Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (the “Company”) consolidated financial condition at June 30, 2025 and consolidated results of operations for the three and six months ended June 30, 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
This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:
● statements of our goals, intentions and expectations;
● statements regarding our business plans, prospects, growth and operating strategies;
● statements regarding the quality of our loan and investment portfolios; and
● estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
● our ability to control costs and manage liquidity;
● our ability to maintain our deposit base cost-effectively and access cost-effective funding;
● general economic conditions, either nationally or in our market areas, which are worse than expected;
● changes in yields on our assets resulting from changes in market interest rates;
● fluctuation in the demand for construction loans in our market area;
● changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
● risks related to a high concentration of loans secured by 1-4 family real estate located in our market area;
● risks related to higher levels of commercial real estate and development loans;
● our ability to control costs when hiring employees in a competitive labor market and rural area;
● our ability to control cost and expenses, particularly those associated with operating a publicly traded company;
● fluctuations in real estate values and market conditions in both residential and commercial real estate;
● demand for loans and deposits in our market area;
● our ability to implement and change our business strategies;
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● competition among depository and other financial institutions and brokers;
● inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of our investment securities and other financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
● adverse changes in the securities or secondary mortgage markets;
● changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
● changes in tax laws;
● changes in the quality or composition of our loan or investment portfolios;
● technological changes that may be more difficult or expensive than expected;
● the inability of third-party providers to perform as expected;
● a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
● our ability to manage market risk, credit risk and operational risk;
● our ability to enter new markets successfully and capitalize on growth opportunities;
● changes in consumer spending, borrowing and savings habits;
● changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
● changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or strategic plan implementation;
● changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Summary of Critical Accounting Policies; Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The Jumpstart Our Business Startups Act of 2012 (JOBS Act) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we had the option to delay adoption of new or revised accounting pronouncements applicable to public companies until such
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pronouncements are made applicable to private companies. However, we have determined not to take advantage of the benefits of this extended transition period.
The following represent our critical accounting policies:
Allowance for Credit Losses. The allowance for credit losses applies to any financial asset carried at amortized cost, including off-balance sheet commitments (unfunded commitments). The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. The Company uses the weighted average remaining maturity (WARM) method to estimate future expected losses for all of the Company’s loan pools. The allowance for credit losses on loans is a reserve for estimated current expected credit losses on individually evaluated loans determined to be impaired as well as estimated current expected credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for credit losses. Loans are charged off when management believes that the collectability of the principal is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. A provision for credit losses, which is a charge against earnings, is recorded to bring the allowance for credit losses to a level that, in management’s judgment, is adequate to absorb current expected losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for credit losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect current expected credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated credit losses and therefore the appropriateness of the allowance for credit losses could change significantly.
For additional information regarding the allowance for credit losses, see notes 1 and 4 of the notes to the accompanying consolidated financial statements.
Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.
The Company files consolidated federal income tax returns with its subsidiaries. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
Comparison of Financial Condition at June 30, 2025 and December 31, 2024
Total Assets. Total assets were $444.1 million at June 30, 2025, an increase of $625,000, or 0.1%, from $443.5 million at December 31, 2024. The increase was due primarily to an increase of $313,000 in net loans and leases and an increase of $7.6 million in interest bearing deposits in banks partially offset by a decrease of $2.0 million in cash and cash equivalents and a decrease in securities of $3.8 million, or 3.9%, to $93.5 million at June 30, 2025 from $97.3 million at December 31, 2024, a decrease in restricted investments carried at cost of $908,000, or 21.4%, to $3.3 million at June 30, 2025 and a decrease in foreclosed assets of $52,000, or 10.8%, to $428,000 at June 30, 2025 from $480,000 at December 31, 2024.
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Cash and Cash Equivalents. Cash and cash equivalents decreased $2.0 million, or 15.0%, to $11.3 million (which includes fed funds sold of $6.4 million) at June 30, 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 $1.3 million in Company stock being repurchased, cash dividends paid to shareholders of $242,000 and an increase in net loans and leases of $313,000.
Interest Bearing Deposits in Banks. Interest bearing deposits in banks increased $7.6 million, or 78.4%, to $17.3 million at June 30, 2025, compared to $9.7 million at December 31, 2024. The increase was primarily the result of a decrease in securities of $3.8 million and an increase in deposits of $3.4 million.
Securities Available for Sale. Securities available for sale decreased by $2.0 million, or 2.7%, to $73.2 million at June 30, 2025 from $75.2 million at December 31, 2024. During the six months ended June 30, 2025, there were purchases of securities of $4.2 million offset by paydowns of $7.0 million. Accumulated other comprehensive loss decreased by $608,000, or 12.8%, to $4.2 million, net of tax, from $4.8 million, net of tax, due primarily to changes in market interest rates and the termination of a derivative instrument. Gross unrealized losses on the AFS portfolio consisting of 78 securities decreased from $6.5 million, or 7.9% of the portfolio’s amortized cost of $81.6 million at December 31, 2024, to $5.3 million, or 6.7%, of the amortized cost of $78.5 million at June 30, 2025. These unrealized losses are due to increases in market interest rates. At June 30, 2025, the AFS portfolio was comprised of 11.8% residential mortgage backed securities, 60.1% collateralized mortgage obligations, 18.2% state and municipal securities and 9.9% corporate bonds.
