What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-27 compared with 2024-03-27 · 134 added, 158 removed, 363 unchanged (45% of the section changed)

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You should read the information in this section in conjunction with the other business and financial information provided in this annual report.

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the Federal Home Loan Bank of Dallas, in residential real estate loans and commercial real estate loans and, to a lesser extent, commercial loans, construction and land loans, and consumer and other loans.

The majority of our loans are fixed-rate loans, however, we have updated our commercial lending terms and are originating more commercial loans with adjustable rates.

We also invest in securities, which have

historically consisted primarily of mortgage-backed securities and obligations issued by U.S.

government sponsored enterprises, state and municipal securities, collateralized mortgage obligations, corporate bonds, and Federal Home Loan Bank stock.

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the Federal Home Loan Bank of Dallas, in residential real estate loans, commercial real estate loans, construction and land loans and, to a lesser extent, commercial loans and consumer and other loans.

Although the majority of our loans were fixed-rate loans, with the growth in the commercial lending portfolio in 2024, many of our originations were loans with adjustable rates.

We also invest in securities, which

have historically consisted primarily of mortgage-backed securities and obligations issued by U.S.

government sponsored enterprises and others, state and municipal securities, collateralized mortgage obligations, corporate bonds, and Federal Home Loan Bank stock.

We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts.

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Our results of operations also are affected by our provisions for credit losses, non-interest income and non-interest expense.

Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, income from bank owned life insurance, and wholesale lending fees.

Wholesale lending fees are generated from facilitating the origination of mortgage loans through the wholesale lender.

Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, income from bank owned life insurance, gains and losses on the sale or disposal of assets and other income.

Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, technology expenses, contract services, director fees, and other expenses.

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Historically, our primary lending activity has been the origination of fixed-rate residential mortgage loans to individuals in our market area funded primarily by deposits gathered from individuals and businesses in our market area.

We expect that this will continue to be a primary focus of our business for the foreseeable future.

We expect that real estate lending will continue to be a primary focus of our business for the foreseeable future, however, this focus has expanded to include more commercial real estate as an integral part of the Company’s strategic plan.

As part of our customer focus, we generally do not sell the loans we originate but retain them in our portfolio.

In 2024, we sold a block of residential loans in order to restructure the loan portfolio more quickly, but it is not part of our normal procedures to sell the loans we originate.

When customers have questions regarding their loans, they are able to deal directly with us rather than another institution.

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This amount includes one- to four-family residential mortgage loans originated in the Dallas Metroplex.

We have originated one-to-four family residential mortgage loans secured primarily by owner-occupied properties primarily located in the northern and eastern sections of the Dallas Metroplex.

We began originating these loans in 2014, and continue to do so primarily through word-of-mouth referrals.

We have originated one-to-four family residential mortgage loans secured primarily by owner-occupied properties primarily located in the northern and eastern sections of the Dallas Metroplex for over ten years and continue to do so primarily through existing relationships and word-of-mouth referrals.

At December 31, 2024, these loans amounted to $44.6 million and included $27.8 million of jumbo loans.

● Grow and diversify our loan portfolio prudently .

There has been an influx of retirees and others from the Dallas metropolitan area and an influx in general into the state of Texas and our market area.

There has been an influx of retirees and others from the Dallas metropolitan area and an influx of new residents in general into the state of Texas and our market area.

Our more rural market area offers a lower-cost of living and many recreational amenities, while being within easy reach of the cities of Dallas and Tyler and the urban amenities they offer.

We believe this movement away from major cities like Dallas was accelerated by the work-from-home trend that accelerated during the COVID-19 pandemic.

In 2018, we opened our branch office in Lindale, Texas, and acquired our branch office in Edgewood, Texas, from another bank.

These offices are located in growth areas of our market area because of their closer proximity to Tyler and Dallas, respectively.

The influx of population into our market area has provided opportunities for residential mortgage lending, construction and land lending, and commercial real estate lending.

In 2023, we began construction of a new building in Lindale to better service that market which is growing rapidly.

That location was opened, along with a branch in Tyler and a

loan production office in Canton, Texas, in February of 2024.

Although we intend to continue our historical focus on the origination of residential mortgage loans, we intend to prudently increase our commercial real estate lending and construction and land lending so as to continue to diversify our loan portfolio and income sources.

At December 31, 2023, commercial real estate loans amounted to $41.8 million, or 14.8% of total loans, and construction and land loans amounted to $37.5 million, or 13.3% of total loans.

We believe this movement away from major cities like Dallas was accelerated by the work-from-home trend.

In 2024, we opened a branch office in Tyler, Texas and a new branch office in Lindale, Texas in order to better serve that rapidly growing Smith county market.

In 2018 we acquired our branch office in Edgewood, Texas.

Edgewood is located in a growth area of our market because of its closer proximity to Dallas.

The increase in population in our market area as well as the expansion in Smith county has provided opportunities for

residential mortgage lending, construction and land lending, and commercial real estate lending.

We closed a loan production office in Canton, Texas in 2024 after determining that we can adequately meet the loan demand of that area through the use of technology and other resources.

As we continue our historical focus on the origination of residential mortgage loans, we have increased our focus on commercial real estate lending and construction and land lending to continue to diversify our loan portfolio and income sources.

At December 31, 2024, commercial real estate loans amounted to $56.1 million, or 19.0% of total loans compared to $41.8 million, or 14.8% at December 31, 2023, and construction and land loans amounted to $54.1 million, or 18.4% of total loans compared to $37.5 million, or 13.3% at December 31, 2023.

In 2024, we sold a block of 111 residential loans totaling $24.3 million to reallocate into commercial real estate and other categories to accelerate diversifying the portfolio with a goal of increasing our interest income and mitigating interest rate risk.

Our commercial real estate loans and construction and land loans have higher credit risk than our residential mortgage loans.

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Historically, we have been able to maintain a high level of asset quality.

We believe strong asset quality remains a key to our long-term financial success .

We believe strong asset quality remains a key factor to our long-term financial success .

Our total nonperforming assets to total assets ratio was 0.62% and 0.30% at December 31, 2024 and 2023, respectively.

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● Grow organically and through opportunistic acquisitions or branching.

