1895 Bancorp of Wisconsin, Inc.: Form 10-Q for the period ended Sep 30, 2022

General

Management’s discussion and analysis of financial condition and results of operations at September 30, 2022 and for the three and nine months ended September 30, 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 consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This 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,” “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 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 Quarterly 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;
• inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, 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 or will make;
• our ability to manage market risk, credit risk and operational risk in the current economic environment;
• the actual or anticipated impacts of military conflict, terrorism or other geopolitical events;
• our ability to access cost-effective funding;
• 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;
• competition among depository and other financial institutions;
• 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;
• a failure in or breach of our operational or security systems or infrastructure, including cyberattacks;
• the inability of third-party providers to perform as expected;
• 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.

Additionally, the outbreak of COVID-19 may continue to adversely impact a broad range of industries in which the Company’s customers operate and will continue to impair their ability to fulfill their financial obligations to the Company.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to continue to have a material impact on our operations.

The CARES Act and related legislation included an option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and December 31, 2021. The relief could only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. As of September 30, 2022, the Company had 1 to 3 month deferrals of approximately $245,000 in interest, escrow, and principal payments on $4.6 million in outstanding loans.

The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP. As part of the first round of this program, the Bank had funded 246 PPP loans totaling $30.3 million, with no outstanding balance remaining as of September 30, 2022.

On December 27, 2020, the Relief Act became law and provided an additional $284 billion for the PPP, as well as extending the PPP through June 30, 2021. As of September 30, 2022, we had funded 143 second round PPP loans totaling $10.5 million, of which $10.2 million had been forgiven as of September 30, 2022.

Because of the above and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K under the heading “Risk Factors.”

Critical Accounting Policies

As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management believes that the critical accounting estimates include the allowance for loan losses, determination of fair value for financial instruments, and valuation of deferred income taxes. A summary of the accounting policies used by management is disclosed in Note 1, “Summary of Significant Accounting Policies” in the most recent Form 10-K (fiscal year ended December 31, 2021) filed with the Securities and Exchange Commission (“SEC”) on March 29, 2022 and amended on April 29, 2022.

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total Assets. Total assets decreased $10.3 million, or 1.9%, to $529.3 million at September 30, 2022 from $539.6 million at December 31, 2021. This decrease was primarily due to a $51.1 million decrease in cash and cash equivalents, partially offset by a $31.0 million increase in loans held for investment, a $6.0 million increase in available-for-sale investment securities and a $5.3 million increase in other assets.

Cash and Cash Equivalents. Cash and cash equivalents decreased $51.1 million, or 76.5%, to $15.7 million at September 30, 2022 from $66.8 million at December 31, 2021. This decrease was primarily due to the purchase of $37.1 million in available-for-sale securities, $31.5 million of net loan growth, $19.0 million in originations of loans held for sale, $8.5 million in principal payments on FHLB advances and a $5.2 million decrease in deposits. These decreases were partially offset by $10.0 million from the issuance of additional FHLB advances, $20.4 million from the sale of mortgage loans held for sale, $14.6 million from maturities, prepayments and calls of available-for-sale securities and an $8.4 million net increase in advance payments by borrowers for taxes and insurance.

Available-for-Sale Securities. Available-for-sale securities increased $6.0 million, or 5.3%, to $118.4 million at September 30, 2022, from $112.4 million at December 31, 2021. The increase was primarily due to purchases of securities totaling $37.1 million during the nine months ended September 30, 2022, partially offset by maturities, prepayments and calls of securities totaling $14.6 million and a reduction in the unrealized gain held within the portfolio of $16.5 million, resulting in a net unrealized loss of $16.3 million at September 30, 2022. The increase in securities purchases was the result of management’s strategy, implemented in the fourth quarter of 2021, to invest a significant portion of the Company’s liquidity that was held in cash and cash equivalents into securities with higher yields to increase future earnings, while maintaining a high degree of liquidity.

Loans Held for Sale. Loans held for sale decreased $818,000, or 69.1%, to $365,000 at September 30, 2022, from $1.2 million at December 31, 2021. This decrease was due primarily to a decrease in the volume of first mortgage residential real estate loan originations sold into the secondary market as a result of the changing interest rate environment. Mortgage loan originations and sales were $19.0 million and $20.4 million, respectively, during the first nine months of 2022 compared to $90.9 million and $102.2 million, respectively, for the same period in 2021.

