increased provision for loan loss in 2022 was primarily due to increased reserves allocated to consumer loans recognizing portfolio growth and the effects of higher economic reserve factors applied. Reserve factors are higher due to the current economic outlook and increases in delinquency and substandard loans. BeginningJanuary 1, 2023 , we adopted the CECL standard for determining the amount of our allowance for credit losses, the impact of which is known and is not deemed to be material. Noninterest Income. Noninterest income decreased$609,000 , or 22.3%, to$2.1 million for the year endedDecember 31, 2022 from$2.7 million for the year endedDecember 31, 2021 . The decrease was primarily due to decreases in insurance commissions, earnings on bank-owned life insurance, other charges, commissions, and fees, and change in fair value of equity securities. Insurance commissions decreased$271,000 , or 37.5%, to$451,000 for the year endedDecember 31, 2022 from$722,000 for the year endedDecember 31, 2021 as a result of the Management Agreement with Northwoods whereby Northwoods assumed customer service responsibilities forGenerations Insurance Agency, Inc. effectiveApril 1, 2022 . Earnings on bank-owned life insurance decreased$141,000 , or 124.8%, to a loss of$28,000 for the year endedDecember 31, 2022 from a gain of$113,000 for the year endedDecember 31, 2021 as a result of decrease in market value below the stable value wrapper coverage limit within our policy. Other charges, commissions, and fees decreased$111,000 , or 50.9%, to$107,000 for the year endedDecember 31, 2022 from$218,000 for the year endedDecember 31, 2021 primarily due to a gain recognized on the sale of a fixed asset in 2021 in addition to a decrease in rental income received in 2022 as a result of the sale of a non-banking retail building inDecember 2021 . Change in fair value of equity securities decreased$72,000 , or 266.7%, to a loss of$45,000 for the year endedDecember 31, 2022 from a gain$27,000 for the year endedDecember 31, 2021 due to a decrease in the fair market value of our equity securities. Noninterest Expense. Noninterest expense decreased$856,000 , or 6.9%, to$11.6 million for the year endedDecember 31, 2022 from$12.4 million for the year endedDecember 31, 2021 . The decrease was primarily attributable to decreases in compensation and benefits, impairment of long-lived assets, and other expenses, offset in part by an increase in professional and other services. Compensation and benefits decreased$408,000 , or 7.7%, to$4.9 million for the year endedDecember 31, 2022 from$5.3 million for the year endedDecember 31, 2021 primarily due to Management Agreement with Northwoods in addition to an increase in pension expense benefit. Impairment of long-lived assets decreased$300,000 due to the write-down of a building in 2021. Other expenses decreased$135,000 , or 10.3%, to$1.2 million for the year endedDecember 31, 2022 from$1.3 million for the year endedDecember 31, 2021 as a result of a decrease in directors' fees related to changes in the market price ofGenerations Bancorp's stock held in the directors' retirement plan during 2022 as compared to 2021. Professional and other services increased$100,000 , or 15.6%, to$743,000 for the year endedDecember 31, 2022 from$643,000 for the year endedDecember 31, 2021 due to increases in legal and consulting fees. Federal Income Taxes. Income tax expense decreased$67,000 , or 23.7%, to$216,000 for the year endedDecember 31, 2022 from$283,000 for the year endedDecember 31, 2021 . The effective tax rate was 16.6% for the year endedDecember 31, 2022 as compared to 16.7% for the year endedDecember 31, 2021 .
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
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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, recreational
vehicle 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
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 FederalHome Loan Bank . AtDecember 31, 2022 , we had$26.5 million outstanding in advances from theFederal Home Loan Bank , and had the ability to borrow approximately$62.3 million based on our collateral capacity. AtDecember 31, 2022 , we had an additional$15.5 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$2.9 million for the year endedDecember 31, 2022 and$3.4 million for the year endedDecember 31, 2021 . 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$28.4 million for the year endedDecember 31, 2022 and$12.7 million for the year endedDecember 31, 2021 . Net cash provided by financing activities, consisting primarily of the activity in deposit accounts andFederal Home Loan Bank advances, was$12.5 million for the year endedDecember 31, 2022 and$3.4 million for the year endedDecember 31, 2021 . 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 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 46 Table of Contents source of liquidity is any dividend payments it may receive fromGenerations Bank .Generations Bank paid dividends of$1.3 million toGenerations Bancorp during the year endedDecember 31, 2022 and no dividends during the year endedDecember 31, 2021 . See "Supervision and Regulation - Federal Banking Regulation - Capital Distributions" for a discussion of the regulations applicable to the ability ofGenerations Bank to pay dividends. AtDecember 31, 2022 , Generations Bancorp (on an unconsolidated, stand-alone basis) had liquid assets totaling$1.8 million .
At
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 inthe 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
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