Business Context and Reporting Period
Fifth District Bancorp, Inc. was incorporated on February 15, 2024, to become the savings and loan holding company for Fifth District Savings Bank following the Bank’s planned mutual-to-stock conversion. As of March 31, 2024, the conversion had not been completed; the Company had no assets, liabilities, or operating activity other than organizational activities. The filing therefore primarily reports the Bank’s financial condition and results for the three months ended March 31, 2024, compared with March 31, 2023.
The conversion remained subject to regulatory approvals, member approval, and completion of the stock offering. No common shares were issued and outstanding as of June 21, 2024.
Key Financial Metrics
| Metric | March 31, 2024 / Q1 2024 | Comparable or Prior Period |
|---|---|---|
| Total assets | $485.7 million | $480.8 million at December 31, 2023 |
| Loans receivable, net | $365.4 million | $365.0 million at December 31, 2023 |
| Deposits | $400.4 million | $390.0 million at December 31, 2023 |
| Cash and cash equivalents | $36.6 million | $19.3 million at December 31, 2023 |
| Investment securities available-for-sale | $53.8 million | $67.9 million at December 31, 2023 |
| Total equity capital | $77.0 million | $77.8 million at December 31, 2023 |
| Net interest income | $2.0 million | $2.8 million in Q1 2023 |
| Net interest margin | 1.81% | 2.52% in Q1 2023 |
| Net income (loss) | $(1.1) million | $376,000 net income in Q1 2023 |
| Operating cash flow | $(770,000) | $667,000 provided in Q1 2023 |
Revenue, Profitability, and Margins
- Total interest and dividend income increased 9.3% to $4.3 million, principally due to higher loan balances and yields.
- Interest expense more than doubled to $2.3 million from $1.1 million, driven by higher deposit costs. The average cost of interest-bearing deposits increased to 2.28% from 1.12%, while the average certificate of deposit rate increased to 3.74% from 2.10%.
- Net interest income declined 27.8% to $2.0 million. The net interest rate spread narrowed to 1.51% from 2.38%, and net interest margin declined to 1.81% from 2.52%.
- Non-interest income changed from $229,000 of income to a $897,000 loss, primarily because of a $1.1 million realized loss on the sale of available-for-sale securities.
- Non-interest expense increased 3.6% to $2.7 million, including higher salaries, occupancy, data processing, audit and examination, and FDIC insurance costs.
- The Bank reported a $100,000 recovery of credit losses, compared with no provision or recovery in Q1 2023. The allowance for credit losses declined to $2.7 million, or 0.73% of total loans.
- The effective income tax rate was 21% in both periods; the tax benefit was $301,000 in Q1 2024 compared with $100,000 of tax expense in Q1 2023.
Cash Flow, Liquidity, and Capital
- Cash and cash equivalents increased by $17.3 million to $36.6 million, supported by $12.7 million of investing cash inflows and $5.4 million of financing cash inflows.
- Investing cash flow benefited from $19.7 million of securities sales or maturities, partly offset by $6.4 million of securities purchases and $272,000 of net loan growth.
- Deposits increased $10.4 million, primarily from a $10.5 million increase in certificates of deposit. Certificates of deposit maturing on or before March 31, 2025 totaled $223.2 million.
- The Bank had no outstanding FHLB advances, correspondent-bank borrowings, or Bank Term Funding Program borrowings at March 31, 2024. It reported potential additional FHLB borrowing capacity of $168.2 million, an unsecured federal funds line of $27.2 million, and a securities-backed overnight line of $15.0 million.
- Management stated that it expected sufficient funds to meet current commitments and anticipated that a substantial portion of maturing time deposits would renew.
- The Bank was categorized as well capitalized. At March 31, 2024, the Tier 1 leverage ratio was 17.04%, common equity Tier 1 and Tier 1 risk-based capital ratios were each 33.95%, and the total risk-based capital ratio was 35.09%.
Material Changes Versus Prior Comparable Period
- Net income deteriorated by approximately $1.5 million, from $376,000 of income to a $1.1 million loss.
- Higher funding costs reduced net interest income by $790,000 and compressed the net interest margin by 71 basis points.
- The Bank sold $18.7 million of low-yielding securities and recognized a $1.1 million pre-tax loss. Management stated that proceeds were reinvested in higher-yielding investments expected to benefit future earnings.
- Loans remained essentially flat at period-end, although average loans increased 3.6% year over year and the average loan yield increased to 4.06% from 3.80%.
- Deposits increased 2.7% from year-end, with customer balances migrating from lower-yielding transaction and money-market accounts into certificates of deposit.
- Accumulated other comprehensive loss improved by $301,000 during the quarter, but the securities portfolio still had $8.5 million of gross unrealized losses at March 31, 2024.
Outlook, Risks, Contingencies, and Unusual Items
- No formal financial guidance was provided.
- Management expects the securities repositioning toward higher-yielding investments to have a positive future earnings effect, but continuing deposit repricing and certificate-of-deposit renewals could keep funding costs elevated.
- Interest-rate risk is material. Management estimated that an immediate parallel 200-basis-point rate increase would reduce economic value of equity by 32.25% and first-year net interest income by 19.52%. The filing cautions that these models are based on assumptions and may not predict actual results.
- The available-for-sale portfolio contained 63 securities with $8.5 million of unrealized losses; 60 securities had been in a loss position for more than 12 months. Management attributed the losses to interest-rate and market conditions, did not identify them as credit losses, and stated that it did not intend or expect to be required to sell the securities before maturity.
- Loan commitments totaled approximately $23.0 million, including $7.2 million of remaining construction-loan disbursements and $12.7 million of unused home-equity lines.
- Nonperforming loans were $753,000 at March 31, 2024, including $212,000 of nonaccrual loans. The allowance for credit losses was 358.53% of nonperforming loans.
- Management disclosed material weaknesses in internal control over financial reporting related to the allowance for credit losses, including insufficient evidence of independent review and supporting documentation for methodologies, assumptions, qualitative factors, and the 2023 CECL adoption. Disclosure controls were consequently deemed ineffective.
- Management is pursuing remediation, including enhanced qualitative-factor documentation, updated appraisals, revised peer comparisons, allowance calculations for unfunded commitments, and independent review. The weaknesses will not be considered remediated until controls operate effectively for a sufficient testing period.
- Other risks include economic and real-estate conditions, deposit retention, access to cost-effective funding, competition, credit losses, regulatory changes, cybersecurity, third-party performance, and technology risks. The Company reported no pending legal proceedings expected to have a material adverse effect.
Important Facts for Investors to Verify
- Completion status, regulatory approvals, member approval, offering size, and timing of the mutual-to-stock conversion.
- Whether the securities portfolio repositioning produces the expected improvement in earnings without requiring additional realized losses.
- Deposit retention and repricing trends, particularly the renewal rate and cost of the $223.2 million of certificates of deposit maturing through March 31, 2025.
- Progress in remediating the material weaknesses related to the allowance for credit losses and whether future filings report effective controls.
- Changes in net interest margin, deposit costs, loan demand, delinquencies, nonperforming loans, and the allowance for credit losses.
- Liquidity availability and collateral capacity if deposits decline or funding costs increase.
- Actual results compared with the filing’s interest-rate sensitivity estimates, recognizing that modeled outcomes are not forecasts.