What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-23 · 96 added, 112 removed, 386 unchanged (35% of the section changed)

19 unchanged sentences

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.

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

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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.

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.

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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.

We believe this movement away from major cities like Dallas has been accelerated by the work-from-home trend that accelerated 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.

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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.

Under the PPP, loan amounts were forgiven if the

borrower maintains employee payrolls and meets certain other requirements.

As of December 31, 2022, only two small PPP loans totaling $2,000 were outstanding.

The remaining PPP loans have been forgiven or paid.

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.

There were no COVID-19 related deferrals granted in the years ended December 31, 2021 or 2022.

● 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.

We intend to grow our assets 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

offices, and the capital we raised in the offering will help us fund any such opportunities that may arise.

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 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.

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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.

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.

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Premises and equipment, net

Foreclosed real estate

Foreclosed assets

Restricted investments carried at cost

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Advances from the Federal Home Loan Bank

Total shareholders' and members’ equity

Total shareholders' equity

For the Years Ended December 31,

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Number of part-time employees

(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.

The following table summarizes securities available for sale:

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Corporate bonds

treasury obligations

Government and agency

Total securities available for sale

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Corporate bonds

treasury obligations

Government and agency

Total securities available for sale

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Total securities held to maturity

(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.

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

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Total assets were $417.3 million as of December 31, 2022, an increase of $52.5 million, or 14.4%, when compared to total assets of $364.8 million as of December 31, 2021.

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.

The increase was due primarily to an increase in securities of $44.5 million, or 49.2%, to $135.0 million at December 31, 2022 from $90.5 million at December 31, 2021 and an increase in net loans and leases of $31.0 million, or 14.1%, to $251.3 million at December 31, 2022 from $220.3 million at December 31, 2021, partially offset by decreases in cash, cash equivalents and interest bearing deposits in banks by a combined $25.9 million, or 70.2%, to $11.0 million at December 31, 2022 from $36.9 million at December 31, 2021.

Asset growth was primarily due to increases in deposits, including $12.0 million in callable brokered deposits, and FHLB advances being invested in securities as part of a strategic purchase plan and loan growth.

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.

Total cash, cash equivalents and due from banks (which includes fed funds sold) decreased $13.0 million, or 59.4%, to $8.9 million (including $2.0 million in Fed Funds sold) at December 31, 2022 from $21.9 million (including $16.3 million in Fed Funds sold) at December 31, 2021.

This decrease is primarily due to an increase in securities of $44.5 million, or 49.2%, and an increase in net loans and leases of $31.0 million, or 14.1%, partially offset by increase in deposits of $21.2 million, or 7.7%, and an increase in Federal Home Loan Bank (FHLB) borrowings of $34.9 million, or 126.4%.

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.

Interest bearing deposits in banks were $2.1 million at December 31, 2022 compared to $15.0 million as of December 31, 2021, a decrease of $12.9 million, or 86.0%.

The decrease was due primarily to the net increases in securities and net loans and leases, partially offset by increased deposits and FHLB borrowings.

Securities Available for Sale.

Securities available for sale (AFS) increased by $50.4 million, or 88.7%, to $107.2 million at December 31, 2022 from $56.8 million at December 31, 2021.

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.

The increase in securities included the investment of $75.3 million in AFS securities, including purchases of $13.8 million in US Treasuries, $9.8 million in mortgage-backed securities (MBS), $43.6 million in collateralized mortgage obligations (CMO), $4.8 million in municipals, and $3.3 million in bank subordinated debt, partially reduced by sales of $10.8 million, paydowns of $5.9 million, and increases in unrealized losses on the AFS portfolio of $8.0 million.

Securities purchases were part of a strategic plan funded by excess cash, brokered deposits and FHLB advances.

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.

Securities held to maturity decreased by $5.9 million, or 17.5%, to $27.8 million at December 31, 2022 from $33.7 million at December 31, 2021.

This decrease is primarily due to principal repayments of $5.3 million and a call on a municipal security totaling $365,000.

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.

Net loans and leases receivable increased $31.0 million, or 14.1%, to $251.3 million at December 31, 2022 from $220.3 million at December 31, 2021, including a reduction in PPP loans of $11,000, or 84.6%, from $13,000 at December 31, 2021 to $2,000 at December 31, 2022.

During the year ended December 31, 2022, loans were originated totaling $109.7 million of which $13.6 million were renewals or refinancings of existing Mineola Community Bank loans, resulting in net originations of $96.1 million.

Loan originations consisted primarily of $32.8 million of 1-4 family home loans, $54.7 million of construction loans (upon completion), including residential speculative construction loans of $11.9 million, $10.1 million in multi-family construction, $7.5 million in commercial real estate, $2.1 million in land and development, $4.2 million of consumer and other loan originations, $4.8 million in commercial and industrial, $3.4 million in farmland and $112,000 in other agricultural loan originations.

During the year ended December 31, 2022, there were $13.0 million in loan principal paydowns and $48.3 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.

During the year ended December 31, 2022, total construction loans (including the 43.1% remaining in process) increased by $30.7 million from $23.3 million at December 31, 2021 to $54.0 million at December 31, 2022.

Construction loans continue to be a growing segment of our portfolio with the majority of the loans being originated in our primary market.

Demand for construction, development and 1-4 family home loan purchases continued to grow in 2022.

Deposits increased $21.1 million, or 7.7%, to $296.1 million at December 31, 2022 from $274.9 million at December 31, 2021.

Core deposits (defined as all deposits other than certificates of deposit) increased $4.3 million, or 2.1%, to $206.7 million at December 31, 2022 from $202.4 million at December 31, 2021.

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.

The large growth in deposits includes $12.0 million in brokered deposits issued to partially fund an investment strategy.

Retail certificates of deposit increased $4.7 million, or 6.5%, to $77.3 million at December 31, 2022 from $72.5 million at December 31, 2021.

The increase in retail deposits is primarily due to the large increase in market interest rates and a strategic effort to retain deposits in a competitive environment during 2022.

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.

Advances from the Federal Home Loan Bank increased by $34.9 million, or 126.7%, to $62.5 million at December 31, 2022 from $27.6 million at December 31, 2021 primarily due to funding a strategic securities purchase plan while providing funds to mitigate deposit fluctuations and deposit pricing volatility.

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.

Total shareholders’ equity decreased $4.2 million, or 7.0%, to $55.9 million at December 31, 2022 from $60.1 million at December 31, 2021.

The decrease was primarily the result of the unrealized loss on available for sale securities and the corresponding accumulated other comprehensive loss increasing by $6.3 million, or 920.3%, to $7.0 million at December 31, 2022 from $686,000 at December 31, 2021 primarily due to the rising interest rate environment and $297,000 in benefits cost related to the 2022 funding of the Mineola Community Bank leveraged ESOP plan and the 2022 equity incentive plan.

At December 31, 2022, the ESOP contra equity account was $2.3 million.

At December 31, 2022, Mineola Community Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes.

As permitted by the CARES Act, at 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, 2022 a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements.

At December 31, 2022, Mineola Community Bank’s community bank leverage ratio was 12.31%.

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Average yields for loans (excluding PPP loans) include loan fees of $399,000 and $579,000 for the years ended December 31, 2022 and 2021, respectively.

Average yield for PPP loans includes $212,000 in loan fees for the year ended December 31, 2020 and none in 2021.

There were no loan fees for PPP loans included in the average yield for the years ended December 31, 2022 or 2021.

We have not recorded deferred loan fees, as we have determined them to be immaterial.

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Total liabilities

Total members’ equity

Total liabilities and members’ equity

Total shareholders' equity

Total liabilities and shareholders' equity

Net interest income

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Comparison of Operating Results for the Years Ended December 31, 2022 and December 31, 2021

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.

Net income was $1.8 million for the year ended December 31, 2022, compared to net income of $518,000 for the year ended December 31, 2021, an increase of $1.2 million, or 238.6%.

The increase was primarily due to a $1.9 million, or 22.2%, increase in net interest income and a $151,000, or 8.8%, increase in noninterest income.

This increase was partially offset by a $292,000, or 3.1%, increase in noninterest expense, a $158,000, or 316.0%, increase in the provision for loan and lease losses and a $330,000, or 354.8%, increase in income tax expense.

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.

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 increased $2.1 million, or 20.0%, to $12.6 million for the year ended December 31, 2022 from $10.5 million at December 31, 2021.

This increase resulted primarily from an increase in average interest earning assets of $38.2 million, or 12.1%, from $317.0 million at December 31, 2021 to $355.2 million at December 31, 2022 and an increase of 22 basis points, or 6.5%, in average yield on interest–earning assets from 3.32% at December 31, 2021 to 3.54% at December 31, 2022.

The interest income increase is primarily due to an increase in the average balance of securities of $45.5 million, or 77.0%, from $59.1 million, for the year ended December 31, 2021 to $104.6 million for the year ended December 31, 2022 and an increase in the average yield on securities of 76 basis points, or 52.6%, from 1.45% for the year ended December 31, 2021 to 2.21% for the year ended December 31, 2022.

The yield increase is reflective of an increase in market interest rate increases and the diversification of the securities portfolio to include higher yielding commercial mortgage-backed securities, subordinated bank debt and other bonds that are not tied to conventional residential mortgages.

Securities interest income increased $1.5 million, or 170.2%, from $857,000 for the year ended December 31, 2021 to $2.3 million for the year ended December 31, 2022.

Interest income on net loans and leases, excluding PPP loan interest, increased $505,000, or 5.3%, to $10.1 million for the year ended December 31, 2022 from $9.6 million for the year ended December 31, 2021 primarily due to an increase of $18.6 million, or 8.6%, increase in the average balance of the loan portfolio from $216.2 million for the year ended December 31, 2021 to $234.8 million for the year ended December 31, 2022, partially offset by a decrease of 14 basis points, or 3.1%, in the average yield on loans from 4.43% for the year ended December 31, 2021 to 4.29% for the year ended December 31, 2022.

The decreased yield on loans is primarily due to decreased loan fees and a full 12 months of interest on lower rate mortgage loans for the year ended December 31, 2022 that were originated in 2021.

Interest on Federal Home Loan Bank and Texas Independent Bank (TIB) stock increased $16,000, or 72.7%, from $22,000 for the year ended December 31, 2021 to $38,000 for the year ended December 31, 2022.

This increase resulted primarily from an increase in yield of 72 basis points, or 66.6%, from 1.08% for the year ended December 31, 2021 to 1.81% for the year ended December 31, 2022 and an increase in average balance of $75,000, or 3.7%, from $2.0 million for the year ended December 31, 2021 to $2.1 million for the year ended December 31, 2022.

Interest bearing deposits in banks and cash and cash equivalents experienced an interest rate increase from December 31, 2021 to December 31, 2022 due to overall market interest rate increases.

Interest income from interest bearing deposits in banks decreased $17,000 or 30.4%, from $56,000 for the year ended December 31, 2021 to $39,000 for the year ended December 31, 2022.

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.

This decline resulted from a decrease in average balance of $14.2 million, or 76.0%, from $18.7 million for the year ended December 31, 2021 to $4.5 million for the year ended December 31, 2022, partially offset by a 57 basis point, or 190.7%, increase in average yield from 0.30% for the year ended December 31, 2021 to 0.87% for the year ended December 31, 2022.

Fed funds interest increased $75,000, or 312.5%, to $99,000 at December 31, 2022 from $24,000 at December 31, 2021.

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.

There was an increase of 81 basis points, or 744.0%, in average yield on fed funds from 0.11% for the year ended December 31, 2021 to 0.92% for the year ended December 31, 2022, which was offset by a $11.3 million, or 51.1%, decrease in average balance from $22.1 million for the year ended December 31, 2021 to $10.8 million for the year ended December 31, 2022.

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.

Interest expense increased $167,000, or 7.9%, to $2.3 million for the year ended December 31, 2022 from $2.1 million for the year ended December 31, 2021 due primarily to an increase in the average balance of interest-bearing liabilities of $18.3 million, or 7.2%, from $253.7 million for the year ended December 31, 2021 to $272.0 million for the year ended December 31, 2022.

Interest expense on deposit accounts increased $6,000, or 0.4%, for the year ended December 31, 2022, due primarily to an increase in average deposit account balances of $14.4 million, or 6.4%, from $224.3 million for the year ended December 31, 2021 to $238.7 million for the year ended December 31, 2022.

This was partially offset by a decrease in average yield of four basis points, or 5.7%, from 0.66% for the year ended December 31, 2021 to 0.63% for the year ended December 31, 2022.

The decrease in yield is primarily due to lower deposit costs during the first three quarters of the year.

Interest expense on Federal Home Loan Bank (FHLB) advances increased $162,000, or 26.3%, to $777,000 for the year ended December 31, 2022 from $615,000 for the year ended December 31, 2021, primarily due to the increase in average balances of FHLB advances of $3.7 million, or 12.7%, to $32.8 million for the year ended December 31, 2022 from $29.1 million for the year ended December 31, 2021 and an increase in average yield of 25 basis points, or 11.9%, from 2.12% for the year ended December 31, 2021 to 2.37% for the year ended December 31, 2022.

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.

Net interest income increased $1.9 million, or 22.6%, to $10.3 million for the year ended December 31, 2022 from $8.4 million for the year ended December 31, 2021, primarily due to an increase of $19.9 million, or 31.4%, in average balance of net interest earning assets from $63.3 million for the year ended December 31, 2021 to $83.2 million for the year ended December 31, 2022.

The net interest rate spread increased 21 basis points, or 8.4%, from 2.49% for the year ended December 31, 2021 to 2.70% for the year ended December 31, 2022.

Net interest margin increased 24 basis points, or 9.0%, to 2.89% for the year ended December 31, 2022 from 2.66% for the year ended December 31, 2021.

Provision for Loan and Lease Losses.

Based on management’s analysis of the adequacy of the allowance for loan and lease losses, the provision for loan and lease losses 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.

Based on management’s analysis of the adequacy of the allowance for loan and lease losses, the provision for loan and lease losses increased $158,000, or 316.0%, from $50,000 for the year ended December 31, 2021 to $208,000 for the year ended December 31, 2022.

The allowance for loan and lease losses was $1.8 million at December 31, 2022 compared to $1.6 million at December 31, 2021.

The increase in the provision was primarily due to an increase in net loans and leases of $31.0 million, or 14.1%, and an increase in net loan chargeoffs of $9,000 to a total of $16,000 for the year ended December 31, 2022 and an increase in losses related to overdrawn deposit accounts of $15,000 to a total of $30,000 for the year ended December 31, 2022.

The loan portfolio was also diversified during the year ended December 31, 2022 with increases in loan types requiring a slightly higher allowance.

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 income increased $151,000, or 8.8%, to $1.9 million for the year ended December 31, 2022 from $1.7 million for the year ended December 31, 2021, primarily the result of increased service charges on deposits of $88,000, or 15.2%, from $578,000 for the year ended December 31, 2021 to $666,000 for the year ended December 31, 2022 primarily resulting from increases in nonsufficient funds and overdraft fees resulting primarily from increases in the number of checking accounts.

Other service charges and fees increased by $44,000 primarily from an increase of $12,000 in ATM fees and $15,000 in loan fees generated through secondary market wholesale lending.

There were a three items exclusive to the year ended December 31, 2022 including a gain of $42,000 on the sale of bank property classified as foreclosed assets and a $6,000 gain on the sale of a fixed asset, partially offset by a $29,000 loss on securities sold in 2022.

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.

Noninterest expense increased $292,000, or 3.1%, to $9.8 million for the year ended December 31, 2022 from $9.5 million for the year ended December 31, 2021 primarily due to the increase in salary and employee benefits, data processing, and director fees, partially offset by decreases in contract services and other expenses.

Salary and employee benefit expenses increased by $652,000, or 12.7%, totaling $5.8 million for the year ended December 31, 2022 and $5.1 million for the year ended December 31, 2021, due primarily to an increase in wages of $487,000 for the year ended December 31, 2022 from $4.0 million to $4.5 million and additional compensation expense of $84,000 for the year ended December 31, 2022 related to equity compensation awards.

Directors’ fees increased $77,000, or 25.2%, from $306,000 for the year ended December 31, 2021 to $383,000 for the year ended December 31, 2022 due to the addition of four new directors and two new advisory directors.

Data (core) processing expense increased by $404,000, or 48.5%, to $1.2 million for the year ended December 31, 2022 from $833,000 for the year ended December 31, 2021 primarily due to increases in the number of accounts and a price increase levied by our core processor.

Contract services and other expenses combined decreased $885,000, or 35.9%, from $2.5 million for the year ended December 31, 2021 to $1.6 million for the year ended December 31, 2022.

This decrease in expenses was primarily due to increased expenses for the year ended December 31, 2021 related to our initial public offering.

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.

Income tax expense increased by $330,000, or 354.8%, to $423,000 for the year ended December 31, 2022 from $93,000 for the year ended December 31, 2021 due primarily to the increase in taxable income.

The effective tax rate was 19.43% and 15.22% for the years ended December 31, 2022 and 2021, respectively.

The increase in the effective tax rate was primarily due to taxable income increasing at a faster rate than nontaxable income.

Management of Market Risk

1 unchanged sentence

Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates.

Our Risk Management and Interest Rate Risk Management Officer is responsible for evaluating the

interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.

We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

Our Risk Management and Interest Rate Risk Management Officer is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.

We currently utilize a third-party modeling program, prepared on a monthly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates.

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● 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;

● continuing to diversify our investment securities portfolio by continuing to add collateralized mortgage obligations (CMOs) and subordinated debt;

● managing our borrowings from the Federal Home Loan Bank of Dallas by using amortizing advances to reduce the average maturities of the borrowings;

● managing our loan services by adding wholesale lending products to continue to offer these services while reducing interest rate risk in the loan portfolio;

● continuing to diversify our loan portfolio by adding more commercial-related loans, which typically have shorter maturities and/or balloon payments.

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(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.

The table above indicates that at December 31, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 2.48% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 7.85% decrease in net interest income.

Net Economic Value .

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(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.

The table above indicates that at December 31, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 7.46% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.20% decrease in EVE.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements.

3 unchanged sentences

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.

For example, increases in market interest rates can decrease the fair values of our loans, mortgage servicing rights, deposits and borrowings.

Liquidity and Capital Resources

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At December 31, 2022, we had unused borrowing capacity of $73.4 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.

In addition, at December 31, 2022, we had a $10.0 million line of credit with Texas Independent Bankers Bank, a $5.0 million line of credit with First Horizon Bank, and an $8.5 million unsecured line of credit with Zions/Amegy Bank.

At December 31, 2022, there was no outstanding balance with any of these facilities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.

Our most liquid assets are cash and short-term investments including interest-bearing demand deposits.

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.

37 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis