What changed in this filing

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Item 1. Financial Statements

2024-05-14 compared with 2023-11-08 · 428 added, 630 removed, 831 unchanged (56% of the section changed)

3 unchanged sentences

Consolidated Statements of Financial Condition

September 30, 2023 and December 31, 2022

March 31, 2024 and December 31, 2023

(Amounts in thousands, except share and per share data)

September 30,

Cash and due from banks

3 unchanged sentences

Securities available for sale

Securities held to maturity (fair values of $ 23,187 at September 30, 2023 and $ 24,615 at December 31, 2022)

Loans receivable, net of allowance for credit losses of $ 2,934 at September 30, 2023 and $ 1,755 at December 31, 2022

Securities held to maturity (fair values of $ 22,031 at March 31, 2024 and $ 23,400 at December 31, 2023)

Loans held for sale, at fair value (amortized cost $ 17,000 at March 31, 2024)

Loans receivable, net of allowance for credit losses of $ 2,823 at March 31, 2024 and $ 3,096 at December 31, 2023

Net investment in direct financing leases

2 unchanged sentences

Bank-owned life insurance

Foreclosed assets

Other real estate owned

Restricted investments carried at cost

11 unchanged sentences

Preferred stock, $ 0.01 par value, 1,000,000 shares authorized, none issued and outstanding

Common stock, $ 0.01 par value, 19,000,000 shares authorized, 3,373,723 issued and 3,246,306 outstanding at September 30, 2023 and 3,296,843 issued and outstanding at December 31, 2022

Common stock, $ 0.01 par value, 19,000,000 shares authorized, 3,373,723 issued and 3,187,881 outstanding at March 31, 2024 and 3,350,268 issued and 3,175,426 outstanding at December 31, 2023

Additional paid in capital

2 unchanged sentences

Unearned Employee Stock Ownership Program (ESOP) shares, at cost

Treasury stock, at cost ( 127,417 shares at September 30, 2023)

Treasury stock, at cost ( 185,842 shares at March 31, 2024 and 174,842 shares at December 31, 2023)

Total shareholders' equity

3 unchanged sentences

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

Three Months Ended

Nine Months Ended

September 30,

Interest Income

18 unchanged sentences

Net loss on securities transactions

Net gain on sale of foreclosed assets

Net loss on sale of loans

Net change in fair value on loans held for sale

Net gain on sale of other real estate owned

Net loss on sale of premises and equipment

Net appreciation on bank-owned life insurance

Total noninterest income (loss)

Total noninterest loss

Noninterest Expenses

6 unchanged sentences

Other expense

Total noninterest expenses

Income (Loss) Before Income Taxes

Income Tax Expense (Benefit)

Net Income (Loss)

Earnings (loss) per share - basic

Earnings (loss) per share - diluted

Total noninterest expense

Loss Before Income Taxes

Income Tax Benefit

Loss per share - basic

Loss per share - diluted

Weighted-average shares outstanding - basic

3 unchanged sentences

and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

Three Months Ended

Nine Months Ended

September 30,

Net Income (Loss)

Other items of comprehensive loss

Other items of comprehensive (loss) income

Debt Securities

Net changes in fair value of available for sale securities, before tax

Reclassification adjustment for realized loss on sale of investment securities included in net income (loss), before tax

Reclassification adjustment for realized loss on sale of investment securities included in net loss, before tax

Net changes in fair value of available for sale securities hedged, before tax

Total other items of comprehensive (loss) income, before tax

Income tax benefit (expense) related to other items of comprehensive (loss) income

Total other items of comprehensive (loss) income, after tax

Comprehensive Loss

Total other items of comprehensive income, before tax

Income tax expense related to other items of comprehensive income

Total other items of comprehensive income (loss), after tax

Comprehensive (Loss) Income

See Notes to Consolidated Financial Statements

2 unchanged sentences

Consolidated Statements of Shareholders’ Equity (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

1 unchanged sentence

Shareholders'

Three Months Ended September 30, 2023 and 2022

Balance at July 1, 2023

Balance at January 1, 2024

Stock based compensation expense

Net changes in other comprehensive income (loss), net of tax

Other comprehensive income, net of tax

Cash dividend declared ($ 0.04 per share)

1 unchanged sentence

Treasury stock purchased, 11,000 shares

Balance at September 30, 2023

Balance at July 1, 2022

Stock based compensation expense

Net changes in other comprehensive income (loss), net of tax

ESOP shares committed to be released, 3,258 shares

Balance at September 30, 2022

Comprehensive

Shareholders'

Nine Months Ended September 30, 2023 and 2022

Balance at March 31, 2024

Balance at January 1, 2023

3 unchanged sentences

Issuance of restricted stock awards

Net changes in other comprehensive income (loss), net of tax

Cash dividends declared ($ 0.02 per share in Q1 and $ 0.03 per share in Q2 and Q3)

ESOP shares committed to be released, 9,774 shares

Treasury stock purchased, 127,417 shares

Balance at September 30, 2023

Balance at January 1, 2022

Stock based compensation expense

Net changes in other comprehensive income (loss), net of tax

Other comprehensive income, net of tax

Cash dividend declared ($ 0.02 per share)

ESOP shares committed to be released, 3,258 shares

Balance at September 30, 2022

Balance at March 31, 2023

See Notes to Consolidated Financial Statements

2 unchanged sentences

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

Nine Months Ended

September 30,

Three Months Ended

Operating Activities

Net (loss) income

Adjustments to reconcile net income to net cash from operating activities

Adjustments to reconcile net loss to net cash from operating activities

Provision for credit losses - loans

Provision for credit losses - off-balance sheet credit exposures

Net (accretion) amortization of securities

Net amortization (accretion) of securities

Depreciation and amortization

Net realized loss on sales of securities available for sale

Loss on sale of fixed assets

Gain on foreclosed assets

Loss on sale of loans

Loss on disposal of fixed assets

Gain on sale of other real estate owned

Appreciation on bank-owned life insurance

1 unchanged sentence

Stock-based compensation

Deferred income tax

Deferred income tax benefit

Loss on fair value adjustment of fair value hedges

Change in fair value of loans held for sale

Net change in

8 unchanged sentences

Maturities, prepayments and calls

Redemptions of restricted investments

Purchases of restricted investments

Loan originations and principal collections, net

Net decrease in net investment in direct financing leases

Proceeds from sales of OREO and foreclosed assets

Purchases of premises and equipment

Net (increase) decrease in net investment in direct financing leases

Proceeds from sale of loans, originally classified as loans held for investment

Proceeds from sales of other real estate owned

Additions of premises and equipment

Net Cash used for Investing Activities

13 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

1 unchanged sentence

Texas Community Bancshares, Inc.

(the “Company”), a Maryland corporation and registered bank holding company, was incorporated on March 5, 2021 and became the holding company for Mineola Community Bank, SSB (the “Bank”) as part of a mutual to stock conversion completed on July 14, 2021.

(the “Company”), a Maryland corporation and registered bank holding company, was incorporated on March 5, 2021 and became the holding company for Broadstreet Bank, SSB (the “Bank”), formerly known as Mineola Community Bank, SSB prior to December 4, 2023, as part of a mutual to stock conversion completed on July 14, 2021.

The Company’s shares trade on the NASDAQ under the symbol TCBS.

4 unchanged sentences

Interim Financial Statements

The interim unaudited consolidated financial statements as of September 30, 2023, and for the three and nine months ended September 30, 2023 and 2022, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

The interim unaudited consolidated financial statements as of March 31, 2024, and for the three months ended March 31, 2024 and 2023, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

Such adjustments are the only adjustments contained in these unaudited consolidated financial statements.

These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission, and therefore certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted.

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2023, or any other period.

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2024, or any other period.

Certain prior period data presented in the consolidated financial statements has been reclassified to conform with the current period presentation.

2 unchanged sentences

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Mineola Community Bank, SSB and its wholly-owned subsidiary Mineola Financial Service Corporation, which is not actively being utilized.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Broadstreet Bank, SSB and its wholly-owned subsidiary Mineola Financial Service Corporation, which is not actively being utilized.

All significant intercompany transactions and balances have been eliminated in consolidation.

6 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

Recently Adopted Accounting Pronouncements

The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective January 1, 2023.

The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases.

ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio.

In addition, ASC 326 made changes to the accounting for available-for-sale debt securities.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will not be required to sell.

The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures.

Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $ 1,025 which was recognized through an $ 810 adjustment to retained earnings, net of tax.

This adjustment brought the beginning balance of the allowance for credit losses to $ 2,780 as of January 1, 2023.

In addition, the Company recorded a $ 254 allowance on unfunded commitments which was recognized through a $ 200 adjustment to retained earnings, net of tax.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30.

As of December 31, 2022, the Company did not hold any purchased loans with deteriorated credit quality.

Therefore, the Company did not have any PCI loans upon adoption of ASC 326 as of January 1, 2023.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023.

As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities.

Therefore, upon adoption of ASC 326, the Company determined than an allowance for credit losses on available-for-sale securities was not deemed necessary.

Held to Maturity Securities

Beginning January 1, 2023, the Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326.

The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through net income.

For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss).

Changes in the allowance for credit losses are recorded as provision for or (reduction of) provision for credit losses.

Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

For the three and nine months ended September 30, 2023, the Company determined no provision for credit losses on securities was necessary.

Allowance for Credit Losses

The Company uses the weighted average remaining maturity (“WARM”) method to estimate expected losses for all of Company’s loan pools.

These pools are as follows:

construction & land;

1-4 residential & multi-family real estate;

commercial real estate;

and consumer and other.

The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council.

For each of these loan pools, the Company calculates an average annual loss rate and estimates future outstanding balances based on contractual maturities and estimated prepayments.

The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data.

Relevant data to support the Company’s estimates of lifetime expected credit losses is maintained through internal and external information.

The CECL model leverages the use of publicly available call report data, which allows the use of external information from peers to supplement the Company’s own historical data.

The loss rate is based on historical loss rates for the peer group and the Company.

Due to internal loss rates being low, a blended historical loss rate of 75% peer group and 25% Company was used.

The weighted average remaining life is determined based on contracted loan payments, expected prepayments and maturity dates.

The allowance model uses data from the St.

Louis Federal Reserve Economic Database for reasonable and supportable forecasts.

Management has determined that between years one and two represents a reasonable and supportable forecast period and reverts to a historical loss rate in years three or four depending on the loan type.

Management leverages economic projections from the St.

Louis Federal Reserve Economic Database (FRED) to inform its loss driver forecasts.

Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

The following table illustrates the impact of the adoption of ASC 326:

Allowance for credit losses on loans

Allowance for credit losses on OBS credit exposures (included in other liabilities)

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

The Company adopted ASU 2022-02 , Financial Instruments – Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures, effective January 1, 2023.

The additional disclosures are included in Note 4 – Loans and Allowance for Credit Losses on a prospective basis and include loan modifications where the contractual payment terms of the borrower’s loan agreement were modified through a refinancing or restructuring.

Modifications that do not impact the contractual payment terms, such as covenant waivers, insignificant payment deferrals, and any modifications made to loans carried at fair value are not included in the disclosures.

The Company uses various indicators to identify borrowers in financial difficulty.

Consumer loan borrowers that are delinquent and commercial loan borrowers that are rated substandard or worse are the primary criteria used to identify borrowers who are experiencing financial difficulty.

If a borrower is current at the time of modification, the loan generally remains a performing loan as long as there is demonstrated performance prior to the modification, and payment in full under the modified terms is expected.

Otherwise, the loan is placed on nonaccrual status and reported as nonperforming until there is sustained repayment performance for a reasonable period, which is generally at least six consecutive months.

Treasury Stock

Treasury stock is accounted for on the cost method and consists of 127,417 shares at September 30, 2023.

The Company had no treasury shares at December 31, 2022.

The Company adopted ASU 2022-01, Derivatives and Hedging (Topic 815) – Fair Value Hedging – Portfolio Layer Method, as of January 1, 2023.

The adoption of this standard did not have a material effect on the Company’s consolidated operating results or financial condition as of December 31, 2022.

At the inception of a derivative contract, the Company designates the derivatives as one of the three types based on the Company’s intentions and belief as to likely effectiveness as a hedge.

These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”).

