1895 Bancorp of Wisconsin, Inc.: Form 10-Q for the period ended Mar 31, 2023

General

Management’s discussion and analysis of financial condition and results of operations at March 31, 2023 and for the three months ended March 31, 2023 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:

• our ability to maintain liquidity, primarily through deposits, in light of recent events in the banking industry;
• 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 credit 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, including our mortgage servicing rights asset, 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;
• 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, capital requirements and insurance premiums;
• 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;
• a failure in or breach of our operational or security systems or infrastructure, including cyberattacks;
• the actual or anticipated impacts of military conflict, terrorism or other geopolitical events;
• 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 have acquired or may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
• our ability to retain key employees;
• 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, including the effects of our adoption of the Current Expected Credit Loss ("CECL") accounting standard, which we implemented on January 1, 2023;
• our compensation expense associated with equity allocated or awarded to our employees;
• changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these 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 under the heading "Risk Factors" in our most recent Annual Report on Form 10-K (fiscal year ended December 31, 2022) filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023, and in this Quarterly Report on Form 10-Q. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. Accordingly, you should not place undue reliance on forward-looking statements.

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 credit 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 Company's most recent Form 10-K (fiscal year ended December 31, 2022) filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023.

On January 1, 2023 we adopted ASU 2016-13, Financial Instruments - Credit Losses. This guidance replaced the incurred loss methodology, which was used to calculate the allowance for loan losses as described in the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K, with an expected lifetime loss methodology, as described in Note 2 to the Consolidated Financial Statements.

During 2023, we did not substantively change any material aspect of our overall methodologies and processes used in developing the remaining critical accounting estimates from those described in the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K, other than those related to the adoption of ASU 2016-13.

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total Assets. Total assets increased $8.6 million, or 1.6%, to $551.6 million at March 31, 2023 from $543.0 million at December 31, 2022. This increase was primarily due to a $7.9 million net increase in loans.

Cash and Cash Equivalents. Cash and cash equivalents increased $0.7 million, or 2.5%, to $29.0 million at March 31, 2023 from $28.3 million at December 31, 2022. This increase was primarily due to $64.5 million of additional FHLB advances, $3.3 million from maturities, payments and calls of available-for-sale securities, a $3.0 million net increase in advance payments by borrowers for taxes and insurance and $2.5 million from the sale of mortgage loans held for sale. These increases were partially offset by $44.0 million in principal payments on FHLB advances, a $15.7 million decrease in deposits, a $7.6 million net increase in loans and $2.3 million in originations of loans held for sale.

Available-for-Sale Securities. Available-for-sale securities decreased $1.1 million, or 1.0%, to $113.4 million at March 31, 2023, from $114.5 million at December 31, 2022. This decrease was primarily due to maturities, payments and calls of securities totaling $3.3 million, partially offset by a $2.2 million reduction in the net unrealized losses on securities held within the portfolio. The net unrealized loss was $13.5 million at March 31, 2023.

Loans Held for Sale. Loans held for sale decreased $125,000, to zero at March 31, 2023. 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 and lower inventory of housing available in our market. Mortgage loan originations and sales were $2.3 million and $2.5 million, respectively, during the first three months of 2023 compared to $6.5 million and $6.8 million, respectively, for the same period in 2022.

Loans. Loans held for investment, net of deferred costs, increased $7.6 million, or 2.1%, to $370.4 million at March 31, 2023, from $362.8 million at December 31, 2022. The majority of this growth was in commercial real estate loans which increased $4.1 million during the first quarter to $215.0 million. Also contributing to this growth was an increase in non-real estate commercial loans which grew $1.6 million during this period to $45.3 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. First mortgage residential real estate loans also increased $3.4 million during the first quarter of 2023 to $88.8 million.

Allowance for Credit Losses. On January 1, 2023, the Company adopted ASU 2016-13 which replaced the incurred loss methodology, which was previously used to calculate the allowance for loan losses, with an expected lifetime loss methodology ("CECL"), as described in Note 2 to the Consolidated Financial Statements. The adoption of ASU 2016-13 resulted in an initial increase of $412,000 to the allowance for credit losses for loans ("ACL for loans") and the establishment of a $665,000 allowance for credit losses for unfunded loan commitments ("ACL for unfunded loan commitments"). The ACL for loans is included as a separate line item on the Company's Consolidated Balance Sheets and the ACL for unfunded loan commitments is included in other liabilities. The total allowance for credit losses was $4.4 million at March 31, 2023.

The ACL for loans was $3.7 million, or 1.00%, of loans, net of deferred costs, at March 31, 2023 compared to an allowance for loan losses of $3.2 million, or 0.88% of loans, net of deferred costs, at December 31, 2022. The increase in the ACL for loans was primarily the result of the $412,000 increase related to the adoption of ASU 2016-13 and a $75,000 provision for credit losses for loans. The ACL for unfunded loan commitments was $665,000 at March 31, 2023. Nonaccrual loans represented 0.20% of total loans at March 31, 2023, compared to 0.21% of total loans at December 31, 2022. Net recoveries for the three months ended March 31, 2023 were $3,000 compared to net recoveries of $54,000 for the three months ended March 31, 2022.

FHLB Stock. FHLB stock increased $1.4 million, or 41.2%, from $3.4 million at December 31, 2022 to $4.8 million at March 31, 2023. This increase was primarily due to the net increase in FHLB advances and the requirement of FHLB to hold additional stock as a result of the increased advances.

Deposits. Deposits decreased $15.7 million, or 4.0%, to $372.0 million at March 31, 2023, from $387.7 million at December 31, 2022. This decrease was primarily due to a $9.1 million decrease in money market accounts, a $7.9 million decrease in noninterest bearing checking accounts and a $6.4 million decrease in savings accounts. These decreases were partially offset by an $8.1 million increase in certificates of deposit. The decrease in deposits was partially due to customers who transferred some or all of their deposits to higher rate investment alternatives, including treasury securities and higher rate deposit accounts at other financial institutions. Based on the relatively higher rates of interest being offered by other financial institutions in our market and the higher cost of other funding alternatives, the Company determined that it was more cost effective to replace a portion of these deposits, many of which were with customers that had no other banking relationships with the Company, with FHLB advances. The Company continues to build upon its banking relationships with its core customers, including deposits, and in attracting new relationships. The decrease in deposits was also partially due to the use of deposit funds by our commercial customers who utilized their noninterest and lower rate deposit balances to fund their operations, as their borrowing cost has increased during the current interest rate environment. As market rates have increased, we have also seen a shift in our deposit mix from noninterest bearing checking accounts and lower interest NOW and savings accounts into money market accounts and certificates of deposits.

Advance Payments by Borrowers for Taxes and Insurance. Advance payments by borrowers for taxes and insurance increased $3.0 million to $4.0 million at March 31, 2023 from $1.0 million at December 31, 2022. The increase was due to normal seasonal activity.

FHLB Advances. FHLB advances, increased $20.5 million, or 28.7%, to $92.0 million at March 31, 2023, from $71.5 million at December 31, 2022. The increase in FHLB advances was primarily used to partially fund outgoing cash flows from the decrease in deposits and the increase in net loans.

Total Stockholders’ Equity. Total stockholders’ equity increased $0.5 million to $75.9 million at March 31, 2023, from $75.4 million at December 31, 2022. The increase was primarily due to a $2.2 million decrease in net unrealized losses on available-for-sale securities, which net of taxes, resulted in a $1.6 million increase in stockholders’ equity. The increase in net unrealized losses on available-for-sale securities was the result of changes in market interest rates. This increase was partially offset by a $1.1 million decrease in retained earnings. The decrease in retained earnings was primarily the result of a net loss of $361,000 for the first quarter of 2023 and the adoption of ASU 2016-13 on January 1, 2023, which had a $783,000 negative impact on retained earnings. The Company also purchased 12,903 shares of its common stock during the first quarter of 2023 under its stock repurchase plan which resulted in a $129,000 reduction 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 (expense) fees of ($19,000) and $105,000 for the three months ended March 31, 2023 and 2022, 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)

Comparison of Operating Results for the Three Months Ended March 31, 2023 and 2022

Net Income (Loss). We recorded a net loss of $361,000 for the three months ended March 31, 2023, compared to a net loss of $55,000 for the three months ended March 31, 2022. The increased loss was primarily due to a $280,000 decrease in net interest income after provision for credit losses and a $496,000 increase in noninterest expense, partially offset by a $379,000 increase in noninterest income and a $91,000 increase in income tax benefit.

Interest and Dividend Income. Interest and dividend income increased $826,000, or 21.2%, to $4.7 million for the three months ended March 31, 2023, from $3.9 million for the three months ended March 31, 2022. The increase was due primarily to a $536,000 increase in interest and fees on loans, a $236,000 increase in interest on other interest earning assets and a $54,000 increase in interest earned on taxable securities. The increase in interest and fees earned on loans was primarily due to a $34.5 million increase in the average amount of loans outstanding, from $329.8 million in the first quarter of 2022 to $364.3 million in the first quarter of 2023, and a 21 basis point increase in the yield earned on loans, from 4.05% for the first quarter of 2022 to 4.26% in the first quarter of 2023. The increase in the yield earned on loans during the first quarter of 2023 was primarily due to increases in market rates. The increase in loans was consistent with the Company's strategy to grow the loan portfolio. The increase in interest earned on other interest earning assets, the majority of which is comprised of fed funds sold and FHLB stock, was primarily due to a 539 basis point increase in yield, from 0.48% for the first quarter of 2022 to 5.87% in the first quarter of 2023, partially offset by a $21.1 million decrease in the average balance outstanding, from $40.7 million in the first quarter of 2022 to $19.6 million in the first quarter of 2023. The increase in interest on taxable securities was primarily due to a 49 basis point increase in the yield, from 1.66% for the first quarter of 2022 to 2.15% in the first quarter of 2023. This increase was partially offset by a $20.1 million decrease in the average amount of securities outstanding, from $134.0 million in the first quarter of 2022 to $113.9 million in the first quarter of 2023.

Interest Expense. Interest expense increased $1.1 million, or 322.6%, to $1.5 million for the three months ended March 31, 2023, from $341,000 for the three months ended March 31, 2022. This increase was primarily due to an $813,000 increase in interest expense on deposits and a $323,000 increase in interest expense on FHLB advances. The increase in interest expense on deposits was primarily due to a 114 basis point increase in the average rate paid on deposits and a $7.8 million increase in average deposits outstanding from the first quarter of 2022 to the first quarter of 2023. The increase in interest expense on deposits was primarily due to the increase in market rates of interest and also a shift in our deposit mix. As market rates increased, many of our deposit customers transferred funds from noninterest bearing checking accounts and low interest NOW and savings accounts into higher rate products, including money market accounts and certificates of deposit. The average balance of noninterest bearing checking accounts decreased $23.4 million, or 22.1%, while NOW and savings accounts decreased $5.1 million, or 13.9%, and $7.6 million, or 11.4%, respectively, from the first quarter of 2022 to the first quarter of 2023. During the same period, the average balance of money market accounts and certificates of deposits increased $18.6 million, or 19.2%, and $1.9 million, or 2.3%, respectively. Interest expense on money market accounts increased $471,000, or 663.4%, from the first quarter of 2022 to the first quarter of 2023 as a result of the increase in average balances outstanding and also a 161 basis point increase in the average rate paid on these accounts. Interest expense on certificates of deposit increased $299,000, or 364.6%, from the first quarter of 2022 to the first quarter of 2023 as a result of the increase in average balances outstanding and also a 145 basis point increase in the average rate paid on these accounts.

Interest expense on FHLB advances increased $323,000, or 190.0%, from $170,000 for the first quarter of 2022 to $493,000 for the first quarter of 2023. This increase was primarily due to a 125 basis point increase in the average rate paid on the advances from 1.25% in the first quarter of 2022 to 2.50% in the first quarter of 2023 and a $25.2 million, or 46.0%, increase in the average balance outstanding, from $54.8 million in the first quarter of 2022 to $80.0 million in the first quarter of 2023. The increase in the average rate paid on FHLB advances was primarily due to the changes in market interest rates.

Net Interest Income. Net interest income decreased $310,000, or 8.9%, to $3.2 million for the three months ended March 31, 2023, from $3.5 million for the three months ended March 31, 2022. This decrease was primarily due to a $1.1 million increase in interest expense partially offset by an $826,000 increase in interest and dividend income. Our net interest rate spread decreased 48 basis points to 2.23% for the three months ended March 31, 2023, from 2.71% for the three months ended March 31, 2022. Our net interest margin decreased 21 basis points to 2.64%, from 2.85% over the same period.

Provision for Credit Losses. The provision for credit losses was $75,000 for the three months ended March 31, 2023, compared to a $105,000 provision for the three months ended March 31, 2022.

Noninterest Income. Noninterest income increased $379,000, or 96.9%, to $770,000 for the three months ended March 31, 2023, from $391,000 for the three months ended March 31, 2022. The increase was primarily the result of a $430,000 increase in income associated with changes in the market value of equity securities, partially offset by a $40,000 decrease in net gain on sale of loans. 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 $430,000 change in the market of equity securities in noninterest expense. 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 $4.3 million, from $6.8 million in the first quarter of 2022 to $2.5 million in the first quarter of 2023. This decrease was primarily the result of the changing interest rate environment and lower inventory of housing available in our market.

Noninterest Expense. Noninterest expense increased $496,000, or 12.7%, to $4.4 million for the three months ended March 31, 2023 from $3.9 million for the three months ended March 31, 2022. This increase was primarily due to a $628,000 increase in salaries and benefits expense, partially offset by $185,000 decrease in other noninterest expenses. The increase in salaries and benefits expense was primarily due to a $430,000 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 noninterest income. Also contributing to the increase in salaries and benefits expense was a $129,000 increase stock option expense, which was primarily related to the issuance of stock options and awards under the 2022 Equity Incentive Plan. The decrease in other noninterest expenses was primarily due to a $117,000 decrease in professional and consulting fees, which includes accounting, tax and attorney services. The Company has taken various actions to reduce noninterest expense and the decrease in professional and consulting fees is partially due to these actions. In addition, the Company has taken various steps to reduce salaries and benefits expenses. These actions include evaluating all open positions prior to rehiring and also a reduction-in-force implemented in April 2023. As a result of these actions, the number of of full-time equivalent employees has been reduced by 15 since March 2022. The costs associated with these actions will partially offset their expected benefits during 2023.

Income Tax (Benefit) Expense. We recorded an income tax benefit of $151,000 for the three months ended March 31, 2023, compared to an income tax benefit of $60,000 for the three months ended March 31, 2022. The increase in income tax benefit was primarily due to an increase in the loss before taxes during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Management of Market Risk

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are 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 March 31, 2023, 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 March 31, 2023, 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 March 31, 2023, in the event of a 100-basis point increase in interest rates, we would have experienced a 1.35% increase in our EVE and in the event of a 100-basis point decrease in interest rates, we would have experienced a 0.25% decrease in our EVE. In the event of a 200-basis point increase in interest rates at March 31, 2023, we would have experienced a 2.50% increase in our EVE and in the event of a 200-basis point decrease in interest rates, we would have experienced a 1.72% 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, FHLB advances, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. At March 31, 2023, we had $92.0 million outstanding in advances from the FHLB. At March 31, 2023, we had $71.2 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago, based on the level of qualifying real estate loans currently pledged to the FHLB. Additionally, at March 31, 2023, we had a $15.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at March 31, 2023. The Company also had an $8.8 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $11.8 million at March 31, 2023. The Company had not drawn on the Federal Reserve line as of March 31, 2023. We also have the ability to participate in the Federal Reserve's new Bank Term Funding Program as needed.

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 used in operating activities was $1.1 million for the three months ended March 31, 2023, as compared to

$418,000 for the three months ended March 31, 2022. Net cash used in investing activities was $5.8 million for the three months ended March 31, 2023, as compared to $27.6 million for the three months ended March 31, 2022. Net cash used in investment activities during the first quarter of 2023 consisted primarily of a $7.6 million net increase in loans and a $1.4 million increase in FHLB stock, partially offset by $3.3 million from maturities, calls and payments on available-for-sale securities. Net cash used in investment activities during the first quarter of 2022 consisted primarily of the purchase of $31.2 million of available-for-sale securities, partially offset by $3.7 million from maturities, calls and payments on available-for-sale securities. Net cash provided by financing activities was $7.6 million for the three months ended March 31, 2023, as compared to $11.8 million for the three months ended March 31, 2022. Net cash provided by financing activities for the first quarter of 2023 primarily resulted from borrowings of $64.5 million of FHLB advances and a $3.0 million increase in advance payments by borrowers for taxes and insurance, partially offset by $44.0 million in principal payments on FHLB advances and a $15.8 million decrease in deposits. Net cash provided by financing activities for the first quarter of 2022 primarily resulted from borrowings of $10.0 million of FHLB advances, a $6.5 million increase in deposits and a $2.9 million increase in advance payments by borrowers for taxes and insurance, partially offset by $7.0 million in principal payments on FHLB advances.

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 March 31, 2023, PyraMax Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $64.7 million, or 11.8% of adjusted total assets, which is above the well-capitalized required level of $27.5 million, or 5.0%. The Bank had total risk-based capital of $69.1 million, or 17.4% of risk-weighted assets, which is above the well-capitalized required level of $39.8 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 as the 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 March 31, 2023. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Except for changes in controls relating to the adoption of the CECL accounting standard, there were no changes in the Company’s internal control over financial reporting in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the fiscal quarter ended March 31, 2023 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, 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Further, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The risk factors set forth below also identify important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Recent banking industry events may adversely affect our business and the market price of our common stock.

Recent developments and events in the financial services industry, including the failures of Silicon Valley Bank, Signature Bank and First Republic Bank and the voluntary liquidation of Silvergate Bank, have resulted in decreased confidence in banks among depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These events and developments could materially and adversely impact our business or financial condition, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses. These recent events and developments have, and could continue to, adversely impact the market price and volatility of our common stock. These recent events may also result in changes to laws or regulations governing banks and bank holding companies, increased regulatory scrutiny, or the imposition of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our businesses. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

The premiums of the FDIC’s deposit insurance program are expected to increase, and banking regulators have signaled further review of regulatory requirements and the potential for changes to laws or regulations governing banks and bank holding companies. Changes resulting from these events could include increased regulatory oversight, higher capital requirements or changes in the way regulatory capital is calculated, and the impositions of additional restrictions through regulatory changes or supervisory or enforcement activities, each of which could have a material impact on our business.

A failure to address the federal debt ceiling in a timely manner, downgrades of the U.S. credit rating and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs.

As a result of uncertain political, credit and financial market conditions, including the potential consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose credit default and liquidity risks. Given that future deterioration in the U.S. credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in the fair value of our U.S. government issued or guaranteed investments will not occur. At March 31, 2023, the fair value of U.S. Treasury notes and government-sponsored mortgage-backed securities held in our securities portfolio totaled $27.1 million and $62.9 million, respectively. Downgrades to the U.S. credit rating could affect the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment securities, and could result in our counterparties requiring additional collateral for our borrowings. Further, unless and until U.S. political, credit and financial market conditions have been sufficiently resolved or stabilized, it may increase our future borrowing costs.