Net Loans. Net loans held for investment increased $30.9 million, or 9.6%, to $354.7 million at September 30, 2022, from $323.8 million at December 31, 2021. The majority of this growth was in commercial real estate loans which increased $22.5 million during this period to $207.7 million. Also contributing to this growth was an increase in non-real estate commercial loans which grew $6.9 million during this period to $45.1 million. The growth in these types of loans is consistent with the Company’s long-term loan strategy to increase the level of commercial and commercial real estate loans within our portfolio.

Other Assets. Other assets increased $5.3 million, or 86.7%, from $6.1 million at December 31, 2021 to $11.4 million at September 30, 2022. This increase was primarily due to a $4.6 million increase in deferred tax assets, which was primarily the result of the increase in unrealized losses on available-for-sale securities. Other assets also increased as a result of a $471,000 increase in right of use lease assets as a result of the adoption of ASU 2016-02 in the first quarter of 2022, and a $189,000 increase in prepaid expenses, which was primarily due to the payment of annual insurance premiums in the first quarter of 2022.

Deposits. Deposits decreased $5.2 million, or 1.4%, to $379.3 million at September 30, 2022, from $384.5 million at December 31, 2021. This decrease was primarily due to a $6.7 million decrease in money market accounts, a $2.4 million decrease in certificates of deposit and a $2.0 million decrease in interest bearing checking accounts. These decreases were partially offset by a $3.3 million increase in statement savings accounts and a $2.6 million increase in noninterest bearing checking accounts.

Advance Payments by Borrowers for Taxes and Insurance. Advance payments by borrowers for taxes and insurance increased $8.3 million to $10.2 million at September 30, 2022 from $1.9 million at December 31, 2021. The increase was due to normal seasonal activity.

Borrowings. Borrowings, consisting entirely of FHLB advances, increased $1.5 million, or 2.7%, to $56.9 million at September 30, 2022, from $55.4 million at December 31, 2021.

Total Stockholders’ Equity. Total stockholders’ equity decreased $15.0 million to $75.9 million at September 30, 2022, from $90.9 million at December 31, 2021. The decrease was primarily due to a $16.5 million increase in net unrealized losses on available-for-sale securities, which net of taxes, resulted in a $12.0 million decrease in stockholders’ equity. The increase in net unrealized losses on available-for-sale securities resulted primarily from changes in market interest rates. The decrease in stockholders' equity was also partially due to the repurchase and retirement of the Company's common stock during the third quarter of 2022 and an increase in unallocated common stock held by the ESOP. During the third quarter of 2022, the Company repurchased 184,270 shares of its common stock, pursuant to the stock repurchase program that was adopted by the Board of Directors on July 29, 2022. The repurchase of these shares resulted in a $2.0 million decrease in stockholders' equity. See "Note 13 - Equity and Regulatory Matters" for additional information regarding the Company's stock repurchase program. The increase in unallocated common shares held by the ESOP, was the result of additional shares purchased by the ESOP during the nine months ended September 30, 2022, which resulted in a $1.1 million decrease in stockholders' equity.

Average Balances and Yields

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material.

(Dollars in thousands)

(1) Includes loan fees (expense) of $20,000 and ($8,000) for the three months ended September 30, 2022 and 2021, respectively.

(2) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(3) Net interest margin represents net interest income divided by average total interest-earning assets.

(Dollars in thousands)

(1) Includes loan fees (expense) of $352,000 and ($39,000) for the nine months ended September 30, 2022 and 2021, respectively.

(2) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(3) Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in average rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior period average 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 were no out-of-period items or adjustments included within the following table.

(Dollars in thousands)

(Dollars in thousands)

37

Comparison of Operating Results for the Three Months Ended September 30, 2022 and 2021

Net Income (Loss). We recorded net income of $124,000 for the three months ended September 30, 2022, an increase of $239,000 from a net loss of $115,000 recorded for the three months ended September 30, 2021. This increase was primarily due to a $915,000 million increase in net interest income after provision for loan losses, which was partially offset by a $449,000 increase in noninterest expense, a $149,000 decrease in noninterest income and a $78,000 increase in income tax expense.

