Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
Overview
Our loan portfolio consists primarily of fixed-rate one- to four-family residential mortgage loans that we have originated. To a substantially lesser extent, we also originate construction loans, home equity loans, home equity lines of credit, land loans, and share loans (loans secured by deposit accounts at Fifth District). With regard to commercial lending, the bank is originating loans, purchasing loan participations, and purchasing whole loans through third party originators. We typically retain in our portfolio the loans we originate. We offer a variety of deposit accounts including checking accounts, money market accounts, and certificates of deposit.
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Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for credit losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, income from bank owned life insurance, and fees from third parties for loan referrals. Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contract services, director fees, FDIC deposit insurance premiums, and other expenses.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Our principal objective is to build long-term value for our stockholders by operating a profitable community-oriented financial institution dedicated to meeting the banking needs of our customers by emphasizing personalized and efficient customer service. Highlights of our current business strategy include:
● Continue to focus on originating fixed-rate one- to four-family residential mortgage loans for retention in our portfolio. We are primarily a fixed-rate one- to four-family residential mortgage loan lender for borrowers in our primary market area. At December 31, 2025, $325.8 million, or 86.3% of our total loan portfolio, consisted of residential mortgage loans. We expect residential mortgage lending to remain our primary lending activity.
● Continue to moderately increase our commercial and industrial loan portfolio. To a limited extent, we have originated and purchased commercial real estate loans, commercial and industrial loans, and loan participations from other lenders and investors. At December 31, 2025, $24.8 million, or 6.6% of our total loan portfolio, consisted of commercial real estate, commercial and industrial loans, and loan participations. These loans are higher-yielding and have shorter terms, which helps to mitigate interest rate risk, than one- to four-family residential mortgage loans.
● Maintain our strong asset quality through conservative loan underwriting. We intend to maintain strong asset quality through what we believe are our conservative underwriting standards and credit monitoring processes. At December 31, 2025, our nonperforming assets totaled $586,000, or 0.1% of total assets.
● Continue efforts to grow low-cost “core” deposits. We consider our core deposits to include all deposits other than certificates of deposit. We will continue our efforts to increase our core deposits, both retail and commercial, to provide a stable source of funds to support loan growth at costs consistent with improving our interest rate spread and net interest margin. Core deposits totaled $153.4 million, or 39.0% of total deposits, at December 31, 2025.
● Remain a community-oriented institution and rely on high quality service to maintain and build a loyal local customer base . We were established in 1926. By servicing all the loans we originate our loan customers are able to deal directly with us when questions may arise about their loans. Through the goodwill we have developed over years of providing timely, efficient banking services, we believe that we have been able to attract a loyal base of local retail customers on which we expect to continue to build our banking business.
● Grow organically and through opportunistic branching and/or acquisitions. We intend to grow our balance sheet organically on a managed basis, and the capital we raised in the stock offering has enabled us to increase our lending and investment capacity. In addition to organic growth, we may also consider expansion opportunities in our market area or in contiguous markets that we believe would enhance both our franchise value and stockholder returns. These opportunities may include
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establishing loan production offices, establishing new, or de novo, branch offices, acquiring branch offices and/or acquiring other financial institutions.
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.
We consider the following accounting policies to be our critical accounting policies:
Allowance for Credit Losses. 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 Taxes. 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.
Fair Value Measurements. 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 judgment 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.
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Selected Financial Data
The following selected financial data sets forth certain financial highlights of the Company and should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
At December 31,
2025
2024
(In thousands)
Selected Financial Condition Data:
Total assets
$
534,394
$
527,307
Cash and cash equivalents
33,852
37,916
Investment securities available-for-sale
99,077
92,987
Loans receivable, net
376,391
367,333
Premises and equipment, net
11,636
11,923
Bank owned life insurance
7,689
10,685
Deferred tax asset, net
1,722
2,447
Deposits
393,162
391,476
Federal Home Loan Bank advances
—
—
Total stockholders' equity
129,757
125,775
For the Years Ended December 31,
2025
2024
(In thousands)
Selected Operating Data:
Total interest and dividend income
$
22,058
$
19,277
Total interest expense
9,210
9,221
Net interest income
12,848
10,056
Provision for (Recovery of) credit losses
10
(1,210)
Net interest income after provision for (recovery of) credit losses
12,838
11,266
Total non-interest income
4,430
11
Total non-interest expense
13,083
12,713
Income (loss) before income taxes
4,185
(1,436)
Provision (benefit) for income taxes
97
(358)
Net income (loss)
$
4,088
$
(1,078)
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At or For the Years Ended December 31,
2025
2024
Performance Ratios:
Return on average assets
0.76
%
(0.21)
%
Return on average equity
3.17
(0.98)
Interest rate spread (1)
2.04
1.68
Net interest margin (2)
2.55
2.13
Noninterest expense as a percentage of average assets
2.44
2.52
Efficiency ratio (3)
75.72
126.28
Average interest-earning assets as a percentage of average interest-bearing liabilities
127.93
123.06
Capital Ratios (Bank only):
Average equity as a percentage of average assets
24.04
%
21.75
%
Total capital as a percentage of risk-weighted assets
41.79
43.91
Tier 1 capital as a percentage of risk-weighted assets
41.17
43.24
Common equity Tier 1 capital as a percentage of risk-weighted assets
41.17
43.24
Tier 1 capital as a percentage of average assets
21.07
20.78
Asset Quality Ratios:
Allowance for credit losses on loans as a percentage of total loans
0.45
%
0.46
%
Allowance for credit losses on loans as a percentage of non-performing loans
312.32
158.05
Allowance for credit losses on loans as a percentage of non-accrual loans
312.32
158.05
Non-accrual loans as a percentage of total loans
0.14
0.29
Net recoveries (charge-offs) as a percentage of average outstanding loans
—
—
Non-performing loans as a percentage of total loans
0.14
0.29
Non-performing loans as a percentage of total assets
0.10
0.20
Total non-performing assets as a percentage of total assets
0.11
0.21
Other Data:
Number of offices
7
7
Number of full-time employees
66
67
Number of part-time employees
1
1
(1) Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2) Represents net interest income as a percentage of average interest-earning assets.
(3) Represents noninterest expenses divided by the sum of net interest income and noninterest income.
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Comparison of Financial Condition at December 31, 2025 and December 31, 2024
Total Assets. Total assets were $534.4 million at December 31, 2025, an increase of $7.1 million, or 1.3%, compared to $527.3 million at December 31, 2024. This increase is primarily due to $6.1 million increase in investment securities available-for-sale, and $9.1 million increase in loans receivable, net offset by a $4.1 million decrease in cash and cash equivalents, and a $3.0 million decrease in bank owned life insurance.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $4.1 million, or 10.7%, to $33.9 million at December 31, 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 commercial real estate loans.
Investment Securities Available-For-Sale. Investment securities available-for-sale increased $6.1 million, or 6.5%, to $99.1 million at December 31, 2025 from $93.0 million at December 31, 2024. Securities purchased totaled $18.3 million, and calls, maturities, and repayments totaled $15.9 million. Adding to the increase was a fair market value adjustment of $3.8 million
Loans Receivable, Net. Loans receivable, net, increased by $9.1 million, or 2.5%, to $376.4 million at December 31, 2025 from $367.3 million at December 31, 2024. Loan originations were $58.5 million and loan repayments totaled $49.4 million. Commercial loans increased by $10.4 million, primarily from the origination of commercial real estate loans, and commercial and industrial loans, 1-4 single family mortgages decreased by $6.9 million, home equity loans increased by $2.1 million, and construction and land loans increased by $3.0 million.
Deposits. Deposits increased by $1.7 million, or 0.4%, to $393.2 million at December 31, 2025, from $391.5 million at December 31, 2024. Certificates of deposit increased $925,000, or 0.4%, to $239.7 million at December 31, 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 and savings accounts. NOW accounts increased $2.4 million, or 4.4%, to $56.3 million at December 31, 2025, from $53.9 million at December 31, 2024. MMDA accounts decreased $2.0 million, or 8.8%, to $20.7 million at December 31, 2025, from $22.7 million at December 31, 2024. Savings Accounts increased $399,000, or 0.5%, to $76.4 million at December 31, 2025, from $76.0 million at December 31, 2024.
Total Stockholders’ Equity. Total stockholders’ equity increased by $4.0 million, or 3.2%, to $129.8 million at December 31, 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 $2.5 million and retained earnings increasing $3.2 million due to the net income for the year offset by the $2.0 million decrease in additional paid-in capital as we deploy excess capital to repurchase shares of our common stock.
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.
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For the Year Ended December 31,
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
$
27,943
$
1,101
3.94
%
$
28,246
$
1,418
5.02
%
Investment securities available-for-sale
98,902
4,083
4.13
76,068
2,574
3.38
Loans receivable, net
376,887
16,841
4.47
366,986
15,253
4.16
Restricted stock
920
33
3.59
892
32
3.59
Total interest-earning assets
504,652
22,058
4.37
472,192
19,277
4.08
Noninterest-earning assets
31,001
32,576
Total assets
$
535,653
$
504,768
Interest-bearing liabilities:
Savings accounts
$
77,186
77
0.10
%
$
80,656
81
0.10
%
NOW accounts
53,904
14
0.03
43,564
13
0.03
Money market accounts
21,172
106
0.50
23,565
120
0.51
Certificates of deposit
242,215
9,013
3.72
235,851
9,003
3.82
Total interest-bearing deposits
394,477
9,210
2.33
383,636
9,217
2.40
Federal Home Loan Bank advances
—
—
—
87
4
4.60
Total interest-bearing liabilities
394,477
9,210
2.33
383,723
9,221
2.40
Noninterest-bearing demand deposits
1,697
1,168
Other noninterest-bearing liabilities
10,699
10,110
Total liabilities
406,873
395,001
Total stockholders' equity
128,780
109,767
Total liabilities and stockholders' equity
$
535,653
504,768
Net interest income
$
12,848
$
10,056
Net interest rate spread (1)
2.04
%
1.68
%
Net interest-earning assets (2)
$
110,175
$
88,469
Net interest margin (3)
2.55
%
2.13
%
Average interest-earning assets to interest-bearing liabilities
127.93
%
123.06
%
(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.
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Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
Year Ended December 31, 2025 vs. 2024
Increase (Decrease) Due to:
Total Increase
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Cash and cash equivalents
$
(15)
$
(302)
$
(317)
Investment securities available-for-sale
773
736
1,509
Loans receivable, net
412
1,176
1,588
Restricted stock
1
—
1
Total interest-earning assets
1,171
1,610
2,781
Interest-bearing liabilities:
Savings accounts
(3)
(1)
(4)
NOW accounts
3
(2)
1
Money market accounts
(12)
(2)
(14)
Certificates of deposit
243
(233)
10
Total deposits
231
(238)
(7)
Federal Home Loan Bank advances
(4)
—
(4)
Total interest-bearing liabilities
227
(238)
(11)
Change in net interest income
$
944
$
1,848
$
2,792
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Comparison of Operating Results for the Years Ended December 31, 2025 and December 31, 2024
General. Net income (loss) for the year ended December 31, 2025, was $4.1 million, an increase of $5.2 million, or 479.2%, compared to ($1.1) million for the year ended December 31, 2024. The increase in net income was primarily from an increase in interest income of $2.8 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 $1.2 million, a $370,000 increase in non-interest expense, and a $455,000 decrease in the (benefit) for income taxes.
Interest Income. Interest and dividend income increased by $2.8 million, or 14.4%, to $22.1 million for the year ended December 31, 2025, compared to $19.3 million for the year ended December 31, 2024. The increase is attributed to a $1.6 million, or 10.4%, increase in interest on loans, a $1.5 million, or 58.6%, increase in interest on investment securities available-for-sale, offset by a $316,000, or 2.2%, decrease in other interest-earning assets.
During the year ended December 31, 2025, average loans receivable, net, increased by $9.9 million, or 2.7%, from year ended December 31, 2024. The average yield on loans increased to 4.47% for the year ended December 31, 2025, from 4.16% for the year ended December 31, 2024, due to the making higher yielding loans such as commercial loans.
The average balance of investment securities available-for-sale increased $22.8 million, or 30.0%, to $98.9 million for the year ended December 31, 2025, from $76.1 million for the year ended December 31, 2024. The average yield on available-for-sale investment securities increased to 4.13% for the year ended December 31, 2025, from 3.38% for the year ended December 31, 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 $317,000, or 22.4%, for the year ended December 31, 2025, primarily due to a decrease in the average balance of cash and cash equivalents by $303,000 to $27.9 million for the year ended December 31, 2025, from $28.2 million for the year ended December 31, 2024. The average yield decreased to 3.94% for year ended December 31, 2025, from 5.02% for the year ended December 31, 2024. The decrease in average yield was due to the decrease in market interest rates.
Interest Expense . Total interest expense decreased $11,000 or 0.1%, to $9.2 million for the year ended December 31, 2025, compared to $9.2 million for the year ended December 31, 2024. The decrease was primarily due to the decrease in the average cost of deposits to 2.33% for the year ended December 31, 2025, from 2.40% for the year ended December 31, 2024, reflecting the decreasing market interest rate environment. The average balance of interest-bearing deposits increased by $10.8 million, or 2.8%, to $394.5 million for the year ended December 31, 2025, from $383.6 million for the year ended December 31, 2024.
Net Interest Income . Net interest income increased $2.8 million, or 27.8%, to $12.8 million for the year ended December 31, 2025, compared to $10.1 million for the year ended December 31, 2024. The interest rate spread increased to 2.04% for the year ended December 31, 2025 from 1.68% for the year ended December 31, 2024, while average net interest-earning assets increased $21.7 million period-to-period. The net interest margin increased to 2.55% for the year ended December 31, 2025, from 2.13% for the year ended December 31, 2024. The average yield on interest-earning assets increased from 4.08% for the year ended December 31, 2024, to 4.37% for the year ended December 31, 2025. The average rate paid on interest-bearing liabilities decreased from 2.40% for the year ended December 31, 2024, to 2.33% for the year ended December 31, 2025, primarily due to a decrease in the average rate paid on certificates of deposit from 3.82% in 2024 to 3.72% in 2025. The decrease in the average rate paid on certificates of deposit was attributed to decreasing market interest rates. The average balance of certificates of deposit increased from $235.9 million as of December 31, 2024, to $242.2 million as December 31, 2025, while over the same period the average balance of savings accounts decreased from $80.7 million to $77.2 million, and the average balance of money market accounts decreased from $23.6 million to $21.2 million.
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Provision (Recovery) for Credit Losses . The provision for credit losses on loans was $-0- for the year ended December 31, 2025, compared to ($1.1 million) for the year ended December 31, 2024. The allowance for credit losses on loans represented 0.45% of total loans at December 31, 2025, and 0.46% of total loans at December 31, 2024. The recovery of credit losses is based on our evaluation of the adequacy of the allowance for credit losses throughout the reporting period.
The provision of credit losses on unfunded commitments was $10,000 for the year ended December 31, 2025 compared to a ($110,000) on unfunded commitments for the year ended December 31, 2024. The increase in the provision was primarily due to an increase on the unfunded balance of construction loans in process. The recovery of credit losses on unfunded commitments is based on an evaluation of the historical usage rate.
Total non-performing loans were $544,000 at December 31, 2025, and $1.1 million December 31, 2024. Classified loans totaled $1.3 million at December 31, 2025, compared to $1.1 at December 31, 2024, and total past due greater than 30 days were $4.9 million and $5.4 million at those respective dates. As a percentage of nonperforming loans, the allowance for credit losses on loans was 312.3% at December 31, 2025, 158.0% at December 31, 2024.
. Noninterest Income. Non-interest income increased $4.4, or 4017.3% to $4.4 million for the year ended December 31, 2025, compared to $11,000 for the year ended December 31, 2024. A $1.1 million realized loss on the sale of investment securities available-for-sale was recorded for the year ended December 31, 2024, compared to no such realized losses recorded for the year ended December 31, 2025. A $3.5 million gain on bank owned life insurance proceeds was recorded for the year ended December 31, 2025, while no such gain was recorded for the year ended December 31, 2024. A $141,000 gain on sale of premises and equipment was recorded for the year ended December 31, 2024, while no such gain was recorded for the year ended December 31, 2025. A gain on real estate owned of $14,000 was recorded for the year ended December 31, 2025, while no such gain was recorded for the year ended December 31, 2024.
Noninterest Expense. Noninterest expense increased $370,000, or 2.9%, to $13.1 million for the year ended December 31, 2025, compared to $12.7 million for the year ended December 31, 2024. The increase was primarily due to an increase in salaries and employee benefits of $958,000 or 14.3%, an increase in occupancy and equipment expense of $210,000, or 11.5%, an increase in professional and legal fees of $136,000, or 70.1%, an increase in data processing expense of $125,000, or 10.6%, an increase in audit and examination fees of $28,000, or 9.2%, partially offset by a $37,000, or 13.4% decrease in directors fees, a $1.3 million, or 99.7%, decrease in charitable contributions from establishing the Fifth District Community Foundation Inc. in 2024, and a $26,000, or 19.8% decrease in advertising. 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 provision (benefit) for income taxes increased by $455,000, or 127.1%, to $97,000 for the year ended December 31, 2025, compared to ($358,000) for the year ended December 31, 2024. The increase was due to a $5.6 million, or 391.4%, increase in pretax income. The effective tax rate was 21% for both years.
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.
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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.
We have not engaged in hedging activities, such as investing in futures or options. We do not anticipate entering into similar 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 December 31, 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 board of directors.
At December 31, 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
$
64,101
$
(58,200)
(47.59)
%
15.83
%
(921)
300
75,621
(46,680)
(38.17)
%
17.92
%
(712)
200
90,623
(31,678)
(25.90)
%
20.46
%
(458)
100
106,649
(15,652)
(12.80)
%
22.91
%
(213)
Level
122,301
—
—
%
25.04
%
—
(100)
133,457
11,156
9.12
%
26.14
%
110
(200)
141,983
19,682
16.09
%
26.68
%
164
(300)
146,710
24,409
19.96
%
26.58
%
154
(400)
148,805
26,504
21.67
%
26.06
%
102
(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.
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The table above indicates that at December 31, 2025, we would experience 25.90% decrease in EVE in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 16.09% increase in EVE in the event of an instantaneous 200 basis point decrease in interest rates.
Change in Net Interest Income. The following table sets forth, at December 31, 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 board of directors.
At December 31, 2025
Change in Interest Rates
Net Interest Income Year 1
(basis points) (1)
Forecast
Year 1 Change from Level
(Dollars in thousands)
400
$
9,340
(33.34)
%
300
10,508
(25.00)
200
11,689
(16.57)
100
12,848
(8.30)
Level
14,011
—
(100)
14,445
3.10
(200)
14,794
5.59
(300)
15,020
7.21
(400)
15,241
8.78
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that at December 31, 2025, we would have experienced a 16.57% decrease in net interest income in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 5.59% 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.
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 and, until March 11, 2024, had the ability to obtain advances under the Federal Reserve Board’s Bank Term Funding Program. Under the terms of the Bank Term Funding Program, advances cannot be obtained after March 11, 2024. At December 31, 2025, we had $-0- of outstanding advances under
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the Bank Term Funding Program. At December 31, 2025, we had no outstanding advances from the Federal Home Loan Bank of Dallas.
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.
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. For additional information, see the Consolidated Statements of Cash Flows.
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.
Fifth District Bancorp is a separate legal entity from Fifth District and must provide for its own liquidity to pay its operating expenses and other financial obligations. Fifth District Bancorp’s primary source of income is dividends received from Fifth District. The amount of dividends that Fifth District may declare and pay to Fifth District Bancorp is governed by applicable bank regulations. At December 31, 2025, Fifth District Bancorp (on an unconsolidated basis) had liquid assets of $19.2 million.
At December 31, 2025, Fifth District was categorized as well-capitalized under regulatory capital guidelines. Management is not aware of any conditions or events since the most recent notification that would change our category. For further information, see note 10 to the notes to consolidated financial statements.
Off-Balance Sheet Arrangements. At December 31, 2025, we had $35.9 million of outstanding commitments to originate loans, which primarily consists of HELOC’s totaling $17.4 million, construction loans totaling $14.2 million, and Board approved loans totaling $3.1 million. At December 31, 2025, certificates of deposit that are scheduled to mature on or before December 31, 2026 totaled $224.1 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.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see note 1 of the notes to the consolidated financial statements appearing elsewhere in this annual report.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this annual report have been prepared according to GAAP 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.