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Item 2. Management’s Discussion and Analysis

2025-05-13 compared with 2024-11-14 · 88 added, 181 removed, 172 unchanged (61% of the section changed)

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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 business and financial information contained in this report and in the Company’s definitive prospectus dated May 10, 2024, as filed with the Securities and Exchange Commission on May 20, 2024.

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

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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 prospectus.

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:

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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 financial statements, which are prepared in conformity with GAAP.

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 policy discussed below to be our critical accounting policy.

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 Jumpstart Our Business Startups Act of 2012 (JOBS Act) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies.

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 financial statements may not be comparable to companies that comply with such new or revised accounting standards.

Accordingly, our consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.

We consider the accounting policy for the allowance for credit losses to be our critical accounting policy.

Effective January 1, 2023, we adopted the Current Expected Credit Loss (CECL) methodology.

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.

For reporting periods before January 1, 2023 and the adoption of CECL, we used the incurred loss impairment method to estimate the allowance for loan losses on loans receivable.

Under the incurred loss impairment methodology, the allowance for loan losses was based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, and other factors, and consisted of allocated and unallocated components.

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 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 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 related to key methodologies, assumptions, and calculations, including support for the qualitative factors, utilized in the allowance for credit losses as of September 30, 2024 and December 31, 2023;

● 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.

These material weaknesses could result in misstatements of our allowance for credit losses and related disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected.

We intend to remediate these material weaknesses.

We currently are assessing and improving our processes and control procedures to ensure they will operate at an acceptable level of assurance.

The remedial measures we will take to address these material weaknesses include calculating an allowance for credit losses on unfunded commitments;

revising the peer group of institutions to include institutions whose loan portfolios better reflect the composition of our loan portfolio;

obtaining updated independent appraisals for loans being evaluated for impairment;

enhancing qualitative factors support to include data points tied to a specified timeframe, such as, for example, the unemployment rate, to consistently allocate basis point reserves for each reporting period;

using qualitative factors to adjust the allowance for credit losses for economic conditions that impact us and documenting the adjustments in a narrative accompanying the allowance calculation;

and assigning an independent individual to review the allowance calculation to assure its accuracy and completeness.

We believe these actions and any other that we may determine need to be implemented, when complete, will remediate the control weaknesses.

However, the weaknesses will not be considered fully remediated until the applicable controls operate for a sufficient period of time for management to test the results for operating effectiveness.

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 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

resulted in a reduced peer group loss rate and corresponding adjustments to our peer comparisons.

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 September 30, 2024 and December 31, 2023

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 March 31, 2025 and December 31, 2024

Total 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.

Total assets were $531.1 million at March 31, 2025, an increase of $3.8 million, or 0.7%, compared to $527.3 million at December 31, 2024.

This increase is primarily due to $3.2 million increase in investment securities available-for-sale, an $8.9 million increase in loans receivable, net, offset by a $7.8 million decrease in cash and cash equivalents.

Cash and Cash Equivalents.

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 are reflected in Stockholders’ equity at September 30, 2024.

Cash and cash equivalents decreased by $7.8 million, or 20.6%, to $30.1 million at March 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 commercial loans.

Investment Securities Available-for-Sale.

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.

Investment securities available-for-sale increased $3.2 million, or 3.4%, to $96.2 million at March 31, 2025 from $93.0 million at December 31, 2024.

Securities purchased totaled $5.0 million during the three months ended March 31, 2025, and calls, maturities, and repayments totaled $3.4 million.

Loans Receivable, Net.

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 $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.

Loans receivable, net, increased by $9.0 million, or 2.5%, to $376.3 million at March 31, 2025 from $367.3 million at December 31, 2024.

During the three months ended March 31, 2025, loan originations were $17.8 million and loan repayments totaled $8.9 million.

During the three months ended March 31, 2025, commercial loans increased by $1.8 million, primarily from the origination of commercial real estate loans, and the purchase of Bankers Healthcare loans, 1-4 single family mortgages increased by $3.7 million, home equity loans increased by $524,000, consumer loans increased by $1.1 million, and construction loans increased by $2.0 million.

Deposits increased by $2.9 million, or 0.7%, to $394.4 million at March 31, 2025, from $391.5 million at December 31, 2024.

Certificates of deposit increased $601,000, or .25%, to $239.4 million at March 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 accounts.

NOW accounts increased $1.8 million, or 3.2%, to $55.7 million at March 31, 2025, from $53.9 million at December 31, 2024.

