Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (the “Company”) consolidated financial condition at March 31, 2026 and consolidated results of operations for the three months ended March 31, 2026 and 2025. It should be read in conjunction with the unaudited consolidated financial statements and the related notes appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements, and notes, contained in the Annual Report on Form 10-K for the year ended December 31, 2025.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:
● statements of our goals, intentions and expectations;
● statements regarding our business plans, prospects, growth and operating strategies;
● statements regarding the quality of our loan and investment portfolios; and
● estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
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:
● our ability to control costs and manage liquidity;
● our ability to maintain our deposit base cost-effectively and access cost-effective funding;
● general economic conditions, either nationally or in our market areas, which are worse than expected;
● changes in yields on our assets resulting from changes in market interest rates;
● fluctuation in the demand for construction loans in our market area;
● changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
● risks related to a high concentration of loans secured by 1-4 family real estate located in our market area;
● risks related to higher levels of commercial real estate and development loans;
● our ability to control costs when hiring employees in a competitive labor market and rural area;
● our ability to control cost and expenses, particularly those associated with operating a publicly traded company;
● fluctuations in real estate values and market conditions in both residential and commercial real estate;
● demand for loans and deposits in our market area;
● our ability to implement and change our business strategies;
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● competition among depository and other financial institutions and brokers;
● inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of our investment securities and other financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
● adverse changes in the securities or secondary mortgage markets;
● changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
● changes in tax laws;
● changes in the quality or composition of our loan or investment portfolios;
● technological changes that may be more difficult or expensive than expected;
● the inability of third-party providers to perform as expected;
● a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
● our ability to manage market risk, credit risk and operational risk;
● our ability to enter new markets successfully and capitalize on growth opportunities;
● changes in consumer spending, borrowing and savings habits;
● changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
● changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or strategic plan implementation;
● changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Summary of Critical Accounting Policies; Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The Jumpstart Our Business Startups Act of 2012 (JOBS Act) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we had the option to delay adoption of new or revised accounting pronouncements applicable to public companies until such
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pronouncements are made applicable to private companies. However, we have determined not to take advantage of the benefits of this extended transition period.
The following represent our critical accounting policies:
Allowance for Credit Losses. The allowance for credit losses applies to any financial asset carried at amortized cost, including off-balance sheet commitments (unfunded commitments). The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. The Company uses the weighted average remaining maturity (WARM) method to estimate future expected losses for all of the Company’s loan pools. The allowance for credit losses on loans is a reserve for estimated current expected credit losses on individually evaluated loans determined to be impaired as well as estimated current expected credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for credit losses. Loans are charged off when management believes that the collectability of the principal is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. A provision for credit losses, which is a charge against earnings, is recorded to bring the allowance for credit losses to a level that, in management’s judgment, is adequate to absorb current expected losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for credit losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect current expected credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated credit losses and therefore the appropriateness of the allowance for credit losses could change significantly.
For additional information regarding the allowance for credit losses, see notes 1 and 4 of the notes to the accompanying consolidated financial statements.
Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.
The Company files consolidated federal income tax returns with its subsidiaries. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
Comparison of Financial Condition at March 31, 2026 and December 31, 2025
Total Assets. Total assets were $430.4 million at March 31, 2026, an increase of $604,000, or 0.1%, from $429.8 million at December 31, 2025. The increase was due primarily to an increase of $4.6 million in interest bearing deposits in banks, offset by a $4.7 million decrease in net loans and leases.
Cash and Cash Equivalents. Cash and cash equivalents were unchanged at $6.5 million at March 31, 2026 and December 31, 2025. This included fed funds sold balances of $3.2 million at March 31, 2026 and $2.6 million at December 31, 2025.
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Interest Bearing Deposits in Banks. Interest bearing deposits in banks increased $4.6 million, or 83.6%, to $10.1 million at March 31, 2026, compared to $5.5 million at December 31, 2025. This increase was primarily the result of a decrease in net loans and leases receivable of $4.7 million, an increase in deposits of $4.1 million, and partially offset by a $4.1 million decrease in advances from the Federal Home Loan Bank.
Securities Available for Sale. Securities available for sale increased by $177,000, or 0.3%, to $60.1 million at March 31, 2026 from $59.9 million at December 31, 2025. During the three months ended March 31, 2026, there were purchases of securities of $1.5 million offset by net paydowns of $927,000. Accumulated other comprehensive loss increased by $309,000, or 9.7%, to $3.4 million, net of tax, from $3.1 million, net of tax, due primarily to changes in market interest rates. Gross unrealized losses on the AFS portfolio consisting of 67 securities increased from $3.9 million, or 6.1% of the portfolio’s amortized cost of $63.8 million at December 31, 2025, to $4.3 million, or 6.7%, of the amortized cost of $64.3 million at March 31, 2026. These unrealized losses are primarily due to increases in market interest rates. At March 31, 2026, the AFS portfolio was comprised of 59.6% collateralized mortgage obligations, 16.1% corporate bonds, 14.3% State and municipal securities, and 10.0% residential mortgage backed securities.
Securities Held to Maturity. Securities held to maturity decreased by $762,000, or 4.4%, to $17.5 million at March 31, 2026 from $18.3 million at December 31, 2025. This decrease is due to paydowns of $729,000. The HTM portfolio had 60 securities with gross unrealized losses of $1.7 million, or 9.7%, of the amortized cost of $17.5 million at March 31, 2026 compared to $1.5 million, or 8.2%, of the amortized cost of $18.3 million at December 31, 2025. These unrealized losses are due to increases in market interest rates. At March 31, 2026, the HTM portfolio was comprised of 88.2% residential mortgage backed securities, 6.8% state and municipal securities and 5.0% U.S government and agency bonds.
Loans and Leases Receivable, Net. Net loans and leases receivable decreased $4.7 million, or 1.6%, to $298.5 million at March 31, 2026 from $303.2 million at December 31, 2025. The decrease in loans was primarily due to the payoff of a $7.7 million multifamily loan in the first quarter of 2026. There were new loan originations of $23.5 million partially offset by payoffs, other principal reductions, and contractual repayments.
The loan and lease portfolio totaled $301.9 million and was comprised of $273.3 million, or 90.5%, real estate loans, $9.3 million, or 3.1%, commercial and industrial loans, $15.2 million, or 5.0%, municipal loans and $4.1 million, or 1.4%, consumer loans and other loans. Real estate loans include $145.9 million, or 48.3%, 1-4 family residential loans, $3.2 million, or 1.1%, multi-family loans, $64.0 million, or 21.2%, commercial real estate (CRE) loans, $17.5 million, or 5.8%, farmland loans, $11.8 million, or 3.9%, 1-4 family construction loans, and $30.9 million, or 10.2%, other construction and development loans. Total loans include interim construction loans of $18.5 million, or 58.3%, of the completed project balance of $31.8 million which includes $20.2 million in single-family residence loans, including $10.5 million in speculative construction loans to builders, $1.7 million in subdivision construction, $1.1 million in multi-family construction loans and $8.8 million in CRE loans. The total construction loan portfolio consisted of 56 loans with completed project balances of $31.8 million at March 31, 2026 compared to 54 loans totaling $36.0 million at December 31, 2025.
At March 31, 2026, commercial real estate loans consisted of $28.2 million owner occupied and $35.8 million non-owner occupied real estate. At March 31, 2026, commercial real estate loans primarily included loans collateralized by gas stations with convenience stores ($17.0 million), self-storage facilities ($15.5 million), and commercial rental properties ($12.8 million). The maximum loan-to-value ratio of our commercial real estate loans is generally 80%. Generally, we require the debt service coverage ratio to be at least 1.2x. The significant majority of our commercial real estate loans are appraised by outside independent appraisers approved by the board of directors. Personal guarantees are generally obtained from the principals of commercial real estate borrowers. We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial conditions of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property, debt service capabilities, global cash flows of the borrower and other guarantors, and the borrower’s payment history with us and other financial institutions.
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Other Real Estate Owned. Other real estate owned decreased $167,000, or 1.8%, to $9.1 million at March 31, 2026 from $9.3 million at December 31, 2025 due to the sale of a bank owned property in the first quarter of 2026. At March 31, 2026, there are three remaining properties including a residential development property in Dallas, Texas with a carrying value of $1.3 million, a commercial development property in North Richland Hills, Texas with a carrying value of $2.1 million, and a multi-family property in our primary service area with a carrying value of $5.7 million. We are actively marketing all three other real estate owned properties.
Deposits. Deposits increased $4.1 million, or 1.3%, to $332.0 million at March 31, 2026 from $327.9 million at December 31, 2025. Core deposits (defined as all deposits other than certificates of deposit) increased $4.9 million, or 2.5%, to $199.0 million at March 31, 2026 from $194.1 million at December 31, 2025. Certificates of deposit decreased $1.5 million, or 1.4%, to $111.5 million at March 31, 2026 from $113.1 million at December 31, 2025. At March 31, 2026, there were $18.0 million in brokered deposits and $3.5 million in listed deposits. Average cost of interest-bearing deposits decreased 12 basis points, or 5.0%, to 2.33% for the three months ended March 31, 2026 compared to 2.45% for the three months ended March 31, 2025. At March 31, 2026, there were 201 accounts with balances in excess of the $250,000 FDIC insurance limit with an aggregate balance of $98.7 million, or 29.7% of deposits. The amount that was over the FDIC insurance limit was $48.5 million, or 14.6%, that was potentially uninsured, including certificates of deposit of $13.0 million, money market and savings accounts of $16.5 million and $19.0 million in checking accounts.
Advances from Federal Home Loan Bank. Advances from Federal Home Loan Bank decreased $4.1 million, or 9.0%, to $41.6 million at March 31, 2026 from $45.7 million at December 31, 2025, as two advances totaling $4.0 million were repaid prior to maturity. There are three short-term advances remaining totaling $13.0 million that will mature in 2026.
Total Shareholders’ Equity. Total shareholders’ equity increased $477,000, or 0.9%, to $54.2 million at March 31, 2026 from $53.8 million at December 31, 2025. This increase was primarily due to net income of $836,000 for the three months ended March 31, 2026, an increase of $37,000 from stock-based compensation expense, and an increase of $56,000 from the accrual of ESOP commitments. This was partially offset by a $309,000 increase in accumulated other comprehensive loss, net of tax, and quarterly dividends paid totaling $143,000.
At March 31, 2026, Broadstreet Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes. A community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements. At March 31, 2026, Broadstreet Bank was well capitalized and had a leverage ratio of 11.97%.
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Average Balance Sheets
The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are only included in the computation of average balances. Average yields for loans include loan fees of $166,000 and $121,000 for the three months ended March 31, 2026 and 2025, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.
For the Three Months Ended March 31,
2026
2025
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans
$
303,040
$
4,654
6.14
%
$
299,454
$
4,400
5.88
%
Allowance for credit losses
(3,439)
(3,244)
Securities
78,030
762
3.91
%
96,100
1,028
4.28
%
Restricted investments
2,776
34
4.90
%
3,630
50
5.51
%
Interest bearing deposits in banks
6,542
59
3.61
%
9,423
104
4.41
%
Federal funds sold
6,813
61
3.58
%
5,643
62
4.39
%
Financial derivative
—
—
—
(10)
Total interest earning assets
393,762
5,570
5.66
%
411,006
5,634
5.48
%
Noninterest earning assets
38,501
29,135
Total assets
$
432,263
$
440,141
Interest-bearing liabilities:
Interest bearing demand deposits
$
60,932
83
0.54
%
$
71,719
113
0.63
%
Regular savings and other deposits
41,503
35
0.34
%
43,233
35
0.32
%
Money market deposits
46,759
278
2.38
%
47,666
327
2.74
%
Certificates of deposit
134,003
1,252
3.74
%
130,974
1,324
4.04
%
Total interest bearing deposits
283,197
1,648
2.33
%
293,592
1,799
2.45
%
Advances from FHLB
45,382
489
4.31
%
49,674
503
4.05
%
Other liabilities
155
2
5.16
%
524
4
3.05
%
Total interest bearing liabilities
328,734
2,139
2.60
%
343,790
2,306
2.68
%
Noninterest bearing demand deposits
50,454
48,905
Other noninterest bearing liabilities
4,078
3,915
Total liabilities
383,266
396,610
Total shareholders’ equity
48,997
43,531
Total liabilities and shareholders' equity
$
432,263
$
440,141
Net interest income
$
3,431
$
3,328
Net interest rate spread (1)
3.06
%
2.80
%
Net interest earning assets (2)
$
65,028
$
67,216
Net interest margin (3)
3.49
%
3.24
%
Average interest earning assets to interest bearing liabilities
119.78
%
119.55
%
(1) Net interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average rate of interest bearing liabilities.
(2) Net interest earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents annualized net interest income divided by average total interest earning assets.
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Comparison of the Operating Results for the Three Months Ended March 31, 2026 and March 31, 2025
Net Income. The Company had net income of $836,000 for the three months ended March 31, 2026, compared to net income of $643,000 for the three months ended March 31, 2025, an increase of $193,000, or 30.0%. The increase was primarily due to a $103,000, or 3.1%, increase in net interest income, and a $107,000, or 94.7% decrease in the provision for loan loss to $6,000 for the three months ended March 31, 2026 from $113,000 for the same period in 2025. Noninterest income increased $236,000, or 51.1%, from $462,000 for the three months ended March 31, 2025 to $698,000 for the three months ended March 31, 2026. This was offset by an increase of $240,000, or 8.2%, in noninterest expense from $2.9 million for the three months ended March 31, 2025 to $3.2 million for the three months ended March 31, 2026.
Interest Income. Interest income decreased $64,000 or 1.1%, to $5.6 million for the three months ended March 31. This was primarily the result of decreased interest income on securities due to a decrease in the average balance and decreased yields and a decrease in interest income on interest bearing deposits in banks due to a decrease in the average balance and decreased yields. This was partially offset by an increase in interest income on loans due to an increase in the average balance and increased yields. Average interest earning assets decreased by $17.2 million, or 4.2%, from $411.0 million for the three months ended March 31, 2025 to $393.8 million for the three months ended March 31, 2026 primarily from a decrease in average securities of $18.1 million, a decrease in average interest bearing deposits in banks of $2.9 million, and partially offset by an increase in average loans of $3.6 million. The yield on average interest earning assets increased 18 basis points, or 3.2%, from 5.48% for the three months ended March 31, 2025 to 5.66% for the three months ended March 31, 2026.
Interest income on loans increased $254,000, or 5.8%, to $4.7 million for the three months ended March 31, 2026 from $4.4 million for the three months ended March 31, 2025. This increase resulted primarily from an increase in average loan balances of $3.6 million, or 1.2%, from $299.4 million for the three months ended March 31, 2025 to $303.0 million for the three months ended March 31, 2026, with an increase in loan yield of 26 basis points, or 4.4%, to 6.14% for the three months ended March 31, 2026 from 5.88% for the three months ended March 31, 2025. The increase in loan volume and yield was due to continued efforts to increase the commercial loan portfolio.
Interest income on securities decreased $266,000, or 25.9%. This decrease was due primarily to a decrease of $18.1 million, or 18.8%, in average balances from $96.1 million for the three months ended March 31, 2025 to $78.0 million for the three months ended March 31, 2026 following the sale of securities in the 4 th quarter of 2025. The yield on securities decreased 37 basis points, or 8.7%, to 3.91% for the three months ended March 31, 2026 from 4.28% for the same period in 2025, due to shorter average lives and faster principal paydown of the higher yielding securities.
Interest income on restricted investments, which includes stock dividends from the Federal Home Loan Bank (FHLB) and our primary correspondent bank, decreased $16,000, or 32.0%, from $50,000 for the three months ended March 31, 2025 to $34,000 for the three months ended March 31, 2026. This decrease resulted primarily from a decrease in the average balance of these investments of $854,000, or 22.2%, from $3.6 million for the three months ended March 31, 2025 to $2.8 million for the three months ended March 31, 2026 primarily due to the FHLB repurchasing $1.1 million in excess stock following a reduction in outstanding advances and a decrease of 61 basis points, or 11.1%, in the average yield from 5.51% for the three months ended March 31, 2025 to 4.90% for the three months ended March 31, 2026 due primarily to a reduction in the dividend rate paid by FHLB.
Interest income on interest bearing deposits in banks decreased $45,000, or 43.3%, from $104,000 for the three months ended March 31, 2025 to $59,000 for the three months ended March 31, 2026. This decrease is due primarily to a decrease in average interest-bearing deposits of $2.9 million, or 30.9%, from $9.4 million for the three months ended March 31, 2025 to $6.5 million for the three months ended March 31, 2026 and a decrease in average yield of 80 basis points, or 18.1%, from 4.41% for the three months ended March 31, 2025 to 3.61% for the three months ended March 31, 2026. Fed funds interest remained relatively flat, decreasing $1,000, or 1.6%, from $62,000 for the three months ended March 31, 2025 to $61,000 for the three months ended March 31, 2026. An increase in average fed funds balances of $1.2 million, or 21.4%, from $5.6 million for the three months ended March 31, 2025 to $6.8 million for the three months ended March 31, 2026 was offset by a decrease in average yield of 81 basis points, or 18.5%, from 4.39% for the three months ended March 31, 2025 to 3.58% for the three months ended March 31, 2026. These changes in volume are
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due primarily to fluctuations in overall bank liquidity, while decreases in yield were due to decreases in fed funds rates and other market interest rates.
Interest Expense. Total interest expense decreased $167,000, or 7.2%, to $2.1 million for the three months ended March 31, 2026 from $2.3 million for the three months ended March 31, 2025 primarily due to a decrease in average interest-bearing liabilities of $15.1 million, or 4.4%, to $328.7 million for the three months ended March 31, 2026 from $343.8 million for the three months ended March 31, 2025 and a decrease in the average cost of interest-bearing liabilities of eight basis points, or 3.0%, from 2.68% for the three months ended March 31, 2025 to 2.60% for the three months ended March 31, 2026, primarily due to the reduction in rates on interest bearing deposits.
Interest expense on deposit accounts decreased $151,000, or 8.4%, from $1.8 million for the three months ended March 31, 2025 to $1.6 million for the three months ended March 31, 2026. This was due to a decrease in average interest-bearing deposits of $10.4 million, or 3.5%, from $293.6 million for the three months ended March 31, 2025, to $283.2 million for the three months ended March 31, 2026. The average deposit cost decreased 12 basis points, or 5.0%, from 2.45% for the three months ended March 31, 2025 to 2.33% for the three months ended March 31, 2026.
Interest expense on Federal Home Loan Bank advances decreased $14,000, or 2.8%, to $489,000 for the three months ended March 31, 2026 from $503,000 for the three months ended March 31, 2025. This decrease was due primarily to a decrease in the average balance of FHLB advances of $4.3 million, or 8.7%, to $45.4 million for the three months ended March 31, 2026 from $49.7 million for the three months ended March 31, 2025. This was partially offset by an increase in average cost of 26 basis points, or 6.4%, primarily due to maturities and paydowns of advances with lower rates than the weighted average cost of all FHLB borrowings.
Net Interest Income. Net interest income increased $103,000, or 3.1%, to $3.4 million for the three months ended March 31, 2026 from $3.3 million for the three months ended March 31, 2025 due primarily to an increase in net interest margin of 25 basis points, or 7.6%, to 3.49% for the three months ended March 31, 2026 from 3.24% for the three months ended March 31, 2025. The increase in net interest margin is due primarily to higher loan volume and yield, a decrease in rates paid on interest bearing deposit accounts, and a decrease in FHLB advances. The increase in net interest margin was partially offset by a decrease in net interest earning assets of $2.2 million, or 3.3%, to $65.0 million for the three months ended March 31, 2026 from $67.2 million for the three months ended March 31, 2025.
Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses decreased $107,000, or 94.7%, to $6,000 for the three months ended March 31, 2026 from $113,000 for the three months ended March 31, 2025, as a result of significant loan payoffs and corresponding decrease in loan balances in the 1 st quarter of 2026. The allowance for credit losses was 1.14% of total loans at March 31, 2026.
Noninterest Income. Noninterest income increased $236,000, or 51.1%, to $698,000 for the three months ended March 31, 2026 from $462,000 for the three months ended March 31, 2025. This was due primarily to $168,000 in rental income on a multifamily property foreclosed on in the 3 rd quarter of 2025, as well as a $57,000 referral fee earned in connection with the payoff and transfer of an existing multifamily loan to capital markets. The foreclosed property is currently held in other real estate owned. It is over 90% occupied and is currently being marketed for sale.
Noninterest Expense. Noninterest expense increased $240,000, or 8.2%, to $3.2 million for the three months ended March 31, 2026 from $2.9 million for the same period in 2025. This was due to an increase in other expenses of $106,000, or 17.7%, to $704,000 for the three months ended March 31, 2026 from $598,000 for the same period in 2025, which was the result of $98,000 in expense related to the foreclosed multifamily property noted previously, including utilities, maintenance, insurance, legal fees and real estate taxes. Technology expense increased $77,000, or 135.1%, from $57,000 for the three months ended March 31, 2025, to $134,000 for the three months ended March 31, 2026, due primarily to expense related to the implementation of an online loan origination and account opening platform. Occupancy and equipment expenses increased $41,000, or 16.6%, from $247,000 for the three months ended March 31, 2025 to $288,000 for the three months ended March 31, 2026 due primarily to higher property taxes due to normal increases and higher values, and expenses related to the lease of new administrative offices.
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Income Tax Expense. Income tax expense increased by $13,000, or 12.3%, to $119,000 for the three months ended March 31, 2026 from $106,000 for the three months ended March 31, 2025. Net income before taxes increased $206,000, or 27.5%, from $749,000 for the three months ended March 31, 2025 to $955,000 for the three months ended March 31, 2026 and the effective tax rate was 12.46% and 14.15% for the three months ended March 31, 2026 and 2025, respectively. The decrease in effective tax rate was primarily due to tax-exempt income increasing at a faster rate than taxable income.
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Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. The Federal Reserve Bank of Boston provides the Bank with a federal funds line of credit and we are able to borrow from the Federal Home Loan Bank of Dallas. At March 31, 2026, we had outstanding advances of $41.6 million from the Federal Home Loan Bank of Dallas. At March 31, 2026, we had unused borrowing capacity of $108.5 million with the Federal Home Loan Bank of Dallas. In addition, at March 31, 2026, we had two unused unsecured lines of credit totaling $8.0 million with correspondent banks.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For additional information, see the consolidated statements of cash flow for the three months ended March 31, 2026 and 2025 included as part of the consolidated financial statements included in this report.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
Texas Community Bancshares, Inc. is a separate legal entity from Broadstreet 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 Broadstreet Bank. The amount of dividends that Broadstreet Bank may declare and pay to Texas Community Bancshares, Inc. is governed by applicable banking laws and regulations. Broadstreet Bank paid $1.0 million in dividends to Texas Community Bancshares, Inc. in the first quarter of 2026. At March 31, 2026, Texas Community Bancshares, Inc. (on a stand-alone, unconsolidated basis) had liquid assets of $4.4 million.
Liquidity management and asset quality continue to be high priorities. With continued volatility in the market and market interest rate fluctuations, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning. We are monitoring deposit balances daily. We run stress tests quarterly in multiple scenarios, which include deposit runoff combined with the inability to access our available lines of credit and a reduction in the availability of FHLB advances. The scenarios indicate that we are able to maintain our operational liquidity with a designated buffer with our liquidity resources available. We are closely monitoring our assets, liabilities, capital and investment portfolio unrealized losses for possible issues and opportunities related to the current economic and market conditions.
We monitor our large depositors and have discussions with them on how to maximize FDIC coverage to the fullest legal extent, which is limited to coverage of $250,000 per insured depositor. At March 31, 2026, there were 201 accounts with balances in excess of the $250,000 FDIC insurance limit totaling $98.7 million, or 29.7% of deposits. The amount that was over $250,000 was $48.5 million, or 14.6%, that was potentially uninsured, including certificates of deposit of $13.0 million and $35.5 million in checking, MMDA and savings accounts.
At March 31, 2026, the weighted average life (WAL) of our securities portfolio is 5.0 years. The gross unrealized losses on the AFS securities was $4.3 million, or 6.6% of the $64.3 million AFS portfolio and 7.9% of capital. Unrealized losses on the HTM securities were $1.7 million, or 9.5% of the $17.5 million HTM portfolio and 3.1% of capital. The total gross unrealized losses are $5.9 million, or 7.2% of the $81.8 million securities portfolio and 10.2% of capital, which includes $31.2 million, or 38.1%, that are agency issued and guaranteed by the U.S. government. These losses are the result of market interest rate increases and we continue to monitor the portfolio for
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credit and other risks. The net unrealized loss on AFS securities, and the corresponding other comprehensive loss, was $3.4 million, or 5.9% of capital. Over the next 24 months from March 31, 2026, we expect to receive $38.4 million in cash flow from the securities portfolio with $17.9 million in 2026, $18.7 million in 2027 and $1.8 million in 2028. We should receive $22.2 million of that over the next 12 months. See the Securities section of the management discussion and analysis for more information.
At March 31, 2026, our allowance for credit losses to loans and leases held for investment was 1.14%. Following the sale of one property in the 1 st quarter of 2026. At March 31, 2026, we had $9.1 million remaining in other real estate owned, which includes a residential development property in Dallas, Texas, with a carrying value of $1.3 million, a commercial development property in North Richland Hills, Texas, with a carrying value of $2.1 million, and a multi-family property in our primary service area with a carrying value of $5.7 million. We are actively marketing all three properties. We monitor credit quality in the loan portfolio on an ongoing basis and maintain strong underwriting standards and asset management procedures. Our overall asset quality remains strong. The Company continues to monitor rates and loan demand weekly and aligns pricing accordingly. Housing supply and demand are monitored for indicators of a significant change in the local housing markets. We are increasing our lending in CRE, other commercial lending and loans to municipalities to more strategically balance our loan portfolio.
The following are the various liquidity sources we had available at March 31, 2026 that we could use as needed:
● FHLB borrowing capacity of $108.5 million
● $8 million in unused credit lines with 2 correspondent banks
● Federal Reserve discount window
● Qwickrate CD Program
● Brokered deposits
● The ability to sell securities
● The ability to sell a group of loans in the secondary market on an as needed basis
● The ability to sell a portion of BOLI assets
At March 31, 2026, Broadstreet Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date. Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category.
Management of Market Risk
Our most significant form of market risk is interest rate risk. As a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Risk Management and Interest Rate Risk Management Officer is responsible for evaluating the interest rate risk inherent in our assets and liabilities, determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:
● maintaining capital levels that exceed the thresholds for well-capitalized status under federal regulations;
● maintaining a high level of liquidity;
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● growing our volume of core deposit accounts;
● managing our investment securities portfolio so as to reduce the average maturity and effective life of the portfolio;
● managing our borrowings from the Federal Home Loan Bank of Dallas;
● continuing to diversify our loan portfolio by adding more commercial loans, which typically have shorter maturities, adjustable rates, and fee income;
● expanding our wholesale lending program to be able to meet customer loan needs while managing the weighted average life and interest rate risk in the loan portfolio; and
● utilizing callable brokered deposits and derivatives.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The tables below set forth the calculation of the estimated changes in our monthly net interest income that would result from the designated immediate changes in the United States Treasury yield curve. The estimated changes presented are within policy guidelines established by the Company’s Board of Directors.
At March 31, 2026
Change in Interest Rates
Net Interest Income Year
Year 1 Change from
(basis points) (1)
1 Forecast
Level
(Dollars in thousands)
400
$
15,587
11.49
%
300
15,261
9.16
%
200
14,890
6.52
%
100
14,428
3.21
%
Level
13,980
—
(100)
13,633
(2.48)
%
(200)
13,561
(3.00)
%
(300)
13,346
(4.54)
%
(400)
13,390
(4.22)
%
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that at March 31, 2026, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 6.52% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 3.00% decrease in net interest income.
Net Economic Value . We also compute amounts by which the net present value of our assets and liabilities (net economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate
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sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability, and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The table below sets forth 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 estimated changes presented are within policy guidelines established by the Company’s Board of Directors.
At March 31, 2026
EVE as a Percentage of
Present Value of Assets (3)
Estimated Increase
Increase
Change in Interest
Estimated
(Decrease) in EVE
(Decrease)
Rates (basis points) (1)
EVE (2)
Amount
Percent
EVE Ratio (4)
(basis points)
(Dollars in thousands)
400
$
64,716
$
(851)
(1.30)
%
16.49
%
135
300
65,703
136
0.21
%
16.35
%
121
200
66,313
746
1.14
%
16.11
%
97
100
66,354
787
1.20
%
15.72
%
58
Level
65,567
—
—
%
15.14
%
—
(100)
63,509
(2,058)
(3.14)
%
14.29
%
(85)
(200)
59,426
(6,141)
(9.37)
%
13.02
%
(212)
(300)
52,721
(12,846)
(19.59)
%
11.25
%
(389)
(400)
42,671
(22,896)
(34.92)
%
8.90
%
(624)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities, and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at March 31, 2026, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 1.14% increase in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 9.37% decrease in EVE.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See “Management of Market Risk” in Item 2 above.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.