Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis is intended to enhance your understanding of our financial condition and results of operations. The financial information in this section is derived from the accompanying consolidated financial statements. You should read the financial information in this section in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the Securities and Exchange Commission on March 26, 2025.
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,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
● statements of our goals, intentions and expectations;
● statements regarding our business plans, prospects, growth and operating strategies;
● statements regarding the asset quality of our loan and investment portfolios; and
● estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this 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 area, which are worse than expected;
● inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of our financial instruments, or our loan origination volume, or increase the level of defaults, losses and prepayments within our loan portfolio;
● 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;
● our ability to access cost-effective funding;
● our ability to maintain adequate liquidity, primarily through deposits;
● fluctuations in real estate values and in the conditions of the residential real estate market;
● demand for loans and deposits in our market area;
● our ability to implement and change our business strategies;
33
Table of Contents
● competition among depository and other financial institutions;
● adverse changes in the securities 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 or breach of our operational or information security systems or infrastructure, including cyberattacks;
● our ability to manage market risk, credit risk, operational risk and reputation risk;
● our ability to enter new markets successfully and capitalize on growth opportunities;
● changes in consumer spending, borrowing and savings habits;
● changes in accounting policies and practices, as may be adopted by 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; and
● changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.
Critical Accounting Policies and Use of Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with GAAP. 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.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. 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 intend to take advantage of the benefits of this extended transition period. Accordingly, our consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.
34
Table of Contents
We consider the accounting policy for the allowance for credit losses to be our critical accounting policy. Effective January 1, 2023, we adopted CECL. Under the CECL methodology, the allowance for credit losses represents management’s estimate of lifetime credit losses in loans as of the balance sheet date using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
Deferred income tax assets and liabilities are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events recognized in the financial statements. A valuation allowance may be established to the extent necessary to reduce the deferred tax asset to a level at which it is “more likely than not” that the tax asset or benefit will be realized. Realization of tax benefits depends on having sufficient taxable income, available tax loss carrybacks or credits, the reversal of taxable temporary differences and/or tax planning strategies within the reversal period, and that current tax law allows for the realization of recorded tax benefits.
Certain assets and liabilities are measured at fair value on a recurring basis, including securities and derivative instruments. Assets and liabilities carried at fair value inherently include subjectivity and may require the use of significant assumptions, adjustments and judgments including, among others, discount rates, rates of return on assets, cash flows, default rates, loss rates, terminal values and liquidation values. A significant change in assumptions may result in a significant change in fair value, which in turn, may result in a higher degree of financial statement volatility and could result in significant impact on our results of operations, financial condition or disclosures of fair value information.
The fair value hierarchy requires use of observable inputs first and subsequently unobservable inputs when observable inputs are not available. Fair value measurements involve inputs that are observable (Level 1 or Level 2 in fair value hierarchy), when available. The level of judgment required to determine fair value is dependent on the methods or techniques used in the process. Assets and liabilities that are measured at fair value using quoted prices in active markets (Level 1) do not require significant judgment while the valuation of assets and liabilities when quoted market prices are not available (Levels 2 and 3) may require significant judgment to assess whether observable or unobservable inputs for those assets and liabilities provide reasonable determination of fair value.
Comparison of Financial Condition at September 30, 2025 and December 31, 2024
Total Assets. Total assets were $539.5 million at September 30, 2025, an increase of $12.2 million, or 2.3%, compared to $527.3 million at December 31, 2024. This increase is primarily due to a $7.7 million increase in investment securities available-for-sale, a $12.0 million increase in loans receivable, net, offset by a $3.5 million decrease in cash and cash equivalents and a $3.1 million decrease in bank owned life insurance.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $3.5 million, or 9.3%, to $34.4 million at September 30, 2025 from $37.9 million at December 31, 2024. This decrease is primarily due to the purchase of investments available for sale and the origination of loans, primarily construction loans.
Investment Securities Available-for-Sale. Investment securities available-for-sale increased $7.7 million, or 8.3%, to $100.7 million at September 30, 2025 from $93.0 million at December 31, 2024. Securities purchased totaled $15.4 million during the nine months ended September 30, 2025, and calls, maturities, and repayments totaled $10.9 million. Adding to the increase was a fair market value adjustment of $3.2 million.