MMDA accounts decreased $1.4 million, or 6.2%, to $21.3 million at March 31, 2025, from $22.7 million at December 31, 2024.

Savings Accounts increased $2.0 million, or 2.6%, to $78.0 million at March 31, 2025, from $76.0 million at December 31, 2024.

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.

Total stockholders’ equity increased by $1.5 million, or 1.2%, to $127.3 million at March 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 $1.3 million and retained earnings increasing $78,000 due to the net income for the period ended March 31, 2025.

Average Balances and Yields .

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Net deferred loan fees/costs are immaterial.

For the Three Months Ended September 30,

Yield/Rate (4)

Interest-earning assets:

Cash and cash equivalents

Investment securities available-for-sale

Loans receivable, net

Restricted stock

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

Savings accounts

Money market accounts

Certificates of deposit

Total interest-bearing deposits

Federal Home Loan Bank advances

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Other noninterest-bearing liabilities

Total liabilities

Total stockholders' equity

Total liabilities and stockholders' equity

Net interest income

Net interest rate spread (1)

Net interest-earning assets (2)

Net interest margin (3)

Average interest-earning assets to interest-bearing liabilities

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Yield/Rate (4)

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

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.

Comparison of Operating Results for the Three Months Ended March 31, 2025 and 2024

Net income (loss) for the three months ended March 31, 2025, was $78,000, an increase of $1.2 million, or 106.9%, compared to ($1.1) million for the three months ended March 31, 2024.

The net income was primarily from an increase in interest income of $909,000, an increase in non-interest income of $1.2 million, partially offset by a $416,000 increase in non-interest expense, and a $322,000 increase 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.

Interest and dividend income increased by $909,000, or 21.0%, to $5.2 million for the three months ended March 31, 2025, compared to $4.3 million for the three months ended March 31, 2024.

The increase is attributed to a $313,000, or 8.5%, increase in interest on loans, a $91,000, or 45.1%, increase in interest on other interest-earning assets and $505,000, or 127.5%, 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 $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.

During the three months ended March 31, 2025, average loans receivable, net, increased by $5.3 million, or 1.5%, from the three months ended March 31, 2024.

The average yield on loans increased to 4.40% for the three months ended March 31, 2025, from 4.06% for the three months ended March 31, 2024, due to the rising market rate environment.

The average balance of investment securities available-for-sale increased $28.3 million, or 42.7%, to $94.6 million for the three months ended March 31, 2025, from $66.3 million for the three months ended March 31, 2024.

The average yield on available-for-sale investment securities increased to 3.86% for the three months ended March 31, 2025, from 2.39% for the three months ended March 31, 2024.

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 reinvesting in higher yielding bonds

Interest income on cash and cash equivalents, comprised primarily of overnight deposits, increased by $91,000, or 46.7%, for the three months ended March 31, 2025, primarily due to an increase in the average yield to 4.03% for the three months ended March 31, 2025, from 3.78% for the three months ended March 31, 2024.

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

The average balance of cash and cash equivalents increased by $8.2 million to $28.8 million from the three months ended March 31, 2025, from $20.6 million for the three months ended March 31, 2024.

Interest Expense .

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.

Total interest expense increased $20,000 or 0.9%, to $2.3 million for the three months ended March 31, 2025, from $2.3 million for the three months ended March 31, 2024.

The increase was primarily due to the increase in the average cost of deposits to 2.36% for the three months ended March 31, 2025, from 2.29% for the three months ended March 31, 2024, reflecting the rising market interest rate environment.

The average balance of interest-bearing deposits decreased by $3.9 million, or 1.0%, to $389.7 million for the three months ended March 31, 2025, from $393.5 million for the three months ended March 31, 2024.

Net Interest Income .

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.

Net interest income increased $889,000, or 43.4%, to $2.9 million for the three months ended March 31, 2025, compared to $2.0 million for the three months ended March 31, 2024.

The increase reflects the increase in the interest rate spread to 1.91% for the three months ended March 31, 2025, from 1.51% for the three months ended March 31, 2024, while average net interest-earning assets increased $46.1 million period-to-period.

The net interest margin increased to 2.41% for the three months ended March 31, 2025, from 1.81% for the three months ended March 31, 2024.

The average yield on interest-earning assets increased from 3.80% for the three months ended March 31, 2024, to 4.27% for the three months ended March 31, 2025.

