Texas Community Bancshares, Inc.

Previous wording

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the Federal Home Loan Bank of Dallas, in residential real estate loans and commercial real estate loans and, to a lesser extent, commercial loans, construction and land loans, and consumer and other loans. The majority of our loans are fixed-rate loans, however, we have updated our commercial lending terms and are originating more commercial loans with adjustable rates. We also invest in securities, which have

Current wording

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the Federal Home Loan Bank of Dallas, in residential real estate loans, commercial real estate loans, construction and land loans and, to a lesser extent, commercial loans and consumer and other loans. Although the majority of our loans were fixed-rate loans, with the growth in the commercial lending portfolio in 2024, many of our originations were loans with adjustable rates. We also invest in securities, which

Previous wording

historically consisted primarily of mortgage-backed securities and obligations issued by U.S. government sponsored enterprises, state and municipal securities, collateralized mortgage obligations, corporate bonds, and Federal Home Loan Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. Broadstreet Bank is subject to comprehensive regulation and examination by the Texas Department of Savings and Mortgage Lending and the Federal Deposit Insurance Corporation and is a member of the Federal Home Loan Bank system.

Current wording

have historically consisted primarily of mortgage-backed securities and obligations issued by U.S. government sponsored enterprises and others, state and municipal securities, collateralized mortgage obligations, corporate bonds, and Federal Home Loan Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. Broadstreet Bank is subject to comprehensive regulation and examination by the Texas Department of Savings and Mortgage Lending and the Federal Deposit Insurance Corporation and is a member of the Federal Home Loan Bank system.

Previous wording

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for credit losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, income from bank owned life insurance, and wholesale lending fees. Wholesale lending fees are generated from facilitating the origination of mortgage loans through the wholesale lender. Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, technology expenses, contract services, director fees, and other expenses.

Current wording

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for credit losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, income from bank owned life insurance, gains and losses on the sale or disposal of assets and other income. Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, technology expenses, contract services, director fees, and other expenses.

Previous wording

We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for credit losses. At December 31, 2023, our investment in bank owned life insurance was $6.2 million, which was within this investment limit.

Current wording

We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for credit losses. At December 31, 2024, our investment in bank owned life insurance was $6.4 million, which was within this investment limit.

Previous wording

loan production office in Canton, Texas, in February of 2024. Although we intend to continue our historical focus on the origination of residential mortgage loans, we intend to prudently increase our commercial real estate lending and construction and land lending so as to continue to diversify our loan portfolio and income sources. At December 31, 2023, commercial real estate loans amounted to $41.8 million, or 14.8% of total loans, and construction and land loans amounted to $37.5 million, or 13.3% of total loans.

Current wording

residential mortgage lending, construction and land lending, and commercial real estate lending. We closed a loan production office in Canton, Texas in 2024 after determining that we can adequately meet the loan demand of that area through the use of technology and other resources. As we continue our historical focus on the origination of residential mortgage loans, we have increased our focus on commercial real estate lending and construction and land lending to continue to diversify our loan portfolio and income sources. At December 31, 2024, commercial real estate loans amounted to $56.1 million, or 19.0% of total loans compared to $41.8 million, or 14.8% at December 31, 2023, and construction and land loans amounted to $54.1 million, or 18.4% of total loans compared to $37.5 million, or 13.3% at December 31, 2023. In 2024, we sold a block of 111 residential loans totaling $24.3 million to reallocate into commercial real estate and other categories to accelerate diversifying the portfolio with a goal of increasing our interest income and mitigating interest rate risk.

Previous wording

decreased retained earnings by $1.0 million. This adjustment was the result of a $1.0 million increase in the allowance for credit losses from $1.8 million at December 31, 2022 to $2.8 million upon adoption of the new CECL methodology on January 1, 2023 and an increase of $254,000 in the allowance for unfunded commitments. The adjustment was primarily a result of incorporating forward looking estimated loss estimates and an allowance for off-balance sheet commitments (unfunded commitments). The allowance for credit losses applies to any financial asset carried at amortized cost, including unfunded commitments. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. The Company uses the weighted average remaining maturity (WARM) method to estimate future expected losses for all of the Company’s loan pools. The allowance for credit losses on loans is a reserve for estimated current expected credit losses on individually evaluated loans determined to be impaired as well as estimated current expected credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for credit losses. Loans are charged off when management believes that the uncollectability of the principal is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. A provision for credit losses, which is a charge against earnings, is recorded to bring the allowance for credit losses to a level that, in management’s judgment, is adequate to absorb current expected losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for credit losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect current expected credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated credit losses and therefore the appropriateness of the allowance for credit losses could change significantly.

Current wording

Allowance for Credit Losses**.**Effective January 1, 2023, the Company adopted Accounting Standards Update 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), referred to as CECL. The allowance for credit losses applies to any financial asset carried at amortized cost, including unfunded commitments. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. The Company uses the weighted average remaining maturity (WARM) method to estimate future expected losses for all of the Company’s loan pools. The allowance for credit losses on loans is a reserve for estimated current expected credit losses on individually evaluated loans determined to be impaired as well as estimated current expected credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for credit losses. Loans are charged off when management believes that the uncollectability of the principal is confirmed. Subsequent recoveries, if any, are credited to the allowance for credit losses. A provision for credit losses, which is a charge against earnings, is recorded to bring the allowance for credit losses to a level that, in management’s judgment, is adequate to absorb current expected losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for credit losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect current expected credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated credit losses and therefore the appropriateness of the allowance for credit losses could change significantly.

Previous wording

Cash and Cash Equivalents. Total cash and cash equivalents (which includes fed funds sold) increased $4.1 million, or 46.1%, to $13.1 million (including $7.6 million in Fed Funds sold) at December 31, 2023 from $8.9 million (including $2.0 million in Fed Funds sold) at December 31, 2022. This increase was primarily due to a decrease in securities of $15.6 million, or 11.6%, to $119.3 million at December 31, 2023 from $135.0 million at December 31, 2022. The decrease in available for sale (AFS) securities of $13.8 million resulted primarily from sales of $19.8 million in 2023 as part of a repricing and balance sheet restructuring strategy. The proceeds were primarily held in cash and cash equivalents and interest bearing deposits in banks as assets are being restructured. These accounts provided a favorable yield while maintaining a high level of liquidity. The Bank made a strategic decision to hold more liquid funds in 2023 due to economic conditions and liquidity concerns resulting from bank failures in the first quarter of the year and other deposit challenges.

Current wording

Cash and Cash Equivalents. Total cash and cash equivalents (which includes fed funds sold) increased $230,000, or 1.5%, to $13.3 million (including $9.3 million in Fed Funds sold) at December 31, 2024 from $13.1 million (including $7.6 million in Fed Funds sold) at December 31, 2023. These accounts provided a favorable yield while maintaining a high level of liquidity. The Bank continued to strategically hold more liquid assets while restructuring the loan portfolio throughout 2024.

Previous wording

Interest Bearing Deposits in Banks**.** Interest bearing deposits in banks were $12.3 million at December 31, 2023 compared to $2.1 million as of December 31, 2022, an increase of $10.2 million, or 485.7%. The increase was due primarily to the net decreases in securities of $15.6 million. The Bank utilizes the Qwickrate listing service, which is a resource where banks can purchase and sell Certificates of Deposit (CDs) with other banks, to invest excess funds easily in CDs at a competitive rate. At December 31, 2023, there was $3.2 million in short-term (3-6 months) Qwickrate CDs with other banks.

Current wording

Interest Bearing Deposits in Banks. Interest bearing deposits in banks decreased $2.6 million, or 21.1%, to $9.7 million at December 31, 2024, from $12.3 million at December 31, 2023. The decrease was primarily the result of a reduction of $3.2 million in Qwickrate Certificates of Deposit (CDs). The Bank utilizes the Qwickrate listing service, which is a resource where banks can purchase and sell Certificates of Deposit (CDs) with other banks to invest excess funds in CDs at a competitive rate. At December 31, 2024, there were no Qwickrate CDs with other banks. Those funds were used primarily to fund loan growth and reduce FHLB debt.

Previous wording

Securities Available for Sale. Securities available for sale decreased by $13.8 million, or 12.9%, to $93.3 million at December 31, 2023 from $107.2 million at December 31, 2022. The decrease in securities resulted primarily from sales of securities as part of an investment repricing strategy adopted in January 2023 to take advantage of then current market interest rate spreads. In 2023, twenty securities were sold totaling $19.8 million at a loss of $1.7 million in order to reprice the portfolio by purchasing investments yielding higher returns or making loans, including purchases of $10.3 million during the period. During 2023, we had purchases of securities of $10.3 million and received paydowns of $6.2 million. The AFS portfolio is comprised of 26.7% residential mortgage backed securities, 53.4% collateralized mortgage obligations, 14.3% state and municipal securities and 5.6% corporate bonds. Net unrealized losses decreased on the available for sale portfolio by $1.3 million, or 18.6%, to $5.7 million, net of tax, from $7.0 million, net of tax, due primarily to decreases in unrealized losses from changes in market interest rates being partially offset by the realized loss related to the securities sold being removed from the total. Gross unrealized losses on the AFS portfolio consisting of 81 securities decreased from $8.9 million, or 7.7% of the portfolio’s amortized cost of $116.0 million at December 31, 2022, to $7.2 million, or 7.2% of the amortized cost of $100.5 million at December 31, 2023. These unrealized losses are due to increases in market interest rates. The total net unrealized losses as reflected in the other comprehensive losses (AOCI) was further reduced by $94,000 from purchases of derivatives hedged against a portion of the AFS portfolio. The total accumulated other comprehensive losses decreased by $1.4 million to $5.6 million at December 31, 2023 from $7.0 million at December 31, 2022.

Current wording

Securities Available for Sale. Securities available for sale decreased by $18.1 million, or 19.4%, to $75.2 million at December 31, 2024 from $93.3 million at December 31, 2023. The decrease in securities resulted primarily from sales of securities in 2024 to take advantage of the current market interest rate spreads. During the twelve months ended December 31, 2024, we had sales of securities of $20.1 million partially offset by strategic purchases of $19.4 million in securities with more attractive yields or overall terms and received paydowns and payoffs of $18.4 million. Net unrealized losses on the available for sale portfolio, including derivatives, decreased by $826,000, or 14.8%, to $4.8 million, net of tax, from $5.7 million, net of tax, due primarily to decreases in market interest rates. Gross unrealized losses on the available for sale portfolio consisting of 77 securities decreased from $7.2 million, or 7.2% of the portfolio’s amortized cost of $100.5 million at December 31, 2023, to $6.5 million, or 8.0% of the amortized cost of $81.6 million at December 31, 2024. These unrealized losses are due to increases in market interest rates since the time of purchase.

Previous wording

Securities Held to Maturity. Securities held to maturity decreased by $1.8 million, or 6.5%, to $26.0 million at December 31, 2023 from $27.8 million at December 31, 2022. This decrease is primarily due to principal repayments of $3.8 million partially offset by a purchase of $2.1 million. The portfolio is comprised of 85.7% residential mortgage backed securities, 7.6% state and municipal securities and 6.7% U.S. government and agency bonds.

Current wording

Securities Held to Maturity. Securities held to maturity decreased by $3.9 million, or 15.0%, to $22.1 million at December 31, 2024 from $26.0 million at December 31, 2023. This decrease is primarily due to principal repayments of $3.4 million and one call of $395,000. At December 31, 2024, the portfolio was comprised of 86.4% residential mortgage backed securities, 7.1% state and municipal securities and 6.5% U.S. government and agency bonds.

Previous wording

Loans and Leases Receivable, Net. Net loans and leases receivable increased $28.6 million, or 11.4%, to $279.9 million at December 31, 2023 from $251.3 million at December 31, 2022, including payment of the last PPP loan of $2,000 bringing the PPP total to zero at December 31, 2023. Loans secured by residential real estate, multifamily and farmland comprise $189.8 million, or 67.1%, of total loans and commercial real estate loans total $41.8 million, or 14.8%, of total loans at December 31, 2023. During the twelve months ended December 31, 2023, loan originations totaled $114.3 million of which $25.6 million were renewals, or refinancings of existing loans with Broadstreet Bank (including interim construction loans converting to a permanent loan), resulting in net originations of $88.7 million. Originations consisted primarily of $29.6 million in one-to-four family residential mortgage loans, $9.1 million in multifamily loans, construction loans of $46.2 million (when fully funded upon completion), $13.5 million in commercial real estate loans, $4.4 million in consumer loans, $6.1 million in commercial and industrial loans, $2.0 million in land& development loans, $2.0 million in farmland loans and $1.4 million in municipal loans. Originated construction loans included $7.1 million in commercial construction, $25.0 million in residential construction loans, including 27 speculative construction home loans of $8.4 million, and four multi-family construction loans totaling $14.1 million. During the year ended December 31, 2023, construction loans (when fully funded upon completion) increased by $307,000, or 0.57%, to $54.3 million at December 31, 2023 from $54.0 million at December 31, 2022. The total construction loan portfolio consisting of 82 loans had funded balances of $31.5 million at December 31, 2023 compared to 98 loans at December 31, 2022 with funded balances of $30.7 million. Construction loans continue to be a large segment of our loan portfolio with the majority of the loans being originated in our primary market. During the year ended December 31, 2023, there were $13.6 million in loan principal paydowns and $68.8 million in loan payoffs.

Current wording

During the year ended December 31, 2024, loan originations totaled $98.1 million of which $9.1 million were renewals or refinancings of existing loans with Broadstreet Bank (including interim construction loans converting to a permanent loan), resulting in net originations of $88.3 million. Originations consisted primarily of $11.1 million in one-to-four family residential mortgage loans, $2.7 million in multifamily loans, interim construction loans of $25.2 million (when fully funded upon completion), $19.5 million in commercial real estate loans, $5.1 million in consumer loans, $5.0 million in commercial and industrial loans, $17.7 million in landand development loans, $3.2 million in farmland loans and $8.5 million in municipal loans. Originated interim construction loans included $7.9 million in commercial construction, $15.1 million in residential construction loans, including 16 speculative residential loans of $6.5 million, two subdivision loans totaling $1.6 million and one multi-family construction loan totaling $598,000. During the year ended December 31, 2024, interim construction loans (when fully funded upon completion) decreased by $11.8 million, or 21.7%, to $42.5 million at December 31, 2024 from $54.3 million at December 31, 2023. The total interim construction loan portfolio consisted of 55 loans with funded balances of $33.1 million at December 31, 2024 compared to 82 loans at December 31, 2023 with funded balances of $31.5 million. Construction loans continue to be a large segment of our loan portfolio with the majority of the loans being originated in our primary market.

Previous wording

Deposits. Deposits increased $21.1 million, or 7.1%, to $317.2 million at December 31, 2023 from $296.1 million at December 31, 2022. Core deposits (defined as all deposits other than certificates of deposit) decreased $8.2 million, or 4.0%, to $198.5 million at December 31, 2023 from $206.7 million at December 31, 2022. Retail certificates of deposit increased $29.3 million, or 37.9%, to $106.7 million at December 31, 2023 from $77.4 million at December 31, 2022. At December 31, 2023, there were $12.0 million in brokered deposits. The decrease in core deposits and increase in CDs was primarily the result of the Bank offering a special CD to retain deposits, which resulted in some customers moving funds to the higher yielding time deposit from a transaction account. We increased the rate on money market accounts as part of the retention effort during this time of rising market interest rates and a competitive deposit market. As a result, our average cost of deposits increased 145 basis points, or 231.4%, to 2.08% at December 31, 2023, compared to 0.63% at December 31, 2022. At December 31, 2023, there were 171 accounts with balances in excess of the $250,000 FDIC insurance limit with a total balance of $79.9 million, or 25.2% of deposits. The amount that was over $250,000 was $37.2 million, or 11.8%, that was potentially uninsured, including certificates of deposit of $8.6 million and $28.6 million in checking, MMDA and savings accounts.

Current wording

Deposits. Deposits increased $18.6 million, or 5.9%, to $335.8 million at December 31, 2024 from $317.2 million at December 31, 2023. Core deposits (defined as all deposits other than certificates of deposit) increased $7.4 million, or 3.7%, to $205.9 million at December 31, 2024 from $198.5 million at December 31, 2023. Retail certificates of deposit increased $1.2 million, or 1.1%, to $107.9 million at December 31, 2024 from $106.7 million at December 31, 2023. Brokered deposits increased $10.0 million, or 83.4%, to $22.0 million at December 31, 2024, from $12.0 million at December 31, 2023. The increase in brokered CDs primarily funded the $10.0 million prepayment of FHLB advances. In 2023, we increased the rate on money market accounts and matched CD rates as part of a retention effort during a time of rising market interest rates and a competitive deposit market. Although rates decreased in 2024, the movement within the portfolio to higher yielding accounts and the additional brokered CDs are the primary reasons for an increase in our average cost of deposits of 42 basis points, or 17.4%, to 2.83% at December 31, 2024, compared to 2.41% at December 31, 2023. At December 31, 2024, there were 191 accounts with balances in excess of the $250,000 FDIC insurance limit with a total balance of $98.0 million, or 29.2% of deposits. The amount that was over $250,000 was $50.3 million, or 15.0%, that was potentially uninsured, including certificates of deposit of $10.7 million and $39.6 million in checking, MMDA and savings accounts.

Previous wording

Shareholders’ Equity. Total shareholders’ equity decreased $2.2 million, or 3.9%, to $53.7 million at December 31, 2023 from $55.9 million at December 31, 2022. This decrease was primarily due to a $733,000 net loss for the year ended December 31, 2023 resulting primarily from the loss on the sale of securities of $1.4 million, net of tax, and a one-time CECL adjustment (increase in the allowance for credit losses) of $1.0 million, net of tax, for the cumulative effect of a change in accounting principle used to estimate credit losses that was effective on January 1, 2023. The CECL cumulative effect adjustment flowed directly through equity instead of being charged as a provision expense for credit losses through the consolidated statement of operations. The Company also repurchased 174,842 shares of its common stock for a decrease of $2.2 million and paid quarterly dividends totaling $368,000, partially offset by a decrease in the net other comprehensive loss of $1.4 million, an increase in equity of $193,000 for the 2023 funding of the Broadstreet Bank leveraged ESOP with the release of 14,844 additional ESOP shares to participants and $528,000 related to the partial vesting of the 2022 Equity Incentive Plan for the year ended December 31, 2023. At December 31, 2023, the unallocated ESOP contra equity account was $2.2 million.

Current wording

Shareholders’ Equity. Total shareholders’ equity decreased $1.6 million, or 3.0%, to $52.1 million at December 31, 2024 from $53.7 million at December 31, 2023. This decrease was primarily due to a $1.3 million net loss for the year ended December 31, 2024 resulting primarily from the pre-tax loss of $3.8 million, net of mortgage servicing rights retained, on the sale of residential mortgage loans. The Company also repurchased 107,431 shares of its common stock for a decrease of $1.6 million and paid quarterly dividends totaling $504,000, partially offset by a decrease in the accumulated other comprehensive loss of $826,000, an increase in equity of $223,000 for the 2024 funding of the Broadstreet Bank leveraged ESOP with the release of 15,862 ESOP shares to participants and $757,000 related to accruals for the equity incentive plan for the year ended December 31, 2024. At December 31, 2024, the unallocated ESOP contra equity account was $2.0 million.

Previous wording

At December 31, 2023, Broadstreet Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes. At December 31, 2023 a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements. At December 31, 2023, Broadstreet Bank’s community bank leverage ratio was 10.76%.

Current wording

At December 31, 2024, Broadstreet Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes. At December 31, 2024 a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements. At December 31, 2024, Broadstreet Bank’s community bank leverage ratio was 10.84%.

Previous wording

The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are included in the computation of average balances. Average yields for loans (excluding PPP loans) include loan fees of $631,000 and $399,000 for the years ended December 31, 2023 and 2022, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.

Current wording

The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are included in the computation of average balances. Average yields for loans include loan fees of $511,000 and $631,000 for the years ended December 31, 2024 and 2023, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.

Previous wording

Interest Income. Interest income increased $6.4 million, or 50.8%, to $19.0 million for the year ended December 31, 2023 from $12.6 million at December 31, 2022. This was primarily the result of increased interest income on securities and loans resulting from an increase in the average balance and average yield on both for the year ended December 31, 2023. There was an increase in average interest earning assets of $49.9 million, or 14.0%, to $405.1 million at December 31, 2023 from $355.2 million at December 31, 2022 and an increase of 115 basis points, or 32.4%, in average yield on interest–earning assets from 3.54% at December 31, 2022 to 4.68% at December 31, 2023.

Current wording

Interest Income. Interest income increased $3.5 million, or 18.4%, to $22.5 million for the year ended December 31, 2024 from $19.0 million at December 31, 2023. This was primarily the result of increased interest income on loans resulting from an increase in the average balance and average yield for the year ended December 31, 2024. There was an increase in average interest earning assets of $15.3 million, or 3.8%, to $420.4 million at December 31, 2024 from $405.1 million at December 31, 2023 and an increase of 66 basis points, or 14.0%, in average yield on interest–earning assets from 4.68% at December 31, 2023 to 5.34% at December 31, 2024.

Previous wording

Interest income on net loans and leases increased $2.7 million, or 26.7%, to $12.8 million for the year ended December 31, 2023 from $10.1 million for the year ended December 31, 2022 primarily due to an increase of $33.4 million, or 14.2%, in the average balance of the loan portfolio from $234.8 million for the year ended December 31, 2022 to $268.2 million for the year ended December 31, 2023, and an increase of 50 basis points, or 11.6%, in the average yield on loans from 4.29% for the year ended December 31, 2022 to 4.79% for the year ended December 31, 2023. The increased yield on loans is primarily due to increased market rates, increased loan fees and changes in the loan portfolio to include more commercial and other higher-yielding loans for the year ended December 31, 2023 than were originated in 2022.

Current wording

Interest income on net loans and leases increased $3.1 million, or 24.0%, to $15.9 million for the year ended December 31, 2024 from $12.8 million for the year ended December 31, 2023 primarily due to an increase of $14.7 million, or 5.5%, in the average balance of the loan portfolio from $268.2 million for the year ended December 31, 2023 to $282.9 million for the year ended December 31, 2024, and an increase of 84 basis points, or 17.5%, in the average yield on loans from 4.79% for the year ended December 31, 2023 to 5.63% for the year ended December 31, 2024. The increased yield on loans is primarily due to increased market interest rates, higher loan rates and fees primarily from an increase in commercial real estate as part of the execution of a strategic restructuring of the loan portfolio in which $24.3 million in residential loans were sold and replaced with other higher-yielding loans.

Previous wording

Dividends on restricted investments including stock in the Federal Home Loan Bank and Texas Independent Bank (TIB) increased $121,000, or 318.4%, from $38,000 for the year ended December 31, 2022 to $159,000 for the year ended December 31, 2023. This increase resulted primarily from an increase in yield of 333 basis points, or 184.4%, from 1.81% for the year ended December 31, 2022 to 5.14% for the year ended December 31, 2023 and an increase in average balance of $1.0 million, or 47.6%, from $2.1 million for the year ended December 31, 2022 to $3.1 million for the year ended December 31, 2023. We were required to purchase $706,000 in FHLB stock to fully secure advance obligations obtained during the period.

Current wording

Dividends on restricted investments including stock in the Federal Home Loan Bank and Texas Independent Bank (TIB) increased $62,000, or 39.0%, from $159,000 for the year ended December 31, 2023 to $221,000 for the year ended December 31, 2024. This increase resulted primarily from an increase in yield of 103 basis points, or 20.1%, from 5.14% for the year ended December 31, 2023 to 6.17% for the year ended December 31, 2024 and an increase in average balance of $488,000, or 15.8%, from $3.1 million for the year ended December 31, 2023 to $3.6 million for the year ended December 31, 2024.

Previous wording

Interest income from interest bearing deposits in banks increased $413,000, or 1,059.0%, from $39,000 for the year ended December 31, 2022 to $452,000 for the year ended December 31, 2023, resulting primarily from the increase in average yield of 427 basis points, or 490.2%, from 0.87% for the year ended December 31, 2022 to 5.14% for the year ended December 31, 2023 and an increase in average interest bearing deposits of $4.3 million, or 95.6% from $4.5 million for the year ended December 31, 2022 to $8.8 million for the year ended December 31, 2023. There was also an increase of $88,000 in fed funds interest income for the year ended December 31, 2023 primarily from an increase of 419 basis points, or 456.8%, in average yield on fed funds sold from 0.92% for the year ended December 31, 2022 to 5.11% for the year ended December 31, 2023, partially offset by a $7.1 million, or 65.7%, decrease in average fed funds sold from $10.8 million for the year ended December 31, 2022 to $3.7 million for the year ended December 31, 2023. The fed funds were used to fund asset growth. The increase in yields on deposits in banks and fed funds is reflective of the increase in market interest rates.

Current wording

Interest income from interest bearing deposits in banks increased $271,000, or 60.0%, from $452,000 for the year ended December 31, 2023 to $723,000 for the year ended December 31, 2024, resulting primarily from the increase in average yield of 31 basis points, or 6.1%, from 5.14% for the year ended December 31, 2023 to 5.45% for the year ended December 31, 2024 and an increase in average interest bearing deposits of $4.5 million, or 51.0% from $8.8 million for the year ended December 31, 2023 to $13.3 million for the year ended December 31, 2024. There was also an increase of $484,000 in fed funds interest income for the year ended December 31, 2024 primarily from an increase of 27 basis points, or 5.3%, in average yield on fed funds sold from 5.11% for the year ended December 31, 2023 to 5.38% for the year ended December 31, 2024 and a $8.8 million, or 237.8%, increase in average fed funds sold from $3.7 million for the year ended December 31, 2023 to $12.5 million for the year ended December 31, 2024. The increases in interest bearing deposits in banks and fed funds are primarily the result of holding the funds from the loan sale in these accounts while waiting to originate new loans, core deposit growth, maturities and principal reductions from the securities portfolio, an increase in brokered deposits, and is partially offset by a reduction in FHLB advances. The increase in yields on deposits in banks and fed funds is reflective of the increase in market interest rates.

Previous wording

Interest income from the fair value hedge was $277,000 for the year ended December 31, 2023. The Company entered into an interest rate swap agreement in the year ended December 31, 2023 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position. Refer to additional detail regarding the fair value hedge in Note 21 – Derivatives of the accompanying consolidated financial statements.

Current wording

Interest income from the fair value hedge was $450,000 for the year ended December 31, 2024. The Company entered into an interest rate swap agreement in the year ended December 31, 2024 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position. Refer to additional detail regarding the fair value hedge in Note 19 – Derivatives of the accompanying consolidated financial statements.

Previous wording

Interest Expense. Interest expense increased $5.6 million, or 243.5%, to $7.9 million for the year ended December 31, 2023 from $2.3 million for the year ended December 31, 2022 due primarily to an increase in the average yield on interest bearing liabilities of 157 basis points, or 187.3%, from 0.84% for the year ended December 31, 2022 to 2.41% for the year ended December 31, 2023 and an increase in the average balance of interest-bearing liabilities of $56.2 million, or 20.7%, from $272.0 million for the year ended December 31, 2022 to $328.2 million for the year ended December 31, 2023 primarily due to an increase in deposit and funding costs. Interest expense on deposit accounts increased $3.8 million, or 257.2%, to $5.3 million for the year ended December 31, 2023 from $1.5 million for the year ended December 31, 2022, due to an increase in the average deposit cost of 145 basis points, or 231.4%, from 0.63% for the year ended December 31, 2022 to 2.08% for the year ended December 31, 2023 and an increase in average interest-bearing deposits of $17.7 million, or 7.4%, from $238.7 million for the year ended December 31, 2022 to $256.4 million for the year ended December 31, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction and savings accounts. Part of the migration to higher yielding accounts resulted from a deposit retention strategy offering a special higher interest rate CD and higher money market rates in order to retain deposits. As rates continued to rise, the Bank continued to be competitive on deposit rates. At December 31, 2023, market rates have leveled off some and the Bank’s deposit rates are starting to decrease.

Current wording

Interest Expense. Interest expense increased $2.0 million, or 25.3%, to $9.9 million for the year ended December 31, 2024 from $7.9 million for the year ended December 31, 2023 due primarily to an increase in the average yield on interest bearing liabilities of 42 basis points, or 17.2%, from 2.41% for the year ended December 31, 2023 to 2.83% for the year ended December 31, 2024 and an increase in the average balance of interest-bearing liabilities of $22.1 million, or 6.7%, from $328.2 million for the year ended December 31, 2023 to $350.3 million for the year ended December 31, 2024 primarily due to an increase in deposit and funding costs. Interest expense on deposit accounts increased $2.0 million, or 37.8%, to $7.3 million for the year ended December 31, 2024 from $5.3 million for the year ended December 31, 2023, due to an increase in the average deposit cost of 51 basis points, or 24.4%, from 2.08% for the year ended December 31, 2023 to 2.59% for the year ended December 31, 2024 and an increase in average interest-bearing deposits of $25.0 million, or 9.8%, from $256.4 million for the year ended December 31, 2023 to $281.4 million for the year ended December 31, 2024, with the increase being primarily in higher cost certificates of deposit and money market deposits, offset by a decrease in lower cost savings accounts. This migration to higher yielding accounts is due to the interest rate environment, competition and additional brokered deposits. At December 31, 2024, market rates had levelled off some and the Bank’s deposit rates had decreased.

Previous wording

Net Interest Income. Net interest income increased $781,000, or 7.6%, to $11.1 million for the year ended December 31, 2023 from $10.3 million for the year ended December 31, 2022, primarily due to an increase in interest-earning assets of $49.9 million, or 14.0%, to $405.1 million at December 31, 2023 from $355.2 million at December 31, 2022, partially offset by a decrease in net interest rate spread of 43 basis points, or 15.8%, from 2.70% for the year ended December 31, 2022 to 2.27% for the year ended December 31, 2023. Net interest margin had a 16 basis point decrease to 2.73% for the year ended December 31, 2023 from 2.89% for the year ended December 31, 2022.

Current wording

Net Interest Income. Net interest income increased $1.5 million, or 13.5%, to $12.6 million for the year ended December 31, 2024 from $11.1 million for the year ended December 31, 2023, primarily due to an increase in interest-earning assets of $15.3 million, or 3.8%, to $420.4 million at December 31, 2024 from $405.1 million at December 31, 2023, and an increase in net interest rate spread of 24 basis points, or 10.6%, from 2.27% for the year ended December 31, 2023 to 2.51% for the year ended December 31, 2024. Net interest margin increased 25 basis points to 2.98% for the year ended December 31, 2024 from 2.73% for the year ended December 31, 2023.

Previous wording

Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $356,000 for the year ended December 31, 2023, compared to $208,000 for the year ended December 31, 2022, an increase of $148,000, or 71.2%, primarily due to an increase in loans and leases and the adoption of ASC 326 on January 1, 2023. See the CECL discussion in the accompanying consolidated financial statements for further explanation of the Bank’s transition to the new methodology.

Current wording

Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $158,000 for the year ended December 31, 2024, compared to $356,000 for the year ended December 31, 2023, a decrease of $198,000, or 55.6%, primarily due to significant loan growth in 2023, and the adoption of ASC 326 on January 1, 2023. See the CECL discussion in the accompanying consolidated financial statements for further explanation of the Bank’s transition to the new methodology.

Previous wording

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

Current wording

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

Previous wording

Income Tax Expense. Income tax expense decreased by $627,000, or 148.2%, from a $423,000 expense for the year ended December 31, 2022 to a $204,000 tax benefit for the year ended December 31, 2023 due primarily to the decrease in taxable income. The effective tax rate was 21.77% and 19.43% for the years ended December 31, 2023 and 2022, respectively. The increase in the effective tax rate was primarily due to taxable income increasing at a faster rate than nontaxable income.

Current wording

Income Tax Benefit.The income tax benefit increased by $272,000, or 133.3%, from $204,000 for the year ended December 31, 2023 to $476,000 for the year ended December 31, 2024 due primarily to the increase in the taxable loss. The effective tax rate was 26.69% and 21.77% for the years ended December 31, 2024 and 2023, respectively. The increase in the effective tax rate was primarily due to taxable income increasing at a faster rate than nontaxable income.

Previous wording

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

Current wording

The tables below set forth the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve. The changes indicated in the following table are within policy guidelines approved by our Board of Directors.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We are also able to borrow from the Federal Home Loan Bank of Dallas. At December 31, 2023, we had outstanding advances of $76.9 million from the Federal Home Loan Bank of Dallas. At December 31, 2023, we had unused borrowing capacity of $72.6 million with the Federal Home Loan Bank of Dallas. In addition, at December 31, 2023, we had a $10.0 million line of credit with Texas Independent Bankers Bank, and a $5.0 million line of credit with First Horizon Bank. At December 31, 2023, there was no outstanding balance with any of these facilities.

Current wording

Loan Bank of Dallas. At December 31, 2024, we had outstanding advances of $49.9 million from the Federal Home Loan Bank of Dallas. At December 31, 2024, we had unused borrowing capacity of $102.4 million with the Federal Home Loan Bank of Dallas. In addition, at December 31, 2024, we had three unused lines of credit which included an unsecured $10.0 million and a secured $3.0 million line of credit with Texas Independent Bankers Bank and an unsecured $5.0 million line of credit with First Horizon Bank. At December 31, 2024, there was no outstanding balance with any of these facilities.

Previous wording

Texas Community Bancshares, Inc. is a separate legal entity from Broadstreet Bank and it must provide for its own liquidity to pay any dividends to stockholders and for other financial purposes. Its primary source of income is dividends received from Broadstreet Bank. The amount of dividends that Broadstreet Bank may declare and pay to Texas Community Bancshares, Inc. is governed by applicable banking laws and regulations. At December 31, 2023, Texas Community Bancshares, Inc. (on an unconsolidated basis) had cash and cash equivalents totaling $10.3 million.

Current wording

Texas Community Bancshares, Inc. is a separate legal entity from Broadstreet Bank and it must provide for its own liquidity to pay any dividends to stockholders and for other financial purposes. Its primary source of income is dividends received from Broadstreet Bank. The amount of dividends that Broadstreet Bank may declare and pay to Texas Community Bancshares, Inc. is governed by applicable banking laws and regulations. At December 31, 2024, Texas Community Bancshares, Inc. (on a stand-alone unconsolidated basis) had liquid assets totaling $7.8 million.

Previous wording

which include deposit runoff combined with the inability to access our available lines of credit and a reduction in the availability of FHLB advances. The scenarios indicate that we are able to maintain our operational liquidity with a designated buffer with our liquidity resources available. We are closely monitoring our assets, liabilities and equity, including investment portfolio unrealized losses for possible issues and opportunities related to the current economic and market conditions.

Current wording

Liquidity management and asset quality continue to be high priorities. With continued volatility in the market and market interest rate uncertainty, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning. We are monitoring deposit balances daily. We run stress tests quarterly in multiple scenarios, which include deposit runoff combined with the inability to access our available lines of credit and a reduction in the availability of FHLB advances. The scenarios indicate that we are able to maintain our operational liquidity with a designated buffer with our liquidity resources available. We are closely monitoring our assets, liabilities, capital and investment portfolio unrealized losses for possible issues and opportunities related to the current economic and market conditions.

Previous wording

We contacted some of our large depositors and had discussions with them regarding how to have FDIC coverage to the fullest legal extent, which is over $250,000 for many depositors depending on the type of account ownership. At December 31, 2023, there were 171 accounts with balances in excess of $250,000 with a total of $79.9 million, or 25.2% of deposits. The amount that was over $250,000 was $37.2 million, or 11.7%, that was potentially uninsured, including certificates of deposit of $8.6 million and $28.6 million in checking, MMDA and savings accounts. We have also been communicating with our depositors in general to help ease any concerns they may have in light of 2023 regional bank failures.

Current wording

The Bank educates and assists large depositors on having FDIC coverage to the fullest legal extent, which is over $250,000 for many depositors depending on the type of account ownership. At December 31, 2024, there were 191 accounts with balances in excess of $250,000 with a total of $98.0 million, or 29.2% of deposits. The amount that was over $250,000 was $50.3 million, or 15.0%, that was potentially uninsured, including certificates of deposit of $10.7 million and $39.6 million in checking, MMDA and savings accounts.

Previous wording

At December 31, 2023, the weighted average life (WAL) of our securities portfolio is 5.2 years. The gross unrealized losses on the AFS securities is $7.2 million, or 7.2% of the $100.5 million AFS portfolio and 12.1% of Tier 1 capital. Unrealized losses on the HTM securities were $2.6 million, or 10.1% of the $26.0 million HTM portfolio and 4.4% of Tier 1 capital. The total gross unrealized losses are $9.8 million, or 7.8% of the $126.5 million securities portfolio and are 16.5% of Tier 1 capital. The securities portfolio includes $60.2 million, or 47.5%, that are agency issued and guaranteed by the U.S. government. These losses are the result of market interest rate increases and we continue to monitor the portfolio for credit and other risks. The net unrealized loss on AFS securities and derivative combined, and the corresponding other comprehensive loss, net of tax, was $5.6 million, or 9.4% of Tier 1 capital. Over the next 24 months from December 31, 2023, we anticipate $43.4 million in incoming cash flow from the securities portfolio with $21.9 million in 2024 and 21.5 million in 2025. See the Securities section of the management discussion and analysis for more information.

Current wording

At December 31, 2024, the weighted average life (WAL) of our securities portfolio is 4.5 years. The gross unrealized losses on the AFS securities is $6.5 million, or 8.0% of the $81.6 million AFS portfolio and 13.5% of capital. Unrealized losses on the HTM securities were $2.6 million, or 11.8% of the $22.1 million HTM portfolio and 5.4% of capital. The total gross unrealized losses are $9.0 million, or 8.7% of the $103.7 million securities portfolio and are 18.8% of capital. The securities portfolio includes $42.4 million, or 41.0%, that are agency issued and guaranteed by the U.S. government. These losses are the result of market interest rate increases and we continue to monitor the portfolio for credit and other risks. The net unrealized loss on AFS securities and derivative combined, and the corresponding other comprehensive loss, net of tax, was $4.8 million, or 9.9% of capital. Over the next 24 months from December 31, 2024, we anticipate $42.7 million in incoming cash flow from the securities portfolio with $22.4 million in 2025 and 20.3 million in 2026. See the Securities section of the management discussion and analysis for more information.

Previous wording

At December 31, 2023, the Bank entered into interest rate swap agreements with a total notional amount of $25 million to hedge the risk of changes in the fair value of fixed rate AFS securities for changes in the SOFR benchmark rate. At December 31, 2023, the derivatives were highly effective and offset the unrealized loss on AFS securities by $94,000 bringing the accumulated other comprehensive loss from $5.7 million to $5.6 million.

Current wording

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

Previous wording

Our asset quality remains strong. We are being optimistically cautious with our lending and strategic decisions, staying focused on long-term goals and taking advantage of opportunities while being diligent about recognizing and mitigating risk. With the CECL implementation, our allowance for credit losses increased to 1.09% due to the change in methodology. This adds a deeper level of coverage for any losses we may experience. The Bank has raised in-house mortgage rates while continuing to offer secondary market options to moderate loan funding and we have seen a decrease in mortgage demand due to higher market interest rates. We are monitoring housing supply and demand, primarily in our Mineola and Lindale markets where home sales and new home construction have been active, for indicators of a significant changes in the local housing markets. The decrease in mortgage demand has been offset by increases in commercial real estate lending.

Current wording

Our asset quality remains strong. We are being cautiously optimistic with our lending and strategic decisions, staying focused on long-term goals and taking advantage of opportunities while being diligent about recognizing and mitigating risk. At December 31, 2024, our allowance for credit losses to total loans and leases was 1.09%. The Company continues to monitor rates and loan demand weekly and align pricing accordingly. Housing supply and demand are monitored for indicators of a significant change in the local housing markets. The Bank has raised in-house mortgage rates while continuing to offer secondary market options to moderate loan funding and we have seen a decrease in mortgage demand due to higher market interest rates. We are monitoring housing supply and demand, primarily in our Mineola and Lindale markets where home sales and new home construction have been active, for indicators of a significant changes in the local housing markets. The decrease in mortgage demand has been offset by increases in commercial real estate and construction and land loan demand.

Previous wording

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, unused lines of credit and swap transactions. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2023, we had outstanding commitments to originate loans of $37.4 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from December 31, 2023 totaled $81.8 million. Management expects that a substantial portion of these time deposits will be retained. However, if a substantial portion of these time deposits is not retained, we may utilize advances from the Federal Home Loan Bank of Dallas or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Current wording

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, unused lines of credit and swap transactions. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2024, we had outstanding commitments to originate loans of $18.0 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from December 31, 2024 totaled $96.2 million. Management expects that a substantial portion of these time deposits will be retained. However, if a substantial portion of these time deposits is not retained, we may utilize advances from the Federal Home Loan Bank of Dallas or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.