# Texas Community Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Texas Community Bancshares, Inc.](/companies/tcbs.md) (CIK 1849466)
- Form: 10-Q
- Filed: 2022-11-14
- Accepted by EDGAR: Nov 14, 2022, 17:31 ET
- Period: 2022-09-30
- Accession: 0001558370-22-017882
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1849466/000155837022017882/tcbs-20220930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1849466/000155837022017882/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $447.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $1.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $126.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $328.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $539.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $1.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.18 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.45 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.18 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.45 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 3,029,465 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 3,017,817 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $2.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $344.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Total assets | at 2022-09-30 | $375.7m | us-gaap:Assets |
| Total liabilities | at 2022-09-30 | $320.1m | us-gaap:Liabilities |

## Management's discussion and analysis

As filed, 58,972 characters.

### General

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (“the Company”) consolidated financial condition at September 30, 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;
- 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 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 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,

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%.

### 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.

*(Dollars in thousands)*

*(Unaudited)*

| ​ ​ ​ ​ ​ ​ ​ ​ Interest-earning assets: | ​ ​ ​ ​ ​ ​ ​ | ​ ​ For the Three Months Ended September 30, 2022 Average Outstanding Balance ​ | ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ | ​ ​ ​ | ​ ​ ​ Average ​ Yield/Rate ​ | ​ ​ 2021 Average Outstanding Balance ​ | ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ | ​ ​ ​ | ​ ​ ​ Average Yield/Rate ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: |
| 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.

### 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,

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.

### 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.

*(Dollars in thousands)*

*(Unaudited)*

| ​ ​ ​ ​ ​ ​ ​ ​ Interest-earning assets: | ​ ​ ​ ​ ​ ​ ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2022 Average Outstanding Balance ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ Average ​ Yield/Rate ​ ​ | ​ ​ 2021 Average Outstanding Balance ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Average ​ Yield/Rate ​ ​ ​ ​ |
| --- | --- | ---: | --- | --- | --- | ---: | ---: | --- | --- | --- | ---: |
| 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.

### 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 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.

### 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.

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*

*(Dollars in thousands)*

| ​ Change in Interest Rates (basis points) (1) | ​ ​ | ​ ​ Net Interest Income Year 1 Forecast | ​ ​ ​ Year 1 Change from ​ Level |
| ---: | --- | ---: | ---: |
| 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.

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*

*(Dollars in thousands)*

| ​ ​ ​ ​ Change in Interest Rates (basis points) (1) | ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ ​ ​ Estimated EVE (2) | ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Estimated Increase (Decrease) in EVE Amount | ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percent | ​ ​ EVE as a Percentage of Present Value of Assets (3) ​ ​ ​ ​ EVE Ratio (4) | ​ Increase (Decrease) (basis points) |
| ---: | --- | ---: | --- | ---: | ---: | ---: | ---: |
| 400 | ​ | $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.

## Controls and procedures

As filed, 891 characters.

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

## Risk factors

As filed, 327 characters.

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.

Filed Nov 14, 2022.
Source: SEC EDGAR, the filing index for accession 0001558370-22-017882. Last ingested by Listed: Oct 30, 2026, 13:46 ET. No prices; not investment advice.