Interest and Dividend Income. Interest and dividend income increased $934,000, or 27.6%, to $4.3 million for the three months ended September 30, 2022, from $3.4 million for the three months ended September 30, 2021. The increase was due primarily to a $624,000 increase in interest and fees on loans and a $245,000 increase in interest earned on taxable securities. The increase in interest and fees earned on loans was primarily due to a $22.3 million increase in the average amount of loans outstanding, from $330.4 million in the third quarter of 2021 to $352.7 million in the third quarter of 2022, and a 48 basis point increase in the yield earned on loans, from 3.53% for the third quarter of 2021 to 4.01% in the third quarter of 2022. The increase in the yield earned on loans during the third quarter of 2022 was due an increase in market rates as well as the collection of $212,000 in loan prepayment fees during the quarter. The increase in loans was consistent with the Company's strategy to grow the loan portfolio. The increase in interest earned on taxable securities was primarily due to the Company’s strategy to deploy excess liquidity into securities, which resulted in the average outstanding balance of securities increasing $34.9 million, or 38.8%, from $89.7 million for the third quarter of 2021 to $124.6 million for the third quarter of 2022.

Interest Expense. Interest expense increased $49,000, or 14.0%, to $398,000 for the three months ended September 30, 2022, from $349,000 for the three months ended September 30, 2021. This increase was primarily due to an increase in interest expense on FHLB advances and money market accounts. Interest expense on FHLB advances increased $22,000, or 12.4%, from $178,000 for the third quarter of 2021 to $200,000 for the third quarter of 2022. This increase was primarily due to a 14 basis point increase in the average rate paid on the advances from 1.24% in the third quarter of 2021 to 1.38% in the third quarter of 2022. Interest expense on money market accounts increased $19,000, or 31.6%, from $60,000 in the third quarter of 2021 to $79,000 in the third quarter of 2022. This increase was primarily the result of a 9 basis point increase in the average rate paid on money market accounts, from 0.25% in the third quarter of 2021 to 0.34% in the third quarter of 2022.

Net Interest Income. Net interest income increased $885,000, or 29.2%, to $3.9 million for the three months ended September 30, 2022, from $3.0 million for the three months ended September 30, 2021. This increase was primarily due to a $624,000 increase in interest and fees on loans and a $245,000 increase in interest earned on taxable securities and a $65,000 increase in interest earned on other interest-earning assets. These increases were partially offset by a $49,000 increase in interest expense. Our net interest rate spread increased 78 basis points to 2.97% for the three months ended September 30, 2022, from 2.19% for the three months ended September 30, 2021. Our net interest margin also increased 78 basis points to 3.11% from 2.33% over the same period.

Provision for Loan Losses. The Company did not make any provision for loan losses during the three months ended September 30, 2022, compared to a $30,000 provision for the three months ended September 30, 2021. The allowance for loan losses was $3.2 million, or 0.89%, of total loans at September 30, 2022, compared to $2.9 million, or 0.88% of total loans at December 31, 2021. Nonaccrual loans constituted 0.21% of total loans at September 30, 2022, compared to 0.31% of total loans at December 31, 2021. Net recoveries for the three months ended September 30, 2022 were $48,000 compared to net recoveries of $26,000 for the three months ended September 30, 2021.

Non-interest Income. Non-interest income decreased $149,000, or 23.7%, to $479,000 for the three months ended September 30, 2022, from $628,000 for the three months ended September 30, 2021. The decrease was primarily the result of a $365,000 decrease in net gain on sale of loans, partially offset by a $218,000 increase in income associated with changes in the market value of equity securities. The decrease in the net gain on sale of loans was primarily due to the decrease in the sale of mortgage loans held for sale, which decreased $26.6 million, from $32.2 million in the third quarter of 2021 to $5.6 million in the third quarter of 2022. The increase in the market value of marketable equity securities was due to an increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market of equity securities in non-interest expense.

Non-interest Expense. Non-interest expense increased $449,000, or 11.8%, to $4.3 million for the three months ended September 30, 2022 from $3.8 million for the three months ended September 30, 2021. This increase was primarily due to a $391,000 increase in salaries and employee benefits expense. The increase in salaries and employee benefits expense was due primarily to a $218,000 increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market of equity securities in non-interest income. The remaining $173,000 increase in other salaries and employee benefits expense was primarily the result of a $65,000 increase in wages, a $39,000 increase in ESOP expense and a $21,000 increase in the accrual for incentive bonuses.