Securities Held to Maturity. Securities held to maturity decreased by $1.8 million, or 8.1%, to $20.3 million at June 30, 2025 from $22.1 million at December 31, 2024. This decrease is due to paydowns of $1.8 million. The HTM portfolio had 69 securities with gross unrealized losses of $2.0 million, or 9.8%, of the amortized cost of $20.3 million at June 30, 2025 compared to $2.6 million, or 11.6%, of the amortized cost of $22.1 million at December 31, 2024. These unrealized losses are due to increases in market interest rates. At June 30, 2025, the HTM portfolio was comprised of 86.6% residential mortgage backed securities, 7.7% state and municipal securities and 5.7% U.S government and agency bonds.
Loans and Leases Receivable, Net. Net loans and leases receivable increased $313,000, or 0.1%, to $294.0 million at June 30, 2025 from $293.7 million at December 31, 2024. The increase in loans was primarily due to $33.7 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 $297.2 million and was comprised of $274.1 million, or 92.2%, real estate loans, $5.4 million, or 1.8%, commercial and industrial loans, $13.2 million, or 4.4%, municipal loans and $4.5 million, or 1.5%, consumer loans and other loans. Real estate loans include $141.8 million, or 51.8%, 1-4 family residential loans, $11.0 million, or 4.0%, multi-family loans, $57.5 million, or 21.0%, commercial real estate (CRE) loans, $17.1 million, or 6.2%, 1-4 family construction loans, $36.9 million, or 13.5%, other construction and development loans and $9.8 million, or 3.6%, farmland loans. Total loans include interim construction loans of $31.1 million, or 76.1%, of the completed project balance of $40.9 million which includes $15.4 million in single-family residence loans, including $5.6 million in speculative construction loans to builders, $1.7 million in subdivision construction, $12.0 million in multi-family construction loans and $11.8 million in CRE loans. The total construction loan portfolio consisted of 52 loans with completed project balances of $40.9 million at June 30, 2025 compared to 55 loans totaling $42.5 million at December 31, 2024.
At June 30, 2025, commercial real estate loans consisted of $24.8 million owner occupied and $32.7 million non-owner occupied real estate. At June 30, 2025, commercial real estate loans primarily include loans collateralized by self-storage facilities ($16.1 million), gas stations with convenience stores ($10.4 million), commercial rental properties ($7.5 million), churches ($4.5 million), rural water district assets ($3.8 million), restaurants ($3.0 million), and metal building manufacturer assets ($2.0 million). The maximum loan-to-value ratio of our commercial real estate loans is generally 80%. Generally, we require the debt service coverage ratio to be at least 1.2x. The significant majority of our commercial real estate loans are appraised by outside independent appraisers approved by the board of directors. Personal guarantees are generally obtained from the principals of commercial real estate borrowers. We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial conditions of
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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. Deposits increased $3.4 million, or 1.0%, to $339.2 million at June 30, 2025 from $335.8 million at December 31, 2024. Core deposits (defined as all deposits other than certificates of deposit) decreased $6.0 million, or 2.9%, to $199.9 million at June 30, 2025 from $205.9 million at December 31, 2024. Certificates of deposit increased $9.4 million, or 7.2%, to $139.3 million at June 30, 2025 from $129.9 million at December 31, 2024. At June 30, 2025, there were $22.0 million in brokered deposits and $1.4 million in listed deposits. The year-to-date average cost of interest-bearing deposits decreased 13 basis points, or 5.0%, to 2.46% at June 30, 2025 compared to 2.59% at December 31, 2024. At June 30, 2025, there were 197 accounts with balances in excess of the $250,000 FDIC insurance limit with an aggregate balance of $97.8 million, or 28.8% of deposits. The amount that was over the FDIC insurance limit was $48.6 million, or 14.3%, that was potentially uninsured, including certificates of deposit of $14.1 million, money market accounts of $11.2 million and $23.3 million in checking and savings accounts.
Advances from Federal Home Loan Bank. Advances from Federal Home Loan Bank decreased by $642,000, or 1.3%, to $49.2 million at June 30, 2025 from $49.9 million at December 31, 2024 due to contractual principal payments on amortizing advances. There are $3.4 million in advances that will mature in 2025. There are no current plans to renew the advances.
Total Shareholders’ Equity. Total shareholders’ equity increased $761,000, or 1.5%, to $52.9 million at June 30, 2025 from $52.1 million at December 31, 2024. This increase was primarily due to net income of $1.3 million for the six months ended June 30, 2025. The Company had additional increases in equity of $305,000 from vesting of equity awards granted under the 2022 Equity Plan and an increase of $110,000 from the accrual of ESOP commitments for the six months ended June 30, 2025 partially offset by a decrease of $1.3 million from the repurchase of 84,500 shares of its common stock and quarterly dividends paid totaling $242,000. At June 30, 2025, there was a decrease in the accumulated other comprehensive loss of $608,000, net of tax, due to changes in market interest rates and the termination of the derivative.
At June 30, 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 June 30, 2025, Broadstreet Bank was well capitalized and had a ratio of 11.32%.
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Average Balance Sheets
The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are only included in the computation of average balances. Average yields for loans include loan fees of $120,000 and $115,000 for the three months ended June 30, 2025 and 2024, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.
For the Three Months Ended June 30,
2025
2024
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans
$
300,237
$
4,271
5.69
%
$
276,058
$
3,801
5.51
%
Allowance for credit losses
(3,280)
(2,875)
Securities
95,502
992
4.15
%
116,323
1,240
4.26
%
Restricted investments
2,667
44
6.60
%
3,557
54
6.07
%
Interest bearing deposits in banks
10,080
112
4.44
%
16,165
222
5.49
%
Federal funds sold
5,037
55
4.37
%
17,930
239
5.33
%
Financial derivative
—
—
762
125
Total interest earning assets
410,243
5,474
5.34
%
427,920
5,681
5.31
%
Noninterest earning assets
28,970
28,995
Total assets
$
439,213
$
456,915
Interest-bearing liabilities:
Interest bearing demand deposits
$
65,087
96
0.59
%
$
72,421
121
0.67
%
Regular savings and other deposits
43,389
41
0.38
%
46,649
36
0.31
%
Money market deposits
45,363
305
2.69
%
44,317
367
3.31
%
Certificates of deposit
136,960
1,355
3.96
%
121,449
1,289
4.25
%
Total interest bearing deposits
290,799
1,797
2.47
%
284,836
1,813
2.55
%
Advances from FHLB
49,348
501
4.06
%
74,565
683
3.66
%
Other liabilities
162
2
4.94
%
733
2
1.09
%
Total interest bearing liabilities
340,309
2,300
2.70
%
360,134
2,498
2.77
%
Noninterest bearing demand deposits
49,817
51,604
Other noninterest bearing liabilities
4,022
4,321
Total liabilities
394,148
416,059
Total shareholders’ equity
45,065
40,856
Total liabilities and shareholders' equity
$
439,213
$
456,915
Net interest income
$
3,174
$
3,183
Net interest rate spread (1)
2.63
%
2.54
%
Net interest earning assets (2)
$
69,934
$
67,786
Net interest margin (3)
3.09
%
2.98
%
Average interest earning assets to interest bearing liabilities
120.55
%
118.82
%
(1) Net interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average rate of interest bearing liabilities.
(2) Net interest earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents annualized net interest income divided by average total interest earning assets.
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Comparison of the Operating Results for the Three months ended June 30, 2025 and June 30, 2024
Net Income. The Company had net income of $678,000 for the three months ended June 30, 2025, compared to net income of $348,000 for the three months ended June 30, 2024, an increase of $330,000, or 94.8%. The increase was primarily due to a $186,000, or 47.3%, increase in noninterest income, a $81,000, or 2.7%, decrease in noninterest expense and a $166,000 decrease in the provision for credit losses partially offset by a $94,000 increase in income tax expense. Net interest income remained flat.
Interest Income. Interest income decreased $207,000 or 3.6%, to $5.5 million for the three months ended June 30, 2024 from $5.7 million for the three months ended June 30, 2024. This decrease included $217,000 in accrued interest being removed from interest income due to three loans from two delinquent loan relationships totaling $9.0 million being put on nonaccrual. Average interest earning assets decreased by $17.7 million, or 4.1%, from 427.9 million for the three months ended June 30, 2024 to $410.2 million for the three months ended June 30, 2025 primarily from $19.0 million more in interest bearing account balances in 2024 resulting primarily from the loans sale in the first quarter of 2024.
Interest income on loans increased $470,000, or 12.4%, to $4.3 million for the three months ended June 30, 2025 from $3.8 million for the three months ended June 30, 2024. This increase resulted primarily from an increase in average loan balances of $24.1 million, or 8.7%, from $276.1 million for the three months ended June 30, 2024 to $300.2 million for the three months ended June 30, 2025, with an increase in loan yield of 18 basis points, or 3.3%, to 5.69% for the three months ended June 30, 2025 from 5.51% for the three months ended June 30, 2024. The increase in loan volume was due primarily to loan growth and average loans being low in 2024 due to the loan sale in the first quarter. Loan interest income would have been $217,000 more without the reversal of accrued interest on the previously mentioned three loans totaling $9.0 million being placed on nonaccrual.
Interest income on securities decreased $248,000, or 20.0%, from $1.2 million for the three months ended June 30, 2024 to $992,000 for the three months ended June 30, 2025. This decrease resulted from a decrease in the average balance of securities of $20.8 million, or 17.9%, from $116.3 million for the three months ended June 30, 2024 to $95.5 million for the three months ended June 30, 2025. The decrease in the portfolio was due primarily to contractual paydowns. The average yield on securities decreased by nine basis points.
Interest income on restricted investments, which includes primarily Federal Home Loan Bank (FHLB) and TIB Bank stock dividends, decreased $10,000, or 18.5%, from $54,000 for the three months ended June 30, 2024 to $44,000 for the three months ended June 30, 2024. This decrease resulted from a decrease in the average balance of these investments of $890,000 or 24.8%, from $3.6 million for the three months ended June 30, 2024 to $2.7 million for the three months ended June 30, 2025. This decrease was due to the FHLB repurchasing $1.1 million in stock related to the decrease in outstanding advances. There was an increase of 53 basis points, or 8.7%, in average yield from 6.07% for the three months ended June 30, 2024 to 6.60% for the three months ended June 30, 2025. The increase in yield was due primarily to advances with rates significantly lower than the overall borrowing base being paid off.
Interest income on interest bearing deposits in banks decreased $110,000, or 49.5%, from $222,000 for the three months ended June 30, 2024 to $112,000 for the three months ended June 30, 2025. This decrease resulted primarily from a decrease in average interest-bearing deposits of $6.1 million, or 37.7%, from $16.2 million for the three months ended June 30, 2024 to $10.1 million for the three months ended June 30, 2025 and a decrease in average yield of 105 basis points, or 19.1%, from 5.49% for the three months ended June 30, 2024 to 4.44% for the three months ended June 30, 2025. Fed funds interest decreased $184,000, or 77.0%, from $239,000 for the three months ended June 30, 2024 to $55,000 for the three months ended June 30, 2025. This decrease resulted primarily from a decrease in average fed funds balances of $12.9 million, or 72.1%, from $17.9 million for the three months ended June 30, 2024 to $5.0 million for the three months ended June 30, 2025 and a decrease in average yield of 96 basis points, or 18.1%, from 5.33% for the three months ended June 30, 2024 to 4.37% for the three months ended June 30, 2025. These decreases were primarily due to the Company maintaining higher account balances due to receiving cash from the loan sale during the three months ended June 30, 2024 in addition to decreases in fed funds rates and other market interest rates.
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Interest income from the fair value hedge was $125,000 for the three months ended June 30, 2024. The financial derivative was terminated on January 15, 2025, so there is no related interest income after the first quarter of 2025.
Interest Expense. Total interest expense decreased $198,000, or 7.9%, to $2.3 million for the three months ended June 30, 2025 from $2.5 million for the three months ended June 30, 2024 primarily due to an decrease in average interest-bearing liabilities of $19.8 million, or 5.5%, to $340.3 million for the three months ended June 30, 2025 from $360.1 million for the three months ended June 30, 2024 and a decrease in the average cost of interest-bearing liabilities of seven basis points, or 2.6%, from 2.77% for the three months ended June 30, 2024 to 2.70% for the three months ended June 30, 2025, primarily due the reduction in FHLB advance balances and changes in deposit pricing.
Interest expense on deposit accounts decreased $16,000, or 0.9%, to $1.8 million for the three months ended June 30, 2025, with a decrease in the average deposit cost of eight basis points, or 3.1%, from 2.55% for the three months ended June 30, 2024 to 2.47% for the three months ended June 30, 2025 and an increase in average interest-bearing deposits of $6.0 million, or 2.1% from $284.8 million for the three months ended June 30, 2024 to $290.8 million for the three months ended June 30, 2025, with the largest increases being in higher cost certificates of deposit which includes an additional $10.0 million in brokered deposits.
Interest expense on Federal Home Loan Bank advances decreased $182,000, or 26.6%, to $501,000 for the three months ended June 30, 2025 from $683,000 for the three months ended June 30, 2024. This decrease was due primarily to a decrease in the average balance of FHLB advances of $25.3 million, or 33.9%, to $49.3 million for the three months ended June 30, 2025 from $74.6 million for the three months ended June 30, 2024. The increase in average yield of 40 basis points, or 10.8%, is primarily due to paying off maturing advances with significantly lower rates than the weighted average cost of all FHLB borrowings.
Net Interest Income. Net interest income remained flat at $3.2 million for the three months ended June 30, 2025. Net interest margin increased 11 basis points, or 3.7%, to 3.09% for the three months ended June 30, 2025 from 2.98% for the three months ended June 30, 2024. The increase in net interest margin was primarily due to a reduction in FHLB advances and 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 three basis points, or 0.5%, to 5.34% for the three months ended June 30, 2025 and the average yield on interest bearing liabilities decreased by seven basis points, or 2.6%, to 2.70% for the three months ended June 30, 2025.
Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses decreased $166,000, or 133.9%, to a reversal of provision of $42,000 for the three months ended June 30, 2025 from a provision for credit losses of $124,000 for the three months ended June 30, 2024, primarily due to an adjustment to the allowance related to $9.0 million in loans being moved from the general reserve loan pool to being individually reviewed and not requiring a specific reserve and a reduction in unfunded commitments. The allowance for credit losses was 1.09% of total loans at June 30, 2025.
Noninterest Income. Noninterest income increased $186,000, or 47.3%, to $579,000 for the three months ended June 30, 2025 from $393,000 for the three months ended June 30, 2024, primarily due to an additional loss of $69,000 on the final piece of the loan sale and a write-down of $78,000 on bank property being held as other real estate owned being marked to fair value in the three months ended June 30, 2024. In the three months ended June 30, 2025 there was a $73,000 gain on an equity investment held at the holding company and a $29,000 increase in net appreciation of bank-owned life insurance due to a change in insurance carriers. The equity investment at the holding company is included in restricted investments carried at cost on the balance sheet and is an investment in a fintech fund.
These items were partially offset by a decrease in net service charges and fees of $61,000, or 11.7%, primarily due to a decrease of $59,000 in fee income from wholesale loans sold of $85,000 for the three months ended June 30, 2024 to $26,000 for the three months ended June 30, 2025 due primarily to decreases in housing demand related to market rates.
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Noninterest Expense. Noninterest expense decreased $81,000, or 2.7%, to $3.0 million for the three months ended June 30, 2025 from $3.1 million for the three months ended June 30, 2024 primarily due to a decrease in salary and employee benefit expenses of $75,000, or 4.6%, due primarily to reduced benefit costs related to executive officers and directors of $30,000, including a one-time $26,000 decrease in 2025 to reverse accrued equity awards forfeited. Salary and employee benefit expenses were $1.6 million for the three months ended June 30, 2025. Director fees decreased $8,000, or 10.1%, to $71,000 for the three months ended June 30, 2025 due to a reduction in the number of directors from 12 to 10 in May 2024 and technology expenses decreased $113,000, or 59.8%, due to card processing project implementation fees in the three months ended June 30, 2024.
These decreases were partially offset by increases in other expenses of $120,000, or 21.3%, primarily due to increased auditing expenses of $51,000, or 46.4%, from $110,000 for the three months ended June 30, 2024 to $161,000 for the three months ended June 30, 2025 due to contracting with a new internal audit firm to perform work regularly throughout the year and additional expenses on the external audit for December 31, 2024. Marketing expense increased $47,000, or 188.0%, to $72,000 for the three months ended June 30, 2025 due to hiring a marketing firm in 2025 and significantly increasing our presence through media outlets we weren’t currently utilizing, including television and other streaming services, We also had an expense of $28,000 that offset part of the gain on the equity investment held at the holding company.
Income Tax Expense. Income tax expense increased by $94,000, or 188.0%, to $144,000 for the three months ended June 30, 2025 from $50,000 for the three months ended June 30, 2024, due primarily to an increase in net income before taxes of $424,000 from $398,000 for the three months ended June 30, 2024 to $822,000 for the three months ended June 30, 2025. The effective tax rate was 17.52% and 12.56% for the three months ended June 30, 2025 and 2024, respectively. The increase in effective tax rate was primarily due to taxable income increasing at a faster rate than nontaxable income.
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Average Balance Sheets
The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are only included in the computation of average balances. Average yields for loans include loan fees of $240,000 and $200,000 for the six months ended June 30, 2025 and 2024, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.
For the Six Months Ended June 30,
2025
2024
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans
$
299,848
$
8,671
5.78
%
$
278,686
$
7,510
5.39
%
Allowance for credit losses
(3,262)
(2,984)
Securities
95,799
2,020
4.22
%
117,688
2,456
4.17
%
Restricted stock
3,146
94
5.98
%
3,531
109
6.17
%
Interest-bearing deposits in banks
9,753
216
4.43
%
17,500
478
5.46
%
Federal funds sold
5,339
117
4.38
%
11,473
306
5.33
%
Financial derivative
37
(10)
523
240
Total interest-earning assets
410,660
11,108
5.41
%
426,417
11,099
5.21
%
Noninterest-earning assets
29,015
28,512
Total assets
$
439,675
$
454,929
Interest-bearing liabilities:
Interest-bearing demand deposits
$
68,385
210
0.61
%
$
68,185
223
0.65
%
Regular savings and other deposits
43,312
84
0.39
%
47,304
76
0.32
%
Money market deposits
46,508
631
2.71
%
42,866
718
3.35
%
Certificates of deposit
133,983
2,671
3.99
%
121,071
2,553
4.22
%
Total interest-bearing deposits
292,188
3,596
2.46
%
279,426
3,570
2.56
%
Advances from the Federal Home Loan Bank
49,511
1,004
4.06
%
75,602
1,379
3.65
%
Other liabilities
278
6
4.32
%
719
4
1.11
%
Total interest-bearing liabilities
341,977
4,606
2.69
%
355,747
4,953
2.78
%
Noninterest-bearing demand deposits
49,364
52,966
Other noninterest-bearing liabilities
3,771
4,272
Total liabilities
395,112
412,985
Total shareholders' equity
44,563
41,944
Total liabilities and shareholders' equity
$
439,675
$
454,929
Net interest income
$
6,502
$
6,146
Net interest rate spread (1)
2.72
%
2.43
%
Net interest-earning assets (2)
$
68,683
$
70,670
Net interest margin (3)
3.17
%
2.88
%
Average interest-earning assets to interest-bearing liabilities
120.08
%
119.87
%
(1) Net interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average rate of interest bearing liabilities.
(2) Net interest earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents annualized net interest income divided by average total interest earning assets.
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Comparison of the Operating Results for the Six months ended June 30, 2025 and June 30, 2024
Net Income. The Company had net income of $1.3 million for the six months ended June 30, 2025, compared to a net loss of $2.3 million for the six months ended June 30, 2024, an increase of $3.6 million, or 156.5%. 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 office building after constructing a new one resulting in combined nonrecurring deductions from noninterest income of $4.1 million. The increase in net income before tax excluding these two nonrecurring items in 2024 was $433,000 primarily due to an increase in net interest income of $356,000, a decrease in noninterest expenses of $224,000, and an increase of $77,000 in noninterest income. This is partially offset by a $224,000 increase in the provision for credit losses primarily from a large decrease in 2024 related to the sale of loans.
Interest Income. Interest income for the six months ended June 30, 2025 was $11.1 million, which is unchanged from the six months ended June 30, 2024. Interest on loans increased by $1.2 million following the loan sale and strategic restructuring into higher yielding loans in the first quarter of 2024, and there was an increase in the average loan balance. However, this was offset by decreases in interest from lower balances on securities, fed funds, deposits in banks, and the financial derivative which was terminated at the beginning of the year. Average interest earning assets decreased by $15.7 million, or 3.7%, from $426.4 million for the six months ended June 30, 2024 to $410.7 million for the six months ended June 30, 2025 but was offset primarily by an increase in the yield on average interest earning assets of 20 basis points, or 3.9%, from 5.21% for the six months ended June 30, 2024 to 5.41% for the six months ended June 30, 2025.
Interest income on loans increased $1.2 million, or 16.0%, to $8.7 million for the six months ended June 30, 2025 from $7.5 million for the six months ended June 30, 2024. This increase resulted primarily from an increase in average loans of $21.1 million, or 7.6%, from $278.7 million for the six months ended June 30, 2024 to $299.8 million for the six months ended June 30, 2025 and an increase in average loan yield of 39 basis points, or 7.3%, to 5.78% for the six months ended June 30, 2025 from 5.39% for the six months ended June 30, 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 loans would have been $217,000 more had there not been a reversal of accrued interest in the second quarter of 2025 due to two loan relationships totaling $9.0 million being placed on nonaccrual.
Interest income on securities decreased $436,000, or 17.5%, from $2.5 million for the six months ended June 30, 2024 to $2.0 million for the six months ended June 30, 2025. This decrease resulted from a decrease in the average balance of securities of $21.9 million, or 18.6%, from $117.7 million for the six months ended June 30, 2024 to $95.8 million for the six months ended June 30, 2025, partially offset by an increase of five basis points, or 1.2%, in average yield from 4.17% for the six months ended June 30, 2024 to 4.22% for the six months ended June 30, 2025. The yield increase is reflective of the purchase of higher yielding securities in 2024 and 2025.
Interest income on restricted investments, which includes primarily Federal Home Loan Bank (FHLB) and TIB Bank stock dividends, decreased $15,000, or 13.8%, from $109,000 for the six months ended June 30, 2024 to $94,000 for the six months ended June 30, 2025. This decrease resulted from a decrease in the average balance of restricted investments of $385,000, or 10.9%, from $3.5 million for the six months ended June 30, 2024 to $3.1 million for the six months ended June 30, 2025, and also from a decrease in the average yield of these investments of 19 basis points, or 3.1%, from 6.17% for the six months ended June 30, 2024 to 5.98% for the six months ended June 30, 2025. The decrease in dividends was due primarily to $1.1 million in stock being repurchased in March 2025 by the FHLB due to the decrease in FHLB advances.
Interest income on interest bearing deposits in banks decreased $262,000, or 54.8%, from $478,000 for the six months ended June 30, 2024 to $216,000 for the six months ended June 30, 2025. This decrease resulted primarily from a decrease in average interest-bearing deposits of $7.7 million, or 44.0%, from $17.5 million for the six months ended June 30, 2024 to $9.8 million for the six months ended June 30, 2025 and a decrease in average yield of 103 basis points, or 18.9%, from 5.46% for the six months ended June 30, 2024 to 4.43% for the six months ended June 30, 2025. The decrease in yields on deposits in banks and fed funds is reflective of the decrease in fed funds rates and other market
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interest rates. During the six months ended June 30, 2024, the Company maintained higher account balances due to receiving cash from the loan sale.
Interest income from the fair value hedge decreased $250,000 due to the termination of the swap agreement from interest income of $240,000 for the six months ended June 30, 2024 to an expense of $10,000 for the six months ended June 30, 2025. 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.
Interest Expense. Total interest expense decreased $347,000, or 7.0%, to $4.6 million for the six months ended June 30, 2025 from $5.0 million for the six months ended June 30, 2024 primarily due to a decrease in average interest-bearing liabilities of $13.7 million, or 3.9%, to $342.0 million for the six months ended June 30, 2025 from $355.7 million for the six months ended June 30, 2024 and a decrease in the average cost of interest-bearing liabilities of nine basis points, or 3.3%, from 2.78% for the six months ended June 30, 2024 to 2.69% for the six months ended June 30, 2025, primarily due to a decrease of $26.1 million in average FHLB advances. Interest expense on deposit accounts increased $26,000, or 0.7%, to $3.6 million for the six months ended June 30, 2025, due to an increase in average interest-bearing deposits of $12.8 million, or 4.6%, from $279.4 million for the six months ended June 30, 2024 to $292.2 million for the six months ended June 30, 2025, partially offset by a decrease in the average interest-bearing deposit cost of 10 basis points, or 3.9%, from 2.56% for the six months ended June 30, 2024 to 2.46% for the six months ended June 30, 2025 with the decrease in average cost being primarily in money market accounts, interest-bearing demand accounts and certificates of deposit.
Interest expense on Federal Home Loan Bank advances decreased $375,000, or 27.2%, to $1.0 million for the six months ended June 30, 2025 from $1.4 million for the six months ended June 30, 2024. This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $26.1 million, or 34.5%, to $49.5 million for the six months ended June 30, 2025 from $75.6 million for the six months ended June 30, 2024. The average yield on advances increased 41 basis points, or 11.2%, from 3.65% for the six months ended June 30, 2024 to 4.06% for the six months ended June 30, 2025 due to the maturity of advances with rates significantly lower than the weighted average cost of all FHLB borrowings.
Net Interest Income. Net interest income increased $356,000, or 5.8%, to $6.5 million for the six months ended June 30, 2025 from $6.1 million for the six months ended June 30, 2024 due primarily to an increase in net interest margin of 29 basis points, or 10.1%, to 3.17% for the six months ended June 30, 2025 from 2.88% for the six months ended June 30, 2024 partially offset by a decrease in average net interest-earning assets of $2.0 million, or 2.8%, to $68.7 million at June 30, 2025 from $70.7 million at June 30, 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 loan and deposit pricing. The average yield on interest-earning assets increased by 20 basis points, or 3.9%, and the average yield on interest bearing liabilities decreased by nine basis points, or 3.3%.
Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses increased $224,000, or 146.4%, to $71,000 for the six months ended June 30, 2025 from a reversal of provision for credit losses of $153,000 for the six months ended June 30, 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 $21.1 million, or 7.96%, from $278.7 million for the six months ended June 30, 2024 to $299.8 million for the six months ended June 30, 2025 also added to the provision required. The allowance for credit losses was 1.09% of total loans at June 30, 2025.
Noninterest Income. Noninterest income increased $4.2 million, or 131.3%, to $1.0 million for the six months ended June 30, 2025 from a noninterest loss of $3.2 million for the six months ended June 30, 2024, primarily due to nonrecurring losses in 2024 of $4.1 million related to the loan sale and branch construction. Excluding these one-time items, noninterest income would have increased by $77,000 over the same period. This increase is due primarily to a
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$73,000 gain on an equity investment held at the holding company. In the six months ended June 30, 2025 there was an increase in net appreciation on bank-owned life insurance of $40,000 partially offset by decreases in other service charges and fees of $22,000, and an increase in losses of $13,000 on other real estate owned due to an additional write-down of $54,000 in 2025 on two bank properties that were originally purchased for expansion then listed for sale in 2024.
Noninterest Expense. Noninterest expense decreased $224,000, or 3.7%, to $5.9 million for the six months ended June 30, 2025 from $6.1 million for the six months ended June 30, 2024 primarily due to decreases in technology expense, salaries and employee benefits, and occupancy and equipment expenses.
Technology expense decreased $170,000, or 56.1%, to $133,000 for the six months ended June 30, 2025 from $303,000 for the six months ended June 30, 2024 due primarily to card processing fees incurred in the first half of 2024 associated with a “tap” debit card implementation project. Salaries and employee benefits decreased $86,000, or 2.6%, to $3.2 million for the six months ended June 30, 2025 from $3.3 million for the six months ended June 30, 2024 primarily related to higher benefits cost in 2024 related to the CEO transition and executive and director equity awards that were forfeited. Occupancy and equipment expenses decreased $45,000, or 8.1%, from $558,000 for the six months ended June 30, 2024 to $513,000 for the six months ended June 30, 2025 primarily due to higher expenses during 2024 related to opening two new branches. Director fees decreased $20,000 from $162,000 to $142,000 for the six months ended June 30, 2025 compared to 2024 due to a reduction in the number of directors from 14 to 12 in May 2024. The board of directors decreased further in size from 12 to 9 in May 2025. Other expenses increased $97,000 to $1.2 million from $1.1 million, primarily due to increases in audit and accounting fees of $47,000 due to contracting with a new internal audit firm to perform work regularly throughout the year and additional expenses on the external audit for December 31, 2024, marketing fees of $59,000 due to contracting with an outside marketing firm and expanding our reach through additional advertising methods, training expenses of $13,000, FDIC assessments of $16,000 and equity investment expenses of $28,000, partially offset by decreases of $37,000 in other compensation due to a one-time expense, $8,000 in REO expenses, $14,000 in legal fees, and $10,000 in office expenses.
Income Tax Expense. Income tax expense increased by $908,000, or 138.0%, to $250,000 for the six months ended June 30, 2025 from an income tax benefit of $658,000 for the six months ended June 30, 2024, due to the increase in net income before taxes of $4.6 million from a loss before taxes of $3.0 million for the six months ended June 30, 2024 to income before taxes of $1.6 million for the six months ended June 30, 2025. The effective tax rate was 15.91% and 21.97% for the six months ended June 30, 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.
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Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. The Federal Reserve Bank of Boston provides the Bank with a federal funds line of credit. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We are also able to borrow from the Federal Home Loan Bank of Dallas. At June 30, 2025, we had outstanding advances of $49.2 million from the Federal Home Loan Bank of Dallas. At June 30, 2025, we had unused borrowing capacity of $99.8 million with the Federal Home Loan Bank of Dallas. In addition, at June 30, 2025, we had two unused unsecured lines of credit totaling $8.0 million with correspondent banks.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For additional information, see the consolidated statements of cash flow for the three and six months ended June 30, 2025 and 2024 included as part of the consolidated financial statements included in this report.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
Texas Community Bancshares, Inc. is a separate legal entity from Broadstreet Bank, and must provide for its own liquidity to pay its operating expenses and other financial obligations. Its primary source of income is dividends received from Broadstreet Bank. The amount of dividends that Broadstreet Bank may declare and pay to Texas Community Bancshares, Inc. is governed by applicable banking laws and regulations. At June 30, 2025, Texas Community Bancshares, Inc. (on a stand-alone, unconsolidated basis) had liquid assets of $6.0 million.
Liquidity management and asset quality continue to be high priorities. With continued volatility in the market and market interest rate fluctuations, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning. We are monitoring deposit balances daily. We run stress tests quarterly in multiple scenarios, which include deposit runoff combined with the inability to access our available lines of credit and a reduction in the availability of FHLB advances. The scenarios indicate that we are able to maintain our operational liquidity with a designated buffer with our liquidity resources available. We are closely monitoring our assets, liabilities, capital and investment portfolio unrealized losses for possible issues and opportunities related to the current economic and market conditions.
We monitor our large depositors and have discussions with them on how to maximize FDIC coverage to the fullest legal extent, which is limited to coverage of $250,000 per insured depositor. At June 30, 2025, there were 197 accounts with balances in excess of the $250,000 FDIC insurance limit totaling $97.8 million, or 28.8% of deposits. The amount that was over $250,000 was $48.6 million, or 14.3%, that was potentially uninsured, including certificates of deposit of $14.1 million and $34.5 million in checking, MMDA and savings accounts.
At June 30, 2025, the weighted average life (WAL) of our securities portfolio is 4.7 years. The gross unrealized losses on the AFS securities was $5.3 million, or 6.7% of the $78.5 million AFS portfolio and 9.3% of capital. Unrealized losses on the HTM securities were $2.0 million, or 9.8 % of the $20.3 million HTM portfolio and 3.5% of capital. The total gross unrealized losses are $7.3 million, or 7.4% of the $98.7 million securities portfolio and 12.8% of capital, which includes $39.1 million, or 39.6%, that are agency issued and guaranteed by the U.S. government. These losses are the result of market interest rate increases and we continue to monitor the portfolio for credit and other risks.
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The net unrealized loss on AFS securities, and the corresponding other comprehensive loss, was $4.2 million, or 7.4% of capital. Over the next 24 months from June 30, 2025, we expect to realize $43.5 million in cash flow from the securities portfolio with $8.4 million in 2025, $22.5 million in 2026 and $12.5 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 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. At June 30, 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 aligns pricing accordingly. Housing supply and demand are monitored for indicators of a significant change in the local housing markets. We are increasing our lending in CRE, other commercial lending and loans to municipalities to more strategically balance our loan portfolio. This was a key component of the loan sale strategy resulting in $27.1 million in residential mortgage loans sold in 2024. At June 30, 2025, we do not have any plans to sell additional loans.
The following are the various liquidity sources we had available at June 30, 2025 that we could use as needed:
● FHLB borrowing capacity of $99.8 million
● $8 million in unused credit lines with 2 correspondent banks
● Federal Reserve discount window
● Qwickrate CD Program
● Brokered deposits
● The ability to sell securities
● The ability to sell a group of loans in the secondary market on an as needed basis
● The ability to sell a portion of BOLI assets
At June 30, 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.
Management of Market Risk
Our most significant form of market risk is interest rate risk. As a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Risk Management and Interest Rate Risk Management Officer is responsible for evaluating the interest rate risk inherent in our assets and liabilities, determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:
● maintaining capital levels that exceed the thresholds for well-capitalized status under federal regulations;
● maintaining a high level of liquidity;
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● growing our volume of core deposit accounts;
● managing our investment securities portfolio so as to reduce the average maturity and effective life of the portfolio;
● managing our borrowings from the Federal Home Loan Bank of Dallas;
● continuing to diversify our loan portfolio by adding more commercial loans, which typically have shorter maturities, adjustable rates, and fee income;
● expanding our wholesale lending program to be able to meet customer loan needs while managing the weighted average life and interest rate risk in the loan portfolio; and
● utilizing callable brokered deposits and derivatives.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The tables below set forth the calculation of the estimated changes in our monthly net interest income that would result from the designated immediate changes in the United States Treasury yield curve. The estimated changes presented are within policy guidelines established by the Company’s Board of Directors.
At June 30, 2025
Change in Interest Rates
Net Interest Income Year
Year 1 Change from
(basis points) (1)
1 Forecast
Level
(Dollars in thousands)
400
$
13,804
5.81
%
300
13,693
4.96
%
200
13,545
3.82
%
100
13,344
2.28
%
Level
13,046
—
(100)
13,006
(0.31)
%
(200)
12,849
(1.51)
%
(300)
12,733
(2.40)
%
(400)
12,565
(3.69)
%
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that at June 30, 2025, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 3.82% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 1.51% decrease in net interest income.
Net Economic Value . We also compute amounts by which the net present value of our assets and liabilities (net economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate
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sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability, and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The table below sets forth the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve. The estimated changes presented are within policy guidelines established by the Company’s Board of Directors.
At June 30, 2025
EVE as a Percentage of
Present Value of Assets (3)
Estimated Increase
Increase
Change in Interest
Estimated
(Decrease) in EVE
(Decrease)
Rates (basis points) (1)
EVE (2)
Amount
Percent
EVE Ratio (4)
(basis points)
(Dollars in thousands)
400
$
55,364
$
(3,249)
(5.54)
%
13.85
%
67
300
57,007
(1,606)
(2.74)
%
13.91
%
73
200
58,280
(333)
(0.57)
%
13.84
%
66
100
58,929
316
0.54
%
13.62
%
44
Level
58,613
—
—
%
13.18
%
—
(100)
57,381
(1,232)
(2.10)
%
12.54
%
(64)
(200)
54,176
(4,437)
(7.57)
%
11.50
%
(168)
(300)
48,357
(10,256)
(17.50)
%
9.97
%
(321)
(400)
41,621
(16,992)
(28.99)
%
8.37
%
(481)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities, and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at June 30, 2025, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 0.57% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 7.57% decrease in EVE.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, mortgage servicing rights, deposits and borrowings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See “Management of Market Risk” in Item 2 above.
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Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.