# Texas Community Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2024

- Company: [Texas Community Bancshares, Inc.](/companies/tcbs.md) (CIK 1849466)
- Form: 10-Q
- Filed: 2024-11-13
- Accepted by EDGAR: Nov 13, 2024, 16:02 ET
- Period: 2024-09-30
- Accession: 0001558370-24-015518
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1849466/000155837024015518/tcbs-20240930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1849466/000155837024015518/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2024-07-01 to 2024-09-30 | $2.5m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2024-01-01 to 2024-09-30 | $7.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $88.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | −$570.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $515.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | −$1.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | −$0.60 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.18 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | −$0.62 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 3,007,265 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 3,030,381 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $2.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $1.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $380.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2024-01-01 to 2024-09-30 | $1.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2024-09-30 | $446.0m | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $393.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $52.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 77,729 characters.

### 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 September 30, 2024 and consolidated results of operations for the three and nine months ended September 30, 2024 and 2023. It should be read in conjunction with the unaudited consolidated financial statements and the related notes appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

### 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;
- 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 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 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.*** Effective January 1, 2023, the Company adopted Accounting Standards Update 2016-13, *Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“*ASC 326”), referred to as CECL. Upon adoption of CECL, the Company made a one-time cumulative-effect adjustment that decreased retained earnings by $1.0 million. This adjustment was the result of a $1.0 million increase in the allowance for credit losses from $1.8 million at December 31, 2022 to $2.8 million upon adoption of the new CECL methodology on January 1, 2023 and an increase of $254,000 in the allowance for unfunded commitments. The adjustment was primarily a result of incorporating forward-looking estimated loss estimates and an allowance for off-balance sheet commitments (unfunded commitments). The allowance for credit losses applies to any financial asset carried at amortized cost, including off-balance sheet commitments (unfunded commitments). 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.

The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for credit losses on loans and includes allocations for specifically identified collateral dependent loans and loss factor allocations for all remaining loans, with a component primarily based on historical peer and Company loss rates, reasonable and supportable forecasts, and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions, reasonable and supportable forecasts, and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allowance for credit losses on loans is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for credit losses on loans was adequate at September 30, 2024 and December 31, 2023. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for credit losses. As a result of such reviews, we may have to adjust our allowance for credit losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for credit losses as the process is the responsibility of the Company and any increase or decrease in the allowance is the responsibility of management.

The allowance for credit losses on unfunded commitments is calculated using the same methodology as loans and considers the funding probability and the amount to be expected to be funded over the life of the commitment.

The Company assesses held to maturity (HTM) securities for credit losses and due to the HTM securities primarily being issued by government-sponsored entities or being highly rated municipals, management concluded that no credit loss should be recognized for these securities for the nine months ended September 30, 2024.

The CECL standard also requires for credit losses on available for sale (AFS) securities to be recorded through an allowance for credit losses rather a write-down of the individual security. As of September 30, 2024, the Company did not have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

***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 September 30, 2024 and December 31, 2023

***Total Assets.*** Total assets were $446.0 million at September 30, 2024, a decrease of $6.0 million, or 1.3%, from $452.0 million at December 31, 2023. The decrease was due primarily to a decrease in securities of $15.7 million, or 13.2%, to $103.6 million at September 30, 2024 from $119.3 million at December 31, 2023 and a decrease in interest bearing deposits in banks of $9.1 million, or 74.0%, to $3.2 million at September 30, 2024 from $12.3 million at December 31, 2023 partially offset by an increase in net loans and leases of $13.1 million, or 4.7%, to $293.0 million at September 30, 2024 from $279.9 million at December 31, 2023 and an increase in cash and cash equivalents of $4.7 million, or 35.9%, to $17.8 million at September 30, 2024 from $13.1 million at December 31, 2023. The increase in loans was net of the sale of 122 performing residential mortgage loans totaling $27.1 million at a loss of $3.8 million, net of mortgage servicing rights retained, as part of a portfolio repositioning strategy to take advantage of repricing opportunities with the goal of increasing yield, shortening weighted average life and diversifying the loan portfolio by reducing the concentration in residential mortgage loans.

***Cash and Cash Equivalents.*** Cash and cash equivalents increased $4.7 million, or 35.9%, to $17.8 million (which includes fed funds sold of $12.6 million) at September 30, 2024 from $13.1 million (which includes fed funds sold of $7.6 million) at December 31, 2023. This increase was primarily the result of an increase in deposits of $9.1 million, or 2.9%, a decrease in securities of $15.7 million and a decrease in interest bearing deposits in banks of $9.1 million partially offset primarily by an increase in loans of $13.1 million, dividends paid of $380,000, stock repurchases of $1.0 million, and a decrease in FHLB advances of $13.7 million.

***Interest Bearing Deposits in Banks.*** Interest bearing deposits in banks decreased $9.1 million, or 74.0%, to $3.2 million at September 30, 2024, compared to $12.3 million at December 31, 2023. The decrease was primarily the result of a reduction of $3.2 million in Qwickrate Certificates of Deposit (CDs) and $6.0 million in money market funds with correspondent banks being moved to cash primarily to be used for the payoff of $12.7 million in FHLB advances. The Bank utilizes the Qwickrate listing service, which is a resource where banks can purchase and sell Certificates of Deposit (CDs) with other banks to invest excess funds in CDs at a competitive rate. At September 30, 2024, there were no Qwickrate CDs with other banks.

***Securities Available for Sale.*** Securities available for sale decreased by $12.6 million, or 13.5%, to $80.7 million at September 30, 2024 from $93.3 million at December 31, 2023. During the nine months ended September 30, 2024, we had purchases of securities of $3.5 million, received paydowns of $9.4 million and securities of $3.4 million being called. During the nine months ended September 30, 2024, we sold two floating rate securities totaling $5.5 million to be reinvested at a fixed rate. Net unrealized losses on the available for sale portfolio, including derivatives, decreased by $1.5 million, or 26.8%, to $4.1 million, net of tax, from $5.6 million, net of tax, due primarily to decreases in market interest rates. Gross unrealized losses on the AFS portfolio consisting of 81 securities decreased from $7.2 million, or 7.2% of the portfolio’s amortized cost of $100.5 million at December 31, 2023, to $5.1 million, or 6.0% of the amortized cost of $85.8 million at September 30, 2024. These unrealized losses are due to increases in market interest rates.

***Securities Held to Maturity.*** Securities held to maturity decreased by $3.1 million, or 11.9%, to $22.9 million at September 30, 2024 from $26.0 million at December 31, 2023. This decrease is due primarily to one security of $395,000 being called and paydowns of $2.6 million. The HTM portfolio had 69 securities with gross unrealized losses of $2.0 million, or 8.8%, of the amortized cost of $22.9 million at September 30, 2024 compared to $2.6 million, or 10.0%, of the amortized cost of $26.0 million at December 31, 2023. These unrealized losses are due to increases in market interest rates.

***Loans and Leases Receivable, Net.*** Net loans and leases receivable increased $13.0 million, or 4.7%, to $293.0 million at September 30, 2024 from $279.9 million at December 31, 2023. The increase in loans was primarily due to an increase in commercial real estate loans after reinvesting the funds from the sale of 122 performing residential mortgage loans totaling $27.1 million being sold at a loss of $3.8 million, net of mortgage servicing rights retained of $239,000. The sales were part of a portfolio repositioning strategy to take advantage of repricing opportunities with the goal of increasing yield, shortening weighted average life and diversifying the loan portfolio by reducing concentration risk in residential mortgage loans. In addition to the loan sale, there was $77.8 million in loan originations partially offset by $37.2 million in payoffs and $9.9 million in contractual repayments.

The loan and lease portfolio totaled $296.1 million and is comprised of $273.6 million, or 92.4%, real estate loans, $7.1 million, or 2.4%, commercial and industrial loans, $6.1 million, or 2.1%, consumer loans and other loans, and $9.3 million, or 3.1%, municipal loans. Real estate loans include $143.1 million, or 48.3%, 1-4 family residential loans, $10.5 million, or 3.6%, multi-family loans, $55.5 million, or 18.8%, commercial real estate (CRE) loans, $22.1 million, or 7.4%, in 1-4 family construction loans, $33.1 million, or 11.2%, in other construction and development loans and $9.3 million, or 3.2%, in farmland loans. Total loans include interim construction loans of $37.9 million, or 76.9%, of the completed project balance of $49.3 million which includes $21.3 million in single-family residence loans, including $7.9 million in speculative construction loans to builders, $2.4 million in subdivision construction, $16.8 million in muti-family construction loans and $8.8 million in CRE loans. The total construction loan portfolio consisted of 65 loans with outstanding balances of $49.3 million at September 30, 2024 compared to 82 loans with outstanding balances of $54.3 million at December 31, 2023.

At September 30, 2024, commercial real estate loans consisted of $23.5 million owner occupied and $32.0 million non-owner occupied real estate. At September 30, 2024, commercial real estate loans primarily include loans collateralized by self-storage facilities ($16.4 million), commercial rental properties ($9.4 million), gas stations with convenience stores ($8.4 million), churches ($4.6 million), rural water district assets ($3.8 million), and restaurants ($2.4 million). The 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 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 $9.1 million, or 2.9%, to $326.3 million at September 30, 2024 from $317.2 million at December 31, 2023. Core deposits (defined as all deposits other than certificates of deposit) increased $6.4 million, or 3.2%, to $204.9 million at September 30, 2024 from $198.5 million at December 31, 2023. Retail certificates of deposit increased $3.0 million, or 2.8%, to $109.5 million at September 30, 2024 from $106.5 million at December 31, 2023. At September 30, 2024, there were $12.0 million in brokered deposits. The year-to-date average cost of interest-bearing deposits increased 50 basis points, or 24.1%, to 2.58% at September 30, 2024 compared to 2.08% at December 31, 2023. Due to a strategic effort to increase noninterest bearing deposits, cost of total deposits increased 11 basis points, or 5.3%, from 2.09% at December 31, 2023 to 2.20% at September 30, 2024. At September 30, 2024, there were 198 accounts with balances in excess of the $250,000 FDIC insurance limit with an aggregate balance of $99.5 million, or 30.5% of deposits. The amount that was over the FDIC insurance limit was $50.0 million, or 15.3%, that was potentially uninsured, including certificates of deposit of $9.7 million, money market accounts of $12.3 million and $28.0 million in checking and savings accounts.

***Advances from Federal Home Loan Bank.*** Advances from Federal Home Loan Bank decreased by $13.7 million, or 17.8%, to $63.2 million at September 30, 2024 from $76.9 million at December 31, 2023 due to the payoff of five advances totaling $12.7 million and to normal principal payments on amortizing advances of $1.0 million. There is one additional $3.0 million advance that will mature in 2024. There are no current plans to renew the advance.

***Total Shareholders’ Equity.*** Total shareholders’ equity decreased $1.0 million, or 1.9%, to $52.7 million at September 30, 2024 from $53.7 million at December 31, 2023. This decrease was primarily due to a net loss for the nine months ended September 30, 2024 of $1.8 million resulting primarily from the pre-tax loss of $3.8 million, net of mortgage servicing rights retained, on the sale of residential mortgage loans. The Company also repurchased 69,931 shares of its common stock for a decrease of $1.0 million and paid quarterly dividends totaling $380,000, partially offset by an increase in equity of $623,000 from vesting of the 2022 Equity Plan and an increase of $139,000 with the accrual of ESOP commitments for the nine months ended September 30, 2024. There was a decrease in the accumulated other comprehensive loss, net of tax, due to decreases in market interest rates that added $1.5 million to shareholder’s equity at September 30, 2024.

At September 30, 2024, Broadstreet Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes. A community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements. At September 30, 2024, Broadstreet Bank was well capitalized and had a ratio of 10.59%.

### 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 $175,000 and $242,000 for the three months ended September 30, 2024 and 2023, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.

*(Dollars in thousands)*

| ​ ​ ​ ​ ​ ​ ​ Interest-earning assets: | ​ ​ ​ ​ ​ ​ | ​ ​ For the Three Months Ended September 30, 2024 Average Outstanding Balance ​ | ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ | ​ ​ ​ | ​ ​ ​ Average ​ Yield/Rate ​ | ​ ​ 2023 Average Outstanding Balance ​ | ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ | ​ ​ ​ | ​ ​ ​ Average Yield/Rate ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: |
| Loans (excluding PPP loans) | ​ | $279,049 | ​ | $4,043 |  | 5.80% | $272,172 | ​ | $3,410 |  | 5.01% |
| Allowance for credit losses | ​ | (3,024) | ​ | ​ |  | ​ | (2,953) | ​ | ​ |  | ​ ​ |
| Securities | ​ | 108,362 | ​ | 1,070 |  | 3.95% | 122,259 | ​ | 1,276 |  | 4.17% |
| Restricted stock | ​ | 3,610 | ​ | 55 |  | 6.09% | 3,266 | ​ | 44 |  | 5.39% |
| Interest bearing deposits in banks | ​ | 8,279 | ​ | 125 |  | 6.04% | 5,602 | ​ | 74 |  | 5.28% |
| Federal funds sold | ​ | 19,383 | ​ | 274 |  | 5.65% | 4,599 | ​ | 60 |  | 5.22% |
| Financial derivative | ​ | 284 | ​ | 135 |  | ​ ​ | 707 | ​ | 112 |  | ​ ​ |
| Total interest earning assets | ​ | 415,943 | ​ | 5,702 |  | 5.48% | 405,652 | ​ | 4,976 |  | 4.91% |
| Noninterest earning assets | ​ | 29,000 | ​ |  |  | ​ ​ | 25,728 | ​ |  |  | ​ ​ |
| Total assets | ​ | $444,943 | ​ |  |  | ​ | $431,380 | ​ |  |  | ​ ​ |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| **Interest-bearing liabilities:** | ​ |  | ​ |  |  | ​ |  | ​ |  |  | ​ ​ |
| Interest bearing demand deposits | ​ | $70,172 | ​ | 122 |  | 0.70% | $56,176 | ​ | 52 |  | 0.37% |
| Regular savings and other deposits | ​ | 44,677 | ​ | 42 |  | 0.38% | 52,878 | ​ | 40 |  | 0.30% |
| Money market deposits | ​ | 44,859 | ​ | 370 |  | 3.30% | 33,489 | ​ | 296 |  | 3.54% |
| Certificates of deposit | ​ | 121,039 | ​ | 1,309 |  | 4.33% | 111,071 | ​ | 1,055 |  | 3.80% |
| Total interest bearing deposits | ​ | 280,747 | ​ | 1,843 |  | 2.63% | 253,614 | ​ | 1,443 |  | 2.28% |
| Advances from FHLB | ​ | 67,001 | ​ | 643 |  | 3.84% | 76,435 | ​ | 687 |  | 3.60% |
| Other liabilities | ​ | 731 | ​ | 3 |  | 1.64% | 619 | ​ | 2 |  | 1.29% |
| Total interest bearing liabilities | ​ | 348,479 | ​ | 2,489 |  | 2.86% | 330,668 | ​ | 2,132 |  | 2.58% |
| Noninterest bearing demand deposits | ​ | 49,461 | ​ |  |  | ​ | 53,789 | ​ |  |  | ​ |
| Other noninterest bearing liabilities | ​ | 4,695 | ​ |  |  | ​ | 5,070 | ​ |  |  | ​ |
| Total liabilities | ​ | 402,635 | ​ |  |  | ​ | 389,527 | ​ |  |  | ​ |
| Total shareholders’ equity | ​ | 42,308 | ​ |  |  | ​ | 41,853 | ​ |  |  | ​ |
| Total liabilities and shareholders' equity | ​ | $444,943 | ​ |  |  | ​ | $431,380 | ​ |  |  | ​ |
| Net interest income | ​ |  | ​ | $3,213 |  | ​ |  | ​ | $2,844 |  | ​ |
| Net interest rate spread (1) | ​ |  | ​ |  |  | 2.62% |  | ​ |  |  | 2.33% |
| Net interest earning assets (2) | ​ | $67,464 | ​ |  |  | ​ ​ | $74,984 | ​ |  |  | ​ ​ |
| Net interest margin (3) | ​ |  | ​ |  |  | 3.09% |  | ​ |  |  | 2.80% |
| Average interest earning assets to interest bearing liabilities | ​ |  | ​ |  |  | 119.36% |  | ​ |  |  | 122.68% |

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

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

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

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

***Net Income.*** The Company had net income of $515,000 for the three months ended September 30, 2024, compared to net income of $456,000 for the three months ended September 30, 2023, an increase of $59,000, or 12.9%. The increase was primarily due to a $369,000, or 13.0%, increase in net interest income and a $29,000 decrease in income tax expense partially offset by a $234,000 increase in the provision for credit losses, a $62,000, or 10.5%, decrease in noninterest income, and a $43,000, or 1.5%, increase in noninterest expense.

***Interest Income.*** Interest income increased $726,000, or 14.6%, to $5.7 million for the three months ended September 30, 2024 from $5.0 million for the three months ended September 30, 2023. This was primarily the result of increased interest income on loans due to increased yields and an increase in the average balance of loans. Average interest earning assets increased by $10.2 million, or 2.5%, from $405.7 million for the three months ended September 30, 2023 to $415.9 million for the three months ended September 30, 2024 and the yield on average interest earning assets increased 57 basis points, or 11.6%, from 4.91% for the three months ended September 30, 2023 to 5.48% for the three months ended September 30, 2024.

Interest income on loans increased $633,000, or 18.6%, to $4.0 million for the three months ended September 30, 2024 from $3.4 million for the three months ended September 30, 2023. This increase resulted primarily from an increase in average loans of $6.8 million, or 2.5%, from $272.2 million for the three months ended September 30, 2023 to $279.0 million for the three months ended September 30, 2024 and an increase in loan yield of 79 basis points, or 15.7%, to 5.80% for the three months ended September 30, 2024 from 5.01% for the three months ended September 30, 2023. The increase in loan yield was due primarily to increased market interest rates and diversification of the loan portfolio to include higher yielding commercial real estate loans.

Interest income on securities decreased $206,000, or 16.1%, from $1.3 million for the three months ended September 30, 2023 to $1.1 million for the three months ended September 30, 2024. This decrease resulted from a decrease in the average balance of securities of $13.9 million, or 11.4%, from $122.3 million for the three months ended September 30, 2023 to $108.4 million for the three months ended September 30, 2024 and a decrease of 22 basis points, or 5.3%, in average yield from 4.17% for the three months ended September 30, 2023 to 3.95% for the three months ended September 30, 2024. The rate decrease is reflective of market interest rate decreases and the sale of some higher yielding securities with a floating rate in order to reprice at a fixed rate.

Interest income on restricted investments, which includes primarily Federal Home Loan Bank (FHLB) and TIB Bank stock dividends, increased $11,000, or 25.0%, from $44,000 for the three months ended September 30, 2023 to $55,000 for the three months ended September 30, 2024. This increase resulted from an increase in the average balance of these investments of $344,000 or 10.5%, from $3.3 million for the three months ended September 30, 2023 to $3.6 million for the three months ended September 30, 2024 in addition to an increase of 70 basis points, or 13.0%, in average yield from 5.39% for the three months ended September 30, 2023 to 6.09% for the three months ended September 30, 2024. The increase in yield was due primarily to increases in dividends paid by the banks and the increase in investments is due to additional required purchases of FHLB stock resulting from an increase in FHLB advances.

Interest income on interest bearing deposits in banks increased $51,000, or 68.9%, from $74,000 for the three months ended September 30, 2023 to $125,000 for the three months ended September 30, 2024. This increase resulted primarily from an increase in average interest-bearing deposits of $2.7 million, or 48.2%, from $5.6 million for the three months ended September 30, 2023 to $8.3 million for the three months ended September 30, 2024 and an increase in average yield of 76 basis points, or 14.3%, from 5.28% for the three months ended September 30, 2023 to 6.04% for the three months ended September 30, 2024. There was also an increase of $214,000, or 356.7%, in fed funds interest income for the three months ended September 30, 2024 from $60,000 for the three months ended September 30, 2023 to $274,000 for the three months ended September 30, 2024, primarily from an increase of 43 basis points, or 8.2%, in average yield on fed funds sold from 5.22% for the three months ended September 30, 2023 to 5.65% for the three months ended September 30, 2024 and a $14.8 million, or 321.7%, increase in average fed funds sold from $4.6 million for the three months ended September 30, 2023 to $19.4 million for the three months ended September 30, 2024. The increase in yields on deposits in banks and fed funds is reflective of the increase in market interest rates. During the three months ended September 30, 2024, the Company maintained higher account balances in interest bearing deposits in banks and fed funds sold, due to receipt of cash from the loan sale and generally maintaining higher levels of liquidity.

Interest income from the fair value hedge was $135,000 for the three months ended September 30, 2024 compared to $112,000 for the three months ended September 30, 2023. The Company entered into an interest rate swap agreement in May 2023 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position. Refer to additional detail regarding the fair value hedge in Note 10 – Derivatives of the accompanying unaudited consolidated financial statements.

***Interest Expense.*** Total interest expense increased $357,000, or 16.7%, to $2.5 million for the three months ended September 30, 2024 from $2.1 million for the three months ended September 30, 2023 primarily due to an increase in average interest-bearing liabilities of $17.8 million, or 5.4%, to $348.5 million for the three months ended September 30, 2024 from $330.7 million for the three months ended September 30, 2023 and an increase in the average cost of interest-bearing liabilities of 28 basis points, or 10.8%, from 2.58% for the three months ended September 30, 2023 to 2.86% for the three months ended September 30, 2024, primarily due to increases in higher cost deposit accounts. Interest expense on deposit accounts increased $400,000, or 27.7%, to $1.8 million for the three months ended September 30, 2024 from $1.4 million for the three months ended September 30, 2023, due to an increase in the average deposit cost of 35 basis points, or 15.4%, from 2.28% for the three months ended September 30, 2023 to 2.63% for the three months ended September 30, 2024 and an increase in average interest-bearing deposits of $27.1 million, or 10.7% from $253.6 million for the three months ended September 30, 2023 to $280.7 million for the three months ended September 30, 2024, with increases being in certificates of deposit, money market accounts and demand deposits.

Interest expense on Federal Home Loan Bank advances decreased $44,000, or 6.4%, to $643,000 for the three months ended September 30, 2024 from $687,000 for the three months ended September 30, 2023. This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $9.4 million, or 12.3%, to $67.0 million for the three months ended September 30, 2024 from $76.4 million for the three months ended September 30, 2023. The average yield on advances increased 24 basis points, or 6.8%, from 3.60% for the three months ended September 30, 2023 to 3.84% for the three months ended September 30, 2024 due to paying off $7.7 million in advances from 2019 with significantly lower rates than the weighted average cost of all FHLB borrowings. The decrease in average advances was primarily due to paying off $7.7 million in maturing advances in the three months ended September 30, 2024 compared to purchasing $8.0 million in the three months ended September 30, 2023 to maintain a higher level of liquidity in 2023 due to market uncertainty.

***Net Interest Income.*** Net interest income increased $369,000, or 13.0%, to $3.2 million for the three months ended September 30, 2024 from $2.8 million for the three months ended September 30, 2023 due primarily to an increase in net interest margin of 29 basis points, or 10.2%, to 3.09% for the three months ended September 30, 2024 from 2.80% for the three months ended September 30, 2023 partially offset by a decrease in average net interest-earning assets of $7.5 million, or 10.0%, to $67.5 million at September 30, 2024 from $75.0 million at September 30, 2023. The increase in net interest margin was primarily due to balance sheet restructurings, which included the loan sale in 2024, allowing us to place the funds in higher yielding assets and increase the rate of repricing interest-earning assets to better align with the rate of repricing interest-bearing liabilities in addition to a more disciplined approach to deposit pricing. The average yield on interest-earning assets increased by 57 basis points, or 11.6%, compared to the average increase on interest bearing liabilities increasing by 28 basis points, or 10.8%.

***Provision for Credit Losses.*** Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses increased $234,000, or 806.9%, to $263,000 for the three months ended September 30, 2024 from a provision for credit losses of $29,000 for the three months ended September 30, 2023, primarily due to a previous decrease in the allowance related to the sale of residential loans being reversed as new loans are originated and added to the portfolio. Many of the loans added are in the commercial portfolio that carry a higher allowance requirement as well. An increase in average loans and leases of $6.8 million from $272.2 million for the three months ended September 30, 2023 to $279.0 million for the three months ended September 30, 2024 and charge-offs of $9,000 that weren’t already specifically reserved for also added to the provision required. The allowance for credit losses was 1.07% of total loans at September 30, 2024.

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

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

Occupancy and equipment expenses increased $68,000, or 35.2%, from $193,000 for the three months ended September 30, 2023 to $261,000 for the three months ended September 30, 2024 primarily due to expenses related to opening two new branches. Data processing decreased $11,000, or 4.5%, due primarily to a contract negotiation and technology expenses decreased $61,000, or 49.6%, due to receipt of a credit associated with the provider reimbursing the cost of tap debit card implementation. Other expenses increased $128,000, or 30.3%, primarily due to increased auditing expenses of $28,000 due primarily to additional internal audits and overall price increases, an increase in FDIC assessment expenses of $15,000 primarily due to an overall increase in the FDIC assessment rate, a $19,000 increase in marketing expenses, a $13,000 increase in insurance expenses, and a $23,000 increase in training expenses. Salary and employee benefit expenses decreased by $50,000, or 3.0%, to $1.6 million for the three months ended September 30, 2024 from $1.7 million for the three months ended September 30, 2023, due primarily to reduced benefit costs from terminating a deferred compensation plan at December 31, 2023, CEO transition in 2023 and decreased director fees of $31,000 due to a reduction in the number of directors in 2024.

***Income Tax Expense.*** Income tax expense decreased by $29,000, or 24.8%, to $88,000 for the three months ended September 30, 2024 from $117,000 for the three months ended September 30, 2023, although there was an increase in net income before taxes of $30,000 from $573,000 for the three months ended September 30, 2023 to $603,000 for the three months ended September 30, 2024. The effective tax rate was 14.6% and 20.4% for the three months ended September 30, 2024 and 2023, respectively. The decrease in taxes and effective tax rate was primarily due to nontaxable income increasing at a faster rate than taxable income.

### Average Balance Sheets

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are only included in the computation of average balances. Average yields for loans include loan fees of $375,000 and $456,000 for the nine months ended September 30, 2024 and 2023, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.

*(Dollars in thousands)*

| ​ ​ ​ ​ ​ ​ ​ Interest-earning assets: | ​ ​ ​ ​ ​ ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2024 Average Outstanding Balance ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ Average ​ Yield/Rate ​ ​ | ​ ​ 2023 Average Outstanding Balance ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Average ​ Yield/Rate ​ ​ ​ |
| --- | --- | ---: | --- | --- | --- | ---: | ---: | --- | --- | --- | ---: |
| Loans (excluding PPP loans) | ​ | $278,808 | ​ | $11,553 | ​ | 5.52% | $265,212 | ​ | $9,289 | ​ | 4.67% |
| Allowance for credit losses | ​ | ​ (2,997) |  | ​ ​ |  | ​ | ​ (2,531) |  | ​ ​ |  | ​ ​ |
| PPP loans | ​ | ​ — |  | ​ — |  | —% | ​ — |  | ​ — |  | —% |
| Securities | ​ | ​ 114,557 |  | ​ 3,526 |  | 4.10% | ​ 125,088 |  | ​ 3,789 |  | 4.04% |
| Restricted stock | ​ | ​ 3,558 |  | ​ 164 |  | 6.15% | ​ 2,974 |  | ​ 105 |  | 4.71% |
| Interest-bearing deposits in banks | ​ | ​ 14,404 |  | ​ 603 |  | 5.58% | ​ 5,942 |  | ​ 202 |  | 4.53% |
| Federal funds sold | ​ | ​ 14,129 |  | ​ 580 |  | 5.47% | ​ 3,488 |  | ​ 130 |  | 4.97% |
| Financial derivative | ​ | ​ 442 | ​ | ​ 375 | ​ | ​ ​ | ​ 622 | ​ | ​ 145 | ​ | ​ ​ |
| Total interest-earning assets | ​ | ​ 422,901 |  | ​ 16,801 |  | 5.30% | ​ 400,795 |  | ​ 13,660 |  | 4.54% |
| Noninterest-earning assets | ​ | ​ 28,675 |  | ​ ​ |  | ​ | ​ 23,504 |  | ​ |  | ​ |
| Total assets | ​ | $451,576 |  | ​ ​ |  | ​ ​ | $424,299 |  | ​ |  | ​ |
| **​** | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| **Interest-bearing liabilities:** | ​ |  | ​ | ​ ​ | ​ | ​ ​ |  |  | ​ |  | ​ |
| Interest-bearing demand deposits | ​ | $68,852 |  | ​ 345 |  | 0.67% | $60,309 |  | ​ 166 |  | 0.37% |
| Regular savings and other deposits | ​ | 46,422 |  | ​ 117 |  | 0.34% | 57,153 |  | ​ 133 |  | 0.31% |
| Money market deposits | ​ | 43,535 |  | ​ 1,089 |  | 3.34% | 30,931 |  | ​ 695 |  | 3.00% |
| Certificates of deposit | ​ | 121,060 |  | ​ 3,862 |  | 4.25% | 104,935 |  | ​ 2,682 |  | 3.41% |
| Total interest-bearing deposits | ​ | 279,869 |  | ​ 5,413 |  | 2.58% | 253,328 |  | ​ 3,676 |  | 1.93% |
| Advances from the Federal Home Loan Bank | ​ | 72,714 |  | ​ 2,022 |  | 3.71% | 68,905 |  | ​ 1,849 |  | 3.58% |
| Other liabilities | ​ | 723 |  | ​ 7 |  | 1.29% | 599 |  | ​ 7 |  | 1.56% |
| Total interest-bearing liabilities | ​ | 353,306 |  | ​ 7,442 |  | 2.81% | 322,832 |  | ​ 5,532 |  | 2.28% |
| Noninterest-bearing demand deposits | ​ | 51,789 |  | ​ ​ |  | ​ ​ | 55,039 |  | ​ ​ |  | ​ ​ |
| Other noninterest-bearing liabilities | ​ | 4,415 |  | ​ ​ |  | ​ ​ | 4,321 |  | ​ ​ |  | ​ ​ |
| Total liabilities | ​ | 409,510 |  | ​ ​ |  | ​ ​ | 382,192 |  | ​ ​ |  | ​ ​ |
| Total shareholders' equity | ​ | 42,066 |  | ​ ​ |  | ​ ​ | 42,107 |  | ​ ​ |  | ​ ​ |
| Total liabilities and shareholders' equity | ​ | $451,576 |  | ​ ​ |  | ​ ​ | $424,299 |  | ​ ​ |  | ​ ​ |
| Net interest income | ​ | ​ ​ |  | $9,359 |  | ​ ​ | ​ | ​ | $8,128 |  | ​ |
| Net interest rate spread (1) | ​ | ​ | ​ | ​ ​ |  | 2.49% | ​ | ​ | ​ |  | 2.26% |
| Net interest-earning assets (2) | ​ | $69,595 | ​ | ​ ​ |  | ​ ​ | $77,963 | ​ | ​ |  | ​ ​ |
| Net interest margin (3) | ​ | ​ | ​ | ​ ​ |  | 2.95% | ​ | ​ | ​ |  | 2.70% |
| Average interest-earning assets to interest-bearing liabilities | ​ | ​ | ​ | ​ ​ |  | 119.70% | ​ | ​ | ​ |  | 124.15% |

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

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

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

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

***Net Income.*** The Company had a net loss of $1.8 million for the nine months ended September 30, 2024, compared to a net loss of $401,000 for the nine months ended September 30, 2023, a decrease of $1.4 million, or 350.0%. The net loss was primarily due to a $2.5 million, or 2,500%, decrease in noninterest income resulting primarily from the sale of 122 performing residential mortgage loans as part of a balance sheet repositioning strategy at a pre-tax loss of $3.8 million, net of mortgage servicing rights retained. Additionally, there was a $651,000, or 7.8%, increase in noninterest expenses, partially offset by an increase in net interest income of $1.3 million, or 16.0%, to $9.4 million for the nine months ended September 30, 2024 from $8.1 million for the nine months ended September 30, 2023 and a $102,000, or 48.1%, decrease in the provision for credit losses and a $432,000, or 313.0%, decrease in income tax expense.

***Interest Income.*** Interest income increased $3.1 million, or 22.6%, to $16.8 million for the nine months ended September 30, 2024 from $13.7 million for the nine months ended September 30, 2023. This was primarily the result of increased interest income on loans, interest-bearing deposits in banks, and federal funds sold due to increased yields and an increase in the average balances. Average interest earning assets increased by $22.1 million, or 5.5%, from $400.8 million for the nine months ended September 30, 2023 to $422.9 million at September 30, 2024, and an increase in the yield on interest earning assets of 76 basis points, or 16.8%, from 4.54% for the nine months ended September 30, 2023 to 5.30% for the nine months ended September 30, 2024.

Interest income on loans increased $2.3 million, or 24.7%, to $11.6 million for the nine months ended September 30, 2024 from $9.3 million for the nine months ended September 30, 2023. This increase resulted primarily from an increase in average loans of $13.6 million, or 5.1%, from $265.2 million for the nine months ended September 30, 2023 to $278.8 million for the nine months ended September 30, 2024, with an increase in loan yield of 85 basis points, or 18.3%, to 5.52% for the nine months ended September 30, 2024 from 4.67% for the nine months ended September 30, 2023. The increase in loan yield was due primarily to increased market interest rates and originating more commercial based loans at higher rates to replace the $27.1 million residential loans that were sold. Additionally, the Company recognized $76,000 during the nine months ended September 30, 2024 in interest income on a loan payoff from a loan that had been on nonaccrual status.

Interest income on securities decreased $263,000, or 6.9%, from $3.8 million for the nine months ended September 30, 2023 to $3.5 million for the nine months ended September 30, 2024. This decrease resulted from a decrease in the average balance of securities of $10.5 million, or 8.4%, from $125.1 million for the nine months ended September 30, 2023 to $114.6 million for the nine months ended September 30, 2024, partially offset by an increase of six basis points, or 1.5%, in average yield from 4.04% for the nine months ended September 30, 2023 to 4.10% for the nine months ended September 30, 2024.

Interest income on interest bearing deposits in banks increased $401,000, or 198.5%, from $202,000 for the nine months ended September 30, 2023 to $603,000 for the nine months ended September 30, 2024. This increase resulted primarily from an increase in average interest-bearing deposits of $8.5 million, or 144.1% from $5.9 million for the nine months ended September 30, 2023 to $14.4 million for the nine months ended September 30, 2024 and an increase in average yield of 105 basis points, or 23.1%, from 4.53% for the nine months ended September 30, 2023 to 5.58% for the nine months ended September 30, 2024. There was also an increase of $450,000 in fed funds interest income for the nine months ended September 30, 2024 primarily from an increase of 50 basis points, or 10.1%, in average yield on fed funds sold from 4.97% for the nine months ended September 30, 2023 to 5.47% for the nine months ended September 30, 2024 and a $10.6 million, or 302.9%, increase in average fed funds sold from $3.5 million for the nine months ended September 30, 2023 to $14.1 million for the nine months ended September 30, 2024. The increase in yields on deposits in banks and fed funds is reflective of the increase in market interest rates. The increase in balances resulted from increases in deposits and holding funds in interest bearing accounts with a competitive rate while originating loans to replace the loans sold.

Dividends from restricted investments increased $59,000, or 56.2%, from $105,000 for the nine months ended September 30, 2023 to $164,000 for the nine months ended September 30, 2024. This increase primarily resulted from a $56,000, or 54.9%, increase in dividends from FHLB stock from $102,000 for the nine months ended September 30, 2023 to $158,000 for the nine months ended September 30, 2024 due primarily to an increase in the amount of FHLB stock owned.

Interest income on the fair value hedge increased $230,000, or 158.6%, from $145,000 for the nine months ended September 30, 2023 to $375,000 for the nine months ended September 30, 2024. The Company entered into an interest rate swap agreement in May 2023 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position. Refer to additional detail regarding the fair value hedge in Note 10 – Derivatives of the accompanying unaudited consolidated financial statements.

***Interest Expense.*** Total interest expense increased $1.9 million, or 34.5%, to $7.4 million for the nine months ended September 30, 2024 from $5.5 million for the nine months ended September 30, 2023 primarily due to an increase in average interest bearing liabilities of $30.5 million, or 9.4%, to $353.3 million for the nine months ended September 30, 2024 from $322.8 million for the nine months ended September 30, 2023 and an increase in the average cost of interest-bearing liabilities of 53 basis points, or 23.3%, from 2.28% for the nine months ended September 30, 2023 to 2.81% for the nine months ended September 30, 2024, primarily due to an increase in deposit and funding costs. Interest expense on deposit accounts increased $1.7 million, or 47.3%, to $5.4 million for the nine months ended September 30, 2024 from $3.7 million for the nine months ended September 30, 2023, due to an increase in the average interest-bearing deposit cost of 65 basis points, or 33.7%, from 1.93% for the nine months ended September 30, 2023 to 2.58% for the nine months ended September 30, 2024 and an increase in average interest-bearing deposits of $26.6 million, or 10.5% from $253.3 million for the nine months ended September 30, 2023 to $279.9 million for the nine months ended September 30, 2024, with the increase being in higher yielding certificates of deposit, money market deposits and interest-bearing demand deposits, offset by a decrease in lower cost savings accounts. Part of the migration to higher yielding accounts resulted from a deposit retention strategy initiated in 2023 offering a special higher interest rate CD and higher money market rates during a competitive rate environment.

Interest expense on Federal Home Loan Bank advances increased $173,000, or 9.4%, to $2.0 million for the nine months ended September 30, 2024 from $1.8 million for the nine months ended September 30, 2023. This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $3.8 million, or 5.5%, to $72.7 million for the nine months ended September 30, 2024 from $68.9 million for the nine months ended September 30, 2023 and an increase in average cost of 13 basis points, or 3.6%, from 3.58% for the nine months ended September 30, 2023 to 3.71% for the nine months ended September 30, 2024. The increase in average advances was primarily to fund loan growth and maintain higher levels of liquidity.

***Net Interest Income.*** Net interest income increased $1.3 million, or 16.0%, to $9.4 million for the nine months ended September 30, 2024 from $8.1 million for the nine months ended September 30, 2023 due primarily to an increase in interest-earning assets of $22.1 million, or 5.5%, to $422.9 million for the nine months ended September 30, 2024 from $400.8 million for the nine months ended September 30, 2023. Net interest margin had a 25 basis point, or 9.1%, increase to 2.95% for the nine months ended September 30, 2024 from 2.70% for the nine months ended September 30, 2023. The increase in net interest margin was primarily due to balance sheet restructurings, which included the loan sale in 2024, allowing us to place the funds in higher yielding assets and increase the rate of repricing interest earning assets to better align with the rate of repricing interest-bearing liabilities. The average yield on interest earning assets increased by 76 basis points, or 16.8%, compared to the average increase on interest bearing liabilities increasing by 53 basis points, or 23.3%.

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

***Noninterest Income.*** Noninterest income decreased $2.5 million, or 2500%, to a loss of $2.6 million for the nine months ended September 30, 2024 from a loss of $104,000 for the nine months ended September 30, 2023, due primarily to a pre-tax loss of $3.8 million, net of mortgage servicing rights retained, from the sale of $27.1 million in residential mortgage loans, a loss of $283,000 associated with demolition of the previous Lindale branch building, and a $78,000 loss related to the write down of two bank properties transferred to other real estate owned which are listed for sale. The loan sale included the sale of 122 performing loans totaling $27.1 million at a pre-tax loss of $3.8 million, net of mortgage servicing rights retained, as part of a portfolio repositioning strategy to take advantage of repricing opportunities with the goal of increasing yield, shortening weighted average life and diversifying the loan portfolio by reducing the concentration in residential mortgage loans. In the nine months ending September 30, 2023 there was a $1.7 million loss on the sale of securities that were part of an investment repricing strategy.

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

Salary and employee benefit expenses increased by $9,000, or 0.2%, to $4.9 million for the nine months ended September 30, 2024 from $4.9 million for the nine months ended September 30, 2023, due to an initial $129,000 vesting expense for equity awards in 2024 offset by reduced executive salary expense related to the CEO transition in 2023 and termination of the deferred compensation plan as of December 31, 2023. Occupancy and equipment expense increased $224,000, 37.6%, primarily due to additional expenses related to a new branch in Tyler, completion of a new branch building in Lindale and general increases in costs. Technology expenses increased $18,000, or 5.2%, due primarily to nonrecurring fees associated with a “tap” debit card implementation project which was partially offset by a credit from the provider. We expect to receive additional credits related to the project as expenses are incurred. Other expenses increased $438,000, or 33.7%, primarily due to an increase of $135,000 in audit and accounting expenses related primarily to loan review, an increase in FDIC assessment expenses of $49,000 primarily due to an overall increase in the FDIC assessment rate and an increase in deposits, an increase of $19,000 in insurance expenses, an increase of $54,000 in training expense primarily associated with executive training and increased emphasis on training, and an increase of $41,000 in marketing expense primarily related to opening new locations, entering new markets and changing the Bank’s name. The Company had nonrecurring director costs of $37,000 and legal fees of $38,000 related to executive and board transitions in the nine months ending September 30, 2024.

***Income Tax Expense.*** Income tax expense decreased by $432,000, or 313.0%, to a tax benefit $570,000 for the nine months ended September 30, 2024 from a tax benefit of $138,000 for the nine months ended September 30, 2023, due to a decrease in net income before taxes of $1.9 million from a loss of $539,000 for the nine months ended September 30, 2023 to a loss of $2.4 million for the nine months ended September 30, 2024. The effective tax rate was 23.83% and 25.6% for the nine months ended September 30, 2024 and 2023, respectively. The decrease in effective tax rate was primarily due to nontaxable income increasing at a faster rate than taxable income.

### 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 September 30, 2024, we had outstanding advances of $63.2 million from the Federal Home Loan Bank of Dallas. At September 30, 2024, we had unused borrowing capacity of $74.2 million with the Federal Home Loan Bank of Dallas. In addition, at September 30, 2024, we had an unused unsecured $10.0 million line of credit and an unused secured $3.0 million line of credit with Texas Independent Bankers Bank and an unused $5.0 million line of credit with First Horizon Bank.

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 nine months ended September 30, 2024 and 2023 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 September 30, 2024, Texas Community Bancshares, Inc. (on a stand-alone, unconsolidated basis) had liquid assets of $8.5 million.

Liquidity management and asset quality continue to be high priorities. With continued volatility in the market, recent banking sector events and market interest rate 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 September 30, 2024, there were 198 accounts with balances in excess of the $250,000 FDIC insurance limit totaling $99.5 million, or 30.5% of deposits. The amount that was over $250,000 was $50.0 million, or 15.3%, that was potentially uninsured, including certificates of deposit of $9.7 million and $40.3 million in checking, MMDA and savings accounts.

At September 30, 2024, the weighted average life (WAL) of our securities portfolio is 4.9 years. The gross unrealized losses on the AFS securities was $5.1 million, or 5.9% of the $85.8 million AFS portfolio and 9.0% of capital. Unrealized losses on the HTM securities were $2.0 million, or 8.7 % of the $22.9 million HTM portfolio and

3.5% of capital. The total gross unrealized losses are $7.1 million, or 6.5% of the $108.7 million securities portfolio and 12.5% of capital, which includes $55.8 million, or 51.3%, 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 derivatives combined, and the corresponding other comprehensive loss, was $4.1 million, or 7.2% of capital. Over the next 24 months from September 30, 2024, we expect to realize $34.7 million in cash flow from the securities portfolio with $8.3 million in 2024, $16.9 million in 2025 and $9.5 million in 2026. We should receive $24.9 million of that over the next 12 months. See the Securities section of the management discussion and analysis for more information.

During the year ended December 31, 2023, the Bank entered into interest rate swap agreements with a total notional amount of $25 million to hedge the risk of changes in the fair value of fixed rate AFS securities for changes in the SOFR benchmark rate. At September 30, 2024, the derivatives remained highly effective, however the fair value went negative temporarily due to a strong reaction to the 50 basis point decrease by the Federal Reserve in the fed funds target rate. This caused an unrealized loss on the derivative of $117,000 that increased the net unrealized loss on the AFS securities of $4.0 to an accumulated other comprehensive loss (AOCI) of $4.1 million at September 30, 2024. This is an increase in AFS fair value and decrease in AOCI of $1.5 million from a net unrealized loss position of $5.6 million at December 31, 2023.

Our asset quality remains strong. We are cautiously optimistic with our lending and strategic decisions, staying focused on long-term goals and taking advantage of opportunities while being diligent about recognizing and mitigating risk. At September 30, 2024, our allowance for credit losses to loans and leases held for investment was 1.07%. 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. We are increasing our lending in CRE, other commercial lending and loans to municipalities to more strategically balance our loan portfolio. This is a key component of the loan sale strategy resulting in $27.1 million in residential mortgage loans sold. At September 30, 2024, we do not have any plans to sell additional loans.

We are currently utilizing listed CDs (Qwickrate) with terms of 3-6 months with full FDIC insurance in order to keep funds liquid while also earning a higher return than holding balances in fed funds.

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

- FHLB borrowing capacity of $74.2 million
- $18 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 our BOLI assets

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

*(Dollars in thousands)*

| ​ Change in Interest Rates (basis points) (1) | ​ ​ | ​ ​ Net Interest Income Year 1 Forecast | ​ ​ ​ Year 1 Change from ​ Level |
| ---: | --- | ---: | ---: |
| 400 | ​ | $13,349 | 12.81% |
| 300 | ​ | 12,999 | 9.85% |
| 200 | ​ | 12,617 | 6.63% |
| 100 | ​ | 12,211 | 3.19% |
| Level | ​ | 11,833 | — ​ |
| (100) | ​ | 11,384 | (3.80)% |
| (200) | ​ | 11,178 | (5.54)% |
| (300) | ​ | 11,053 | (6.60)% |
| (400) | ​ | 10,926 | (7.66)% |

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

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

***Net Economic Value.*** We also compute amounts by which the net present value of our assets and liabilities (net economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability, and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

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

*At September 30, 2024*

*(Dollars in thousands)*

| ​ ​ ​ ​ Change in Interest Rates (basis points) (1) | ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ ​ ​ Estimated EVE (2) | ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Estimated Increase (Decrease) in EVE Amount | ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percent | ​ ​ EVE as a Percentage of Present Value of Assets (3) ​ ​ ​ ​ EVE Ratio (4) | ​ Increase (Decrease) (basis points) |
| ---: | --- | ---: | --- | ---: | ---: | ---: | ---: |
| 400 | ​ | $52,008 | ​ | $2,217 | 4.45% | 12.83% | 173 |
| 300 | ​ | ​ 52,493 | ​ | 2,702 | 5.43% | 12.65% | 154 |
| 200 | ​ | 52,489 | ​ | 2,698 | 5.42% | 12.33% | 123 |
| 100 | ​ | 51,726 | ​ | 1,935 | 3.89% | 11.84% | 74 |
| Level | ​ | 49,791 | ​ | — | —% | 11.10% | — |
| (100) | ​ | 46,576 | ​ | (3,215) | (6.46)% | 10.10% | (100) |
| (200) | ​ | 41,201 | ​ | (8,590) | (17.25)% | 8.69% | (241) |
| (300) | ​ | 32,830 | ​ | (16,961) | (34.06)% | 6.73% | (438) |
| (400) | ​ | 32,197 | ​ | (17,594) | (35.34)% | 6.47% | (463) |

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

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.

## Controls and procedures

As filed, 891 characters.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, 2024. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2024.

During the quarter ended September 30, 2024, there were no changes in the Company’s internal controls over financial reporting that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Nov 13, 2024.
Source: SEC EDGAR, the filing index for accession 0001558370-24-015518. Last ingested by Listed: Oct 30, 2026, 13:46 ET. No prices; not investment advice.