Income Tax (Benefit) Expense. We recorded an income tax expense of $21,000 for the three months ended September 30, 2022, compared to an income tax benefit of $57,000 for the three months ended September 30, 2021. The increase in income tax expense was primarily due to a increase in income before taxes during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Comparison of Operating Results for the Nine Months Ended September 30, 2022 and 2021

Net (Loss) Income. We recorded a net loss of $172,000 for the nine months ended September 30, 2022, compared to net income of $354,000 recorded for the nine months ended September 30, 2021. This decrease was primarily due to a $2.4 million decrease in non-interest income, which was partially offset by a $1.3 million increase in net interest income after provision for loan losses, a $372,000 decrease in noninterest expense and a $217,000 decrease in income tax expense.

Interest and Dividend Income. Interest and dividend income increased $1.4 million, or 12.9%, to $11.9 million for the nine months ended September 30, 2022, from $10.5 million for the nine months ended September 30, 2021. The increase was due primarily to an increase in interest earned on taxable securities and an increase in interest earned on loans. Interest income on taxable securities increased $756,000, or 77.9% from $971,000 in the first nine months of 2021 to $1.7 million in the first nine months of 2022. This increase was primarily due to the Company’s strategy to deploy excess liquidity into securities, which resulted in the average outstanding balance of securities increasing $52.4 million, or 68.5%, from $76.5 million for the first nine months of 2021 to $128.9 million for the same period of 2022. The increase in interest income on loans was primarily the result of a 12 basis point increase in the yield earned on loans from 3.75% for the first nine months of 2021 to 3.87% for the same period in 2022 and a $7.4 million increase in average loans outstanding for the same period.

Interest Expense. Interest expense decreased $91,000, or 7.6%, to $1.1 million for the nine months ended September 30, 2022, from $1.2 million for the nine months ended September 30, 2021. This decrease was primarily due to a decline in the cost of our interest-bearing deposits, which decreased 4 basis points from 0.30% for the first nine months of 2021 to 0.26% for the same period in 2022. This decline was primarily due to the low interest rate environment. Also contributing to the decrease in interest expense was a $6.7 million decrease in the average outstanding balance of FHLB advances, which was partially offset by an 8 basis point increase in the average rate paid on these advances.

Net Interest Income. Net interest income increased $1.5 million, or 15.6%, to $10.8 million for the nine months ended September 30, 2022 from $9.3 million for the nine months ended September 30, 2021. Our net interest rate spread increased 36 basis points to 2.73% for the nine months ended September 30, 2022, from 2.37% for the nine months ended September 30, 2021 while our net interest margin also increased 35 basis points to 2.86% from 2.51% over the same period.

Provision for Loan Losses. Provision for loan losses for the nine months ended September 30, 2022 was $210,000 compared to $30,000 for the nine months ended September 30, 2021. The increase in provision was primarily due to the increase in loans outstanding. Net recoveries for the nine months ended September 30, 2022 were $112,000 compared to net recoveries of $55,000 for the nine months ended September 30, 2021.

Non-interest Income. Non-interest income decreased $2.4 million, or 70.8%, to $986,000 for the nine months ended September 30, 2022 from $3.4 million for the nine months ended September 30, 2021. This decrease was due primarily to a $1.1 million decrease in net gains on the sale of loans, an $887,000 decline in income associated with changes in the market value of marketable equity securities and a $456,000 decrease in loan servicing fees. The decrease in the net gain on sale of loans was primarily due to the decrease in the sale of mortgage loans held for sale, which decreased $81.8 million, from $102.2 million in the first nine months of 2021 to $20.4 million in the same period of 2022. The decrease in the market value of marketable equity securities was due to a decrease in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market of equity securities in non-interest expense. The decrease in loan servicing fees was primarily due to the reversal of a $369,000 impairment previously recorded against the value of mortgage servicing rights in the first nine months of 2021. The value of mortgage servicing rights increased as a result of an increase in market interest rates.