We intend to grow our assets organically on a managed basis, and the capital we raised in the offering has enabled us to increase our lending and investment capacity.

We intend to grow our assets organically on a managed basis, and the capital raised in the offering has enabled us to increase our lending and investment capacity.

In addition to organic growth, we may also consider expansion opportunities in our market area or in contiguous markets that we believe would enhance both our franchise value and stockholder returns.

These opportunities may include acquiring other financial institutions and/or establishing loan production offices, establishing new, or de novo, branch offices and/or acquiring branch offices, and the capital we raised in the offering will help us fund any such opportunities that may arise.

During 2023, we opened a loan production office in Canton, Texas and opened a full-service branch in Tyler in February of 2024.

Summary of Critical Accounting Policies and Critical Accounting Estimates

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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 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.

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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 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 nonaccrual 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.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans.

Because each of the criteria used is subject to change, the allowance for credit losses on loans is not necessarily indicative of the trend of future loan losses in any particular loan category.

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 December 31, 2023.

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

In addition, various regulatory agencies periodically review the allowance for credit losses.

As a result of such reviews, we may have to adjust our allowance for credit losses.

However, regulatory agencies are not directly involved in the process of establishing the allowance for credit losses as the process is the responsibility of the Company and any increase or decrease in the allowance is the responsibility of management.

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 year ended December 31, 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 December 31, 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.

For additional information regarding the allowance for credit losses, see notes 1 and 4 of the notes to consolidated financial statements.

Income Taxes.

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Bank owned life insurance

Foreclosed assets

Other real estate owned

Restricted investments carried at cost

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Net interest income after provision for credit losses

Noninterest income

Noninterest (loss) income

Noninterest expense

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Loss before income taxes

Income tax benefit

At or For the Years Ended

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(3) Represents noninterest expenses divided by the sum of net interest income and noninterest income.

(4) Update to risk-weighted assets in 2022 due to calculation error.

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

Total Assets.

Total assets were $452.0 million as of December 31, 2023, an increase of 34.7 million, or 8.3%, when compared to total assets of $417.3 million as of December 31, 2022.

The increase was due primarily to an increase in net loans and leases of $28.6 million, or 11.4%, to $279.9 million at December 31, 2023 from $251.3 million at December 31, 2022, an increase in cash and interest bearing deposits in banks of 14.4 million, or 130.9%, to $25.4 million at December 31, 2023 from $11.0 million at December 31, 2022, an increase in net premises and equipment of $5.3 million, or 84.1%, to $11.6 million at December 31, 2023 from $6.3 million at December 31, 2022, and an increase in restricted investments carried at cost, which is primarily FHLB stock, of $1.1 million, or 39.3%, to $3.9 million at December 31, 2023 partially offset by a decrease in securities of $15.6 million, or 11.6% to $119.3 million at December 31, 2023 from $135.0 million at December 31, 2022.

Asset growth was funded by increases in deposits of $21.1 million, or 7.1%, to $317.2 million at December 31, 2023 from $296.1 million at December 31, 2022 and increases in FHLB advances of $14.4 million, or 23.0% to $76.9 million at December 31, 2023 from $62.5 million at December 31, 2022.

The increase in net premises and equipment was primarily due to the purchase of two building adjacent to the Bank’s main office in Mineola, the purchase of a former bank building in Tyler to house our new Tyler branch office and the construction of the new branch building in Lindale.

Both of the new locations were opened by February 2024.

Total assets were $443.5 million as of December 31, 2024, a decrease of $8.5 million, or 1.9%, when compared to total assets of $452.0 million as of December 31, 2023.

The decrease was due primarily to a decrease in securities of $22.0 million, or 18.4%, to $97.3 million at December 31, 2024 from $119.3 million at December 31, 2023 and a decrease in interest bearing deposits in banks of $2.6 million, or 21.1%, to $9.7 million at December 31, 2024 from $12.3 million at December 31, 2023 partially offset by an increase in net loans and leases of $13.8 million, or 4.9%, to $293.7 million at December 31, 2024 from $279.9 million at December 31, 2023, an increase in other real estate owned of $318,000, or 196.3% to $480,000 at December 31, 2024 which consisted of two buildings the Company had purchased for expansion and had listed for sale, an increase of $343,000, or 8.8%, to $4.3 million at December 31, 2024 in restricted investments carried at cost, which includes $3.5 million in FHLB stock.

The increase in loans was net of the sale of 111 performing residential mortgage loans totaling $24.3 million at a loss of $3.8 million, net of mortgage servicing rights retained, 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 by reducing the concentration in residential mortgage loans.

The decrease in securities included sales of securities to partially fund loan

growth and a paydown in FHLB advances of $27.0 million, or 35.1%, to $49.9 million at December 31, 2024 from $76.9 million at December 31, 2023 partially offset by an increase in deposits of $18.6 million, or 5.9%, to $335.8 million at December 31, 2024 from $317.2 million at December 31, 2023.

Cash and Cash Equivalents.

Total cash and cash equivalents (which includes fed funds sold) increased $4.1 million, or 46.1%, to $13.1 million (including $7.6 million in Fed Funds sold) at December 31, 2023 from $8.9 million (including $2.0 million in Fed Funds sold) at December 31, 2022.

This increase was primarily due to a decrease in securities of $15.6 million, or 11.6%, to $119.3 million at December 31, 2023 from $135.0 million at December 31, 2022.

The decrease in available for sale (AFS) securities of $13.8 million resulted primarily from sales of $19.8 million in 2023 as part of a repricing and balance sheet restructuring strategy.

The proceeds were primarily held in cash and cash equivalents and interest bearing deposits in banks as assets are being restructured.

Total cash and cash equivalents (which includes fed funds sold) increased $230,000, or 1.5%, to $13.3 million (including $9.3 million in Fed Funds sold) at December 31, 2024 from $13.1 million (including $7.6 million in Fed Funds sold) at December 31, 2023.

These accounts provided a favorable yield while maintaining a high level of liquidity.

The Bank made a strategic decision to hold more liquid funds in 2023 due to economic conditions and liquidity concerns resulting from bank failures in the first quarter of the year and other deposit challenges.

The Bank continued to strategically hold more liquid assets while restructuring the loan portfolio throughout 2024.

Interest Bearing Deposits in Banks.

Interest bearing deposits in banks were $12.3 million at December 31, 2023 compared to $2.1 million as of December 31, 2022, an increase of $10.2 million, or 485.7%.

The increase was due primarily to the net decreases in securities of $15.6 million.

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 December 31, 2023, there was $3.2 million in short-term (3-6 months) Qwickrate CDs with other banks.

Interest bearing deposits in banks decreased $2.6 million, or 21.1%, to $9.7 million at December 31, 2024, from $12.3 million at December 31, 2023.

The decrease was primarily the result of a reduction of $3.2 million in Qwickrate Certificates of Deposit (CDs).

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 December 31, 2024, there were no Qwickrate CDs with other banks.

Those funds were used primarily to fund loan growth and reduce FHLB debt.

Securities Available for Sale.

Securities available for sale decreased by $18.1 million, or 19.4%, to $75.2 million at December 31, 2024 from $93.3 million at December 31, 2023.

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

In 2023, twenty securities were sold totaling $19.8 million at a loss of $1.7 million in order to reprice the portfolio by purchasing investments yielding higher returns or making loans, including purchases of $10.3 million during the period.

During 2023, we had purchases of securities of $10.3 million and received paydowns of $6.2 million.

The AFS portfolio is comprised of 26.7% residential mortgage backed securities, 53.4% collateralized mortgage obligations, 14.3% state and municipal securities and 5.6% corporate bonds.

Net unrealized losses decreased on the available for sale portfolio by $1.3 million, or 18.6%, to $5.7 million, net of tax, from $7.0 million, net of tax, due primarily to decreases in unrealized losses from changes in market interest rates being partially offset by the realized loss related to the securities sold being removed from the total.

Gross unrealized losses on the AFS portfolio consisting of 81 securities decreased from $8.9 million, or 7.7% of the portfolio’s amortized cost of $116.0 million at December 31, 2022, to $7.2 million, or 7.2% of the amortized cost of $100.5 million at December 31, 2023.

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 $94,000 from purchases of derivatives hedged against a portion of the AFS portfolio.

The total accumulated other comprehensive losses decreased by $1.4 million to $5.6 million at December 31, 2023 from $7.0 million at December 31, 2022.

The decrease in securities resulted primarily from sales of securities in 2024 to take advantage of the current market interest rate spreads.

During the twelve months ended December 31, 2024, we had sales of securities of $20.1 million partially offset by strategic purchases of $19.4 million in securities with more attractive yields or overall terms and received paydowns and payoffs of $18.4 million.

Net unrealized losses on the available for sale portfolio, including derivatives, decreased by $826,000, or 14.8%, to $4.8 million, net of tax, from $5.7 million, net of tax, due primarily to decreases in market interest rates.

Gross unrealized losses on the available for sale portfolio consisting of 77 securities decreased from $7.2 million, or 7.2% of the portfolio’s amortized cost of $100.5 million at December 31, 2023, to $6.5 million, or 8.0% of the amortized cost of $81.6 million at December 31, 2024.

These unrealized losses are due to increases in market interest rates since the time of purchase.

At December 31, 2024, the AFS portfolio was comprised of 12.2% residential mortgage backed securities, 61.9% collateralized mortgage obligations, 17.7% state and municipal securities and 8.2% corporate bonds.

Securities Held to Maturity.

Securities held to maturity decreased by $3.9 million, or 15.0%, to $22.1 million at December 31, 2024 from $26.0 million at December 31, 2023.

This decrease is primarily due to principal repayments of $3.8 million partially offset by a purchase of $2.1 million.

The portfolio is comprised of 85.7% residential mortgage backed securities, 7.6% state and municipal securities and 6.7% U.S.

This decrease is primarily due to principal repayments of $3.4 million and one call of $395,000.

At December 31, 2024, the portfolio was comprised of 86.4% residential mortgage backed securities, 7.1% state and municipal securities and 6.5% U.S.

government and agency bonds.

Loans and Leases Receivable, Net.

Net loans and leases receivable increased $28.6 million, or 11.4%, to $279.9 million at December 31, 2023 from $251.3 million at December 31, 2022, including payment of the last PPP loan of $2,000 bringing the PPP total to zero at December 31, 2023.

Loans secured by residential real estate, multifamily and farmland comprise $189.8 million, or 67.1%, of total loans and commercial real estate loans total $41.8 million, or 14.8%, of total loans at December 31, 2023.

During the twelve months ended December 31, 2023, loan originations totaled $114.3 million of which $25.6 million were renewals, or refinancings of existing loans with Broadstreet Bank (including interim construction loans converting to a permanent loan), resulting in net originations of $88.7 million.

Originations consisted primarily of $29.6 million in one-to-four family residential mortgage loans, $9.1 million in multifamily loans, construction loans of $46.2 million (when fully funded upon completion), $13.5 million in commercial real estate loans, $4.4 million in consumer loans, $6.1 million in commercial and industrial loans, $2.0 million in land & development loans, $2.0 million in farmland loans and $1.4 million in municipal loans.

Originated construction loans included $7.1 million in commercial construction, $25.0 million in residential construction loans, including 27 speculative construction home loans of $8.4 million, and four multi-family construction loans totaling $14.1 million.

During the year ended December 31, 2023, construction loans (when fully funded upon completion) increased by $307,000, or 0.57%, to $54.3 million at December 31, 2023 from $54.0 million at December 31, 2022.

The total construction loan portfolio consisting of 82 loans had funded balances of $31.5 million at December 31, 2023 compared to 98 loans at December 31, 2022 with funded balances of $30.7 million.

Net loans and leases receivable increased $13.8 million, or 4.9%, to $293.7 million at December 31, 2024 from $279.9 million at December 31, 2023.

The increase in loans was primarily due to an increase in commercial real estate loans and construction and land loans from investing the funds from the sale of 111 performing residential mortgage loans totaling $24.3 million being sold at a loss of $3.8 million, net of mortgage servicing rights retained of $239,000.

The sales were 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 by reducing concentration risk in residential mortgage loans.

In addition to the loan sale, there was $98.1 million in loan originations partially offset by $53.7 million in payoffs and other principal reductions and $13.5 million in contractual repayments.

The loan portfolio has become more diverse in line with the Bank’s strategic plan to increase loans in the commercial real estate sector.

Loans secured by residential real estate, multifamily and farmland decreased $24.2 million, or 12.8%, to $165.6 million, or 55.8% of the loan portfolio, at December 31, 2024 from $189.8 million, or 67.1% of total loans at December 31, 2023 and commercial real estate loans increased $14.3 million, or 34.2%, to $56.1 million, or 18.9% of total loans at December 31, 2024 from $41.8 million, or 14.8% of total loans at December 31, 2023.

Construction and land loans increased $16.6 million, or 44.3%, to $54.1 million at December 31, 2024 from $37.5 million at December 31, 2023.

At December 31, 2024, commercial real estate loans consisted of $23.4 million owner occupied and $32.7 million non-owner occupied real estate.

At December 31, 2024, commercial real estate loans primarily include loans collateralized by self-storage facilities ($16.3 million), commercial rental properties ($7.6 million), gas stations with convenience stores ($10.5 million), churches ($4.5 million), rural water district assets ($3.8 million), restaurants ($3.6 million), and hotels ($923,000).

At December 31, 2024, $13.3 million in commercial real estate loans are outside of our primary market area.

During the year ended December 31, 2024, loan originations totaled $98.1 million of which $9.1 million were renewals or refinancings of existing loans with Broadstreet Bank (including interim construction loans converting to a permanent loan), resulting in net originations of $88.3 million.

Originations consisted primarily of $11.1 million in one-to-four family residential mortgage loans, $2.7 million in multifamily loans, interim construction loans of $25.2 million (when fully funded upon completion), $19.5 million in commercial real estate loans, $5.1 million in consumer loans, $5.0 million in commercial and industrial loans, $17.7 million in land and development loans, $3.2 million in farmland loans and $8.5 million in municipal loans.

Originated interim construction loans included $7.9 million in commercial construction, $15.1 million in residential construction loans, including 16 speculative residential loans of $6.5 million, two subdivision loans totaling $1.6 million and one multi-family construction loan totaling $598,000.

During the year ended December 31, 2024, interim construction loans (when fully funded upon completion) decreased by $11.8 million, or 21.7%, to $42.5 million at December 31, 2024 from $54.3 million at December 31, 2023.

The total interim construction loan portfolio consisted of 55 loans with funded balances of $33.1 million at December 31, 2024 compared to 82 loans at December 31, 2023 with funded balances of $31.5 million.

Construction loans continue to be a large segment of our loan portfolio with the majority of the loans being originated in our primary market.

During the year ended December 31, 2023, there were $13.6 million in loan principal paydowns and $68.8 million in loan payoffs.

Deposits increased $18.6 million, or 5.9%, to $335.8 million at December 31, 2024 from $317.2 million at December 31, 2023.

Core deposits (defined as all deposits other than certificates of deposit) decreased $8.2 million, or 4.0%, to $198.5 million at December 31, 2023 from $206.7 million at December 31, 2022.

Core deposits (defined as all deposits other than certificates of deposit) increased $7.4 million, or 3.7%, to $205.9 million at December 31, 2024 from $198.5 million at December 31, 2023.

Retail certificates of deposit increased $1.2 million, or 1.1%, to $107.9 million at December 31, 2024 from $106.7 million at December 31, 2023.

At December 31, 2023, there were $12.0 million in brokered deposits.

The decrease in core deposits and increase in CDs was primarily the result of the Bank offering a special CD to retain deposits, which resulted in some customers moving funds to the higher yielding time deposit from a transaction account.

We 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 average cost of deposits increased 145 basis points, or 231.4%, to 2.08% at December 31, 2023, compared to 0.63% at December 31, 2022.

Brokered deposits increased $10.0 million, or 83.4%, to $22.0 million at December 31, 2024, from $12.0 million at December 31, 2023.

The increase in brokered CDs primarily funded the $10.0 million prepayment of FHLB advances.

In 2023, we increased the rate on money market accounts and matched CD rates as part of a retention effort during a time of rising market interest rates and a competitive deposit market.

Although rates decreased in 2024, the movement within the portfolio to higher yielding accounts and the additional brokered CDs are the primary reasons for an increase in our average cost of deposits of 42 basis points, or 17.4%, to 2.83% at December 31, 2024, compared to 2.41% at December 31, 2023.

At December 31, 2024, there were 191 accounts with balances in excess of the $250,000 FDIC insurance limit with a total balance of $98.0 million, or 29.2% of deposits.

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Advances from the Federal Home Loan Bank.

Advances from the Federal Home Loan Bank increased by $14.4 million, or 23.0%, to $76.9 million at December 31, 2023 from $62.5 million at December 31, 2022 primarily to fund loan growth and increases in net premises and equipment while keeping a larger amount of cash on hand to mitigate risk primarily related to economic uncertainty and deposit volatility.

Advances from the Federal Home Loan Bank decreased by $27.0 million, or 35.1%, to $49.9 million at December 31, 2024 from $76.9 million at December 31, 2023 due primarily to the payoff of nine advances totaling $30.7 million and normal principal payments on amortizing advances of $1.3 million partially offset by a short-term purchase of $5.0 million.

Seven advances totaling $25.7 million had matured and two advances totaling $10.0 million were prepaid to take advantage of favorable market conditions.

Shareholders’ Equity.

Total shareholders’ equity decreased $1.6 million, or 3.0%, to $52.1 million at December 31, 2024 from $53.7 million at December 31, 2023.

This decrease was primarily due to a $733,000 net loss for the year ended December 31, 2023 resulting primarily from the loss on the sale of securities of $1.4 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 equity instead of being charged as a provision expense for credit losses through the consolidated statement of operations.

The Company also repurchased 174,842 shares of its common stock for a decrease of $2.2 million and paid quarterly dividends totaling $368,000, partially offset by a decrease in the net other comprehensive loss of $1.4 million, an increase in equity of $193,000 for the 2023 funding of the Broadstreet Bank leveraged ESOP with the release of 14,844 additional ESOP shares to participants and $528,000 related to the partial vesting of the 2022 Equity Incentive Plan for the year ended December 31, 2023.

This decrease was primarily due to a $1.3 million net loss for the year ended December 31, 2024 resulting primarily from the pre-tax loss of $3.8 million, net of mortgage servicing rights retained, on the sale of residential mortgage loans.

The Company also repurchased 107,431 shares of its common stock for a decrease of $1.6 million and paid quarterly dividends totaling $504,000, partially offset by a decrease in the accumulated other comprehensive loss of $826,000, an increase in equity of $223,000 for the 2024 funding of the Broadstreet Bank leveraged ESOP with the release of 15,862 ESOP shares to participants and $757,000 related to accruals for the equity incentive plan for the year ended December 31, 2024.

At December 31, 2024, the unallocated ESOP contra equity account was $2.0 million.

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Nonaccrual loans are included in the computation of average balances.

Average yields for loans (excluding PPP loans) include loan fees of $631,000 and $399,000 for the years ended December 31, 2023 and 2022, respectively.

Average yields for loans include loan fees of $511,000 and $631,000 for the years ended December 31, 2024 and 2023, respectively.

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

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Interest-earning assets:

Loans (excluding PPP loans)

Allowance for credit losses

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Comparison of Operating Results for the Years Ended December 31, 2024 and December 31, 2023

Net loss was $733,000 for the year ended December 31, 2023, compared to net income of $1.8 million for the year ended December 31, 2022, a decrease of $2.5 million, or 138.9%.

The decrease was primarily due to a decrease in noninterest income of $1.5 million, or 78.9%, primarily due to the sale of securities at a loss of $1.7 million, an increase in noninterest expense of $2.2 million, or 22.4%, due primarily to extraordinary items specific to the year ended December 31, 2023 including expenses related to the retirement of the former CEO, benefit plan termination, the Bank name change and expenses related to the new branches, and an increase of $148,000, or 71.2%, in the provision for credit losses.

These items were partially offset by an increase of $781,000, or 7.6%, increase in net interest income and a decrease of $627,000, or 148.2%, in income tax expense.

The net loss was $1.3 million for the year ended December 31, 2024, compared to a net loss of $733,000 for the year ended December 31, 2023, an increased loss of $572,000, or 78.0%.

The increase in the loss was primarily due to a $3.8 million loss on the sale of loans as part of a strategic repositioning of the balance sheet.

This was partially offset by an increase of $1.5 million, or 13.4%, in net interest income, a $190,000 gain on the sale of securities and a decrease in the provision for credit losses of $198,000.

A loss on the sale of securities of $1.7 million was recognized in the prior year ending December 31, 2023.

Interest Income.

Interest income increased $3.5 million, or 18.4%, to $22.5 million for the year ended December 31, 2024 from $19.0 million at December 31, 2023.

This was primarily the result of increased interest income on securities and loans resulting from an increase in the average balance and average yield on both for the year ended December 31, 2023.

This was primarily the result of increased interest income on loans resulting from an increase in the average balance and average yield for the year ended December 31, 2024.

There was an increase in average interest earning assets of $15.3 million, or 3.8%, to $420.4 million at December 31, 2024 from $405.1 million at December 31, 2023 and an increase of 66 basis points, or 14.0%, in average yield on interest–earning assets from 4.68% at December 31, 2023 to 5.34% at December 31, 2024.

The interest income increase is partially due to an increase in the average balance of securities of $18.9 million, or 18.1%, from $104.6 million, for the year ended December 31, 2022 to $123.5 million for the year ended December 31, 2023 and an increase in the average yield on securities of 189 basis points, or 85.2%, from 2.21% for the year ended December 31, 2022 to 4.10% for the year ended December 31, 2023.

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

In 2023, the Company sold twenty securities totaling $19.8 million at a loss of $1.7 million as part of a repricing strategy to increase interest income and restructure the portfolio.

Interest income on securities increased $2.7 million, or 118.5%, from $2.3 million for the year ended December 31, 2022 to $5.1 million for the year ended December 31, 2023.

Interest income on the securities portfolio decreased $597,000, or 11.8% to $4.5 million for the year ended December 31, 2024, from $5.1 million for the year ended December 31, 2023.

This decrease is primarily due to a decrease in the average balance of securities of $12.6 million, or 10.2%, from $123.5 million, for the year ended December 31, 2023 to $110.9 million for the year ended December 31, 2024.

The average yield on securities declined by seven basis points, or 1.8%, from 4.10% for the year ended December 31, 2023 to 4.03% for the year ended December 31, 2024.

The yield decrease is reflective of changes in the securities portfolio due to maturities, principal payments, and strategic purchases and sales.

In 2024, the Company sold eight securities totaling $20.1 million at a gain of $190,000 and purchased nine securities totaling $19.4 million as part of a balance sheet restructuring strategy to increase interest income and diversify the portfolio.

Interest income on net loans and leases increased $3.1 million, or 24.0%, to $15.9 million for the year ended December 31, 2024 from $12.8 million for the year ended December 31, 2023 primarily due to an increase of $14.7 million, or 5.5%, in the average balance of the loan portfolio from $268.2 million for the year ended December 31, 2023 to $282.9 million for the year ended December 31, 2024, and an increase of 84 basis points, or 17.5%, in the average yield on loans from 4.79% for the year ended December 31, 2023 to 5.63% for the year ended December 31, 2024.

The increased yield on loans is primarily due to increased market rates, increased loan fees and changes in the loan portfolio to include more commercial and other higher-yielding loans for the year ended December 31, 2023 than were originated in 2022.

The increased yield on loans is primarily due to increased market interest rates, higher loan rates and fees primarily from an increase in commercial real estate as part of the execution of a strategic restructuring of the loan portfolio in which $24.3 million in residential loans were sold and replaced with other higher-yielding loans.

Dividends on restricted investments including stock in the Federal Home Loan Bank and Texas Independent Bank (TIB) increased $62,000, or 39.0%, from $159,000 for the year ended December 31, 2023 to $221,000 for the year ended December 31, 2024.