For a fair value hedge, the gain or loss on the derivate, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as fair values change.

For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings.

Changes in the fair value of derivatives not designated or that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.

Accrued settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged.

Accrued settlements on derivatives not designated or that do not qualify for hedge accounting are reported in non-interest income.

Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship.

This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.

The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

effective in offsetting changes in fair values or cash flows of the hedged items.

The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income.

When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability.

When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position.

The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements.

All the contracts to which the Company is a party settle monthly or semi-annually.

Loans Held for Sale

Mortgage loans held for investment that are transferred to loans held for sale are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments.

Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held for sale are generally sold with servicing rights retained.

Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loans sold, including any servicing right value, if servicing is to be retained.

Loans held for sale, for which the fair value option has been elected, are recorded at fair value as of each balance sheet date.

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying financial statements to maintain consistency between periods presented.

The reclassifications had no impact on net income (loss) or shareholders’ equity.

The reclassifications had not impact on net income or shareholder’s equity.

Note 2 – Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, including allocated and committed to be released ESOP shares and restricted stock awards granted on August 31, 2022 and February 28, 2023, during the applicable period.

Basic earnings per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period, including allocated and committed to be released ESOP shares and restricted stock awards granted on August 31, 2022, February 28, 2023, and February 28, 2024, during the applicable period.

Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

2 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

Net Income (Loss)

Weighted average shares outstanding for basic earnings per share:

4 unchanged sentences

Weighted average shares outstanding for dilutive earnings per share

Basic and dilutive earnings (loss) per share

Restricted stock awards for 115,964 shares of common stock were not considered in computing diluted earnings per share for 2023, because they were antidilutive.

Stock options for 270,386 shares of common stock were not considered in computing diluted earnings per share for 2023 because they were nonvested.

Basic loss per share

Dilutive loss per share

Nonvested restricted stock awards for 74,007 and 115,964 shares of common stock were not considered in computing diluted earnings per share for 2024 and 2023, respectively, because they were antidilutive.

Stock options for 231,946 and 289,932 shares of common stock were not considered in computing diluted earnings per share for 2024 and 2023 because they were nonvested.

Stock options for 46,258 shares of common stock have vested, however, were not considered in computing diluted earnings per share for 2024, because they were antidilutive.

2 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

1 unchanged sentence

The amortized cost and fair value of securities, with gross unrealized gains and losses, follows:

September 30, 2023

March 31, 2024

Available for Sale

18 unchanged sentences

Corporate bonds

Government and agency

Total securities available for sale

3 unchanged sentences

State and municipal

Government and agency

Total securities held to maturity

During the nine months ended September 30, 2023, the Company had sales of available for sale securities of $ 17,027 with a loss of $ 1,687 .

During the three months ended September 30, 2023 and 2022, the Company had no sales of available for sale securities or held to maturity securities.

During the nine months ended September 30, 2022, the Company had sales of available for sale securities of $ 10,822 with a loss of $ 29 .

At September 30, 2023 and December 31, 2022, securities with a fair value of $ 4,366 and $ 3,162 , respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

During the three months ended March 31, 2024, the Company had no sales of available for sale securities or held to maturity securities.

During the three months ended March 31, 2023, the Company had sales of available for sale securities of $ 17,027 with a loss of $ 1,687 .

At March 31, 2024 and December 31, 2023, securities with a fair value of $ 16,102 and $ 14,152 , respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2023, follows:

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2024, follows:

Available for Sale

7 unchanged sentences

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

September 30, 2023

March 31, 2024

Less than 12 months

15 unchanged sentences

Government and agency (1,0)

At September 30, 2023, the Company had investment securities with approximately $ 12,624 in unrealized losses, which have been in continuous loss positions for more than twelve months.

At March 31, 2024 and December 31, 2023, the Company had investment securities with approximately $ 9,858 and $ 9,593 , respectively, in unrealized losses, which have been in continuous loss positions for more than twelve months.

The Company’s assessments indicated that the cause of the market depreciation was primarily the change in market interest rates and not the issuers’ financial condition or downgrades by rating agencies.

In addition, approximately 14.2 % of the principal balance from the Company’s investment portfolio will mature and be repaid to the Company within five years or less.

As a result, the Company has the ability and intent to hold such securities until maturity.

As a result, the Company has the ability and intent to hold such securities

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following table summarizes bond ratings for the Company’s held-to-maturity portfolio, based upon amortized cost, issued by state and political subdivisions and other securities as of September 30, 2023:

until maturity.

The Company monitors credit quality of debt securities held-to-maturity through the use of credit rating.

The Company monitors credit rating on a continual basis.

March 31, 2024

mortgage-backed

U.S Government

December 31, 2023

mortgage-backed

U.S Government

As of March 31, 2024 and December 31, 2023, there were no securities held to maturity on nonaccrual status or past due.

Mortgage-backed securities and Collateralized Mortgage Obligations

The unrealized losses on the Company’s investments in residential mortgage-backed securities and collateralized mortgage obligations were caused by market interest rate increases and decreases in prepayment speeds.

Interest rates rose sharply throughout 2022 and caused increases in unrealized losses on securities.

The unrealized losses on the Company’s investments in mortgage-backed securities and collateralized mortgage obligations were caused by interest rate increases and decreases in prepayment speeds.

The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements.

The contractual cash flows of many of these investments are guaranteed by agencies of the U.S.

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.

Because the decline in fair value is attributable to changes in market interest rates and decreases in prepayment speeds and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022.

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments.

Because the decline in fair value is attributable to changes in interest rates and prepayment speeds and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity.

The unrealized losses on the Company’s investment in mortgage-backed securities have not been recognized into income and no allowance for credit losses was established at March 31, 2024 or December 31, 2023.

Government and agency

The unrealized losses on the Company’s investments in U.S.

government and agency securities were caused by market interest rate increases.

Interest rates rose sharply throughout 2022 and caused increases in unrealized losses on securities.

The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements.

The contractual cash flows of those investments are guaranteed by an agency of the U.S.

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.

Because the decline in fair value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022.

Municipal Securities and Corporate Bonds

The unrealized losses on the Company’s investments in state and municipal securities and corporate bonds were caused by market interest rate increases.

Interest rates rose sharply throughout 2022 and caused increases in unrealized losses on securities.

The Company has no plans to sell these securities and will continue to monitor the effect of the unrealized losses on the financial statements.

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.

government and agency securities have not been recognized into income and no allowance for credit losses was established because the bonds are of high credit quality, management does not intend to sell, and it is likely that management will not be required to sell the securities prior to their anticipated recovery.

The decline in fair value is largely due to increases in market interest rates and not credit quality deterioration and the fair value is expected to recover as the bonds approach maturity.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022.

Other than temporary impairment

Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) evaluation by the Company of (a) its intent to sell a debt security prior to recovery and (b) whether it is more likely than not the Company will have to sell the debt security prior to recovery.

As of December 31, 2022, no investment securities were other-than-temporarily impaired.

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.

Therefore, an allowance for credit losses is deemed unnecessary at March 31, 2024 and December 31, 2023.

Municipal Securities and Corporate Bonds

The unrealized losses on the Company’s investments in state and municipal securities and corporate bonds have not been recognized into income and no allowance for credit losses was established because the bonds are of high credit quality, management does not intend to sell, and it is likely that management will not be required to sell the securities prior to their anticipated recovery.

The decline in fair value is largely due to increases in market interest rates and not credit quality deterioration and the fair value is expected to recover as the bonds approach maturity.

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.

Therefore, an allowance for credit losses is deemed unnecessary at March 31, 2024 and December 31, 2023.

Note 4 - Loans and Allowance for Credit Losses

A summary of the balances of loans and leases follows:

September 30,

Construction and land

5 unchanged sentences

Loans and leases, net

Direct financing leases of $ 840 and $ 36 are included in consumer and other loans at March 31, 2024 and December 31, 2023, respectively.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following tables set forth information regarding the activity in the allowance for credit losses for the three and nine months ended September 30, 2023:

September 30, 2023

The following tables set forth information regarding the activity in the allowance for credit losses for the three months ended March 31, 2024 and March 31, 2023:

March 31, 2024

Allowance for credit losses:

1 unchanged sentence

& multi-family

Three months ended

Beginning balance, July 1, 2023

Provision for credit losses

Loans charged-off

Balance, September 30, 2023

Nine months ended

Beginning balance prior to adoption of ASC 326

Impact of adopting ASC 326 on January 1, 2023

Balance, January 1, 2024

Provision for credit losses

Loans charged-off

Balance, September 30, 2023

Balance, September 30, 2023 allocated to loans and leases individually evaluated

Balance, September 30, 2023 allocated to loans and leases collectively evaluated

Balance, March 31, 2024

Balance, March 31, 2024 allocated to loans and leases individually evaluated

Balance, March 31, 2024 allocated to loans and leases collectively evaluated

Loans and leases receivable:

Balance, September 30, 2023 loans and leases individually evaluated

Balance, September 30, 2023 loans and leases collectively evaluated

Balance, September 30, 2023

Balance, March 31, 2024 loans and leases individually evaluated

Balance, March 31, 2024 loans and leases collectively evaluated

Balance, March 31, 2024

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following tables present the balances and activity in the allowance for loan and lease losses as of and for the three and nine months ended September 30, 2022 and the allowance for loan and lease losses and recorded investment in loans receivable based on portfolio segment by impairment method as of December 31, 2022.

Allocation of a portion of the allowance to one type of loan does not preclude its availability to absorb losses in other categories.

September 30, 2022

Allowance for loan and lease losses:

Three months ended

Balance, July 1, 2022

Balance, September 30, 2022

Nine months ended

Balance, January 1, 2022

Balance, September 30, 2022

March 31, 2023

Allowance for credit losses:

1-4 Residential

& multi-family

Beginning balance prior to adoption of ASC 326

Impact of adopting ASC 326 on January 1, 2023

Provision for credit losses

Loans charged-off

Balance, March 31, 2023

December 31, 2023

Allowance for loan and lease losses:

Balance, December 31, 2022 allocated to loans and leases individually evaluated for impairment

Balance, December 31, 2022 allocated to loans and leases collectively evaluated for impairment

1-4 Residential

& multi-family

Allowance for credit losses:

Balance, December 31, 2023 allocated to loans and leases individually evaluated

Balance, December 31, 2023 allocated to loans and leases collectively evaluated

Loans and leases receivable:

Balance, December 31, 2022 loans and leases individually evaluated for impairment

Balance, December 31, 2022 loans and leases collectively evaluated for impairment

Balance, December 31, 2023 loans and leases individually evaluated

Balance, December 31, 2023 loans and leases collectively evaluated

Balance, December 31, 2023

2 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of September 30, 2023:

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of March 31, 2024 and December 31, 2023:

March 31, 2024

with Allowance

4 unchanged sentences

Consumer and other

The following table sets forth information regarding the nonaccrual status within the loan and lease portfolio as of December 31, 2022:

December 31, 2023

with Allowance

Due Over 90 Days Still Accruing

Construction and land

2 unchanged sentences

Consumer and other

The Company did no t recognize any interest income on nonaccrual loans during the periods ended September 30, 2023 or September 30, 2022.

The Company did not recognize any interest income on nonaccrual loans during the periods ended March 31, 2024 or March 31, 2023.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023:

1-4 Residential & multi-family

Commercial real estate

The Company had $ 1,412 in collateral-dependent loans as of September 30, 2023.

The following table sets forth information regarding impaired loans as of December 31, 2022:

With no related allowance

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2024 and December 31, 2023:

March 31, 2024

Construction and land

1-4 Residential & multi-family

Commercial real estate

Consumer and other

With a related allowance

December 31, 2023

1-4 Residential & multi-family

Commercial real estate

Consumer and other

The Company had $ 1,504 and $ 1,157 in collateral-dependent loans at March 31, 2024 and December 31, 2023, respectively.

Internal Risk Categories

1 unchanged sentence

it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.

Impaired loans include nonperforming loans (nonaccrual loans), loans performing but with deterioration that leads to doubt regarding collectability and also includes loans modified in troubled debt restructurings when concessions have been granted to borrowers experiencing financial difficulties.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Collateral dependent loans include nonperforming loans (nonaccrual loans), loans performing but with deterioration that leads to doubt regarding collectability.

Loans that do not share risk characteristics are evaluated on an individual basis.

For collateral-dependent loans, excluding loans secured by assisted living facilities which are evaluated using a market price valuation methodology, where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

For collateral-dependent loans, where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral.

1 unchanged sentence

The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The Company monitors credit quality within its portfolio segments based on primary credit quality indicators.

17 unchanged sentences

Credits rated doubtful are generally also placed on nonaccrual.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

Credits rated loss are those that are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

Credits rated loss are those that are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

1 unchanged sentence

In addition to this primary credit quality indicator, the Company uses other credit quality indicators for certain types of loans.

The Company evaluates the loan risk grading system definitions and allowance for loan and lease loss methodology on an ongoing basis.

No significant changes were made during the period ended September 30, 2023 or the year ended December 31, 2022.

The Company evaluates the loan risk grading system definitions and allowance for credit loss methodology on an ongoing basis.

No significant changes were made during the period ended March 31, 202 4.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

Based on the most recent analysis performed, the risk category of loans by class of loans as of September 30, 2023 and gross chargeoffs for the nine months then ended are as follows:

Based on the most recent analysis performed, the risk category of loans by class of loans and gross chargeoffs as of March 31, 2024 and December 31, 2023 are as follows:

March 31, 2024

Term Loans Amortized Cost Basis by Origination Year

14 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following tables set forth information regarding the internal classification of the loan and lease portfolio at December 31, 2022:

December 31, 2023

Term Loans Amortized Cost Basis by Origination Year

Construction and land

Special mention

1-4 Residential & multi-family

Special mention

Commercial real estate

Special mention

Consumer and other

Special mention

Current period gross charge-offs

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses.

The Company also evaluates credit quality based on the aging status of the loan, which is subsequently presented.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses.

The Company also evaluates credit quality based on the aging status of the loan, which is subsequently presented.

The following table presents the amortized cost of performing and non-performing loans as of September 30, 2023:

following table presents the amortized cost of performing and non-performing loans as of March 31, 2024 and December 31, 2023:

March 31, 2024

Term Loans Amortized Cost Basis by Origination Year

Construction and land

Non-performing

Nonperforming

1-4 Residential & multi-family

Non-performing

Nonperforming

Commercial real estate

Non-performing

Nonperforming

Consumer and other

Non-performing

Nonperforming

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following table sets forth information regarding the credit risk profile based on payment activity of the loan and lease portfolio at December 31, 2022:

December 31, 2023

Term Loans Amortized Cost Basis by Origination Year

Construction and land

Nonperforming

1-4 Residential & multi-family

Nonperforming

Commercial real estate

Nonperforming

Consumer and other

The following is an aging analysis for loans as of September 30, 2023 and December 31, 2022:

September 30, 2023

Nonperforming

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following is an aging analysis for loans as of March 31, 2024 and December 31, 2023:

March 31, 2024

Construction and land

3 unchanged sentences

December 31, 2023

> 90 Days and

Still Accruing

Construction and land

2 unchanged sentences

Consumer and other

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

All interest accrued but not collected for loans that are placed on nonaccrual or charged‐off is reversed against interest income.

1 unchanged sentence

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

No interest income was recognized for loans on nonaccrual status for the three and nine months ended September 30, 2023 and 2022.

The following table presents interest income recognized on loans that are collateral-dependent and individually reviewed for the three and nine months ended September 30, 2023 and 2022:

No interest income was recognized for loans on nonaccrual status for the three months ended March 31, 2024 and 2023.

The following table presents interest income recognized on loans that are collateral-dependent and individually reviewed for the three months ended March 31, 2024 and 2023:

Three Months Ended

Nine Months Ended

September 30,

1-4 Residential & multi-family

Commercial real estate

During the three and nine months ended September 30, 2023, there were no modifications of loans to borrowers in financial difficulty.

During the three and nine months ended September 30, 2022, there were no modifications resulting in troubled debt restructurings.

There have been no subsequently defaulted troubled debt restructurings.

The Company has no commitments to loan additional funds to borrowers whose loans have been modified but may on occasion extend financing to these borrowers.

At September 30, 2023 and December 31, 2022, the Company had a recorded investment of $ 331 and $ 364 , respectively, of troubled debt restructured loans.

The Company has no current commitments to loan additional funds to the borrowers whose loans have been modified.

During the three months ended March 31, 2024 and 2023, there were no modifications of loans to borrowers in financial difficulty.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

There have been no modifications to borrowers with financial difficulty in the three months ended March 31, 2024 and 2023 that subsequently defaulted The Company has no commitments to loan additional funds to borrowers whose loans have been modified but may on occasion extend financing to these borrowers.

Note 5 - Off-Balance-Sheet Activities

4 unchanged sentences

The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

At September 30, 2023 and December 31, 2022, the following financial instruments were outstanding whose contract amounts represent credit risk:

At March 31, 2024 and December 31, 2023, the following financial instruments were outstanding whose contract amounts represent credit risk:

Contract Amount

September 30, 2023

March 31, 2024

December 31, 2023

Commitments to extend credit

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

8 unchanged sentences

One line renews annually and the other line is in effect until either party changes the terms of the agreement.

At September 30, 2023, the Company had no commitments to purchase securities.

At March 31, 2024, the Company had no commitments to purchase securities.

The Company has no other off-balance-sheet arrangements or transactions with unconsolidated, special purpose entities that would expose the Company to liability that is not reflected on the face of the consolidated financial statements.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

Note 6 - Supplemental Cash Flow Information

Supplemental disclosure of cash flow information is as follows:

Nine Months Ended

September 30,

Three Months Ended

Supplemental cash flow information:

Loan originations to facilitate the sale of foreclosed assets

Cash paid for

2 unchanged sentences

Other interest

Non-cash activities

Transfer on loans receivable to loans held for sale

Loan originations to facilitate the sale of other real estate owned

Premises and equipment transferred to other real estate owned

Note 7 - Minimum Regulatory Capital Requirements

4 unchanged sentences

The Bank has opted into the Community Bank Leverage Ratio (CBLR) framework, beginning with the Call Report filed for the first quarter of 2020.

At September 30, 2023 and December 31, 2022, the Bank’s CBLR ratio was

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

11.16 % and 12.31 %, respectively, which exceeded all regulatory capital requirements under the CBLR framework, and the Bank was considered to be “well-capitalized.”

At March 31, 2024 and December 31, 2023, the Bank’s CBLR ratio was 10.09 % and 10.76 %, respectively, which exceeded all regulatory capital requirements under the CBLR framework, and the Bank was considered to be “well-capitalized.”

Under the CBLR framework, banks and their bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, are eligible to opt into the CBLR framework.

5 unchanged sentences

Qualifying community banking organizations that elect to be under the CBLR framework generally would be exempt from the current capital framework, including risk-based capital requirements and capital conservation buffer requirements.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

Note 8 - Fair Value Measurements

15 unchanged sentences

● Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(Amounts in thousands, except share and per share data)

● Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

2 unchanged sentences

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

There were no changes in valuation techniques during either the nine months ended September 30, 2023 or the year ended December 31, 2022.

There were no changes in valuation techniques during either the three months ended March 31, 2024 or the year ended December 31, 2023.

In general, fair value is based upon quoted market prices, where available.

If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market- based parameters.

If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

based parameters.

Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.

4 unchanged sentences

Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things.

Derivative Instruments – As discussed in Note 10 “Derivatives” within this Item 1 of this Quarterly Report, the Company records derivative instruments at fair value on a recurring basis.

Derivative Instruments – The Company records derivative instruments at fair value on a recurring basis.

The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities.

1 unchanged sentence

Third-party valuations are validated by the Company using the Bloomberg Valuation Service’s derivative pricing functions.

No significant differences were identified during the validation as of September 30, 2023.

No significant differences were identified during the validation as of March 31, 2024.

Collateral-dependent Loans – Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.

Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.

Other real estate owned – Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans or when the asset is transferred into other real estate owned from premises and equipment.

The value is based upon primarily third-party appraisals, less estimated costs to sell.

The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business.

Such discounts are typically significant and result in Level 3 classification of inputs for determining fair value.

Other real estate owned is

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2023

reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same or similar factors above.

Loans Held for Sale, at Fair Value – The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2024

Financial assets

4 unchanged sentences

Corporate bonds

Financial derivatives

Derivative instruments

Loans held for sale, at fair value

Total financial assets

6 unchanged sentences

Corporate bonds

Government and agency

Derivative instruments

Total financial assets

4 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following table summarizes financial and non-financial assets measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2023

The following table summarizes financial and non-financial assets measured at fair value on a nonrecurring basis as of March 31, 2024 and December 31, 2023, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2024

Financial assets

Collateral-dependent loans

Nonfinancial assets

Other real estate owned

December 31, 2023

Financial assets

Impaired loans

During the nine months ended September 30, 2023 and 2022, certain collateral-dependent loans were remeasured and reported at fair value through a specific allocation of the allowance for credit losses based upon the fair value of the underlying collateral.

At September 30, 2023, collateral-dependent loans with a carrying value of $ 353 were reduced by specific valuation allowance allocations totaling $ 300 to a reported fair value of $ 53 .

At December 31, 2022, impaired loans with a carrying value of $ 389 were reduced by specific valuation allowance allocations totaling $ 300 to a reported fair value of $ 89 .

The fair value of impaired loans is determined based on collateral valuations utilizing Level 3 valuation inputs.

There was no charge to the provision for credit losses - loans as a result of the valuation allowances for the three and nine months ended September 30, 2023 and 2022.

Collateral-dependent loans

Nonfinancial assets

Other real estate owned

During the three months ended March 31, 2024 and 2023, certain collateral-dependent loans were remeasured and reported at fair value through a specific valuation allowance allocation for credit losses based upon the fair value of the underlying collateral.

At March 31, 2024, collateral-dependent loans with a carrying value of $ 375 were reduced by specific valuation allowance allocations totaling $ 316 to a reported fair value of $ 59 .

At December 31, 2023, collateral dependent loans with a carrying value of $ 345 were reduced by specific valuation allowance allocations totaling $ 300 to a reported fair value of $ 45 .

The fair value of collateral dependent loans is determined based on collateral valuations utilizing Level 3 valuation inputs.

There was a charge to provision for credit losses of $ 16 as a result of valuation allowances moving from the general reserve to specific reserve for the three months ended March 31, 2024.

There was no charge to the provision for credit losses as a result of the valuation allowances for the three months ended March 31, 2023.

At March 31, 2024, the Company had other real estate owned consisting of two bank properties that were purchased for future expansion, but have now been listed for sale.

At December 31, 2023, the Company had one commercial building held as other real estate owned with a carrying value of $ 162 , which was sold at a gain during the three months ended March 31, 2024.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

Quantitative Information About Significant Unobservable Inputs Used in Level 3 Fair Value Measurements – The following table represents the Company’s Level 3 financial assets, the valuation techniques used to measure the fair value of those financial assets, the significant unobservable inputs and the ranges of values for those inputs:

2 unchanged sentences

Significant Input

September 30, 2023

March 31, 2024

Collateral-dependent loans

1 unchanged sentence

Appraisal adjustment

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustment

Fair Value at

2 unchanged sentences

December 31, 2023

Impaired loans

Collateral-dependent loans

Appraisal of collateral (1)

Appraisal adjustment

Other real estate owned

Appraisal of collateral (1)

Appraisal adjustment

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

2 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

September 30, 2023

March 31, 2024

Carrying Value

30 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

22 unchanged sentences

Dividends on unallocated ESOP shares, if any, are recorded as a reduction of debt and accrued interest.

ESOP compensation was $ 40 and $ 127 for the three and nine months ended September 30, 2023 and $ 53 and $ 164 for the three and nine months ended September 30, 2022.

ESOP compensation was $ 46 and $ 49 for the three months ended March 31, 2024 and 2023.

Texas Community Bancshares, Inc.

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Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

A summary of the ESOP shares as of September 30, 2023 and December 31, 2022 are as follows:

September 30, 2023

A summary of the ESOP shares as of March 31, 2023 and December 31, 2023 are as follows:

March 31, 2024

December 31, 2023

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Fair Value Hedges – Derivatives are designated as fair value hedges when they are used to manage exposure to changes in the fair value of certain financial assets and liabilities, referred to as the hedged items, which fluctuate in value as a result of movements in interest rates.

Available for Sale Securities – The Company has a swap agreement to hedge the interest rate risk on a portion of its fixed rate available for sale (AFS) securities.

At September 30, 2023, the aggregate notional amount of the related hedged items of the AFS securities totaled $ 25 million and the fair value of the swaps associated with the derivative related to hedged items was an unrealized gain of $ 940 .

Securities available for sale – The Company has a swap agreement to hedge the interest rate risk on a portion of its fixed rate securities available for sale.

At March 31, 2024 and December 31, 2023, the aggregate notional amount of the related hedged items of the securities available for sale totaled $ 25 million and the fair value of the swaps associated with the derivative related to hedged items was an unrealized gain of $ 560 and $ 119 , respectively.

The Company applies hedge accounting in accordance with ASC 815, Derivatives and Hedging , and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded within other interest income on the Company’s Consolidated Statements of Operations.

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Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Three Months Ended March 31, 2024 and 2023

(Amounts in thousands, except share and per share data)

The following table summarizes key elements of the Company’s derivative instruments as of September 30, 2023, segregated by derivatives that are considered accounting hedges and those that are not:

September 30, 2023

The following table summarizes key elements of the Company’s derivative instruments as of March 31, 2024 and December 31, 2023, segregated by derivatives that are considered accounting hedges and those that are not:

March 31, 2024

December 31, 2023

Notional Amount

Derivatives designated as hedges:

Fair Value Hedges

The following table summarizes the carrying value of the Company’s hedged assets in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of September 30, 2023:

March 31, 2024

December 31, 2023

Carrying Amount of Hedged Assets Amount

Cumulative Amount of Basis Adjustments Included in the Carrying Amount of the Hedged Assets

Carrying Amount of Hedged Assets Amount

Cumulative Amount of Basis Adjustments Included in the Carrying Amount of the Hedged Assets

Line items on the Consolidated Statements of Financial Condition in which the hedged items is included:

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 September 30, 2023 and consolidated results of operations for the three and nine months ended September 30, 2023 and 2022.

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, 2024 and consolidated results of operations for the three months ended March 31, 2024 and 2023.

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.

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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 through a period of high inflation and rapidly rising interest rates;

● our ability to control costs and manage liquidity through a period of high inflation and rising interest rates;

● our ability to maintain our deposit base cost-effectively and access cost-effective funding;

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Allowance for Credit Losses .

Effective January 1, 2023, the Company adopted ASC 326, referred to as CECL.

Effective January 1, 2023, the Company adopted Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASC 326”), referred to as CECL.

Upon adoption of CECL, the Company made a one-time cumulative-effect adjustment that decreased retained earnings by $1.0 million.

This adjustment was the result of a $1.0 million increase in the allowance for loan losses from $1.8 million at December 31, 2022 to $2.8 million upon adoption of the new CECL methodology on January 1, 2023 and an increase of $254,000 in the allowance for unfunded commitments.

This adjustment was the result of a $1.0 million increase in the allowance for credit losses from $1.8 million at December 31, 2022 to $2.8 million upon adoption of the new CECL methodology on January 1, 2023 and an increase of $254,000 in the allowance for unfunded commitments.

The adjustment was primarily a result of incorporating forward-looking estimated loss estimates and an allowance for off-balance sheet commitments (unfunded commitments).

The allowance for credit losses applies to any financial asset carried at amortized cost, including unfunded commitments.

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 probable credit losses on individually evaluated loans determined to be impaired as well as estimated probable credit losses inherent in the loan portfolio.

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 unlikely.

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 probable 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 probable credit losses.

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.

The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for credit losses on loans and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical peer and Company loss rates, reasonable and supportable forecasts, and a component primarily based on other qualitative factors.

The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for credit losses on loans and includes allocations for specifically identified collateral dependent loans and loss factor allocations for all remaining loans, with a component primarily based on historical peer and Company loss rates, reasonable and supportable forecasts, and a component primarily based on other qualitative factors.

The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions, reasonable and supportable forecasts, and other qualitative and quantitative factors which could affect potential credit losses.

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The total allowance is available to absorb losses from any segment of the loan portfolio.

Management believes the allowance for credit losses on loans was adequate at September 30, 2023 and December 31, 2022.

Management believes the allowance for credit losses on loans was adequate at March 31, 2024 and December 31, 2023.

The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements.

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The allowance for credit losses on unfunded commitments is calculated using the same methodology as loans and considers the funding probability and the amount to be expected to be funded over the life of the commitment.

The Company assesses held to maturity (HTM) securities for credit losses and due to the HTM securities primarily being issued by government-sponsored entities or being highly rated municipals, management concluded that no credit loss should be recognized for these securities for the nine months ended September 30, 2023.

The CECL standard also requires for credit losses on available for sale (AFS) securities to be recorded through an allowance for credit losses rather a write-down of the individual security.

As of September 30, 2023, the Company

did not have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

As of March 31, 2024, the Company did not have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

Income Taxes.

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Penalties related to unrecognized tax benefits are classified as income tax expense.

Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Comparison of Financial Condition at March 31, 2024 and December 31, 2023

Total Assets.

Total assets were $436.7 million at September 30, 2023, an increase of $19.4 million, or 4.6%, from $417.3 million at December 31, 2022.

The increase was due primarily to increases in net loans and leases of $17.6 million, or 7.0%, from $251.3 million at December 31, 2022 to $268.9 million at September 30, 2023, an increase of $4.1 million, or 65.1%, in net premises and equipment, and increases in cash, fed funds sold and interest bearing deposits in banks totaling $10.5 million, or 95.5%, to $21.5 million at September 30, 2023 from $11.0 million at December 31, 2022, partially offset by a decrease in securities of $15.6 million, or 11.6%, from $135.0 million at December 31, 2022 to $119.4 million at September 30, 2023.

The $4.1 million, or 65.1%, increase in net premises and equipment was primarily due to the purchase of two buildings adjacent to the Bank’s main office in Mineola, the purchase of a building that had recently been a bank branch in Tyler and the construction of the new branch building in Lindale at the current location, which should be completed in 2024.

Total assets were $463.8 million at March 31, 2024, an increase of $11.8 million, or 2.6%, from $452.0 million at December 31, 2023.

The increase was due primarily to increases in cash, fed funds sold and interest bearing deposits in banks of $24.1 million, or 94.9%, to $49.5 million at March 31, 2024 from $25.4 million at December 31, 2023 offset by a decrease in securities of $1.5 million, or 1.2%, and a decrease in net loans and leases of $12.4 million, or 4.4%, from $279.9 million at December 31, 2023 to $267.5 million at March 31, 2024.

The decrease in loans was primarily due to the block sale of 54 performing loans totaling $12.4 million at a loss of $1.5 million, net of mortgage servicing rights, as part of a portfolio repositioning strategy to take advantage of repricing opportunities with the goal of increasing yield, shortening weighted average life and diversifying the loan portfolio while reducing the concentration in residential mortgages.

Cash and Cash Equivalents.

Cash and cash equivalents increased $3.5 million, or 39.3%, to $12.4 million (which includes fed funds sold of $7.1 million) at September 30, 2023 from $8.9 million (which includes fed funds sold of $2.0 million) at December 31, 2022.

This increase was primarily the result of a decrease in securities of $15.6 million resulting primarily from the sale of a group of securities in January 2023 as part of an investment repricing strategy, an increase in deposits of $3.8 million, or, 1.3%, and an increase in FHLB advances of $16.9 million, or 27.0%, partially offset primarily by an increase in loans of $17.6 million, an increase in net premises and equipment of $4.1 million, dividends paid of $265,000, stock repurchases of $1.6 million and an increase in interest bearing deposits in banks of $7.0 million.

Cash and cash equivalents increased $7.9 million, or 60.3%, to $21.0 million (which includes fed funds sold of $15.1 million) at March 31, 2024 from $13.1 million (which includes fed funds sold of $7.6 million) at December 31, 2023.

This increase was primarily the result of the loan sale of $12.4 million resulting primarily from the strategic sale of a block of loans in March 2024, an increase in deposits of $14.6 million, or, 4.6%, and a decrease in securities on $1.5 million, partially offset primarily by a write down of $2.3 million to mark loans held for sale to fair value, dividends paid of $128,000, stock repurchases of $154,000, and an increase of $16.2 million in interest bearing deposits in banks to maximize return.

Interest Bearing Deposits in Banks.

Interest bearing deposits in banks were $9.1 million at September 30, 2023, compared to $2.1 million at December 31, 2022, an increase of $7.0 million, or 333.3%.

The increase was primarily the result of the purchase of $5.0 million in Qwickrate Certificates of Deposit (CDs) and an increase of $2 million in excess cash being moved to a higher yielding interest bearing account.

The Bank utilizes the Qwickrate listing service, which is a resource where banks can purchase and sell Certificates of Deposit (CDs) with other banks, to invest excess funds easily in CDs at a competitive rate.

At September 30, 2023, there was $5.0 million in short-term (3-6 months) Qwickrate CDs with other banks.

Interest bearing deposits in banks increased $16.2 million, or 131.7%, to $28.5 million at March 31, 2024, compared to $12.3 million at December 31, 2023.

The increase was primarily the result of net purchases of $5.0 million in Qwickrate Certificates of Deposit (CDs) and an increase of $11.0 million in excess cash being moved to a higher yielding interest bearing account.

The Bank utilizes the Qwickrate listing service, which is a resource where banks can purchase and sell Certificates of Deposit (CDs) with other banks to invest excess funds in CDs at a competitive rate.

At March 31, 2024, there was $8.2 million in short-term (3-6 months) Qwickrate CDs with other banks.

Securities Available for Sale.

Securities available for sale decreased by $14.7 million, or 13.7%, to $92.5 million at September 30, 2023 from $107.2 million at December 31, 2022.

The decrease in securities resulted primarily from the sale of a group of securities as part of an investment repricing strategy adopted in January 2023 to take advantage of then current market interest rate spreads.

Sixteen securities were sold totaling $17.0 million at a loss of $1.7 million in order to reprice the portfolio by purchasing investments yielding higher returns, including purchases of $9.5 million during the period.

During 2023, we had purchases of securities of $9.5 million and received paydowns of $4.7 million.

Net unrealized losses increased on the available for sale portfolio by $703,000, or 10.0%, to $7.7 million, net of tax, from $7.0 million, net of tax, due primarily to increases in unrealized losses from rising market interest rates being partially offset by the realized loss of $1.3 million, net of tax, related to the sale of securities being removed from the total.

Gross unrealized losses on the AFS portfolio consisting of 84 securities increased from $8.9 million, or 7.6% of the portfolio’s amortized cost of $116.0 million at December 31, 2022, to $9.7 million, or 9.4% of the amortized cost of $102.2 million at September 30, 2023.

Securities available for sale decreased by $243,000, or 0.3%, to $93.1 at March 31, 2024 from $93.3 million at December 31, 2023.

During the three months ended March, 31 2024, we had purchases of securities of $994,000 and received paydowns of $1.5 million.

Net unrealized losses on the available for sale portfolio, including derivatives, decreased by $417,000, or 7.5%, to $5.2 million, net of tax, from $5.6 million, net of tax, due primarily to decreases in unrealized losses from rising market interest rates.

Gross unrealized losses on the AFS portfolio consisting of 83 securities decreased from $7.2 million, or 7.2% of the portfolio’s amortized cost of $100.5 million at December 31, 2023, to $7.1 million, or 7.1% of the amortized cost of $100.2 million at March 31, 2024.

These unrealized losses are due to increases in market interest rates.

The total net unrealized losses as reflected in the other comprehensive losses (AOCI) was further reduced by $743,000 to $7.0 million at September 30, 2023 from purchases of derivatives hedged against a portion of the AFS portfolio.

This left total other comprehensive losses flat at $7.0 million on September 30, 2023 and December 31, 2022.

Securities Held to Maturity.

Securities held to maturity decreased by $932,000, or 3.3%, to $26.9 million at September 30, 2023 from $27.8 million at December 31, 2022.

This decrease is due primarily to the purchase of one security of $2.1 million as part of the repricing strategy, being offset by paydowns of $3.0 million.

The HTM portfolio had 70 securities with gross unrealized losses of $3.7 million, or 13.7%, of the amortized cost of $26.9 million at September 30, 2023 compared to $3.2 million, or 11.5%, of the amortized cost of $27.8 million at December 31, 2022.

Securities held to maturity decreased by $1.2 million, or 4.6%, to $24.8 million at March 31, 2024 from $26.0 million at December 31, 2023.

This decrease is due primarily to one security of $395,000 being called and paydowns of $818,000.

The HTM portfolio had 69 securities with gross unrealized losses of $2.7 million, or 10.8%, of the amortized cost of $24.8 million at March 31, 2024 compared to $2.6 million, or 10.0%, of the amortized cost of $26.0 million at December 31, 2023.

These unrealized losses are due to increases in market interest rates.

Loans and Leases Receivable, Net.

Net loans and leases receivable increased $17.6 million, or 7.0%, to $268.9 million at September 30, 2023 from $251.3 million at December 31, 2022.

Loans secured by residential real estate, multifamily and farmland comprise $185.1 million, or 68.1%, of total loans and commercial real estate loans total $35.5 million, or 13.1%, of total loans at September 30, 2023.

During the nine months ended September 30, 2023, loan originations totaled $86.5 million of which $15.5 million were renewals, or refinancings of existing loans with Mineola Community Bank (including interim construction loans converting to a permanent loan), resulting in originations of new loans of $71.0 million.

Originations consisted primarily of $23.2 million in one-to-four family residential mortgage loans, a $7.7 million multifamily loan, construction loans of $37.8 million (when fully funded upon completion), $5.1 million in commercial real estate loans, $3.6 million in consumer loans, $4.2 million in commercial and industrial loans, $1.4 million in land & development loans, $1.9 million in farmland loans and $1.4 million in municipal loans.

Originated construction loans included $18.6 million in commercial construction and $19.3 million in residential construction loans, including 19 speculative construction home loans of $5.9 million.

During the nine months ended September 30, 2023, there were $61.1 million in loan principal payments and $50.7 million in loan payoffs.

During the nine months ended September 30, 2023, construction loans (when fully funded upon completion) increased by $4.3 million, or 8.0%, to $58.3 million at September 30, 2023 from $54.0 million at December 31, 2022.

The total construction loan portfolio consisting of 93 loans had funded balances of $31.6 million at September 30, 2023 compared to 98 loans at December 31, 2022 with funded balances of $30.7 million.

Construction loans continue to be a large segment of our loan portfolio.

Deposits increased $3.8 million, or 1.3%, to $299.9 million at September 30, 2023 from $296.1 million at December 31, 2022.

Core deposits (defined as all deposits other than certificates of deposit) decreased $20.0 million, or 9.7%, to $186.7 million at September 30, 2023 from $206.7 million at December 31, 2022.

Retail certificates of deposit increased $23.7 million, or 30.7%, to $101.0 million at September 30, 2023 from $77.3 million at December 31, 2022.

At September 30, 2023, there were $12.0 million in brokered deposits.

The decrease in core deposits and increase in CDs is primarily the result of the Bank offering a special CD with a higher rate in an effort to retain deposits resulting in customers moving funds within the Bank to the higher yielding account.

We have also increased the rate on money market accounts as part of the retention effort during this time of rising market interest rates and a competitive deposit market.

As a result, our cost of deposits increased 92 basis points, or 86.8%, to 1.98% at September 30, 2023 compared to 1.06% at December 31, 2022.

At September 30, 2023, there were 154 accounts with balances in excess of the $250,000 FDIC insurance limit with a total of $63.0 million, or 21.0% of deposits.

The amount that was over

$250,000 was $24.5 million, or 8.2%, that was potentially uninsured, including certificates of deposit of $7.4 million and $17.1 million in checking, MMDA and savings accounts.

Net loans and leases receivable decreased $12.4 million, or 4.4%, to $267.5 million at March 31, 2024 from $279.9 million at December 31, 2023.

The decrease in loans was primarily due to the sale of a block of 54 performing loans totaling $12.4 million being sold at a loss of $1.5 million, net of mortgage servicing rights, and a write down of $2.3 million on 81 additional performing loans from a book value of $17.0 million to a fair value of $14.7 million while these loans are being held for sale.

The sales are part of a portfolio repositioning strategy to take advantage of repricing opportunities with the goal of increasing yield, shortening weighted average life and diversifying the loan portfolio while reducing the concentration in residential loans and the risk related to that concentration.

There were additional loan principal paydowns of $3.7 million and payoffs of $13.3 million partially offset by $16.8 million in originations.

The loan and lease portfolio, including loans held for sale of $14.7 million 1-4 family residential loans, totaled $270.3 million and is comprised of $255.1 million, or 94.4%, real estate loans, $6.8 million, or 2.51%, commercial and industrial loans, $4.5 million, or 1.7%, consumer loans and $3.9 million, or 1.4%, municipal and other loans.

Real estate loans include $157.2 million, or 58.2%, 1-4 family residential loans, $11.2 million, or 4.4%, multi-family loans $42.1 million, or 16.1%, commercial real estate (CRE), $16.4 million, or 6.1%, in1-4 family construction loans, $20.8 million, or 7.7%, in other construction and development loans and $7.4 million, or 2.7%, in farmland loans.

Total loans include interim construction loans of $31.2 million, or 61.7%, of the completed project balance of $50.6 million which includes $23.6 million in single-family residence loans, including $5.9 million in speculative loans to builders, $2.4 million in subdivision construction, $16.2 million in muti-family construction and $8.4 million in CRE.

The total construction loan portfolio consisted of 78 loans with outstanding balances of $50.6 million at March 31, 2024 compared to 82 loans at December 31, 2023 with outstanding balances of $54.3 million.

Deposits increased $14.6 million, or 4.6%, to $331.8 million at March 31, 2024 from $317.2 million at December 31, 2023.

Core deposits (defined as all deposits other than certificates of deposit) increased $11.3 million, or 5.7%, to $209.8 million at March 31, 2024 from $198.5 million at December 31, 2023.

Retail certificates of deposit increased $3.3 million, or 3.1%, to $109.8 million at March 31, 2024 from $106.5 million at December 31, 2023.

At March 31, 2024, there were $12.0 million in brokered deposits.

The average cost of deposits increased 48 basis points, or 23.1%, to 2.56% at March 31, 2024 compared to 2.08% at December 31, 2023.

At March 31, 2024, there were 179 accounts with balances in excess of the $250,000 FDIC insurance limit with an aggregate balance of $93.9 million, or 28.3% of deposits.

The amount that was over $250,000 was $49.2 million, or 14.8%, that was potentially uninsured, including certificates of deposit of $9.7 million and $39.5 million in checking, MMDA and savings accounts.

Advances from Federal Home Loan Bank.

Advances from Federal Home Loan Bank increased by $16.9 million, or 27.0%, to $79.4 million at September 30, 2023 from $62.5 million at December 31, 2022 due to additional advances of $19.0 million, offset by scheduled monthly principal payments on amortizing advances of $2.1 million.

The advances were purchased to help fund loan growth and real estate purchases.

Advances from Federal Home Loan Bank decreased by $369,000, or 0.5%, to $76.5 million at March 31, 2024 from $76.9 million at December 31, 2023 due to normal payments on amortizing advances.

There are six advances totaling $15.7 million maturing in 2024.

There are no current plans to renew these advances.

Total Shareholders’ Equity.

Total shareholders’ equity decreased $2.6 million, or 4.7%, to $53.3 million at September 30, 2023 from $55.9 million at December 31, 2022.

This decrease was primarily due to a net loss for the nine months ended September 30, 2023 of $401,000 resulting primarily from the loss on the sale of securities of $1.3 million, net of tax, and a one-time CECL adjustment (increase in the allowance for credit losses) of $1.0 million, net of tax, for the cumulative effect of a change in accounting principle used to estimate credit losses that was effective on January 1, 2023.

The CECL cumulative effect adjustment flowed directly through capital instead of being charged as a provision expense for credit losses through the consolidated statement of operations.

The Company also repurchased 127,417 shares of its common stock for a decrease of $1.6 million and paid quarterly dividends totaling $265,000, partially offset by an increase in equity of $467,000 from stock plan vesting of the 2022 Equity Plan and an increase of $127,000 with the commitment to release 9,774 additional ESOP shares to participants for the nine months ended September 30, 2023.

At September 30, 2023, Mineola Community Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes, as permitted by the CARES Act.

At September 30, 2023, a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements.

At September 30, 2023, Mineola Community Bank was well capitalized and had a ratio of 11.16%.

Total shareholders’ equity decreased $2.2 million, or 4.1%, to $51.5 million at March 31, 2024 from $53.7 million at December 31, 2023.

This decrease was primarily due to a net loss for the three months ended March 31, 2024 of $2.7 million resulting primarily from the loss on the sale of loans of $1.5 million, net of mortgage servicing rights, and a $2.3 million provision to mark loans held for sale to fair value.

The Company also repurchased 11,000 shares of its common stock for a decrease of $154,000 and paid quarterly dividends totaling $128,000, partially offset by an increase in equity of $286,000 from vesting of the 2022 Equity Plan and an increase of $46,000 with the quarterly accrual of ESOP commitments for the three months ended March 31, 2024.

At March 31, 2024, 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, 2024, Broadstreet Bank was well capitalized and had a ratio of 10.09%.

Average Balance Sheets

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Nonaccrual loans are only included in the computation of average balances.

Average yields for loans include loan fees of $242,000 and $90,000 for the three months ended September 30, 2023 and 2022, respectively.

Average yields for loans include loan fees of $85,000 and $70,000 for the three months ended March 31, 2024 and 2023, respectively.

We have not recorded deferred loan fees, as we have determined them to be immaterial.

For the Three Months Ended September 30,

For the Three Months Ended March 31,

(Dollars in thousands)

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(3) Net interest margin represents net interest income divided by average total interest earning assets.

Comparison of the Operating Results for the Three Months Ended September 30, 2023 and September 30, 2022

The Company had net income of $456,000 for the three months ended September 30, 2023, compared to net income of $539,000 for the three months ended September 30, 2022, a decrease of $83,000, or 15.4%.

The decrease was primarily due to an increase in noninterest expense of $298,000, or 11.8%, an increase in interest expense of $1.7 million, or 377.0%, and a decrease of 65 basis points, or 21.8%, in net interest rate spread.

Comparison of the Operating Results for the Three Months Ended March 31, 2024 and March 31, 2023

The Company had a net loss of $2.7 million for the three months ended March 31, 2024, compared to a net loss of $1.0 million for the three months ended March 31, 2023, a decrease of $1.7 million, or 170.0%.

The net loss was primarily due to a $2.4 million, or 200.0%, decrease in noninterest income resulting primarily from the sale of a group of 54 performing loans as part of a balance sheet repositioning strategy at a loss of $1.5 million, net of mortgage servicing rights, and funding a valuation allowance of $2.3 million to bring $17.0 million in residential mortgage loans held for sale to fair value.

Additionally, there was a $433,000, or $16.4%, increase in noninterest expenses, partially offset by a $367,000, or 407.8%, decrease in the provision for credit losses and a $422,000, or 147.6%, decrease in income tax expense.

Interest Income.

Interest income increased $1.8 million, or 56.3%, to $5.0 million for the three months ended September 30, 2023 from $3.2 million for the three months ended September 30, 2022.

This was primarily the result of increased interest income on securities and loans due to increased yields and an increase in the average balance of loans and securities.

Average interest earning assets increased by $56.2 million, or 16.1%, from $349.5 million for the three months ended September 30, 2022 to $405.7 million at September 30, 2023, and an increase in the yield on interest earning assets of 125 basis points, or 34.1%, from 3.66% for the three months ended September 30, 2022 to 4.91% for the three months ended September 30, 2023.

Interest income on loans increased $879,000, or 34.7%, to $3.4 million for the three months ended September 30, 2023 from $2.5 million for the three months ended September 30, 2022.

This increase resulted primarily from an increase in average loans of $36.8 million, or 15.6%, from $235.4 million for the three months ended September 30, 2022 to $272.2 million for the three months ended September 30, 2023, with an increase in loan yield of 71 basis points, or 16.5%, to 5.01% for the three months ended September 30, 2023 from 4.30% for the three months ended September 30, 2022.

The increase in loan yield was due primarily to increased market interest rates and increased loan fees primarily on loans other than residential.

Interest income on securities increased $675,000, or 112.3%, from $601,000 for the three months ended September 30, 2022 to $1.3 million for the three months ended September 30, 2023.

This increase resulted from an increase in the average balance of securities of $19.6 million, or 19.1%, from $102.7 million for the three months ended September 30, 2022 to $122.3 million for the three months ended September 30, 2023 and an increase of 183 basis points, or 78.3%, in average yield from 2.34% for the three months ended September 30, 2022 to 4.17% for the three months ended September 30, 2023.

Interest income increased $1.3 million, or 31.7%, to $5.4 million for the three months ended March 31, 2024 from $4.1 million for the three months ended March 31, 2023.

This was primarily the result of increased interest income on loans due to increased yields and an increase in the average balance of loans.

Average interest earning assets increased by $32.4 million, or 8.3%, from $392.5 million for the three months ended March 31, 2023 to $424.9 million at March 31, 2024, and an increase in the yield on interest earning assets of 88 basis points, or 20.7%, from 4.22% for the three months ended March 31, 2023 to 5.10% for the three months ended March 31, 2024.

Interest income on loans increased $929,000, or 33.4%, to $3.7 million for the three months ended March 31, 2024 from $2.8 million for the three months ended March 31, 2023.

This increase resulted primarily from an increase in average loans of $24.5 million, or 9.5%, from $256.8 million for the three months ended March 31, 2023 to $281.3 million for the three months ended March 31, 2024, with an increase in loan yield of 94 basis points, or 21.8%, to 5.27% for the three months ended March 31, 2024 from 4.33% for the three months ended March 31, 2023.

The increase in loan yield was due primarily to increased market interest rates and increased loan fees primarily on loans other than residential mortgage loans.

Additionally, the Company recognized $76,000 in interest income on a loan payoff from a loan had been on nonaccrual status.

Interest income on securities decreased $37,000, or 3.0%, from $1.3 million for the three months ended March 31, 2023 to $1.2 million for the three months ended March 31, 2024.

This decrease resulted from a decrease in the average balance of securities of $7.7 million, or 6.1%, from $126.8 million for the three months ended March 31, 2023 to $119.1 million for the three months ended March 31, 2024, partially offset by and an increase of 13 basis points, or 3.3%, in average yield from 3.95% for the three months ended March 31, 2023 to 4.09% for the three months ended March 31, 2024.

The rate increase is reflective of market rate increases and the diversification of the securities portfolio to include higher yielding commercial mortgage-backed securities, subordinated bank debt and other bonds with interest rates that are not tied to conventional residential mortgage loan rates.

In January 2023, the Company sold 16 securities totaling $17.0 million at a loss of $1.7 million as part of a repricing strategy to increase interest income.

A portion of these funds have been reinvested into these higher yielding securities accounting for part of the 183 basis point yield increase between September 30, 2022 and September 30, 2023.

The Federal Reserve increased rates 500 basis points, or 1,000%, between March 31, 2022 and September 30, 2023.

Interest income on interest bearing deposits in banks increased $59,000, or 393.3%, from $15,000 for the three months ended September 30, 2022 to $74,000 for the three months ended September 30, 2023.

This increase resulted primarily from an increase in average yield of 338 basis points, or 178.1%, from 1.90% for the three months ended September 30, 2022 to 5.28% for the three months ended September 30, 2023 and an increase in average interest bearing deposits of $2.4 million, or 77.4% from $3.2 million for the three months ended September 30, 2022 to $5.6 million for the three months ended September 30, 2023.

There was also an increase of $19,000 in fed funds interest income for the three months ended September 30, 2023 primarily from an increase of 313 basis points, or 150.0%, in average yield on fed funds sold from 2.09% for the three months ended September 30, 2022 to 5.22% for the three months ended September 30, 2023, partially offset by a $3.3 million, or 41.5%, decrease in average fed funds sold from $7.9 million for the three months ended September 30, 2022 to $4.6 million for the three months ended September 30, 2023.

The increase in yields on deposits in banks and fed funds is reflective of the sharp increase in market interest rates.

Dividends from restricted investments increased $35,000, or 388.9%, from $9,000 for the three months ended September 30, 2022 to $44,000 for the three months ended September 30, 2023.

This increase primarily resulted from a $35,000, or 500.0%, increase in dividends from FHLB stock from $7,000 for the three months ended September 30, 2022 to $42,000 for the three months ended September 30, 2023.

During the three months ended September 30, 2023 we were required to purchase $348,000 in FHLB stock to fully secure advance obligations obtained during the period.

Interest income from the fair value hedge was $112,000 for the three months ended September 30, 2023.

The Company entered into an interest rate swap agreement in the nine months ended September 30, 2023 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position.

Interest income on interest bearing deposits in banks increased $207,000, or 422.4%, from $49,000 for the three months ended March 31, 2023 to $256,000 for the three months ended March 31, 2024.

This increase resulted primarily from an increase in average interest bearing deposits of $14.1 million, or 300.0% from $4.7 million for the three months ended March 31, 2023 to $18.8 million for the three months ended March 31, 2024 and an increase in average yield of 128 basis points, or 30.8%, from 4.16% for the three months ended March 31, 2023 to 5.44% for the three months ended March 31, 2024.

There was also an increase of $28,000 in fed funds interest income for the three months ended March 31, 2024 primarily from an increase of 76 basis points, or 16.6%, in average yield on fed funds sold from 4.58% for the three months ended March 31, 2023 to 5.34% for the three months ended March 31, 2024 and a $1.6 million, or 47.1%, increase in average fed funds sold from $3.4 million for the three months ended March 31, 2023 to $5.0 million for the three months ended March 31, 2024.

The increase in yields on deposits in banks and fed funds is reflective of the increase in market interest rates and migration to higher rate deposits.

Dividends from restricted investments increased $30,000, or 120.0%, from $25,000 for the three months ended March 31, 2023 to $55,000 for the three months ended March 31, 2024.

This increase primarily resulted from a $27,000, or 108%, increase in dividends from FHLB stock from $25,000 for the three months ended March 31, 2023 to $52,000 for the three months ended March 31, 2024.

Interest income from the fair value hedge was $115,000 for the three months ended March 31, 2024.

The Company entered into an interest rate swap agreement in May 2023 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position.

Refer to additional detail regarding the fair value hedge in Note 10 – Derivatives of the accompanying unaudited consolidated financial statements.

Interest Expense.

Total interest expense increased $1.7 million, or 377.0%, to $2.1 million for the three months ended September 30, 2023 from $447,000 for the three months ended September 30, 2022 primarily due to an increase in the average cost of interest-bearing liabilities of 190 basis points, or 281.1%, from 0.68% for the three months ended September 30, 2022 to 2.58% for the three months ended September 30, 2023, primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $1.1 million, or 381.0%, to $1.4 million for the three months ended September 30, 2023 from $300,000 for the three months ended September 30, 2022, due to an increase in the average deposit cost of 177 basis points, or 348.3%, from 0.51% for the three months ended September 30, 2022 to 2.28% for the three months ended September 30, 2023 and an increase in average interest-bearing deposits of $17.2 million, or 7.2% from $236.4 million for the three months ended September 30, 2022 to $253.6 million for the three months ended September 30, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction and savings accounts.

Part of the migration to higher yielding accounts results from a deposit retention strategy of offering a special higher interest rate CD and higher money market rates implemented during the quarter ended December 31, 2022.

Interest expense on Federal Home Loan Bank advances increased $543,000, or 377.1%, to $687,000 for the three months ended September 30, 2023 from $144,000 for the three months ended September 30, 2022.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $49.1 million, or 179.6%, to $76.4 million for the three months ended September 30, 2023 from $27.3 million for the three months ended September 30, 2022 and an increase in average yield of 149 basis points, or 70.7%, from 2.11% for the three months ended September 30, 2022 to 3.60% for the three months ended September 30, 2023.

The increase in average advances was primarily to fund loan growth and securities purchases related to repricing strategy.

At September 30, 2023, we have lengthened our short-term advances as they have matured and are holding excess liquidity in interest bearing accounts and fed funds.

The Company believes this to be prudent given the uncertainty in the market, including consumer behavior and interest rates, and management concerns about regulatory response and public perceptions in light of recent large regional bank failures.

Net Interest Income.

Net interest income increased $94,000, or 3.4%, to $2.8 million for the three months ended September 30, 2023 from $2.7 million for the three months ended September 30, 2022 due primarily to the increase in interest-earning assets of $56.2 million, or 16.1%, to $405.7 million at September 30, 2023 from $349.5 million at September 30, 2022, partially offset by a decrease in net interest rate spread of 65 basis points, or 21.8%, from 2.98% for the three months ended September 30, 2022 to 2.33% for the three months ended September 30, 2023.

Net interest margin had a 35 basis point, or 11.1%, decrease to 2.80% for the three months ended September 30, 2023 from 3.15% for the three months ended September 30, 2022.

The decrease in net interest rate spread was primarily due to the rapid increase in rates between periods and the inability to reprice interest earning assets at the same speed as interest bearing liabilities with the average yield on interest earning assets increasing by 125 basis points, or 34.1%, compared to the average increase on interest bearing liabilities increasing by 190 basis points, or 281.1%.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $29,000 for the three months ended September 30, 2023, compared to $48,000 for the three months ended September 30, 2022, a decrease of $19,000, or 39.6%, primarily due to the conversion to the CECL methodology in 2023 and changes in loan volume in various loan types within the loan portfolio.

See the CECL discussion in the accompanying consolidated financial statements for further explanation of the Bank’s transition to the new methodology.

Noninterest Income.

Noninterest income increased $93,000, or 18.6%, to $592,000 for the three months ended September 30, 2023 from $499,000 for the three months ended September 30, 2022, due primarily to an increase in loan fee income from the wholesale lending program of $81,000 to $84,000 for the three months ended September 30, 2023 from $3,000 for the three months ended September 30, 2022, rental income of $5,000 on the newly acquired buildings

located adjacent to the current Bank premises that were purchased in January of 2023 for future expansion, and a $16,000 increase in service charges on deposit accounts.

Noninterest Expense.

Noninterest expense increased $298,000, or 11.8%, to $2.8 million for the three months ended September 30, 2023 from $2.5 million for the three months ended September 30, 2022 primarily due to increases in salaries and employee benefits, data processing, technology, contract services, and other expenses.

Salary and employee benefit expenses increased by $191,000, or 12.8%, to $1.7 million for the three months ended September 30, 2023 from $1.5 million for the three months ended September 30, 2022, due primarily to compensation expenses due to normal salary and benefits increases and an increase of $161,000 for stock options and restricted stock awards granted under the 2022 Equity Plan, which was approved by shareholders and effective on August 31, 2022.

Data processing increased $19,000, or 8.4% due primarily to due to cost increases from providers.

Technology expenses increased $25,000, or 25.5%, to $123,000 for the three months ended September 30, 2023 from $98,000 for the three months ended September 30, 2022.

Other expenses increased $40,000, or 10.4%, primarily due to an increase of $12,000 in insurance expenses due to normal rate increases and the addition of new properties, an increase in FDIC assessment expenses of $22,000 primarily due to an overall increase in the FDIC assessment rate, and an increase of $13,000 in office supply expense primarily related to opening the loan production office in Canton and the new branch in Tyler.

Contract services increased $12,000, or 23.1%, to $64,000 for the three months ended September 30, 2023 from $52,000 for the three months ended September 30, 2022.

These increases are reflective of the price increases in all types of services that the Company incurred in 2023, primarily as a result of general wage and inflationary pressures.

Income Tax Expense.

Income tax expense decreased by $9,000, or 7.1%, to $117,000 for the three months ended September 30, 2023 from $126,000 for the three months ended September 30, 2022, due to the decrease in net income before taxes of $92,000 from $665,000 for the three months ended September 30, 2022 to $573,000 for the three months ended September 30, 2023.

The effective tax rate was 20.42% and 18.95% for the three months ended September 30, 2023 and 2022, respectively.

The increase in effective tax rate was primarily due to taxable income increasing at a faster rate than nontaxable income and the effect of a temporary tax difference becoming permanent during the three months ended September 30, 2023.

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.

Non-accrual loans are only included in the computation of average balances.

Average yields for loans (excluding PPP loans) include loan fees of $456,000 and $304,000 for the nine months ended September 30, 2023 and 2022, respectively.

We have not recorded deferred loan fees, as we have determined them to be immaterial.

For the Nine Months Ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans (excluding PPP loans)

Allowance for loan and lease losses

Restricted stock

Interest-bearing deposits in banks

Federal funds sold

Financial derivative

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Regular savings and other deposits

Money market deposits

Certificates of deposit

Total interest-bearing deposits

Advances from the Federal Home Loan Bank

Other liabilities

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Other noninterest-bearing liabilities

Total liabilities

Total shareholders' equity

Total liabilities and shareholders' 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

(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 net interest income divided by average total interest earning assets.

Comparison of the Operating Results for the Nine Months Ended September 30, 2023 and September 30, 2022

The Company had a net loss of $401,000 for the nine months ended September 30, 2023, compared to net income of $1.3 million for the nine months ended September 30, 2022, a decrease of $1.7 million, or 130.8%.

The net loss was primarily due to a $1.5 million, or 107.4%, decrease in noninterest income resulting primarily from the sale of securities at a net loss of $1.7 million.

Additionally, there was a $1.2 million increase in noninterest expense and a $87,000 increase in provision for credit losses, partially offset by a $581,000 increase in net interest income and a decrease in income tax expense of $466,000.

Interest Income.

Interest income increased $4.8 million, or 53.9%, from $8.9 million for the nine months ended September 30, 2022 to $13.7 million for the nine months ended September 30, 2023.

This was primarily the result of increased interest income on securities and loans due to increased yields and an increase in the average balance of loans and securities.

Average interest earning assets increased by $52.0 million, or 14.9%, from $348.8 million for the nine months ended September 30, 2022 to $400.8 million at September 30, 2023, and the yield on interest earning assets increased 114 basis points, or 33.5%, from 3.40% for the nine months ended September 30, 2022 to 4.54% for the nine months ended September 30, 2023.

Interest income on loans increased $2.0 million, or 27.4%, to $9.3 million for the nine months ended September 30, 2023 from $7.3 million for the nine months ended September 30, 2022.

This increase resulted primarily from an increase in average loans of $35.4 million, or 15.4%, from $229.8 million for the nine months ended September 30, 2022 to $265.2 million for the nine months ended September 30, 2023, and an increase in loan yield of 41 basis points, or 9.7%, to 4.67% for the nine months ended September 30, 2023 from 4.26% for the nine months ended September 30, 2022.

The increase in loan yield was due primarily to increased market interest rates.

Interest income on securities increased $2.4 million, or 171.4%, from $1.4 million for the nine months ended September 30, 2022 to $3.8 million for the nine months ended September 30, 2023.

This increase resulted primarily from an increase in the average balance of securities of $26.0 million, or 26.3%, from $99.1 million for the nine months ended September 30, 2022 to $125.1 million for the nine months ended September 30, 2023 and an increase of 213 basis points, or 111.2%, in average yield from 1.91% for the nine months ended September 30, 2022 to 4.04% for the nine months ended September 30, 2023.

In January 2023, the Company sold 16 securities totaling $17.0 million at a loss of $1.7 million as part of a repricing strategy to increase interest income.

A portion of these funds have been reinvested into these higher yielding securities accounting for part of the difference in the 213 basis point yield increase between September 30, 2022 and September 30, 2023.

The Federal Reserve increased rates 500 basis points, or 1,000.0%, between March 31, 2022 and September 30, 2023.

Interest income from interest bearing deposits in banks increased $168,000, or 494.1%, from $34,000 for the nine months ended September 30, 2022 to $202,000 for the nine months ended September 30, 2023, resulting primarily from the increase in average yield of 374 basis points, or 473.4%, from 0.79% for the nine months ended September 30, 2022 to 4.53% for the nine months ended September 30, 2023 and an increase in average interest bearing deposits of $184,000, or 3.2% from $5.7 million for the nine months ended September 30, 2022 to $5.9 million for the nine months ended September 30, 2023.

There was also an increase of $50,000 in fed funds interest income for the nine months ended September 30, 2023 primarily from an increase of 419 basis points, or 540.3%, in average yield on fed funds sold from 0.78% for the nine months ended September 30, 2022 to 4.97% for the nine months ended September 30, 2023, partially offset by a $10.2 million, or 74.5%, decrease in average fed funds sold from $13.7 million for the nine months ended September 30, 2022 to $3.5 million for the nine months ended September 30, 2023.

The fed funds were used to fund asset growth.

The increase in yields on deposits in banks and fed funds is reflective of the sharp increase in market interest rates.

Dividends from restricted investments increased $85,000, or 425.0%, from $20,000 for the nine months ended September 30, 2022 to $105,000 for the nine months ended September 30, 2023.

This increase partially resulted from an $88,000, or 628.6%, increase in dividends on FHLB stock from $14,000 for the nine months ended September 30, 2022 to $102,000 for the nine months ended September 30, 2023.

During the nine months ended September 30, 2023 we were

required to purchase $807,000 in FHLB stock to fully secure advance obligations obtained during the period.

This brought the FHLB stock balance at September 30, 2023 to $3.3 million compared to $2.5 million at September 30, 2022.

Interest income from the fair value hedge was $145,000 for the nine months ended September 30, 2023.

Refer to additional detail regarding the fair value hedge in Note 10 – Derivatives of the accompanying consolidated financial statements.

Interest Expense.

Total interest expense increased $4.2 million, or 323.1%, to $5.5 million for the nine months ended September 30, 2023 from $1.3 million for the nine months ended September 30, 2022 due to an increase in the average cost of interest-bearing liabilities of 161 basis points, or 237.8%, from 0.68% for the nine months ended September 30, 2022 to 2.28% for the nine months ended September 30, 2023, primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $2.8 million, or 311.1%, to $3.7 million for the nine months ended September 30, 2023 from $908,000 for the nine months ended September 30, 2022, due to an increase in the average deposit cost of 142 basis points, or 279.7%, from 0.51% for the nine months ended September 30, 2022 to 1.93% for the nine months ended September 30, 2023 and an increase in average interest-bearing deposits of $15.7 million, or 6.6%, from $237.6 million for the nine months ended September 30, 2022 to $253.3 million for the nine months ended September 30, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction and savings accounts.

Part of the migration to higher yielding accounts resulted from a deposit retention strategy offering a special higher interest rate CD and higher money market rates implemented during the quarter ended December 31, 2022.

As rates have continued to rise, the Bank has continued to be competitive on deposit rates.

Interest expense on Federal Home Loan Bank advances increased $1.4 million, or 331.0%, to $1.8 million for the nine months ended September 30, 2023 from $429,000 for the nine months ended September 30, 2022.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $41.8 million, or 154.3%, to $68.9 million for the nine months ended September 30, 2023 from $27.1 million for the nine months ended September 30, 2022 and an increase in average yield of 147 basis points, or 69.5%, from 2.11% for the nine months ended September 30, 2022 to 3.58% for the nine months ended September 30, 2023 The increase in average advances was primarily to fund an investment strategy initiated in 2022 and to fund loan growth.

At September 30, 2023, we have lengthened our short-term advances as they have matured and are holding excess liquidity in interest bearing accounts.

Total interest expense increased $941,000, or 62.2%, to $2.4 million for the three months ended March 31, 2024 from $1.5 million for the three months ended March 31, 2023 primarily due to an increase in average interest earning liabilities of $38.4 million to $351.4 million for the three months ended March 31, 2024 from $313.0 million for the three months ended March 31, 2023 and an increase in the average cost of interest-bearing liabilities of 86 basis points, or 44.5%, from 1.93% for the three months ended March 31, 2023 to 2.79% for the three months ended March 31, 2024, primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $771,000, or 78.2%, to $1.8 million for the three months ended March 31, 2024 from $986,000 for the three months ended March 31, 2023, due to an increase in the average deposit cost of 100 basis points, or 64.2%, from 1.56% for the three months ended March 31, 2023 to 2.56% for the three months ended March 31, 2024 and an increase in average interest-bearing deposits of $21.4 million, or 8.5% from $252.6 million for the three months ended March 31, 2023 to $274.0 million for the three months ended March 31, 2024, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction and savings accounts.

Part of the migration to higher yielding accounts resulted from a deposit retention strategy of offering a special higher interest rate CD and higher money market rates implemented during 2023.

Interest expense on Federal Home Loan Bank advances increased $170,000, or 32.3%, to $696,000 for the three months ended March 31, 2024 from $526,000 for the three months ended March 31, 2023.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $16.7 million, or 27.9%, to $76.6 million for the three months ended March 31, 2024 from $59.9 million for the three months ended March 31, 2023 and an increase in average yield of 12 basis points, or 3.5%, from 3.51% for the three months ended March 31, 2023 to 3.63% for the three months ended March 31, 2024.

The increase in average advances was primarily to fund loan growth and securities purchases related to a repricing strategy in 2023.

Net Interest Income.

Net interest income increased $582,000, or 7.7%, to $8.1 million for the nine months ended September 30, 2023 from $7.5 million for the nine months ended September 30, 2022 due primarily to an increase in interest-earning assets of $52.0 million, or 14.9%, to $400.8 million at September 30, 2023 from $348.8 million at September 30, 2022, partially offset by a decrease in net interest rate spread of 46 basis points, or 17.1%, from 2.72% for the nine months ended September 30, 2022 to 2.26% for the nine months ended September 30, 2023.

Net interest margin had an 18 basis point decrease to 2.70% for the nine months ended September 30, 2023 from 2.88% for the nine months ended September 30, 2022.

Net interest income increased $331,000, or 12.6%, to $3.0 million for the three months ended March 31, 2024 from $2.6 million for the three months ended March 31, 2023 due primarily to an increase in interest-earning assets of $32.4 million, or 8.3%, to $424.9 million at March 31, 2024 from $392.5 million at March 31, 2023.

Net interest margin had an 11 basis point, or 4.0%, increase to 2.79% for the three months ended March 31, 2024 from 2.68% for the three months ended March 31, 2023.

The increase in net interest rate spread was primarily due to repricing strategies initiated in 2023 allowing us to increase the speed of repricing interest earning assets to better align with the speed of interest bearing liabilities.

The average yield on interest earning assets increased by 88 basis points, or 20.7%, compared to the average increase on interest bearing liabilities increasing by 86 basis points, or 44.5%.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $212,000 for the nine months ended September 30, 2023, compared to $125,000 for the nine months ended September 30, 2022, an increase of $87,000, or 69.6%, primarily due to an increase in loans and leases and the adoption of ASC 326 on January 1, 2023.

See the CECL discussion in the accompanying consolidated financial statements for further explanation of the Bank’s transition to the new methodology.

Based on management’s analysis of the adequacy of the allowance for credit losses, the reversal of provision for credit losses was $277,000 for the three months ended March 31, 2024, compared to a provision for credit losses of $90,000 for the three months ended March 31, 2023, resulted in a decrease of $367,000, or 407.8%, primarily due to a decrease of $12.4 million in net loans and leases receivable to $267.5 million at March 31, 2024 from $279.9 million at December 31, 2023 and additionally removing $17.0 million in loans held for sale from the allowance calculation due to those loans being carried at fair value.

Removal of the $29.4 million in loans connected with the loan sale resulted in $265,000 of the $277,000 reversal of the provision for credit losses.

Noninterest Income.

Noninterest income decreased $1.5 million, or 107.4%, to a loss of $104,000 for the nine months ended September 30, 2023 from income of $1.4 million for the nine months ended September 30, 2022, due primarily to a $1.7 million loss on the sale of securities during the nine months ended September 30, 2023.

This was partially offset by two income items that were new to the Bank in the nine months ended September 30, 2023.

additional loan fee income from the wholesale lending program of $152,000 for the nine months ended September 30, 2023 and compared to only $7,000 for the nine months ended September 30, 2022, when the program first started, and rental income of $18,000 on space that was already leased in the two newly acquired buildings located adjacent to the current Bank premises that were purchased in January of 2023 for future expansion.

Noninterest income decreased $2.4 million, or 200.0%, to a loss of $3.6 million for the three months ended March 31, 2024 from a loss of $1.2 million for the three months ended March 31, 2023, due primarily to a loss of $1.5 million, net of mortgage servicing rights, from the sale of loans, writing down a group of residential mortgage loans being held for sale to fair value by providing a valuation allowance of $2.3 million, and a loss of $283,000 associated with demolition of the previous Lindale branch building.

This was partially offset by a gain on the sale of other real estate owned of $37,000.

The losses of the loan sales involved the sale of a block of 54 performing loans totaling $12.4 million at a loss of $1.5 million, net of mortgage servicing rights, with another 81 loans totaling $17.0 million being marked down to a fair value of $14.7 million as part of a portfolio repositioning strategy to take

advantage of repricing opportunities with the goal of increasing yield, shortening weighted average life and diversifying the loan portfolio while reducing the concentration in residential mortgages.

Noninterest Expense.

Noninterest expense increased $1.2 million, or 16.9%, to $8.3 million for the nine months ended September 30, 2023 from $7.1 million primarily due to increases in salaries and employee benefits, data processing, technology, contract services, and other expenses.

Salary and employee benefit expenses increased by $672,000, or 15.8%, to $4.9 million for the nine months ended September 30, 2023 from $4.3 million for the nine months ended September 30, 2022, due to normal salary and benefits increases and an increase in compensation expense of $446,000 for restricted stock awards and stock options granted under the 2022 Equity Plan, which was approved by shareholders on August 31, 2022.

The Equity Plan had just recently been adopted during the nine months ended September 30, 2022.

Technology expenses increased $54,000, or 18.4%, to $347,000 for the nine months ended September 30, 2023 from $293,000 for the nine months ended September 30, 2022 primarily due to higher costs.

Data processing costs also increased $67,000, or 10.8%, to $686,000 for the nine months ended September 30, 2023 from $619,000 for the nine months ended September 30, 2022.

Contract services increased $61,000, or 46.9%, to $191,000 for the nine months ended September 30, 2023 from $130,000 for the nine months ended September 30, 2022.

Other expenses increased $306,000, or 30.8%, primarily due to an increase in FDIC assessment expenses of $48,000 primarily due to an overall increase in the FDIC assessment rate, $22,000 in audit and accounting expenses, $79,000 in insurance expenses, $39,000 in investment expenses, $13,000 in marketing expense and $54,000 in other operating expenses primarily due to a one-time fee associated with hiring.

Increases are reflective of the price increases in all types of services that the Company incurred in 2023, primarily as a result of general wage, inflationary pressures and fees correlated with asset size of the Company.

Noninterest expense increased $433,000, or 16.4%, to $3.1 million for the three months ended March 31, 2024 from $2.6 million for the three months ended March 31, 2023 primarily due to increases in salaries and employee benefits, occupancy and equipment, data processing, and other expenses.

Salary and employee benefit expenses increased by $98,000, or 6.3%, to $1.7 million for the three months ended March 31, 2024 from $1.6 million for the three months ended March 31, 2023, due to an initial $129,000 vesting expense for equity awards offset by reduced executive salary expense related to the CEO transition in 2023.

Occupancy and equipment expense increased $88,000, 44.7%, primarily due to additional expenses related to a new branch in Tyler and completion of a new branch building in Lindale.

Data processing increased $20,000, or 9.0%, due primarily to normal cost increases from providers.

Other expenses increased $237,000, or 61.7%, primarily due to an increase of $61,000 in audit and accounting expenses related primarily to loan review, an increase in FDIC assessment expenses of $23,000 primarily due to an overall increase in the FDIC assessment rate and an increase in deposits, an increase of $20,000 in office supply expense and $17,000 in marketing expense primarily related to opening new locations, entering new markets and expenses associated with changing the Bank’s name.

The Bank had nonrecurring costs of $28,000 associated with the demolition cost of the existing building in Lindale and legal fees of $38,000.

Income Tax Expense.

Income tax expense decreased by $466,000, or 142.1%, to an income tax benefit of $138,000 for the nine months ended September 30, 2023 from an income tax expense of $328,000 for the nine months ended September 30, 2022, due to the net loss at September 30, 2023.

The effective tax rate was 25.60% and 19.59% for the nine months ended September 30, 2023 and 2022, respectively.

The increase in effective tax rate was primarily due to taxable income increasing at a faster rate than nontaxable income.

Income tax expense decreased by $422,000, or 147.6%, to a tax benefit $708,000 for the three months ended March 31, 2024 from a tax benefit of $286,000 for the three months ended March 31, 2023, due to a decrease in net income before taxes of $2.1 million from a loss of $1.3 million for the three months ended March 31, 2023 to a loss of $3.4 million for the three months ended March 31, 2024.

The effective tax rate was 20.87% and 21.95% for the three months ended March 31, 2024 and 2023, respectively.

The decrease in effective tax rate was primarily due to nontaxable income increasing at a faster rate than taxable income.

Liquidity and Capital Resources

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We are also able to borrow from the Federal Home Loan Bank of Dallas.

At September 30, 2023, we had outstanding advances of $79.4 million from the Federal Home Loan Bank of Dallas.

At September 30, 2023, we had unused borrowing capacity of $75.3 million with the Federal Home Loan Bank of Dallas.

In addition, at September 30, 2023, we had a $10.0 million line of credit with Texas Independent Bankers Bank and a $5.0 million line of credit with First Horizon Bank.

At September 30, 2023, there was no outstanding balance under any of these facilities.

At March 31, 2024, we had outstanding advances of $76.5 million from the Federal Home Loan Bank of Dallas.

At March 31, 2024, we had unused borrowing capacity of $81.2 million with the Federal Home Loan Bank of Dallas.

In addition, at March 31, 2024, we had an unused $10.0 million line of credit with Texas Independent Bankers Bank and an unused $5.0 million line of credit with First Horizon Bank.

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 short-term investments including interest-bearing demand deposits.

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.

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cash flows from operating activities, investing activities, and financing activities.

For additional information, see the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 included as part of the consolidated financial statements included in this report.

For additional information, see the consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 included as part of the consolidated financial statements included in this report.

We are committed to maintaining a strong liquidity position.

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Texas Community Bancshares, Inc.

is a separate legal entity from Mineola Community 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 Mineola Community Bank.

The amount of dividends that Mineola Community Bank may declare and pay to 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.

At September 30, 2023, Texas Community Bancshares, Inc.

At March 31, 2024, Texas Community Bancshares, Inc.

(on a stand-alone, unconsolidated basis) had liquid assets of $9.8 million.

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With continued volatility in the market, recent banking sector events and market interest rate increases, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning.

We are monitoring deposit runoff and threats of deposit runoff daily.

We have been able to maintain our deposit base through this cycle with some new product offerings and competitive interest rates, which has increased our funding costs.

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.

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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 have contacted some of our large depositors and had discussions with them regarding how to have FDIC coverage to the fullest legal extent, which is over $250,000 for many depositors depending on the type of account ownership.

At September 30, 2023, there were 154 accounts with balances in excess of $250,000 with a total of $63.0 million, or 21.0% of deposits.

We are monitoring our large depositors and continue to have discussions on how to have FDIC coverage to the fullest legal extent, which is over $250,000 for many depositors depending on the type of account ownership.

At March 31, 2024, there were 179 accounts with balances in excess of the $250,000 FDIC insurance limit with a total of $93.9 million, or 28.3% of deposits.

We have also been communicating with our depositors in general to help ease any concerns they may have in light of recent regional bank failures.

At September 30, 2023, the weighted average life (WAL) of our securities portfolio is 5.2 years.

The gross unrealized losses on the AFS securities is $9.8 million, or 9.5% of the $102.2 million AFS portfolio and 16.1% of capital.

At March 31, 2024, the weighted average life (WAL) of our securities portfolio is 5.1 years.

The gross unrealized losses on the AFS securities was $7.1 million, or 7.1% of the $100.2 million AFS portfolio and 12.5% of capital.

Unrealized losses on the HTM securities were $2.7 million, or 10.9% of the $24.8 million HTM portfolio and 4.8% of capital.

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The net unrealized loss on AFS securities and derivative combined, and the corresponding other comprehensive loss, was $5.2 million, or 9.2% of capital.

Over the next 24 months from September 30, 2023, we expect to realize $44.4 million in cash flow from the securities portfolio with $3.5 million in 2023, $21.7 million in 2024 and 19.1 million in 2025.

Over the next 24 months from March 31, 2024, we expect to realize $43.8 million in cash flow from the securities portfolio with $18.1 million in 2024, $22.6 million in 2025 and $3.1 million in 2026.

We should receive $25.4 million of that over the next 12 months.

See the Securities section of the management discussion and analysis for more information.

At September 30, 2023, the Bank entered into interest rate swap agreements with a total notional amount of $25 million to hedge the risk of changes in the fair value of fixed rate AFS securities for changes in the SOFR benchmark rate.

At September 30, 2023, the derivatives were highly effective and offset the unrealized loss on AFS securities by $743,000 bringing the net other comprehensive loss from $7.7 million to $7.0 million.

During the year ended December 31, 2023, the Bank entered into interest rate swap agreements with a total notional amount of $25 million to hedge the risk of changes in the fair value of fixed rate AFS securities for changes in the SOFR benchmark rate.

At March 31, 2024, the derivatives were highly effective and offset the unrealized loss on AFS securities by $442,000 bringing the net other comprehensive loss from $5.6 million to $5.2 million.

Our asset quality remains strong.

We are being optimistically cautious with our lending and strategic decisions, staying focused on long-term goals and taking advantage of opportunities while being diligent about recognizing and mitigating risk.

With the CECL implementation, our allowance for credit losses increased to 1.08% due to the change in methodology.

This adds a deeper level of coverage for any losses we may experience.

The Bank has raised in-house mortgage rates while continuing to offer secondary market options to moderate loan funding and we are starting to see a decrease in mortgage demand due to higher market interest rates.

We are monitoring housing supply and demand, primarily in our Mineola and Lindale markets where home sales and new home construction have been active, for

indicators of a significant change in the local housing markets.

The decrease in mortgage demand is offset by increases in commercial real estate lending.

At March 31, 2024, our allowance for credit losses to loans and leases held for investment was 1.10%.

The Bank continues to monitor rates and loan demand weekly and align pricing accordingly.

Housing supply and demand, primarily in our Mineola and Lindale markets where home sales and new home construction have been active, are monitored for indicators of a significant change in the local housing markets.

We are increasing our lending in CRE and other commercial lending to more strategically balance our loan portfolio.

This is a key component of the strategy of selling the $30 million in loans.

At March 31, 2024, we do not have any plans to sell additional loans above the $14.7 million being held for sale.

We are currently utilizing listed CDs (Qwickrate) with terms of 3-6 months with full FDIC insurance in order to keep funds liquid while also earning a higher return than holding balances in fed funds.

We are not currently utilizing the Bank Term Funding Program.

The following are the various liquidity sources we had available at September 30, 2023 that we could use as needed:

The following are the various liquidity sources we had available at March 31, 2024 that we could use as needed:

● FHLB borrowing capacity of $81.2 million

● $15 million in credit lines with 2 correspondent banks

● $15 million in unused credit lines with 2 correspondent banks

● Federal Reserve discount window

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● The ability to sell securities.

We have run an analysis of securities that could be sold with minimal losses to provide liquidity.

● The ability to sell a group of loans in the secondary market on an as needed basis

● The ability to sell some of our BOLI assets

At September 30, 2023, Mineola Community Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

At March 31, 2024, 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.

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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, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating

environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

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.

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● 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 and/or balloon payments and additional fee income;

● 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;

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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.

At September 30, 2023

At March 31, 2024

Change in Interest Rates

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

The table above indicates that at September 30, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 0.46% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 2.13% decrease in net interest income.

The table above indicates that at March 31, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 5.2% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 6.8% decrease in net interest income.

Net Economic Value .

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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.

At September 30, 2023

At March 31, 2024

EVE as a Percentage of

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

The table above indicates that at September 30, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 10.79% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 2.13% increase in EVE.

The table above indicates that at March 31, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 0.75% increase in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 10.85% decrease in EVE.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements.

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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 1. Financial Statements