# Texas Community Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Texas Community Bancshares, Inc.](/companies/tcbs.md) (CIK 1849466)
- Form: 10-Q
- Filed: 2023-08-10
- Accepted by EDGAR: Aug 10, 2023, 17:00 ET
- Period: 2023-06-30
- Accession: 0001558370-23-014534
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1849466/000155837023014534/tcbs-20230630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1849466/000155837023014534/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $1.9m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $3.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $31.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | −$255.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $160.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$857.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.05 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.05 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 3,131,800 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 3,093,113 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $1.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $3.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $168.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $610.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-06-30 | $432.2m | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $377.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $54.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 75,970 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 June 30, 2023 and consolidated results of operations for the three and six months ended June 30, 2023 and 2022. It should be read in conjunction with the unaudited consolidated financial statements and the related notes appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

### Cautionary Note Regarding Forward-Looking Statements

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

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

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

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

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

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

### Summary of Critical Accounting Policies; Critical Accounting Estimates

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

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

The following represent our critical accounting policies:

***Allowance for Credit Losses.*** Effective January 1, 2023, the Company adopted ASC 326, referred to as CECL. Upon adoption of CECL, the Company made a one-time cumulative-effect adjustment that decreased retained earnings by $1.0 million. This adjustment was the result of a $1.0 million increase in the allowance for loan losses from $1.8 million at December 31, 2022 to $2.8 million upon adoption of the new CECL methodology on January 1, 2023 and an increase of $254,000 in the allowance for unfunded commitments. The adjustment was primarily a result of incorporating forward-looking estimated loss estimates and an allowance for off-balance sheet commitments (unfunded commitments). The allowance for credit losses applies to any financial asset carried at amortized cost, including unfunded commitments. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. The Company uses the weighted average remaining maturity (WARM) method to estimate future expected losses for all of the Company’s loan pools. The allowance for credit losses on loans is a reserve for estimated 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 credit 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 credit losses. A provision for credit losses, which is a charge against earnings, is recorded to bring the allowance for credit losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for credit losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect 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 credit losses and therefore the appropriateness of the allowance for credit losses could change significantly.

The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for credit losses on loans and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical peer and Company loss rates, reasonable and supportable forecasts, and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions, reasonable and supportable forecasts, and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allowance for credit losses on loans is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for credit losses on loans was adequate at June 30, 2023 and December 31, 2022. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for credit losses. As a result of such reviews, we may have to adjust our allowance for credit losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for credit losses as the process is the responsibility of the Company and any increase or decrease in the allowance is the responsibility of management.

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

The Company assesses held to maturity (HTM) securities for credit losses and due to the HTM securities primarily being issued by government-sponsored entities or being highly rated municipals, management concluded that no credit loss should be recognized for these securities for the six months ended June 30, 2023.

The CECL standard also requires for credit losses on available for sale (AFS) securities to be recorded through an allowance for credit losses rather a write-down of the individual security. As of June 30, 2023, the Company did not have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

***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 June 30, 2023 and December 31, 2022

***Total Assets.*** Total assets were $432.2 million at June 30, 2023, an increase of $14.9 million, or 3.6%, from $417.3 million at December 31, 2022. The increase was due primarily to increases in net loans and leases of $17.5 million, or 7.0%, from $251.3 million at December 31, 2022 to $268.8 million at June 30, 2023, an increase of $3.2 million, or 50.8%, in net premises and equipment, and increases in cash, fed funds sold and interest bearing deposits in banks totaling $4.1 million, or 37.3%, to $15.1 million at June 30, 2023 from $11.0 million at December 31, 2022, partially offset by a decrease in securities of $11.3 million, or 8.4%, from $135.0 million at December 31, 2022 to $123.7 million at June 30, 2023. The $3.2 million, or 50.8%, increase in net premises and equipment was primarily due to the purchase of two buildings adjacent to the Bank’s main office in Mineola, the purchase of a building that had recently been a bank branch in Tyler and the construction of the new branch building in Lindale at the current location, which should be completed in 2024.

***Cash and Cash Equivalents.*** Cash and cash equivalents increased $1.1 million, or 12.4%, to $10.0 million (which includes fed funds sold of $4.6 million) at June 30, 2023 from $8.9 million (which includes fed funds sold of $2.0 million) at December 31, 2022. This increase was primarily the result of a decrease in securities of $11.3 million resulting primarily from the sale of a group of securities in January 2023 as part of an investment repricing strategy, an increase in deposits of $6.5 million, or, 2.2%, and an increase in FHLB advances of $9.4 million, or 15.0%, partially offset primarily by an increase in loans of $17.5 million, an increase in net premises and equipment of $3.2 million, dividends paid of $168,000, stock repurchases of $610,000 and an increase in interest bearing deposits in banks of $3.0 million.

***Interest Bearing Deposits in Banks.*** Interest bearing deposits in banks were $5.1 million at June 30, 2023, compared to $2.1 million at December 31, 2022, an increase of $3.0 million, or 142.9%. The increase was primarily the result of the purchase of $5.0 million in Qwickrate Certificates of Deposit (CDs), partially offset by cash needed for loan funding and property purchases. The Bank utilizes the Qwickrate listing service, which is a resource where banks can purchase and sell Certificates of Deposit (CDs) with other banks, to invest excess funds easily in CDs at a competitive rate. At June 30, 2023, there was $5.0 million in short-term (3-6 months) Qwickrate CDs with other banks.

***Securities Available for Sale.*** Securities available for sale decreased by $11.4 million, or 10.6%, to $95.8 million at June 30, 2023 from $107.2 million at December 31, 2022. The decrease in securities resulted primarily from the sale of a group of securities as part of an investment repricing strategy adopted in January 2023 to take advantage of then current market interest rate spreads. Sixteen securities were sold totaling $17.0 million at a loss of $1.7 million in order to reprice the portfolio by purchasing investments yielding higher returns, including purchases of $9.5 million during the period. We received paydowns of $2.9 million and a decrease in net unrealized losses on the available for sale portfolio of $418,000, or 6.0%, to $6.6 million from $7.0 million due primarily to the realized loss of $1.3 million, net of tax, related to the sale of securities being removed from the total, partially offset by increased unrealized losses from rising rates. Gross unrealized losses on the AFS portfolio consisting of 84 securities decreased from $8.9 million, or 7.6% of the portfolio’s amortized cost of $116.0 million at December 31, 2022, to $8.3 million, or 8.0% of the amortized cost of $104.2 million at June 30, 2023. These unrealized losses are due to increases in market interest rates. The total net unrealized losses as refected in the other comprehensive losses (AOCI) was further reduced by $434,000 to $6.1 million at June 30, 2023 from purchases of derivatives hedged against a portion of the AFS portfolio. This was a total reduction in other comprehensive losses of $852,000, or 12.2%, from $7.0 million at December 31, 2022 to $6.1 million at June 30, 2023.

***Securities Held to Maturity.*** Securities held to maturity increased by $43,000, or 0.2%, to $27.9 million at June 30, 2023 from $27.8 million at December 31, 2022. This increase is due primarily to the purchase of one security of $2.1 million as part of the repricing strategy, partially offset by paydowns of $2.0 million. The HTM portfolio had 70 securities with gross unrealized losses of $3.0 million, or 10.8%, of the amortized cost of $27.9 million at June 30, 2023 compared to $3.2 million, or 11.5%, of the amortized cost of $27.8 million at December 31, 2022. These unrealized losses are due to increases in market interest rates.

***Loans and Leases Receivable, Net.*** Net loans and leases receivable increased $17.5 million, or 7.0%, to $268.8 million at June 30, 2023 from $251.3 million at December 31, 2022. Loans secured by residential real estate and farmland comprise $176.8 million, or 65.0% of total loans at June 30, 2023. During the six months ended June 30, 2023, loan originations totaled $52.4 million of which $11.1 million were renewals, or refinancings of existing loans with Mineola Community Bank (including interim construction loans converting to a permanent loan), resulting in originations of new loans of $41.3 million. Originations consisted primarily of $17.0 million in one-to-four family residential mortgage loans, $22.2 million of residential construction loans (upon completion), including 21 speculative construction home loans of $5.9 million and nine quadplex properties of $5.8 million, $2.5 million in commercial real estate loans, $2.5 million in consumer loans, $2.7 million in commercial and industrial loans, $2.7 million in land & development loans, and $1.6 million in farmland loans. During the six months ended June 30, 2023, there were $7.3 million in loan principal payments and $25.9 million in loan payoffs. During the six months ended June 30, 2023, construction loans (when fully funded upon completion) increased by $9.2 million, or 17.0%, to $63.2 million at June 30, 2023 from $54.0 million at December 31, 2022. The total construction loan portfolio consisting of 108 loans had funded balances of $39.7 million at June 30, 2023 compared to 98 loans at December 31, 2022 with funded balances of $30.7 million. Construction loans continue to be a large segment of our loan portfolio.

***Deposits.*** Deposits increased $6.5 million, or 2.2%, to $302.6 million at June 30, 2023 from $296.1 million at December 31, 2022. Core deposits (defined as all deposits other than certificates of deposit) decreased $13.4 million, or 6.5%, to $193.3 million at June 30, 2023 from $206.7 million at December 31, 2022. Retail certificates of deposit increased $20.0 million, or 25.9%, to $97.3 million at June 30, 2023 from $77.3 million at December 31, 2022. At June 30, 2023, there were $12.0 million in brokered deposits. The decrease in core deposits and increase in CDs is primarily the result of the Bank offering a special CD with a higher rate in an effort to retain deposits resulting in customers moving funds within the Bank to the higher yielding account. We have also increased the rates on money market accounts as part of the retention effort during this time of rising market interest rates and a competitive deposit market. As a result, our cost of deposits increased 64 basis points, or 60.4%, to 1.70% at June 30, 2023 compared to 1.06% at December 31, 2022. At June 30, 2023, there were 152 accounts with balances in excess of $250,000 with a total of $63.9 million, or 21.1% of deposits. The amount that was over $250,000 was $25.9 million, or 8.6%, that was potentially uninsured, including certificates of deposit of $6.9 million and $19.0 million in checking, MMDA and savings accounts.

***Advances from Federal Home Loan Bank.*** Advances from Federal Home Loan Bank increased by $9.4 million, or 15.0%, to $71.9 million at June 30, 2023 from $62.5 million at December 31, 2022 due to additional advances of $11.0 million, offset by scheduled monthly principal payments on amortizing advances of $1.6 million. The advances were purchased to help fund loan growth and real estate purchases.

***Total Shareholders’ Equity.*** Total shareholders’ equity decreased $1.4 million, or 2.5%, to $54.5 million at June 30, 2023 from $55.9 million at December 31, 2022. This decrease was primarily due to a net loss for the six months ended June 30, 2023 of $857,000 resulting primarily from the loss on the sale of securities of $1.3 million, net of tax, and a one-time CECL adjustment (increase in the allowance for credit losses) of $1.0 million, net of tax, for the cumulative effect of a change in accounting principle used to estimate credit losses that was effective on January 1, 2023. The CECL cumulative effect adjustment flowed directly through capital instead of being charged as a provision expense for credit losses through the statement of operations. These decreases were partially offset by increases in equity including a net reduction of $852,000, or 12.2%, in the accumulated other comprehensive loss from $7.0 million at December 31, 2022 to $6.1 million at June 30, 2023; a net decrease in the unrealized losses on AFS securities of $418,000 primarily due to removing unrealized losses associated with the sale of securities partially offset by increases in the unrealized losses due to rising rates; and a net increase of $434,000 from the change in the fair value of cash flow hedges on $25.0 million of the securities in the AFS portfolio. An increase in equity of $285,000 came from stock plan vesting of the 2022 Equity Plan for the six months ended June 30, 2023, and an increase of $87,000 with the commitment to release 6,516 additional ESOP shares to participants. In the six months ended June 30, 2023, the Company paid quarterly dividends totaling $168,000 and repurchased 50,267 shares of TCBS stock at a cost of $610,000.

At June 30, 2023, 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 June 30, 2023, a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements. At June 30, 2023, Mineola Community Bank was well capitalized and had a ratio of 11.12%.

### Average Balance Sheets

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Nonaccrual loans are only included in the computation of average balances. Average yields for loans include loan fees of $143,000 and $103,000 for the three months ended June 30, 2023 and 2022, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.

*(Dollars in thousands)*

| ​ ​ ​ ​ ​ ​ ​ Interest-earning assets: | ​ ​ ​ ​ ​ ​ | ​ ​ For the Three Months Ended June 30, 2023 Average Outstanding Balance ​ | ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ | ​ ​ ​ | ​ ​ ​ Average ​ Yield/Rate ​ | ​ ​ 2022 Average Outstanding Balance ​ | ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ | ​ ​ ​ | ​ ​ ​ Average Yield/Rate ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | ---: | --- | ---: | --- | ---: |
| Loans (excluding PPP loans) | ​ | $266,539 | ​ | $3,099 |  | 4.65% | $229,891 | ​ | $2,431 |  | 4.23% |
| Allowance for credit losses | ​ | (2,860) | ​ | ​ |  | ​ | (1,624) | ​ | ​ |  | ​ ​ |
| PPP loans | ​ | — | ​ | — |  | —% | 8 | ​ | — |  | —% |
| Securities | ​ | 126,272 | ​ | 1,260 |  | 3.99% | 100,288 | ​ | 447 |  | 1.78% |
| Restricted stock | ​ | 3,000 | ​ | 36 |  | 4.80% | 2,040 | ​ | 6 |  | 1.18% |
| Interest bearing deposits in banks | ​ | 7,507 | ​ | 79 |  | 4.21% | 5,547 | ​ | 13 |  | 0.94% |
| Federal funds sold | ​ | 2,446 | ​ | 31 |  | 5.07% | 14,872 | ​ | 30 |  | 0.81% |
| Financial derivative | ​ | 536 | ​ | 33 |  | 6.16% | — | ​ | — |  | —% |
| Total interest earning assets | ​ | 403,440 | ​ | 4,538 |  | 4.50% | 351,022 | ​ | 2,927 |  | 3.34% |
| Noninterest earning assets | ​ | 23,032 | ​ |  |  | ​ ​ | 21,900 | ​ |  |  | ​ ​ |
| Total assets | ​ | $426,472 | ​ |  |  | ​ | $372,922 | ​ |  |  | ​ ​ |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| **Interest-bearing liabilities:** | ​ |  | ​ |  |  | ​ |  | ​ |  |  | ​ ​ |
| Interest bearing demand deposits | ​ | $60,728 | ​ | 56 |  | 0.37% | $77,063 | ​ | 64 |  | 0.33% |
| Regular savings and other deposits | ​ | 55,616 | ​ | 43 |  | 0.31% | 81,222 | ​ | 72 |  | 0.35% |
| Money market deposits | ​ | 30,935 | ​ | 228 |  | 2.95% | 11,999 | ​ | 9 |  | 0.30% |
| Certificates of deposit | ​ | 106,529 | ​ | 920 |  | 3.45% | 69,819 | ​ | 153 |  | 0.88% |
| Total interest bearing deposits | ​ | 253,808 | ​ | 1,247 |  | 1.97% | 240,103 | ​ | 298 |  | 0.50% |
| Advances from FHLB | ​ | 70,177 | ​ | 636 |  | 3.63% | 26,718 | ​ | 141 |  | 2.11% |
| Other liabilities | ​ | 528 | ​ | 3 |  | 2.27% | 510 | ​ | 2 |  | 1.57% |
| Total interest bearing liabilities | ​ | 324,513 | ​ | 1,886 |  | 2.32% | 267,331 | ​ | 441 |  | 0.66% |
| Noninterest bearing demand deposits | ​ | 55,434 | ​ |  |  | ​ | 58,102 | ​ |  |  | ​ |
| Other noninterest bearing liabilities | ​ | 4,706 | ​ |  |  | ​ | 3,661 | ​ |  |  | ​ |
| Total liabilities | ​ | 384,653 | ​ |  |  | ​ | 329,094 | ​ |  |  | ​ |
| Total shareholders’ equity | ​ | 41,819 | ​ |  |  | ​ | 43,828 | ​ |  |  | ​ |
| Total liabilities and shareholders' equity | ​ | $426,472 | ​ |  |  | ​ | $372,922 | ​ |  |  | ​ |
| Net interest income | ​ |  | ​ | $2,652 |  | ​ |  | ​ | $2,486 |  | ​ |
| Net interest rate spread (1) | ​ |  | ​ |  |  | 2.17% |  | ​ |  |  | 2.68% |
| Net interest earning assets (2) | ​ | $78,927 | ​ |  |  | ​ ​ | $83,691 | ​ |  |  | ​ ​ |
| Net interest margin (3) | ​ |  | ​ |  |  | 2.63% |  | ​ |  |  | 2.83% |
| Average interest earning assets to interest bearing liabilities | ​ |  | ​ |  |  | 124.32% |  | ​ |  |  | 131.31% |

(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 June 30, 2023 and June 30, 2022

***Net Income.*** The Company had a net income of $160,000 for the three months ended June 30, 2023, compared to net income of $416,000 for the three months ended June 30, 2022, a decrease of $256,000, or 61.5%. The decrease was primarily due to a decrease in net interest income of $166,000, or 6.7%, primarily due to a 50 basis point, or 18.7%, decrease in net interest rate spread primarily due to the rapid increase in market interest rates between periods and the inability to reprice interest earning assets at the same speed as interest bearing liabilities. Additionally, there was a $56,000 increase in provision for credit losses primarily due to an increase in the balance of the average loan portfolio of $36.6 million, or 15.9%, a $511,000, or 21.6%, increase in noninterest expense only being partially offset by a $62,000, or 13.8%, increase in noninterest income and a decrease in income tax expense of $83,000.

***Interest Income.*** Interest income increased $1.6 million, or 55.0%, to $4.5 million for the three months ended June 30, 2023 from $2.9 million for the three months ended June 30, 2022. This was primarily the result of increased interest income on securities and loans due to increased yields and an increase in the average balance of loans and securities. Average interest earning assets increased by $52.4 million, or 14.9%, from $351.0 million for the three months ended June 30, 2022 to $403.4 million at June 30, 2023, and an increase in the yield on interest earning assets of 116 basis points, or 34.9%, from 3.34% for the three months ended June 30, 2022 to 4.50% for the three months ended June 30, 2023.

Interest income on loans increased $668,000, or 27.5%, to $3.1 million for the three months ended June 30, 2023 from $2.4 million for the three months ended June 30, 2022. This increase resulted from an increase in average loans of $36.6 million, or 15.9%, from $229.9 million for the three months ended June 30, 2022 to $266.5 million for the three months ended June 30, 2023, with an increase in loan yield of 42 basis points, or 10.0%, to 4.65% for the three months ended June 30, 2023 from 4.23% for the three months ended June 30, 2022. The increase in loan yield was due primarily to increased market interest rates.

Interest income on securities increased $813,000, or 181.9%, from $447,000 for the three months ended June 30, 2022 to $1.3 million for the three months ended June 30, 2023. This increase resulted from an increase in the average balance of securities of $26.0 million, or 25.9%, from $100.3 million for the three months ended June 30, 2022 to $126.3 million for the three months ended June 30, 2023 and an increase of 221 basis points, or 123.9%, in average yield from 1.78% for the three months ended June 30, 2022 to 3.99% for the three months ended June 30, 2023. The rate increase is reflective of market rate increases and the diversification of the securities portfolio to include higher yielding commercial mortgage-backed securities, subordinated bank debt and other bonds with interest rates that are not tied to conventional residential mortgage loan rates. In January 2023, the Company sold 16 securities totaling $17.0 million at a loss of $1.7 million as part of a repricing strategy to increase interest income. A portion of these funds have been reinvested into these higher yielding securities accounting for part of the difference in the 221 basis point yield increase between June 30, 2022 and June 30, 2023. The Federal Reserve increased rates 450 basis points, or 900%, between March 30, 2022 and March 30, 2023.

Interest income from interest bearing deposits in banks increased $66,000, or 507.7%, from $13,000 for the three months ended June 30, 2022 to $79,000 for the three months ended June 30, 2023. This increase resulted from an increase in average yield of 327 basis points, or 349.0%, from 0.94% for the three months ended June 30, 2022 to 4.21% for the three months ended June 30, 2023 and an increase in average interest bearing deposits of $2.0 million, or 35.3% from $5.5 million for the three months ended June 30, 2022 to $7.5 million for the three months ended June 30, 2023. There was also an increase of $1,000 in fed funds interest income for the three months ended June 30, 2023 primarily from an increase of 426 basis points, or 528.3%, in average yield on fed funds sold from 0.81% for the three months ended June 30, 2022 to 5.07% for the three months ended June 30, 2023, partially offset by a $12.4 million, or 84.1%, decrease in average fed funds sold from $14.9 million for the three months ended June 30, 2022 to $2.4 million for the three months ended June 30, 2023. The increases in yields on deposits in banks and fed funds is reflective of the sharp increase in market interest rates.

Interest income from the fair value hedge increased $33,000 for the six months ended June 30, 2023. The Company entered into an interest rate swap agreement in the six months ended June 30, 2023 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position. Refer to additional detail regarding the fair value hedge in Note 10 – Derivatives.

***Interest Expense.*** Total interest expense increased $1.5 million, or 330.8%, to $1.9 million for the three months ended June 30, 2023 from $441,000 for the three months ended June 30, 2022 due to an increase in the average cost of interest-bearing liabilities of 166 basis points, or 252.3%, from 0.66% for the three months ended June 30, 2022 to 2.32% for the three months ended June 30, 2023, primarily due to an increase in deposit and funding costs. Interest expense on deposit accounts increased $949,000, or 318.5 %, to $1.2 million for the three months ended June 30, 2023 from $298,000 for the three months ended June 30, 2022, due to an increase in the average deposit cost of 147 basis points, or 295.9%, from 0.50% for the three months ended June 30, 2022 to 1.97% for the three months ended June 30, 2023 and an increase in average interest-bearing deposits of $13.7 million, or 5.7% from $240.1 million for the three months ended June 30, 2022 to $253.8 million for the three months ended June 30, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction accounts. Part of the migration to higher yielding accounts results from a deposit retention strategy of offering a special higher interest rate CD and higher money market rates implemented during the quarter ended December 31, 2022. The speed of the market rate increases created a competitive deposit market quickly, especially after the four consecutive 75 basis point raises from June 2022 to November 2022.

Interest expense on Federal Home Loan Bank advances increased $495,000, or 351.1%, to $636,000 for the three months ended June 30, 2023 from $141,000 for the three months ended June 30, 2022. This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $43.5 million, or 162.7%, to $70.2 million for the three months ended June 30, 2023 from $26.7 million for the three months ended June 30, 2022 and an increase in average yield of 151 basis points, or 71.7%, from 2.11% for the three months ended June 30, 2022 to 3.63% for the three months ended June 30, 2023. The increase in average advances was primarily to fund loan growth. At June 30, 2023, we have lengthened our short-term advances as they have matured and are holding onto any excess liquidity in interest bearing accounts. The Company believes this to be prudent given the uncertainty in the market, including consumer behavior and interest rates, and management concerns about regulatory response and public perceptions in light of recent large regional bank failures.

***Net Interest Income.*** Net interest income increased $166,000, or 6.7%, to $2.7 million for the three months ended June 30, 2023 from $2.5 million for the three months ended June 30, 2022 due primarily to the increase in interest-earning assets of $52.4 million, or 14.9%, to $403.4 million at June 30, 2023 from $351.0 million at June 30, 2022, partially offset by a decrease in net interest rate spread of 50 basis points, or 18.7%, from 2.68% for the three months ended June 30, 2022 to 2.18% for the three months ended June 30, 2023. Net interest margin had a 20 basis point decrease to 2.63% for the three months ended June 30, 2023 from 2.83% for the three months ended June 30, 2022. The decrease in net interest rate spread was primarily due to the rapid increase in rates between periods and the inability to reprice interest earning assets at the same speed as interest bearing liabilities with the average yield on interest earning assets increasing by 116 basis points, or 34.9%, compared to the average increase on interest bearing liabilities increasing by 166 basis points, or 252.3%.

***Provision for Credit Losses.*** Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $93,000 for the three months ended June 30, 2023, compared to $37,000 for the three months ended June 30, 2022, an increase of $56,000, or 151.4%, primarily due to an increase in average loans and leases of $36.6 million, of 15.9% and the adoption of the new credit loss methodology, ASC 326. See the CECL section in the financial statements for further explanation of the Bank’s transition to the new methodology.

***Noninterest Income.*** Noninterest income increased $62,000, or 13.8%, to $511,000 for the three months ended June 30, 2023 from $449,000 for the three months ended June 30, 2022, due primarily to an increase in loan fee income from the wholesale lending program of $39,000, or 924.0% to $43,000 for the three months ended June 30, 2023 from $4,000 for the three months ended June 30, 2022, rental income of $6,000 on the newly acquired buildings located adjacent to the current Bank premises that were purchased in January of 2023 for future expansion, a $29,000 loss on the sale of securities occurred in the three months ended June 30, 2022 with no losses in the three months ended June 30, 2023 and a $7,000 increase in service charges on deposit accounts, partially offset by a decrease of $15,000 in other service charges and fees from 274,000 for the three months ended June 30, 2022 to $259,000 for the three months ended June 30, 2023 due primarily to a decrease in ATM fees of $13,000.

***Noninterest Expense.*** Noninterest expense increased $511,000, or 21.6%, to $2.9 million for the three months ended June 30, 2023 from $2.4 million for the three months ended June 30, 2022 primarily due to increases in salaries and employee benefits, data processing, contract services, and other expenses.

Salary and employee benefit expenses increased by $277,000, or 19.7%, to $1.7 million for the three months ended June 30, 2023 from $1.4 million for the three months ended June 30, 2022, due primarily to compensation expenses due to normal salary and benefits increases and a one-time expense related to hiring a new Bank president in March 2023 and an increase of $182,000 for stock options and awards granted under the 2022 Equity Plan, which was approved by shareholders and effective on August 31, 2022. The Equity Plan was not in existence during the three months ended June 30, 2022. Occupancy expenses increased 21,000, or 11.4% due primarily to increases in depreciation, property taxes and utilities. Technology expenses increased $8,000, or 7.5%, to $115,000 for the three months ended June 30, 2023 from $107,000 for the three months ended June 30, 2022 and data processing expenses increased $18,000, or 8.9%, to $221,000 for the three months ended June 30, 2023 from $203,000 for the three months ended June 30, 2022 primarily due to cost increases from the providers. Other expenses increased $161,000, or 48.8%, primarily due to an increase of $19,000 in audit and accounting expenses, a $35,000 increase in insurance expenses due to rate increases and the addition of new properties, a $57,000 increase in other operating expenses primarily due to a one time fee associated with hiring, an increase in FDIC assessment expenses of $23,000 primarily due to an overall increase in the FDIC assessment rate, an $8,000 increase in marketing expense and an $8,000 increase in investment expense. Contract services increased $22,000, or 51.2%, to $65,000 for the three months ended June 30, 2023 from $43,000 for the three months ended June 30, 2022. These increases are reflective of the price increases in all types of services that the Company incurred in 2022, primarily as a result of general wage and inflationary pressures.

***Income Tax Expense.*** Income tax expense decreased by $83,000, or 72.8%, to $31,000 for the three months ended June 30, 2023 from $114,000 for the three months ended June 30, 2022, due to the decrease in net income before taxes of $339,000 from $530,000 for the three months ended June 30, 2022 to $191,000 for the three months ended June 30, 2023. The effective tax rate was 16.23% and 21.51% for the three months ended June 30, 2023 and 2022, respectively. The decrease in effective tax rate was primarily due to nontaxable income increasing at a faster rate than taxable income.

### Average Balance Sheets

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are only included in the computation of average balances. Average yields for loans (excluding PPP loans) include loan fees of $214,000 and $215,000 for the six months ended June 30, 2023 and 2022, respectively. We have not recorded deferred loan fees, as we have determined them to be immaterial.

*(Dollars in thousands)*

| ​ ​ ​ ​ ​ ​ ​ Interest-earning assets: | ​ ​ ​ ​ ​ ​ ​ ​ | ​ ​ For the Six Months Ended June 30, 2023 Average Outstanding Balance ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ Average ​ Yield/Rate ​ ​ | ​ ​ 2022 Average Outstanding Balance ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ Interest ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Average ​ Yield/Rate ​ ​ ​ |
| --- | --- | ---: | --- | --- | --- | ---: | ---: | --- | --- | --- | ---: |
| Loans (excluding PPP loans) | ​ | $261,675 | ​ | $5,879 | ​ | 4.49% | $226,911 | ​ | $4,805 | ​ | 4.24% |
| Allowance for loan and lease losses | ​ | ​ (2,316) |  | ​ — |  | — | ​ (1,609) |  | ​ — |  | — ​ |
| PPP loans | ​ | ​ 1 |  | ​ — |  | —% | ​ 10 |  | ​ — |  | —% |
| Securities | ​ | ​ 126,525 |  | ​ 2,513 |  | 3.97% | ​ 97,246 |  | ​ 820 |  | 1.69% |
| Restricted stock | ​ | ​ 2,825 |  | ​ 61 |  | 4.32% | ​ 2,039 |  | ​ 11 |  | 1.08% |
| Interest-bearing deposits in banks | ​ | ​ 6,115 |  | ​ 128 |  | 4.19% | ​ 7,080 |  | ​ 19 |  | 0.54% |
| Federal funds sold | ​ | ​ 2,923 |  | ​ 70 |  | 4.79% | ​ 16,737 |  | ​ 39 |  | 0.47% |
| Financial derivative | ​ | ​ 536 | ​ | ​ 33 | ​ | 6.16% | ​ — | ​ | ​ — | ​ | —% |
| Total interest-earning assets | ​ | ​ 398,284 |  | ​ 8,684 |  | 4.36% | ​ 348,414 |  | ​ 5,694 |  | 3.27% |
| Noninterest-earning assets | ​ | ​ 22,416 |  | ​ ​ |  | ​ | ​ 21,438 |  | ​ |  | ​ |
| Total assets | ​ | $420,700 |  | ​ ​ |  | ​ ​ | $369,852 |  | ​ |  | ​ |
| **​** | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| **Interest-bearing liabilities:** | ​ |  | ​ | ​ ​ | ​ | ​ ​ |  |  | ​ |  | ​ |
| Interest-bearing demand deposits | ​ | $62,409 |  | ​ 114 |  | 0.37% | $75,611 |  | ​ 126 |  | 0.33% |
| Regular savings and other deposits | ​ | 59,326 |  | ​ 93 |  | 0.31% | 80,192 |  | ​ 143 |  | 0.36% |
| Money market deposits | ​ | 29,631 |  | ​ 398 |  | 2.69% | 11,703 |  | ​ 17 |  | 0.29% |
| Certificates of deposit | ​ | 101,817 |  | ​ 1,628 |  | 3.20% | 70,737 |  | ​ 322 |  | 0.91% |
| Total interest-bearing deposits | ​ | 253,183 |  | ​ 2,233 |  | 1.76% | 238,243 |  | ​ 608 |  | 0.51% |
| Advances from the Federal Home Loan Bank | ​ | 65,078 |  | ​ 1,162 |  | 3.57% | 26,976 |  | ​ 285 |  | 2.11% |
| Other liabilities | ​ | 575 |  | ​ 5 |  | 1.74% | 468 |  | ​ 5 |  | 2.14% |
| Total interest-bearing liabilities | ​ | 318,836 |  | ​ 3,400 |  | 2.13% | 265,687 |  | ​ 898 |  | 0.68% |
| Noninterest-bearing demand deposits | ​ | 55,674 |  | ​ ​ |  | ​ ​ | 55,703 |  | ​ ​ |  | ​ ​ |
| Other noninterest-bearing liabilities | ​ | 3,954 |  | ​ ​ |  | ​ ​ | 3,455 |  | ​ ​ |  | ​ ​ |
| Total liabilities | ​ | 378,464 |  | ​ ​ |  | ​ ​ | 324,845 |  | ​ ​ |  | ​ ​ |
| Total shareholders' equity | ​ | 42,236 |  | ​ ​ |  | ​ ​ | 45,007 |  | ​ ​ |  | ​ ​ |
| Total liabilities and shareholders' equity | ​ | $420,700 |  | ​ ​ |  | ​ ​ | $369,852 |  | ​ ​ |  | ​ ​ |
| Net interest income | ​ | ​ ​ |  | $5,284 |  | ​ ​ | ​ | ​ | $4,796 |  | ​ |
| Net interest rate spread (1) | ​ | ​ | ​ | ​ ​ |  | 2.23% | ​ | ​ | ​ |  | 2.59% |
| Net interest-earning assets (2) | ​ | $79,448 | ​ | ​ ​ |  | ​ ​ | $82,727 | ​ | ​ |  | ​ ​ |
| Net interest margin (3) | ​ | ​ | ​ | ​ ​ |  | 2.65% | ​ | ​ | ​ |  | 2.75% |
| Average interest-earning assets to interest-bearing liabilities | ​ | ​ | ​ | ​ ​ |  | 124.92% | ​ | ​ | ​ |  | 131.14% |

(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 Six Months Ended June 30, 2023 and June 30, 2022

***Net Income.*** The Company had a net loss of $857,000 for the six months ended June 30, 2023, compared to net income of $807,000 for the six months ended June 30, 2022, a decrease of $1.7 million, or 206.2%. The net loss was primarily due to a $1.6 million, or 177.2%, decrease in noninterest income resulting primarily from the sale of securities at a net loss of $1.7 million. Additionally, there was a $906,000 increase in noninterest expense and a $106,000 increase in provision for credit losses, partially offset by a $489,000 increase in net interest income and a decrease in income tax expense of $457,000.

***Interest Income.*** Interest income increased $3.0 million, or 52.5%, from $5.7 million for the six months ended June 30, 2022 to $8.7 million for the six months ended June 30, 2023. This was primarily the result of increased interest income on securities and loans due to increased yields and an increase in the average balance of loans and securities. Average interest earning assets increased by $49.9 million, or 14.3%, from $348.4 million for the six months ended June 30, 2022 to $398.3 million at June 30, 2023, and an increase in the yield on interest earning assets of 109 basis points, or 33.4%, from 3.27% for the six months ended June 30, 2022 to 4.36% for the six months ended June 30, 2023.

Interest income on loans increased $1.1 million, or 22.9%, to $5.9 million for the six months ended June 30, 2023 from $4.8 million for the six months ended June 30, 2022. This increase resulted from an increase in average loans of $34.8 million, or 15.3%, from $226.9 million for the six months ended June 30, 2022 to $261.7 million for the six months ended June 30, 2023, with an increase in loan yield of 25 basis points, or 6.0%, to 4.49% for the six months ended June 30, 2023 from 4.24% for the six months ended June 30, 2022. The increase in loan yield was due primarily to increased market interest rates.

Interest income on securities increased $1.7 million, or 206.5%, from $820,000 for the six months ended June 30, 2022 to $2.5 million for the six months ended June 30, 2023. This increase resulted from an increase in the average balance of securities of $29.3 million, or 30.1%, from $97.2 million for the six months ended June 30, 2022 to $126.5 million for the six months ended June 30, 2023 and an increase of 228 basis points, or 135.0%, in average yield from 1.69% for the six months ended June 30, 2022 to 3.97% for the six months ended June 30, 2023. The rate increase is reflective of market rate increases and the diversification of the securities portfolio to include higher yielding commercial mortgage-backed securities, subordinated bank debt and other bonds with interest rates that are not tied to conventional residential mortgage loan rates. In January 2023, the Company sold 16 securities totaling $17.0 million at a loss of $1.7 million as part of a repricing strategy to increase interest income. A portion of these funds have been reinvested into these higher yielding securities accounting for part of the difference in the 221 basis point yield increase between June 30, 2022 and June 30, 2023. The Federal Reserve increased rates 450 basis points, or 900%, between March 30, 2022 and March 30, 2023.

Interest income from interest bearing deposits in banks increased $109,000, or 573.7%, from $19,000 for the six months ended June 30, 2022 to $128,000 for the six months ended June 30, 2023. This increase primarily resulted from the purchase of certificates of deposits (CDs) through Qwickrate at competitive rates. The increase in average yield of 365 basis points, or 675.3%, from 0.54% for the six months ended June 30, 2022 to 4.19% for the six months ended June 30, 2023, was partially offset by a decrease in average interest bearing deposits of $1.0 million, or 13.6% from $7.1 million for the six months ended June 30, 2022 to $6.1 million for the six months ended June 30, 2023. There was also an increase of $31,000 in fed funds interest income for the six months ended June 30, 2023 primarily from an increase of 432 basis points, or 919.1%, in average yield on fed funds sold from 0.47% for the six months ended June 30, 2022 to 4.79% for the six months ended June 30, 2023, partially offset by a $13.8 million, or 82.5%, decrease in average fed funds sold from $16.7 million for the six months ended June 30, 2022 to $2.9 million for the six months ended June 30, 2023. The increases in yields on deposits in banks and fed funds is reflective of the sharp increase in market interest rates.

Dividends from restricted investments increased $50,000, or 454.5%, from $11,000 for the six months ended June 30, 2022 to $61,000 for the six months ended June 30, 2023. This increase primarily resulted from a $52,000, or 742.9%, increase in dividends on FHLB stock from $7,000 for the six months ending June 30, 2022 to $59,000 for the six months ending June 30, 2023. During the six months ending June 30, 2023 we were required to purchase $459,000 in FHLB stock to fully secure advance obligations obtained during the period. This brought the FHLB stock balance at June 30, 2023 to $2.9 million compared to $2.0 million at June 30, 2022.

Interest income from the fair value hedge increased $33,000 for the six months ended June 30, 2023. The Company entered into an interest rate swap agreement in the six months ended June 30, 2023 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position. Refer to additional detail regarding the fair value hedge in Note 10 – Derivatives.

***Interest Expense.*** Total interest expense increased $2.5 million, or 278.4%, to $3.4 million for the six months ended June 30, 2023 from $898,000 for the six months ended June 30, 2022 due to an increase in the average cost of interest-bearing liabilities of 145 basis points, or 213.6%, from 0.68% for the six months ended June 30, 2022 to 2.13% for the six months ended June 30, 2023, primarily due to an increase in deposit and funding costs. Interest expense on deposit accounts increased $1.6 million, or 267.3%, to $2.2 million for the six months ended June 30, 2023 from $609,000 for the six months ended June 30, 2022, due to an increase in the average deposit cost of 125 basis points, or 245.9%, from 0.51% for the six months ended June 30, 2022 to 1.76% for the six months ended June 30, 2023 and an increase in average interest-bearing deposits of $14.9 million, or 6.3% from $238.2 million for the six months ended June 30, 2022 to $253.2 million for the six months ended June 30, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction accounts. Part of the migration to higher yielding accounts resulted from a deposit retention strategy of offering a special higher interest rate CD and higher money market rates implemented during the quarter ended December 31, 2022.

Interest expense on Federal Home Loan Bank advances increased $877,000, or 307.7%, to $1.2 million for the six months ended June 30, 2023 from $285,000 for the six months ended June 30, 2022. This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $38.1 million, or 141.2%, to $65.1 million for the six months ended June 30, 2023 from $27.0 million for the six months ended June 30, 2022 and an increase in average yield of 146 basis points, or 69.2%, from 2.11% for the six months ended June 30, 2022 to 3.57% for the six months ended June 30, 2023 The increase in average advances was primarily to fund an investment strategy initiated in 2022 and to fund loans. At June 30, 2023, we have lengthened our short-term advances as they have matured and are holding onto any excess liquidity in interest bearing accounts. The Company believes this to be prudent given the uncertainty in the market, including consumer behavior and interest rates, and management concerns about regulatory response and public perceptions in light of recent large regional bank failures.

***Net Interest Income.*** Net interest income increased $500,000, or 10.2%, to $5.3 million for the six months ended June 30, 2023 from $4.8 million for the six months ended June 30, 2022 due primarily to the increase in interest-earning assets of $49.9 million, or 14.3%, to 398.3 million at June 30, 2023 from $348.4 million at June 30, 2022, partially offset by a decrease in net interest rate spread of 36 basis points, or 14.0%, from 2.59% for the six months ended June 30, 2022 to 2.23% for the six months ended June 30, 2023. Net interest margin had a 10 basis point decrease to 2.65% for the six months ended June 30, 2023 from 2.75% for the six months ended June 30, 2022.

***Provision for Credit Losses.*** Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $183,000 for the six months ended June 30, 2023, compared to $77,000 for the six months ended June 30, 2022, an increase of $106,000, or 137.7%, primarily due to an increase in loans and leases and the adoption of ASC 326. See the CECL section in the financial statements for further explanation of the Bank’s transition to the new methodology.

***Noninterest Income.*** Noninterest income decreased $1.6 million, or 177.2%, to a loss of $696,000 for the six months ended June 30, 2023 from income of $902,000 for the six months ended June 30, 2022, due primarily to a $1.7 million loss on the sale of securities during the six months ended June 30, 2023. This was partially offset by two income items that were not in the quarter ended June 30, 2022. There was additional loan fee income from the wholesale lending program of $68,000 and rental income of $14,000 on two newly acquired buildings located adjacent to the current Bank premises that were purchased in January of 2023 for future expansion.

***Noninterest Expense.*** Noninterest expense increased $900,000, or 19.6%, to $5.5 million for the six months ended June 30, 2023 from $4.6 million primarily due to increases in salaries and employee benefits, data processing, contract services, and other expenses.

Salary and employee benefit expenses increased by $482,000, or 17.4%, to $3.3 million for the six months ended June 30, 2023 from $2.8 million for the six months ended June 30, 2022, due to normal salary and benefits increases and an increase in compensation expense of $285,000 for stock awards and stock options awarded under the 2022 Equity Plan, which was approved by shareholders on August 31, 2022. The Equity Plan was not in existence during the six months ended June 30, 2022. Technology expenses increased $29,000, or 14.9%, to $224,000 for the six months ended June 30, 2023, primarily due to higher costs. Other expenses increased $266,000, or 43.7%, primarily due to an increase of $72,000 in audit and accounting expenses, a $67,000 increase in insurance expenses and $58,000 in other operating expenses primarily due to a one time fee associated with hiring. Data processing costs also increased $48,000, or 12.2%, to $442,000 for the six months ended June 30, 2023 from $394,000 for the six months ended June 30, 2022. Contract services increased $49,000, or 62.8%, to $127,000 for the six months ended June 30, 2023 from $78,000 for the six months ended June 30, 2022. Both of these increases are reflective of the price increases in all types of services that the Company incurred in 2022, primarily as a result of general wage, inflationary pressures and fees correlated with asset size of the Company.

***Income Tax Expense.*** Income tax expense decreased by $457,000, or 226.2%, to an income tax benefit of $255,000 for the six months ended June 30, 2023 from an income tax expense of $202,000 for the six months ended June 30, 2022, due to the net loss at June 30, 2023. The effective tax rate was 22.93% and 20.02% for the six months ended June 30, 2023 and 2022, respectively. The increase in effective tax rate was primarily due to taxable income increasing at a faster rate than nontaxable income.

### Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. The Federal Reserve Bank of Boston provides the Bank with a federal funds line of credit. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We are also able to borrow from the Federal Home Loan Bank of Dallas. At June 30, 2023, we had outstanding advances of $71.9 million from the Federal Home Loan Bank of Dallas. At June 30, 2023, we had unused borrowing capacity of $78.2 million with the Federal Home Loan Bank of Dallas. In addition, at June 30, 2023, we had a $10.0 million line of credit with Texas Independent Bankers Bank and a $5.0 million line of credit with First Horizon Bank. At June 30, 2023, there was no outstanding balance under any of these facilities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and 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 six months ended June 30, 2023 and 2022 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 June 30, 2023, Texas Community Bancshares, Inc. (on a stand-alone, unconsolidated basis) had liquid assets of $12.4 million.

Liquidity management and asset quality continue to be high priorities. With continued volatility in the market, recent banking sector events and market interest rate increases, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning. We are monitoring deposit runoff and threats of deposit runoff daily. We have been able to maintain our deposit base through this cycle with some new product offerings and competitive interest rates, which has increased our funding costs. We run stress tests monthly with a severe scenario of 35% CD runoff and 20% other deposit runoff combined with the inability to access our available lines of credit. The scenarios indicate that we are able to maintain our operational liquidity with a designated buffer with our liquidity resources available. We are closely monitoring our assets, liabilities, capital and investment portfolio unrealized losses for possible issues and opportunities related to the current economic and market conditions.

We have contacted some of our large depositors and had discussions with them regarding how to have FDIC coverage to the fullest legal extent, which is over $250,000 for many depositors depending on the type of account ownership. At June 30, 2023, there were 152 accounts with balances in excess of $250,000 with a total of $63.9 million, or 21.1% of deposits. The amount that was over $250,000 was $25.9 million, or 8.6%, that was potentially uninsured, including certificates of deposit of $6.9 million and $19.0 million in checking, MMDA and savings accounts. We have also been communicating with our depositors in general to help ease any fears they may have in light of recent bank failures.

At June 30, 2023, the weighted average life (WAL) of our securities portfolio is 5.6 years. The unrealized losses on the AFS securities is $8.3 million, or 8.0% of the $104.2 million AFS portfolio. Unrealized losses on the HTM securities is $3.0 million, or 10.7% of the $27.9 million HTM portfolio. The total unrealized losses are $11.3 million, or 8.6% of the $132.0 million securities portfolio, which includes $63.4 million, or 48.0%, that are agency issued and guaranteed by the U.S. government. These losses are the result of market interest rate increases and we continue to monitor the portfolio for credit and other risks. The gross unrealized losses on the AFS portfolio is 13.7% of capital and the total gross unrealized loss is 18.6% of capital. The net unrealized loss on AFS securities, and the corresponding other comprehensive loss, was $6.6 million, or 10.9% of capital. Over the next 24 months from June 30, 2023, we expect to realize $7.7 million, $21.8 million, and 12.8 million in cash flow from the securities portfolio in 2023, 2024 and 2025, respectively, with $17.2 million of that being over the next 12 months. See the Securities section of the management discussion and analysis for more information.

At June 30, 2023, the Bank entered into interest rate swap agreements with a total notional amount of $25 million to hedge the risk of changes in the fair value of fixed rate AFS securities for changes in the SOFR benchmark rate. At June 30, 2023 the derivatives were highly effective and offset the unrealized loss on AFS securities by $434,000 bringing the net other comprehensive loss from $6.6 million to $6.1 million.

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

We are currently utilizing listed CDs (Qwickrate) with terms of 3-6 months with full FDIC insurance in order to keep funds liquid while also earning a higher return than holding balances in fed funds. We are not currently utilizing the Bank Term Funding Program.

The following are the various liquidity sources we had available at June 30, 2023 that we could use as needed:

- FHLB borrowing capacity of $78.2 million
- $15 million in credit lines with 2 correspondent banks
- Federal Reserve discount window
- Qwickrate CD Program
- Brokered deposits
- The ability to sell securities. We have run an analysis of securities that could be sold with minimal losses to provide liquidity.
- The ability to sell a group of loans in the secondary market on an as needed basis
- The ability to sell some of our BOLI assets

At June 30, 2023, 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

Our most significant form of market risk is interest rate risk. As a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Risk Management and Interest Rate Risk Management Officer is responsible for evaluating the interest rate risk inherent in our assets and liabilities, determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a 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 and additional fee income;
- expanding our wholesale lending program to be able to meet customer loan needs while managing the weighted average life and interest rate risk in the loan portfolio.

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 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 June 30, 2023*

*(Dollars in thousands)*

| ​ Change in Interest Rates (basis points) (1) | ​ ​ | ​ ​ Net Interest Income Year 1 Forecast | ​ ​ ​ Year 1 Change from ​ Level |
| ---: | --- | ---: | ---: |
| 400 | ​ | $12,519 | (3.79)% |
| 300 | ​ | 12,671 | (2.63)% |
| 200 | ​ | 12,815 | (1.52)% |
| 100 | ​ | 12,975 | (0.30)% |
| Level | ​ | 13,013 | — ​ |
| (100) | ​ | 12,840 | (1.33)% |
| (200) | ​ | 12,660 | (2.71)% |
| (300) | ​ | 12,493 | (4.00)% |
| (400) | ​ | 12,402 | (4.69)% |

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

The table above indicates that at June 30, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 1.52% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 2.71% decrease in net interest income.

***Net Economic Value.*** We also compute amounts by which the net present value of our assets and liabilities (net economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 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 June 30, 2023*

*(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 | ​ | $51,382 | ​ | $(9,087) | (15.03)% | 13.99% | (60) |
| 300 | ​ | 53,928 | ​ | (6,541) | (10.82)% | 14.24% | (35) |
| 200 | ​ | 56,402 | ​ | (4,067) | (6.73)% | 14.45% | (14) |
| 100 | ​ | 58,746 | ​ | (1,723) | (2.85)% | 14.60% | 1 |
| Level | ​ | 60,469 | ​ | — | —% | 14.59% | — |
| (100) | ​ | 60,881 | ​ | 412 | 0.68% | 14.30% | (29) |
| (200) | ​ | 60,559 | ​ | 90 | 0.15% | 13.86% | (73) |
| (300) | ​ | 59,401 | ​ | (1,068) | (1.77)% | 13.27% | (132) |
| (400) | ​ | 57,766 | ​ | (2,703) | (4.47)% | 12.61% | (198) |

(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 June 30, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 6.73% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.15% 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, 876 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 June 30, 2023. 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 June 30, 2023.

During the quarter ended June 30, 2023, there were no changes in the Company’s internal controls over financial reporting that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Aug 10, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-014534. Last ingested by Listed: Oct 30, 2026, 13:46 ET. No prices; not investment advice.