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Texas Community Bancshares, Inc. - Quarter Report: 2022 September (Form 10-Q)

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File No. 001-40610

Texas Community Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

    

86-2760335

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

215 West Broad Street, Mineola, Texas

75773

(Address of Principal Executive Offices)

(Zip Code)

(903) 569-2602

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:  

 

 

 

 

Common stock, $0.01 par value per share

 

TCBS

 

The Nasdaq Stock Market LLC

(Title of Each Class)

(Trading Symbol(s))

 

(Name of Each Exchange on Which Registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.   YES      NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   YES     NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No  

There were 3,296,843 shares, par value $0.01 per share, of the Registrant’s common stock outstanding as of November 9, 2022.

Table of Contents

Texas Community Bancshares, Inc.

Form 10-Q

Table of Contents

    

    

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

1

Consolidated Statements of Financial Condition at September 30, 2022 (unaudited) and December 31, 2021

1

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

2

Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

3

Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)

5

Notes to Consolidated Financial Statements (unaudited)

6

Item 2.

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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4.

Controls and Procedures

45

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

45

Item 6.

Exhibits

46

Signatures

47

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.        Financial Statements

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of Financial Condition

September 30, 2022 and December 31, 2021

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

    

September 30, 

    

December 31, 

2022

2021

(unaudited)

Assets

  

  

Cash and due from banks

 

$

4,345

 

$

5,651

Federal funds sold

4,523

16,264

Cash and cash equivalents

8,868

21,915

Interest bearing deposits in banks

359

14,955

Securities available for sale

78,340

56,800

Securities held to maturity (fair values of $25,597 at September 30, 2022 and $33,673 at December 31, 2021)

28,821

33,682

Loans receivable, net of allowance for loan and lease losses of $1,686 at September 30, 2022 and $1,592 at December 31, 2021

240,120

220,162

Net investment in direct financing leases

64

105

Accrued interest receivable

1,065

931

Premises and equipment

6,325

6,215

Bank-owned life insurance

6,094

6,020

Foreclosed assets

209

Restricted investments carried at cost

2,102

2,037

Core deposit intangible

430

529

Mortgage servicing rights

7

8

Deferred income taxes

2,275

651

Other assets

827

607

$

375,697

$

364,826

Liabilities and Shareholders' Equity

  

  

Liabilities

  

  

Noninterest bearing

$

48,715

$

40,576

Interest bearing

233,486

234,357

Total deposits

282,201

274,933

Advances from Federal Home Loan Bank (FHLB)

35,015

27,571

Accrued expenses and other liabilities

2,854

2,190

Total liabilities

320,070

304,694

Shareholders' Equity

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

Common stock, $0.01 par value, 19,000,000 shares authorized, 3,296,843 shares issued and outstanding

33

33

Additional paid in capital

31,019

30,932

Retained earnings

33,675

32,329

Accumulated other comprehensive loss

(6,722)

(686)

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

(2,378)

(2,476)

Total shareholders' equity

55,627

60,132

$

375,697

$

364,826

See Notes to Consolidated Financial Statement

1

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2022

    

2021

    

2022

    

2021

Interest Income

  

 

  

 

Loans, including fees

$

2,531

$

2,392

$

7,336

$

7,196

Debt securities

 

  

 

 

 

Taxable

 

562

 

172

 

1,307

 

472

Non taxable

 

39

 

21

 

114

 

88

Dividends on restricted investments

 

9

 

6

 

20

 

15

Federal funds sold

 

41

 

12

 

80

 

17

Deposits with banks

 

15

 

10

 

34

 

45

Total interest income

 

3,197

 

2,613

 

8,891

 

7,833

Interest Expense

 

  

 

  

Deposits

 

300

 

362

 

908

 

1,152

Advances from FHLB

 

144

 

151

 

429

 

468

Other

 

3

 

3

 

8

 

8

Total interest expense

 

447

 

516

 

1,345

 

1,628

Net Interest Income

 

2,750

 

2,097

 

7,546

 

6,205

Provision for Loan and Lease Losses

 

48

 

14

 

125

 

44

Net Interest Income After Provision for Loan and Lease Losses

 

2,702

 

2,083

 

7,421

 

6,161

Noninterest Income

 

  

 

  

Service charges on deposit accounts

 

166

 

159

 

496

 

412

Other service charges and fees

 

261

 

260

 

795

 

752

Net gain (loss) on securities transactions

 

 

 

(29)

 

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

 

42

 

 

42

 

Net appreciation on bank-owned life insurance

 

26

 

27

 

75

 

80

Other income

 

4

 

6

 

22

 

16

Total noninterest income

 

499

 

452

 

1,401

 

1,260

Noninterest Expenses

 

  

 

  

Salaries and employee benefits

 

1,494

 

1,316

 

4,263

 

3,808

Occupancy and equipment expense

 

188

 

174

 

564

 

542

Data processing

 

225

 

196

 

619

 

644

Contract services

 

52

 

125

 

130

 

416

Director fees

 

96

 

75

 

287

 

231

Other expense

 

481

 

883

 

1,285

 

1,501

Total noninterest expenses

 

2,536

 

2,769

 

7,148

 

7,142

Income (Loss) Before Income Taxes

 

665

 

(234)

 

1,674

 

279

Income Tax Expense (Benefit)

 

126

 

(36)

 

328

 

47

Net Income (Loss)

$

539

$

(198)

$

1,346

$

232

Earnings (loss) per share - basic

$

0.18

$

(0.07)

$

0.45

$

0.08

Earnings (loss) per share - diluted

$

0.18

$

(0.07)

$

0.45

$

0.08

Weighted-average shares outstanding - basic

3,029,465

2,999,612

3,017,817

2,999,612

Weighted-average shares outstanding - diluted

3,029,465

2,999,612

3,017,817

2,999,612

See Notes to Consolidated Financial Statements

2

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Net Income (Loss)

$

539

$

(198)

$

1,346

$

232

Other items of comprehensive (loss) income

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

 

(1,563)

 

51

 

(7,669)

 

10

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

 

 

 

29

 

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

 

(1,563)

 

51

 

(7,640)

 

10

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

 

328

 

(11)

 

1,604

 

(2)

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

 

(1,235)

 

40

 

(6,036)

 

8

Comprehensive (Loss) Income

$

(696)

$

(158)

$

(4,690)

$

240

See Notes to Consolidated Financial Statements

3

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

    

    

    

    

Accumulated

    

    

Additional

Other

Unearned

Total

Preferred

Common

Paid In

Retained

Comprehensive

ESOP

Shareholders'

Three Months Ended September 30, 2022 and 2021

Stock

Stock

Capital

Earnings

(Loss) Income

Shares

Equity

Balance at July 1, 2022

$

$

33

$

30,978

$

33,136

$

(5,487)

$

(2,411)

$

56,249

Net Income

 

 

 

 

539

 

 

 

539

Stock based compensation expense

21

21

Net changes in fair value of available for sale securities, net of tax benefit of $328

 

 

 

 

 

(1,235)

 

 

(1,235)

ESOP shares committed to be released, 3,258 shares

 

 

 

20

 

 

 

33

 

53

Balance at September 30, 2022

$

$

33

$

31,019

$

33,675

$

(6,722)

$

(2,378)

$

55,627

Balance at July 1, 2021

$

$

$

(748)

$

32,241

$

96

$

$

31,589

Net Loss

 

 

 

 

(198)

 

 

 

(198)

Stock Issuance, net of conversion costs of $936

33

31,646

31,679

Net changes in fair value of available for sale securities, net of tax expense of $11

 

 

 

 

 

40

 

 

40

Leveraged ESOP Shares, 2,606,210 shares

 

 

 

 

 

 

(2,606)

 

(2,606)

ESOP shares committed to be released, 6,515 shares

 

 

 

 

 

 

65

 

65

Balance at September 30, 2021

$

$

33

$

30,898

$

32,043

$

136

$

(2,541)

$

60,569

    

    

    

    

    

Accumulated

    

    

Additional

Other

Unearned

Total

Preferred

Common

Paid In

Retained

Comprehensive

ESOP

Shareholders'

Nine Months Ended September 30, 2022 and 2021

Stock

Stock

Capital

Earnings

(Loss) Income

Shares

Equity

Balance at January 1, 2022

$

$

33

$

30,932

$

32,329

$

(686)

$

(2,476)

$

60,132

Net income

 

 

 

1,346

 

 

 

1,346

Stock based compensation expense

21

21

Net changes in fair value of available for sale securities, net of tax benefit of $1,604

 

 

 

 

 

(6,036)

 

 

(6,036)

ESOP shares committed to be released, 9,774 shares

 

 

 

66

 

 

 

98

 

164

Balance at September 30, 2022

$

$

33

$

31,019

$

33,675

$

(6,722)

$

(2,378)

$

55,627

Balance at January 1, 2021

$

$

$

$

31,811

$

128

$

$

31,939

Net income

 

 

 

 

232

 

 

 

232

Stock issuance, net of conversion costs of $1,684

33

30,898

30,931

Net changes in fair value of available for sale securities, net of tax expense of $2

 

 

 

 

 

8

 

 

8

Leveraged ESOP shares, 2,606,210 shares

 

 

 

 

 

 

(2,606)

 

(2,606)

ESOP shares earned, 6,515 shares

 

 

 

 

 

 

65

 

65

Balance at September 30, 2021

$

$

33

$

30,898

$

32,043

$

136

$

(2,541)

$

60,569

See Notes to Consolidated Financial Statements

4

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2022 and 2021

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

Nine Months Ended

September 30, 

    

2022

    

2021

Operating Activities

 

  

 

  

Net income

$

1,346

$

232

Adjustments to reconcile net income to net cash from operating activities

 

  

 

  

Provision for loan and lease losses

 

125

 

44

Net amortization of securities

 

355

 

318

Depreciation and amortization

 

324

 

328

Net realized loss on sale of investment securities

 

29

 

Loss on sale of fixed assets

 

10

 

Stock based compensation

 

21

 

Gain on sale of other real estate owned

 

(42)

 

Appreciation on bank-owned life insurance

 

(75)

 

(80)

ESOP compensation expense for allocated shares

164

Deferred income tax

 

(20)

 

(187)

Net change in

 

 

  

Accrued interest receivable

 

(134)

 

173

Mortgage servicing rights

 

 

4

Other assets

 

(219)

 

(118)

Accrued expenses and other liabilities

 

663

 

4,050

Net Cash from Operating Activities

 

2,547

 

4,764

Investing Activities

 

  

 

  

Net change in interest bearing deposits in banks

 

14,596

 

(4,556)

Activity in available for sale securities

Purchases

 

(44,465)

 

(26,444)

Sales

 

10,822

 

Maturities, prepayments and calls

 

4,209

 

3,363

Activity in held to maturity securities

 

  

 

Purchases

 

 

(13,839)

Maturities, prepayments and calls

 

4,732

 

11,914

Purchases of restricted investments

 

(65)

 

(10)

Loan originations and principal collections, net

 

(20,075)

 

(3,538)

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

 

41

 

(73)

Proceeds from sales of OREO and foreclosed assets

 

243

 

Purchases of premises and equipment

 

(344)

 

(138)

Net Cash used for Investing Activities

 

(30,306)

 

(33,321)

Financing Activities

 

  

 

  

Net increase in deposits

 

7,268

 

29,335

Advances from FHLB and other borrowings

 

9,000

 

Payments on long-term FHLB and other borrowings

 

(1,556)

 

(2,684)

Proceeds from issuance of common stock net of conversion costs

 

 

30,997

Loan to ESOP for purchase of common stock

 

 

(2,606)

Net Cash from Financing Activities

 

14,712

 

55,042

Net Change in Cash and Cash Equivalents

 

(13,047)

 

26,485

Cash and Cash Equivalents at Beginning of Period

 

21,915

 

8,073

Cash and Cash Equivalents at End of Period

$

8,868

$

34,558

See Notes to Consolidated Financial Statements

5

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

(Amounts in thousands, except 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 to become the holding company for Mineola Community Bank, SSB (the “Bank”) upon the conversion of Mineola Community Mutual Holding Company (“MHC”) from a mutual holding company to a stock holding company (the “Conversion”). The Conversion was completed on July 14, 2021. The Company’s shares began trading on the NASDAQ under the symbol TCBS on July 15, 2021. In connection with the Conversion, the Company acquired 100% ownership of the Bank and the Company offered and sold 3,207,759 shares of its common stock at $10.00 per share, for gross offering proceeds of $32,078. The cost of the conversion and issuance of common stock was approximately $1,684, which was deducted from the gross offering proceeds. The Company also contributed 50,000 shares of its common stock and $75 of cash to Texas Community Bancshares Foundation, Inc. (the “Foundation”), a charitable foundation formed in connection with the Conversion. The Bank’s employee stock ownership plan purchased 260,621 shares of the common stock sold by the Company, which was 8% of the 3,257,759 shares of common stock issued by the Company, including the shares contributed to the Foundation. The ESOP purchased the shares using a loan from the Company. The Company contributed $15,276 of the net proceeds from the offering to the Bank, loaned $2,606 of the net proceeds to the ESOP, contributed $75 to the Foundation and retained approximately $12,436 of the net proceeds.

Following the Conversion, voting rights in the Company are held and exercised exclusively by the shareholders of the Company. Deposit account holders continue to be insured by the FDIC. In connection with the Conversion, liquidation accounts were established by the Company and the Bank in an aggregate amount equal to (i) the MHC’s ownership interest in the shareholders’ equity of Mineola Community Financial Group, Inc. (the former subsidiary holding company of the Bank) as of the date of the latest statement of financial condition included in the Company’s definitive prospectus dated May 14, 2021, plus (ii) the value of the net assets of the MHC as of the date of the MHC’s latest statement of financial condition before the consummation of the Conversion (excluding the MHC’s ownership interest in Mineola Community Financial Group, Inc.). Each eligible account holder and supplemental eligible account holder is entitled to a proportionate share of the liquidation accounts in the event of a liquidation of (i) the Company and the Bank or (ii) the Bank, and only in such events. This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after conversion in the related deposit balance. The Bank may not pay a dividend on its capital stock if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements. In addition, the Company is subject to certain regulations related to the payment of dividends and the repurchase of its capital stock.

The Conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

The Bank’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:

6

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Interim Financial Statements

The interim unaudited consolidated financial statements as of September 30, 2022, and for the three and nine months ended September 30, 2022 and 2021, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments contained in these unaudited consolidated financial statements. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission, and therefore certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted. The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2022, or any other period. Certain prior period data presented in the consolidated financial statements has been reclassified to conform with the current period presentation. The accompanying consolidated financial statements have been derived from and should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company for the year ended December 31, 2021. Reference is made to the accounting policies of the Company described in the Notes to Consolidated Financial Statements contained in Form 10-K for the year ended December 31, 2021.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Mineola Community Bank, S.S.B. 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 loan and lease losses.

7

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Stock Incentive Plan

Compensation cost is recognized for stock options and restricted stock awards issued to directors, based on the fair value of these awards at the date of the grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of the grant is used for restricted stock awards.

Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted–average number of common shares outstanding during the period, including allocated and committed-to-be-released ESOP shares and restricted stock awards granted on August 31, 2022, during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. There were no dilutive shares as of September 30, 2022.

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

    

Three Months Ended

Nine Months Ended

    

September 30,

September 30,

    

2022

    

2021

2022

2021

Net Income (Loss)

$

539

$

(198)

$

1,346

$

232

Weighted average shares outstanding for basic earnings per share:

 

  

 

  

 

  

 

  

Average shares outstanding

 

3,270,504

 

3,257,759

 

3,262,054

 

3,257,759

Less: average unearned ESOP shares

 

(241,039)

 

(258,147)

 

(244,237)

 

(258,147)

Weighted average shares outstanding for basic earnings per share

 

3,029,465

 

2,999,612

 

3,017,817

 

2,999,612

Additional dilutive shares

 

 

 

 

Weighted average shares outstanding for dilutive earnings per share

 

3,029,465

 

2,999,612

 

3,017,817

 

2,999,612

Basic and dilutive earnings (loss) per share

$

0.18

$

(0.07)

$

0.45

$

0.08

8

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Note 2 -    Debt Securities

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

September 30, 2022

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Available for Sale

    

Cost

    

Gains

    

Losses

    

Value

Debt Securities:

 

  

 

  

 

  

 

  

Residential mortgage-backed

$

16,437

$

$

(1,663)

$

14,774

Collateralized mortgage obligations

 

32,063

 

107

 

(2,031)

 

30,139

State and municipal

 

16,419

 

 

(2,543)

 

13,876

Corporate bonds

 

5,750

 

11

 

(802)

 

4,959

U.S. Government and agency

 

16,179

 

 

(1,587)

 

14,592

Total securities available for sale

$

86,848

$

118

$

(8,626)

$

78,340

Held to Maturity

 

  

 

  

 

  

 

  

Debt Securities:

 

  

 

  

 

  

 

  

Residential mortgage-backed

$

26,804

$

$

(3,157)

$

23,647

State and municipal

 

2,017

 

 

(67)

 

1,950

Total securities held to maturity

$

28,821

$

$

(3,224)

$

25,597

December 31, 2021

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Available for Sale

    

Cost

    

Gains

    

Losses

    

Value

Debt Securities:

 

  

 

  

 

  

 

  

Residential mortgage-backed

$

19,073

$

113

$

(401)

$

18,785

Collateralized mortgage obligations

 

11,202

 

 

(126)

 

11,076

State and municipal

 

11,670

 

36

 

(167)

 

11,539

Corporate bonds

 

2,500

 

 

(94)

 

2,406

U.S. Government and agency

 

13,224

 

 

(230)

 

12,994

Total securities available for sale

$

57,669

$

149

$

(1,018)

$

56,800

Held to Maturity

 

  

 

  

 

  

 

  

Debt Securities:

 

  

 

  

 

  

 

  

Residential mortgage-backed

$

31,277

$

374

$

(392)

$

31,259

State and municipal

 

2,405

 

15

 

(6)

 

2,414

Total securities held to maturity

$

33,682

$

389

$

(398)

$

33,673

During the three months ended September 30, 2022, there were no sales of securities. During the nine months ended September 30, 2022, the Company had sales of available for sale securities of $10,822 with a loss of $29. During the three and nine months ended September 30, 2021, the Company had no sales of available for sale securities or held to maturity securities.

At September 30, 2022 and December 31, 2021, securities with a carrying value of $3,182 and $2,745, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

9

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2022, follows:

Available for Sale

Held to Maturity

Estimated

Estimated

Amortized

Fair

Amortized

Fair

    

Cost

    

Value

    

Cost

    

Value

Due in one year

$

$

$

$

Due from one to five years

 

14,159

 

12,939

 

765

 

762

Due in five to ten years

 

17,605

 

15,258

 

134

 

117

After ten years

 

6,584

 

5,230

 

1,118

 

1,071

Residential mortgage-backed

 

16,437

 

14,774

 

26,804

 

23,647

Collateralized mortgage obligations

 

32,063

 

30,139

 

 

Total

$

86,848

$

78,340

$

28,821

$

25,597

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

September 30, 2022

Less than 12 months

12 months or longer

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Category (number of securities)

    

Value

    

Losses

    

Value

    

Losses

Residential mortgage-backed (73,14)

$

24,816

$

(2,561)

$

13,607

$

(2,259)

Collateralized mortgage obligations (13)

 

23,183

 

(2,031)

 

 

State and municipal (23,1)

 

14,754

 

(2,564)

 

1,072

 

(46)

Corporate bonds (11)

 

4,448

 

(802)

 

 

U.S. Government and agency (7,7)

 

8,337

 

(820)

 

6,255

 

(767)

Total

$

75,538

$

(8,778)

$

20,934

$

(3,072)

December 31, 2021

Less than 12 months

12 months or longer

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Category (number of securities)

    

Value

    

Losses

    

Value

    

Losses

Residential mortgage-backed (20,5)

$

22,903

$

(624)

$

5,666

$

(169)

Collateralized mortgage obligations (5)

 

11,076

 

(126)

 

 

State and municipal (9)

 

8,416

 

(173)

 

 

Corporate bonds (2)

 

906

 

(94)

 

 

U.S. Government and agency (13)

 

12,994

 

(230)

 

 

Total

$

56,295

$

(1,247)

$

5,666

$

(169)

10

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Mortgage-backed Securities

The unrealized losses on the Company’s investments in residential mortgage-backed securities and collateralized mortgage obligations were caused by market interest rate increases and decreases in prepayment speeds. Interest rates have risen sharply throughout 2022 and caused increases in unrealized losses on securities. The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements. The contractual cash flows of many of these investments are guaranteed by agencies of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in market interest rates and decreases in prepayment speeds and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

U.S. Government and Agency

The unrealized losses on the Company’s investments in U.S. government and agency securities were caused by market interest rate increases. Interest rates have risen sharply throughout 2022 and caused increases in unrealized losses on securities. The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

Municipal Securities and Corporate Bonds

The unrealized losses on the Company’s investments in state and municipal securities and corporate bonds were caused by market interest rate increases. Interest rates have risen sharply throughout 2022 and caused increases in unrealized losses on securities. The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) evaluation by the Company of (a) its intent to sell a debt security prior to recovery and (b) whether it is more likely than not the Company will have to sell the debt security prior to recovery. As of September 30, 2022 and December 31, 2021, no investment securities were other-than- temporarily impaired.

11

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Note 3 -   Loans and Leases

A summary of the balances of loans and leases follows:

September 30, 

December 31, 

    

2022

    

2021

Real estate

$

229,213

$

209,946

Agriculture

 

190

 

234

Commercial

 

7,067

 

6,141

Consumer and other

 

5,400

 

5,538

Subtotal

 

241,870

 

221,859

Less allowance for loan and lease losses

 

(1,686)

 

(1,592)

Loans and leases, net

$

240,184

$

220,267

Paycheck Protection Program Loans

In March 2020, the United States government passed legislation designed to help the nation’s economy recover from the coronavirus disease 2019 (“COVID‐19”) pandemic. This legislation is called the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which provides economy‐wide financial stimulus in the form of financial aid to individuals, businesses, nonprofit entities, states and municipalities. The CARES Act temporarily added a new program titled the “Paycheck Protection Program” (PPP) to the U.S. Small Business Administration’s loan program. The CARES Act permits the SBA to guarantee 100 percent of these loans and also provides for forgiveness of up to the full principal amount of these loans. As of September 30, 2022, the Company originated $5,484 in PPP loans of which $5,479 had been forgiven. Additionally, the Company recognized $0 and $5 of PPP loan interest in interest income during the nine months ended September 30, 2022 and 2021, respectively, and $0 and $1 for the three months ended September 30, 2022 and 2021, respectively.

12

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The following tables set forth information regarding the activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2022 and 2021 and the year ended December 31, 2021:

    

September 30, 2022

    

    

    

    

Consumer 

    

Real Estate

Agriculture

Commercial

and Other

Total

Allowance for loan and lease losses:

  

 

  

 

  

 

  

 

  

Three-months ended

Beginning balance, July 1, 2022

$

1,208

$

1

$

367

$

63

$

1,639

Charge-offs

 

 

 

 

(8)

 

(8)

Recoveries

 

 

 

 

7

 

7

Provision (credit)

 

53

 

 

 

(5)

 

48

Ending balance, September 30, 2022

$

1,261

$

1

$

367

$

57

$

1,686

Nine-months ended

  

 

  

 

  

 

  

 

  

Balance, January 1, 2022

$

1,178

$

1

$

357

$

56

$

1,592

Charge-offs

 

 

 

 

(44)

 

(44)

Recoveries

 

 

 

 

13

 

13

Provision

 

83

 

 

10

 

32

 

125

Balance, September 30, 2022

$

1,261

$

1

$

367

$

57

$

1,686

Balance, September 30, 2022 allocated to loans and leases individually evaluated for impairment

$

$

$

300

$

$

300

Balance, September 30, 2022 allocated to loans and leases collectively evaluated for impairment

$

1,261

$

1

$

67

$

57

$

1,386

Loans and leases receivable:

 

  

 

  

 

  

 

  

 

  

Balance, September 30, 2022 loans and leases individually evaluated for impairment

$

998

$

$

424

$

$

1,422

Balance, September 30, 2022 loans and leases collectively evaluated for impairment

 

228,215

 

190

 

6,643

 

5,400

 

240,448

Balance, September 30, 2022

$

229,213

$

190

$

7,067

$

5,400

$

241,870

13

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

    

September 30, 2021

    

    

    

    

Consumer 

    

Real Estate

Agriculture

Commercial

and Other

Total

Allowance for loan and lease losses:

  

 

  

 

  

 

  

 

  

Three-months ended

Beginning balance, July 1, 2021

$

1,170

$

$

362

$

52

$

1,584

Charge-offs

 

 

 

 

(9)

 

(9)

Recoveries

 

 

 

 

3

 

3

Provision (credit)

 

8

 

2

 

(7)

 

11

 

14

Ending balance, September 30, 2021

$

1,178

$

2

$

355

$

57

$

1,592

Nine-months ended

  

 

  

 

  

 

  

 

  

Balance, January 1, 2021

$

1,171

$

2

$

355

$

33

$

1,561

Charge-offs

 

 

 

 

(30)

 

(30)

Recoveries

 

 

 

 

17

 

17

Provision (credit)

 

7

 

 

 

37

 

44

Balance, September 30, 2021

$

1,178

$

2

$

355

$

57

$

1,592

    

December 31, 2021

    

    

    

    

Consumer 

    

Allowance for loan and lease losses:

Real Estate

Agriculture

Commercial

and Other

Total

Balance, December 31, 2021 allocated to loans and leases individually evaluated for impairment

$

8

$

$

300

$

$

308

Balance, December 31, 2021 allocated to loans and leases collectively evaluated for impairment

$

1,170

$

1

$

57

$

56

$

1,284

Loans and leases receivable:

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2021 loans and leases individually evaluated for impairment

$

2,437

$

$

474

$

33

$

2,944

Balance, December 31, 2021 loans and leases collectively evaluated for impairment

 

207,509

 

234

 

5,667

 

5,505

 

218,915

Balance, December 31, 2021

$

209,946

$

234

$

6,141

$

5,538

$

221,859

Internal Risk Categories

The Company monitors credit quality within its portfolio segments based on primary credit quality indicators. All of the Company’s loans and leases are evaluated using pass rated or reservable criticized as the primary credit quality indicator. The term reservable criticized refers to those loans and leases that are internally classified or listed by the Company as special mention, substandard, doubtful or loss. These assets pose an elevated risk and may have a high probability of default or total loss.

The classifications of loans and leases reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits quarterly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each quarterly reporting period.

14

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits with this classification have often become collateral dependent and any shortage in collateral or other likely loss amount is recorded as a specific valuation allowance. Credits rated doubtful are generally also placed on nonaccrual.

Credits rated loss are those that are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Pass rated refer to loans that are not considered criticized. In addition to this primary credit quality indicator, the Company uses other credit quality indicators for certain types of loans.

The Company evaluates the loan risk grading system definitions and allowance for loan and lease loss methodology on an ongoing basis. No significant changes were made during the nine months ended September 30, 2022 or during the year ended December 31, 2021.

15

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The following tables set forth information regarding the internal classification of the loan and lease portfolio:

    

September 30, 2022

Special

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Loss

    

Total

Real estate

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land

$

25,513

$

507

$

94

$

$

$

26,114

Farmland

 

7,128

 

 

329

 

 

 

7,457

1‑4 residential & multi-family

 

160,670

 

9

 

1,220

 

 

 

161,899

Commercial real estate

 

33,633

 

 

110

 

 

 

33,743

Agriculture

 

190

 

 

 

 

 

190

Commercial

 

6,638

 

 

27

 

402

 

 

7,067

Consumer and other

 

5,371

 

 

29

 

 

 

5,400

Total

$

239,143

$

516

$

1,809

$

402

$

$

241,870

    

December 31, 2021

Special

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Loss

    

Total

Real estate

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land

$

17,560

$

$

90

$

$

$

17,650

Farmland

 

6,083

 

 

359

 

 

 

6,442

1‑4 residential & multi-family

 

151,708

 

556

 

1,904

 

 

 

154,168

Commercial real estate

 

30,418

 

 

1,268

 

 

 

31,686

Agriculture

 

234

 

 

 

 

 

234

Commercial

 

5,652

 

 

52

 

437

 

 

6,141

Consumer and other

 

5,478

 

12

 

48

 

 

 

5,538

Total

$

217,133

$

568

$

3,721

$

437

$

$

221,859

The following table sets forth information regarding the credit risk profile based on payment activity of the loan and lease portfolio:

    

September 30, 2022

    

December 31, 2021

Non- 

Non- 

    

Performing

    

performing

    

Total

    

Performing

    

performing

    

Total

Real estate

  

 

  

 

  

  

 

  

 

  

Construction and land

$

26,114

$

$

26,114

$

17,650

$

$

17,650

Farmland

 

7,292

 

165

 

7,457

 

6,250

 

192

 

6,442

1‑4 residential & multi-family

 

161,340

 

559

 

161,899

 

153,400

 

768

 

154,168

Commercial real estate

 

33,633

 

110

 

33,743

 

31,563

 

123

 

31,686

Agriculture

 

190

 

 

190

 

234

 

 

234

Commercial

 

6,643

 

424

 

7,067

 

5,667

 

474

 

6,141

Consumer and other

 

5,400

 

 

5,400

 

5,505

 

33

 

5,538

Total

$

240,612

$

1,258

$

241,870

$

220,269

$

1,590

$

221,859

16

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The following tables set forth information regarding the delinquencies not on nonaccrual within the loan and lease portfolio:

September 30, 2022

    

    

    

    

    

    

Recorded

90 Days

Investment

30‑89 Days

and

Total

Total

> 90 Days and

Past Due

Greater

Past Due

Current

Loans

 

Still Accruing

Real estate

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land

$

1,220

$

$

1,220

$

24,894

$

26,114

$

Farmland

 

164

 

 

164

 

7,293

 

7,457

 

1‑4 residential & multi-family

 

185

 

 

185

 

161,714

 

161,899

 

Commercial real estate

 

 

 

 

33,743

 

33,743

 

Agriculture

 

 

 

 

190

 

190

 

Commercial

 

5

 

3

 

8

 

7,059

 

7,067

 

3

Consumer and other

 

22

 

 

22

 

5,378

 

5,400

 

Total

$

1,596

$

3

$

1,599

$

240,271

$

241,870

$

3

December 31, 2021

    

    

    

    

    

    

Recorded

90 Days

Investment

30‑89 Days

and

Total

Total

> 90 Days and

Past Due

Greater

Past Due

Current

Loans

 

Still Accruing

Real estate

 

  

 

  

 

  

 

  

 

  

 

  

Construction and land

$

1,620

$

$

1,620

$

16,030

$

17,650

$

Farmland

 

 

 

 

6,442

 

6,442

 

1‑4 residential & multi-family

 

305

 

 

305

 

153,863

 

154,168

 

Commercial real estate

 

 

 

 

31,686

 

31,686

 

Agriculture

 

 

 

 

234

 

234

 

Commercial

 

30

 

 

30

 

6,111

 

6,141

 

Consumer and other

 

19

 

 

19

 

5,519

 

5,538

 

Total

$

1,974

$

$

1,974

$

219,885

$

221,859

$

The following table sets forth information regarding the nonaccrual status within the loan and lease portfolio as of September 30, 2022 and December 31, 2021:

September 30, 

    

December 31, 

2022

2021

Real estate

  

 

  

Construction and land

$

$

Farmland

165

192

1‑4 residential & multi-family

 

559

 

768

Commercial real estate

 

110

 

123

Agriculture

Commercial

 

424

 

474

Consumer and other

 

 

33

Total

$

1,258

$

1,590

17

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

A loan is considered impaired when based on current information and events; it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans (nonaccrual loans), loans performing but with deterioration that leads to doubt regarding collectability and also includes loans modified in troubled debt restructurings when concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

All interest accrued but not collected for loans that are placed on nonaccrual or charged‐off is reversed against interest income. The interest on these loans is accounted for on the cash‐basis or cost‐recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. No interest income was recognized for loans on nonaccrual status for the three and nine months ended September 30, 2022 and 2021.

The following table presents interest income recognized on impaired loans for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

2022

    

2021

Real estate

 

  

 

  

  

 

  

1-4 residential & multi-family

$

3

$

4

$

7

$

23

Commercial real estate

 

 

22

 

13

 

51

Commercial

 

 

6

 

 

20

Consumer and other

 

 

 

 

1

$

3

$

32

$

20

$

95

18

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The following table sets forth information regarding impaired loans as of September 30, 2022:

Unpaid

Average

Recorded

Principal

Related

Recorded

    

Investment

    

Balance

    

Allowance

    

Investment

With no related allowance

 

  

 

  

 

  

 

  

Real estate

 

  

 

  

 

  

 

  

Farmland

$

165

$

223

$

$

179

1‑4 residential & multi-family

 

723

 

771

 

 

850

Commercial real estate

 

110

 

117

 

 

117

Commercial

 

11

 

14

 

 

24

With a related allowance

 

  

 

 

  

 

  

Commercial

 

413

 

436

 

300

 

425

Total

 

  

 

  

 

  

 

  

Real estate

 

  

 

  

 

  

 

  

Farmland

 

165

 

223

 

 

179

1-4 residential & multi-family

 

723

 

771

 

 

850

Commercial real estate

 

110

 

117

 

 

117

Commercial

 

424

 

450

 

300

 

449

$

1,422

$

1,561

$

300

$

1,595

19

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The following table sets forth information regarding impaired loans as of December 31, 2021:

Unpaid

Average

Recorded

Principal

Related

Recorded

    

Investment

    

Balance

    

Allowance

    

Investment

With no related allowance

 

  

 

  

 

  

 

  

Real estate

 

  

 

  

 

  

 

  

Farmland

$

192

$

240

$

$

96

1‑4 residential & multi-family

 

977

 

1,027

 

 

488

Commercial real estate

 

123

 

125

 

 

62

Commercial

 

37

 

42

 

 

19

Consumer and other

 

33

 

33

 

 

17

With a related allowance

 

  

 

 

  

 

  

Real estate

 

  

 

  

 

  

 

  

Commercial real estate

 

1,145

 

1,145

 

8

 

573

Commercial

 

437

 

442

 

300

 

219

Total

 

  

 

  

 

  

 

  

Real estate

 

  

 

  

 

  

 

  

Farmland

 

192

 

240

 

 

96

1-4 residential & multi-family

 

977

 

1,027

 

 

488

Commercial real estate

 

1,268

 

1,270

 

8

 

635

Commercial

 

474

 

484

 

300

 

238

Consumer and other

 

33

 

33

 

 

17

$

2,944

$

3,054

$

308

$

1,474

During the nine months ended September 30, 2022, there were no modifications resulting in troubled debt restructurings.

During the nine months ended September 30, 2022, there were no subsequently defaulted troubled debt restructurings. At September 30, 2022 and December 31, 2021, the Company had no commitments to loan additional funds to borrowers whose loans have been modified but may on occasion extend financing to these borrowers.

At September 30, 2022 and December 31, 2021, the Company had a recorded investment of $375 and $493, respectively, of troubled debt restructured loans. The Company has no current commitments to loan additional funds to the borrowers whose loans have been modified.

Note 4 -   Off-Balance-Sheet Activities

The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

20

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

At September 30, 2022 and December 31, 2021, the following financial instruments were outstanding whose contract amounts represent credit risk:

    

Contract Amount

    

September 30, 

    

December 31, 

2022

2021

Commitments to extend credit

$

40,794

$

27,374

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

The Company is party to an agreement with the Federal Reserve Bank of Boston that provides the Company with a federal funds line of credit in an amount tied to securities on deposit with that bank. The Company pays no fees for this line of credit and has not drawn upon it. The Company is party to agreements with its correspondent banks that provide the Company with lines for up to $15,000 federal funds line of credit to support overnight funding needs. The Company pays no fees for this line of credit and has not drawn upon it. The lines renew annually. At September 30, 2022, the Company had unused borrowing capacity of $100,500 with the Federal Home Loan Bank of Dallas.

At September 30, 2022, the Company had no commitments to purchase securities.

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

Note 5 -   Supplemental Cash Flow Information

Supplemental disclosure of cash flow information is as follows:

Nine Months Ended

September 30, 

    

2022

    

2021

Supplemental cash flow information:

 

  

 

  

Loan originations to facilitate the sale of foreclosed assets

 

$

8

$

Cash paid for

 

  

 

Interest on deposits

$

924

$

1,190

Interest on FHLB advances

 

429

 

472

Other interest

 

8

 

8

Income taxes

 

190

 

275

Note 6 -   Minimum Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions

21

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.

The Bank has opted into the Community Bank Leverage Ratio (CBLR) framework, beginning with the Call Report filed for the first quarter of 2020. At September 30, 2022 and December 31, 2021, the Bank’s CBLR ratio was 13.00% and 12.89%, respectively, which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be “well-capitalized.”

Under the CLBR framework, banks and their bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, are eligible to opt into the CBLR framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules (generally applicable capital rules) and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Accordingly, beginning January 1, 2022, qualifying community banking organizations that exceed the 9% CBLR are considered to have met: (i) the generally applicable risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; (iii) any other applicable capital or leverage requirements. A qualifying community banking organization that elects to be under the CBLR framework generally would be exempt from the current capital framework, including risk-based capital requirements and capital conservation buffer requirements.

On April 6, 2020, the federal banking regulators, implementing the applicable provisions of the CARES Act, issued interim rules which modified the CBLR framework so that: (i) beginning second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (ii) community banking organizations had until January 1, 2022 before the CBLR requirement is reestablished at greater than 9%. Under the interim rules, the minimum CBLR was 8% beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The interim rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable community bank leverage ratio.

Note 7 -   Fair Value Measurements

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Authoritative guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information

22

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs – Significant unobservable inputs that reflect an entitys own assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. There were no changes in valuation techniques during either the nine months ended September 30, 2022 or the year ended December 31, 2021.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market- based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Available for Sale Securities – Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things.

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.

23

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Foreclosed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based upon primarily third-party appraisals, less estimated costs to sell. The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Such discounts are typically significant and result in Level 3 classification of the inputs for determining fair value. Foreclosed assets are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same or similar factors above.

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

Inputs

Inputs

Inputs

Fair Value

Financial assets

 

  

 

  

 

  

 

  

Available for sale securities

 

  

 

  

 

  

 

  

Residential mortgage-backed

$

$

14,774

$

$

14,774

Collateralized mortgage obligations

30,139

30,139

State and municipal

 

 

13,876

 

 

13,876

Corporate bonds

4,959

4,959

U.S. Government and agency

 

 

14,592

 

 

14,592

Total financial assets

$

$

78,340

$

$

78,340

December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

Inputs

Inputs

Inputs

Fair Value

Financial assets

 

  

 

  

 

  

 

  

Available for sale securities

 

  

 

  

 

  

 

  

Residential mortgage-backed

$

$

18,785

$

$

18,785

Collateralized mortgage obligations

11,076

11,076

State and municipal

 

 

11,539

 

 

11,539

Corporate bonds

2,406

2,406

U.S. Government and agency

 

 

12,994

 

 

12,994

Total financial assets

$

$

56,800

$

$

56,800

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

24

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The following table summarizes financial and non-financial assets measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

    

September 30, 2022

Level 1

Level 2

Level 3

Total Fair

    

Inputs

    

Inputs

    

Inputs

    

Value

Financial assets

 

  

 

  

 

  

 

  

Impaired loans

$

$

$

113

$

113

$

$

$

113

$

113

    

December 31, 2021

Level 1

Level 2

Level 3

Total Fair

    

Inputs

    

Inputs

    

Inputs

    

Value

Financial assets

Impaired loans

$

$

$

1,274

$

1,274

Nonfinancial assets

 

  

 

  

 

  

 

  

Foreclosed assets

 

 

 

209

 

209

$

$

$

1,483

$

1,483

During the nine months ended September 30, 2022 and the year ended December 31, 2021, certain impaired loans were remeasured and reported at fair value through a specific allocation of the allowance for loan and lease losses based upon the fair value of the underlying collateral. At September 30, 2022, impaired loans with a carrying value of $413 were reduced by specific valuation allowance allocations totaling $300 to a reported fair value of $113. At December 31, 2021, impaired loans with a carrying value of $1,582 were reduced by specific valuation allowance allocations totaling $308 to a reported fair value of $1,274. The fair value of impaired loans is determined based on collateral valuations utilizing Level 3 valuation inputs. There was no charge to the provision for loan and lease losses as a result of the valuation allowances for the three and nine months ended September 30, 2022 and 2021.

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

    

    

    

Significant

    

Range of

 

Fair Value at

Principal Valuation

Unobservable

Significant Input

 

Instrument

September 30, 2022

Technique

Inputs

Values

 

Impaired loans

$

113

 

Appraisal of collateral (1)

 

Appraisal adjustment

 

10-25

%

25

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

    

    

    

Significant

    

Range of

 

Fair Value at

Principal Valuation

Unobservable

Significant Input

 

Instrument

December 31, 2021

Technique

Inputs

Values

 

Impaired loans

$

1,274

 

Appraisal of collateral (1)

 

Appraisal adjustment

 

10-25

%

Foreclosed assets

$

209

 

Appraisal of collateral (1)

 

Appraisal adjustment

 

10-25

%

(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

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

September 30, 2022

Level 1

Level 2

Level 3

Total

Total

    

Inputs

    

Inputs

    

Inputs

    

Fair Value

    

Carrying Value

Financial assets

Cash and cash equivalents

$

8,868

$

$

$

8,868

$

8,868

Interest bearing deposits in banks

 

359

 

 

 

359

 

359

Securities held to maturity

 

 

25,597

 

 

25,597

 

28,821

Loans, net

 

 

 

239,962

 

239,962

 

240,120

Net investment in direct financing leases

 

 

64

 

64

 

64

Interest receivable

 

1,065

 

 

 

1,065

 

1,065

Restricted investments carried at cost

 

 

2,102

 

 

2,102

 

2,102

Mortgage servicing rights

 

 

 

7

 

7

 

7

Financial liabilities

 

  

 

  

 

  

 

  

 

  

Deposits

 

 

 

281,835

 

281,835

 

282,201

FHLB advances

 

 

 

33,922

 

33,922

 

35,015

Interest payable

 

113

 

 

 

113

 

113

December 31, 2021

Level 1

Level 2

Level 3

Total

Total

    

Inputs

    

Inputs

    

Inputs

    

Fair Value

    

Carrying Value

Financial assets

Cash and cash equivalents

$

21,915

$

$

$

21,915

$

21,915

Interest bearing deposits in banks

 

14,955

 

 

 

14,955

 

14,955

Securities held to maturity

 

 

33,673

 

 

33,673

 

33,682

Loans, net

 

 

 

224,354

 

224,354

 

220,162

Net investment in direct financing leases

 

 

 

105

 

105

 

105

Interest receivable

 

931

 

 

 

931

 

931

Restricted investments carried at cost

 

 

2,037

 

 

2,037

 

2,037

Mortgage servicing rights

 

 

 

8

 

8

 

8

Financial liabilities

 

  

 

  

 

  

 

  

 

  

Deposits

 

 

 

274,995

 

274,995

 

274,933

FHLB advances

 

 

 

28,259

 

28,259

 

27,571

Interest payable

 

128

 

 

 

128

 

128

26

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and cash equivalents and interest-bearing deposits in banks – The carrying value approximates their fair values.

Securities held to maturity – Fair values for investment securities are based on quoted market prices or whose value is determined using discounted cash flow methodologies.

Loans and net investment in direct financing leases – The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality.

Interest receivable – The carrying value approximates its fair value.

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

Mortgage servicing rights – Fair values are estimated using discounted cash flows based on current market rates of interest.

Deposits – The fair values disclosed for demand deposits (for example, interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

FHLB advances – Current market rates for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Interest payable – The carrying value approximates the fair value.

Note 8 -   Employee Stock Ownership Plan

In connection with the Conversion, the Company established an Employee Stock Ownership Plan for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase 260,621 shares (approximately 8.0% of the common stock issued in connection with the Conversion). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Company and dividends received by the ESOP. Contributions will be applied to repay interest on the loan first, and then the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 20 years.

Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation. Participants will vest in their accrued benefits determined by the years of service for vesting purposes. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Company or the Bank. Forfeitures will be reallocated to remaining participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP.

The debt of the ESOP is eliminated in consolidation. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports the compensation expense equal to the average market price of the shares for the respective period,

27

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

and the shares become outstanding for earnings per share computations. Dividends on unallocated ESOP shares, if any, are recorded as a reduction of debt and accrued interest. ESOP compensation was $53 and $164 for the three and nine months ended September 30, 2022, respectively, and $102 for the three and nine months ended September 30, 2021.

A summary of the ESOP shares are as follows:

    

September 30, 

    

December 31, 

2022

2021

Shares allocated to participants

 

13,031

 

Shares committed to be released to participants

 

9,774

 

13,031

Unreleased shares

 

237,816

 

247,590

Total

 

260,621

 

260,621

Fair value of unreleased shares

$

3,691

$

3,838

Note 9 - Stock-Based Compensation

The Company has one equity incentive plan with two share based compensation awards as described below. Total compensation cost that has been charged against income for those plans was $21 for the three and nine months ended September 30, 2022.

Stock Option Awards

The Company’s 2022 Equity Incentive Plan (the Equity Plan), which is shareholder approved, permits the grant of stock options to its directors for up to 325,775 shares of common stock. Stock option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have vesting periods of five years and have 10-year contractual terms. The Company has a policy of using shares held as treasury stock to satisfy share option exercises. Currently, the Company does not have treasury shares and will issue new shares to satisfy expected stock option exercises.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions determined by management. Expected volatility is based on historical volatility of the Company’s common stock. The Company uses historical data when available to estimate option exercise and post-vesting termination behavior. Due to lack of historical data, the Company estimated the expected term of options granted is 7.5 years. This represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The Company’s accounting policy is to recognize forfeitures as they occur. The risk-free interest rate for the expected term of the options is based on the 7-year U.S. Treasury yield curve in effect at the time of the grants. On August 31, 2022, the non-employee directors of the Company were granted 97,728 stock options with a cost of $6.50 per option and an exercise price of $16.00. These options will vest annually over a five year period ending August 31, 2027 and will expire on August 31, 2032. Compensation expense for the stock options for the three and nine months ended September 30, 2022 was $11.

The fair value of options granted was determined using the following weighted-average assumptions as of grant date.

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

    

2022

Expected volatility

30.25

%

Expected dividends

-

%

Expected term (in years)

7.50

Risk-free rate

3.25

%

A summary of the activity in the stock option awards for 2022 follows:

Weighted-Average

Weighted-Average

Remaining

Options

    

Options

Exercise Price

    

Contractual Term

Outstanding at December 31, 2021

  

 

-

  

$

-

  

 

-

  

Granted

 

97,728

  

16.00

  

 

4.9

  

Exercised

-

-

-

Forfeited or expired

-

-

-

Outstanding at September 30, 2022

97,728

$

16.00

4.9

.

Exercisable at September 30, 2022

-

$

-

-

Weighted-Average

Grant Date

Non-Vested Options

Options

    

Fair Value

Non-vested at December 31, 2021

  

 

-

  

 

$

-

Granted

 

97,728

  

 

6.50

Vested

-

-

Exercised

-

-

Forfeited

-

-

Non-vested at September 30, 2022

97,728

$

6.50

As of September 30, 2022, there was $624,645 of total unrecognized compensation cost related to non-vested stock options granted under the plan. The cost is expected to be recognized over a weighted-average period of five years.

Restricted Stock Awards

The Equity Plan also permits the grant of restricted stock to its directors. Compensation expense for restricted stock awards is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock was determined using the closing stock price of the Company on grant date. Restricted shares fully vest on the fifth anniversary of the grant date. On August 31, 2022, the non-employee directors of the Company were granted 39,084 shares of Company stock at a fair market value of $16.00 per share. These stock awards will vest in five equal annual installments through August 31, 2027. Compensation expense for the stock awards for the three months and nine months ended September 30, 2022 was $10.

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

A summary of changes in the Company’s non-vested shares for the period follows:

Weighted-Average

Grant Date

Non-Vested Shares

Shares

    

Fair Value

Non-vested at December 31, 2021

  

 

-

 

$

-

Granted

 

39,084

 

16.00

Vested

-

-

Exercised

-

-

Forfeited

-

-

Non-vested at September 30, 2022

39,084

$

16.00

As of September 30, 2022, there was $614,922 of total unrecognized compensation cost related to non-vested restricted stock granted under the plan. The cost is expected to be recognized over a weighted-average period of five years.

Note 10 -   Recently Issued But Not Yet Effective Accounting Pronouncements

Accounting Standards Update (ASU) 2016‐13, “Financial Instruments ‐ Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016‐13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and 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 an organization’s portfolio. ASU 2016‐13 is effective for the Company on January 1, 2023. The Company has contracted with a third-party vendor recommended by the Current Expected Credit Losses (“CECL”) team. Management is analyzing loan data used in the CECL model and corresponding results for the quarter ended September 30, 2022, and re-evaluating the Company’s internal and external factors, including economic and peer data for use in the third quarter calculation. A parallel run using the new CECL model and the current allowance for loan and lease losses model will be run for the September 30, 2022 data. At this time, the CECL process and data is still being updated.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). The guidance was effective upon issuance and generally can be applied through December 31, 2022. ASU No. 2020-04 has not had and is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2021, the FASB issued ASU No. 2021-01 Reference Rate Reform (Topic 848), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. ASU 2021-01 has not had and is not expected to have a significant impact on the Company’s consolidated financial statements.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (“the Company”) consolidated financial condition at September 30, 2022 and consolidated results of operations for the three and nine months ended September 30, 2022 and 2021. It should be read in conjunction with the unaudited consolidated financial statements and the related notes appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

conditions relating to the COVID-19 pandemic, including the severity, scope and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;
government action in response to the COVID-19 pandemic and its effects on our business and operations;
general economic conditions, either nationally or in our market areas, that are worse than expected;
changes in yields on our assets resulting from changes in market interest rates;
fluctuation in the demand for construction loans in our market area due to increased cost of building materials and their availability;
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses;
estimated costs and provisions associated with the implementation of the Current Expected Credit Losses (CECL) methodology, the new standard for estimating the allowance for loan and lease losses, being greater than anticipated;
risks related to a high concentration of loans secured by real estate located in our market area;

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our ability to control costs when hiring employees in a highly competitive environment;
our ability to control cost and expenses, particularly those associated with operating a publicly traded company;
our ability to control costs and manage liquidity through a period of high inflation and rapidly rising interest rates
our ability to access cost-effective funding;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
our ability to implement and change our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of our investment securities and other financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
adverse changes in the securities or secondary mortgage markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
changes in the quality or composition of our loan or investment portfolios;
technological changes that may be more difficult or expensive than expected;
the inability of third-party providers to perform as expected;
a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
our ability to manage market risk, credit risk and operational risk;
our ability to enter new markets successfully and capitalize on growth opportunities;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or strategic plan implementation
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any

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forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Summary of Critical Accounting Policies; Critical Accounting Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The Jumpstart Our Business Startups Act of 2012 (JOBS Act) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we had the option to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. However, we have determined not to take advantage of the benefits of this extended transition period.

The following represent our critical accounting policies:

Allowance for Loan and Lease Losses. The allowance for loan and lease losses is a reserve for estimated probable credit losses on individually evaluated loans determined to be impaired as well as estimated probable credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan and lease losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan and lease losses. A provision for loan and lease losses, which is a charge against earnings, is recorded to bring the allowance for loan and lease losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for loan and lease 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 probable 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 loan and lease losses and therefore the appropriateness of the allowance for loan and lease losses could change significantly.

The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for loan and lease losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions 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 allocation of the allowance for loan and lease losses is made for analytical purposes and 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 loan and lease losses was adequate at September 30, 2022 and December 31, 2021. 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 loan and lease losses. As a result of such reviews, we may have to adjust our allowance for loan and lease losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan and lease losses as the

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process is the responsibility of the Company and any increase or decrease in the allowance is the responsibility of management.

Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.

The Company files consolidated federal income tax returns with its subsidiaries. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total Assets. Total assets were $375.7 million at September 30, 2022, an increase of $10.9 million, or 3.0%, from $364.8 million at December 31, 2021. The increase was due primarily to increases in net loans and leases of $19.8 million, or 9.0%, from $220.2 million at December 31, 2021 to $240.1 million at September 30, 2022 and an increase in securities of $16.7 million, or 18.5%, from $90.5 million at December 31, 2021 to $107.2 million at September 30, 2022, partially offset by decreases in cash, fed funds sold and deposits in banks.

Cash and Cash Equivalents. Cash and cash equivalents decreased $13.0 million, or 59.4%, to $8.9 million (which includes fed funds sold of $4.5 million) at September 30, 2022 from $21.9 million (which includes fed funds sold of $16.3 million) at December 31, 2021. This decrease was primarily the result of increases in net loans and leases of $19.8 million and increases in securities of $16.7 million, partially offset by an increase in deposits of $7.3 million and a decrease in interest bearing deposits in banks of $14.6 million.

Interest Bearing Deposits in Banks. Interest bearing deposits in banks were $359,000 at September 30, 2022 compared to $15.0 million at December 31, 2021, a decrease of $14.6 million, or 97.3%. The decrease was primarily the result of funding increases in net loans and leases of $19.8 million and increases in securities of $16.7 million, partially offset by an increase in deposits of $7.3 million and the use of cash and cash equivalents of $13.0 million.

Securities Available for Sale. Securities available for sale increased by $21.5 million, or 37.9%, to $78.3 million at September 30, 2022 from $56.8 million at December 31, 2021. The increase in securities resulted primarily from purchases of $44.5 million, sales of $10.8 million, paydowns of $4.2 million, and unrealized losses on the available for sale portfolio of $7.6 million due primarily to the increase in market interest rates during the period.

Securities Held to Maturity. Securities held to maturity decreased by $4.9 million, or 14.5%, to $28.8 million at September 30, 2022 from $33.7 million at December 31, 2021. This decrease is due primarily to principal repayments of $4.4 million and one municipal security with a principal amount of $365,000 being called.

Loans and Leases Receivable, Net. Net loans and leases receivable increased $19.8 million, or 9.0%, to $240.1 million at September 30, 2022 from $220.3 million at December 31, 2021. Loans secured by residential real estate and farmland comprise $169.4, or 70.0% of total loans at September 30, 2022. During the nine months ended September 30,

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2022, loan originations totaled $84.3 million of which $11.7 million were renewals or refinancings of existing loans with Mineola Community Bank, resulting in originations of new loans of $72.6 million. Originations consisted primarily of $29.3 million in one- to-four family residential mortgage loans, $31.5 million of residential construction loans (upon completion), including speculative construction loans of $10.5 million, $6.4 million in commercial real estate loans, $3.5 million in consumer loans, $4.1 million in commercial and industrial loans, $6.8 million in land & development loans, and $2.7 million in farmland loans. During the nine months ended September 30, 2022, there were $9.5 million in loan principal paydowns and $39.8 million in loan payoffs. PPP loans have paid down to two loans totaling $5,000 at September 30, 2022. During the nine months ended September 30, 2022, construction loans (when fully funded upon completion) increased by $18.6 million, or 79.8%, to $41.9 million at September 30, 2022 from $23.3 million at December 31, 2021 and the construction loan balance increased $10.0 million to $21.4 million at September 30, 2022. Construction loans continue to be a large segment of our loan portfolio.

Deposits. Deposits increased $7.3 million, or 2.7%, to $282.2 million at September 30, 2022 from $274.9 million at December 31, 2021. Core deposits (defined as all deposits other than certificates of deposit) increased $14.0 million, or 6.9%, to $216.4 million at September 30, 2022 from $202.4 million at December 31, 2021. Certificates of deposit decreased $6.8 million, or 9.4%, to $65.8 million at September 30, 2022 from $72.6 million at December 31, 2021. At September 30, 2022, there were no brokered deposits.

Advances from Federal Home Loan Bank. Advances from Federal Home Loan Bank increased by $7.4 million, or 26.8%, to $35.0 million at September 30, 2022 from $27.6 million at December 31, 2021 due to new advances of $12.0 million less maturities of $3 million and scheduled monthly payments of principal on amortizing advances of $1.6 million.

Total Shareholders’ Equity. Total shareholders’ equity decreased $4.5 million, or 7.5%, to $55.6 million at September 30, 2022 from $60.1 million at December 31, 2021. This decrease was primarily due to a $6.0 million, or 879.9%, change in accumulated other comprehensive loss representing decreases in the fair value of available for sale securities resulting primarily from rising market interest rates. At September 30, 2022, the accumulated other comprehensive loss was $6.7 million, compared to $686,000 at December 31, 2021, partially offset by net income of $1.3 million and an additional $164,000 added to shareholders’ equity with the commitment to release 9,774 additional ESOP shares to participants during the nine months ended September 30, 2022. In addition, there was a $21,000 charge to capital for one month of the newly adopted equity incentive plan.

At September 30, 2022, Mineola Community Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes, as permitted by the CARES Act. At September 30, 2022, a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements. At September 30, 2022, Mineola Community Bank was well capitalized and had a ratio of 13.00%.

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Average Balance Sheets

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances. Average yields for loans (excluding PPP loans) include loan fees of $90,000 and $134,000 for the three months ended September 30, 2022 and 2021, respectively. No PPP loans were originated during the three months ended September 30, 2022 or 2021. We have not recorded deferred loan fees, as we have determined them to be immaterial.

For the Three Months Ended September 30, 

 

    

2022

    

2021

 

    

Average

    

    

    

Average

    

    

 

Outstanding

Average

Outstanding

Average

 

Balance

Interest

Yield/Rate

Balance

Interest

Yield/Rate

 

(Dollars in thousands)

 

(Unaudited)

 

Interest-earning assets:

  

 

  

 

  

 

  

 

  

 

  

Loans (excluding PPP loans)

$

235,403

$

2,531

 

4.30

%  

$

219,838

$

2,391

 

4.35

%

Allowance for loan and lease losses

 

(1,640)

 

  

 

  

 

(1,590)

 

 

PPP loans

 

6

 

 

%  

 

189

 

1

 

2.12

%

Securities

 

102,671

 

601

 

2.34

%  

 

55,168

 

193

 

1.40

%

Restricted stock

 

2,044

 

9

 

1.76

%  

 

2,031

 

6

 

1.18

%

Interest-bearing deposits in banks

 

3,158

 

15

 

1.90

%  

 

16,963

 

10

 

0.24

%

Federal funds sold

 

7,856

 

41

 

2.09

%  

 

40,393

 

12

 

0.12

%

Total interest-earning assets

 

349,498

 

3,197

 

3.66

%  

 

332,992

 

2,613

 

3.14

%

Noninterest-earning assets

 

21,626

 

  

 

  

 

21,180

 

  

 

Total assets

$

371,124

 

  

 

  

$

354,172

 

  

 

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

Interest-bearing demand deposits

$

75,856

 

70

 

0.37

%  

$

71,668

 

60

 

0.33

%

Regular savings and other deposits

 

81,271

 

71

 

0.35

%  

 

71,311

 

66

 

0.37

%

Money market deposits

 

12,165

 

11

 

0.36

%  

 

9,281

 

7

 

0.30

%

Certificates of deposit

 

67,060

 

148

 

0.88

%  

 

75,418

 

229

 

1.21

%

Total interest-bearing deposits

 

236,352

 

300

 

0.51

%  

 

227,678

 

362

 

0.64

%

Advances from FHLB

 

27,342

 

144

 

2.11

%  

 

28,279

 

151

 

2.12

%

Other liabilities

 

508

 

3

 

2.36

%  

 

410

 

3

 

2.93

%

Total interest-bearing liabilities

 

264,202

 

447

 

0.68

%  

 

256,367

 

516

 

0.80

%

Noninterest-bearing demand deposits

 

59,315

 

  

 

  

 

48,569

 

  

 

  

Other noninterest-bearing liabilities

 

4,318

 

  

 

  

 

4,421

 

  

 

  

Total liabilities

 

327,835

 

  

 

  

 

309,357

 

  

 

  

Total shareholders’ equity

 

43,289

 

  

 

  

 

44,815

 

  

 

  

Total liabilities and shareholders' equity

$

371,124

 

  

 

  

$

354,172

 

  

 

  

Net interest income

 

  

$

2,750

 

  

 

  

$

2,097

 

  

Net interest rate spread (1)

 

  

 

  

 

2.98

%  

 

  

 

  

 

2.33

%

Net interest-earning assets (2)

$

85,296

 

  

 

$

76,625

 

  

 

  

Net interest margin (3)

 

  

 

  

 

3.15

%  

 

  

 

  

 

2.52

%

Average interest-earning assets to interest-bearing liabilities

 

  

 

  

 

132.28

%  

 

  

 

  

 

129.89

%

(1)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)Net interest margin represents net interest income divided by average total interest-earning assets.

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Comparison of the Operating Results for the Three Months Ended September 30, 2022 and September 30, 2021

Net Income. Net income was $539,000 for the three months ended September 30, 2022, compared to a net loss of $198,000 for the three months ended September 30, 2021, an increase of $737,000, or 372.2%. The increase was primarily due to a $653,000, or 31.1%, increase in net interest income and a $280,000, or 12.2%, increase in net noninterest income, partially offset by a $34,000 increase in the provision for loan and lease losses and a $162,000 increase in income tax expense.

Interest Income. Interest income increased by $584,000, or 22.5%, to $3.2 million for the three months ended September 30, 2022 from $2.6 million for the three months ended September 30, 2021. This was primarily the result of increased interest income on securities due to an increased average balance increase of 86.1% and an increase in yield of 67.1% and increased loan interest from an increased average balance of 7.1%. Average interest earning assets overall increased by $16.5 million, or 5.0%, from $333.0 million at September 30, 2021 to $349.5 million at September 30, 2022, and the yield on those assets increased by 52 basis points, or 16.6%, from 3.14% for the three months ended September 30, 2021 to 3.66% for the three months ended September 30, 2022.

Interest income on loans (excluding PPP loans) increased $140,000, or 5.8%, from $2.4 million for the three months ended September 30, 2021 to $2.5 million for the three months ended September 30, 2022. This was primarily due to an increase of $15.6 million, or 7.1%, in the average balance of the loan portfolio to $235.4 million for the three months ended September 30, 2022 from $219.8 million for the three months ended September 30, 2021 being offset by a decrease of five basis points, or 1.1%, in the average yield on loans from 4.35% for the three months ended September 30, 2021 to 4.30% for the three months ended September 30, 2022. In the three months ending September 30, 2021, we originated more loans with fees that were included in interest income than in the three months ending September 30, 2022 and although loan rates have increased, we had not originated enough loans at the higher rates at September 30, 2022 to increase the weighted average cost of the entire loan portfolio.

Interest income on securities increased $408,000, or 211.4%, from $193,000 for the three months ended September 30, 2021 to $601,000 for the three months ended September 30, 2022. This increase resulted from an increase of 94 basis points, or 67.1%, in yield from 1.40% for the three months ended September 30, 2021 to 2.34% for the three months ended September 30, 2022 and an increase in average securities of $47.5 million, or 86.1%, from $55.2 million for the three months ended September 30, 2021 to $102.7 million for the three months ended September 30, 2022. The rate increase is reflective of the rise in market interest rates in the overall market and diversification of the securities portfolio as the Company continued to invest the net proceeds of the conversion stock offering over the periods compared.

Interest income from interest bearing deposits in banks increased $5,000, or 50.0%, from $10,000 for the three months ended September 30, 2021 to $15,000 for the three months ended September 30, 2022. This increase resulted primarily from an increase in average yield of 166 basis points, or 691.7%, from 0.24% for the three months ended September 30, 2021 to 1.90% for the three months ended September 30, 2022, partially offset by a decrease in the average interest bearing deposits in banks of $13.8 million, or 81.2%, from $17.0 million for the three months ended September 30, 2021 to $3.2 million for the three months ended September 30, 2022. There was also an increase in fed funds interest income of $29,000, or 241.7%, resulting from a 197 basis points, or 1,641.7%, increase in average yield on fed funds sold from 0.12% for the three months ended September 30, 2021 to 2.09% for the three months ended September 30, 2022, partially offset by a $32.5 million, or 80.4%, decrease in average fed funds balances from $40.4 million for the three months ended September 30, 2021 to $7.9 million for the three months ended September 30, 2022.

Interest Expense. Total interest expense decreased $69,000, or 13.4%, to $447,000 for the three months ended September 30, 2022 from $516,000 for the three months ended September 30, 2021 due primarily to a decrease in the average cost of interest-bearing liabilities of 12 basis points, or 15.0%, from 0.80% for the three months ended September 30, 2021 to 0.68% for the three months ended September 30, 2022, primarily due to decreased deposit costs for the period as a result of lower deposit rates in the last quarter of 2021 and the first half of 2022. Interest expense on deposit accounts decreased $62,000, or 17.1%, to $300,000 for three months ended September 30, 2022 from $362,000 for the three months ended September 30, 2021, due to a decrease in the average deposit cost of 13 basis points, or 20.3%, from 0.64% for the three months ended September 30, 2021 to 0.51% for the three months ended September 30,

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2022, primarily the result of lower average deposit rates in the three months ended September 30, 2022 combined with a movement of funds to more liquid and lower-cost types of accounts. This was partially offset by an increase of $8.7 million, or 3.8%, in the average deposit account balances from $227.7 million for the three months ended September 30, 2021 to $236.4 million for the three months ended September 30, 2022, with the increase being in lower cost interest bearing transaction accounts.

Interest expense on Federal Home Loan Bank advances decreased $7,000, or 4.6%, to $144,000 for the three months ended September 30, 2022 from $151,000 for the three months ended September 30, 2021. This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $1.0 million, or 3.5%, to $27.3 million for the three months ended September 30, 2022 from $28.3 million for the three months ended September 30, 2021.

Net Interest Income. Net interest income increased $653,000, or 31.1%, to $2.8 million for the three months ended September 30, 2022 from $2.1 million for the three months ended September 30, 2021 primarily due to an increase in the average balance of net interest-earning assets of $8.7 million, or 11.3%, from $76.6 million for the three months ended September 30, 2021 to $85.3 million for the three months ended September 30, 2022, with a 65 basis point, or 27.9%, increase in the net interest rate spread from 2.33% for the three months ended September 30, 2021 to 2.98% for the three months ended September 30, 2022 and an increase in net interest margin of 63 basis points, or 25.0%, to 3.15% for the three months ended September 30, 2022 from 2.52% for the three months ended September 30, 2021.

Provision for Loan and Lease Losses. Based on management’s analysis of the adequacy of allowance for loan and lease losses, the provision for loan and lease losses was $48,000 for the three months ended September 30, 2022, compared to $14,000 for the three months ended September 30, 2021, an increase of $34,000, or 242.9%, due primarily to increased loan volume and the diversification of the loan portfolio.

Noninterest Income. Noninterest income increased $47,000, or 10.4%, to $499,000 for the three months ended September 30, 2022 from $452,000 for the three months ended September 30, 2021, due primarily to an increase in service charges on deposit accounts of $7,000, or 4.4%, and an increase in other service charges and fees of $1,000, or 0.4%, for the three months ended September 30, 2022 and a gain of $42,000 for the three months ended September 30, 2022 on the sale of other real estate owned.

Noninterest Expense. Noninterest expense decreased $233,000, or 8.4%, to $2.5 million for the three months ended September 30, 2022 from $2.8 million for the three months ended September 30, 2021, primarily due to decreases in other expenses and contract services that were higher in 2021 due to the stock conversion transaction, partially offset by increases in salaries, employee benefits and director fees.

Salary and employee benefit expenses increased by $178,000, or 13.5%, to $1.5 million for the three months ended September 30, 2022 from $1.3 million for the three months ended September 30, 2021, due to normal salary increases and a $21,000 contribution to the Equity Plan for the three months ended September 30, 2022 which did not exist in the three months ended September 30, 2021, partially offset by decreased ESOP expense in the three months ending September 30, 2022 due to initial funding costs being higher in the three months ended September 30, 2021. Directors’ fees also increased $21,000, or 28.0%, to $96,000 for the three months ended September 30, 2022 from $75,000 for the three months ended September 30, 2021 due to the addition of four new directors and two new advisory directors. This was partially offset by a decrease of $446,000, or 37.0%, in data processing, contract services and other fees combined, primarily due to higher expenses related to the stock conversion transaction during the three months ended September 30, 2021.

Income Tax Expense. Income tax expense increased by $162,000, or 450.0%, to $126,000 for the three months ended September 30, 2022 from a tax benefit of $36,000 primarily due to higher income before taxes. The effective tax rate was 19.0% and 15.4% for the three months ended September 30, 2022 and 2021, respectively. The effective tax rate was higher for the three months ended September 30, 2022 due to taxable income increasing at a faster rate than tax exempt income.

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Average Balance Sheets

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances. Average yields for loans (excluding PPP loans) include loan fees of $304,000 and $429,000 for the nine months ended September 30, 2022 and 2021, respectively. No PPP loans were originated during the nine months ended September 30, 2022 or 2021. We have not recorded deferred loan fees, as we have determined them to be immaterial.

For the Nine Months Ended September 30, 

 

2022

2021

 

Average

Average

 

Outstanding

Average

Outstanding

Average

Balance

    

Interest

    

Yield/Rate

    

Balance

    

Interest

    

Yield/Rate

(Dollars in thousands)

 

(Unaudited)

Interest-earning assets:

Loans (excluding PPP loans)

$

229,773

$

7,336

4.26

%  

$

215,452

$

7,190

4.45

%  

Allowance for loan and lease losses

(1,619)

 

 

 

(1,571)

 

 

PPP loans

8

 

 

%

722

 

6

 

1.11

%  

Securities

99,074

 

1,421

 

1.91

%

50,887

 

560

 

1.47

%  

Restricted stock

2,041

 

20

 

1.31

%

2,027

 

15

 

0.99

%  

Interest-bearing deposits in banks

5,758

 

34

 

0.79

%

19,414

 

45

 

0.31

%  

Federal funds sold

13,744

 

80

 

0.78

%

22,344

 

17

 

0.10

%  

Total interest-earning assets

348,779

 

8,891

 

3.40

%

309,275

 

7,833

 

3.38

%  

Noninterest-earning assets

21,501

 

 

 

21,233

 

  

 

  

Total assets

$

370,280

 

 

$

330,508

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

Interest-bearing demand deposits

$

75,694

 

195

 

0.34

%  

$

69,030

 

175

 

0.34

%  

Regular savings and other deposits

 

80,556

 

214

 

0.35

%  

 

68,354

 

193

 

0.38

%  

Money market deposits

 

11,858

 

28

 

0.31

%  

 

9,497

 

28

 

0.39

%  

Certificates of deposit

 

69,498

 

471

 

0.90

%  

 

75,646

 

756

 

1.33

%  

Total interest-bearing deposits

 

237,606

 

908

 

0.51

%  

 

222,527

 

1,152

 

0.69

%  

Advances from the Federal Home Loan Bank

 

27,099

 

429

 

2.11

%  

 

29,502

 

468

 

2.12

%  

Other liabilities

 

457

 

8

 

2.33

%  

 

391

 

8

 

2.73

%  

Total interest-bearing liabilities

 

265,162

 

1,345

 

0.68

%  

 

252,420

 

1,628

 

0.86

%  

Noninterest-bearing demand deposits

 

56,920

 

 

 

38,404

 

 

Other noninterest-bearing liabilities

 

3,770

 

 

 

3,509

 

 

Total liabilities

 

325,852

 

 

 

294,333

 

 

Total shareholders' equity

 

44,428

 

 

 

36,175

 

 

Total liabilities and shareholders' equity

$

370,280

 

 

$

330,508

 

 

Net interest income

 

$

7,546

 

 

$

6,205

 

  

Net interest rate spread (1)

 

 

2.72

%

 

 

 

2.52

%  

Net interest-earning assets (2)

$

83,617

 

$

56,855

 

 

Net interest margin (3)

 

 

2.88

%  

 

 

 

2.68

%  

Average interest-earning assets to interest-bearing liabilities

 

 

131.53

%

 

 

 

122.50

%  

(1)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)Net interest margin represents net interest income divided by average total interest-earning assets.

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Comparison of the Operating Results for the Nine Months Ended September 30, 2022 and September 30, 2021

Net Income. Net income was $1.3 million for the nine months ended September 30, 2022, compared to net income of $232,000 for the nine months ended September 30, 2021, an increase of $1.1 million, or 550.0%. The increase was primarily due to a $1.3 million, or 21.0%, increase in net interest income and a $141,000 increase in noninterest income, offset by a $81,000 increase in the provision for loan and lease losses and an increase in income tax expense of $281,000.

Interest Income. Interest income increased $1.1 million, or 14.1%, for the nine months ended September 30, 2022 from $7.8 million at September 30, 2021 to $8.9 million at September 30, 2022. This was primarily the result of increased interest income on securities and fed funds sold due primarily to the continued investment of the net proceeds from the conversion stock offering and increased yields on those investments resulting primarily from rising market interest rates. Average interest earning assets increased by $39.5 million, or 12.8%, from $309.3 million at September 30, 2021 to $348.8 million at September 30, 2022, and a small increase in the yield on interest earning assets of 2 basis points, or 0.6%, from 3.38% on September 30, 2021 to 3.40% on September 30, 2022.

Interest income on loans increased $146,000, or 2.0%, to $7.3 million for the nine months ended September 30, 2022 from $7.2 million for the nine months ending September 30, 2021. Average loans increased $14.3 million, or 6.6%, from $215.5 million at September 30, 2021 to $229.8 million at September 30, 2022, being offset by a 19 basis point, or 4.3%, decrease in loan yield to 4.26% for the nine months ended September 30, 2022 from 4.45% for the nine months ended September 30, 2021. In the nine months ending September 30, 2021, we originated more loans with fees that were included in interest income than in the three months ending September 30 2022 and although loan rates have increased, we had not originated enough loans at the higher rates at September 30, 2022 to increase the weighted average cost of the entire loan portfolio.

Interest income on securities increased $861,000, or 153.8%, from $560,000 for the nine months ended September 30, 2021 to $1.4 million for the nine months ended September 30, 2022. This increase resulted from an increase in average securities of $48.2 million, or 94.7%, from $50.9 million for the nine months ended September 30, 2021 to $99.1 million for the nine months ended September 30, 2022 and an increase of 44 basis points, or 29.9%, in average yield from 1.47% for the nine months ended September 30, 2021 to 1.91% for the nine months ended September 30, 2022. The rate increase is reflective of market rate increases and the diversification of the securities portfolio as the net proceeds of the conversion stock offering continued to be invested into higher yielding investments.

Interest income from interest bearing deposits in banks declined $11,000, or 24.4%, from $45,000 for the nine months ended September 30, 2021 to $34,000 for the nine months ended September 30, 2022. This decline resulted from a decrease in average deposits in banks of $13.6 million, or 70.1%, from $19.4 million for the nine months ended September 30, 2021 to $5.8 million for the nine months ended September 30, 2022, partially offset by 48 basis points, or 154.8%, increase in average yield from 0.31% for the nine months ended September 30, 2021 to 0.79% for the nine months ended September 30, 2022. There was also an increase of $63,000 in fed funds interest income for the nine months ended September 30, 2022 primarily from an increase of 68 basis points, or 680.0%, in average yield on fed funds sold from 0.10% for the nine months ended September 30, 2021 to 0.78% for the nine months ended September 30, 2022, partially offset by a $8.6 million, or 38.6%, decrease in average fed funds sold from $22.3 million for the nine months ended September 30, 2021 to $13.7 million for the nine months ended September 30, 2022. The increases in yields on deposits in banks and fed funds is reflective of the sharp increase in market rates.

Interest Expense. Total interest expense decreased $283,000, or 17.4%, to $1.3 million for the nine months ended September 30, 2022 from $1.6 million for the nine months ended September 30, 2021 due to a decrease in the average cost of interest-bearing liabilities of 18 basis points, or 20.9%, from 0.86% for the nine months ended September 30, 2021 to 0.68% for the nine months ended September 30, 2022, primarily due to a decrease in deposit costs. Interest expense on deposit accounts decreased $244,000, or 21.2%, to $908,000 for the nine months ended September 30, 2022 from $1.2 million for the nine months ended September 30, 2021, due to a decrease in the average deposit cost of 18 basis points, or 26.1%, from 0.69% for the nine months ended September 30, 2021 to 0.51% for the nine months ended September 30, 2022. This was partially offset by an increase of $15.1 million, or 6.8%, in the average interest bearing

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deposit account balances from $222.6 million for the nine months ended September 30, 2021 to $237.6 million for the nine months ended September 30, 2022, with the increase being in lower cost interest-bearing transaction accounts.

Interest expense on Federal Home Loan Bank advances decreased $39,000, or 8.3%, to $429,000 for the nine months ended September 30, 2022 from $468,000 for the nine months ended September 30, 2021. This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $2.4 million, or 8.1%, to $27.1 million for the nine months ended September 30, 2022 from $29.5 million for the nine months ended September 30, 2021. The average yield was 2.11% for the nine months ended September 30, 2022 and 2.12% for the nine months ended September 30, 2021.

Net Interest Income. Net interest income increased $1.3 million, or 21.6%, to $7.5 million for the nine months ended September 30, 2022 from $6.2 million for the nine months ended September 30, 2021 primarily due to an increase of $26.7 million, or 46.9%, in the average balance of net interest-earning assets from $56.9 million for the nine months ended September 30, 2021 to $83.6 million for the nine months ended September 30, 2022, and a 20 basis points, or 7.9%, increase in the net interest rate spread from 2.52% for the nine months ended September 30, 2021 to 2.72% for the nine months ended September 30, 2022. Net interest margin increased 20 basis points, or 7.5%, to 2.88% for the nine months ended September 30, 2022 from 2.68% for the nine months ended September 30, 2021.

Provision for Loan and Lease Losses. Based on management’s analysis of the adequacy of the allowance for loan and lease losses, the provision for loan and lease losses was $125,000 for the nine months ended September 30, 2022, compared to $44,000 for the nine months ended September 30, 2021, an increase of $81,000, or 184.1%, primarily due to an increase in loans and leases, an $18,000 increase in net consumer credit losses to $31,000 for the nine months ended September 30, 2022 and diversification of the loan portfolio.

Noninterest Income. Noninterest income increased $141,000, or 7.7%, to $1.4 million for the nine months ended September 30, 2022 from $1.3 million for the nine months ended September 30, 2021, due primarily to an increase of $127,000, or 10.9%, in service charges and fees from $1.2 million for the nine months ended September 30, 2021 to $1.3 million for the nine months ended September 30, 2022. The increase is primarily due to an $84,000 increase in service charges primarily due to waiving fees during part of 2021 on deposit accounts and increases in the number of deposit accounts. There was also a $42,000 gain on the sale of real estate owned in the nine months ended September 30, 2022, partially offset by a $29,000 loss on the sale of securities during the nine months ended September 30, 2022.

Noninterest Expense. Noninterest expense remained flat at $7.1 million for the nine months ended September 30, 2022 primarily due to increases in salaries, employee benefits and director fees being offset by decreases in contract services, data processing and other expenses.

Salary and employee benefit expenses increased by $455,000, or 11.9%, to $4.3 million for the nine months ended September 30, 2022 from $3.8 million for the nine months ended September 30, 2021, due to normal salary and benefits increases and an increase in the ESOP contribution expense of $61,000 and a new $21,000 contribution expense for the Equity Plan in the nine months ending September 30, 2022. The Equity Plan was not in existence and the ESOP was not fully funded for the nine months ending September 30, 2021. Directors’ fees increased $56,000, or 24.2%, to $287,000 for the nine months ended September 30, 2022 from $231,000 for the nine months ended September 30, 2021 due to the addition of four new directors and two new advisory directors in 2022. These increases were offset primarily by a combined decrease in data processing, contract services and other expenses of $527,000. These expenses were higher in the nine months ended September 30, 2021 due partially to additional expenses related to the stock conversion.

Income Tax Expense. Income tax expense increased by $281,000, or 597.9%, to $328,000 for the nine months ended September 30, 2022 from $47,000 for the nine months ended September 30, 2021, primarily due to higher income before taxes. The effective tax rate was 19.59% and 16.85% for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate was higher for the nine months ended September 30, 2022 due to taxable income increasing at a faster rate than tax exempt income.

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Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Federal Reserve Bank of Boston provides the Company with a federal funds line of credit. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We are also able to borrow from the Federal Home Loan Bank of Dallas. At September 30, 2022, we had outstanding advances of $35.0 million from the Federal Home Loan Bank of Dallas. At September 30, 2022, we had unused borrowing capacity of $100.5 million with the Federal Home Loan Bank of Dallas. In addition, at September 30, 2022, 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 September 30, 2022, there was no outstanding balance under either 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 short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For additional information, see the consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 included as part of the consolidated financial statements included in this report.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

Texas Community Bancshares, Inc. is a separate legal entity from Mineola Community Bank, and must provide for its own liquidity to pay its operating expenses and other financial obligations. Its primary source of income is dividends received from Mineola Community Bank. The amount of dividends that Mineola Community Bank may declare and pay to Texas Community Bancshares, Inc. is governed by applicable banking laws and regulations. At September 30, 2022, Texas Community Bancshares, Inc. (on a stand-alone, unconsolidated basis) had liquid assets of $13.4 million.

At September 30, 2022, Mineola Community Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date. Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category.

Management of Market Risk

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 monthly 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 capital levels that exceed the thresholds for well-capitalized status under federal regulations;
maintaining a high level of liquidity;
growing our volume of core deposit accounts;
managing our investment securities portfolio so as to reduce the average maturity and effective life of the portfolio;
managing our borrowings from the Federal Home Loan Bank of Dallas by using amortizing advances to as to reduce the average maturities of the borrowings; and
continuing to diversify our loan portfolio by adding more commercial-related loans, which typically have shorter maturities and/or balloon payments.

By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.

We have not engaged in hedging activities, such as engaging in futures or options. We do not anticipate entering into similar transactions in the future.

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.

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

At September 30, 2022

 

Change in Interest Rates

    

Net Interest Income Year

    

Year 1 Change from

 

(basis points) (1)

1 Forecast

Level

 

(Dollars in thousands)

 

400

$

11,395

 

(6.82)

%

300

 

11,667

 

(4.60)

%

200

 

11,971

 

(2.11)

%

100

 

12,157

 

(0.59)

%

Level

 

12,229

 

(100)

 

12,193

 

(0.29)

%

(200)

 

12,001

 

(1.86)

%

(300)

 

11,579

 

(5.31)

%

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

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The table above indicates that at September 30, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 2.11% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 1.86% decrease in net interest income. The net interest income decreases in both interest rate scenarios due to the assets and liabilities repricing at different speeds in a rates up and rates down environment.

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

At September 30, 2022

EVE as a Percentage of

Present Value of Assets (3)

Estimated Increase

Increase

Change in Interest

Estimated

(Decrease) in EVE

(Decrease)

Rates (basis points) (1)

    

EVE (2)

    

Amount

    

Percent

    

EVE Ratio (4)

    

(basis points)

(Dollars in thousands)

400

$

66,485

$

(12,783)

 

(16.13)

%  

19.79

%  

(114)

300

 

70,214

 

(9,054)

 

(11.42)

%  

20.26

%  

(67)

200

 

73,840

 

(5,428)

 

(6.85)

%  

20.65

%  

(28)

100

 

76,960

 

(2,308)

 

(2.91)

%  

20.90

%  

(3)

Level

 

79,268

 

 

%  

20.93

%  

(100)

 

79,875

 

607

 

0.77

%  

20.55

%  

(38)

(200)

 

79,292

 

24

 

0.03

%  

19.92

%  

(101)

(300)

 

76,933

 

(2,335)

 

(2.95)

%  

18.91

%  

(202)

(1)Assumes an immediate uniform change in interest rates at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)EVE Ratio represents EVE divided by the present value of assets.

The table above indicates that at September 30, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 6.85% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.03% increase in EVE.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, mortgage servicing rights, deposits and borrowings.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

See “Management of Market Risk” in Item 2 above.

Item 4.  Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2022. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

During the quarter ended September 30, 2022, there were no changes in the Company’s internal controls over financial reporting that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

We are not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2022, we were not involved in any legal proceedings the outcome of which we believe would be material to our consolidated financial condition or results of operations.

Item 1A.  Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under the heading “Risk Factors” contained in the Prospectus. The Company believes that the risk factors applicable to it have not changed materially from those disclosed in the Prospectus.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

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Table of Contents

Item 6.  Exhibits

Exhibit

    

 

Number

 

Description

 

 

 

3.1

 

Articles of Incorporation of Texas Community Bancshares, Inc. (1)

 

 

 

3.2

Amended and Restated Bylaws of Texas Community Bancshares, Inc. (2)

10.1

 

Texas Community Bancshares, Inc. 2022 Equity Incentive Plan(3)

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

 

The following materials for the quarter ended September 30, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income, (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

(1)Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-254053), as filed on March 9, 2021.
(2)Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (Commission File No. 001-40610), as filed on January 26, 2022.
(3)Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement (Commission File No. 001-40610) as filed on July 20, 2022.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    

TEXAS COMMUNITY BANCSHARES, INC.

Date: November 14, 2022

/s/ James H Herlocker, III

James H. Herlocker, III

Chairman, President and Chief Executive Officer

Date: November 14, 2022

/s/ Julie Sharff

Julie Sharff, CPA

Chief Financial Officer

47