Loans Receivable, Net. Loans receivable, net, increased by $12.0 million, or 3.3%, to $379.3 million at September 30, 2025 from $367.3 million at December 31, 2024. During the nine months ended September 30, 2025, loan originations were $45.1 million and loan repayments totaled $33.1 million. During the nine months ended September 30, 2025, commercial loans increased by $3.1 million, primarily from the origination of commercial real estate loans, and commercial and industrial loans, 1-4 single family mortgages increased by $1.9 million, home equity loans increased by $2.4 million, consumer loans increased by $365,000, and construction and land loans increased by $4.1 million.
Deposits. Deposits increased by $4.7 million, or 1.2%, to $396.2 million at September 30, 2025, from $391.5 million at December 31, 2024. Certificates of deposit increased $5.3 million, or 2.2%, to $244.1 million at September 30,
35
Table of Contents
2025, from $238.8 million at December 31, 2024. The majority of the increase in certificates of deposit was driven by new customer activity and migration from lower yielding money markets accounts. NOW accounts increased $1.0 million, or 1.9%, to $55.0 million at September 30, 2025, from $53.9 million at December 31, 2024. MMDA accounts decreased $2.1 million, or 9.3%, to $20.6 million at September 30, 2025, from $22.7 million at December 31, 2024. Savings Accounts increased $449,000, or 0.6%, to $76.5 million at September 30, 2025, from $76.0 million at December 31, 2024.
Total Stockholders’ Equity. Total stockholders’ equity increased by $5.5 million, or 4.4%, to $131.3 million at September 30, 2025, from $125.8 million at December 31, 2024. The increase resulted primarily from the accumulated other comprehensive loss (as a result of market value adjustment of investment securities available-for-sale due to the rise in market interest rates during the period) declining $2.3 million and retained earnings increasing $3.4 million due to the net income for the nine months ended September 30, 2025.
Average Balances and Yields . The following table sets forth average balance sheets, average yields and rates, and other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects are immaterial. Average balances are calculated using daily average balances. Non-accrual loans are included in average balances only. Average yields include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Net deferred loan fees/costs are immaterial.
For the Three Months Ended September 30,
2025
2024
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate (4)
Balance
Interest
Yield/Rate (4)
Interest-earning assets:
Cash and cash equivalents
$
26,647
$
269
4.01
%
$
40,493
$
548
5.37
%
Investment securities available-for-sale
101,060
1,106
4.34
82,639
772
3.71
Loans receivable, net
380,558
4,304
4.49
368,805
3,863
4.16
Restricted stock
923
14
6.02
896
10
4.43
Total interest-earning assets
509,188
5,693
4.44
492,833
5,193
4.18
Noninterest-earning assets
30,627
32,408
Total assets
$
539,815
$
525,241
Interest-bearing liabilities:
Savings accounts
$
77,218
19
0.10
%
$
79,804
20
0.10
%
NOW accounts
53,627
3
0.02
66,363
3
0.02
Money market accounts
20,915
26
0.49
22,193
28
0.50
Certificates of deposit
244,299
2,300
3.74
235,163
2,259
3.81
Total interest-bearing deposits
396,059
2,348
2.35
403,523
2,310
2.27
Federal Home Loan Bank advances
—
—
—
—
—
—
Total interest-bearing liabilities
396,059
2,348
2.35
403,523
2,310
2.27
Noninterest-bearing demand deposits
1,381
1,185
Other noninterest-bearing liabilities
11,151
10,542
Total liabilities
408,591
415,250
Total stockholders' equity
131,224
109,991
Total liabilities and stockholders' equity
539,815
525,241
Net interest income
$
3,345
$
2,883
Net interest rate spread (1)
2.09
%
1.91
%
Net interest-earning assets (2)
$
113,129
$
89,310
Net interest margin (3)
2.61
%
2.32
%
Average interest-earning assets to interest-bearing liabilities
128.56
%
122.13
%
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
(4) Average yield/rate is an annualized amount.
36
Table of Contents
Comparison of Operating Results for the Three Months Ended September 30, 2025 and 2024
General . Net income (loss) for the three months ended September 30, 2025, was $343,000, an increase of $1.1 million, or 143.5%, compared to ($788,000) for the three months ended September 30, 2024. The increase in net income was primarily from a $500,000 increase in interest and dividend income, a decrease in non-interest expense of $1.1 million, partially offset by an increase interest expense of $38,000, and decrease in recovery of credit losses on loans of $110,000, a decrease in non-interest income of $24,000, and an increase in income tax expense of $301,000.
Interest and Dividend Income. Interest and dividend income increased by $500,000, or 9.6%, to $5.7 million for the three months ended September 30, 2025, compared to $5.2 million for the three months ended September 30, 2024. The increase is attributed to a $441,000, or 11.4%, increase in interest on loans, a $334,000, or 43.3%, increase in interest on investment securities available-for-sale offset by a $275,000, or 49.3%, decrease in interest on other interest-earning assets.
During the three months ended September 30, 2025, average loans receivable, net, increased by $11.8 million, or 3.2%, from the three months ended September 30, 2024. The average yield on loans increased to 4.49% for the three months ended September 30, 2025, from 4.16% for the three months ended September 30, 2024, mainly due to the higher yielding loans that were originated during the period.
The average balance of investment securities available-for-sale increased $18.4 million, or 22.3%, to $101.1 million for the three months ended September 30, 2025, from $82.6 million for the three months ended September 30, 2024. The average yield on available-for-sale investment securities increased to 4.34% for the three months ended September 30, 2025, from 3.71% for the three months ended September 30, 2024. The increase in the average yield on available-for-sale investment securities was primarily due to reinvesting in higher yielding securities.
Interest income on cash and cash equivalents, comprised primarily of overnight deposits, decreased by $279,000, or 50.9%, for the three months ended September 30, 2025, primarily due to an decrease in the average yield to 4.01% for the three months ended September 30, 2025, from 5.37% for the three months ended September 30, 2024. The decrease in average yield was due to the decline in market interest rates as well as the decrease in the average balance in cash and cash equivalents. The average balance of cash and cash equivalents decreased by $13.8 to $26.6 million from the three months ended September 30, 2025, from $40.5 million for the three months ended September 30, 2024. The decrease in the average balance was mainly due to using cash to purchase available-for-sale investments.
Interest Expense . Total interest expense increased $38,000 or 1.6%, to $2.3 million for the three months ended September 30, 2025, from $2.3 million for the three months ended September 30, 2024. The average balance of interest-bearing deposits decreased by $7.5 million, or 1.8%, to $396.1 million for the three months ended September 30, 2025, from $403.5 million for the three months ended September 30, 2024.
Net Interest Income . Net interest income increased $462,000, or 16.0%, to $3.3 million for the three months ended September 30, 2025, compared to $2.9 million for the three months ended September 30, 2024. The increase reflects the increase in the interest rate spread to 2.09% for the three months ended September 30, 2025, from 1.91% for the three months ended September 30, 2024, while average net interest-earning assets increased $23.8 million period-to-period. The net interest margin increased to 2.61% for the three months ended September 30, 2025, from 2.32% for the three months ended September 30, 2024. The average yield on interest-earning assets increased from 4.18% for the three months ended September 30, 2024, to 4.44% for the three months ended September 30, 2025. The average rate paid on interest-bearing liabilities increased from 2.27% for the three months ended September 30, 2024, to 2.35% for the three months ended September 30, 2025. The average rate on certificates of deposits decreased from 3.81% for the three months ended September 30, 2024, to 3.74% for the three months ended September 30, 2025. The decrease in the average rate paid on certificates of deposit primarily resulted from a decrease in market interest rates. The average balance of certificates of deposit increased from $235.2 million as of September 30, 2024, to $244.3 million as September 30, 2025, while over the same period the average balance of savings accounts decreased from $79.8 million to $77.2 million, and the average balance of money market accounts decreased from $22.2 million to $20.9 million.
37
Table of Contents
Provision (Recovery) for Credit Losses . The provision for credit losses on loans was $-0- for the three months ended September 30, 2025, compared to ($110,000) for the three months ended September 30, 2024. The allowance for credit losses on loans represented 0.45% of total loans at September 30, 2025 and 0.46% of total loans at September 30, 2024. The recovery of credit losses is based on our evaluation of the adequacy of the allowance for credit losses throughout the reporting period.
Total non-performing loans were $198,000 at September 30, 2025, compared to $647,000 at September 30, 2024. We had $199,000 of loans over 90 days delinquent at September 30, 2025, compared to $647,000 at September 30, 2024. Classified loans totaled $1.3 million at September 30, 2025, compared to $647,000 at September 30, 2024. As a percentage of nonperforming loans, the allowance for credit losses on loans was 858.1% at September 30, 2025, and 262.6% at September 30, 2024.
Noninterest Income . Noninterest income totaled $228,000 for the three months ended September 30, 2025, a decrease of $24,000, or 9.5%, from $252,000 for the three months ended September 30, 2024. The majority of the decrease was due to a $21,000 decrease in income on bank owned life insurance for the three months ended September 30, 2025.
Noninterest Expense . Noninterest expense decreased $1.1 million, or 26.0%, to $3.1 million for the three months ended September 30, 2025, compared to $4.2 million for the three months ended September 30, 2024. The decrease was primarily due to a decrease in charitable contributions of $1.3 million ($1.2 million was to fund the Fifth District Savings Foundation), or 99.4%, a decrease in audit and examination expense of $19,000, or 18.5%, a decrease in director fees of $9,000, or 12.3%, a decrease in advertising expense of $4,000, or 13.3%, partially offset by a $43,000, or 15.1%, increase data processing, a $59,000, or 107.3% increase in professional and legal fees, and a $66,000, or 44.3% increase in other expenses.
Provision (Benefit) for Income Taxes . The provision (benefit) for income taxes increased by $301,000, or 143.3%, to $91,000 for the three months ended September 30, 2025, compared to ($210,000) for the three months ended September 30, 2024. Pretax income increased by $1.4 million, or 143.5%, to $434,000 for the three months ended
38
Table of Contents
September 30, 2025, compared to $($998,000) for the three months ended September 30, 2024. The effective tax rate was 21% for both periods.
For the Nine Months Ended September 30,
2025
2024
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Cash and cash equivalents
$
26,571
$
807
4.06
%
$
27,197
$
1,061
5.20
%
Investment securities available-for-sale
98,208
3,025
4.12
71,213
1,675
3.13
Loans receivable, net
376,656
12,523
4.45
366,991
11,375
4.13
Restricted stock
917
26
3.79
889
24
3.60
Total interest-earning assets
502,352
16,381
4.36
466,290
14,135
4.04
Noninterest-earning assets
31,735
32,572
Total assets
$
534,087
$
498,862
Interest-bearing liabilities:
Savings accounts
$
77,351
58
0.10
%
$
81,915
61
0.10
%
NOW accounts
53,609
10
0.02
47,957
9
0.02
Money market accounts
21,235
80
0.50
23,870
91
0.51
Certificates of deposit
242,071
6,804
3.76
236,268
6,763
3.81
Total interest-bearing deposits
394,266
6,952
2.36
390,010
6,924
2.36
Federal Home Loan Bank advances
—
—
—
113
4
4.72
Total interest-bearing liabilities
394,266
6,952
2.36
390,123
6,928
2.37
Noninterest-bearing demand deposits
1,656
1,116
Other noninterest-bearing liabilities
9,989
9,598
Total liabilities
405,911
400,837
Total stockholders' equity
128,176
98,025
Total liabilities and stockholders' equity
$
534,087
498,862
Net interest income
$
9,429
$
7,207
Net interest rate spread (1)
2.00
%
1.67
%
Net interest-earning assets (2)
$
108,086
$
76,167
Net interest margin (3)
2.51
%
2.06
%
Average interest-earning assets to interest-bearing liabilities
127.41
%
119.52
%
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
(4) Average yield/rate is an annualized amount.
Comparison of Operating Results for the Nine Months Ended September 30, 2025 and 2024
General . Net income (loss) for the nine months ended September 30, 2025, was $3.5 million an increase of $4.8 million or 386.7%, compared to ($1.2) million for the nine months ended September 30, 2024. The net income was primarily from an increase in interest income of $2.2 million, an increase in non-interest income of $4.4 million mainly due to a gain on bank owned life insurance proceeds, partially offset by a decrease in recovery of credit losses on loans of $1.1 million, a $318,000 increase in non-interest expense, and a $350,000 decrease in the (benefit) for income taxes.
Interest and Dividend Income. Interest and dividend income increased by $2.2 million, or 15.9%, to $16.4 million for the nine months ended September 30, 2025, compared to $14.1 million for the nine months ended September 30, 2024. The increase is attributed to a $1.1 million, or 10.1%, increase in interest on loans, a $1.4 million, or 80.6%, increase in interest on investment securities available-for-sale, partially offset by a $252,000, or 23.2%, decrease in interest on other interest-earning-assets.
During the nine months ended September 30, 2025, average loans receivable, net, increased by $9.7 million, or 2.6%, from the nine months ended September 30, 2024. The average yield on loans increased to 4.45% for the nine months
39
Table of Contents
ended September 30, 2025, from 4.13% for the nine months ended September 30, 2024, mainly due to higher yielding loans originated during the period.
The average balance of investment securities available-for-sale increased $27.0 million, or 37.9%, to $98.2 million for the nine months ended September 30, 2025, from $71.2 million for the nine months ended September 30, 2024. The average yield on available-for-sale investment securities increased to 4.12% for the nine months ended September 30, 2025, from 3.13% for the nine months ended September 30, 2024. The increase in the average yield on available-for-sale investment securities was primarily due to reinvesting in higher yielding securities.
Interest income on cash and cash equivalents, comprised primarily of overnight deposits, decreased by $254,000, or 23.94%, for the nine months ended September 30, 2025, primarily due to a decrease in the average balance of cash and cash equivalents by $626,000 to $26.6 million for the nine months ended September 30, 2025, from $27.2 million for the nine months ended September 30, 2024. The average yield decreased to 4.06% for the nine months ended September 30, 2025, from 5.20% for the nine months ended September 30, 2024. The decrease in average yield was due to the decrease in market interest rates.
Interest Expense . Total interest expense increased $24,000 or 0.3%, to $7.0 million for the nine months ended September 30, 2025, from $6.9 million for the nine months ended September 30, 2024. The increase was due to a $28,000, or 0.4%, increase in interest on deposits, offset by a $4,000 decrease in interest expense on Federal Home Loan Bank advances as there were no advances taken in the nine months ended September 30, 2025.. The average balance of interest-bearing deposits increased by $4.3 million, or 1.1%, to $394.3 million for the nine months ended September 30, 2025, from $390.0 million for the nine months ended September 30, 2024.
Net Interest Income . Net interest income increased $2.2 million, or 30.8%, to $9.4 million for the nine months ended September 30, 2025, compared to $7.2 million for the nine months ended September 30, 2024. The increase reflects the increase in the interest rate spread to 2.00% for the nine months ended September 30, 2025, from 1.67% for the nine months ended September 30, 2024, while average net interest-earning assets increased $31.9 million period-to-period. The net interest margin increased to 2.51% for the nine months ended September 30, 2025, from 2.06% for the nine months ended September 30, 2024. The average yield on interest-earning assets increased from 4.04% for the nine months ended September 30, 2024, to 4.36% for the nine months ended September 30, 2025. The average rate paid on interest-bearing liabilities decreased from 2.37% for the nine months ended September 30, 2024, to 2.36% for the nine months ended September 30, 2025. There was no average balance of Federal Home Loan Bank advances for the nine months ended September 30, 2025, compared to an average balance of $113,000 for the nine months ended September 30, 2024. The average balance of certificates of deposit increased from $236.3 million for the nine months ended September 30, 2024, to $242.1 million for the nine months ended September 30, 2025. Over the same period, the average balance of savings accounts decreased from $81.9 million to $77.4 million, and the average balance of money market accounts decreased from $23.9 million to $21.2 million.
Provision (Recovery) for Credit Losses . The provision for credit losses on loans was $-0- for the nine months ended September 30, 2025, compared to ($1.1 million) for the nine months ended September 30, 2024. The allowance for credit losses on loans represented 0.45% of total loans at September 30, 2025 and 0.46% of total loans at September 30, 2024. The recovery of credit losses is based on our evaluation of the adequacy of the allowance for credit losses throughout the reporting period.
