What changed in this filing

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Item 1. Financial Statements

2025-05-13 compared with 2024-11-13 · 320 added, 540 removed, 904 unchanged (49% of the section changed)

3 unchanged sentences

Consolidated Statements of Financial Condition

September 30, 2024 and December 31, 2023

March 31, 2025 and December 31, 2024

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

September 30,

Cash and due from banks

3 unchanged sentences

Securities available for sale

Securities held to maturity (fair values of $ 20,974 at September 30, 2024 and $ 23,400 at December 31, 2023)

Loans receivable, net of allowance for credit losses of $ 3,174 at September 30, 2024 and $ 3,096 at December 31, 2023

Securities held to maturity (fair values of $ 18,992 at March 31, 2025 and $ 19,531 at December 31, 2024)

Loans receivable, net of allowance for credit losses of $ 3,273 at March 31, 2025 and $ 3,222 at December 31, 2024

Net investment in direct financing leases

12 unchanged sentences

Advances from Federal Home Loan Bank (FHLB)

Financial derivative

Accrued expenses and other liabilities

2 unchanged sentences

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

Common stock, $ 0.01 par value, 19,000,000 shares authorized, 3,380,329 issued and 3,135,556 outstanding at September 30, 2024 and 3,350,268 issued and 3,175,426 outstanding at December 31, 2023

Common stock, $ 0.01 par value, 19,000,000 shares authorized, 3,370,425 issued and 3,056,652 outstanding at March 31, 2025 and 3,370,425 issued and 3,088,152 outstanding at December 31, 2024

Additional paid in capital

2 unchanged sentences

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

Treasury stock, at cost ( 244,773 shares at September 30, 2024 and 174,842 shares at December 31, 2023)

Treasury stock, at cost ( 313,773 shares at March 31, 2025 and 282,273 shares at December 31, 2024)

Total shareholders' equity

3 unchanged sentences

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

Three Months Ended March 31, 2025 and 2024

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

Three Months Ended

Nine Months Ended

September 30,

Interest Income

13 unchanged sentences

Provision (Credit) for Credit Losses

Net Interest Income After Provision for Credit Losses

Net Interest Income After Provision (Credit) for Credit Losses

Noninterest Income

1 unchanged sentence

Other service charges and fees

Net loss on securities transactions

Net loss on sale of loans

Net gain (loss) on sale of other real estate owned

Net change in fair value on loans held for sale

Net (loss) gain on sale of other real estate owned

Net loss on sale of premises and equipment

13 unchanged sentences

Net Income (Loss)

Income (loss) per share - basic

Income (loss) per share - diluted

Earnings (Loss) per share - basic

Earnings (Loss) per share - diluted

Weighted-average shares outstanding - basic

4 unchanged sentences

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

Three Months Ended March 31, 2025 and 2024

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

Three Months Ended

Nine Months Ended

September 30,

Net Income (Loss)

2 unchanged sentences

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

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

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

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

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

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

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

4 unchanged sentences

Consolidated Statements of Shareholders’ Equity (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

Three Months Ended March 31, 2025 and 2024

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

1 unchanged sentence

Shareholders'

Three Months Ended September 30, 2024 and 2023

Balance at July 1, 2024

Stock based compensation expense

Other comprehensive income, net of tax

Cash dividend declared ($ 0.04 per share)

ESOP shares committed to be released, 3,277 shares

Treasury stock purchased, 29,331 shares

Balance at September 30, 2024

Balance at July 1, 2023

Stock based compensation expense

Other comprehensive loss, net of tax

Cash dividend declared ($ 0.03 per share)

ESOP shares committed to be released, 3,258 shares

Treasury stock purchased, 77,150 shares

Balance at September 30, 2023

Comprehensive

Shareholders'

Nine Months Ended September 30, 2024 and 2023

Three Months Ended March 31, 2025 and 2024

Balance at January 1, 2025

4 unchanged sentences

Treasury stock purchased, 31,500 shares

Balance at September 30, 2024

Balance at March 31, 2025

Balance at January 1, 2024

Cumulative change in accounting principle (adoption of ASC 326)

Balance at January 1, 2023 (as adjusted for change in accounting principle)

Stock based compensation expense

Issuance of restricted stock awards

Other comprehensive income, net of tax

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

Cash dividend declared ($ 0.04 per share)

ESOP shares committed to be released, 3,277 shares

Treasury stock purchased, 11,000 shares

Balance at September 30, 2023

Balance at March 31, 2024

See Notes to Consolidated Financial Statements

2 unchanged sentences

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2024 and 2023

Three Months Ended March 31, 2025 and 2024

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

Nine Months Ended

September 30,

Three Months Ended

Operating Activities

Net income (loss)

Adjustments to reconcile net loss to net cash from operating activities

1 unchanged sentence

Provision (credit) for credit losses - off-balance sheet credit exposures

Net amortization (accretion) of securities

Net (accretion) amortization of securities

Depreciation and amortization

Net realized loss on sales of securities available for sale

Net unrealized gain on discontinued financial derivative

Stock dividends on restricted investments

Loss on sale of loans

2 unchanged sentences

ESOP compensation expense for allocated shares

Loss (gain) on other real estate owned

Gain on sale other real estate owned

Write-down of other real estate owned

Stock-based compensation

Deferred income tax benefit

(Gain) loss on fair value adjustment of fair value hedges

Deferred income tax expense (benefit)

Loss on fair value adjustment of fair value hedges

Change in fair value of loans held for sale

Net change in

1 unchanged sentence

Accrued expenses and other liabilities

Net Cash from Operating Activities

Net Cash (used for) from Operating Activities

Investing Activities

4 unchanged sentences

Maturities, prepayments and calls

Redemptions of restricted investments

Purchases of restricted investments

Loan originations and principal collections, net

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

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

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

1 unchanged sentence

Additions of premises and equipment

Net Cash from (used for) Investing Activities

Net Cash used for Investing Activities

Financing Activities

Net increase in deposits

Advances from FHLB and other borrowings

Payments on FHLB and other borrowings

9 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

Note 1 - Summary of Significant Accounting Policies

1 unchanged sentence

(the “Company”), a Maryland corporation and registered bank holding company, was incorporated on March 5, 2021.

The Company became the holding company for Broadstreet Bank, SSB (the “Bank”), formerly known as Mineola Community Bank, SSB prior to December 4, 2023, as part of a mutual to stock conversion completed on July 14, 2021.

The Company became the holding company for Broadstreet Bank, SSB (the “Bank”), formerly known as Mineola Community Bank, SSB prior to December 4, 2023, as part of the Bank’s mutual to stock conversion completed on July 14, 2021.

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

4 unchanged sentences

Interim Financial Statements

The interim unaudited consolidated financial statements as of September 30, 2024, and for the three and nine months ended September 30, 2024 and 2023, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

The interim unaudited consolidated financial statements as of March 31, 2025, and for the three months ended March 31, 2025 and 2024, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

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

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

The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be achieved for the year ending December 31, 2024, or any other period.

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

The results of operations for the three months ended March 31, 2025 are not necessarily indicative of the results to be achieved for the year ending December 31, 2025, or any other period.

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

The accompanying consolidated financial statements have been derived from and should be read in conjunction with the audited consolidated financial statements, and notes, contained in the Company’s Form 10-K for the year ended December 31, 2024.

1 unchanged sentence

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Broadstreet Bank, SSB and its wholly-owned subsidiary Mineola Financial Service Corporation, which is inactive.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include the Bank and its wholly-owned subsidiary Mineola Financial Service Corporation, which is inactive.

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

6 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Loans Held for Sale

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

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

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

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

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

Subsequent Events

After the period ended September 30, 2024, the Company sold $ 5,500 in securities for a gain of $ 40 .

The Company also prepaid $ 10,000 in FHLB advances incurring a prepayment penalty of $ 17 as well as a payoff of a $ 3,000 FHLB advance that had matured.

Three Months Ended March 31, 2025 and 2024

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

Operating Segments

While the Company’s chief decision-maker (“CODM”) monitors the revenue streams of the various products and services, operations are managed, and financial performance is evaluated on a Company-wide basis.

Discrete operating results are not reviewed by senior management to make resource allocation or performance decisions.

Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Segment Information

The Company’s CODM is the Chief Executive Officer.

Operating segments are defined as components of a business about which separate financial information is available and evaluated regularly by the CODM in deciding how to allocate resources and assess performance.

While the CODM monitors the revenue streams of the various products and services offered by the Bank, the Company’s operations are managed and financial performance is evaluated on a Company-wide basis as a single reportable operating segment, which is the Bank.

Discrete financial information, with a full allocation of revenue, costs, and capital from key corporate functions, is not available at a level other than on a Company-wide basis.

Although the CODM has some limited financial information about the Company’s various financial products and services, this information is not complete and is insufficient for making resource allocation decisions or performance assessments at a more granular level.

Therefore, management considers all financial service operations to be aggregated within one reportable operating segment, the Bank, and evaluates financial performance on a company-wide basis using net income as reported on the Consolidated Statement of Operations.

The measure of segment assets is total assets, as reported on the Consolidated Statements of Financial Condition.

The CODM uses net income to monitor budget versus actual results and in the determination of allocating resources across the Company.

The Company’s single reportable segment, the Bank, generates revenues primarily from interest income from financial instruments and non-interest income and service charges on deposit accounts.

There are no intra-entity sales or transfers within the Company.

Management continues to evaluate the Company’s business units for potential separate reporting in the future as facts and circumstances evolve.

Note 2 – Earnings Per Share

Basic earnings per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period, including allocated and committed to be released ESOP shares and restricted stock awards granted on August 31, 2022, February 28, 2023, February 28, 2024, and August 30, 2024, during the applicable period.

Basic earnings per share is computed by dividing the net gain or loss by the weighted-average number of common shares outstanding during the period, including allocated and committed to be released ESOP shares and restricted stock awards granted during the applicable period.

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

2 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share:

Three Months Ended

Nine Months Ended

September 30,

Net Income (Loss)

8 unchanged sentences

Nonvested restricted stock awards for 21,493 and 74,007 shares of common stock were not considered in computing diluted earnings per share for 2025 and 2024, respectively, because they were antidilutive.

Nonvested stock options for 158,974 and 270,386 shares of common stock and vested stock options for 64,176 and 19,546 shares of common stock were not considered in computing diluted earnings per share for 2024 and 2023, respectively, because they were antidilutive.