The average rate paid on interest-bearing liabilities increased from 2.28% for the three months ended March 31, 2024, to 2.36% for the three months ended March 31, 2025, primarily due to an increase in the average rate paid on certificates of deposit from 3.74% in 2024 to 3.79% in 2025.

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 $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 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.

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 $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 $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 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 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 $2.6 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 $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 3.65% 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 $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.

The average balance of certificates of deposit increased from $234.3 million as of March 31, 2024, to $238.2 million as March 31, 2025, while over the same period the average balance of savings accounts decreased from $83.5 million to $77.0 million, and the average balance of money market accounts decreased from $25.7 million to $21.7 million.

Provision (Recovery) for Credit Losses .

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 0.46% of total loans at September 30, 2024, and 0.86% of total loans at September 30, 2023.

The recovery of credit losses on loans decreased $100,000 to $0 for the three months ended March 31, 2025, compared to $100,000 for the three months ended March 31, 2024.

The allowance for credit losses on loans represented 0.45% of total loans at March 31, 2025 and 0.46% of total loans at March 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 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.

Total non-performing loans were $758,000 at March 31, 2025, compared to $753,000 at March 31, 2024.

We had $145,000 of loans over 90 days delinquent at March 31, 2025, compared to $753,000 at March 31, 2024.

Classified loans totaled $758,000 at March 31, 2025, compared to $212,000 at March 31, 2024.

As a percentage of nonperforming loans, the allowance for credit losses on loans was 224.1% at March 31, 2025, and 225.6% at March 31, 2024.

Noninterest Income (loss) .

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 income (loss) totaled $262,000 for the three months ended March 31, 2025, an increase of $1.2 million, or 129.2%, from ($897,000) for the three months ended March 31, 2024.

A $1.1 million realized loss on the sale of investment securities available-for-sale was recorded during the three months ended March 31, 2024, compared to no such realized losses recorded during the three months ended March 31, 2025.

Noninterest Expense .

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.

Noninterest expense increased $416,000, or 15.5%, to $3.1 million for the three months ended March 31, 2025, compared to $2.7 million for the three months ended March 31, 2024.

The increase was primarily due to an increase in salaries and employee benefits of $258,000, or 16.5%, an increase in occupancy and equipment expense of $50,000, or 11.7%, an increase in professional and legal fees of $22,000, or 57.9%, an increase in data processing expense of $24,000, or 8.2%, an increase in audit and examination fees of $22,000, or 34.9%, and an increase in other expenses of $45,000, or 30.8%, partially offset by a $9,000, or 32.1%, decrease advertising.

Provision (Benefit) for Income Taxes .

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.

The provision (benefit) for income taxes increased by $322,000, or 107.0%, to $21,000 for the three months ended March 31, 2025, compared to ($301,000) for the three months ended March 31, 2024.

The increase was due to a $1.5 million, or 106.9%, increase in pretax income.

The effective tax rate was 21% for both periods.

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

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.

At March 31, 2025, we had no outstanding advances from the Federal Home Loan Bank of Dallas.

At March 31, 2025, 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 March 31, 2025 and December 31, 2024 were $45.3 million and $48.3 million, respectively.

Based on collateral pledged, consisting of all shares of FHLB stock owned and the blanket pledge of approximately $234.2 million of its qualifying mortgage loans as of March 31, 2025, the Bank was eligible to borrow up to an additional $184.5 million as of March 31, 2025.

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 March 31, 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, 2024 and December 31, 2023.

There was no amount outstanding on this line of credit as of March 31, 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.

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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.

At March 31, 2025, the Company (on an unconsolidated basis) had liquid assets of $21.8 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 September 30, 2024, the Bank was categorized as well-capitalized under applicable bank regulatory capital guidelines.

At March 31, 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, 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.

At March 31, 2025, we had $24.6 million of outstanding commitments to originate loans, which primarily consists of $9.9 million of remaining funds to be disbursed on construction loans in process and $14.2 million of unused balances of home equity lines of credit.

At March 31, 2025, certificates of deposit that are scheduled to mature on or before March 31, 2026 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 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.

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

At March 31, 2025

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 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.

The table above indicates that at March 31, 2025, we would have experienced a 27.48% decrease in EVE in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 19.34% 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 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.

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

At March 31, 2025

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 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.

The table above indicates that as of March 31 2025, we would have experienced a 15.70% decrease in net interest income in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 4.50% 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