Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
Overview
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
32
Table of Contents
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. Broadstreet Bank is subject to comprehensive regulation and examination by the Texas Department of Savings and Mortgage Lending and the Federal Deposit Insurance Corporation and is a member of the Federal Home Loan Bank system.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. 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, 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.
We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for credit losses. At December 31, 2024, our investment in bank owned life insurance was $6.4 million, which was within this investment limit.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Our current business strategy consists of the following:
● Continue to serve our community as a community bank. Since our founding in 1934, we have operated as a community bank. 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 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. At December 31, 2024, one-to-four family residential mortgage loans totaled $145.6 million, or 49.0% of total loans. 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 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 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. 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
33
Table of Contents
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.
● Continue to grow core deposits . We consider our core deposits to include statement savings accounts, money market accounts, negotiable orders of withdrawal (NOW) accounts, other savings deposits and checking accounts . We will continue our efforts to increase our core deposits to provide a stable source of funds to support loan growth at costs consistent with improving our interest rate spread and net interest margin. Core deposits totaled $205.9 million, or 61.3% of total deposits, as of December 31, 2024, compared to $198.5 million, or 62.6% of total deposits, as of December 31, 2023.
● Continue to manage credit risk to maintain a low level of nonperforming assets. Historically, we have been able to maintain a high level of asset quality. 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. Our strategy for credit risk management continues to focus on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring.
● Grow organically and through opportunistic acquisitions or branching. 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.
Summary of Critical Accounting Policies and Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We determined not to take advantage of the benefits of this extended transition period.
34
Table of Contents
The following represent our critical accounting policies:
Allowance for Credit Losses . 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. The allowance for credit losses applies to any financial asset carried at amortized cost, including unfunded commitments. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. The Company uses the weighted average remaining maturity (WARM) method to estimate future expected losses for all of the Company’s loan pools. The allowance for credit losses on loans is a reserve for estimated current expected credit losses on individually evaluated loans determined to be impaired as well as estimated current expected credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for credit losses. Loans are charged off when management believes that the uncollectability of the principal is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. A provision for credit losses, which is a charge against earnings, is recorded to bring the allowance for credit losses to a level that, in management’s judgment, is adequate to absorb current expected losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for credit losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect current expected credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated credit losses and therefore the appropriateness of the allowance for credit losses could change significantly.
For additional information regarding the allowance for credit losses, see notes 1 and 4 of the notes to consolidated financial statements.
Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.
Texas Community Bancshares files consolidated federal income tax returns with Broadstreet Bank. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
35
Table of Contents
Selected Financial Data
The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
At December 31,
2024
2023
(In thousands)
Selected Financial Condition Data:
Total assets
$
443,457
$
452,044
Cash and cash equivalents
13,290
13,060
Interest bearing deposits in banks
9,720
12,298
Securities available for sale
75,189
93,327
Securities held to maturity
22,096
26,020
Loans and leases receivable, net
293,708
279,932
Premises and equipment, net
11,526
11,609
Bank owned life insurance
6,370
6,238
Other real estate owned
480
162
Restricted investments carried at cost
4,252
3,909
Core deposit intangible
132
265
Total deposits
335,828
317,241
Advances from the Federal Home Loan Bank
49,878
76,896
Total shareholders' equity
52,108
53,689
For the Years Ended December 31,
2024
2023
(In thousands)
Selected Operating Data:
Interest income
$
22,452
18,978
Interest expense
9,902
7,914
Net interest income
12,550
11,064
Provision for credit losses
158
356
Net interest income after provision for credit losses
12,392
10,708
Noninterest (loss) income
(1,903)
352
Noninterest expense
12,270
11,997
Loss before income taxes
(1,781)
(937)
Income tax benefit
(476)
(204)
Net loss
$
(1,305)
$
(733)
36
Table of Contents
At or For the Years Ended
December 31,
2024
2023
Performance Ratios:
Return on average assets
(0.29)
%
(0.17)
%
Return on average equity
(3.08)
%
(1.75)
%
Interest rate spread (1)
2.51
%
2.27
%
Net interest margin (2)
2.98
%
2.73
%
Noninterest expense to average assets
2.73
%
2.79
%
Efficiency ratio (3)
115.24
%
105.09
%
Average interest-earning assets to average interest-bearing liabilities
120.01
%
123.43
%
Capital Ratios:
Average equity to average assets
9.44
%
9.77
%
Total capital to risk-weighted assets (4)
15.60
%
16.73
%
Tier 1 capital to risk-weighted assets (4)
14.59
%
15.65
%
Common equity tier 1 capital to risk-weighted assets (4)
14.59
%
15.65
%
Tier 1 capital to average assets
10.84
%
10.76
%
Asset Quality Ratios:
Allowance for credit losses as a percentage of total loans
1.09
%
1.09
%
Allowance for credit losses as a percentage of nonperforming loans
142.57
%
267.59
%
Allowance for credit losses as a percentage of nonaccrual loans
151.62
%
340.59
%
Nonaccrual loans as a percentage of total loans
0.72
%
0.32
%
Net (charge-offs) recoveries to average outstanding loans during the year
(0.05)
%
(0.02)
%
Nonperforming loans as a percentage of total loans
0.76
%
0.41
%
Nonperforming loans as a percentage of total assets
0.51
%
0.26
%
Total nonperforming assets as a percentage of total assets
0.62
%
0.30
%
Other Data:
Number of offices
7
6
Number of full-time employees
60
62
Number of part-time employees
8
5
(1) Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2) Represents net interest income as a percentage of average interest-earning assets.
(3) Represents noninterest expenses divided by the sum of net interest income and noninterest income.
Comparison of Financial Condition at December 31, 2024 and December 31, 2023
Total Assets. 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
37
Table of Contents
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 $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 continued to strategically hold more liquid assets while restructuring the loan portfolio throughout 2024.
Interest Bearing Deposits in 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 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 $3.4 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 $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.
38
Table of Contents
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.
Deposits. 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) 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. 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. 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.
Advances from the Federal Home Loan Bank. 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 $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.
39
Table of Contents
At December 31, 2024, Broadstreet Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes. At December 31, 2024 a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements. At December 31, 2024, Broadstreet Bank’s community bank leverage ratio was 10.84%.
Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are included in the computation of average balances. 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.
For the Year Ended December 31,
2024
2023
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans
$
282,894
$
15,923
5.63
%
$
268,179
$
12,842
4.79
%
Allowance for credit losses
(3,044)
(2,642)
Securities
110,893
4,464
4.03
%
123,494
5,061
4.10
%
Restricted stock
3,584
221
6.17
%
3,096
159
5.14
%
Interest-bearing deposits in banks
13,271
723
5.45
%
8,787
452
5.14
%
Federal funds sold
12,465
671
5.38
%
3,661
187
5.11
%
Financial derivative
380
450
559
277
Total interest-earning assets
420,443
22,452
5.34
%
405,134
18,978
4.68
%
Noninterest-earning assets
28,720
24,667
Total assets
$
449,163
$
429,801
Interest-bearing liabilities:
Interest-bearing demand deposits
$
69,237
454
0.66
%
$
60,271
247
0.41
%
Regular savings and other deposits
45,652
134
0.29
%
55,509
171
0.31
%
Money market deposits
44,526
1,453
3.26
%
32,626
1,055
3.23
%
Certificates of deposit
121,986
5,252
4.31
%
108,011
3,871
3.58
%
Total interest-bearing deposits
281,401
7,293
2.59
%
256,417
5,344
2.08
%
Advances from the Federal Home Loan Bank
68,224
2,599
3.81
%
71,198
2,561
3.60
%
Other liabilities
724
10
1.38
%
608
9
1.48
%
Total interest-bearing liabilities
350,349
9,902
2.83
%
328,223
7,914
2.41
%
Noninterest-bearing demand deposits
51,760
54,943
Other noninterest-bearing liabilities
4,641
4,652
Total liabilities
406,750
387,818
Total shareholders' equity
42,413
41,983
Total liabilities and shareholders' equity
$
449,163
$
429,801
Net interest income
$
12,550
$
11,064
Net interest rate spread (1)
2.51
%
2.27
%
Net interest-earning assets (2)
$
70,094
$
76,911
Net interest margin (3)
2.98
%
2.73
%
Average interest-earning assets to interest-bearing liabilities
120.01
%
123.43
%
(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.
40
Table of Contents
Rate/Volume Analysis
The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current year volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
Years Ended December 31, 2024 vs. 2023
Increase (Decrease) Due to
Total Increase
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Loans
$
705
$
2,376
$
3,081
Securities
(516)
(81)
(597)
Restricted stock
25
37
62
Interest-bearing deposits in banks
231
40
271
Federal funds sold and other
450
34
484
Derivative
—
173
173
Total interest-earning assets
895
2,579
3,474
Interest-bearing liabilities:
Interest-bearing demand deposits
37
170
207
Regular savings and other deposits
(30)
(7)
(37)
Money market deposits
385
13
398
Certificates of deposit
501
880
1,381
Total deposits
893
1,056
1,949
Advances from the Federal Home Loan Bank
(107)
145
38
Other interest-bearing liabilities
2
(1)
1
Total interest-bearing liabilities
788
1,200
1,988
Change in net interest income
$
107
$
1,379
$
1,486
Comparison of Operating Results for the Years Ended December 31, 2024 and December 31, 2023
Net Loss. 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 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.
41
Table of Contents
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 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 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 $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.
Interest income from the fair value hedge was $450,000 for the year ended December 31, 2024. The Company entered into an interest rate swap agreement in the year ended December 31, 2024 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 19 – Derivatives of the accompanying consolidated financial statements.
42
Table of Contents
Interest Expense. 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 $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 $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 $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.
43
Table of Contents
Noninterest Income. 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 $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 $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. The increase in the effective tax rate was primarily due to taxable income increasing at a faster rate than nontaxable income.
Management of Market Risk
General . Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Risk Management and Interest Rate Risk Management Officer is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for 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 have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:
● maintaining capital levels that exceed the thresholds for well-capitalized status under federal regulations;
● maintaining a high level of liquidity;
● growing our volume of core deposit accounts;
44
Table of Contents
● managing our investment securities portfolio so as to reduce the average maturity and effective life of the portfolio;
● continuing to diversify our investment securities portfolio by continuing to add collateralized mortgage obligations (CMOs) and subordinated debt;
● managing our borrowings from the Federal Home Loan Bank of Dallas;
● managing our loan services by adding wholesale lending products to continue to offer these services while reducing interest rate risk in the loan portfolio;
● continuing to diversify our loan portfolio by adding more commercial-related loans, which typically have shorter maturities, adjustable rates, and fee income; and
● Derivatives.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The tables below set forth the calculation of the estimated changes in our 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
Change in Interest Rates
Net Interest Income Year
Year 1 Change from
(basis points) (1)
1 Forecast
Level
(Dollars in thousands)
400
$
14,146
13.54
%
300
13,787
10.66
%
200
13,394
7.50
%
100
12,973
4.13
%
Level
12,459
—
(100)
11,990
(3.76)
%
(200)
11,624
(6.70)
%
(300)
11,182
(10.25)
%
(400)
10,686
(14.23)
%
(1) Assumes an immediate uniform change in interest rates at all maturities.
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.
45
Table of Contents
Net Economic Value . We also compute amounts by which the net present value of our assets and liabilities (net economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The tables below set 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 December 31, 2024
EVE as a Percentage of
Present Value of Assets (3)
Estimated Increase
Increase
Change in Interest
Estimated
(Decrease) in EVE
(Decrease)
Rates (basis points) (1)
EVE (2)
Amount
Percent
EVE Ratio (4)
(basis points)
(Dollars in thousands)
400
$
51,464
$
(1,635)
(3.08)
%
13.02
%
92
300
52,659
(440)
(0.83)
%
12.99
%
89
200
53,511
412
0.78
%
12.86
%
76
100
53,805
706
1.33
%
12.59
%
49
Level
53,099
—
—
%
12.10
%
—
(100)
51,791
(1,308)
(2.46)
%
11.47
%
(63)
(200)
48,504
(4,595)
(8.65)
%
10.44
%
(166)
(300)
42,756
(10,343)
(19.48)
%
8.94
%
(316)
(400)
32,770
(20,329)
(38.29)
%
6.66
%
(544)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at 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. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, increases in market interest rates can decrease the fair values of our loans, mortgage servicing rights, deposits and borrowings.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities and loans. We are also able to borrow from the Federal Home
46
Table of Contents
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, 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.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents and short-term investments including interest-bearing demand deposits. The levels of these assets depend on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For additional information, see the consolidated statements of cash flows for the years ended December 31, 2024 and 2023 included as part of the consolidated financial statements appearing elsewhere in this annual report.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
Texas Community Bancshares, Inc. is a separate legal entity from Broadstreet Bank and it must provide for its own liquidity to pay any dividends to stockholders and for other financial purposes. 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 December 31, 2024, Texas Community Bancshares, Inc. (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 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, 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.
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 $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. government. 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 $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.
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. At
47
Table of Contents
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 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 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:
● FHLB borrowing capacity of $102.4 million
● $18 million in credit lines with 2 correspondent banks
● Federal Reserve discount window
● Qwickrate (listed) CD Program
● Brokered deposits
● The ability to sell securities.
● The ability to sell a group of loans in the secondary market on an as needed basis
● The ability to sell a portion of 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. Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category. See Note 17 of the notes to consolidated financial statements.
Off-Balance Sheet Arrangements
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, unused lines of credit and swap transactions. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2024, we had outstanding commitments to originate loans of $18.0 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from December 31, 2024 totaled $96.2 million. Management expects that a substantial portion of these time deposits will be retained. However, if a substantial portion of these time deposits is not retained, we may utilize advances from the Federal Home Loan Bank of Dallas or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
48
Table of Contents
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our consolidated financial statements beginning on page F-1 of this annual report.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information regarding this Item is contained in Item 7 under the heading “Management of Market Risk.”
49
Table of Contents