Stock options for 159,755 and 231,946 shares of common stock were not considered in computing diluted earnings per share for 2025 and 2024, because they were nonvested.

Stock options for 35,838 and 46,258 shares of common stock have vested, however, were not considered in computing diluted earnings per share for 2025 and 2024, because they were antidilutive.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

Note 3 - Debt Securities

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

September 30, 2024

March 31, 2025

Available for Sale

25 unchanged sentences

Total securities held to maturity

During the three and nine months ended September 30, 2024, the Company had sales of available for sale securities of $ 5,499 with a loss of $ 1 and no sales of held to maturity securities.

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

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

At September 30, 2024 and December 31, 2023, securities with a fair value of $ 16,583 and $ 14,152 , respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

During the three months ended March 31, 2025 and 2024, the Company had no sales of available for sale securities or held to maturity securities.

At March 31, 2025 and December 31, 2024, securities with a fair value of $ 17,995 and $ 17,862 , respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2024, follows:

Three Months Ended March 31, 2025 and 2024

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

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2025, follows:

Available for Sale

7 unchanged sentences

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

September 30, 2024

March 31, 2025

Less than 12 months

5 unchanged sentences

Corporate bonds (0,13)

Government and agency (0,0)

December 31, 2024

6 unchanged sentences

Corporate bonds (2,12)

Government and agency (1,0)

At September 30, 2024 and December 31, 2023, the Company had investment securities with approximately $ 7,144 and $ 9,593 , respectively, in unrealized losses, which have been in continuous loss positions for more than twelve months.

At March 31, 2025 and December 31, 2024, the Company had investment securities with approximately $ 7,605 and $ 8,773 , respectively, in unrealized losses, which have been in continuous loss positions for more than twelve months.

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

In addition, approximately 11.8 % of the principal balance from the Company’s investment portfolio will mature and be repaid to the Company within five years or less.

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

The Company has the ability and intent to hold such securities until maturity.

The Company monitors credit quality of debt securities held-to-maturity through the use of nationally recognized

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

until maturity.

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

Three Months Ended March 31, 2025 and 2024

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

credit ratings.

The Company monitors credit ratings on a continual basis.

The following table summarizes bond ratings for the Company’s held-to-maturity portfolio, based upon amortized cost, issued by state and political subdivisions and other securities as of September 30, 2024 and December 31, 2023:

September 30, 2024

March 31, 2025

mortgage-backed

3 unchanged sentences

U.S Government

As of September 30, 2024 and December 31, 2023, there were no securities held to maturity on nonaccrual status or past due.

As of March 31, 2025 and December 31, 2024, there were no securities held to maturity on nonaccrual status or past due status.

Mortgage-backed Securities and Collateralized Mortgage Obligations

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

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

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

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

The Company purchased these investments at a premium or discount relative to its face amount, and the contractual cash flows of these investments are guaranteed by an agency of the U.S.

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

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

The unrealized losses on the Company’s investment in mortgage-backed securities have not been recognized into income and no allowance for credit losses was established at September 30, 2024 or December 31, 2023.

The unrealized losses on the Company’s investment in mortgage-backed securities have not been recognized into income and no allowance for credit losses was established at March 31, 2025 or December 31, 2024.

Government and Agency Securities

1 unchanged sentence

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

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

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

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

Therefore, an allowance for credit losses is deemed unnecessary at March 31, 2025 and December 31, 2024.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

bonds approach maturity.

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

Therefore, an allowance for credit losses is deemed unnecessary at September 30, 2024 and December 31, 2023.

Three Months Ended March 31, 2025 and 2024

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

Municipal Securities and Corporate Bonds

1 unchanged sentence

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

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

Therefore, an allowance for credit losses is deemed unnecessary at September 30, 2024 and December 31, 2023.

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

Therefore, an allowance for credit losses is deemed unnecessary at March 31, 2025 and December 31, 2024.

Note 4 - Loans and Allowance for Credit Losses

A summary of the balances of loans and leases follows:

September 30,

Construction and land

6 unchanged sentences

Loans and leases, net

Direct financing leases of $ 1,330 and $ 36 are included in consumer and other loans at September 30, 2024 and December 31, 2023, respectively.

Direct financing leases of $ 1,143 and $ 1,292 are included in consumer and other loans at March 31, 2025 and December 31, 2024, respectively.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

The following tables set forth information regarding the activity in the allowance for credit losses for the three and nine months ended September 30, 2024 and September 30, 2023:

September 30, 2024

Three Months Ended March 31, 2025 and 2024

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

The following tables set forth information regarding the activity in the allowance for credit losses for the three months ended March 31, 2025 and March 31, 2024:

March 31, 2025

Allowance for credit losses:

2 unchanged sentences

Municipalities

Three months ended

Beginning balance, July 1, 2024

Provision (credit) for credit losses

Loans charged-off

Balance, September 30, 2024

Nine months ended

Balance, January 1, 2025

1 unchanged sentence

Loans charged-off

Balance, September 30, 2024

Balance, September 30, 2024 allocated to loans and leases individually evaluated

Balance, September 30, 2024 allocated to loans and leases collectively evaluated

Balance, March 31, 2025

Balance, March 31, 2025 allocated to loans and leases individually evaluated

Balance, March 31, 2025 allocated to loans and leases collectively evaluated

Loans and leases receivable:

Balance, September 30, 2024 loans and leases individually evaluated

Balance, September 30, 2024 loans and leases collectively evaluated

Balance, September 30, 2024

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

September 30, 2023

Balance, March 31, 2025 loans and leases individually evaluated

Balance, March 31, 2025 loans and leases collectively evaluated

Balance, March 31, 2025

March 31, 2024

Allowance for credit losses:

2 unchanged sentences

Municipalities

Three months ended

Beginning balance, July 1, 2023

Provision for credit losses

Loans charged-off

Balance, September 30, 2023

Nine months ended

Beginning balance prior to adoption of ASC 326

Impact of adopting ASC 326 on January 1, 2023

Balance, January 1, 2024

Provision for credit losses

Loans charged-off

Balance, September 30, 2023

December 31, 2023

1-4 Residential

& multi-family

Municipalities

Allowance for credit losses:

Balance, March 31, 2024

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

4 unchanged sentences

Balance, December 31, 2024

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of June 30, 2024 and December 31, 2023:

September 30, 2024

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2025 and 2024

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

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of March 31, 2025 and December 31, 2024:

March 31, 2025

with Allowance

5 unchanged sentences

Consumer and other

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

December 31, 2024

6 unchanged sentences

Consumer and other

The Company did not recognize any interest income on nonaccrual loans during the periods ended June 30, 2024 or September 30, 2023.

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2024 and December 31, 2023:

September 30, 2024

The Company did no t recognize any interest income on nonaccrual loans during the three months ended March 31, 2025 or March 31, 2024.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2025 and 2024

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

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2025 and December 31, 2024:

March 31, 2025

Construction and land

1 unchanged sentence

Commercial real estate

Consumer and other

December 31, 2024

Construction and land

1-4 Residential & multi-family

Commercial real estate

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

The Company had $ 2,200 and $ 1,157 in collateral-dependent loans at September 30, 2024 and December 31, 2023, respectively.

The Company had $ 2,155 and $ 2,260 in collateral-dependent loans at March 31, 2025 and December 31, 2024, respectively.

Internal Risk Categories

5 unchanged sentences

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

When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the fair value of the underlying collateral, less estimated costs to sell.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2025 and 2024

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

collateral, less estimated costs to sell.

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

14 unchanged sentences

Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt.

7 unchanged sentences

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

No significant changes in methodology were made during the three and nine months ended September 30, 2024.

Certain loan segments were reclassified during the period ended September 30, 2024.

Each loan segment is made up of loan categories with similar risk characteristics.

The Company’s realignment of the segments primarily consisted of separately presenting municipality loans from the consumer and other category.

Management believes this accurately represents the risk profile of each loan segment.

The prior period balances have been revised to conform to the current period presentation.

These reclassifications did not have a significant impact on the allowance for credit losses.

No significant changes in methodology were made during the three months ended March 31, 2025.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Based on the most recent analysis performed, the risk category of loans by class of loans and gross chargeoffs as of September 30, 2024 and December 31, 2023 are as follows:

September 30, 2024

Three Months Ended March 31, 2025 and 2024

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

Based on the most recent analysis performed, the risk category of loans by class of loans and gross chargeoffs as of March 31, 2025 and December 31, 2024 are as follows:

March 31, 2025

Term Loans Amortized Cost Basis by Origination Year

9 unchanged sentences

Special mention

Current period gross charge-offs

Municipalities

6 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

December 31, 2024

5 unchanged sentences

Special mention

Current period gross charge-offs

Commercial real estate

2 unchanged sentences

Special mention

Current period gross charge-offs

Municipalities

6 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

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

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

The following table presents the amortized cost of performing and non-performing loans as of September 30, 2024 and December 31, 2023:

September 30, 2024

Term Loans Amortized Cost Basis by Origination Year

Construction and land

Nonperforming

1-4 Residential & multi-family

Nonperforming

Commercial real estate

Nonperforming

Municipalities

Nonperforming

Consumer and other

Nonperforming

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

December 31, 2023

Term Loans Amortized Cost Basis by Origination Year

Construction and land

Nonperforming

1-4 Residential & multi-family

Nonperforming

Commercial real estate

Nonperforming

Municipalities

Nonperforming

Consumer and other

Nonperforming

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

The following is an aging analysis for loans as of September 30, 2024 and December 31, 2023:

September 30, 2024

The Company also evaluates credit quality based on the aging status of the loan.

The following is an aging analysis for loans as of March 31, 2025 and December 31, 2024:

March 31, 2025

Construction and land

12 unchanged sentences

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

No interest income was recognized for loans on nonaccrual status for the three and nine months ended September 30, 2024 and 2023.

The following table presents interest income recognized on loans that are collateral-dependent and individually reviewed for the three and nine months ended September 30, 2024 and 2023:

No interest income was recognized for loans on nonaccrual status for the three months ended March 31, 2025 and 2024.

The following table presents interest income recognized on loans that are collateral-dependent and individually reviewed for the three months ended March 31, 2025 and 2024:

Three Months Ended

Nine Months Ended

September 30,

1-4 Residential & multi-family

During the three and nine months ended September 30, 2024 and 2023, there were no modifications of loans to borrowers in financial difficulty.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

There have been no modifications to borrowers with financial difficulty in the three and nine months ended September 30, 2024 and 2023 that subsequently defaulted.

Three Months Ended March 31, 2025 and 2024

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

During the three months ended March 31, 2025 and 2024, there were no modifications of loans to borrowers in financial difficulty.

There have been no modifications to borrowers with financial difficulty in the three months ended March 31, 2025 and 2024, that subsequently defaulted.

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

5 unchanged sentences

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

At September 30, 2024 and December 31, 2023, the following financial instruments were outstanding whose contract amounts represent credit risk:

At March 31, 2025 and December 31, 2024, the following financial instruments were outstanding whose contract amounts represent credit risk:

Contract Amount

September 30, 2024

March 31, 2025

December 31, 2024

11 unchanged sentences

The Bank is party to an additional agreement on a secured federal funds line of credit of $ 3,000 that is in effect until either party changes or fails to meet the terms of the agreement.

At September 30, 2024, the Company had no commitments to purchase securities.

At March 31, 2025, the Company had no commitments to purchase securities.

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

2 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

Note 6 - Supplemental Cash Flow Information

Supplemental disclosure of cash flow information is as follows:

Nine Months Ended

September 30,

Three Months Ended

Supplemental cash flow information:

6 unchanged sentences

Loan originations to facilitate the sale of other real estate owned

Loans transferred to other real estate owned

Premises and equipment transferred to other real estate owned

5 unchanged sentences

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

At September 30, 2024 and December 31, 2023, the Bank’s CBLR ratio was 10.59 % and 10.76 %, respectively, which exceeded all regulatory capital requirements under the CBLR framework, and the Bank was considered to be “well-capitalized.”

At March 31, 2025 and December 31, 2024, the Bank’s CBLR ratio was 11.09 % and 10.84 %, respectively, which exceeded all regulatory capital requirements under the CBLR framework, and the Bank was considered to be “well-capitalized.”

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

8 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

Note 8 - Fair Value Measurements

19 unchanged sentences

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

There were no changes in valuation techniques during either the nine months ended September 30, 2024 or the year ended December 31, 2023.

There were no changes in valuation techniques during either the three months ended March 31, 2025 or the year ended December 31, 2024.

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

3 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

observable market- based parameters.

9 unchanged sentences

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

No significant differences were identified during the validation as of September 30, 2024.

No significant differences were identified during the validation as of March 31, 2025.

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

8 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

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

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2024

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2025 and December 31, 2024, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2025

Financial assets

5 unchanged sentences

Total financial assets

Financial liabilities

Derivative instruments

Total financial liabilities

December 31, 2024

12 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

The following table summarizes financial and non-financial assets measured at fair value on a nonrecurring basis as of September 30, 2024 and December 31, 2023, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2024

Three Months Ended March 31, 2025 and 2024

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

The following table summarizes financial and non-financial assets measured at fair value on a nonrecurring basis as of March 31, 2025 and December 31, 2024, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2025

Financial assets

7 unchanged sentences

Other real estate owned

During the nine months ended September 30, 2024 and 2023, certain collateral-dependent loans were remeasured and reported at fair value through a specific allocation of the allowance for credit losses based upon the fair value of the underlying collateral.

At September 30, 2024, collateral-dependent loans with a carrying value of $ 1,200 were reduced by specific valuation allowance allocations totaling $ 279 to a reported fair value of $ 921 .

During the three months ended March 31, 2025 and 2024, certain collateral-dependent loans were remeasured and reported at fair value through a specific allocation of the allowance for credit losses based upon the fair value of the underlying collateral.

At March 31, 2025, collateral-dependent loans with a carrying value of $ 1,080 were reduced by specific valuation allowance allocations totaling $ 279 to a reported fair value of $ 801 .

At December 31, 2024, collateral dependent loans with a carrying value of $ 1,140 were reduced by specific valuation allowance allocations totaling $ 279 to a reported fair value of $ 861 .

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

There was a charge of $ 15 to the provision for credit losses and a transfer of $ 48 from the general reserve to the specific reserve as a result of additional reserve requirements according to the quarterly evaluation conducted on collateral dependent loans for the nine months ended September 30, 2024.

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

At September 30, 2024, the Company had other real estate owned consisting of two bank properties that were purchased for future expansion, but have now been listed for sale.

At December 31, 2023, the Company had one commercial building held as other real estate owned with a carrying value of $ 162 , which was sold at a gain during the nine months ended September 30, 2024.

There was a charge of $ 3 to the provision for credit losses for the three months ended March 31, 2025.

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

At March 31, 2025, the Company had other real estate owned consisting of two bank properties that were purchased for future expansion that have been listed for sale and one 1-4 residential property that has also been listed for sale.

During the three months ended March 31, 2025, the Company had a $ 52 write-down of other real estate owned.

During the three months ended March 31, 2024, there were no write-downs of other real estate owned.

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

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

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

2 unchanged sentences

Significant Input

September 30, 2024

March 31, 2025

Collateral-dependent loans

18 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

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

September 30, 2024

March 31, 2025

Carrying Value

6 unchanged sentences

Restricted investments carried at cost

Mortgage servicing rights

Financial liabilities

22 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

Three Months Ended March 31, 2025 and 2024

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

Restricted investments carried at cost – The carrying value of these investments approximates fair value based on the redemption provisions contained in each.

8 unchanged sentences

The ESOP borrowed funds from the Company in an amount sufficient to purchase 260,621 shares (approximately 8.0 % of the common stock issued in connection with the conversion).

The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Company and dividends received by the ESOP.

The loan is secured by the unallocated ESOP shares and will be repaid by the ESOP with funds from contributions made by the Company and dividends received by the ESOP.

Contributions will be applied to repay interest on the loan first, and then the remainder will be applied to principal.

10 unchanged sentences

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

ESOP compensation was $ 46 and $ 139 for the three and nine months ended September 30, 2024 and $ 40 and $ 127 for the three and nine months ended September 30, 2023.

ESOP compensation was $ 52 and $ 46 for the three months ended March 31, 2025 and 2024.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

A summary of the ESOP shares as of September 30, 2024 and December 31, 2023 are as follows:

September 30, 2024

Three Months Ended March 31, 2025 and 2024

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

A summary of the ESOP shares as of March 31, 2025 and December 31, 2024 are as follows:

March 31, 2025

December 31, 2024

5 unchanged sentences

Note 10 – Derivatives

The Company is exposed to economic risks arising from its business operations and uses derivatives primarily to manage risk associated with changing interest rates.

The Company is exposed to economic risks arising from its business operations and has used derivatives primarily to manage risk associated with changing interest rates.

The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge).

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

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

At September 30, 2024 and December 31, 2023, the aggregate notional amount of the related hedged items of the securities available for sale totaled $ 25 million and the fair value of the swaps associated with the derivative related to hedged items was an unrealized loss of $ 148 and an unrealized gain of $ 119 , respectively.

During the nine months ended September 30, 2024, the carrying amount of the hedged assets decreased due to the sale of two securities with an amortized cost of $ 5,500 .

At September 30, 2024, the hedging relationship still qualified for hedge accounting due to the amortized cost of the remaining securities exceeding the notional amount.

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

At December 31, 2024, the aggregate notional amount of the related hedged items of the securities available for sale totaled $ 25 million and the fair value of the swaps associated with the derivative related to the hedged items was an unrealized gain of $ 417 .

As of March 31, 2025, the Company terminated the swap agreement and transitioned the net unrealized gain on the swaps of $ 463 through the underlying securities by reducing the book value of the securities.

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

7 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2024 and 2023

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

The following table summarizes key elements of the Company’s derivative instruments as of September 30, 2024 and December 31, 2023, segregated by derivatives that are considered accounting hedges and those that are not:

September 30, 2024

Three Months Ended March 31, 2025 and 2024

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

During the three-months ended March 31, 2025, the Company terminated the financial derivative resulting in an unrealized gain of $ 463 , reducing the cost basis of investments related to the financial derivative.

The unrealized gain will be recognized over the contractual life of the underlying securities.

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

December 31, 2024

Notional Amount

Derivatives designated as hedges:

Fair Value Hedges

The following table summarizes the carrying value of the Company’s hedged assets in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of September 30, 2024 and December 31, 2023:

September 30, 2024

December 31, 2024

1 unchanged sentence

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

Carrying Amount of Hedged Assets Amount

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

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

1 unchanged sentence

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

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (the “Company”) consolidated financial condition at September 30, 2024 and consolidated results of operations for the three and nine months ended September 30, 2024 and 2023.

It should be read in conjunction with the unaudited consolidated financial statements and the related notes appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (the “Company”) consolidated financial condition at March 31, 2025 and consolidated results of operations for the three months ended March 31, 2025 and 2024.

It should be read in conjunction with the unaudited consolidated financial statements and the related notes appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements, and notes, contained in the Annual Report on Form 10-K for the year ended December 31, 2024..

Cautionary Note Regarding Forward-Looking Statements

49 unchanged sentences

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.

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 off-balance sheet commitments (unfunded commitments).

9 unchanged sentences

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 non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions, reasonable and supportable forecasts, and other qualitative and quantitative factors which could affect potential credit losses.

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 September 30, 2024 and 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 nine months ended September 30, 2024.

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

As of September 30, 2024, the Company did not have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

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

Income Taxes.

10 unchanged sentences

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

Comparison of Financial Condition at September 30, 2024 and December 31, 2023

Comparison of Financial Condition at March 31, 2025 and December 31, 2024

Total Assets.

Total assets were $446.0 million at September 30, 2024, a decrease of $6.0 million, or 1.3%, from $452.0 million at December 31, 2023.

The decrease was due primarily to a decrease in securities of $15.7 million, or 13.2%, to $103.6 million at September 30, 2024 from $119.3 million at December 31, 2023 and a decrease in interest bearing deposits in banks of $9.1 million, or 74.0%, to $3.2 million at September 30, 2024 from $12.3 million at December 31, 2023 partially offset by an increase in net loans and leases of $13.1 million, or 4.7%, to $293.0 million at September 30, 2024 from $279.9 million at December 31, 2023 and an increase in cash and cash equivalents of $4.7 million, or 35.9%, to $17.8 million at September 30, 2024 from $13.1 million at December 31, 2023.

The increase in loans was net of the sale of 122 performing residential mortgage loans totaling $27.1 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.

Total assets were $442.2 million at March 31, 2025, a decrease of $1.3 million, or 0.3%, from $443.5 million at December 31, 2024.

The decrease was due primarily to a decrease in securities of $1.3 million, or 1.3%, to $96.0 million at March 31, 2025 from $97.3 million at December 31, 2024, a decrease in cash and interest bearing deposits in banks of $1.9 million, or 8.3%, to $21.1 million at March 31, 2025 from $23.0 million at December 31, 2024 and a decrease in restricted investments carried at cost of $1.0 million, or 23.8%, to $3.2 million at March 31, 2025 partially offset by an increase in net loans and leases of $3.8 million, or 1.3%, to $297.5 million at March 31, 2025 from $293.7 million at December 31, 2024.

Cash and Cash Equivalents.

Cash and cash equivalents increased $4.7 million, or 35.9%, to $17.8 million (which includes fed funds sold of $12.6 million) at September 30, 2024 from $13.1 million (which includes fed funds sold of $7.6 million) at December 31, 2023.

This increase was primarily the result of an increase in deposits of $9.1 million, or 2.9%, a decrease in securities of $15.7 million and a decrease in interest bearing deposits in banks of $9.1 million partially offset primarily by an increase in loans of $13.1 million, dividends paid of $380,000, stock repurchases of $1.0 million, and a decrease in FHLB advances of $13.7 million.

Cash and cash equivalents decreased $1.5 million, or 11.3%, to $11.8 million (which includes fed funds sold of $3.2 million) at March 31, 2025 from $13.3 million (which includes fed funds sold of $9.3 million) at December 31, 2024.

This decrease was primarily the result of an increase in loans of $3.8 million, or 1.3%, and stock repurchases of $495,000 partially offset by a decrease in securities of $1.3 million and an increase in deposits of $1.7 million.

Interest Bearing Deposits in Banks.

Interest bearing deposits in banks decreased $9.1 million, or 74.0%, to $3.2 million at September 30, 2024, compared to $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) and $6.0 million in money market funds with correspondent banks being moved to cash primarily to be used for the payoff of $12.7 million in FHLB advances.

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 September 30, 2024, there were no Qwickrate CDs with other banks.

Interest bearing deposits in banks decreased $436,000, or 4.5%, to $9.3 million at March 31, 2025, compared to $9.7 million at December 31, 2024.

The decrease was primarily the result of a decrease in FHLB advances of $320,000 and cash dividends of $123,000 paid by the Company.

Securities Available for Sale.

Securities available for sale decreased by $12.6 million, or 13.5%, to $80.7 million at September 30, 2024 from $93.3 million at December 31, 2023.

During the nine months ended September 30, 2024, we had purchases of securities of $3.5 million, received paydowns of $9.4 million and securities of $3.4 million being called.

During the nine months ended September 30, 2024, we sold two floating rate securities totaling $5.5 million to be reinvested at a fixed rate.

Net unrealized losses on the available for sale portfolio, including derivatives, decreased by $1.5 million, or 26.8%, to $4.1 million, net of tax, from $5.6 million, net of tax, due primarily to decreases in market interest rates.

Gross unrealized losses on the AFS portfolio consisting of 81 securities decreased from $7.2 million, or 7.2% of the portfolio’s amortized cost of $100.5 million at December 31, 2023, to $5.1 million, or 6.0% of the amortized cost of $85.8 million at September 30, 2024.

Securities available for sale decreased by $400,000, or 0.5%, to $74.8 million at March 31, 2025 from $75.2 million at December 31, 2024.

During the three months ended March 31, 2025, there were purchases of securities of $2.7 million offset by net paydowns of $3.6 million.

Accumulated other comprehensive income decreased by $400,000, or 8.5%, to $4.4 million, net of tax, from $4.8 million, net of tax, due primarily to changes in market interest rates and the termination of the derivative.

Gross unrealized losses on the AFS portfolio consisting of 78 securities decreased from $6.5 million, or 8.0% of the portfolio’s amortized cost of $81.6 million at December 31, 2024, to $5.5 million, or 6.9% of the amortized cost of $80.3 million at March 31, 2025.

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

At March 31, 2025, the AFS portfolio was comprised of 11.9% residential mortgage backed securities, 60.7% collateralized mortgage obligations, 17.8% state and municipal securities and 9.7% corporate bonds.

Securities Held to Maturity.

Securities held to maturity decreased by $3.1 million, or 11.9%, to $22.9 million at September 30, 2024 from $26.0 million at December 31, 2023.

This decrease is due primarily to one security of $395,000 being called and paydowns of $2.6 million.

The HTM portfolio had 69 securities with gross unrealized losses of $2.0 million, or 8.8%, of the amortized cost of $22.9 million at September 30, 2024 compared to $2.6 million, or 10.0%, of the amortized cost of $26.0 million at December 31, 2023.

Securities held to maturity decreased by $900,000, or 4.1%, to $21.2 million at March 31, 2025 from $22.1 million at December 31, 2024.

This decrease is due primarily to paydowns of $891,000.

The HTM portfolio had 69 securities with gross unrealized losses of $2.2 million, or 10.4%, of the amortized cost of $21.2 million at March 31, 2025 compared to $2.6 million, or 10.0%, of the amortized cost of $26.0 million at December 31, 2024.

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

At March 31, 2025, the HTM portfolio was comprised of 86.6% residential mortgage backed securities, 7.4% state and municipal securities and 6.0% U.S government and agency bonds.

Loans and Leases Receivable, Net.

Net loans and leases receivable increased $13.0 million, or 4.7%, to $293.0 million at September 30, 2024 from $279.9 million at December 31, 2023.

The increase in loans was primarily due to an increase in commercial real estate loans after reinvesting the funds from the sale of 122 performing residential mortgage loans totaling $27.1 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 $77.8 million in loan originations partially offset by $37.2 million in payoffs and $9.9 million in contractual repayments.

Net loans and leases receivable increased $3.8 million, or 1.3%, to $297.5 million at March 31, 2025 from $293.7 million at December 31, 2024.

The increase in loans was primarily due to $21.2 million in loan originations and $2.8 million in loans repurchased from the 2024 loan sale partially offset by payoffs and contractual repayments.

The loan and lease portfolio totaled $300.8 million and is comprised of $277.8 million, or 92.3%, real estate loans, $5.6 million, or 1.9%, commercial and industrial loans, $5.0 million, or 1.7%, consumer loans and other loans, and $12.4 million, or 4.1%, municipal loans.

Real estate loans include $143.1 million, or 48.3%, 1-4 family residential loans, $10.5 million, or 3.6%, multi-family loans, $55.5 million, or 18.8%, commercial real estate (CRE) loans, $22.1 million, or 7.4%, in 1-4 family construction loans, $33.1 million, or 11.2%, in other construction and development loans and $9.3 million, or 3.2%, in farmland loans.

Real estate loans include $143.6 million, or 51.7%, 1-4 family residential loans, $10.5 million, or 3.8%, multi-family loans, $57.3 million, or 20.6%, commercial real estate (CRE) loans, $18.5 million, or 6.7%, 1-4 family construction loans, $37.8 million, or 13.6%, other construction and development loans and $10.0 million, or 3.6%, farmland loans.

Total loans include interim construction loans of $34.6 million, or 75.9%, of the completed project balance of $45.5 million which includes $18.3 million in single-family residence loans, including $4.6 million in speculative construction loans to builders, $2.6 million in subdivision construction, $15.5 million in muti-family construction loans and $9.1 million in CRE loans.

The total construction loan portfolio consisted of 65 loans with outstanding balances of $49.3 million at September 30, 2024 compared to 82 loans with outstanding balances of $54.3 million at December 31, 2023.

At September 30, 2024, commercial real estate loans consisted of $23.5 million owner occupied and $32.0 million non-owner occupied real estate.

At September 30, 2024, commercial real estate loans primarily include loans collateralized by self-storage facilities ($16.4 million), commercial rental properties ($9.4 million), gas stations with convenience stores ($8.4 million), churches ($4.6 million), rural water district assets ($3.8 million), and restaurants ($2.4 million).

The total construction loan portfolio consisted of 57 loans with completed project balances of $45.5 million at March 31, 2025 compared to 55 loans totaling $42.5 million at December 31, 2024.

At March 31, 2025, commercial real estate loans consisted of $23.5 million owner occupied and $33.8 million non-owner occupied real estate.

At March 31, 2025, commercial real estate loans primarily include loans collateralized by self-storage facilities ($16.3 million), commercial rental properties ($7.5 million), gas stations with convenience stores ($10.8 million), churches ($4.4 million), rural water district assets ($3.8 million), and restaurants ($3.6 million).

The maximum loan-to-value ratio of our commercial real estate loans is generally 80%.

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Personal guarantees are generally obtained from the principals of commercial real estate borrowers.

We consider a number of factors in originating commercial real estate loans.

We consider a number of factors in originating commercial real estate

We evaluate the qualifications and financial conditions of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan.

When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property, debt service capabilities, global cash flows of the borrower and other guarantors, and the borrower’s payment history with us and other financial institutions.

Deposits increased $9.1 million, or 2.9%, to $326.3 million at September 30, 2024 from $317.2 million at December 31, 2023.

Core deposits (defined as all deposits other than certificates of deposit) increased $6.4 million, or 3.2%, to $204.9 million at September 30, 2024 from $198.5 million at December 31, 2023.

Retail certificates of deposit increased $3.0 million, or 2.8%, to $109.5 million at September 30, 2024 from $106.5 million at December 31, 2023.

At September 30, 2024, there were $12.0 million in brokered deposits.

The year-to-date average cost of interest-bearing deposits increased 50 basis points, or 24.1%, to 2.58% at September 30, 2024 compared to 2.08% at December 31, 2023.

Due to a strategic effort to increase noninterest bearing deposits, cost of total deposits increased 11 basis points, or 5.3%, from 2.09% at December 31, 2023 to 2.20% at September 30, 2024.

At September 30, 2024, there were 198 accounts with balances in excess of the $250,000 FDIC insurance limit with an aggregate balance of $99.5 million, or 30.5% of deposits.

Deposits increased $1.7 million, or 0.5%, to $337.5 million at March 31, 2025 from $335.8 million at December 31, 2024.

Core deposits (defined as all deposits other than certificates of deposit) decreased $1.9 million, or 0.9%, to $204.0 million at March 31, 2025 from $205.9 million at December 31, 2024.

Certificates of deposit increased $3.6 million, or 2.8%, to $133.5 million at March 31, 2025 from $129.9 million at December 31, 2024.

At March 31, 2025, there were $22.0 million in brokered and $499,000 in listed deposits.

The year-to-date average cost of interest-bearing deposits decreased 14 basis points, or 5.4%, to 2.45% at March 31, 2025 compared to 2.59% at December 31, 2024.

At March 31, 2025, there were 204 accounts with balances in excess of the $250,000 FDIC insurance limit with an aggregate balance of $98.2 million, or 30.5% of deposits.

The amount that was over the FDIC insurance limit was $47.2 million, or 14.0%, that was potentially uninsured, including certificates of deposit of $11.3 million, money market accounts of $10.8 million and $25.1 million in checking and savings accounts.

Advances from Federal Home Loan Bank.

Advances from Federal Home Loan Bank decreased by $13.7 million, or 17.8%, to $63.2 million at September 30, 2024 from $76.9 million at December 31, 2023 due to the payoff of five advances totaling $12.7 million and to normal principal payments on amortizing advances of $1.0 million.

There is one additional $3.0 million advance that will mature in 2024.

There are no current plans to renew the advance.

Advances from Federal Home Loan Bank decreased by $300,000, or 0.6%, to $49.6 million at March 31, 2025 from $49.9 million at December 31, 2024 due to normal principal payments on amortizing advances of $320,000.

There is $3.5 million in advances that will mature in 2025.

There are no current plans to renew the advances.

Total Shareholders’ Equity.

Total shareholders’ equity decreased $1.0 million, or 1.9%, to $52.7 million at September 30, 2024 from $53.7 million at December 31, 2023.

This decrease was primarily due to a net loss for the nine months ended September 30, 2024 of $1.8 million 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 69,931 shares of its common stock for a decrease of $1.0 million and paid quarterly dividends totaling $380,000, partially offset by an increase in equity of $623,000 from vesting of the 2022 Equity Plan and an increase of $139,000 with the accrual of ESOP commitments for the nine months ended September 30, 2024.

There was a decrease in the accumulated other comprehensive loss, net of tax, due to decreases in market interest rates that added $1.5 million to shareholder’s equity at September 30, 2024.

At September 30, 2024, Broadstreet Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes.

Total shareholders’ equity increased $647,000, or 1.2%, to $52.8 million at March 31, 2025 from $52.1 million at December 31, 2024.

This increase was primarily due to net income of $643,000 for the three months ended March 31, 2025.

The Company had additional increases in equity of $175,000 from vesting of the 2022 Equity Plan and an increase of $52,000 with the accrual of ESOP commitments for the three months ended March 31, 2025 partially offset by a decrease of $495,000 from the repurchase of 31,500 shares of its common stock and quarterly dividends paid totaling $123,000.

There was a decrease in the accumulated other comprehensive loss of $395,000, net of tax, due to changes in market interest rates and the termination of the derivative at March 31, 2025.

At March 31, 2025, Broadstreet Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes.

A community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements.

At September 30, 2024, Broadstreet Bank was well capitalized and had a ratio of 10.59%.

At March 31, 2025, Broadstreet Bank was well capitalized and had a ratio of 11.09%.

Average Balance Sheets

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

Average yields for loans include loan fees of $175,000 and $242,000 for the three months ended September 30, 2024 and 2023, respectively.

Average yields for loans include loan fees of $121,000 and $85,000 for the three months ended March 31, 2025 and 2024, respectively.

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

For the Three Months Ended September 30,

For the Three Months Ended March 31,

(Dollars in thousands)

Interest-earning assets:

Loans (excluding PPP loans)

Allowance for credit losses

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

Comparison of the Operating Results for the Three Months Ended September 30, 2024 and September 30, 2023

The Company had net income of $515,000 for the three months ended September 30, 2024, compared to net income of $456,000 for the three months ended September 30, 2023, an increase of $59,000, or 12.9%.

The increase was primarily due to a $369,000, or 13.0%, increase in net interest income and a $29,000 decrease in income tax expense partially offset by a $234,000 increase in the provision for credit losses, a $62,000, or 10.5%, decrease in noninterest income, and a $43,000, or 1.5%, increase in noninterest expense.

Comparison of the Operating Results for the Three Months Ended March 31, 2025 and March 31, 2024

The Company had net income of $643,000 for the three months ended March 31, 2025, compared to a net loss of $2.7 million for the three months ended March 31, 2024, an increase of $3.3 million, or 123.9%.

In the first quarter of 2024, the Company made a strategic loan sale at a loss of $3.8 million in order to rebalance the portfolio and demolished a branch after constructing a new one resulting in combined nonrecurring deductions from noninterest income of $4.1 million.

The increase in net income before tax with the removal of these two nonrecurring items in 2024 was $98,000 primarily due to an increase in net interest income of $365,000, a decrease in noninterest expenses of $143,000 partially offset by a decrease of $40,000 in noninterest income primarily related to a loss on real estate owned and a $390,000 increase in the provision for credit losses primarily from a large decrease in 2024 related to the sale of loans.

Interest Income.

Interest income increased $726,000, or 14.6%, to $5.7 million for the three months ended September 30, 2024 from $5.0 million for the three months ended September 30, 2023.

Interest income increased $216,000, or 4.0%, to $5.6 million for the three months ended March 31, 2025 from $5.4 million for the three months ended March 31, 2024.

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

Average interest earning assets increased by $10.2 million, or 2.5%, from $405.7 million for the three months ended September 30, 2023 to $415.9 million for the three months ended September 30, 2024 and the yield on average interest earning assets increased 57 basis points, or 11.6%, from 4.91% for the three months ended September 30, 2023 to 5.48% for the three months ended September 30, 2024.

Interest income on loans increased $633,000, or 18.6%, to $4.0 million for the three months ended September 30, 2024 from $3.4 million for the three months ended September 30, 2023.

This increase resulted primarily from an increase in average loans of $6.8 million, or 2.5%, from $272.2 million for the three months ended September 30, 2023 to $279.0 million for the three months ended September 30, 2024 and an increase in loan yield of 79 basis points, or 15.7%, to 5.80% for the three months ended September 30, 2024 from 5.01% for the three months ended September 30, 2023.

The increase in loan yield was due primarily to increased market interest rates and diversification of the loan portfolio to include higher yielding commercial real estate loans.

Interest income on securities decreased $206,000, or 16.1%, from $1.3 million for the three months ended September 30, 2023 to $1.1 million for the three months ended September 30, 2024.

This decrease resulted from a decrease in the average balance of securities of $13.9 million, or 11.4%, from $122.3 million for the three months ended September 30, 2023 to $108.4 million for the three months ended September 30, 2024 and a decrease of 22 basis points, or 5.3%, in average yield from 4.17% for the three months ended September 30, 2023 to 3.95% for the three months ended September 30, 2024.

The rate decrease is reflective of market interest rate decreases and the sale of some higher yielding securities with a floating rate in order to reprice at a fixed rate.

Interest income on restricted investments, which includes primarily Federal Home Loan Bank (FHLB) and TIB Bank stock dividends, increased $11,000, or 25.0%, from $44,000 for the three months ended September 30, 2023 to $55,000 for the three months ended September 30, 2024.

This increase resulted from an increase in the average balance of these investments of $344,000 or 10.5%, from $3.3 million for the three months ended September 30, 2023 to $3.6 million for the three months ended September 30, 2024 in addition to an increase of 70 basis points, or 13.0%, in average yield from 5.39% for the three months ended September 30, 2023 to 6.09% for the three months ended September 30, 2024.

The increase in yield was due primarily to increases in dividends paid by the banks and the increase in investments is due to additional required purchases of FHLB stock resulting from an increase in FHLB advances.

Interest income on interest bearing deposits in banks increased $51,000, or 68.9%, from $74,000 for the three months ended September 30, 2023 to $125,000 for the three months ended September 30, 2024.

This increase resulted primarily from an increase in average interest-bearing deposits of $2.7 million, or 48.2%, from $5.6 million for the three months ended September 30, 2023 to $8.3 million for the three months ended September 30, 2024 and an increase in average yield of 76 basis points, or 14.3%, from 5.28% for the three months ended September 30, 2023 to 6.04% for the three months ended September 30, 2024.

There was also an increase of $214,000, or 356.7%, in fed funds interest income for the three months ended September 30, 2024 from $60,000 for the three months ended September 30, 2023 to $274,000 for the three months ended September 30, 2024, primarily from an increase of 43 basis points, or 8.2%, in average yield on fed funds sold from 5.22% for the three months ended September 30, 2023 to 5.65% for the three months ended September 30, 2024 and a $14.8 million, or 321.7%, increase in average fed funds sold from $4.6 million for the three months ended September 30, 2023 to $19.4 million for the three months ended September 30, 2024.

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

three months ended September 30, 2024, the Company maintained higher account balances in interest bearing deposits in banks and fed funds sold, due to receipt of cash from the loan sale and generally maintaining higher levels of liquidity.

Interest income from the fair value hedge was $135,000 for the three months ended September 30, 2024 compared to $112,000 for the three months ended September 30, 2023.

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

Average interest earning assets decreased by $13.9 million, or 3.3%, from $424.9 million for the three months ended March 31, 2024 to $411.0 million for the three months ended March 31, 2025 but was offset primarily by an increase in the yield on average interest earning assets of 38 basis points, or 7.5%, from 5.10% for the three months ended March 31, 2024 to 5.48% for the three months ended March 31, 2025.

Interest income on loans increased $691,000, or 18.6%, to $4.4 million for the three months ended March 31, 2025 from $3.7 million for the three months ended March 31, 2024.

This increase resulted primarily from an increase in average loans of $18.1 million, or 6.4%, from $281.3 million for the three months ended March 31, 2024 to $299.4 million for the three months ended March 31, 2025 and an increase in loan yield of 61 basis points, or 11.5%, to 5.88% for the three months ended March 31, 2025 from 5.27% for the three months ended March 31, 2024.

The increase in loan yield was due primarily to the diversification of the loan portfolio resulting in a reduction of lower yielding residential loans and an increase in higher yielding commercial real estate loans.

Interest income on securities decreased $188,000, or 15.5%, from $1.2 million for the three months ended March 31, 2024 to $1.0 million for the three months ended March 31, 2025.

This decrease resulted from a decrease in the average balance of securities of $23.0 million, or 19.3%, from $119.1 million for the three months ended March 31, 2024 to $96.1 million for the three months ended March 31, 2025, partially offset by an increase of 19 basis points, or 4.6%, in average yield from 4.09% for the three months ended March 31, 2024 to 4.28% for the three months ended March 31, 2025.

The rate increase is reflective of the purchase of higher yielding securities in 2024.

Interest income on restricted investments, which includes primarily Federal Home Loan Bank (FHLB) and TIB Bank stock dividends, decreased $5,000, or 9.1%, from $55,000 for the three months ended March 31, 2024 to $50,000 for the three months ended March 31, 2025.

This decrease resulted from a decrease in the average yield of these investments of 77 basis points, or 12.3%, from 6.28% for the three months ended March 31, 2024 to 5.51% for the three months ended March 31, 2025, partially offset by an increase in the average balance of restricted investments of $125,000, or 3.6%, from $3.5 million for the three months ended March 31, 2024 to $3.6 million for the three months ended March 31, 2025.

The decrease in yield was due primarily to decreases in dividends paid by the FHLB.

Interest income on interest bearing deposits in banks decreased $152,000, or 59.4%, from $256,000 for the three months ended March 31, 2024 to $104,000 for the three months ended March 31, 2025.

This decrease resulted primarily from a decrease in average interest-bearing deposits of $9.4 million, or 50.0%, from $18.8 million for the three months ended March 31, 2024 to $9.4 million for the three months ended March 31, 2025 and a decrease in average yield of 103 basis points, or 18.8%, from 5.44% for the three months ended March 31, 2024 to 4.41% for the three months ended March 31, 2025.

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

During the three months ended March 31, 2024, the Company maintained higher account balances due to receiving cash from the loan sale.

Interest expense from the fair value hedge was $10,000 for the three months ended March 31, 2025 compared to interest income of $115,000 for the three months ended March 31, 2024.

The Company terminated the interest rate swap

agreements on January 15, 2025, and the $463,000 unrealized gain in the value of the asset was locked in at the time of sale and will be amortized to interest income over the remaining life of the hedged securities.

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

Interest Expense.

Total interest expense increased $357,000, or 16.7%, to $2.5 million for the three months ended September 30, 2024 from $2.1 million for the three months ended September 30, 2023 primarily due to an increase in average interest-bearing liabilities of $17.8 million, or 5.4%, to $348.5 million for the three months ended September 30, 2024 from $330.7 million for the three months ended September 30, 2023 and an increase in the average cost of interest-bearing liabilities of 28 basis points, or 10.8%, from 2.58% for the three months ended September 30, 2023 to 2.86% for the three months ended September 30, 2024, primarily due to increases in higher cost deposit accounts.

Interest expense on deposit accounts increased $400,000, or 27.7%, to $1.8 million for the three months ended September 30, 2024 from $1.4 million for the three months ended September 30, 2023, due to an increase in the average deposit cost of 35 basis points, or 15.4%, from 2.28% for the three months ended September 30, 2023 to 2.63% for the three months ended September 30, 2024 and an increase in average interest-bearing deposits of $27.1 million, or 10.7% from $253.6 million for the three months ended September 30, 2023 to $280.7 million for the three months ended September 30, 2024, with increases being in certificates of deposit, money market accounts and demand deposits.

Interest expense on Federal Home Loan Bank advances decreased $44,000, or 6.4%, to $643,000 for the three months ended September 30, 2024 from $687,000 for the three months ended September 30, 2023.

This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $9.4 million, or 12.3%, to $67.0 million for the three months ended September 30, 2024 from $76.4 million for the three months ended September 30, 2023.

The average yield on advances increased 24 basis points, or 6.8%, from 3.60% for the three months ended September 30, 2023 to 3.84% for the three months ended September 30, 2024 due to paying off $7.7 million in advances from 2019 with significantly lower rates than the weighted average cost of all FHLB borrowings.

The decrease in average advances was primarily due to paying off $7.7 million in maturing advances in the three months ended September 30, 2024 compared to purchasing $8.0 million in the three months ended September 30, 2023 to maintain a higher level of liquidity in 2023 due to market uncertainty.

Total interest expense decreased $149,000, or 6.1%, to $2.3 million for the three months ended March 31, 2025 from $2.4 million for the three months ended March 31, 2024 primarily due to a decrease in average interest-bearing liabilities of $7.6 million, or 2.2%, to $343.8 million for the three months ended March 31, 2025 from $351.4 million for the three months ended March 31, 2024 and a decrease in the average cost of interest-bearing liabilities of 11 basis points, or 3.8%, from 2.79% for the three months ended March 31, 2024 to 2.68% for the three months ended March 31, 2025, primarily due to a decrease in average FHLB advances.

Interest expense on deposit accounts increased $42,000, or 2.4%, to $1.8 million for the three months ended March 31, 2025, due to an increase in average interest-bearing deposits of $19.6 million, or 7.2%, from $274.0 million for the three months ended March 31, 2024 to $293.6 million for the three months ended March 31, 2025, partially offset by a decrease in the average interest-bearing deposit cost of 11 basis points, or 4.3%, from 2.56% for the three months ended March 31, 2024 to 2.45% for the three months ended March 31, 2025 with the decrease in average cost being primarily in certificates of deposit and money market accounts.

Interest expense on Federal Home Loan Bank advances decreased $193,000, or 27.7%, to $503,000 for the three months ended March 31, 2025 from $696,000 for the three months ended March 31, 2024.

This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $26.9 million, or 35.1%, to $49.7 million for the three months ended March 31, 2025 from $76.6 million for the three months ended March 31, 2024.

The average yield on advances increased 42 basis points, or 11.6%, from 3.63% for the three months ended March 31, 2024 to 4.05% for the three months ended March 31, 2025 due to paying off advances with significantly lower rates than the weighted average cost of all FHLB borrowings.

Net Interest Income.

Net interest income increased $369,000, or 13.0%, to $3.2 million for the three months ended September 30, 2024 from $2.8 million for the three months ended September 30, 2023 due primarily to an increase in net interest margin of 29 basis points, or 10.2%, to 3.09% for the three months ended September 30, 2024 from 2.80% for the three months ended September 30, 2023 partially offset by a decrease in average net interest-earning assets of $7.5 million, or 10.0%, to $67.5 million at September 30, 2024 from $75.0 million at September 30, 2023.

The increase in net interest margin was primarily due to balance sheet restructurings, which included the loan sale in 2024, allowing us to place the funds in higher yielding assets and increase the rate of repricing interest-earning assets to better align with the rate of repricing interest-bearing liabilities in addition to a more disciplined approach to deposit pricing.

The average yield on interest-earning assets increased by 57 basis points, or 11.6%, compared to the average increase on interest bearing liabilities increasing by 28 basis points, or 10.8%.

Net interest income increased $365,000, or 12.3%, to $3.3 million for the three months ended March 31, 2025 from $3.0 million for the three months ended March 31, 2024 due primarily to an increase in net interest margin of 45 basis points, or 16.0%, to 3.24% for the three months ended March 31, 2025 from 2.79% for the three months ended March 31, 2024 partially offset by a decrease in average net interest-earning assets of $6.3 million, or 8.6%, to $67.2 million at March 31, 2025 from $73.6 million at March 31, 2024.

The increase in net interest margin was primarily due to balance sheet restructurings, which included the loan sale in 2024, allowing us to place the funds in higher yielding assets and increase the rate of repricing interest-earning assets to better align with the rate of repricing deposits in addition to a more disciplined approach to deposit pricing.

The average yield on interest-earning assets increased by 38 basis points, or 7.5% and the average yield on interest bearing liabilities decreased by 11 basis points, or 3.8%.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses increased $234,000, or 806.9%, to $263,000 for the three months ended September 30, 2024 from a provision for credit losses of $29,000 for the three months ended September 30, 2023, primarily due to a previous decrease in the allowance related to the sale of residential loans being reversed as new loans are originated and added to the portfolio.

Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses increased $390,000, or 140.8%, to $113,000 for the three months ended March 31, 2025 from a reversal of provision for credit losses of $277,000 for the three months ended March 31, 2024, primarily due to a previous decrease in the allowance related to the sale of residential loans being reversed as new loans are originated and added to the portfolio.

Many of the loans added are in the commercial portfolio that carry a higher allowance requirement as well.

An increase in average loans and leases of $6.8 million from $272.2 million for the three months ended September 30, 2023 to $279.0 million for the three months ended September 30, 2024 and charge-offs of $9,000 that weren’t already specifically reserved for also added to the provision required.

The allowance for credit losses was 1.07% of total loans at September 30, 2024.

Noninterest Income.

Noninterest income decreased $62,000, or 10.5%, to $530,000 for the three months ended September 30, 2024 from $592,000 for the three months ended September 30, 2023, primarily due to a decrease of $42,000 in loan fee income from the wholesale lending program, a decrease of $10,000 in deposit service charges, and nonrecurring income of $36,000 related to write up of foreclosed property in 2023 partially offset by a $15,000 increase in net appreciation of bank-owned life insurance due to a change in carriers to increase yield.

Noninterest Expense.

Noninterest expense increased $43,000, or 1.5%, to $2.9 million for the three months ended September 30, 2024 from $2.8 million for the three months ended September 30, 2023 primarily due to increases in occupancy and equipment expenses related to new branches and other expenses partially offset by decreases in salary and employee benefit expenses, data processing, technology expenses and director fees.

Occupancy and equipment expenses increased $68,000, or 35.2%, from $193,000 for the three months ended September 30, 2023 to $261,000 for the three months ended September 30, 2024 primarily due to expenses related to opening two new branches.

Data processing decreased $11,000, or 4.5%, due primarily to a contract negotiation and technology expenses decreased $61,000, or 49.6%, due to receipt of a credit associated with the provider reimbursing the cost of tap debit card implementation.

Other expenses increased $128,000, or 30.3%, primarily due to increased auditing expenses of $28,000 due primarily to additional internal audits and overall price increases, an increase in FDIC assessment expenses of $15,000 primarily due to an overall increase in the FDIC assessment rate, a $19,000 increase in marketing expenses, a $13,000 increase in insurance expenses, and a $23,000 increase in training expenses.

Salary and employee benefit expenses decreased by $50,000, or 3.0%, to $1.6 million for the three months ended September 30, 2024 from $1.7 million for the three months ended September 30, 2023, due primarily to reduced benefit costs from terminating a deferred compensation plan at December 31, 2023, CEO transition in 2023 and decreased director fees of $31,000 due to a reduction in the number of directors in 2024.

Income Tax Expense.

Income tax expense decreased by $29,000, or 24.8%, to $88,000 for the three months ended September 30, 2024 from $117,000 for the three months ended September 30, 2023, although there was an increase in net income before taxes of $30,000 from $573,000 for the three months ended September 30, 2023 to $603,000 for the three months ended September 30, 2024.

The effective tax rate was 14.6% and 20.4% for the three months ended September 30, 2024 and 2023, respectively.

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

Average Balance Sheets

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated.

No tax-equivalent yield adjustments have been made, as the effects would be immaterial.

All average balances are daily average balances.

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

Average yields for loans include loan fees of $375,000 and $456,000 for the nine months ended September 30, 2024 and 2023, respectively.

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

For the Nine Months Ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans (excluding PPP loans)

Allowance for credit losses

Restricted stock

Interest-bearing deposits in banks

Federal funds sold

Financial derivative

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Regular savings and other deposits

Money market deposits

Certificates of deposit

Total interest-bearing deposits

Advances from the Federal Home Loan Bank

Other liabilities

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Other noninterest-bearing liabilities

Total liabilities

Total shareholders' equity

Total liabilities and shareholders' equity

Net interest income

Net interest rate spread (1)

Net interest-earning assets (2)

Net interest margin (3)

Average interest-earning assets to interest-bearing liabilities

(1) Net interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average rate of interest bearing liabilities.

(2) Net interest earning assets represent total interest-earning assets less total interest-bearing liabilities.

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

Comparison of the Operating Results for the Nine Months Ended September 30, 2024 and September 30, 2023

The Company had a net loss of $1.8 million for the nine months ended September 30, 2024, compared to a net loss of $401,000 for the nine months ended September 30, 2023, a decrease of $1.4 million, or 350.0%.

The net loss was primarily due to a $2.5 million, or 2,500%, decrease in noninterest income resulting primarily from the sale of 122 performing residential mortgage loans as part of a balance sheet repositioning strategy at a pre-tax loss of $3.8 million, net of mortgage servicing rights retained.

Additionally, there was a $651,000, or 7.8%, increase in noninterest expenses, partially offset by an increase in net interest income of $1.3 million, or 16.0%, to $9.4 million for the nine months ended September 30, 2024 from $8.1 million for the nine months ended September 30, 2023 and a $102,000, or 48.1%, decrease in the provision for credit losses and a $432,000, or 313.0%, decrease in income tax expense.

Interest Income.

Interest income increased $3.1 million, or 22.6%, to $16.8 million for the nine months ended September 30, 2024 from $13.7 million for the nine months ended September 30, 2023.

This was primarily the result of increased interest income on loans, interest-bearing deposits in banks, and federal funds sold due to increased yields and an increase in the average balances.

Average interest earning assets increased by $22.1 million, or 5.5%, from $400.8 million for the nine months ended September 30, 2023 to $422.9 million at September 30, 2024, and an increase in the yield on interest earning assets of 76 basis points, or 16.8%, from 4.54% for the nine months ended September 30, 2023 to 5.30% for the nine months ended September 30, 2024.

Interest income on loans increased $2.3 million, or 24.7%, to $11.6 million for the nine months ended September 30, 2024 from $9.3 million for the nine months ended September 30, 2023.

This increase resulted primarily from an increase in average loans of $13.6 million, or 5.1%, from $265.2 million for the nine months ended September 30, 2023 to $278.8 million for the nine months ended September 30, 2024, with an increase in loan yield of 85 basis points, or 18.3%, to 5.52% for the nine months ended September 30, 2024 from 4.67% for the nine months ended September 30, 2023.

The increase in loan yield was due primarily to increased market interest rates and originating more commercial based loans at higher rates to replace the $27.1 million residential loans that were sold.

Additionally, the Company recognized $76,000 during the nine months ended September 30, 2024 in interest income on a loan payoff from a loan that had been on nonaccrual status.

Interest income on securities decreased $263,000, or 6.9%, from $3.8 million for the nine months ended September 30, 2023 to $3.5 million for the nine months ended September 30, 2024.

This decrease resulted from a decrease in the average balance of securities of $10.5 million, or 8.4%, from $125.1 million for the nine months ended September 30, 2023 to $114.6 million for the nine months ended September 30, 2024, partially offset by an increase of six basis points, or 1.5%, in average yield from 4.04% for the nine months ended September 30, 2023 to 4.10% for the nine months ended September 30, 2024.

Interest income on interest bearing deposits in banks increased $401,000, or 198.5%, from $202,000 for the nine months ended September 30, 2023 to $603,000 for the nine months ended September 30, 2024.

This increase resulted primarily from an increase in average interest-bearing deposits of $8.5 million, or 144.1% from $5.9 million for the nine months ended September 30, 2023 to $14.4 million for the nine months ended September 30, 2024 and an increase in average yield of 105 basis points, or 23.1%, from 4.53% for the nine months ended September 30, 2023 to 5.58% for the nine months ended September 30, 2024.

There was also an increase of $450,000 in fed funds interest income for the nine months ended September 30, 2024 primarily from an increase of 50 basis points, or 10.1%, in average yield on fed funds sold from 4.97% for the nine months ended September 30, 2023 to 5.47% for the nine months ended September 30, 2024 and a $10.6 million, or 302.9%, increase in average fed funds sold from $3.5 million for the nine months ended September 30, 2023 to $14.1 million for the nine months ended September 30, 2024.

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

The increase in balances resulted from increases in deposits and holding funds in interest bearing accounts with a competitive rate while originating loans to replace the loans sold.

Dividends from restricted investments increased $59,000, or 56.2%, from $105,000 for the nine months ended September 30, 2023 to $164,000 for the nine months ended September 30, 2024.

This increase primarily resulted from a $56,000, or 54.9%, increase in dividends from FHLB stock from $102,000 for the nine months ended September 30, 2023 to $158,000 for the nine months ended September 30, 2024 due primarily to an increase in the amount of FHLB stock owned.

Interest income on the fair value hedge increased $230,000, or 158.6%, from $145,000 for the nine months ended September 30, 2023 to $375,000 for the nine months ended September 30, 2024.

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

Interest Expense.

Total interest expense increased $1.9 million, or 34.5%, to $7.4 million for the nine months ended September 30, 2024 from $5.5 million for the nine months ended September 30, 2023 primarily due to an increase in average interest bearing liabilities of $30.5 million, or 9.4%, to $353.3 million for the nine months ended September 30, 2024 from $322.8 million for the nine months ended September 30, 2023 and an increase in the average cost of interest-bearing liabilities of 53 basis points, or 23.3%, from 2.28% for the nine months ended September 30, 2023 to 2.81% for the nine months ended September 30, 2024, primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $1.7 million, or 47.3%, to $5.4 million for the nine months ended September 30, 2024 from $3.7 million for the nine months ended September 30, 2023, due to an increase in the average interest-bearing deposit cost of 65 basis points, or 33.7%, from 1.93% for the nine months ended September 30, 2023 to 2.58% for the nine months ended September 30, 2024 and an increase in average interest-bearing deposits of $26.6 million, or 10.5% from $253.3 million for the nine months ended September 30, 2023 to $279.9 million for the nine months ended September 30, 2024, with the increase being in higher yielding certificates of deposit, money market deposits and interest-bearing demand deposits, offset by a decrease in lower cost savings accounts.

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

Interest expense on Federal Home Loan Bank advances increased $173,000, or 9.4%, to $2.0 million for the nine months ended September 30, 2024 from $1.8 million for the nine months ended September 30, 2023.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $3.8 million, or 5.5%, to $72.7 million for the nine months ended September 30, 2024 from $68.9 million for the nine months ended September 30, 2023 and an increase in average cost of 13 basis points, or 3.6%, from 3.58% for the nine months ended September 30, 2023 to 3.71% for the nine months ended September 30, 2024.

The increase in average advances was primarily to fund loan growth and maintain higher levels of liquidity.

Net Interest Income.

Net interest income increased $1.3 million, or 16.0%, to $9.4 million for the nine months ended September 30, 2024 from $8.1 million for the nine months ended September 30, 2023 due primarily to an increase in interest-earning assets of $22.1 million, or 5.5%, to $422.9 million for the nine months ended September 30, 2024 from $400.8 million for the nine months ended September 30, 2023.

Net interest margin had a 25 basis point, or 9.1%, increase to 2.95% for the nine months ended September 30, 2024 from 2.70% for the nine months ended September 30, 2023.

The increase in net interest margin was primarily due to balance sheet restructurings, which included the loan sale in 2024, allowing us to place the funds in higher yielding assets and increase the rate of repricing interest earning assets to better align with the rate of repricing interest-bearing liabilities.

The average yield on interest earning assets increased by 76 basis points, or 16.8%, compared to the average increase on interest bearing liabilities increasing by 53 basis points, or 23.3%.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses, a provision for credit losses of $110,000 for the nine months ended September 30, 2024, compared to a provision for credit losses of $212,000 for the nine months ended September 30, 2023, resulted in a decrease of $102,000, or 48.1%, to the provision expense primarily due to the sale of $27.1 million in loans during the nine months ended September 30, 2024 which accounted for a $244,000 decrease in the provision for credit losses when the loans were sold or transferred to held for sale.

An increase in average loans and leases of $18.1 million from $281.3 million for the three months ended March 31, 2024 to $299.4 million for the three months ended March 31, 2025 also added to the provision required.

The allowance for credit losses was 1.09% of total loans at March 31, 2025.

Noninterest Income.

Noninterest income decreased $2.5 million, or 2500%, to a loss of $2.6 million for the nine months ended September 30, 2024 from a loss of $104,000 for the nine months ended September 30, 2023, due primarily to a pre-tax loss of $3.8 million, net of mortgage servicing rights retained, from the sale of $27.1 million in residential mortgage loans, a loss of $283,000 associated with demolition of the previous Lindale branch building, and a $78,000 loss related to the write down of two bank properties transferred to other real estate owned which are listed for sale.

The loan sale included the sale of 122 performing loans totaling $27.1 million at a pre-tax 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.

In the nine months ending September 30, 2023 there was a $1.7 million loss on the sale of securities that were part of an investment repricing strategy.

Noninterest income increased $4.1 million, or 113.9%, to $462,000 for the three months ended March 31, 2025 from a noninterest loss of $3.6 million for the three months ended March 31, 2024, primarily due to nonrecurring losses in 2024 of $4.1 million related to the loan sale and branch construction.

In the three months ended March 31, 2025, there was an increase of $42,000, or 16.2% in other service charges and fees due primarily to a $51,000 increase in loan fees from $14,000 for the three months ended March 31, 2024 to $65,000 for the three months ended March 31, 2025 primarily due to an increase of $8,000 in servicing fees from the servicing retained in the loan sale in 2024 and a $43,000, or 390.9%, increase from loans closed through the wholesale lending program from $11,000 for the three months ended March 31, 2024 to $54,000 for the three months ended March 31, 2025.

There was an increase of

$11,000, or 36.7%, in net appreciation of bank-owned life insurance due to a change in carriers in 2024 to increase yield, partially offset by an $89,000 decrease in net income on sales of real estate owned primarily due to a $52,000 net loss in the three months ended March 31, 2025 due to an additional write-down to market value on two bank properties that were purchased originally for expansion then listed for sale in 2024 compared to a $37,000 net gain on the sale of a foreclosed property in 2024.

Noninterest Expense.

Noninterest expense increased $651,000, or 7.9%, to $9.0 million for the nine months ended September 30, 2024 from $8.3 million for the nine months ended September 30, 2023 primarily due to increases in occupancy and equipment, data processing, technology, and other expenses.

Salary and employee benefit expenses increased by $9,000, or 0.2%, to $4.9 million for the nine months ended September 30, 2024 from $4.9 million for the nine months ended September 30, 2023, due to an initial $129,000 vesting expense for equity awards in 2024 offset by reduced executive salary expense related to the CEO transition in 2023 and termination of the deferred compensation plan as of December 31, 2023.

Occupancy and equipment expense increased $224,000, 37.6%, primarily due to additional expenses related to a new branch in Tyler, completion of a new branch building in Lindale and general increases in costs.

Technology expenses increased $18,000, or 5.2%, due primarily to nonrecurring fees associated with a “tap” debit card implementation project which was partially offset by a credit from the provider.

We expect to receive additional credits related to the project as expenses are incurred.

Other expenses increased $438,000, or 33.7%, primarily due to an increase of $135,000 in audit and accounting expenses related primarily to loan review, an increase in FDIC assessment expenses of $49,000 primarily due to an overall increase in the FDIC assessment rate and an increase in deposits, an increase of $19,000 in insurance expenses, an increase of $54,000 in training expense primarily associated with executive training and increased emphasis on training, and an increase of $41,000 in marketing expense primarily related to opening new locations, entering new markets and changing the Bank’s name.

The Company had nonrecurring director costs of $37,000 and legal fees of $38,000 related to executive and board transitions in the nine months ending September 30, 2024.

Noninterest expense decreased $143,000, or 4.7%, to $2.9 million for the three months ended March 31, 2025 from $3.1 million for the three months ended March 31, 2024 primarily due to decreases in occupancy and equipment expenses, salary and employee benefit expenses, technology expenses and director fees.

Occupancy and equipment expenses decreased $38,000, or 13.3%, from $285,000 for the three months ended March 31, 2024 to $247,000 for the three months ended March 31, 2025 primarily due to higher expenses during 2024 related to opening two new branches.

Technology expenses decreased $57,000, or 50.0%, due primarily to a contract negotiation with our debit card provider.

Director fees decreased $12,000, or 14.5%, due to a reduction in board size.

Other expenses decreased $23,000, or 3.7%, primarily due to a decrease of $26,000 in office supply expense and $18,000 in other operating expenses due to having higher expenses during 2024 associated with branch openings, and a $21,000 decrease in legal fees due to higher fees in 2024 associated with executive changes partially offset by increased marketing expenses of $12,000 due primarily to the use of a third-party marketing firm, an increase in FDIC assessment expenses of $14,000 primarily due to an overall increase in the FDIC assessment rate, and a $21,000 increase in training expenses primarily due to employees taking on new roles and responsibilities.

Income Tax Expense.

Income tax expense decreased by $432,000, or 313.0%, to a tax benefit $570,000 for the nine months ended September 30, 2024 from a tax benefit of $138,000 for the nine months ended September 30, 2023, due to a decrease in net income before taxes of $1.9 million from a loss of $539,000 for the nine months ended September 30, 2023 to a loss of $2.4 million for the nine months ended September 30, 2024.

The effective tax rate was 23.83% and 25.6% for the nine months ended September 30, 2024 and 2023, respectively.

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

Income tax expense increased by $814,000, or 115.0%, to $106,000 for the three months ended March 31, 2025 from an income tax benefit of $708,000 for the three months ended March 31, 2024, due to the increase in net income before taxes of $4.1 million from a loss of $3.4 million for the three months ended March 31, 2024 to income of $749,000 for the three months ended March 31, 2025.

The effective tax rate was 14.15% and 20.87% for the three months ended March 31, 2025 and 2024, respectively.

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

Liquidity and Capital Resources

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

At September 30, 2024, we had outstanding advances of $63.2 million from the Federal Home Loan Bank of Dallas.

At September 30, 2024, we had unused borrowing capacity of $74.2 million with the Federal Home Loan Bank of Dallas.

In addition, at September 30, 2024, we had an unused unsecured $10.0 million line of credit and an unused secured $3.0 million line of credit with Texas Independent Bankers Bank and an unused $5.0 million line of credit with First Horizon Bank.

At March 31, 2025, we had outstanding advances of $49.6 million from the Federal Home Loan Bank of Dallas.

At March 31, 2025, we had unused borrowing capacity of $98.7 million with the Federal Home Loan Bank of Dallas.

In addition, at March 31, 2025, we had an unused unsecured $10.0 million line of credit and an unused secured $3.0 million line of credit with Texas Independent Bankers Bank and an unused $5.0 million line of credit with First Horizon Bank.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.

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

For additional information, see the consolidated statements of cash flow for the nine months ended September 30, 2024 and 2023 included as part of the consolidated financial statements included in this report.

For additional information, see the consolidated statements of cash flow for the three months ended March 31, 2025 and 2024 included as part of the consolidated financial statements included in this report.

We are committed to maintaining a strong liquidity position.

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is governed by applicable banking laws and regulations.

At September 30, 2024, Texas Community Bancshares, Inc.

At March 31, 2025, Texas Community Bancshares, Inc.

(on a stand-alone, unconsolidated basis) had liquid assets of $7.1 million.

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We monitor our large depositors and have discussions with them on how to maximize FDIC coverage to the fullest legal extent, which is limited to coverage of $250,000 per insured depositor.

At September 30, 2024, there were 198 accounts with balances in excess of the $250,000 FDIC insurance limit totaling $99.5 million, or 30.5% of deposits.

At March 31, 2025, there were 204 accounts with balances in excess of the $250,000 FDIC insurance limit totaling $98.2 million, or 29.1% of deposits.

The amount that was over $250,000 was $47.2 million, or 14.0%, that was potentially uninsured, including certificates of deposit of $11.3 million and $35.9 million in checking, MMDA and savings accounts.

At September 30, 2024, the weighted average life (WAL) of our securities portfolio is 4.9 years.

At March 31, 2025, the weighted average life (WAL) of our securities portfolio is 5.1 years.

The gross unrealized losses on the AFS securities was $5.5 million, or 6.9% of the $80.3 million AFS portfolio and 9.7% of capital.

Unrealized losses on the HTM securities were $2.0 million, or 8.7 % of the $22.9 million HTM portfolio and

3.5% of capital.

Unrealized losses on the HTM securities were $2.2 million, or 10.3 % of the $21.2 million HTM portfolio and 3.8% of capital.

The total gross unrealized losses are $7.7 million, or 7.6% of the $101.5 million securities portfolio and 13.5% of capital, which includes $40.5 million, or 39.9%, 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 derivatives combined, and the corresponding other comprehensive loss, was $4.1 million, or 7.2% of capital.

Over the next 24 months from September 30, 2024, we expect to realize $34.7 million in cash flow from the securities portfolio with $8.3 million in 2024, $16.9 million in 2025 and $9.5 million in 2026.

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 the corresponding other comprehensive loss, was $4.4 million, or 7.7% of capital.

Over the next 24 months from March 31, 2025, we expect to realize $43.7 million in cash flow from the securities portfolio with $17.8 million in 2025, $21.5 million in 2026 and $4.4 million in 2027.

We should receive $21.3 million of that over the next 12 months.

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

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

At September 30, 2024, the derivatives remained highly effective, however the fair value went negative temporarily due to a strong reaction to the 50 basis point decrease by the Federal Reserve in the fed funds target rate.

This caused an unrealized loss on the derivative of $117,000 that increased the net unrealized loss on the AFS securities of $4.0 to an accumulated other comprehensive loss (AOCI) of $4.1 million at September 30, 2024.

This is an increase in AFS fair value and decrease in AOCI of $1.5 million from a net unrealized loss position of $5.6 million at December 31, 2023.

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.

In the first quarter of 2025, the Bank terminated these swap agreements and recognized a gain of $463,000.

This gain reduced the unrealized loss on the underlying securities and will be included in income over their remaining life.

Our asset quality remains strong.

We are 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 September 30, 2024, our allowance for credit losses to loans and leases held for investment was 1.07%.

At March 31, 2025, our allowance for credit losses to loans and leases held for investment was 1.09%.

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

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

This is a key component of the loan sale strategy resulting in $27.1 million in residential mortgage loans sold.

At September 30, 2024, we do not have any plans to sell additional loans.

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.

The following are the various liquidity sources we had available at September 30, 2024 that we could use as needed:

This was a key component of the loan sale strategy resulting in $27.1 million in residential mortgage loans sold in 2024.

At March 31, 2025, we do not have any plans to sell additional loans.

The following are the various liquidity sources we had available at March 31, 2025 that we could use as needed:

● FHLB borrowing capacity of $98.7 million

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● The ability to sell a portion of our BOLI assets

At September 30, 2024, Broadstreet Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

At March 31, 2025, Broadstreet Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category.

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The estimated changes presented are within policy guidelines established by the Company’s Board of Directors.

At September 30, 2024

At March 31, 2025

Change in Interest Rates

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

The table above indicates that at September 30, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 6.63% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 5.54% decrease in net interest income.

The table above indicates that at March 31, 2025, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 3.95% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 1.55% decrease in net interest income.

Net Economic Value .

We also compute amounts by which the net present value of our assets and liabilities (net economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates.

This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value.

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 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

The table below sets forth the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.

At September 30, 2024

The estimated changes presented are within policy guidelines established by the Company’s Board of Directors.

At March 31, 2025

EVE as a Percentage of

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

The table above indicates that at September 30, 2024, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 5.42% increase in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 17.25% decrease in EVE.

The table above indicates that at March 31, 2025, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 0.97% increase in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 9.67% decrease in EVE.

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

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

What changed 10-Q

Item 1. Financial Statements