Total non-performing loans were $198,000 at September 30, 2025, compared to $647,000 at September 30, 2024. We had $199,000 of loans over 90 days delinquent at September 30, 2025, compared to $647,000 at September 30, 2024. Classified loans totaled $1.3 million at September 30, 2025, compared to $647,000 at September 30, 2024. As a percentage of nonperforming loans, the allowance for credit losses on loans was 858.1% at September 30, 2025, and 262.6% at September 30, 2024.
Noninterest Income (loss) . Noninterest income (loss) totaled $4.2 million for the nine months ended September 30, 2025, an increase of $4.4 million, or 1922.1%, from ($231,000) for the nine months ended September 30, 2024. A $1.1 million realized loss on the sale of investment securities available-for-sale was recorded during the nine months ended September 30, 2024, compared to no such realized losses recorded during the nine months ended September 30, 2025. A
40
Table of Contents
$3.5 million gain on bank owned life insurance proceeds was recorded during the nine months ended September 30, 2025, while no such gain was recorded during the nine months ended September 30, 2024. A $141,000 gain on sale of premises and equipment was recorded during the nine months ended September 30, 2024, while no such gain was record during the nine months ended September 30, 2025.
Noninterest Expense . Noninterest expense increased $318,000, or 3.3%, to $10.1 million for the nine months ended September 30, 2025, compared to $9.8 million for the nine months ended September 30, 2024. The increase was primarily due to an increase in salaries and employee benefits of $1.2 million, or 24.2%, an increase in occupancy and equipment expense of $62,000, or 4.6%, an increase in professional and legal fees of $119,000, or 90.8%, an increase in data processing expense of $74,000, or 8.3%, an increase in audit and examination fees of $23,000, or 10.0%, and an increase in other expenses of $156,000, or 35.9%, partially offset by a $37,000, or 34.6%, decrease in advertising, and a $18,000, or 8.3% decrease in directors fees. The increase in salaries and employee benefits is mainly from a death benefit paid to the intended beneficiaries of the late President and Chief Executive Officer from the proceeds of the bank owned life insurance.
Provision (Benefit) for Income Taxes . The (benefit) for income taxes decreased by $350,000, or 106.4%, to $21,000 for the nine months ended September 30, 2025, compared to ($329,000) for the nine months ended September 30, 2024. While pretax income increased by $5.1 million, or 327.8%, for the nine months ended September 30, 2025, $3.5 million of the pretax income was from the non-taxable proceeds of the bank owned life insurance. The effective tax rate was 21% for both periods.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Dallas and from two correspondent banks. At September 30, 2025, we had no outstanding advances from the Federal Home Loan Bank of Dallas. At September 30, 2025, we had no outstanding balances under the correspondent bank credit facilities.
Time deposits that meet or exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 at September 30, 2025 and December 31, 2024 were $50.0 million and $48.3 million, respectively.
Based on collateral pledged, consisting of all shares of FHLB stock owned and the blanket pledge of approximately $234.8 million of its qualifying mortgage loans as of September 30, 2025, the Bank was eligible to borrow up to an additional $188.8 million as of September 30, 2025.
The Bank has an unsecured federal funds line of credit with FNBB that expires on September 30, 2026. The Bank is eligible to borrow up to $27.2 million. There was no amount outstanding on this line of credit as of September 30, 2025 and December 31, 2024.
The Bank is eligible to borrow from TIB’s Federal Funds Purchase Line Program, which provides overnight liquidity through pledge of certain qualifying securities. The Bank is eligible to borrow up to $15.0 million and repayment is due the next day. There was no amount outstanding on this line of credit as of September 30, 2025 and December 31, 2024.
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. The levels of these assets depend on our operating, financing, lending, and investing activities during any given period.
41
Table of Contents
Our cash flows are comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. See the accompanying consolidated Statements of Cash Flows for further information.
Fifth District Bancorp, Inc. is a separate legal entity from Fifth District Savings Bank and must provide for its own liquidity to pay its operating expenses and other financial obligations. Its primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company is governed by applicable bank regulations. At September 30, 2025, the Company (on an unconsolidated basis) had liquid assets of $21.2 million.
We believe we maintain a strong liquidity position, and are committed to maintaining it. 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 deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
At September 30, 2025, the Bank was categorized as well-capitalized under applicable bank regulatory capital guidelines. Management is not aware of any conditions or events since the most recent notification that would change its category.
Off-Balance Sheet Arrangements
At September 30, 2025, we had $26.8 million of outstanding commitments to originate loans, which primarily consists of $9.2 million of remaining funds to be disbursed on construction loans in process and $16.2 million of unused balances of home equity lines of credit. At September 30, 2025, certificates of deposit that are scheduled to mature on or before September 30, 2026 totaled $225.0 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may raise interest rates on deposits to attract new accounts or utilize Federal Home Loan Bank of Dallas advances, which may result in higher levels of interest expense.
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. All directors participate in discussions during the regular board meetings evaluating the interest rate risk inherent in our assets and liabilities, and the level of risk that is appropriate. These discussions take into consideration our business strategy, operating environment, capital, liquidity and performance objectives consistent with the policy and guidelines approved by them. The board of directors establishes policies and guidelines for managing interest rate risk.
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 are using to manage interest rate risk are:
● maintaining capital levels that substantially exceed the thresholds for well-capitalized status under federal regulations;
● maintaining a high liquidity level;
● growing our core deposit accounts; and
● managing our investment securities portfolio to reduce the average maturity and effective life of the portfolio.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.
42
Table of Contents
We have not engaged in hedging activities, such as investing in futures or options. We do not anticipate entering into hedging transactions in the future.
Economic Value of Equity . We compute amounts by which the net present value of our assets and liabilities (economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases instantaneously by 100, 200, 300 and 400 basis point increments or decreases instantaneously by 100, 200, 300 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The following table sets forth, as of September 30, 2025, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve. All estimated changes presented in the table are within the policy limits established by the Company’s board of directors.
At September 30, 2025
EVE as a Percentage of Present Value
of Assets (3)
Estimated Increase (Decrease) in
Increase
EVE
(Decrease)
Change in Interest Rates (basis points) (1)
Estimated EVE (2)
Amount
Percent
EVE Ratio (4)
(basis points)
(Dollars in thousands)
400
$
58,835
$
(59,201)
(50.15)
%
14.50
%
(960)
300
70,558
(47,479)
(40.22)
%
16.68
%
(742)
200
85,095
(32,942)
(27.91)
%
19.19
%
(491)
100
101,088
(16,948)
(14.36)
%
21.70
%
(240)
Level
118,037
—
—
%
24.10
%
—
(100)
129,946
11,909
10.09
%
25.36
%
126
(200)
138,615
20,579
17.43
%
25.96
%
186
(300)
144,679
26,642
22.57
%
26.08
%
198
(400)
147,459
29,422
24.93
%
25.66
%
156
(1) Assumes an immediate 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.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at September 30, 2025, we would have experienced a 27.91% decrease in EVE in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 17.43% increase in EVE in the event of an instantaneous 200 basis point decrease in market interest rates.
43
Table of Contents
Change in Net Interest Income. The following table sets forth, as of September 30, 2025, 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. All estimated changes presented in the table are within the policy limits established by the Company’s board of directors.
At September 30, 2025
Change in Interest Rates
Net Interest Income Year 1
(basis points) (1)
Forecast
Year 1 Change from Level
(Dollars in thousands)
400
$
9,019
(35.57)
%
300
10,281
(26.55)
200
11,530
(17.63)
100
12,761
(8.83)
Level
13,998
—
(100)
14,436
3.13
(200)
14,689
4.94
(300)
14,947
6.78
(400)
15,162
8.32
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that as of September 30, 2025, we would have experienced a 17.63% decrease in net interest income in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 4.94% increase in net interest income in the event of an instantaneous 200 basis point decrease in market interest rates.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement. Modeling changes in EVE and NII 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. For instance, the EVE and NII tables presented above assume 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. However, the shape of the yield curve changes constantly and the value and pricing of our assets and liabilities, including our deposits, may not closely correlate with changes in market interest rates. Accordingly, although the EVE and NII tables may provide an indication of our interest rate risk exposure at a particular point in time and in the context of a particular yield curve, 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 NII and will differ from actual results.
EVE and net interest NII 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information in Item 2 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management of Market Risk” is incorporated in this Item 3 by reference.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.