This increase resulted primarily from an increase in yield of 333 basis points, or 184.4%, from 1.81% for the year ended December 31, 2022 to 5.14% for the year ended December 31, 2023 and an increase in average balance of $1.0 million, or 47.6%, from $2.1 million for the year ended December 31, 2022 to $3.1 million for the year ended December 31, 2023.

We were required to purchase $706,000 in FHLB stock to fully secure advance obligations obtained during the period.

This increase resulted primarily from an increase in yield of 103 basis points, or 20.1%, from 5.14% for the year ended December 31, 2023 to 6.17% for the year ended December 31, 2024 and an increase in average balance of $488,000, or 15.8%, from $3.1 million for the year ended December 31, 2023 to $3.6 million for the year ended December 31, 2024.

Interest income from interest bearing deposits in banks increased $271,000, or 60.0%, from $452,000 for the year ended December 31, 2023 to $723,000 for the year ended December 31, 2024, resulting primarily from the increase in average yield of 31 basis points, or 6.1%, from 5.14% for the year ended December 31, 2023 to 5.45% for the year ended December 31, 2024 and an increase in average interest bearing deposits of $4.5 million, or 51.0% from $8.8 million for the year ended December 31, 2023 to $13.3 million for the year ended December 31, 2024.

There was also an increase of $88,000 in fed funds interest income for the year ended December 31, 2023 primarily from an increase of 419 basis points, or 456.8%, in average yield on fed funds sold from 0.92% for the year ended December 31, 2022 to 5.11% for the year ended December 31, 2023, partially offset by a $7.1 million, or 65.7%, decrease in average fed funds sold from $10.8 million for the year ended December 31, 2022 to $3.7 million for the year ended December 31, 2023.

The fed funds were used to fund asset growth.

There was also an increase of $484,000 in fed funds interest income for the year ended December 31, 2024 primarily from an increase of 27 basis points, or 5.3%, in average yield on fed funds sold from 5.11% for the year ended December 31, 2023 to 5.38% for the year ended December 31, 2024 and a $8.8 million, or 237.8%, increase in average fed funds sold from $3.7 million for the year ended December 31, 2023 to $12.5 million for the year ended December 31, 2024.

The increases in interest bearing deposits in banks and fed funds are primarily the result of holding the funds from the loan sale in these accounts while waiting to originate new loans, core deposit growth, maturities and principal reductions from the securities portfolio, an increase in brokered deposits, and is partially offset by a reduction in FHLB advances.

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

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Interest expense increased $2.0 million, or 25.3%, to $9.9 million for the year ended December 31, 2024 from $7.9 million for the year ended December 31, 2023 due primarily to an increase in the average yield on interest bearing liabilities of 42 basis points, or 17.2%, from 2.41% for the year ended December 31, 2023 to 2.83% for the year ended December 31, 2024 and an increase in the average balance of interest-bearing liabilities of $22.1 million, or 6.7%, from $328.2 million for the year ended December 31, 2023 to $350.3 million for the year ended December 31, 2024 primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $3.8 million, or 257.2%, to $5.3 million for the year ended December 31, 2023 from $1.5 million for the year ended December 31, 2022, due to an increase in the average deposit cost of 145 basis points, or 231.4%, from 0.63% for the year ended December 31, 2022 to 2.08% for the year ended December 31, 2023 and an increase in average interest-bearing deposits of $17.7 million, or 7.4%, from $238.7 million for the year ended December 31, 2022 to $256.4 million for the year ended December 31, 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 in order to retain deposits.

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

At December 31, 2023, market rates have leveled off some and the Bank’s deposit rates are starting to decrease.

Interest expense on Federal Home Loan Bank advances increased $1.8 million, 229.6%, to $2.6 million for the year ended December 31, 2023 from $777,000 for the year ended December 31, 2022.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $38.4 million, or 117.1%, to $71.2 million for the year ended December 31, 2023 from $32.8 million for the year ended December 31, 2022 and an increase in average yield of 123 basis points, or 51.9%, from 2.37% for the year ended December 31, 2022 to 3.60% for the year ended December 31, 2023.

The increase in average advances was primarily to fund an investment strategy, loan growth and liquidity.

At December 31, 2023, we have lengthened our advances as they have matured and are holding excess liquidity in interest bearing accounts.

The Company believed 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 the 2023 bank failures.

Interest expense on deposit accounts increased $2.0 million, or 37.8%, to $7.3 million for the year ended December 31, 2024 from $5.3 million for the year ended December 31, 2023, due to an increase in the average deposit cost of 51 basis points, or 24.4%, from 2.08% for the year ended December 31, 2023 to 2.59% for the year ended December 31, 2024 and an increase in average interest-bearing deposits of $25.0 million, or 9.8%, from $256.4 million for the year ended December 31, 2023 to $281.4 million for the year ended December 31, 2024, with the increase being primarily in higher cost certificates of deposit and money market deposits, offset by a decrease in lower cost savings accounts.

This migration to higher yielding accounts is due to the interest rate environment, competition and additional brokered deposits.

At December 31, 2024, market rates had levelled off some and the Bank’s deposit rates had decreased.

Interest expense on Federal Home Loan Bank advances increased $38,000, or 1.5%, to $2.6 million for the year ended December 31, 2024.

The average balance of Federal Home Loan Bank advances decreased by $3.0 million, or 4.2%, to $68.2 million for the year ended December 31, 2024 from $71.2 million for the year ended December 31, 2023.

This was offset by an increase in average cost of 21 basis points, or 5.9%, from 3.60% for the year ended December 31, 2023 to 3.81% for the year ended December 31, 2024.

As overall liquidity has improved, this has enabled the Company to pay down FHLB advances to $49.9 million at December 31, 2024.

Net Interest Income .

Net interest income increased $781,000, or 7.6%, to $11.1 million for the year ended December 31, 2023 from $10.3 million for the year ended December 31, 2022, primarily due to an increase in interest-earning assets of $49.9 million, or 14.0%, to $405.1 million at December 31, 2023 from $355.2 million at December 31, 2022, partially offset by a decrease in net interest rate spread of 43 basis points, or 15.8%, from 2.70% for the year ended December 31, 2022 to 2.27% for the year ended December 31, 2023.

