What changed in this filing

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Item 1. Financial Statements

2023-05-15 compared with 2022-11-14 · 563 added, 587 removed, 684 unchanged (63% of the section changed)

3 unchanged sentences

Consolidated Statements of Financial Condition

September 30, 2022 and December 31, 2021

March 31, 2023 and December 31, 2022

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

September 30,

Cash and due from banks

3 unchanged sentences

Securities available for sale

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

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

Securities held to maturity (fair values of $ 26,082 at March 31, 2023 and $ 24,615 at December 31, 2022)

Loans receivable, net of allowance for credit losses of $ 2,859 at March 31, 2023 and $ 1,755 at December 31, 2022

Net investment in direct financing leases

Accrued interest receivable

Premises and equipment

Premises and equipment, net

Bank-owned life insurance

Foreclosed assets

Restricted investments carried at cost

Core deposit intangible

Mortgage servicing rights

Mortgage servicing rights, net

Deferred income taxes

8 unchanged sentences

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

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

Common stock, $ 0.01 par value, 19,000,000 shares authorized, 3,373,723 and 3,296,843 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Additional paid in capital

3 unchanged sentences

Total shareholders' equity

See Notes to Consolidated Financial Statement

See Notes to Consolidated Financial Statements

Texas Community Bancshares, Inc.

1 unchanged sentence

Consolidated Statements of Operations (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

Three Months Ended

Nine Months Ended

September 30,

Interest Income

9 unchanged sentences

Net Interest Income

Provision for Loan and Lease Losses

Net Interest Income After Provision for Loan and Lease Losses

Provision for Credit Losses - loans

Provision for Credit Losses - off-balance sheet credit exposures

Provision for Credit Losses

Net Interest Income After Provision for Credit Losses

Noninterest Income

1 unchanged sentence

Other service charges and fees

Net gain (loss) on securities transactions

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

Net loss on securities transactions

Net appreciation on bank-owned life insurance

Total noninterest income

Total noninterest (loss) income

Noninterest Expenses

2 unchanged sentences

Data processing

Technology expense

Contract services

2 unchanged sentences

Total noninterest expenses

Income (Loss) Before Income Taxes

Income Tax Expense (Benefit)

Net Income (Loss)

(Loss) Income Before Income Taxes

Income Tax (Benefit) Expense

Net (Loss) Income

Earnings (loss) per share - basic

5 unchanged sentences

and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

Three Months Ended

Nine Months Ended

September 30,

Net Income (Loss)

Other items of comprehensive (loss) income

Net (Loss) Income

Other items of comprehensive income (loss)

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

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

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

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

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

Comprehensive (Loss) Income

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

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

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

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

Comprehensive Income (Loss)

See Notes to Consolidated Financial Statements

2 unchanged sentences

Consolidated Statements of Shareholders’ Equity (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

1 unchanged sentence

Shareholders'

Three Months Ended September 30, 2022 and 2021

(Loss) Income

Balance at July 1, 2022

Three Months Ended March 31, 2023 and 2022

Balance at January 1, 2023

Cumulative change in accounting principle (adoption of ASC 326)

Balance at January 1, 2023 (as adjusted for change in accounting principle)

Stock based compensation expense

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

ESOP shares committed to be released, 3,258 shares

Balance at September 30, 2022

Balance at July 1, 2021

Stock Issuance, net of conversion costs of $ 936

Issuance of restricted stock awards

Net changes in fair value of available for sale securities, net of tax expense of $ 405

Leveraged ESOP Shares, 2,606,210 shares

Cash dividend declared ($ 0.02 per share)

ESOP shares committed to be released, 3,258 shares

Balance at September 30, 2021

Comprehensive

Shareholders'

Nine Months Ended September 30, 2022 and 2021

(Loss) Income

Balance at March 31, 2023

Balance at January 1, 2022

Stock based compensation expense

Net changes in fair value of available for sale securities, net of tax benefit of $ 663

ESOP shares committed to be released, 3,258 shares

Balance at September 30, 2022

Balance at January 1, 2021

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

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

Leveraged ESOP shares, 2,606,210 shares

ESOP shares earned, 6,515 shares

Balance at September 30, 2021

Balance at March 31, 2022

See Notes to Consolidated Financial Statements

2 unchanged sentences

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

Nine Months Ended

September 30,

Three Months Ended

Operating Activities

Net (loss) income

Adjustments to reconcile net income to net cash from operating activities

Provision for loan and lease losses

Net amortization of securities

Provision for credit losses - loans

Provision for credit losses - off-balance sheet credit exposures

Net (accretion) amortization of securities

Depreciation and amortization

Net realized loss on sale of investment securities

Loss on sale of fixed assets

Stock based compensation

Gain on sale of other real estate owned

Net realized loss on sales of securities available for sale

Appreciation on bank-owned life insurance

ESOP compensation expense for allocated shares

Deferred income tax

Stock-based compensation

Deferred income tax benefit

Net change in

Accrued interest receivable

Mortgage servicing rights

Accrued expenses and other liabilities

6 unchanged sentences

Maturities, prepayments and calls

Redemptions of restricted investments

Purchases of restricted investments

Loan originations and principal collections, net

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

Proceeds from sales of OREO and foreclosed assets

Net decrease in net investment in direct financing leases

Purchases of premises and equipment

3 unchanged sentences

Advances from FHLB and other borrowings

Payments on long-term FHLB and other borrowings

Proceeds from issuance of common stock net of conversion costs

Loan to ESOP for purchase of common stock

Payments on FHLB and other borrowings

Cash dividend declared and paid

Net Cash from Financing Activities

6 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

1 unchanged sentence

Texas Community Bancshares, Inc.

(the “Company”), a Maryland corporation and registered bank holding company, was incorporated on March 5, 2021 to become the holding company for Mineola Community Bank, SSB (the “Bank”) upon the conversion of Mineola Community Mutual Holding Company (“MHC”) from a mutual holding company to a stock holding company (the “Conversion”).

The Conversion was completed on July 14, 2021.

The Company’s shares began trading on the NASDAQ under the symbol TCBS on July 15, 2021.

