ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
Overview
Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the Federal Home Loan Bank of Dallas, in residential real estate loans 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
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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.
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.
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.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Our current business strategy consists of the following:
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Our commercial real estate loans and construction and land loans have higher credit risk than our residential mortgage loans.
Summary of Critical Accounting Policies and Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We determined not to take advantage of the benefits of this extended transition period.
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
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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.
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 nonaccrual 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 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 year ended December 31, 2023.
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 December 31, 2023, 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.
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Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.
Texas Community Bancshares files consolidated federal income tax returns with Broadstreet Bank. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
Selected Financial Data
The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
At December 31,
(In thousands)
Selected Financial Condition Data:
Cash and cash equivalents 13,060 8,927
Interest bearing deposits in banks 12,298 2,055
Bank owned life insurance 6,238 6,125
Foreclosed assets 162 —
Restricted investments carried at cost 3,909 2,805
Core deposit intangible 265 397
Advances from the Federal Home Loan Bank 76,896 62,494
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For the Years Ended December 31,
(In thousands)
Selected Operating Data:
Provision for credit losses 356 208
Net interest income after provision for credit losses 10,708 10,075
(Loss) income before income taxes (937) 2,177
Income tax (benefit) expense (204) 423
At or For the Years Ended
December 31,
Performance Ratios:
Return on average assets (0.17) % 0.47 %
Return on average equity (1.75) % 4.01 %
Interest rate spread (1) 2.27 % 2.70 %
Net interest margin (2) 2.73 % 2.89 %
Noninterest expense to average assets 2.79 % 2.59 %
Capital Ratios:
Average equity to average assets 9.77 % 11.61 %
Total capital to risk-weighted assets (4) 16.73 % 20.09 %
Tier 1 capital to risk-weighted assets (4) 15.65 % 19.39 %
Common equity tier 1 capital to risk-weighted assets (4) 15.65 % 19.39 %
Tier 1 capital to average assets 10.76 % 12.31 %
Asset Quality Ratios:
Allowance for credit losses as a percentage of total loans 1.09 % 0.69 %
Nonaccrual loans as a percentage of total loans 0.32 % 0.47 %
Nonperforming loans as a percentage of total loans 0.41 % 0.47 %
Nonperforming loans as a percentage of total assets 0.26 % 0.28 %
Total nonperforming assets as a percentage of total assets 0.30 % 0.28 %
Other Data:
Number of offices 6 6
Number of full-time employees 62 61
Number of part-time employees 5 5
(4) Update to risk-weighted assets in 2022 due to calculation error.
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Comparison of Financial Condition at December 31, 2023 and December 31, 2022
Total Assets. Total assets were $452.0 million as of December 31, 2023, an increase of 34.7 million, or 8.3%, when compared to total assets of $417.3 million as of December 31, 2022. The increase was due primarily to an increase in net loans and leases of $28.6 million, or 11.4%, to $279.9 million at December 31, 2023 from $251.3 million at December 31, 2022, an increase in cash and interest bearing deposits in banks of 14.4 million, or 130.9%, to $25.4 million at December 31, 2023 from $11.0 million at December 31, 2022, an increase in net premises and equipment of $5.3 million, or 84.1%, to $11.6 million at December 31, 2023 from $6.3 million at December 31, 2022, and an increase in restricted investments carried at cost, which is primarily FHLB stock, of $1.1 million, or 39.3%, to $3.9 million at December 31, 2023 partially offset by 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. Asset growth was funded by increases in deposits of $21.1 million, or 7.1%, to $317.2 million at December 31, 2023 from $296.1 million at December 31, 2022 and increases in FHLB advances of $14.4 million, or 23.0% to $76.9 million at December 31, 2023 from $62.5 million at December 31, 2022. The increase in net premises and equipment was primarily due to the purchase of two building adjacent to the Bank’s main office in Mineola, the purchase of a former bank building in Tyler to house our new Tyler branch office and the construction of the new branch building in Lindale. Both of the new locations were opened by February 2024.
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.
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.
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.
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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.
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.
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.
Advances from the Federal Home Loan Bank. Advances from the Federal Home Loan Bank increased by $14.4 million, or 23.0%, to $76.9 million at December 31, 2023 from $62.5 million at December 31, 2022 primarily to fund loan growth and increases in net premises and equipment while keeping a larger amount of cash on hand to mitigate risk primarily related to economic uncertainty and deposit volatility.
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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.
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%.
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Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are included in the computation of average balances. Average yields for loans (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.
For the Year Ended December 31,
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Allowance for credit losses (2,642) — — (1,641) — —
PPP loans — — — % 7 — — %
Financial derivative 559 277 49.55 % — — — %
Noninterest-earning assets 24,667 21,628
Interest-bearing liabilities:
Noninterest-bearing demand deposits 54,943 57,280
Other noninterest-bearing liabilities 4,652 3,805
Total shareholders' equity 41,983 43,737
Total liabilities and shareholders' equity $ 429,801 $ 376,830
Net interest income $ 11,064 $ 10,283
Net interest rate spread (1) 2.27 % 2.70 %
Net interest-earning assets (2) $ 76,911 $ 83,194
Net interest margin (3) 2.73 % 2.89 %
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Rate/Volume Analysis
The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current year volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
Increase (Decrease) Due to Total Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Interest-bearing deposits in banks 38 375 413
Federal funds sold and other (65) 153 88
Interest-bearing liabilities:
Interest-bearing demand deposits (50) 33 (17)
Regular savings and other deposits (82) (24) (106)
Advances from the Federal Home Loan Bank 908 876 1,784
Other interest-bearing liabilities 2 (3) (1)
Change in net interest income $ 759 $ 22 $ 781
Comparison of Operating Results for the Years Ended December 31, 2023 and December 31, 2022
Net Loss. Net loss was $733,000 for the year ended December 31, 2023, compared to net income of $1.8 million for the year ended December 31, 2022, a decrease of $2.5 million, or 138.9%. The decrease was primarily due to a decrease in noninterest income of $1.5 million, or 78.9%, primarily due to the sale of securities at a loss of $1.7 million, an increase in noninterest expense of $2.2 million, or 22.4%, due primarily to extraordinary items specific to the year ended December 31, 2023 including expenses related to the retirement of the former CEO, benefit plan termination, the Bank name change and expenses related to the new branches, and an increase of $148,000, or 71.2%, in the provision for credit losses. These items were partially offset by an increase of $781,000, or 7.6%, increase in net interest income and a decrease of $627,000, or 148.2%, in income tax expense.
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.
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The interest income increase is partially due to an increase in the average balance of securities of $18.9 million, or 18.1%, from $104.6 million, for the year ended December 31, 2022 to $123.5 million for the year ended December 31, 2023 and an increase in the average yield on securities of 189 basis points, or 85.2%, from 2.21% for the year ended December 31, 2022 to 4.10% for the year ended December 31, 2023. The yield increase is reflective of market interest rate increases and the diversification of the securities portfolio to include higher yielding commercial mortgage-backed securities, subordinated bank debt and other bonds that are not tied to conventional residential mortgages. In 2023, the Company sold twenty securities totaling $19.8 million at a loss of $1.7 million as part of a repricing strategy to increase interest income and restructure the portfolio. Interest income on securities increased $2.7 million, or 118.5%, from $2.3 million for the year ended December 31, 2022 to $5.1 million for the year ended December 31, 2023.
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.
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.
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.
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.
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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.
Interest expense on Federal Home Loan Bank advances increased $1.8 million, 229.6%, to $2.6 million for the year ended December 31, 2023 from $777,000 for the year ended December 31, 2022. This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $38.4 million, or 117.1%, to $71.2 million for the year ended December 31, 2023 from $32.8 million for the year ended December 31, 2022 and an increase in average yield of 123 basis points, or 51.9%, from 2.37% for the year ended December 31, 2022 to 3.60% for the year ended December 31, 2023. The increase in average advances was primarily to fund an investment strategy, loan growth and liquidity. At December 31, 2023, we have lengthened our advances as they have matured and are holding excess liquidity in interest bearing accounts. The Company believed this to be prudent given the uncertainty in the market, including consumer behavior and interest rates, and management concerns about regulatory response and public perceptions in light of the 2023 bank failures.
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.
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.
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Noninterest Income. Noninterest income decreased $1.5 million, or 78.9%, to $352,000 for the year ended December 31, 2023 from $1.9 million for the year ended December 31, 2022. This decrease is primarily due to a loss on the sale of securities of $1.7 million during the year ended December 31, 2023, partially offset by two income items that were new to the Bank in the year ended December 31, 2023 including an increase of $175,000 in wholesale lending fees to $190,000 for the year ended December 31, 2023 from $15,000 for the year ended December 31, 2022 and $23,000 in rental income on space that was already leased in one of the buildings we purchased in 2023.
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.
Salary and employee benefit expenses increased by $1.3 million, or 22.4%, to $7.1 million for the year ended December 31, 2023 from $5.8 million for the year ended December 31, 2022, due primarily to increased expenses of $444,000 for restricted stock awards and options granted under the 2022 Equity Incentive Plan that was approved by stockholders on August 31, 2022. The funding cost increased from $84,000 for the year ended December 31, 2022 to $528,000 for the year ended December 31, 2023 because this was the first year for the majority of the plan to be in existence. There was an extraordinary increase in the deferred incentive plan expense of $664,000, or 241.5%, primarily due to vesting related to participants retiring, reaching retirement age and the termination of the plan as of December 31, 2023. The remaining $192,000 increase was due to normal increases in wages, insurance costs and payroll taxes. Occupancy and equipment expenses increased by $66,000, or 8.6%, primarily due to normal costs related to owning and occupying more property in the year ended December 31, 2023 and normal increases in property taxes. Directors’ fees increased $16,000, or 4.2%, from $383,000 for the year ended December 31, 2022 to $399,000 for the year ended December 31, 2023 due to a reporting change. Data (core) processing expense increased by $89,000, or 10.6%, to $927,000 for the year ended December 31, 2023 from $838,000 for the year ended December 31, 2022 and other technology expenses increased $74,000, or 18.5%, primarily due to increases in the number of users, workstations and accounts, and price increases levied by our core processor and other technology providers. Contract services and other expenses combined increased $715,000, or 44.7%, from $1.6 million for the year ended December 31, 2022 to $2.3 million for the year ended December 31, 2023 including a $58,000 increase in audit and accounting expenses due partially to normal increases and partially to increased complexity and review, a $71,000 increase in FDIC assessments due to an overall increase in the assessment rate, an $88,000 increase in insurance cost due to increases in asset size, property additions and normal risk and rate increases. The Bank had $206,000 in nonrecurring retirement and recruitment expenses related to the retirement of the former CEO. Increases for the year ended December 31, 2023 were primarily related to growth, including branch completion, bank name change, asset size, recruitment and leadership change and price increases in all types of services the Company incurred due to inflationary pressures.
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.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Risk Management and Interest Rate Risk Management Officer is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
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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 a high level of liquidity;
● growing our volume of core deposit accounts;
● managing our borrowings from the Federal Home Loan Bank of Dallas;
● Derivatives.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
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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.
Change in Interest Rates Net Interest Income Year Year 1 Change from
(basis points) (1) 1 Forecast Level
(Dollars in thousands)
(1) Assumes an immediate uniform change in interest rates at all maturities.
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.
Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (net economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The tables below set forth the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.
EVE as a Percentage of
Present Value of Assets (3)
Estimated Increase Increase
Change in Interest Estimated (Decrease) in EVE (Decrease)
Rates (basis points) (1) EVE (2) Amount Percent EVE Ratio (4) (basis points)
(Dollars in thousands)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(4) EVE Ratio represents EVE divided by the present value of assets.
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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.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, increases in market interest rates can decrease the fair values of our loans, mortgage servicing rights, deposits and borrowings.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. 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.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents and short-term investments including interest-bearing demand deposits. The levels of these assets depend on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For additional information, see the consolidated statements of cash flows for the years ended December 31, 2023 and 2022 included as part of the consolidated financial statements appearing elsewhere in this annual report.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
Texas Community Bancshares, Inc. is a separate legal entity from Broadstreet Bank and it must provide for its own liquidity to pay any dividends to stockholders and for other financial purposes. Its primary source of income is dividends received from Broadstreet Bank. The amount of dividends that Broadstreet Bank may declare and pay to Texas Community Bancshares, Inc. is governed by applicable banking laws and regulations. At December 31, 2023, Texas Community Bancshares, Inc. (on an unconsolidated basis) had cash and cash equivalents totaling $10.3 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 increases, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning. We are monitoring deposit runoff and threats of deposit runoff daily. We have been able to maintain our deposit base through this cycle with some new product offerings and competitive interest rates, which has increased our funding costs. We run stress tests quarterly in multiple scenarios,
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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.
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.
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.
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.
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.
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. We are not currently utilizing the Bank Term Funding Program.
The following are the various liquidity sources we had available at December 31, 2023 that we could use as needed:
● FHLB borrowing capacity of $72.6 million
● $15 million in credit lines with 2 correspondent banks
● Federal Reserve discount window
● Qwickrate CD Program
● Brokered deposits
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● The ability to sell securities.
● The ability to sell some of our BOLI assets
At December 31, 2023, Broadstreet Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date. Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category. See Note 19 of the notes to consolidated financial statements.
Off-Balance Sheet Arrangements
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, unused lines of credit and swap transactions. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 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.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our consolidated financial statements beginning on page F-1 of this annual report.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk
The information regarding this Item is contained in Item 7 under the heading “Management of Market Risk.”
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ITEM 8.Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm (PCAOB ID 686)
Shareholders, Board of Directors and Audit Committee
Texas Community Bancshares, Inc. and Subsidiaries
Mineola, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Texas Community Bancshares, Inc. and Subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. Federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ FORVIS, LLP
We have served as the Company's auditor since 2020.
Houston, Texas
March 27, 2024
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Texas Community Bancshares, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
Assets
Cash and cash equivalents 13,060 8,927
Interest bearing deposits in banks 12,298 2,055
Net investment in direct financing leases 36 64
Accrued interest receivable 1,728 1,327
Premises and equipment, net 11,609 6,299
Bank-owned life insurance 6,238 6,125
Foreclosed assets 162 —
Restricted investments carried at cost 3,909 2,805
Core deposit intangible 265 397
Deferred income taxes 2,432 2,304
Financial derivative 115 —
Liabilities and Shareholders' Equity
Liabilities
Advances from Federal Home Loan Bank (FHLB) 76,896 62,494
Accrued expenses and other liabilities 4,218 2,905
Shareholders' Equity
Accumulated other comprehensive loss (5,592) (6,999)
See Notes to Consolidated Financial Statements
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Texas Community Bancshares, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
Interest Income
Debt securities
Dividends on restricted investments 159 38
Federal funds sold 187 99
Deposits with banks 452 39
Financial derivative 277 —
Interest Expense
Provision for Credit Losses - loans 329 208
Provision for Credit Losses - off-balance sheet credit exposures 27 —
Provision for Credit Losses 356 208
Net Interest Income After Provision for Credit Losses 10,708 10,075
Noninterest Income
Service charges on deposit accounts 686 666
Other service charges and fees 1,206 1,051
Net loss on securities transactions (1,734) (29)
Net gain on sale of foreclosed assets 32 42
Net (loss) gain on sale of fixed assets (1) 6
Net appreciation on bank-owned life insurance 113 105
Other income 50 27
Total noninterest income 352 1,868
Noninterest Expenses
Salaries and employee benefits 7,069 5,798
Occupancy and equipment expense 835 769
(Loss) Income Before Income Taxes (937) 2,177
Income Tax (Benefit) Expense (204) 423
Net (Loss) Income $ (733) $ 1,754
(Loss) earnings per share - basic $ (0.24) $ 0.58
(Loss) earnings per share - diluted $ (0.24) $ 0.58
Weighted-average shares outstanding - basic 3,062,517 3,028,214
Weighted-average shares outstanding - diluted 3,062,517 3,028,214
See Notes to Consolidated Financial Statements
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Texas Community Bancshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
Net (Loss) Income $ (733) $ 1,754
Other items of comprehensive income (loss)
Debt Securities
Total other items of comprehensive income (loss), before tax 1,781 (7,991)
Total other items of comprehensive income (loss), after tax 1,407 (6,313)
Comprehensive Income (Loss) $ 674 $ (4,559)
See Notes to Consolidated Financial Statements
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Texas Community Bancshares, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
Accumulated
Additional Other Unearned Total
Stock Stock Capital Earnings Loss Shares Stock Equity
Net loss — — — (733) — — — (733)
Issuance of restricted stock awards — 1 — — — — — 1
Other comprehensive income, net of tax — — — — 1,407 — — 1,407
ESOP shares earned, 14,844 shares — — 44 — — 149 — 193
Net income — — — 1,754 — — — 1,754
Other comprehensive loss, net of tax — — — — (6,313) — — (6,313)
ESOP shares earned, 13,031 shares — — 83 — — 130 — 213
See Notes to Consolidated Financial Statements
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Texas Community Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
Operating Activities
Net (loss) income $ (733) $ 1,754
Provision for credit losses - loans 329 208
Provision for credit losses - off-balance sheet credit exposures 27 —
Net (accretion) amortization of securities (47) 421
Depreciation and amortization 422 431
Net realized loss on sales of securities available for sale 1,734 29
Stock dividends on restricted securities (49) (28)
Loss (gain) on sale of fixed assets 1 (6)
Gain on foreclosed assets (32) (42)
Appreciation on bank-owned life insurance (113) (105)
ESOP compensation expense for allocated shares 193 213
Stock-based compensation 528 84
Deferred income tax (232) 25
Loss on fair value adjustment of fair value hedges 4 —
Net change in
Accrued interest receivable (401) (396)
Accrued expenses and other liabilities 817 715
Net Cash from Operating Activities 2,288 3,129
Investing Activities
Net change in interest bearing deposits in banks (10,243) 12,900
Activity in available for sale securities
Maturities, prepayments and calls 6,173 5,839
Activity in held to maturity securities
Purchases (2,139) —
Maturities, prepayments and calls 3,802 5,694
Purchases of restricted investments (1,055) (740)
Loan originations and principal collections, net (29,891) (31,312)
Net decrease in net investment in direct financing leases 28 41
Proceeds from sales of OREO and foreclosed assets — 243
Proceeds from sales of fixed assets — 16
Purchases of premises and equipment (5,601) (393)
Net Cash used for Investing Activities (31,154) (72,184)
Financing Activities
Advances from FHLB and other borrowings 33,201 192,500
Payments on FHLB and other borrowings (18,799) (157,577)
Cash dividends declared and paid (368) —
Purchases of treasury stock (2,199) —
Net Cash from Financing Activities 32,999 56,067
Net Change in Cash and Cash Equivalents 4,133 (12,988)
Cash and Cash Equivalents at Beginning of Period 8,927 21,915
Cash and Cash Equivalents at End of Period $ 13,060 $ 8,927
See Notes to Consolidated Financial Statements
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Texas Community Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
Note 1 - Summary of Significant Accounting Policies
General
Texas Community Bancshares, Inc. (the “Company”), a Maryland corporation and registered bank holding company, was incorporated on March 5, 2021, and became the holding company for Broadstreet Bank, SSB (the “Bank”), formerly known as Mineola Community Bank, SSB prior to December 4, 2023, as part of the mutual to stock conversion of the former Mineola Community Mutual Holding Company (“MHC”), which was completed on July 14, 2021. The Company’s shares trade on the NASDAQ under the symbol TCBS. Voting rights in the Company are held and exercised exclusively by the shareholders of the Company.
The Company’s primary source of revenue is providing loans and banking services to consumers and commercial customers in Mineola, Texas, and the surrounding area and the Dallas Fort Worth Metroplex. The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (GAAP) and to general practices of the banking industry.
Policies and practices which materially affect the determination of financial position, results of operations and cash flows are summarized as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Broadstreet Bank, SSB and its wholly-owned subsidiary Mineola Financial Service Corporation, which is not actively being utilized. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses.
Significant Group Concentration of Credit Risk
Most of the Company’s activities are with customers located within the Wood, Smith, and Van Zandt County areas and the Dallas Fort Worth Metroplex. Note 3 discusses the types of securities in which the Company invests. Note 4 discusses the types of lending in which the Company engages. Approximately 95% of the loan balance at December 31, 2023 and 2022, is secured by real estate. The Company does not have any other significant concentrations to any one industry or customer.
Recently Adopted Accounting Pronouncements
The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.
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Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will not be required to sell.
The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $1,025 which was recognized through an $810 adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $2,780 as of January 1, 2023. In addition, the Company recorded a $254 allowance on unfunded commitments which was recognized through a $200 adjustment to retained earnings, net of tax.
The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. As of December 31, 2022, the Company did not hold any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption of ASC 326 as of January 1, 2023.
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed necessary.
The following table illustrates the impact of the adoption of ASC 326:
As Reported under ASC 326 Pre ASC 326 Adoption Impact of ASC 326 Adoption
Assets:
Allowance for credit losses on loans $ 2,780 $ 1,755 $ 1,025
Liabilities:
The Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326):Troubled Debt Restructurings and Vintage Disclosures, effective January 1, 2023. The additional disclosures are included in Note 4 – Loans and Leases on a prospective basis and include loan modifications where the contractual payment terms of the borrower’s loan agreement were modified through a refinancing or restructuring. Modifications that do not impact the contractual payment terms, such as covenant waivers, insignificant payment deferrals, and any modifications made to loans carried at fair value are not included in the disclosures.
The Company uses various indicators to identify borrowers in financial difficulty. Consumer loan borrowers that are delinquent and commercial loan borrowers that are rated substandard or worse are the primary criteria used to identify borrowers who are experiencing financial difficulty.
If a borrower is current at the time of modification, the loan generally remains a performing loan as long as there is
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Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
demonstrated performance prior to the modification, and payment in full under the modified terms is expected. Otherwise, the loan is placed on nonaccrual status and reported as nonperforming until there is sustained repayment performance for a reasonable period, which is generally at least six consecutive months.
Prior to the adoption of ASC 326, when the Company restructured a loan to a borrower that was experiencing financial difficulty and granted a concession that it would not otherwise consider, a “troubled debt restructuring” (“TDR”) results and the Bank classified the loan as a TDR.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks and federal funds sold, all of which mature within ninety days.
The Company is required to maintain average balances on hand or with the Federal Reserve Bank. As of December 31, 2023 and 2022, the Company was not required to maintain any amounts in excess of required reserves.
Balances in transaction accounts at other financial institutions may exceed amounts covered by federal deposit insurance. Management regularly evaluates the credit risk associated with other financial institutions and believes that the Company is not exposed to any significant credit risks on cash and cash equivalents. At December 31, 2023 and 2022, the Company had $11,603 and $1,750, respectively, that exceeded amounts covered by federal deposit insurance.
Interest Bearing Deposits in Banks
Interest bearing deposits in banks mature within three to six months and are carried at cost.
Debt Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Debt securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss).
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Held to Maturity Securities
Beginning January 1, 2023, the Company evaluates all securities quarterly to determine if any securities in a loss
position require a provision for credit losses in accordance with ASC 326. The Company first assesses whether it intends to sell or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through net income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.
In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the
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Texas Community Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss). Changes in the allowance for credit losses are recorded as provision for or (reduction of) provision for credit losses.
Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
For the year ended December 31, 2023, the Company determined no provision for credit losses on securities was necessary.
Restricted Investments Carried at Cost
The Company’s primary restricted investment is Federal Home Loan Bank stock carried at cost ($100 per share par value), which approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB advances. The Company may request redemption at par value of any stock in excess of the amount it is required to hold. Stock redemptions are made at the discretion of FHLB. Due to requirements for additional advances, there were purchases of $706 and dividend reinvestments of $150 for the year ended December 31, 2023, and there were purchases and dividend reinvestments of $583 and $28, respectively, for the year ended December 31, 2022. Both cash and stock dividends are reported as income. There were no sales during 2023 or 2022. Additionally, the Company periodically evaluates FHLB stock for impairment. As of December 31, 2023 or 2022, no impairment charges were recorded.
Other restricted investments are carried at cost. Any changes to the cost basis of these investments are recorded in the consolidated statements of operations.
Loans and Leases
The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by loans secured by real estate throughout the Wood, Smith, and Van Zandt Counties and the Dallas Fort Worth Metroplex area. The ability of the Company’s debtors to honor their contracts is dependent upon the general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off which are measured at historical cost are generally reported at their outstanding unpaid principal balances net of any unearned income, charge-offs, and unamortized deferred fees and costs on originated loans. Interest income is accrued on the unpaid principal balance. The deferral of all loan origination fees and origination costs is quantified annually. In 2023 and 2022, management determined the deferral of these fees and costs to be immaterial to the consolidated financial statements. Unearned income is amortized to interest income using a level yield methodology. Accrued interest receivable on loans totaled $1,127 as of December 31, 2023, and was reported in accrued interest receivable on the consolidated statement of financial condition and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance.
The Company makes disclosures of loans and other financing receivables and the related allowance in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 310, Receivables. The accounting guidance defines a portfolio segment as the level at which an entity develops and documents a systematic methodology to determine the allowance for credit losses, and a class of financing receivables as the level of disaggregation of portfolio segments based on the initial measurement attributes, risk characteristics and methods for assessing risk. The Company’s portfolio segments are real estate, agriculture, commercial, and consumer and other. The classes of financing receivables within the real estate segment are Construction and Land, Farmland, 1-4 Residential and
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Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
Multifamily, and Commercial Real Estate. The remaining portfolio segments contain a single class of financing receivables. Under this accounting guidance, the allowance is presented by portfolio segment.
Allowance for Credit Losses
The Company uses the weighted average remaining maturity (“WARM”) method to estimate expected losses for all of Company’s loan pools. These pools are as follows: construction & land; farmland; 1-4 residential & multi-family real estate; commercial real estate; agriculture; commercial; and consumer and other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council. For each of these loan pools, the Company calculates an average annual loss rate and estimates future outstanding balances based on contractual maturities and estimated prepayments. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. Relevant data to support the Company’s estimates of lifetime expected credit losses is maintained through internal and external information. The CECL model leverages the use of publicly available call report data, which allows the use of external information from peers to supplement the Company’s own historical data. The loss rate is based on historical loss rates for the peer group and the Company. Due to internal loss rates being low, a blended historical loss rate of 75% peer group and 25% Company was used. The weighted average remaining life is determined based on contracted loan payments, expected prepayments and maturity dates. The allowance model uses data from the St. Louis Federal Reserve Economic Database for reasonable and supportable forecasts.
Management has determined that between years one and two represents a reasonable and supportable forecast period and reverts to a historical loss rate in years three or four depending on the loan type. Management leverages economic projections from the St. Louis Federal Reserve Economic Database (FRED) to inform its loss driver forecasts. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
Prior to the adoption of ASU 2016-13, the allowance for credit losses on loans was established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its expected life. Estimates are influenced by historical losses, economic conditions and reasonable and supportable forecasts described in the preceding section for the allowance for credit losses on loans receivable.
Nonperforming Loans, Charge-Offs and Delinquencies
Nonperforming loans generally include loans that have been placed on nonaccrual status including nonaccrual loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.
The entire balance of a loan is contractually delinquent if the minimum payment is not received by the specified due date on the customer’s billing statement. Interest and fees continue to accrue on past due loans until the date the loan goes into nonaccrual status, if applicable.
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Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(Amounts in thousands, except for share and per share data)
The outstanding balance of real estate secured loans, including all classes of financing receivables within the real estate portfolio segment, that is in excess of the estimated property value, less estimated costs to sell, is generally charged off no later than the end of the month in which the account becomes 180 days past due. The estimated property value, less estimated costs to sell, is determined utilizing appraisals or broker price opinions of the fair value of the collateral.
The outstanding balance of loans within the remaining loan segments (agriculture, commercial, and consumer) are generally charged off no later than the end of the month in which the account becomes 120 days past due. For secured loans, accounts are written down to the collateral value.
The fair value of the collateral is estimated by management based on current financial information, inspections, and appraisals. For unsecured loans, the outstanding balance is written off.
Loans within all portfolio segments are generally placed on nonaccrual status and classified as nonperforming at 90 days past due.
Accrued interest receivable is reversed when a loan is placed on nonaccrual status. Interest collections on non-accruing loans for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to interest income when received. These loans may be restored to accrual status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection.
Wholesale Lending
The Company has entered into a wholesale lending agreement with a wholesale lender and correspondent bank, TIB. The Company facilitates the loan application process and interacts with the customer while the wholesale lender underwrites, funds, closes and services the loan. The Company receives a fee from the wholesale lender at closing for the services provided which is included in noninterest income.
Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Derivative Loan Commitments
Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance (FASB ASC 815, Derivatives and Hedging). Loan commitments that are derivatives are recognized at fair value on the consolidated statements of financial condition in other assets and other liabilities with changes in their fair values recorded in noninterest income.
Forward Loan Sale Commitments
The Company evaluates all loan sales agreements to determine whether they meet the definition of a derivative under FASB ASC 815 as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company uses "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated statements of financial condition in other assets and liabilities with changes in their fair values recorded in other noninterest income.
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