Net interest margin had a 16 basis point decrease to 2.73% for the year ended December 31, 2023 from 2.89% for the year ended December 31, 2022.

Net interest income increased $1.5 million, or 13.5%, to $12.6 million for the year ended December 31, 2024 from $11.1 million for the year ended December 31, 2023, primarily due to an increase in interest-earning assets of $15.3 million, or 3.8%, to $420.4 million at December 31, 2024 from $405.1 million at December 31, 2023, and an increase in net interest rate spread of 24 basis points, or 10.6%, from 2.27% for the year ended December 31, 2023 to 2.51% for the year ended December 31, 2024.

Net interest margin increased 25 basis points to 2.98% for the year ended December 31, 2024 from 2.73% for the year ended December 31, 2023.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses , the provision for credit losses was $356,000 for the year ended December 31, 2023, compared to $208,000 for the year ended December 31, 2022, an increase of $148,000, or 71.2%, primarily due to an increase in loans and leases and the adoption of ASC 326 on January 1, 2023.

Based on management’s analysis of the adequacy of the allowance for credit losses , the provision for credit losses was $158,000 for the year ended December 31, 2024, compared to $356,000 for the year ended December 31, 2023, a decrease of $198,000, or 55.6%, primarily due to significant loan growth in 2023, 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.

Noninterest Income.

Noninterest income decreased $1.5 million, or 78.9%, to $352,000 for the year ended December 31, 2023 from $1.9 million for the year ended December 31, 2022.

This decrease is primarily due to a loss on the sale of securities of $1.7 million during the year ended December 31, 2023, partially offset by two income items that were new to the Bank in the year ended December 31, 2023 including an increase of $175,000 in wholesale lending fees to $190,000 for the year ended December 31, 2023 from $15,000 for the year ended December 31, 2022 and $23,000 in rental income on space that was already leased in one of the buildings we purchased in 2023.

Noninterest income decreased $2.3 million, or 641.0%, to a loss of $1.9 million for the year ended December 31, 2024 from $352,000 for the year ended December 31, 2023.

This decrease is primarily due to a $3.8 million loss on the sale of loans as part of a strategic balance sheet repositioning executed during the year ended December 31, 2024, a $287,000 expense on the disposal of a fixed asset related to the new branch partially offset by a $190,000 gain on the sale of securities.

A loss $1.7 million on the sale of securities was recognized in the year ended December 31, 2023.

Noninterest Expense.

Noninterest expense increased $2.2 million, or 22.4%, to $12.0 million for the year ended December 31, 2023 from $9.8 million for the year ended December 31, 2022 primarily due to the increase in salary and employee benefits, occupancy and equipment costs, data processing, technology expenses, contract services, director fees and other expenses.

Salary and employee benefit expenses increased by $1.3 million, or 22.4%, to $7.1 million for the year ended December 31, 2023 from $5.8 million for the year ended December 31, 2022, due primarily to increased expenses of $444,000 for restricted stock awards and options granted under the 2022 Equity Incentive Plan that was approved by stockholders on August 31, 2022.

The funding cost increased from $84,000 for the year ended December 31, 2022 to $528,000 for the year ended December 31, 2023 because this was the first year for the majority of the plan to be in existence.

There was an extraordinary increase in the deferred incentive plan expense of $664,000, or 241.5%, primarily due to vesting related to participants retiring, reaching retirement age and the termination of the plan as of December 31, 2023.

Noninterest expense increased $273,000, or 2.3%, to $12.3 million for the year ended December 31, 2024 from $12.0 million for the year ended December 31, 2023 primarily due to the increase in occupancy and equipment costs and other expenses.

Salary and employee benefit expenses decreased by $229,000, or 3.2%, to $6.8 million for the year ended December 31, 2024 from $7.1 million for the year ended December 31, 2023.

This is due primarily to an increase in equity award expenses of $229,000 including an extraordinary $129,000 initial vesting expense and nonrecurring expenses of $230,000 related to executive changes in 2024 being offset primarily by reduced executive salary expense related to the CEO transition and the termination of the deferred compensation executive incentive plan on December 31, 2023.

The remaining increase was due to normal increases in wages, insurance costs and payroll taxes.

Occupancy and equipment expenses increased by $66,000, or 8.6%, primarily due to normal costs related to owning and occupying more property in the year ended December 31, 2023 and normal increases in property taxes.

Directors’ fees increased $16,000, or 4.2%, from $383,000 for the year ended December 31, 2022 to $399,000 for the year ended December 31, 2023 due to a reporting change.

Data (core) processing expense increased by $89,000, or 10.6%, to $927,000 for the year ended December 31, 2023 from $838,000 for the year ended December 31, 2022 and other technology expenses increased $74,000, or 18.5%, primarily due to increases in the number of users, workstations and accounts, and price increases levied by our core processor and other technology providers.

Contract services and other expenses combined increased $715,000, or 44.7%, from $1.6 million for the year ended December 31, 2022 to $2.3 million for the year ended December 31, 2023 including a $58,000 increase in audit and accounting expenses due partially to normal increases and partially to increased complexity and review, a $71,000 increase in FDIC assessments due to an overall increase in the assessment rate, an $88,000 increase in insurance cost due to increases in asset size, property additions and normal risk and rate increases.

The Bank had $206,000 in nonrecurring retirement and recruitment expenses related to the retirement of the former CEO.

Increases for the year ended December 31, 2023 were primarily related to growth, including branch completion, bank name change, asset size, recruitment and leadership change and price increases in all types of services the Company incurred due to inflationary pressures.

Income Tax Expense.

Income tax expense decreased by $627,000, or 148.2%, from a $423,000 expense for the year ended December 31, 2022 to a $204,000 tax benefit for the year ended December 31, 2023 due primarily to the decrease in taxable income.

Occupancy and equipment expenses increased by $268,000, or 32.1%, primarily due to depreciation, building expense and property taxes associated with two new bank branch locations opened in 2024.