Non-interest Expense. Non-interest expense decreased $372,000, or 3.0%, to $11.9 million for the nine months ended September 30, 2022 from $12.3 million for the nine months ended September 30, 2021. This decrease was primarily due to a $444,000 decrease in salaries and employee benefits expense. The decrease in salaries and employee benefits expense primarily resulted from an $887,000 decline in the market value of marketable equity securities held in our deferred compensation plan. We record an offsetting amount for the change in the market of equity securities in non-interest income. This decrease was partially offset by a $443,000 increase in other salaries and benefits expense, which was primarily the result of a $134,000 increase in wages, a $91,000 increase in ESOP expense and a $156,000 increase in the accrual for incentive bonuses.

Income Tax (Benefit) Expense. We recorded an income tax benefit of $172,000 for the nine months ended September 30, 2022, compared to an income tax expense of $45,000 for the nine months ended September 30, 2021. The decrease in income tax expense was primarily due to a decrease in income before taxes during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 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 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:

• originating commercial real estate and commercial loans, which tend to have shorter terms and higher interest rates than owner occupied one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest-bearing checking accounts;
• selling substantially all of our conforming and eligible jumbo, longer-term, fixed-rate one- to four-family residential real estate loans and retaining the non-conforming and shorter-term, fixed-rate and adjustable-rate one- to four-family residential real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management needs; and
• reducing our dependence on jumbo and brokered 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 executive management team and other essential operational staff which are responsible for our asset/liability analysis. These officers act as an asset/liability committee and are charged with developing and implementing an asset/liability management plan, and they meet at least quarterly 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.

We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.

The table below sets forth, as of September 30, 2022, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

(Dollars in thousands)

(1) Assumes an immediate uniform change in interest rates at all maturities.

Economic Value of Equity. We also monitor interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist us in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within our policy guidelines.

The table below sets forth, as of September 30, 2022, the estimated changes in our EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

(Dollars in thousands)

(1) Assumes an instantaneous uniform change in interest rates at all maturities.

(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

The table above indicates that at September 30, 2022, in the event of a 100-basis point increase in interest rates, we would have experienced a 3.10% decrease in our EVE. In the event of a 200-basis point increase in interest rates at September 30, 2022, we would have experienced a 6.01% decrease in our EVE.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and will differ from actual results.

EVE calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

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, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB. At September 30, 2022, we had $57.0 million outstanding in advances from the FHLB. At September 30, 2022, we had $112.6 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago. Additionally, at September 30, 2022, we had a $15.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at September 30, 2022. The Company also had a $10.0 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $13.2 million at September 30, 2022. The Company had not drawn on the Federal Reserve line as of September 30, 2022.

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 cash equivalents and available-for-sale investment securities. 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 $1.8 million for the nine months ended September 30, 2022, as compared to net cash provided by operating activities of $11.0 million for the nine months ended September 30, 2021. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of available-for-sale securities, offset by proceeds from maturing securities and pay downs on securities, was $54.5 million for the nine months ended September 30, 2022, as compared to $39.9 million for the nine months ended September 30, 2021. Net cash provided by financing activities, consisting primarily of increases in borrowings and advance payments by borrowers for taxes and insurance, was $1.6 million for the nine months ended September 30, 2022, as compared to $23.2 million of cash provided by financing activities during the nine months ended September 30, 2021. The primary source of the difference in cash provided by financing activities were net proceeds of $33.5 million from the stock offering in 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 based on our current strategy to increase core deposits, along with the continued use of FHLB advances as well as brokered certificates of deposit as needed, to fund loan growth.

Capital

At September 30, 2022, PyraMax Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $64.9 million, or 11.9% of adjusted total assets, which is above the well-capitalized required level of $27.2 million, or 5.0%. The Bank had total risk-based capital of $68.1 million, or 17.7% of risk-weighted assets, which is above the well-capitalized required level of $38.5 million, or 10.0%. Management is not aware of any conditions or events since the most recent notification that would change our category. For additional information, see Note 13 of the Notes to Financial Statements.

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. For additional information, see Note 9 of the Notes to Financial Statements.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowings and deposits, and agreements with respect to securities.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein 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.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief 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 September 30, 2022. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2022, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the other information set forth in the Form 10-Q, you should carefully consider the risk factors that appeared under Item 1A “Risk Factors” disclosed in the Company’s December 31, 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There are no material changes from the risk factors included in the Annual Report on Form 10-K.