FDSB

Business Context and Reporting Period

Fifth District Bancorp, Inc. (the "Company") is a savings and loan holding company formed to serve as the parent of Fifth District Savings Bank (the "Bank"). As of June 30, 2024, the Company had no assets or liabilities and had not conducted business activities other than organizational activities. The financial statements presented relate primarily to the Bank. The Bank's conversion from a mutual to a stock form of organization was consummated on July 31, 2024. This report covers the quarterly period ended June 30, 2024.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income for Q2 2024 was $683,000, a 234.8% increase from $204,000 in Q2 2023. However, the Bank reported a net loss of $449,000 for the six months ended June 30, 2024, compared to net income of $580,000 in the prior year period.
• Interest Rates and Margins: Net interest income decreased 13.1% in Q2 and 20.8% YTD compared to the prior year. The Net Interest Margin (NIM) compressed to 2.00% in Q2 (from 2.36% in Q2 2023) and 1.92% YTD (from 2.46% YTD 2023) due to rising deposit costs outpacing asset yield growth.
• Asset Growth: Total assets increased 7.3% to $516.0 million, driven primarily by a $26.9 million increase in cash and cash equivalents (139.4% increase) and a $4.2 million increase in investment securities.
• Deposit Growth: Total deposits increased 9.9% to $428.6 million. Noninterest-bearing deposits surged from $0.8 million to $33.3 million, largely due to cash received from subscriptions for the Company's common stock in its initial public offering.
• Provision for Credit Losses: The Bank recorded a $1.1 million recovery of credit losses for the six months ended June 30, 2024, compared to no provision in the prior year. This was driven by a refinement of the peer group selection for the CECL calculation and low net charge-offs.
• Non-Interest Income: YTD non-interest income turned negative at ($482,000) due to a $1.1 million realized loss on the sale of investment securities available-for-sale.

Guidance, Outlook, Risks, and Unusual Items

• Conversion Status: The Bank successfully converted to a stock form of organization on July 31, 2024. The Company sold 5,459,473 shares of common stock at $10.00 per share.
• Internal Control Weaknesses: Management identified material weaknesses in internal control over financial reporting regarding the allowance for credit losses. Specifically, there was insufficient evidence of independent review and supporting documentation for key methodologies and qualitative factors. Remediation plans are underway.
• Interest Rate Risk: The Bank is exposed to interest rate risk. Modeling indicates that a 200 basis point increase in rates would decrease Economic Value of Equity (EVE) by 33.35% and Net Interest Income by 17.96% in Year 1.
• Asset Quality: Non-performing loans increased to $1.1 million (0.30% of total loans) from $213,000 in the prior year, primarily due to loans 90+ days delinquent. The allowance for credit losses covers 160.7% of non-performing loans.
• Liquidity: The Bank maintains a strong liquidity position with $46.2 million in cash and cash equivalents and access to additional borrowing capacity of approximately $169.8 million through the Federal Home Loan Bank.

Investor Verification Checklist

• Remediation of Material Weaknesses: Verify the progress of remediation efforts regarding the allowance for credit losses internal controls to ensure future financial statement reliability.
• Deposit Composition: Analyze the sustainability of the $33.3 million in noninterest-bearing deposits, which were largely driven by IPO subscription proceeds rather than organic growth.
• Investment Portfolio Losses: Review the $1.1 million realized loss on the sale of available-for-sale securities and assess the remaining unrealized losses ($8.1 million) in the portfolio.
• Net Interest Margin Trajectory: Monitor the ability to manage deposit costs as the Bank transitions to a stock form and competes for deposits in a higher-rate environment.
• Asset Quality Trends: Track the increase in loans 90+ days delinquent to ensure the $1.1 million recovery in the allowance for credit losses was not overly aggressive given the rise in delinquencies.