Other expenses combined increased $381,000, or 19.0%, from $2.0 million for the year ended December 31, 2023 to $2.4 million for the year ended December 31, 2024 including a $172,000 increase in audit and accounting expenses related primarily to additional loan review, a $69,000 increase in FDIC assessments due to an overall increase in the assessment rate, and a $67,000 increase in employee training expense.

Increases for the year ended December 31, 2024 were primarily related to growth, including branch completion, employee recruitment and price increases in all types of services the Company incurred due to inflationary pressures.

Income Tax Benefit.

The i ncome tax benefit increased by $272,000, or 133.3%, from $204,000 for the year ended December 31, 2023 to $476,000 for the year ended December 31, 2024 due primarily to the increase in the taxable loss.

The effective tax rate was 26.69% and 21.77% for the years ended December 31, 2024 and 2023, respectively.

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The tables below set forth the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

The changes indicated in the following table are within policy guidelines approved by our Board of Directors.

At December 31, 2024

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

The table above indicates that at December 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 2.27% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.40% increase in net interest income.

The table above indicates that at December 31, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 7.50% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 6.70% decrease in net interest income.

Net Economic Value .

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

The table above indicates that at December 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience an 11.19% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 1.76% decrease in EVE.

The table above indicates that at December 31, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 0.78% increase in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 8.65% decrease in EVE.

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

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Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities.

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

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities and loans.

We are also able to borrow from the Federal Home

Loan Bank of Dallas.

At December 31, 2024, we had outstanding advances of $49.9 million from the Federal Home Loan Bank of Dallas.

At December 31, 2024, we had unused borrowing capacity of $102.4 million with the Federal Home Loan Bank of Dallas.

In addition, at December 31, 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.

In addition, at December 31, 2024, we had three unused lines of credit which included an unsecured $10.0 million and a secured $3.0 million line of credit with Texas Independent Bankers Bank and an unsecured $5.0 million line of credit with First Horizon Bank.

At December 31, 2024, there was no outstanding balance with any of these facilities.

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

(on an unconsolidated basis) had cash and cash equivalents totaling $10.3 million.

(on a stand-alone unconsolidated basis) had liquid assets totaling $7.8 million.

Liquidity management and asset quality continue to be high priorities.

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 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.

With continued volatility in the market and market interest rate uncertainty, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning.

We are monitoring deposit balances daily.

We run stress tests quarterly in multiple scenarios, which include deposit runoff combined with the inability to access our available lines of credit and a reduction in the availability of FHLB advances.

The scenarios indicate that we are able to maintain our operational liquidity with a designated buffer with our liquidity resources available.

We are closely monitoring our assets, liabilities and equity, including investment portfolio unrealized losses for possible issues and opportunities related to the current economic and market conditions.

We 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.

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.

The Bank educates and assists large depositors on having FDIC coverage to the fullest legal extent, which is over $250,000 for many depositors depending on the type of account ownership.

At December 31, 2024, there were 191 accounts with balances in excess of $250,000 with a total of $98.0 million, or 29.2% of deposits.

The amount that was over $250,000 was $50.3 million, or 15.0%, that was potentially uninsured, including certificates of deposit of $10.7 million and $39.6 million in checking, MMDA and savings accounts.

We have also been communicating with our depositors in general to help ease any concerns they may have in light of 2023 regional bank failures.

At December 31, 2024, the weighted average life (WAL) of our securities portfolio is 4.5 years.

The gross unrealized losses on the AFS securities is $7.2 million, or 7.2% of the $100.5 million AFS portfolio and 12.1% of Tier 1 capital.

Unrealized losses on the HTM securities were $2.6 million, or 10.1% of the $26.0 million HTM portfolio and 4.4% of Tier 1 capital.

The total gross unrealized losses are $9.8 million, or 7.8% of the $126.5 million securities portfolio and are 16.5% of Tier 1 capital.

The gross unrealized losses on the AFS securities is $6.5 million, or 8.0% of the $81.6 million AFS portfolio and 13.5% of capital.

Unrealized losses on the HTM securities were $2.6 million, or 11.8% of the $22.1 million HTM portfolio and 5.4% of capital.

The total gross unrealized losses are $9.0 million, or 8.7% of the $103.7 million securities portfolio and are 18.8% of capital.

The securities portfolio includes $42.4 million, or 41.0%, that are agency issued and guaranteed by the U.S.

These losses are the result of market interest rate increases and we continue to monitor the portfolio for credit and other risks.

The net unrealized loss on AFS securities and derivative combined, and the corresponding other comprehensive loss, net of tax, was $5.6 million, or 9.4% of Tier 1 capital.

The net unrealized loss on AFS securities and derivative combined, and the corresponding other comprehensive loss, net of tax, was $4.8 million, or 9.9% of capital.

Over the next 24 months from December 31, 2024, we anticipate $42.7 million in incoming cash flow from the securities portfolio with $22.4 million in 2025 and 20.3 million in 2026.

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

At 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 December 31, 2023, the derivatives were highly effective and offset the unrealized loss on AFS securities by $94,000 bringing the accumulated other comprehensive loss from $5.7 million to $5.6 million.

During 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.

December 31, 2024, the derivatives were highly effective and offset the unrealized loss on AFS securities by $329,000 bringing the accumulated other comprehensive loss from $5.1 million to $4.8 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 1.09% due to the change in methodology.

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

We are being cautiously optimistic 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.

At December 31, 2024, our allowance for credit losses to total loans and leases was 1.09%.

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

Housing supply and demand are monitored for indicators of a significant change in the local housing markets.

The Bank has raised in-house mortgage rates while continuing to offer secondary market options to moderate loan funding and we have seen 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 changes in the local housing markets.

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

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 decrease in mortgage demand has been offset by increases in commercial real estate and construction and land loan demand.

We are not currently utilizing internet deposit listing service CDs, but we did attain an additional $10 million in brokered CDs in 2024 to help maintain liquidity while prepaying $10 million in FHLB borrowings.

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

2 unchanged sentences

● Federal Reserve discount window

● Qwickrate CD Program

● Qwickrate (listed) CD Program

● Brokered deposits

1 unchanged sentence

● 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

● The ability to sell a portion of our BOLI assets

At December 31, 2024, Broadstreet Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

25 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis