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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-14 · 127 added, 115 removed, 226 unchanged (52% of the section changed)

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Internal Control Over Financial Reporting

We have identified material weaknesses in our internal control over financial reporting with respect to our allowance for credit losses that existed as of June 30, 2024 and December 31, 2023.

We have identified material weaknesses in our internal control over financial reporting with respect to our allowance for credit losses that existed as of September 30, 2024 and December 31, 2023.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements may not be prevented or detected on a timely basis.

We concluded that our procedures were not effective as of June 30, 2024 and December 31, 2023, and that we had, as of such dates, identified the following material weaknesses in our internal control over financial reporting:

● management did not maintain sufficient evidence of independent review or supporting documentation related to key methodologies, assumptions, and calculations, including support for the qualitative factors, utilized in the allowance for credit losses as of June 30, 2024 and December 31, 2023;

We concluded that our procedures were not effective as of December 31, 2023 and un-remediated as of September 30, 2024.

Specifically, we identified, the following material weaknesses in our internal control over our financial reporting:

● management did not maintain sufficient evidence of independent review or supporting documentation, including support for the qualitative factors, related to the January 1, 2023 adoption of Accounting Standard Update (ASU) 2016-13 Financial Instruments – Credit Losses.

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Once implemented, we intend to continue periodic testing and reporting of the internal controls to ensure continuity of compliance.

The decrease in the allowance for credit losses as of June 30, 2024 as compared to December 31, 2023 was driven by various factors, including the evolving economic outlook, values in the local real estate market, low net charge-offs, and refining our peer group selection to better align with peers whose loan portfolios reflect the composition of our own loan portfolio and the current local economic conditions.

The decrease in the allowance for credit losses as of September 30, 2024 as compared to December 31, 2023 was driven by various factors, including the evolving economic outlook, values in the local real estate market, low net charge-offs, and refining our peer group selection to better align with peers whose loan portfolios reflect the composition of our own loan portfolio and the current local economic conditions.

Adjusting this component of our estimate has

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In turn our CECL reserve percentage was decreased resulting in a $1.1 million reversal in our allowance for credit loss.

Comparison of Financial Condition at June 30, 2024 and December 31, 2023

Comparison of Financial Condition at September 30, 2024 and December 31, 2023

Total Assets.

Total assets were $516.0 million at June 30, 2024, an increase of $35.2 million, or 7.3%, compared to $480.8 million at December 31, 2023.

This increase is primarily due to $26.9 million increase in cash and cash equivalents, $4.2 million increase in investment securities available-for-sale, $2.9 million increase in loans receivable, net, and increase of $1.2 million in other assets.

Total assets were $523.8 million at September 30, 2024, an increase of $43.0 million, or 9.0%, compared to $480.8 million at December 31, 2023.

This increase is primarily due to $14.8 million increase in cash and cash equivalents, $25.9 million increase in investment securities available-for-sale, and $2.7 million increase in loans receivable, net.

Cash and Cash Equivalents.

Cash and cash equivalents increased by $26.9 million, or 139.4%, to $46.2 million at June 30, 2024 from $19.3 million at December 31, 2023.

Cash and cash equivalents increased by $14.8 million, or 76.6%, to $34.1 million at September 30, 2024 from $19.3 million at December 31, 2023.

This increase resulted primarily from the cash received for subscriptions to purchase shares of the Company’s common stock in its initial public offering.

The net proceeds of the public offering will be reflected in the Company’s consolidated shareholder’s equity at September 30, 2024.

The net proceeds of the public offering are reflected in Stockholders’ equity at September 30, 2024.

Investment Securities Available-for-Sale.

Investment securities available-for-sale increased $4.2 million, or 6.2%, to $72.1 million at June 30, 2024 from $67.9 million at December 31, 2023.

Securities purchased totaled $26.0 million during the six months ended June 30, 2024, securities sold totaled $18.7 million, and calls, maturities, and repayments totaled $3.3 million.

Investment securities available-for-sale increased $25.9 million, or 38.1%, to $93.8 million at September 30, 2024 from $67.9 million at December 31, 2023.

Securities purchased totaled $48.2 million during the nine months ended September 30, 2024, securities sold totaled $18.7 million, and calls, maturities, and repayments totaled $5.3 million.

Loans Receivable, Net.

Loans receivable, net, increased by $2.9 million, or 0.8%, to $367.9 million at June 30, 2024 from $365.0 million at December 31, 2023.

During the six months ended June 30, 2024, loan originations were $18.6 million and loan repayments totaled $16.8 million.

During the six months ended June 24, 2024 commercial and industrial loans increased by $2.7 million, primarily from the purchase of the guaranteed portion of government loans.

Our 1-4 single family mortgages decreased by $2.8 million, Home Equity loan decreased by $347,000, Construction loans increased by $2.1 million, and we reversed $1.1 million from our allowance for credit losses.

Deposits increased by $38.6 million, or 9.9%, to $428.6 million at June 30, 2024, from $390.0 million at December 31, 2023.

Certificates of deposit increased $11.1 million, or 4.8%, to $239.2 million at June 30, 2024, from $228.1 million at December 31, 2023.

Loans receivable, net, increased by $2.7 million, or 0.7%, to $367.7 million at September 30, 2024 from $365.0 million at December 31, 2023.

During the nine months ended September 30, 2024, loan originations were $26.9 million and loan repayments totaled $24.2 million.

During the nine months ended September 30, 2024, commercial and industrial loans increased by $3.7 million, primarily from the purchase of the guaranteed portion of government loans, and Bankers Healthcare loans.

1-4 single family mortgages decreased by $2.8 million, home equity loans decreased by $629,000, construction loans increased by $1.5 million, and we reversed $1.1 million from our allowance for credit losses.

Deposits decreased by $5.9 million, or 1.5%, to $384.1 million at September 30, 2024, from $390.0 million at December 31, 2023.

Certificates of deposit increased $3.6 million, or 1.59%, to $231.8 million at September 30, 2024, from $228.1 million at December 31, 2023.

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 $32.7 million, or 64.2%, to $83.5 million at June 30, 2024, from $50.8 million at December 31, 2023, primarily from the cash received for subscriptions to purchase shares of the Company’s common stock in its initial public offering.

Total Equity Capital.

Total equity capital increased by $232,000, or 0.3%, to $78.0 million at June 30, 2024, from $77.8 million at December 31, 2023.

The increase resulted 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 $681,000 and retained earnings decreasing $449,000 due to the net loss for the quarter ended June 30, 2024.

NOW accounts increased $2.0 million, or 3.9%, to $52.8 million at September 30, 2024, from $50.8 million at December 31, 2023.

MMDA accounts decreased $4.4 million, or 16.8%, to $22.0 million at September 30, 2024, from $26.4 million at December 31, 2023.

Savings Accounts decrease $7.1 million, or 8.37%, to $77.5 million at September 30, 2024, from $84.6 million at December 31, 2023.

Total Stockholders’ Equity.

Total stockholders’ equity increased by $50.1 million, or 64.4%, to $127.9 million at September 30, 2024, from $77.8 million at December 31, 2023.

The increase resulted from the sale of stock in the initial public offering that totaled $53.2 million, offset by the unearned ESOP of $4.3 million, 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 decreasing $1.2 million due to the net loss for the period ended September 30, 2024.

Average Balances and Yields .

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Net deferred loan fees/costs are immaterial.

For the Three Months Ended June 30,

For the Three Months Ended September 30,

Yield/Rate (4)

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Total interest-bearing deposits

Federal Home Loan Bank advances

Total interest-bearing liabilities

Noninterest-bearing demand deposits

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Total liabilities

Total equity capital

Total liabilities and equity capital

Total stockholders' equity

Total liabilities and stockholders' equity

Net interest income

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Average interest-earning assets to interest-bearing liabilities

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Yield/Rate (4)

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Cash and cash equivalents

Certificates of deposit at other institutions

Investment securities available-for-sale

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Total liabilities

Total equity capital

Total liabilities and equity capital

Total stockholders' equity

Total liabilities and stockholders' equity

Net interest income

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(4) Average yield/rate is an annualized amount.

Comparison of Operating Results for the Three Months Ended June 30, 2024 and 2023

Net income for the three months ended June 30, 2024, was $683,000, an increase of $479,000, or 234.8%, compared to $204,000 for the three months ended June 30, 2023.

The increase in net income was primarily due to an increase in interest income of $553,000, a $1 million recovery of credit losses on loans, an increase in non-interest income of $150,000, partially offset by an increase in interest expense of $897,000, an increase in non-interest expense of $199,000, and a $128,000 increase in provision for income taxes.

Interest Income.

Interest income increased by $553,000, or 13.5%, to $4.6 million for the three months ended June 30, 2024, compared to $4.1 million for the three months ended June 30, 2023.

The increase in interest income is attributed to a $322,000, or 9.2%, increase in interest on loans, a $160,000, or 97.6%, increase in interest on other interest-earning assets and $71,000, or 16.3%, increase in interest on investment securities available-for-sale.

During the three months ended June 30, 2024, average loans receivable, net, increased by $9.3 million, or 2.6%, from the three months ended June 30, 2023.

The average yield on loans increased to 4.16% for the three months ended June 30, 2024, from 3.91% for the three months ended June 30, 2023.

The average balance of investment securities available-for-sale decreased $11.3 million, or 15.3%, to $62.5 million for the three months ended June 30, 2024, from $73.7 million for the three months ended June 30, 2023.

The average yield on available-for-sale investment securities increased to 3.26% for the three months ended June 30, 2024, from 2.38% for the three months ended June 30, 2023.

Comparison of Operating Results for the Three Months Ended September 30, 2024 and 2023

Net income (loss) for the three months ended September 30, 2024, was ($788,000), a decrease of $827,000, or 2,120.5%, compared to $39,000 for the three months ended September 30, 2023.

The net loss was primarily from an increase in non-interest expense of $1.6 million resulting from a $1.3 million charitable contribution to establish the Fifth District Community Foundation, a $508,000 increase in interest expense, partially offset by a $1.0 million increase in interest income, and a $220,000 decrease in provision for income taxes.

Interest and Dividend Income.

Interest and dividend income increased by $1.0 million, or 25.0%, to $5.2 million for the three months ended September 30, 2024, compared to $4.2 million for the three months ended September 30, 2023.

The increase is attributed to a $252,000, or 7.0%, increase in interest on loans, a $433,000, or 346.4%, increase in interest on other interest-earning assets and $353,000, or 84.3%, increase in interest on investment securities available-for-sale.

During the three months ended September 30, 2024, average loans receivable, net, increased by $6.9 million, or 1.9%, from the three months ended September 30, 2023.

The average yield on loans increased to 4.16% for the three months ended September 30, 2024, from 3.96% for the three months ended September 30, 2023, due to the rising market rate environment.

The average balance of investment securities available-for-sale increased $13.4 million, or 19.4%, to $82.6 million for the three months ended September 30, 2024, from $69.2 million for the three months ended September 30, 2023.

The average yield on available-for-sale investment securities increased to 3.71% for the three months ended September 30, 2024, from 2.40% for the three months ended September 30, 2023.

The increase in the average yield on available-for-sale investment securities was primarily due to the rising market interest rate environment.

Interest income on cash and cash equivalents, comprised primarily of overnight deposits, increased by $159,000, or 100.6%, for the three months ended June 30, 2024, due to an increase in the average yield to 5.12% for the three months ended June 30, 2024, from 4.77% for the three months ended June 30, 2023.

Interest income on cash and cash equivalents, comprised primarily of overnight deposits, increased by $433,000, or 376.5%, for the three months ended September 30, 2024, due to an increase in the average yield to 5.37% for the three months ended September 30, 2024, from 4.80% for the three months ended September 30, 2023.

The increase in interest income was mainly due to the increase in the balance of cash and cash equivalents arising from the cash received for the purchase of stock in the IPO.

The increase in average yield was due to the rise in market interest rates.

Interest Expense .

Total interest expense increased $897,000 or 61.0%, to $2.4 million for the three months ended June 30, 2024, from $1.5 million for the three months ended June 30, 2023.

The increase was primarily due to the increase in the average cost of deposits to 2.36% for the three months ended June 30, 2024, from 1.51% for the three months ended June 30, 2023, reflecting the rising market interest rate environment.

The average balance of interest-bearing deposits increased by $11.4, or 2.9%, to $401.7 million for the three months ended June 30, 2024, from $390.3 million for the three months ended June 30, 2023.

Total interest expense increased $508,000 or 28.2%, to $2.3 million for the three months ended September 30, 2024, from $1.8 million for the three months ended September 30, 2023.

The increase was primarily due to the increase in the average cost of deposits to 2.27% for the three months ended September 30, 2024, from 1.81% for the three months ended September 30, 2023, reflecting the rising market interest rate environment.

The average balance of interest-bearing deposits increased by $18.7 million, or 4.9%, to $403.5 million for the three months ended September 30, 2024, from $384.8 million for the three months ended September 30, 2023.

Net Interest Income .

Net interest income decreased $344,000, or 13.1%, to $2.3 million for the three months ended June 30, 2024, compared to $2.6 million for the three months ended June 30, 2023.

The decrease reflects the decrease in the interest rate spread to 1.73% for the three months ended June 30, 2024, from 2.17% for the three months ended June 30, 2023, while average net interest-earning assets decreased $1.8 million period-to-period.

The net interest margin decreased to 2.0% for the three months ended June 30, 2024, from 2.36% for the three months ended June 30, 2023.

Both the interest rate spread and net interest margin decreased due to the rising interest rate environment.

The average yield on interest-earning assets increased from 3.68% for the three months ended June 30, 2023, to 4.09% for the three months ended June 30, 2024.

The average rate paid on interest-bearing liabilities increased from 1.51% for the three months ended June 30, 2023, to 2.36% for the three months ended June 30, 2024, primarily due to an increase in the average rate paid on certificates of deposit from 2.77% in 2023 to 3.87% in 2024.

Net interest income increased $530,000, or 22.5%, to $2.9 million for the three months ended September 30, 2024, compared to $2.4 million for the three months ended September 30, 2023.

The increase reflects the increase in the interest rate spread to 1.91% for the three months ended September 30, 2024, from 1.89% for the three months ended September 30, 2023, while average net interest-earning assets increased $36.0 million period-to-period.

The net interest margin increased to 2.32% for the three months ended September 30, 2024, from 2.11% for the three months ended September 30, 2023.

The average yield on interest-earning assets increased from 3.73% for the three months ended September 30, 2023, to 4.18% for the three months ended September 30, 2024.

The average rate paid on interest-bearing liabilities increased from 1.84% for the three months ended September 30, 2023, to 2.27% for the three months ended September 30, 2024, primarily due to an increase in the average rate paid on certificates of deposit from 3.22% in 2023 to 3.81% in 2024.

The increase in the average rate paid on certificates of deposit contributed to migration from lower yielding savings accounts and money market accounts, to higher yielding certificates of deposit.

The average balance of certificates of deposit increased from $202.3 million as of June 30, 2023, to $239.8 million as June 30, 2024, while over the same period the average balance of savings accounts decreased from $98.1 million to $82.9 million, and the average balance of money market accounts decreased from $35.4 million to $23.9 million.

The average balance of certificates of deposit increased from $208.6 million as of September 30, 2023, to $235.2 million as September 30, 2024, while over the same period the average balance of savings accounts decreased from $93.1 million to $79.8 million, and the average balance of money market accounts decreased from $31.7 million to $22.2 million.

Provision (Recovery) for Credit Losses .

The recovery of credit losses on loans increased $1 million to $1 million for the three months ended June 30, 2024, compared to no provision (recovery) for the three months ended June 30, 2023.

The recovery was primarily due to changes in the peer group for the CECL calculation.

The allowance for credit losses on loans represented 0.50% of total loans at June 30, 2024, and 0.99% of total loans at June 30, 2023.

The recovery of credit losses on loans decreased $100,000 to $0 for the three months ended September 30, 2024, compared to $100,000 for the three months ended September 30, 2023.

The allowance for credit losses on loans represented 0.46% of total loans at September 30, 2024, and 0.76% of total loans at September 30, 2023.

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 $1.1 million at June 30, 2024, compared to $213,000 at June 30, 2023.

The increase is due to our loans 90 or more days delinquent increasing from $86,000 at June 30, 2023 to $1.1 million at June 30, 2024.

Classified loans totaled $118,000 at June 30, 2024, compared to $86,000 at June 30, 2023.

As a percentage of

nonperforming loans, the allowance for credit losses on loans was 160.7% at June 30, 2024, compared to 1524.8% at June 30, 2023.

The recovery of credit losses on unfunded commitments increased $110,000 for the three months ended September 30, 2024 compared to no recovery for the three months ended September 30, 2023.

The recovery of credit losses on unfunded commitments is based on an evaluation of the historical usage rate.

Total non-performing loans were $647,000 at September 30, 2024, compared to $0 at September 30, 2023.

We did not have any loans over 90 days delinquent at September 30, 2023 compared to $647,000 at September 30, 2024.

Classified loans totaled $647,000 at September 30, 2024, compared to $106,000 at September 30, 2023.

As a percentage of nonperforming loans, the allowance for credit losses on loans was 262.6% at September 30, 2024, and there were no non-performing loans at September 30, 2023.

Noninterest Income .

Noninterest income totaled $400,000 for the three months ended June 30, 2024, an increase of $150,000, or 60.0%, from $250,000 for the three months ended June 30, 2023.

The increase was primarily due to the $140,000 gain on sale of real estate owned.

Noninterest income totaled $252,000 for the three months ended September 30, 2024, an increase of $3,000, or 1.2%, from $249,000 for the three months ended September 30, 2023.

Noninterest Expense .

Noninterest expense increased $199,000, or 7.6%, to $2.8 million for the three months ended June 30, 2024, compared to $2.6 million for the three months ended June 30, 2023.

The increase was primarily due to an increase in salaries and employee benefits of $95,000, or 6.2%, an increase in occupancy and equipment expense of $43,000, or 10.2%, an increase in data processing expense of $45,000, or 16.8%, an increase in audit and examination fees of $28,000, or 80.0%, and an increase in FDIC insurance premiums of $21,000, or 70.0%, offset by a $25,000, or 34.3%, decrease in advertising expense and a $16,000, or 18.0% decrease in directors fees.

Provision for Income Taxes .

The provision for income taxes increased by $128,000, or 237.0%, to $182,000 for the three months ended June 30, 2024, compared to $54,000 for the three months ended June 30, 2023.

The increase was due to a $607,000, or 235.3%, increase in pretax income.

Noninterest expense increased $1.6 million, or 59.9%, to $4.2 million for the three months ended September 30, 2024, compared to $2.7 million for the three months ended September 30, 2023.

The increase was primarily due to an increase in salaries and employee benefits of $243,000, or 15.9%, an increase in occupancy and equipment expense of $28,000, or 6.5%, an increase in professional and legal fees of $16,000, or 41.0%, an increase in data processing expense of $9,000, or 3.3%, an increase in audit and examination fees of $68,000, or 194.3%, and an increase in charitable contributions of $1.3 million, or 9,615.4% from establishing the Fifth District Community Foundation, partially offset by a $5,000, or 8.8%, decrease in FDIC insurance expense, an $18,000, or 19.8% decrease in directors fees, and a $25,000, or 45.5% decrease in advertising.

Provision (Benefit) for Income Taxes .

The provision (benefit) for income taxes decreased by $220,000, or 2,200.0%, to ($210,000) for the three months ended September 30, 2024, compared to $10,000 for the three months ended September 30, 2023.

The decrease was due to a $1.0 million, or 2,136.7%, decrease in pretax income.

The effective tax rate was 21% for both periods.

Comparison of Operating Results for the Six Months Ended June 30, 2024 and 2023

Net income (loss) for the six months ended June 30, 2024, was ($449,000), a decrease of $1.0 million, or 177.4%, compared to $580,000 for the six months ended June 30, 2023.

The decrease in net income was primarily due to an increase in interest expense of $2.1 million, an increase in non-interest expense of $310,000 and a decrease in non-interest income of $959,000, partially offset by a $918,000 increase in interest income, a $1.1 million recovery of credit losses on loans, and a $273,000 decrease in provision for income taxes.

Interest Income.

Interest income increased by $918,000, or 11.4%, to $8.9 million for the six months ended June 30, 2024, compared to $8.0 million for the six months ended June 30, 2023.

Comparison of Operating Results for the Nine Months Ended September 30, 2024 and 2023

Net income (loss) for the nine months ended September 30, 2024, was ($1.2) million, a decrease of $1.9 million, or 299.8%, compared to $619,000 for the nine months ended September 30, 2023.

The net loss was primarily from an increase in non-interest expense of $1.9 million resulting from a $1.3 million charitable contribution to establish the Fifth District Community Foundation, an increase in interest expense of $2.6 million, a decrease in non-interest income of $956,000, partially offset by an increase in interest income of $2.0 million, and a $493,000 decrease in provision for income taxes.

Interest and Dividend Income.

Interest and dividend income increased by $2.0 million, or 16.1%, to $14.1 million for the nine months ended September 30, 2024, compared to $12.2 million for the nine months ended September 30, 2023.

The increase in interest income is attributed to a $931,000, or 8.9%, increase in interest on loans, a $624,000, or 135.4%, increase in interest on other interest-earning assets and $402,000, or 31.6%, increase in interest on investment securities available-for-sale.

During the six months ended June 30, 2024, average loans receivable, net, increased by $11.0 million, or 3.1%, from the six months ended June 30, 2023.

The average yield on loans increased to 4.12% for the six months ended June 30, 2024, from 3.86% for the six months ended June 30, 2023.

The average balance of investment securities available-for-sale decreased $10.4 million, or 13.9%, to $64.5 million for the six months ended June 30, 2024, from $74.9 million for the six months ended June 30, 2023.

The average yield on available-for-sale investment securities increased to 2.81% for the six months ended June 30, 2024, from 2.29% for the six months ended June 30, 2023.

The increase in the average yield on available-for-sale investment securities was primarily due to the rising market interest rate environment.

Interest income on cash and cash equivalents, comprised primarily of certificate of deposit in other financial institutions and overnight deposits, increased by $187,000, or 57.4%, for the six months ended June 30, 2024, due to an increase in the average yield to 5.04% for the six months ended June 30, 2024, from 4.50% for the six months ended June 30, 2023.

During the nine months ended September 30, 2024, average loans receivable, net, increased by $9.6 million, or 2.7%, from the nine months ended September 30, 2023.

The average yield on loans increased to 4.13% for the nine months ended September 30, 2024, from 3.89% for the nine months ended September 30, 2023, due to the rising market interest rate environment.

The average balance of investment securities available-for-sale decreased $1.8 million, or 2.4%, to $71.2 million for the nine months ended September 30, 2024, from $73.0 million for the nine months ended September 30, 2023.

The average yield on available-for-sale investment securities increased to 3.13% for the nine months ended September 30, 2024, from 2.32% for the nine months ended September 30, 2023.

The increase in the average yield on

available-for-sale investment securities was primarily due to the rising market interest rate environment as well as selling low yielding bonds to reinvest in higher yielding bonds.

Interest income on cash and cash equivalents, comprised primarily of certificate of deposit in other financial institutions and overnight deposits, increased by $620,000, or 140.8%, for the nine months ended September 30, 2024, due to an increase in the average yield to 5.20% for the nine months ended September 30, 2024, from 4.55% for the nine months ended September 30, 2023.

The increase in average yield was due to the rise in market interest rates.

Interest Expense .

Total interest expense increased $2.1 million, or 79.9%, to $4.6 million for the six months ended June 30, 2024, from $2.6 million for the six months ended June 30, 2023.

The increase was primarily due to the increase in the average cost of deposits to 2.33% for the six months ended June 30, 2024, from 1.32% for the six months ended June 30, 2023, reflecting the rising market interest rate environment.

The average balance of interest-bearing deposits increased by $7.5 million, or 1.9%, to $397.8 million for the six months ended June 30, 2024, from $390.3 million for the six months ended June 30, 2023.

Total interest expense increased $2.6 million, or 58.6%, to $6.9 million for the nine months ended September 30, 2024, from $4.4 million for the nine months ended September 30, 2023.

The increase was primarily due to the increase in the average cost of deposits to 2.36% for the nine months ended September 30, 2024, from 1.48% for the nine months ended September 30, 2023, reflecting the rising market interest rate environment.

The average balance of interest-bearing deposits increased by $1.6 million, or 0.4%, to $390.0 million for the nine months ended September 30, 2024, from $388.4 million for the nine months ended September 30, 2023.

Net Interest Income .

Net interest income decreased $1.1, or 20.8%, to $4.3 million for the six months ended June 30, 2024, compared to $5.5 million for the six months ended June 30, 2023.

The decrease reflects the decrease in the interest rate spread to 1.64% for the six months ended June 30, 2024, from 2.29% for the six months ended June 30, 2023, while average net interest-earning assets decreased $1.2 million period-to-period.

The net interest margin decreased to 1.92% for the six months ended June 30, 2024, from 2.46% for the six months ended June 30, 2023.

Net interest income decreased $602,000, or 7.7%, to $7.2 million for the nine months ended September 30, 2024, compared to $7.8 million for the nine months ended September 30, 2023.

The decrease reflects the decrease in the interest rate spread to 1.67% for the nine months ended September 30, 2024, from 2.16% for the nine months ended September 30, 2023, while average net interest-earning assets increased $21.6 million period-to-period.

The net interest margin decreased to 2.06% for the nine months ended September 30, 2024, from 2.34% for the nine months ended September 30, 2023.

Both the interest rate spread and net interest margin decreased due to the rising interest rate environment.

The average yield on interest-earning assets increased from 3.61% for the six months ended June 30, 2023, to 3.97% for the six months ended June 30, 2024.

The average rate paid on interest-bearing liabilities increased from 1.32% for the six months ended June 30, 2023, to 2.33% for the six months ended June 30, 2024, primarily due to an increase in the average rate paid on certificates of deposit from 2.45% in 2023 to 3.81% in 2024.

The average yield on interest-earning assets increased from 3.65% for the nine months ended September 30, 2023, to 4.04% for the nine months ended September 30, 2024.

The average rate paid on interest-bearing liabilities increased from 1.49% for the nine months ended September 30, 2023, to 2.37% for the nine months ended September 30, 2024, primarily due to an increase in the average rate paid on certificates of deposit from 2.71% in 2023 to 3.81% in 2024.

The increase in the average rate paid on certificates of deposit contributed to migration from lower yielding savings accounts, NOW accounts and money market accounts, to higher yielding certificates of deposit.

The average balance of certificates of deposit increased from $197.6 million as of June 30, 2023, to $237.0 million as June 30, 2024, while over the same period the average balance of savings accounts decreased from $99.8 million to $83.2 million, the average balance of NOW accounts decreased from $55.2 million to $52.8 million and the average balance of money market accounts decreased from $37.7 million to $24.8 million.

The average balance of certificates of deposit increased from $201.3 million as of September 30, 2023, to $236.3 million as of September 30, 2024, while over the same period the average balance of savings accounts decreased from $97.5 million to $81.9 million, the average balance of NOW accounts decreased from $53.9 million to $48.0 million and the average balance of money market accounts decreased from $35.6 million to $23.9 million.

Provision (Recovery) for Credit Losses .

The recovery of credit losses on loans increased $1.1 million to $1.1 million for the six months ended June 30, 2024, compared to no provision (recovery) for the six months ended June 30, 2023.

The recovery of credit losses on loans increased $1.0 million to $1.1 million for the nine months ended September 30, 2024, compared to $100,000 for the nine months ended September 30, 2023.

The recovery was primarily due to changes in the peer group for the CECL calculation.

The allowance for credit losses on loans represented 0.50% of total loans at June 30, 2024, and 0.99% of total loans at June 30, 2023.

The allowance for credit losses on loans represented 0.46% of total loans at September 30, 2024, and 0.86% of total loans at September 30, 2023.

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 $1.1 million at June 30, 2024, compared to $213,000 at June 30, 2023.

The increase is due to our loans 90 or more days delinquent increasing from $86,000 at June 30, 2023 to $1.1 million at June 30, 2024.Classified loans totaled $118,000 at June 30, 2024, compared to $86,000 at June 30, 2023.

As a percentage of nonperforming loans, the allowance for credit losses on loans was 160.7% at June 30, 2024, compared to 1524.8% at June 30, 2023.

The recovery of credit losses on unfunded commitments increased $110,000 for the three months ended September 30, 2024 compared to no recovery for the three months ended September 30, 2023.

The recovery of credit losses on unfunded commitments is based on an evaluation of the historical usage rate.

Total non-performing loans were $647,000 at September 30, 2024, compared to $0 at September 30, 2023.

We did not have any loans over 90 days delinquent at September 30, 2023 compared to $647,000 at September 30, 2024.

Classified loans totaled $647,000 at September 30, 2024, compared to $106,000 at September 30, 2023.

As a percentage of nonperforming loans, the allowance for credit losses on loans was 262.6% at September 30, 2024, and there were no non-performing loans at September 30, 2023.

Noninterest Income (Loss) .

Noninterest income (loss) totaled ($482,000) for the six months ended June 30, 2024, a decrease of $959,000, or 201.1%, from $477,000 for the six months ended June 30, 2023.

The decrease was primarily due to the $1.1 million realized loss on the sale of investment securities available-for-sale discussed earlier and a $10,000, or 4.8%, decrease in ATM and check card fees, offset by a $33,000, or 22.3%, increase in the cash surrender value of the bank owned life insurance, and a $7,000, or 7.1%, increase in deposit service charges and fees.

Noninterest income (loss) totaled ($231,000) for the nine months ended September 30, 2024, a decrease of $956,000, or 131.9%, from $725,000 for the nine months ended September 30, 2023.

The decrease was primarily due to the $1.1 million realized loss on the sale of investment securities available-for-sale and a $10,000, or 3.3%, decrease in ATM and check card fees, offset by a $34,000, or 14.4%, increase in the cash surrender value of the

bank owned life insurance, a $13,000, or 8.6%, increase in deposit service charges and fees, and a $141,000 gain on sale of property.

Noninterest Expense .

Noninterest expense increased $310,000, or 6.0%, to $5.5 million for the six months ended June 30, 2024, compared to $5.2 million for the six months ended June 30, 2023.

The increase was primarily due to an increase in salaries and employee benefits of $139,000, or 4.6%, an increase in occupancy and equipment expense of $81,000, or 10.0%, an increase in data processing expense of $85,000, or 16.25%, an increase in audit and examination fees of $49,000, or 63.6%, a increase in other fees of $21,000 or 7.2%, and an increase in FDIC insurance premiums of $41,000, or 68.3%, offset by a $66,000, or 46.5%, decrease in advertising expense, and a $38,000, or 20.8% decrease in directors fees.

Noninterest expense increased $1.9 million, or 24.2%, to $9.8 million for the nine months ended September 30, 2024, compared to $7.9 million for the nine months ended September 30, 2023.

The increase was primarily due to an increase in salaries and employee benefits of $382,000, or 8.4%, an increase in occupancy and equipment expense of $109,000, or 8.8%, an increase in FDIC insurance of $36,000, or 30.8%, an increase in data processing expense of $93,000, or 11.7%, an increase in audit and examination fees of $118,000, or 105.4%, an increase in other fees of $45,000 or 11.6%, and an increase in charitable contributions of $1.3 million, or 3,289.5% from establishing the Fifth District Community Foundation, offset by a $90,000, or 45.7%, decrease in advertising expense, and a $56,000, or 20.4% decrease in directors fees.

Provision (Benefit) for Income Taxes .

The provision (benefit) for income taxes decreased by $273,000, or 177.3%, to ($119,000) for the six months ended June 30, 2024, compared to $154,000 for the six months ended June 30, 2023.

The provision (benefit) for income taxes decreased by $493,000, or 300.6%, to ($329,000) for the nine months ended September 30, 2024, compared to $164,000 for the nine months ended September 30, 2023.

The decrease was due to a $2.3 million, or 300.0%, decrease in pretax income.

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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.

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.

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Under the terms of the Bank Term Funding Program, advances cannot be obtained after March 11, 2024.

At June 30, 2024, we had no outstanding advances from the Federal Home Loan Bank of Dallas.

At June 30, 2024, we had no outstanding balances under the correspondent bank credit facilities and no outstanding balance under the Bank Term Funding Program.

Time deposits that meet or exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 at June 30, 2024 and December 31, 2023 were $43.4 million and $42.2 million, respectively.

Based on collateral pledged, consisting of all shares of FHLB stock owned and the blanket pledge of approximately $234.0 million of its qualifying mortgage loans as of June 30, 2024, the Bank was eligible to borrow up to an additional $169.8 million as of June 30, 2024.

The Bank has an unsecured federal funds line of credit with FNBB that expires on June 30, 2025.

The Bank is eligible to borrow up to $27.2 million.

There was no amount outstanding on this line of credit as of June 30, 2024 and December 31, 2023.

The Bank is eligible to borrow from TIB’s Federal Funds Purchase Line Program, which provides overnight liquidity through pledge of certain qualifying securities.

At September 30, 2024, we had no outstanding advances from the Federal Home Loan Bank of Dallas.

At September 30, 2024, we had no outstanding balances under the correspondent bank credit facilities and no outstanding balance under the Bank Term Funding Program.

Time deposits that meet or exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 at September 30, 2024 and December 31, 2023 were $45.2 million and $42.2 million, respectively.

Based on collateral pledged, consisting of all shares of FHLB stock owned and the blanket pledge of approximately $237.0 million of its qualifying mortgage loans as of September 30, 2024, the Company was eligible to borrow up to an additional $180.5 million as of September 30, 2024.

The Company has an unsecured federal funds line of credit with FNBB that expires on September 30, 2025.

The Company is eligible to borrow up to $27.2 million.

There was no amount outstanding on this line of credit as of September 30, 2024 and December 31, 2023.

The Company 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 June 30, 2024 and December 31, 2023.

There was no amount outstanding on this line of credit as of September 30, 2024 and December 31, 2023.

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.

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See the accompanying 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, 2024, the Company (on an unconsolidated basis) had liquid assets of $21.4 million.

We believe we maintain a strong liquidity position, and are committed to maintaining it.

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Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

At June 30, 2024, 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.

At September 30, 2024, 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 June 30, 2024, we had $22.1 million of outstanding commitments to originate loans, which primarily consists of $8.9 million of remaining funds to be disbursed on construction loans in process and $12.8 million of unused balances of home equity lines of credit.

At June 30, 2024, certificates of deposit that are scheduled to mature on or before June 30, 2025 totaled $225.2 million.

At September 30, 2024, we had $23.6 million of outstanding commitments to originate loans, which primarily consists of $8.4 million of remaining funds to be disbursed on construction loans in process and $13.4 million of unused balances of home equity lines of credit.

At September 30, 2024, certificates of deposit that are scheduled to mature on or before September 30, 2025 totaled $215.2 million.

Management expects that a substantial portion of the maturing certificates of deposit will be renewed.

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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 June 30, 2024, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.

The following table sets forth, as of September 30, 2024, 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 June 30, 2024

At September 30, 2024

EVE as a Percentage of Present Value

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(4) EVE Ratio represents EVE divided by the present value of assets.

The table above indicates that at June 30, 2024, we would have experienced a 33.35% decrease in EVE in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 24.68% increase in EVE in the event of an instantaneous 200 basis point decrease in market interest rates.

The table above indicates that at September 30, 2024, we would have experienced a 28.48% decrease in EVE in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 20.27% increase in EVE in the event of an instantaneous 200 basis point decrease in market interest rates.

Change in Net Interest Income.

The following table sets forth, as of June 30, 2024, 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.

The following table sets forth, as of September 30, 2024, 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 June 30, 2024

At September 30, 2024

Change in Interest Rates

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

The table above indicates that as of June 30, 2024, we would have experienced a 17.96% decrease in net interest income in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 2.99% increase in net interest income in the event of an instantaneous 200 basis point decrease in market interest rates.

The table above indicates that as of September 30, 2024, we would have experienced a 16.31% decrease in net interest income in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 2.52% 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.

8 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis