Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
Overview
Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the Federal Home Loan Bank of Dallas, in residential real estate loans and commercial real estate loans and, to a lesser extent, commercial loans, construction and land loans, and consumer and other loans. Substantially all of our loans are fixed-rate loans. We also invest in securities, which have historically consisted primarily of mortgage-backed securities and obligations issued by U.S. government sponsored enterprises, state and municipal securities, and Federal Home Loan Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. Mineola Community Bank is subject to comprehensive regulation and examination by the Texas Department of Savings and Mortgage Lending and the Federal Deposit Insurance Corporation and is a member of the Federal Home Loan Bank system.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan and lease losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, and income from bank owned life insurance. Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contract services, director fees, and other expenses.
We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan and lease losses. At December 31, 2021, our investment in bank owned life insurance was $6.0 million, which was within this investment limit.
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Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Impact of COVID-19 Pandemic
The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, state governments, including Texas, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures have dramatically increased unemployment in the United States and have negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.
The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”). The CARES Act also established the PPP through the SBA, which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. In addition, the Federal Reserve Board took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero.
We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from TDR classification under U.S. GAAP. In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications ( i.e. , six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs.
Given the continuing uncertainty and evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition remain uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services, protracted periods of lower interest rates, increased non-interest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.
Business Strategy
Our current business strategy consists of the following:
● Continue to serve our community as a community bank. Since our founding in 1934, we have operated as a community bank. Historically, our primary lending activity has been the origination of fixed-rate residential mortgage loans to individuals in our market area funded primarily by deposits gathered from individuals and businesses in our market area. We expect that this will continue to be the focus of our business for the foreseeable future. As part of our customer focus, we generally do not sell the loans we originate but retain them in our portfolio. When customers have questions regarding their loans, they are able to deal directly with us rather than another institution. At December 31, 2021, one- to four-family residential mortgage loans totaled $153.8 million, or 69.3% of total loans. This amount includes one- to four-family residential mortgage loans originated in the Dallas Metroplex. We have originated one- to four-family residential mortgage loans secured primarily by owner-occupied properties primarily located in the northern and eastern sections of the Dallas Metroplex. We began originating these loans in 2014, and continue to do so primarily through word-of-mouth referrals. At December 31, 2021, these loans amounted to $61.4 million including $40.9 million of jumbo loans.
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● Grow and diversify our loan portfolio prudently . There has been an influx of retirees and others from the Dallas metropolitan area into our market area. Our more rural market area offers a lower-cost of living and many recreational amenities, while being within easy reach of the cities of Dallas and Tyler and the urban amenities they offer. We believe this movement away from major cities like Dallas has been accelerated by the work-from-home trend that has arisen due to the COVID-19 pandemic. In 2018, we opened our branch office in Lindale, Texas, and acquired our branch office in Edgewood, Texas, from another bank. These offices are located in growth areas of our market area because of their closer proximity to Tyler and Dallas, respectively. The influx of population into our market area has provided opportunities for residential mortgage lending, construction and land lending, and commercial real estate lending. Although we intend to continue our historical focus on the origination of residential mortgage loans, we intend to prudently increase our commercial real estate lending and construction and land lending so as to continue to diversify our loan portfolio. At December 31, 2021, commercial real estate loans amounted to $31.7 million, or 14.3% of total loans, and construction and land loans amounted to $17.6 million, or 8.0% of total loans.
Our commercial real estate loans and construction and land loans have higher credit risk than our residential mortgage loans.
● Continue to grow core deposits . We consider our core deposits to include statement savings accounts, money market accounts, negotiable orders of withdrawal (NOW) accounts, other savings deposits and checking accounts . We will continue our efforts to increase our core deposits to provide a stable source of funds to support loan growth at costs consistent with improving our interest rate spread and net interest margin. Core deposits totaled $202.4 million, or 73.6% of total deposits, as of December 31, 2021, compared to $159.4 million, or 67.8% of total deposits, as of December 31, 2020.
● Continue to manage credit risk to maintain a low level of non-performing assets. Historically, we have been able to maintain a high level of asset quality. We believe strong asset quality remains a key to our long-term financial success . Our total non-performing assets to total assets ratio was 0.49% and 0.36% at December 31, 2021 and 2020, respectively. Our strategy for credit risk management continues to focus on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring. Furthermore, given the uncertainty surrounding the length and severity of the COVID-19 pandemic, management has established and will continue to use enhanced underwriting criteria for all loan types, with a particular focus on portfolio segments identified as having elevated risk.
● Continue to support our customers and our local community . The COVID-19 pandemic has restricted the level of economic activity in our markets, resulting in dramatically increased unemployment and significant negative impacts on many businesses, thereby threatening the repayment ability of some of our borrowers. As we have done during prior economic downturns, we are taking actions to support our customers and our local community. For example, during the year ended December 31, 2020, we originated $5.4 million of small business loans under the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) that was signed into law in March 2020. Under the PPP, loan amounts were forgiven if the borrower maintains employee payrolls and meets certain other requirements. As of December 31, 2021, only four small PPP loans totaling $13,000 were outstanding. The remaining PPP loans have been forgiven. During the year ended December 31, 2020, we also granted short-term payment deferrals on loans to assist customers during the COVID- 19 pandemic. There were no COVID-19 related deferrals granted in the year ending December 31, 2021.
● Grow organically and through opportunistic acquisitions or branching. We intend to grow our balance sheet organically on a managed basis, and the capital we raised in the offering will enable us to increase our lending and investment capacity. In addition to organic growth, we may also consider expansion opportunities in our market area or in contiguous markets that we believe would enhance both our franchise value and stockholder returns. These opportunities may include acquiring other financial institutions and/or establishing loan production offices, establishing new, or de novo, branch offices and/or acquiring branch
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offices, and the capital we raised in the offering will help us fund any such opportunities that may arise. We have no current plans or intentions regarding any such expansion activities.
Summary of Critical Accounting Policies and Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We determined not to take advantage of the benefits of this extended transition period.
The following represent our critical accounting policies:
Allowance for 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 Mineola Community Bank 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 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 Mineola Community Bank and any increase or decrease in the allowance is the responsibility of management.
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Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.
Texas Community Bancshares files consolidated federal income tax returns with Mineola Community Bank. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.
Selected Financial Data
The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
At December 31,
2021
2020
(In thousands)
Selected Financial Condition Data:
Total assets
$
364,826
$
299,638
Cash and cash equivalents
21,915
8,073
Interest bearing deposits in banks
14,955
14,015
Securities available for sale
56,800
12,966
Securities held to maturity
33,682
34,328
Loans receivable, net
220,267
213,239
Premises and equipment, net
6,215
6,383
Foreclosed real estate
209
209
Restricted investments carried at cost
2,037
2,024
Bank owned life insurance
6,020
5,908
Core deposit intangible
529
661
Total deposits
274,933
235,140
Advances from the Federal Home Loan Bank
27,571
30,768
Total shareholders' and members’ equity
60,132
31,939
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For the Years Ended December 31,
2021
2020
(In thousands)
Selected Operating Data:
Interest income
$
10,534
10,802
Interest expense
2,116
2,509
Net interest income
8,418
8,294
Provision for loan and lease losses
50
484
Net interest income after provision for loan and lease losses
8,368
7,809
Noninterest income
1,717
1,557
Noninterest expense
9,474
8,424
Income before income taxes
611
942
Income tax expense
93
193
Net income
$
518
$
749
At or For the Years Ended
December 31,
2021
2020
Performance Ratios:
Return on average assets
0.15
%
0.26
%
Return on average equity
1.39
%
2.35
%
Interest rate spread (1)
2.49
%
2.95
%
Net interest margin (2)
2.66
%
3.14
%
Noninterest expense to average assets
2.80
%
2.96
%
Efficiency ratio (3)
93.48
%
85.51
%
Average interest-earning assets to average interest-bearing liabilities
124.96
%
119.96
%
Capital Ratios:
Average equity to average assets
11.05
%
11.21
%
Total capital to risk-weighted assets
27.59
%
19.16
%
Tier 1 capital to risk-weighted assets
26.68
%
18.68
%
Common equity tier 1 capital to risk-weighted assets
26.68
%
18.68
%
Tier 1 capital to average assets
12.89
%
10.50
%
Asset Quality Ratios:
Allowance for loan and lease losses as a percentage of total loans
0.72
%
0.73
%
Allowance for loan and lease losses as a percentage of non-performing loans
100.13
%
178.81
%
Allowance for loan and lease losses as a percentage of non-accrual loans
100.13
%
178.81
%
Non-accrual loans as a percentage of total loans
0.72
%
0.41
%
Net (charge-offs) recoveries to average outstanding loans during the year
(0.01)
%
(0.01)
%
Non-performing loans as a percentage of total loans
0.72
%
0.41
%
Non-performing loans as a percentage of total assets
0.44
%
0.29
%
Total non-performing assets as a percentage of total assets
0.49
%
0.36
%
Other Data:
Number of offices
6
6
Number of full-time employees
60
61
Number of part-time employees
2
2
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The following table summarizes securities available for sale:
December 31,
2021
2020
Fair
Percentage of
Fair
Percentage of
Value
Total
Value
Total
Securities available for sale:
Residential mortgage-backed
$
18,785
33.1
%
$
12,062
93.0
%
Collateralized mortgage obligations
11,076
19.5
%
—
—
%
State and municipal
11,539
20.3
%
904
—
%
Corporate bonds
2,406
4.2
%
—
7.0
%
U.S. treasury obligations
12,994
22.9
%
—
—
%
Total securities available for sale
$
56,800
100.0
%
$
12,966
100.0
%
The following table sets forth information regarding fair values, weighted average yields and maturities of available for sale investments. The yields have been computed on a tax equivalent basis. Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur.
December 31, 2021
Due in One Year
One to Five Years
Five to Ten Years
After Ten Years
Total Investment Securities
Weighted
Weighted
Weighted
Weighted
Weighted
Fair
Average
Fair
Average
Fair
Average
Fair
Average
Fair
Average
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Value
Yield
Securities available for sale:
Residential mortgage-backed
$
8
2.10
%
$
245
2.13
%
$
6,504
1.42
%
$
12,028
1.60
%
$
18,785
1.55
%
Collateralized mortgage obligations
—
—
%
—
—
%
—
—
%
11,076
1.26
%
11,076
1.26
%
State and municipal
—
—
%
848
1.93
%
3,372
2.26
%
7,319
2.96
%
11,539
2.68
%
Corporate bonds
—
—
%
—
—
%
1,406
3.14
%
1,000
3.32
%
2,406
3.22
%
U.S. treasury obligations
—
—
%
8,993
0.70
%
4,001
0.98
%
—
—
%
12,994
0.79
%
Total securities available for sale
$
8
$
10,086
$
15,283
$
31,423
$
56,800
The following table summarizes securities held to maturity:
December 31,
2021
2020
Amortized
Percentage of
Amortized
Percentage of
Cost
Total
Cost
Total
Securities held to maturity:
Residential mortgage-backed
$
31,277
92.9
%
$
28,407
82.8
%
State and municipal
2,405
7.1
%
5,921
17.2
%
Total securities held to maturity
$
33,682
100.0
%
$
34,328
100.0
%
The following table sets forth information regarding amortized costs, weighted average yields and maturities of all held to maturity investments. The yields have been computed on a tax equivalent basis. Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur.
December 31, 2021
Due in One Year
One to Five Years
Five to Ten Years
After Ten Years
Total Investment Securities
Weighted
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Securities held to maturity:
Residential mortgage-backed
$
28
1.99
%
$
952
2.94
%
$
8,507
1.72
%
$
21,790
1.58
%
$
31,277
1.66
%
State and municipal
—
—
%
1,137
2.34
%
134
2.74
%
1,134
4.03
%
2,405
3.16
%
Total securities held to maturity
$
28
$
2,089
$
8,641
$
22,924
$
33,682
(1) Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2) Represents net interest income as a percentage of average interest-earning assets.
(3) Represents noninterest expenses divided by the sum of net interest income and noninterest income.
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Comparison of Financial Condition at December 31, 2021 and December 31, 2020
Total Assets . Total assets were $364.8 million as of December 31, 2021, an increase of $65.2 million, or 21.8%, when compared to total assets of $299.6 million as of December 31, 2020. The increase was due primarily to increases in cash, cash equivalents and interest bearing deposits in banks increasing by a combined $14.8 million, or 67.0%, and an increase of $43.2 million, or 91.3%, in securities to $90.5 million at December 31, 2021 from $47.3 million at December 31, 2020. A portion of the increases in assets were due to the Conversion, resulting in an increase in capital of $28.2 million, or 88.4%, to $60.1 million at December 31, 2021 from $31.9 million at December 31, 2020.
Cash, Cash Equivalents and Due From Banks. Total cash, cash equivalents and due from banks (which includes fed funds sold) increased $13.8 million, or 170.4%, to $21.9 million (including $16.3 million in Fed Funds sold) at December 31, 2021 from $8.1 million (including $2.1 million in Fed Funds sold) at December 31, 2020. This increase is primarily due to the net increase in deposits of $39.8 million and the net proceeds of $28.2 million from the mutual to stock conversion resulting in increased capital, partially offset by securities purchases and loan funding.
Interest Bearing Deposits in Banks . Interest bearing deposits in banks were $15.0 million at December 31, 2021 compared to $14.0 million as of December 31, 2020, an increase of $1 million or 7.1%. The increase was due primarily to the net increases in deposits and capital, partially offset by securities purchases.
Securities Available for Sale. Securities available for sale (AFS) increased by $43.8 million, or 336.9%, to $56.8 million at December 31, 2021 from $13.0 million at December 31, 2020. This increase is primarily due to the investment of the funds provided by the mutual to stock conversion and the increase in deposits. The increase in securities included the investment of $79.4 million in AFS securities, including purchases of $43.2 million in US Treasuries, $11.3 million in mortgage-backed securities (MBS), $11.3 million in collateralized mortgage obligations (CMO), $11.0 million in municipals, and $2.5 million in bank subordinated debt, partially reduced by paydowns of $4.2 million, one municipal of $200,000 called, $30 million in short-term treasuries that matured and unrealized losses on the AFS portfolio of $1.0 million.
Securities Held to Maturity. Securities held to maturity decreased by $600,000, or 1.7%, to $33.7 million at December 31, 2021 from $34.3 million at December 31, 2020. This decrease is primarily due to purchases of MBS totaling $13.8 million, offset by principal repayments of $10.7 million and calls on municipal securities totaling $3.5 million.
Loans and Leases Receivable, Net . Net loans and leases receivable increased $7.1 million, or 3.3%, to $220.3 million at December 31, 2021 from $213.2 million at December 31, 2020, including a reduction in PPP loans of $4.1 million, or 99.7%, from $4.1 million at December 31, 2020 to $13,000 at December 31, 2021. During the year ended December 31, 2021, loans were originated totaling $112.8 million of which $21.2 million were renewals or refinancings of existing Mineola Community Bank loans, resulting in net originations of $91.6 million, less participations sold of $6.5 million. Loan originations consisted primarily of $48.2 million of 1-4 family home loans, $28.2 million of construction loans (upon completion), including speculative construction loans of $12.0 million, $18.4 million in commercial real estate less $6.5 million sold through participations, $3.1 million of consumer loan originations, $5.4 million in commercial and industrial loan originations, $3.4 million in land & development, $2.9 million in farmland and $1.1 million in municipal loan originations. During the year ended December 31, 2021, there were $11.9 million in loan principal paydowns and $74.5 million in loan payoffs. During the year ended December 31, 2021, total construction loans (including the 49% remaining in process) decreased by $195,000 from $23.5 million at December 31, 2020 to $23.3 million at December 31, 2021. Construction loans continue to be a large segment of our portfolio which is a reflection of strong housing demand in our primary market area.
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Deposits. Deposits increased $39.8 million, or 16.9%, to $274.9 million at December 31, 2021 from $235.1 million at December 31, 2020. Core deposits (defined as all deposits other than certificates of deposit) increased $43.0 million, or 27.0%, to $202.4 million at December 31, 2021 from $159.4 million at December 31, 2020. Certificates of deposit decreased $3.2 million, or 4.2%, to $72.5 million at December 31, 2021 from $75.8 million at December 31, 2020. We have no brokered deposits. The large growth in deposits during 2021 is partially due to higher customer cash balances resulting from various forms of Covid-19 relief and increased government stimulus. The decrease in certificates of deposit is primarily due to a declining rate environment in the market for time deposits combined with a strategic effort to reduce our overall cost of funds through a reduction of higher costs certificates of deposit.
Advances from the Federal Home Loan Bank. Advances from the Federal Home Loan Bank decreased by $3.2 million, or 10.4%, to $27.6 million at December 31, 2021 from $30.8 million at December 31, 2020 due to monthly principal reductions on amortizing advances and the payoff of a $1.0 million advance.
Shareholders’ Equity. Total shareholders’ equity increased $28.2 million, or 88.4%, to $60.1 million at December 31, 2021 from $31.9 million at December 31, 2020. The increase was primarily the result of the Conversion on July 14, 2021, which netted $30.9 million from the sale of common stock, reduced by $2.6 million with the establishment of the Mineola Community Bank leveraged ESOP, for a net addition to equity of $28.3 million from the conversion. Retained earnings was increased further by consolidated income for the year ended December 31, 2021 of $518,000, and ESOP shares earned adding $202,000 to capital, offset by an $814,000 reduction in accumulated other comprehensive income from $128,000 at December 31, 2020 to ($686,000) at December 31, 2021. The ESOP contra equity account was $2.5 million at December 31, 2021.
At December 31, 2021, 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 December 31, 2021 a community bank leverage ratio of at least 8.5% is required to be considered “well capitalized” under regulatory requirements. At December 31, 2021, Mineola Community Bank’s community bank leverage ratio was 12.89%.
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Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances. Average yields for loans (excluding PPP loans) include loan fees of $579,000 and $583,000 for the years ended December 31, 2021 and 2020, respectively. Average yield for PPP loans includes $212,000 in loan fees for the year ended December 31, 2020 and none in 2021. We have not recorded deferred loan fees, as we have determined them to be immaterial.
For the Years Ended December 31,
2021
2020
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans)
$
216,207
$
9,569
4.43
%
$
193,765
$
9,372
4.84
%
Allowance for loan and lease losses
(1,576)
—
—
(1,205)
—
—
PPP loans
545
6
1.10
%
3,422
248
7.25
%
Securities
59,083
857
1.45
%
48,777
898
1.84
%
Restricted stock
2,029
22
1.08
%
2,008
38
1.89
%
Interest-bearing deposits in banks
18,677
56
0.30
%
15,791
241
1.53
%
Federal funds sold
22,080
24
0.11
%
1,866
5
0.27
%
Total interest-earning assets
317,045
10,534
3.32
%
264,424
10,802
4.09
%
Noninterest-earning assets
21,357
20,082
Total assets
$
338,402
$
284,506
Interest-bearing liabilities:
Interest-bearing demand deposits
$
69,116
234
0.34
%
$
49,345
177
0.36
%
Regular savings and other deposits
70,338
263
0.37
%
52,223
238
0.46
%
Money market deposits
9,758
36
0.37
%
10,862
87
0.8
%
Certificates of deposit
75,080
957
1.27
%
74,935
1,304
1.74
%
Total interest-bearing deposits
224,292
1,490
0.66
%
187,365
1,806
0.96
%
Advances from the Federal Home Loan Bank
29,061
615
2.12
%
32,738
691
2.11
%
Other liabilities
371
11
2.96
%
332
12
3.61
%
Total interest-bearing liabilities
253,724
2,116
0.83
%
220,435
2,509
1.14
%
Noninterest-bearing demand deposits
43,454
29,183
Other noninterest-bearing liabilities
3,840
3,005
Total liabilities
301,018
252,623
Total members’ equity
37,384
31,883
Total liabilities and members’ equity
$
338,402
$
284,506
Net interest income
$
8,418
$
8,293
Net interest rate spread (1)
2.49
%
2.95
%
Net interest-earning assets (2)
$
63,321
$
43,989
Net interest margin (3)
2.66
%
3.14
%
Average interest-earning assets to interest-bearing liabilities
124.96
%
119.96
%
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
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Rate/Volume Analysis
The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current year volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
Years Ended December 31, 2021 vs. 2020
Increase (Decrease) Due to
Total Increase
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Loans (excluding PPP loans)
$
1,085
$
(888)
$
197
PPP loans
(209)
(33)
(242)
Securities
190
(231)
(41)
Restricted stock
—
(16)
(16)
Interest-bearing deposits in banks
44
(229)
(185)
Federal funds sold and other
54
(35)
19
Total interest-earning assets
1,164
(1,432)
(268)
Interest-bearing liabilities:
Interest-bearing demand deposits
71
(14)
57
Regular savings and other deposits
83
(58)
25
Money market deposits
(9)
(42)
(51)
Certificates of deposit
3
(350)
(347)
Total deposits
148
(464)
(316)
Advances from the Federal Home Loan Bank
(78)
2
(76)
Other interest-bearing liabilities
1
(2)
(1)
Total interest-bearing liabilities
71
(464)
(393)
Change in net interest income
$
1,093
$
(968)
$
125
Comparison of Operating Results for the Years Ended December 31, 2021 and December 31, 2020
Net Income. Net income was $518,000 for the year ended December 31, 2021, compared to net income of $749,000 for the year ended December 31, 2020, a decrease of $231,000, or 30.8%. The decrease was primarily due to a $1.0 million, or 12.5%, increase in non-interest expense, partially offset by a $124,000, or 1.5%, increase in net interest income, a $434,000, or 89.7%, decrease in the provision for loan and lease losses, a $160,000 increase in noninterest income and a $100,000 decrease in income tax expense. The large increase in non-interest expense includes $575,000 in expenses related to the establishment of the TCBS Foundation as part of the conversion and $202,000 in expenses related to the newly formed ESOP.
Interest Income. Interest income decreased $268,000, or 2.5%, to $10.5 million for the year ended December 31, 2021 from $10.8 million at December 31, 2020. This decrease was the result of decreased yields on all interest earnings assets. Total average interest earning assets increased by $52.6 million, or 19.9%, but was offset by a 75 basis point, or 18.4%, drop in yield from 4.09% at December 31, 2020 to 3.32% at December 31, 2021.
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Interest income on loans, excluding PPP interest, increased $197,000. This interest increase was primarily due to an increase of $22.4 million, or 11.6%, increase in the average balance of the loan portfolio from $193.8 million for the year ended December 31, 2020 to $216.2 million for the year ended December 31, 2021. This was partially offset by a decrease of 41 basis points, or 8.5%, in the average yield on loans from 4.84% for the year ended December 31, 2020 to 4.43% for the year ended December 31, 2021. PPP loan interest decreased $242,000, or 97.6%, to $6,000 for the year ended December 31, 2021 from $248,000 for the year ended December 31, 2020. This decrease was due to a decrease in yield of 615 basis points, or 84.8%, from 7.25% for the year ended December 31, 2021 to 1.10% for the year ended December 31, 2020. There were $212,000 in PPP loan fees included in interest for the year ended December 31, 2020 and none in 2021.
Securities interest decreased $41,000, or 4.6%, from $898,000 for the year ended December 31, 2020 to $857,000 for the year ended December 31, 2021. This decline resulted from a 39 basis point, or 21.2%, decline in yield from 1.84% for the year ended December 31, 2020 to 1.45% for the year ended December 31, 2021, partially offset by the $10.3 million, or 21.1%, increase in average securities from $48.8 million for the year ended December 31, 2020 to $59.1 million for the year ended December 31, 2021. The yield decrease is reflective of the overall rate decline in the market resulting in lower average yields on securities added to the portfolio over the past year.
Interest bearing deposits in banks and cash and cash equivalents experienced a significant interest rate decrease from December 31, 2020 to December 31, 2021 due to overall market and economic conditions. Interest income from interest bearing deposits in banks decreased $185,000, or 76.8%, from $241,000 for the year ended December 31, 2020 to $56,000 for the year ended December 31, 2021. This decline resulted from a decrease of 123 basis points, or 80.4%, in average yield from 1.53% for the year ended December 31, 2020 to 0.30% for the year ended December 31, 2021, which was partially offset by a $2.9 million, or 18.3%, increase in deposits in banks from $15.8 million for the year ended December 31, 2020 to $18.7 million for the year ended December 31, 2021. Fed funds interest increased $19,000, or 380.0%, to $24,000 at December 31, 2021 from $5,000 at December 31, 2020. There was also a decrease of 16 basis points, or 59.4%, in average yield on fed funds from 0.27% for the year ended December 31, 2020 to 0.11% for the year ended December 31, 2021, which was offset by a $20.2 million, or 1,083.3%, increase in fed funds from $1.9 million for the year ended December 31, 2020 to $22.1 million for the year ended December 31, 2021. Average interest earning assets increased by $52.6 million, or 19.9%, from $264.4 million at December 31, 2020 to $317.0 million at December 31, 2021, which was offset by a decrease in yield of 75 basis points, or 18.4%, from 4.09% for the year ended December 31, 2020 to 3.32% for the year ended December 31, 2021.
Interest Expense. Interest expense decreased $393,000, or 15.7%, to $2.1 million for the year ended December 31, 2021 from $2.5 million for the year ended December 31, 2020 due to a decrease in the average cost on interest-bearing liabilities of 30 basis points, or 26.7%, from 1.14% for the year ended December 31, 2020 to 0.83% for the year ended December 31, 2021, partially offset by an increase in average deposit accounts of $33.3 million, or 15.1% to $253.7 for the year ended December 31, 2021 from $220.4 million for year ended December 31, 2021. Interest expense on deposit accounts decreased $316,000, or 17.5%, for the year ended December 31, 2021 from $1.8 million for the year ended December 31, 2020 to $1.5 million for the year ended December 31, 2021, due primarily to a decrease in the average deposit cost of 30 basis points, or 31.1%, from 0.96% for the year ended December 31, 2020 to 0.66% for the year ended December 31, 2021. This 30 basis point, or 31.1%, decrease in deposit cost was primarily due to a decrease in market interest rates. This was partially offset by an increase of $36.9 million, or 19.7%, in the average deposit account balances from $187.4 million for the year ended December 31, 2020 to $224.3 million for the year ended December 31, 2021.
Interest expense on Federal Home Loan Bank (FHLB) advances decreased $76,000, or 11.0%, to $615,000 for the year ended December 31, 2021 from $691,000 for the year ended December 31, 2020, primarily due to the decrease in average balances of FHLB advances of $3.7 million, or 11.2%, to $29.1 million for the year ended December 31, 2021 from $32.7 million for the year ended December 31, 2020, resulting from normal monthly principal reductions and a $1.0 million advance that matured. The average rate remained basically flat at 2.12% for the year ended December 31, 2021.
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Net Interest Income . Net interest income increased $125,000, or 1.5%, to $8.4 million for the year ended December 31, 2021 from $8.3 million for the year ended December 31, 2020, primarily due to a increase $19.3 million, or 43.9% in average net interest earning assets from $44.0 million for the year ended December 31, 2020 to $63.3 million for the year ended December 31, 2021, partially offset by a 46 basis point, or 15.6%, decrease in net interest rate spread from 2.95% for the year ended December 31, 2020 to 2.49% for the year ending December 31, 2021. Net interest margin decreased 48 basis points, or 15.3%, to 2.66% for the year ended December 31, 2021 from 3.14% for the year ended December 31, 2020.
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 decreased $434,000, or 89.7%, from $484,000 for the year ended December 31, 2020 to $50,000 for the year ended December 31, 2021, leaving the allowance for loan and lease losses basically flat at $1.6 million at December 31, 2021. The higher amount in 2020 was partially the result of a $300,000 specific reserve placed on one loan relationship.
Noninterest Income. Noninterest income increased $160,000, or 10.3%, to $1.7 million for the year ended December 31, 2021 from $1.6 million for the year ended December 31, 2020, primarily the result of increased other ATM fees of $167,000, or 23.3%, from $718,000 at December 31, 2020 to $885,000 at December 31, 2021, and an $11,000, or 1.6%, increase in additional deposit account related fees and other service charges and fees over the year ended December 31, 2021. This was offset by a decrease of $10,000, or 8.3%, in bank-owned life insurance income and an $8,000, or 27.6%, decrease in other miscellaneous income.
Noninterest Expense. Noninterest expense increased $1.1 million, or 12.5%, to $9.5 million for the year ended December 31, 2021 from $8.4 million for the year ended December 31, 2020 primarily due to increased expenses relating to the conversion and reporting, including a $575,000 expense to initially fund the TCBS Foundation and a $202,000 expense related to the newly formed Mineola Community Bank ESOP. Increases in professional services and technologies utilized for SEC accounting and reporting and additional FDIC insurance costs also increased our noninterest expense.
Salary and employee benefit expenses increased by $233,000, or 4.7%, totaling $5.1 million for the year ended December 31, 2021 and $4.9 million for the year ended December 31, 2020, due primarily to the new $202,000 ESOP expense in 2021 and an increase of $29,000 in health insurance costs for the year ending December 31, 2021 from $453,000 to $482,000. Directors’ fees increased $38,000, or 14.2%, from $268,000 for the year ended December 31, 2020 to $306,000 for the year ended December 31, 2021 due to an increase in monthly director compensation. Data (core) processing expense decreased by $38,000, or 4.4%, to $833,000 for the year ended December 31, 2021 from $871,000 for the year ended December 31, 2020 primarily due to a contract renegotiation and renewal. However, we have been notified of a 6% price increase from FPS, our core processor, in 2022 due to increased operating costs. Contract services increased $75,000, or 15.9%, from $472,000 to $547,000 over the year ended December 31, 2021 along with other expenses increasing $723,000, or 60.6%, for the year ended December 31, 2021 from $1.2 million to $1.9 million. There was a decrease of $88,000 in donations and contributions in 2021, offset by several increases in expenses primarily related to the conversion and new auditing and reporting requirements associated with being a public company including but not limited to, a $575,000 expense for the initial funding of the foundation, and an increase in audit, accounting and reporting expenses of $170,000.
Income Tax Expense. Income tax expense decreased by $100,000, or 51.8%, to $93,000 for the year ended December 31, 2021 from $193,000 for the year ended December 31, 2020. The effective tax rate was 15.22% and 20.5% for the year ended December 31, 2021 and 2020, respectively. The decrease in the effective tax rate was primarily due to a decrease in non-deductible tax items in 2021 as compared to 2020.
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
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interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
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.
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The tables below set forth the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.
At December 31, 2021
Change in Interest Rates
Net Interest Income Year
Year 1 Change from
(basis points) (1)
1 Forecast
Level
(Dollars in thousands)
400
$
7,966
(8.12)
%
300
8,215
(5.25)
%
200
8,462
(2.40)
%
100
8,626
(0.51)
%
Level
8,670
—
(100)
8,734
0.74
%
(200)
8,621
(0.57)
%
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that at December 31, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 2.40% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.57% 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 tables below set forth the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.
At December 31, 2021
EVE as a Percentage of
Present Value of Assets (3)
Estimated Increase
Increase
Change in Interest
Estimated
(Decrease) in EVE
(Decrease)
Rates (basis points) (1)
EVE (2)
Amount
Percent
EVE Ratio (4)
(basis points)
(Dollars in thousands)
400
$
50,893
$
(9,533)
(15.78)
%
15.76
%
(64)
300
53,982
(6,444)
(10.66)
%
16.14
%
(26)
200
56,955
(3,471)
(5.74)
%
16.45
%
5
100
59,192
(1,234)
(2.04)
%
16.55
%
15
Level
60,426
—
—
%
16.40
%
—
(100)
59,283
(1,143)
(1.89)
%
15.68
%
(72)
(200)
60,738
312
0.52
%
15.76
%
(64)
(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 December 31, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 5.74% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.52% increase in EVE.
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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.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We are also able to borrow from the Federal Home Loan Bank of Dallas. At December 31, 2021, we had outstanding advances of $27.6 million from the Federal Home Loan Bank of Dallas. At December 31, 2021, we had unused borrowing capacity of $104.5 million with the Federal Home Loan Bank of Dallas. In addition, at December 31, 2021, we had a $10.0 million line of credit with Texas Independent Bankers Bank and a $5.0 million line of credit with First Horizon Bank. At December 31, 2021, 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 depend on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For additional information, see the consolidated statements of cash flows for the years ended December 31, 2021 and 2020 included as part of the consolidated financial statements appearing elsewhere in this annual report.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
Texas Community Bancshares, Inc. is a separate legal entity from Mineola Community Bank and it must provide for its own liquidity to pay any dividends to stockholders and for other corporate purposes. At December 31, 2021, Texas Community Bancshares, Inc. (on an unconsolidated basis) had cash and cash equivalents totaling $21.9 million.
At December 31, 2021, 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. See Note 18 of the notes to consolidated financial statements.
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Off-Balance Sheet Arrangements
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, unused lines of credit and swap transactions. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2021, we had outstanding commitments to originate loans of $27.4 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from December 31, 2021 totaled $43.9 million. Management expects that a substantial portion of these time deposits will be retained. However, if a substantial portion of these time deposits is not retained, we may utilize advances from the Federal Home Loan Bank of Dallas or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 22 of the notes to our consolidated financial statements beginning on page F-1 of this annual report.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this prospectus have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information regarding this Item is contained in Item 7 under the heading “Management of Market Risk.”
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.