In connection with the Conversion, the Company acquired 100 % ownership of the Bank and the Company offered and sold 3,207,759 shares of its common stock at $ 10.00 per share, for gross offering proceeds of $ 32,078 .

The cost of the conversion and issuance of common stock was approximately $ 1,684 , which was deducted from the gross offering proceeds.

The Company also contributed 50,000 shares of its common stock and $ 75 of cash to Texas Community Bancshares Foundation, Inc.

(the “Foundation”), a charitable foundation formed in connection with the Conversion.

The Bank’s employee stock ownership plan purchased 260,621 shares of the common stock sold by the Company, which was 8 % of the 3,257,759 shares of common stock issued by the Company, including the shares contributed to the Foundation.

The ESOP purchased the shares using a loan from the Company.

The Company contributed $ 15,276 of the net proceeds from the offering to the Bank, loaned $ 2,606 of the net proceeds to the ESOP, contributed $ 75 to the Foundation and retained approximately $ 12,436 of the net proceeds.

Following the Conversion, voting rights in the Company are held and exercised exclusively by the shareholders of the Company.

Deposit account holders continue to be insured by the FDIC.

In connection with the Conversion, liquidation accounts were established by the Company and the Bank in an aggregate amount equal to (i) the MHC’s ownership interest in the shareholders’ equity of Mineola Community Financial Group, Inc.

(the former subsidiary holding company of the Bank) as of the date of the latest statement of financial condition included in the Company’s definitive prospectus dated May 14, 2021, plus (ii) the value of the net assets of the MHC as of the date of the MHC’s latest statement of financial condition before the consummation of the Conversion (excluding the MHC’s ownership interest in Mineola Community Financial Group, Inc.).

Each eligible account holder and supplemental eligible account holder is entitled to a proportionate share of the liquidation accounts in the event of a liquidation of (i) the Company and the Bank or (ii) the Bank, and only in such events.

This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record and will cease to exist if the account is closed.

The liquidation account will never be increased despite any increase after conversion in the related deposit balance.

The Bank may not pay a dividend on its capital stock if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements.

In addition, the Company is subject to certain regulations related to the payment of dividends and the repurchase of its capital stock.

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

The Bank’s primary source of revenue is providing loans and banking services to consumers and commercial customers in Mineola, Texas and the surrounding area and the Dallas Fort Worth Metroplex.

(the “Company”), a Maryland corporation and registered bank holding company, was incorporated on March 5, 2021 and became the holding company for Mineola Community Bank, SSB (the “Bank”) upon the conversion of Mineola Community Mutual Holding Company (“MHC”) from a mutual holding company to a stock holding company (the “Conversion”).

The Conversion was completed on July 14, 2021 and was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

The Company’s primary source of revenue is providing loans and banking services to consumers and commercial customers in Mineola, Texas and the surrounding area and the Dallas Fort Worth Metroplex.

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (GAAP) and to general practices of the banking industry.

Policies and practices which materially affect the determination of financial position, results of operations and cash flows are summarized as follows:

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Interim Financial Statements

The interim unaudited consolidated financial statements as of September 30, 2022, and for the three and nine months ended September 30, 2022 and 2021, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

The interim unaudited consolidated financial statements as of March 31, 2023, and for the three months ended March 31, 2023 and 2022, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

Such adjustments are the only adjustments contained in these unaudited consolidated financial statements.

These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission, and therefore certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted.

The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2022, or any other period.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2023, or any other period.

Certain prior period data presented in the consolidated financial statements has been reclassified to conform with the current period presentation.

1 unchanged sentence

Reference is made to the accounting policies of the Company described in the Notes to Consolidated Financial Statements contained in Form 10-K for the year ended December 31, 2022.

Principles of Consolidation

P rinciples of Consolidation

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

3 unchanged sentences

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses.

Actual results could differ

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

Stock Incentive Plan

Compensation cost is recognized for stock options and restricted stock awards issued to directors, based on the fair value of these awards at the date of the grant.

A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of the grant is used for restricted stock awards.

Compensation cost is recognized over the required service period, generally defined as the vesting period.

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

Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted–average number of common shares outstanding during the period, including allocated and committed-to-be-released ESOP shares and restricted stock awards granted on August 31, 2022, during the applicable period.

from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses.

Recently Adopted Accounting Pronouncements

The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective January 1, 2023.

The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases.

ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio.

In addition, ASC 326 made changes to the accounting for available-for-sale debt securities.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will not be required to sell.

The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures.

Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $ 1,025 which was recognized through an $ 810 adjustment to retained earnings, net of tax.

This adjustment brought the beginning balance of the allowance for credit losses to $ 2,780 as of January 1, 2023.

In addition, the Company recorded a $ 254 allowance on unfunded commitments which was recognized through a $ 200 adjustment to retained earnings, net of tax.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30.

As of December 31, 2022, the Company did not hold any purchased loans with deteriorated credit quality.

Therefore, the Company did not have any PCI loans upon adoption of ASC 326 as of January 1, 2023.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023.

As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities.

Therefore, upon adoption of ASC 326, the Company determined than an allowance for credit losses on available-for-sale securities was not deemed necessary.

Held to Maturity Securities

Beginning January 1, 2023, the Company evaluates all securities quarterly to determine if any securities in a loss

position require a provision for credit losses in accordance with ASC 326.

The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through net income.

For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss).

Changes in the allowance for credit losses are recorded as provision for or (reduction of) provision for credit losses.

Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

For the three months ended March 31, 2023, the Company determined no provision for credit losses was necessary.

Allowance for Credit Losses

The Company uses the weighted average remaining maturity (“WARM”) method to estimate expected losses for all of Company’s loan pools.

These pools are as follows:

construction & land;

1-4 residential & multi-family real estate;

commercial real estate;

and consumer and other.

The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council.

For each of these loan pools, the Company calculates an average annual loss rate and estimates future outstanding balances based on contractual maturities and estimated prepayments.

The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data.

Relevant data to support the Company’s estimates of lifetime expected credit losses is maintained through internal and external information.

The CECL model leverages the use of publicly available call report data, which allows the use of external information from peers to supplement the Company’s own historical data.

The loss rate is based on historical loss rates for the peer group and the Company.

Due to internal loss rates being low, a blended historical loss rate of 75% peer group and 25% Company was used.

The weighted average remaining life is determined based on contracted loan payments, expected prepayments and maturity dates.

The allowance model uses data from the St.

Louis Federal Reserve Economic Database for reasonable and supportable forecasts.

Management has determined that between years one and two represents a reasonable and supportable forecast period and reverts to a historical loss rate in years three or four depending on the loan type.

Management leverages economic projections from the St.

Louis Federal Reserve Economic Database (FRED) to inform its loss driver forecasts.

Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

The following table illustrates the impact of the adoption of ASC 326:

Allowance for credit losses on loans

Allowance for credit losses on OBS credit exposures (included in other liabilities)

The Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures effective January 1, 2023 .

The additional disclosures are included in Note 4 – Loans and Allowance for Credit Losses on a prospective basis and include loan modifications where the contractual payment terms of the borrower’s loan agreement were modified through a refinancing or restructuring.

Modifications that do not impact the contractual payment terms, such as covenant waivers, insignificant payment deferrals, and any modifications made to loans carried at fair value are not included in the disclosures.

The Company uses various indicators to identify borrowers in financial difficulty.

Consumer loan borrowers that are delinquent and commercial loan borrowers that are rated substandard or worse are the primary criteria used to identify borrowers who are experiencing financial difficulty.

If a borrower is current at the time of modification, the loan generally remains a performing loan as long as there is demonstrated performance prior to the modification, and payment in full under the modified terms is expected.

Otherwise, the loan is placed on nonaccrual status and reported as nonperforming until there is sustained repayment performance for a reasonable period, which is generally at least six consecutive months.

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying financial statements to maintain consistency between periods presented.

The reclassifications had no impact on net income (loss) shareholders’ equity.

Note 2 – Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, including allocated and committed-to-be-released ESOP shares and restricted stock awards granted on August 31, 2022 and February 28, 2023, during the applicable period.

Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

There were no dilutive shares as of September 30, 2022.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

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

Three Months Ended

Nine Months Ended

September 30,

Net Income (Loss)

Net (Loss) Income

Weighted average shares outstanding for basic earnings per share:

5 unchanged sentences

Basic and dilutive earnings (loss) per share

Restricted stock awards for 115,964 shares of common stock were not considered in computing diluted earnings per share for 2023, because they were antidilutive.

Stock options for 289,932 shares of common stock were not considered in computing diluted earnings per share for 2023, because they were nonvested.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

1 unchanged sentence

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

September 30, 2022

March 31, 2023

Available for Sale

4 unchanged sentences

Corporate bonds

Government and agency

Total securities available for sale

3 unchanged sentences

State and municipal

Government and agency

Total securities held to maturity

13 unchanged sentences

Total securities held to maturity

During the three months ended September 30, 2022, there were no sales of securities.

During the nine months ended September 30, 2022, the Company had sales of available for sale securities of $ 10,822 with a loss of $ 29 .

During the three and nine months ended September 30, 2021, the Company had no sales of available for sale securities or held to maturity securities.

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

During the three months ended March 31, 2023, the Company had sales of available for sale securities of $ 17,027 with a loss of $ 1,687 .

During the three months ended March 31, 2022, the Company had no sales of available for sale securities or held to maturity securities.

At March 31, 2023 and December 31, 2022, securities with a fair value of $ 3,811 and $ 3,162 , respectively, were

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

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

pledged to secure public deposits and for other purposes required or permitted by law.

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2023, follows:

Available for Sale

7 unchanged sentences

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

September 30, 2022

March 31, 2023

Less than 12 months

15 unchanged sentences

Government and agency (1,13)

For the three months ended March 31, 2023, the Company had investment securities with approximately $8,800 in unrealized losses, which have been in continuous loss positions for more than twelve months.

The Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates and not the issuers’ financial condition or downgrades by rating agencies.

In addition, approximately 10.2 % of the principal balance from the Company’s investment portfolio will mature and be repaid to the Company within five years or

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

Mortgage-backed Securities

As a result, the Company has the ability and intent to hold such securities until maturity.

The following table summarizes bond ratings for the Company’s held-to-maturity portfolio, based upon amortized cost, issued by state and political subdivisions and other securities as of March 31, 2023:

mortgage-backed

U.S Government

Mortgage-backed securities and Collateralized Mortgage Obiligations

The unrealized losses on the Company’s investments in residential mortgage-backed securities and collateralized mortgage obligations were caused by market interest rate increases and decreases in prepayment speeds.

Interest rates have risen sharply throughout 2022 and caused increases in unrealized losses on securities.

Interest rates rose sharply throughout 2022 and caused increases in unrealized losses on securities.

The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements.

1 unchanged sentence

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.

Because the decline in fair value is attributable to changes in market interest rates and decreases in prepayment speeds and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

Government and agency

1 unchanged sentence

government and agency securities were caused by market interest rate increases.

Interest rates have risen sharply throughout 2022 and caused increases in unrealized losses on securities.

Interest rates rose sharply throughout 2022 and caused increases in unrealized losses on securities.

The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements.

1 unchanged sentence

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.

Because the decline in fair value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2022 or December 31, 2021.

Municipal Securities and Corporate Bonds

The unrealized losses on the Company’s investments in state and municipal securities and corporate bonds were caused by market interest rate increases.

Interest rates have risen sharply throughout 2022 and caused increases in unrealized losses on securities.

The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements.

Interest rates rose sharply throughout 2022 and caused increases in unrealized losses on securities.

The Company has no plans to sell these securities and will continue to monitor the effect of the unrealized losses on the financial statements.

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.

Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) evaluation by the Company of (a) its intent to sell a debt security prior to recovery and (b) whether it is more likely than not the Company will have to sell the debt security prior to recovery.

As of September 30, 2022 and December 31, 2021, no investment securities were other-than- temporarily impaired.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

Note 3 - Loans and Leases

Other-than-temporary impairment

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

As of December 31, 2022, no investment securities were other-than-temporarily impaired.

Note 4 - Loans and Allowance for Credit Losses

A summary of the balances of loans and leases follows:

September 30,

Construction and land

1-4 Residential & multi-family

Commercial real estate

Total Real Estate

Consumer and other

Less allowance for loan and lease losses

Less allowance for credit losses

Loans and leases, net

Paycheck Protection Program Loans

In March 2020, the United States government passed legislation designed to help the nation’s economy recover from the coronavirus disease 2019 (“COVID‐19”) pandemic.

This legislation is called the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which provides economy‐wide financial stimulus in the form of financial aid to individuals, businesses, nonprofit entities, states and municipalities.

The CARES Act temporarily added a new program titled the “Paycheck Protection Program” (PPP) to the U.S.

Small Business Administration’s loan program.

The CARES Act permits the SBA to guarantee 100 percent of these loans and also provides for forgiveness of up to the full principal amount of these loans.

As of September 30, 2022, the Company originated $ 5,484 in PPP loans of which $ 5,479 had been forgiven.

Additionally, the Company recognized $ 0 and $ 5 of PPP loan interest in interest income during the nine months ended September 30, 2022 and 2021, respectively, and $ 0 and $ 1 for the three months ended September 30, 2022 and 2021, respectively.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

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

September 30, 2022

Allowance for loan and lease losses:

Three-months ended

Beginning balance, July 1, 2022

Provision (credit)

Ending balance, September 30, 2022

Nine-months ended

Balance, January 1, 2022

Balance, September 30, 2022

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

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

The following tables set forth information regarding the activity in the allowance for credit losses for the three months ended March 31, 2023:

March 31, 2023

1-4 Residential

& multi-family

Allowance for credit losses:

Beginning balance prior to adoption of ASC 326

Impact of adopting ASC 326

Provision for credit losses

Loans charged-off

Balance, March 31, 2023

Balance, March 31, 2023 allocated to loans and leases individually evaluated

Balance, March 31, 2023 allocated to loans and leases collectively evaluated

Loans and leases receivable:

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

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

Balance, September 30, 2022

Balance, March 31, 2023 loans and leases individually evaluated

Balance, March 31, 2023 loans and leases collectively evaluated

Balance, March 31, 2023

The following tables present the balances in the allowance for loan losses for the three months ended March 31, 2022 and the year ended December 31, 2022, and the allowance for loan losses and recorded investment in loans receivable based on portfolio segment by impairment method as of December 31, 2022.

Allocation of a portion of the allowance to one type of loan does not preclude its availability to absorb losses in other categories.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

September 30, 2021

March 31, 2022

Allowance for loan and lease losses:

Three-months ended

Beginning balance, July 1, 2021

Provision (credit)

Ending balance, September 30, 2021

Nine-months ended

Balance, January 1, 2022

Provision (credit)

Balance, September 30, 2021

Balance, March 31, 2022

December 31, 2022

6 unchanged sentences

Balance, December 31, 2022

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing as of March 31, 2023:

Due Over 90 Days Still Accruing

Construction and land

1‑4 Residential & multi-family

Commercial real estate

Consumer and other

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

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

Construction and land

1‑4 Residential & multi-family

Commercial real estate

Consumer and other

The Company did no t recognize any interest income on nonaccrual loans during the periods ended March 31, 2023 or March 31, 2022.

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2023:

1-4 Residential & multi-family

Commercial real estate

Consumer and other

The Company had $2,636 in collateral-dependent loans for the three months ended March 31, 2023.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

The following table sets forth information regarding impaired loans as of December 31, 2022:

With no related allowance

1‑4 Residential & multi-family

Commercial real estate

Consumer and other

With a related allowance

1-4 Residential & multi-family

Commercial real estate

Consumer and other

Internal Risk Categories

A loan is considered collateral-dependent when based on current information and events;

it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.

Impaired loans include nonperforming loans (nonaccrual loans), loans performing but with deterioration that leads to doubt regarding collectability and also includes loans modified in troubled debt restructurings when concessions have been granted to borrowers experiencing financial difficulties.

These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Loans that do not share risk characteristics are evaluated on an individual basis.

For collateral-dependent loans, excluding assisted living loans which are evaluated using a market price valuation methodology, where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral.

When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the fair value of the underlying collateral less estimated costs to sell.

The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

The Company monitors credit quality within its portfolio segments based on primary credit quality indicators.

5 unchanged sentences

Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each quarterly reporting period.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

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

12 unchanged sentences

This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Pass rated refer to loans that are not considered criticized.

Pass rated refers to loans that are not considered criticized.

In addition to this primary credit quality indicator, the Company uses other credit quality indicators for certain types of loans.

The Company evaluates the loan risk grading system definitions and allowance for loan and lease loss methodology on an ongoing basis.

No significant changes were made during the nine months ended September 30, 2022 or during the year ended December 31, 2021.

No significant changes were made during the year ended December 31, 2022.

Based on the most recent analysis performed, the risk category of loans by class of loans as of March 31, 2023 is as follows:

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

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

September 30, 2022

Construction and land

1‑4 residential & multi-family

Commercial real estate

Consumer and other

December 31, 2021

Construction and land

1‑4 residential & multi-family

Commercial real estate

Consumer and other

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

September 30, 2022

December 31, 2021

Term Loans Amortized Cost Basis by Origination Year

Construction and land

Special mention

1-4 Residential & multi-family

Special mention

Commercial real estate

Special mention

Consumer and other

Special mention

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

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

September 30, 2022

> 90 Days and

Still Accruing

Construction and land

1‑4 residential & multi-family

Commercial real estate

Consumer and other

Current period gross charge-offs

The following tables set forth information regarding the internal classification of the loan and lease portfolio at December 31, 2022:

December 31, 2022

> 90 Days and

Still Accruing

Construction and land

2 unchanged sentences

Consumer and other

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

September 30,

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses.

The Company also evaluates credit quality based on the aging status of the loan, which is subsequently presented.

The following table presents the amortized cost of performing and non-performing loans as of March 31, 2023:

Term Loans Amortized Cost Basis by Origination Year

Construction and land

Non-performing

1-4 Residential & multi-family

Non-performing

Commercial real estate

Non-performing

Consumer and other

2 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

A loan is considered impaired when based on current information and events;

it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.

These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

All interest accrued but not collected for loans that are placed on nonaccrual or charged‐off is reversed against interest income.

The interest on these loans is accounted for on the cash‐basis or cost‐recovery method, until qualifying for return to accrual.

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

No interest income was recognized for loans on nonaccrual status for the three and nine months ended September 30, 2022 and 2021.

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

Three Months Ended

Nine Months Ended

September 30,

Non-performing

The following table sets forth information regarding the credit risk profile based on payment activity of the loan and lease portfolio at December 31, 2022:

December 31, 2022

Construction and land

1‑4 Residential & multi-family

1 unchanged sentence

Consumer and other

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

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

With no related allowance

1‑4 residential & multi-family

Commercial real estate

With a related allowance

The following is an aging analysis for loans as of March 31, 2023 and December 31, 2022:

March 31, 2023

Construction and land

1‑4 Residential & multi-family

Commercial real estate

Consumer and other

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

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

With no related allowance

December 31, 2022

> 90 Days and

Still Accruing

Construction and land

1‑4 Residential & multi-family

1 unchanged sentence

Consumer and other

With a related allowance

Commercial real estate

All interest accrued but not collected for loans that are placed on nonaccrual or charged‐off is reversed against interest income.

The interest on these loans is accounted for on the cash‐basis or cost‐recovery method, until qualifying for return to accrual.

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

No interest income was recognized for loans on nonaccrual status for the three months ended March 31, 2023 and 2022.

The following table presents interest income recognized on loans that are collateral-dependent and individually reviewed for the three months ended March 31, 2023 and 2022:

1-4 Residential & multi-family

Commercial real estate

Consumer and other

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

During the nine months ended September 30, 2022, there were no subsequently defaulted troubled debt restructurings.

At September 30, 2022 and December 31, 2021, the Company had no commitments to loan additional funds to borrowers whose loans have been modified but may on occasion extend financing to these borrowers.

At September 30, 2022 and December 31, 2021, the Company had a recorded investment of $ 375 and $ 493 , respectively, of troubled debt restructured loans.

During the three months ended March 31, 2023, there were no modifications of loans to borrowers in financial difficulty.

During the three months ended March 31, 2022, there were no modifications resulting in troubled debt restructurings.

There have been no subsequently defaulted troubled debt restructurings.

The Company has no commitments to loan additional funds to borrowers whose loans have been modified but may on occasion extend financing to these borrowers.

At March 31, 2023 and December 31, 2022, the Company had a recorded investment of $ 390 and $ 364 , respectively, of troubled debt restructured loans.

The Company has no current commitments to loan additional funds to the borrowers whose loans have been modified.

3 unchanged sentences

Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments.

The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

The Company’s

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

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

exposure to credit loss is represented by the contractual amount of these commitments.

The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

At March 31, 2023 and December 31, 2022, the following financial instruments were outstanding whose contract amounts represent credit risk:

Contract Amount

September 30,

March 31, 2023

December 31, 2022

Commitments to extend credit

4 unchanged sentences

The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

The Company is party to an agreement with the Federal Reserve Bank of Boston that provides the Company with a federal funds line of credit in an amount tied to securities on deposit with that bank.

The Company pays no fees for this line of credit and has not drawn upon it.

The Company is party to agreements with its correspondent banks that provide the Company with lines for up to $ 15,000 federal funds line of credit to support overnight funding needs.

The Company pays no fees for this line of credit and has not drawn upon it.

The lines renew annually.

At September 30, 2022, the Company had unused borrowing capacity of $ 100,500 with the Federal Home Loan Bank of Dallas.

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

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

The Bank is party to an agreement with the Federal Reserve Bank of Boston that provides the Bank with a federal funds line of credit in an amount tied to securities on deposit with that bank.

The Bank pays no fees for this line of credit and has not drawn upon it.

The Bank is party to agreements with its correspondent banks that provide the Bank with lines for up to $ 15,000 federal funds lines of credit to support overnight funding needs.

The Bank pays no fees for these lines of credit and has not drawn upon them.

One line renews annually and the other line is in effect until either party changes the terms of the agreement.

At March 31, 2023, the Company had no commitments to purchase securities.

Note 6 - Supplemental Cash Flow Information

Supplemental disclosure of cash flow information is as follows:

Nine Months Ended

September 30,

Supplemental cash flow information:

Loan originations to facilitate the sale of foreclosed assets

Cash paid for

4 unchanged sentences

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements.

The capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.

The Bank has opted into the Community Bank Leverage Ratio (CBLR) framework, beginning with the Call Report filed for the first quarter of 2020.

At September 30, 2022 and December 31, 2021, the Bank’s CBLR ratio was 13.00 % and 12.89 %, respectively, which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be “well-capitalized.”

Under the CLBR framework, banks and their bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, are eligible to opt into the CBLR framework.

At March 31, 2023 and December 31, 2022, the Bank’s CBLR ratio was 11.32 % and 12.31 %, respectively, which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be “well-capitalized.”

Under the CBLR framework, banks and their bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, are eligible to opt into the CBLR framework.

Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules (generally applicable capital rules) and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act.

Accordingly, beginning January 1, 2022, qualifying community banking organizations that exceed the 9% CBLR are considered to have met:

Accordingly, qualifying community banking organizations that exceed the 9% CBLR are considered to have met:

(i) the generally applicable risk-based and leverage capital requirements of the generally applicable capital rules;

1 unchanged sentence

(iii) any other applicable capital or leverage requirements.

A qualifying community banking organization that elects to be under the CBLR framework generally would be exempt from the current capital framework, including risk-based capital requirements and capital conservation buffer requirements.

On April 6, 2020, the federal banking regulators, implementing the applicable provisions of the CARES Act, issued interim rules which modified the CBLR framework so that:

(i) beginning second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework;

and (ii) community banking organizations had until January 1, 2022 before the CBLR requirement is reestablished at greater than 9%.

Under the interim rules, the minimum CBLR was 8% beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter.

The interim rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable community bank leverage ratio.

Qualifying community banking organizations that elect to be under the CBLR framework generally would be exempt from the current capital framework, including risk-based capital requirements and capital conservation buffer requirements.

Note 8 - Fair Value Measurements

6 unchanged sentences

Authoritative guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.

The market approach uses prices and other relevant information

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

generated by market transactions involving identical or comparable assets and liabilities.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.

The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis.

6 unchanged sentences

● Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

● Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

2 unchanged sentences

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

There were no changes in valuation techniques during either the nine months ended September 30, 2022 or the year ended December 31, 2021.

There were no changes in valuation techniques during either the three months ended March 31, 2023 or the year ended December 31, 2022.

In general, fair value is based upon quoted market prices, where available.

6 unchanged sentences

Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things.

Impaired Loans – Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.

Collateral-dependent Loans – Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.

Collateral values are estimated using Level 3 inputs based on internally customized discounting criteria.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Foreclosed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans.

The value is based upon primarily third-party appraisals, less estimated costs to sell.

The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business.

Such discounts are typically significant and result in Level 3 classification of the inputs for determining fair value.

Foreclosed assets are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same or similar factors above.

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

September 30, 2022

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2023

Financial assets

4 unchanged sentences

Corporate bonds

Government and agency

Total financial assets

1 unchanged sentence

Financial assets

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

Available for sale securities

7 unchanged sentences

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

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

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

September 30, 2022

The following table summarizes financial and non-financial assets measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2023

Financial assets

Impaired loans

Collateral-dependent loans

December 31, 2022

1 unchanged sentence

Impaired loans

Nonfinancial assets

Foreclosed assets

During the nine months ended September 30, 2022 and the year ended December 31, 2021, certain impaired loans were remeasured and reported at fair value through a specific allocation of the allowance for loan and lease losses based upon the fair value of the underlying collateral.

At September 30, 2022, impaired loans with a carrying value of $ 413 were reduced by specific valuation allowance allocations totaling $ 300 to a reported fair value of $ 113 .

During the three months ended March 31, 2023 and 2022, certain collateral-dependent loans were remeasured and reported at fair value through a specific allocation of the allowance for credit losses based upon the fair value of the underlying collateral.

At March 31, 2023, collateral-dependent loans with a carrying value of $ 377 were reduced by specific valuation allowance allocations totaling $ 300 to a reported fair value of $ 77 .

At December 31, 2022, impaired loans with a carrying value of $ 389 were reduced by specific valuation allowance allocations totaling $ 300 to a reported fair value of $ 89 .

The fair value of impaired loans is determined based on collateral valuations utilizing Level 3 valuation inputs.

There was no charge to the provision for loan and lease losses as a result of the valuation allowances for the three and nine months ended September 30, 2022 and 2021.

There was no charge to the provision for loan losses as a result of the valuation allowances for the three months ended March 31, 2023 and 2022.

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

2 unchanged sentences

Significant Input

September 30, 2022

Impaired loans

March 31, 2023

Collateral-dependent loans

Appraisal of collateral (1)

3 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

6 unchanged sentences

Appraisal adjustment

Foreclosed assets

Appraisal of collateral (1)

Appraisal adjustment

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

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

September 30, 2022

March 31, 2023

Carrying Value

4 unchanged sentences

Net investment in direct financing leases

Interest receivable

Accrued interest receivable

Restricted investments carried at cost

10 unchanged sentences

Net investment in direct financing leases

Interest receivable

Accrued interest receivable

Restricted investments carried at cost

3 unchanged sentences

Interest payable

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

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

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

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

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

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

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

Interest receivable – The carrying value approximates its fair value.

Accrued interest receivable – The carrying value approximates its fair value.

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

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Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement.

As shares are committed to be released from collateral, the Company reports the compensation expense equal to the average market price of the shares for the respective period,

As shares are committed to be released from collateral, the Company reports the compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations.

Dividends on unallocated ESOP shares, if any, are recorded as a reduction of debt and accrued interest.

ESOP compensation was $ 49 and $ 51 for the three months ended March 31, 2023 and 2022.

A summary of the ESOP shares as of March 31, 2023 and December 31, 2022 are as follows:

March 31, 2023

December 31, 2022

Shares allocated to participants

Texas Community Bancshares, Inc.

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Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

and the shares become outstanding for earnings per share computations.

Dividends on unallocated ESOP shares, if any, are recorded as a reduction of debt and accrued interest.

ESOP compensation was $ 53 and $ 164 for the three and nine months ended September 30, 2022, respectively, and $ 102 for the three and nine months ended September 30, 2021.

A summary of the ESOP shares are as follows:

September 30,

Shares allocated to participants

Shares committed to be released to participants

Shares distributed to retiring participant

Unreleased shares

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The Company has one equity incentive plan with two share based compensation awards as described below.

Total compensation cost that has been charged against income for those plans was $ 21 for the three and nine months ended September 30, 2022.

Total compensation cost that has been charged against income for those plans was $ 103 for the three months ended March 31, 2023.

There was no compensation cost charged against income for the three months ended March 31, 2022.

Stock Option Awards

The Company’s 2022 Equity Incentive Plan (the Equity Plan), which is shareholder approved, permits the grant of stock options to its directors for up to 325,775 shares of common stock.

The Company’s 2022 Equity Incentive Plan (the Equity Plan), which is shareholder approved, permits the grant of stock options to its directors and management for up to 325,775 shares of common stock.

Stock option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant;

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Treasury yield curve in effect at the time of the grants.

On August 31, 2022, the non-employee directors of the Company were granted 97,728 stock options with a cost of $ 6.50 per option and an exercise price of $ 16.00 .

These options will vest annually over a five year period ending August 31, 2027 and will expire on August 31, 2032.

Compensation expense for the stock options for the three and nine months ended September 30, 2022 was $ 11 .

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

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

Expected volatility

Expected dividends

Expected term (in years)

Risk-free rate

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

Weighted-Average

Exercise Price

Contractual Term

Outstanding at December 31, 2021

Forfeited or expired

Outstanding at September 30, 2022

Exercisable at September 30, 2022

Weighted-Average

Non-Vested Options

Non-vested at December 31, 2021

Non-vested at September 30, 2022

As of September 30, 2022, there was $ 624,645 of total unrecognized compensation cost related to non-vested stock options granted under the plan.

The cost is expected to be recognized over a weighted-average period of five years.

On February 28, 2023, management of the Company were granted 192,204 stock options with a cost of $ 6.14 per option and an exercise price of $ 15.67 .

These options will vest annually over a five year period ending February 28, 2028 and will expire on February 28, 2033.

Compensation expense for the stock options for the three months ended March 31, 2023, was $ 52 .

Restricted Stock Awards

The Equity Plan also permits the grant of restricted stock to its directors.

The Equity Plan also permits the grant of restricted stock to its directors and management.

Compensation expense for restricted stock awards is recognized over the vesting period of the awards based on the fair value of the stock at issue date.

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Restricted shares fully vest on the fifth anniversary of the grant date.

On August 31, 2022, the non-employee directors of the Company were granted 39,084 shares of Company stock at a fair market value of $ 16.00 per share.

These stock awards will vest in five equal annual installments through August 31, 2027.

Compensation expense for the stock awards for the three months and nine months ended September 30, 2022 was $ 10 .

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Nine Months Ended September 30, 2022 and 2021

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

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

Weighted-Average

Non-Vested Shares

Non-vested at December 31, 2021

Non-vested at September 30, 2022

As of September 30, 2022, there was $ 614,922 of total unrecognized compensation cost related to non-vested restricted stock granted under the plan.

The cost is expected to be recognized over a weighted-average period of five years.

Note 10 - Recently Issued But Not Yet Effective Accounting Pronouncements

Accounting Standards Update (ASU) 2016‐13, “Financial Instruments ‐ Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” ASU 2016‐13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio.

ASU 2016‐ 13 is effective for the Company on January 1, 2023.

The Company has contracted with a third-party vendor recommended by the Current Expected Credit Losses (“CECL”) team.

Management is analyzing loan data used in the CECL model and corresponding results for the quarter ended September 30, 2022, and re-evaluating the Company’s internal and external factors, including economic and peer data for use in the third quarter calculation.

A parallel run using the new CECL model and the current allowance for loan and lease losses model will be run for the September 30, 2022 data.

At this time, the CECL process and data is still being updated.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”).

The guidance was effective upon issuance and generally can be applied through December 31, 2022.

2020-04 has not had and is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2021, the FASB issued ASU No.

2021-01 Reference Rate Reform (Topic 848), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

2021-01 was effective upon issuance and generally can be applied through December 31, 2022.

ASU 2021-01 has not had and is not expected to have a significant impact on the Company’s consolidated financial statements.

On February 28, 2023, management of the Company were granted 76,880 shares of Company stock when the stock price was $ 15.67 per share.

These stock awards will vest in five equal annual installments through February 28, 2028.

Compensation expense for the three months ended March 31, 2023 was $ 51 .

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

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (“the Company”) consolidated financial condition at September 30, 2022 and consolidated results of operations for the three and nine months ended September 30, 2022 and 2021.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (“the Company”) consolidated financial condition at March 31, 2023 and consolidated results of operations for the three months ended March 31, 2023 and 2022.

It should be read in conjunction with the unaudited consolidated financial statements and the related notes appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.

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

● conditions relating to the COVID-19 pandemic, including the severity, scope and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;

● government action in response to the COVID-19 pandemic and its effects on our business and operations;

● our ability to control costs and manage liquidity through a period of high inflation and rapidly rising interest rates;

● our ability to maintain our deposit base cost-effectively and access cost-effective funding;

● general economic conditions, either nationally or in our market areas, that are worse than expected;

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● fluctuation in the demand for construction loans in our market area due to increased cost of building materials and their availability;

● changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses;

● estimated costs and provisions associated with the implementation of the Current Expected Credit Losses (CECL) methodology, the new standard for estimating the allowance for loan and lease losses, being greater than anticipated;

● changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;

● risks related to a high concentration of loans secured by real estate located in our market area;

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● our ability to control cost and expenses, particularly those associated with operating a publicly traded company;

● our ability to control costs and manage liquidity through a period of high inflation and rapidly rising interest rates

● our ability to access cost-effective funding;

● fluctuations in real estate values and both residential and commercial real estate market conditions;

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● our ability to implement and change our business strategies;

● competition among depository and other financial institutions;

● competition among depository and other financial institutions and brokers;

● inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of our investment securities and other financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

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Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any

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

Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Summary of Critical Accounting Policies;

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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.

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.

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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.

Allowance for Credit Losses .

Effective January 1, 2023, the Company adopted ASC 326, referred to as CECL.

Upon adoption of CECL, the Company made a one-time cumulative-effect adjustment that decreased retained earnings by $1.0 million.

This adjustment was the result of a $1.0 million increase in the allowance for loan losses from $1.8 million at December 31, 2022 to $2.8 million upon adoption of the new CECL methodology on January 1, 2023 and an increase of $254,000 in the allowance for unfunded commitments.

The adjustment was primarily a result of incorporating forward-looking estimated loss estimates and an allowance for off-balance sheet commitments (unfunded commitments).

The allowance for credit losses applies to any financial asset carried at amortized cost, including unfunded commitments.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability.

The Company uses the weighted average remaining maturity (WARM) method to estimate future expected losses for all of the Company’s loan pools.

The allowance for credit losses on loans is a reserve for estimated probable credit losses on individually evaluated loans determined to be impaired as well as estimated probable credit losses inherent in the loan portfolio.

Actual credit losses, net of recoveries, are deducted from the allowance for credit losses.

Loans are charged off when management believes that the collectability of the principal is unlikely.

Subsequent recoveries, if any, are credited to the allowance for 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.

Subsequent recoveries, if any, are credited to the allowance for credit losses.

A provision for credit losses, which is a charge against earnings, is recorded to bring the allowance for credit losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio.

Management’s evaluation process used to determine the appropriateness of the allowance for credit losses is subject to the use of estimates, assumptions, and judgment.

The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses.

Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan and lease losses and therefore the appropriateness of the allowance for loan and lease losses could change significantly.

The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for loan and lease losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors.

The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.

Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated credit losses and therefore the appropriateness of the allowance for credit losses could change significantly.

The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for credit losses on loans and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical peer and Company loss rates, reasonable and supportable forecasts, and a component primarily based on other qualitative factors.

The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions, reasonable and supportable forecasts, and other qualitative and quantitative factors which could affect potential credit losses.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans.

Because each of the criteria used is subject to change, the 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.

Because each of the criteria used is subject to change, the allowance for credit losses on loans is not necessarily indicative of the trend of future loan losses in any particular loan category.

The total allowance is available to absorb losses from any segment of the loan portfolio.

Management believes the allowance for loan and lease losses was adequate at September 30, 2022 and December 31, 2021.

Management believes the allowance for credit losses on loans was adequate at March 31, 2023 and December 31, 2022.

The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements.

In addition, various regulatory agencies periodically review the allowance for loan and lease losses.

As a result of such reviews, we may have to adjust our allowance for loan and lease losses.

However, regulatory agencies are not directly involved in the process of establishing the allowance for loan and lease losses as the

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

In addition, various regulatory agencies periodically review the allowance for credit losses.

As a result of such reviews, we may have to adjust our allowance for credit losses.

However, regulatory agencies are not directly involved in the process of establishing the

allowance for credit losses as the process is the responsibility of the Company and any increase or decrease in the allowance is the responsibility of management.

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

The Company assesses held to maturity (HTM) securities for credit losses and due to the HTM securities primarily being issued by government-sponsored entities or being highly rated municipals, management concluded that no credit loss should be recognized for these securities for the three months ended March 31, 2023.

The CECL standard also requires for credit losses on available for sale (AFS) securities to be recorded through an allowance for credit losses rather a write-down of the individual security.

As of March 31, 2023, the Company did not have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

Income Taxes.

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Penalties related to unrecognized tax benefits are classified as income tax expense.

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

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total Assets.

Total assets were $375.7 million at September 30, 2022, an increase of $10.9 million, or 3.0%, from $364.8 million at December 31, 2021.

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

Total assets were $418.0 million at March 31, 2023, an increase of $700,000, or 0.2%, from $417.3 million at December 31, 2022.

The increase was due primarily to increases in net loans and leases of $8.6 million, or 3.4%, from $251.3 million at December 31, 2022 to $259.9 million at March 31, 2023 and an increase of $1.0 million, or 15.9%, in net premises and equipment, partially offset by a decrease in securities of $7.3 million, or 5.4%, from $135.0 million at December 31, 2022 to $127.7 million at March 31, 2023 and decreases in cash, fed funds sold and deposits in banks totaling $1.6 million, or 14.5%.

The $1.0 million increase in net premises and equipment was primarily due to the purchase of two buildings adjacent to the Bank’s main office in Mineola and the beginning phases of construction of the new branch building in Lindale at the current location which should be completed in 2024.

Cash and Cash Equivalents.

Cash and cash equivalents decreased $13.0 million, or 59.4%, to $8.9 million (which includes fed funds sold of $4.5 million) at September 30, 2022 from $21.9 million (which includes fed funds sold of $16.3 million) at December 31, 2021.

This decrease was primarily the result of increases in net loans and leases of $19.8 million and increases in securities of $16.7 million, partially offset by an increase in deposits of $7.3 million and a decrease in interest bearing deposits in banks of $14.6 million.

Cash and cash equivalents decreased $2.1 million, or 23.8%, to $6.8 million (which includes fed funds sold of $1.9 million) at March 31, 2023 from $8.9 million (which includes fed funds sold of $2.0 million) at December 31, 2022.

This decrease was primarily the result of funding the increase in net loans and leases of $8.6 million and the increase in net premises and equipment of $1.0 million, partially offset by a decrease in securities of $7.3 million resulting primarily from the sale of a group of securities in January 2023 as part of an investment repricing strategy, an increase in deposits of $1.4 million and an increase in interest bearing deposits in banks of $548,000.

Interest Bearing Deposits in Banks.

Interest bearing deposits in banks were $359,000 at September 30, 2022 compared to $15.0 million at December 31, 2021, a decrease of $14.6 million, or 97.3%.

The decrease was primarily the result of funding increases in net loans and leases of $19.8 million and increases in securities of $16.7 million, partially offset by an increase in deposits of $7.3 million and the use of cash and cash equivalents of $13.0 million.

Interest bearing deposits in banks were $2.6 million at March 31, 2023, compared to $2.1 million at December 31, 2022, an increase of $548,000 or 23.8%.

The increase was primarily the result of the purchase of $1.7 million in Qwickrate Certificates of Deposit (CDs), partially offset by cash needed for loan funding.

The Bank utilizes the Qwickrate listing service, which is a resource where banks can purchase and sell Certificates of Deposit (CDs) with other banks, to invest excess funds easily in CDs at a competitive rate.

At March 31, 2023, there was $1.7 million in short-term (1-3 months) Qwickrate CDs with other banks.

Securities Available for Sale.

Securities available for sale increased by $21.5 million, or 37.9%, to $78.3 million at September 30, 2022 from $56.8 million at December 31, 2021.

The increase in securities resulted primarily from purchases of $44.5 million, sales of $10.8 million, paydowns of $4.2 million, and unrealized losses on the available for sale portfolio of $7.6 million due primarily to the increase in market interest rates during the period.

Securities available for sale decreased by $8.5 million, or 7.9%, to $98.7 million at March 31, 2023 from $107.2 million at December 31, 2022.

The decrease in securities resulted primarily from the sale of a group of securities as part of an investment repricing strategy adopted in January 2023 to take advantage of current market spreads.

We sold 16 securities totaling $17.0 million at a loss of $1.7 million in order to reprice the portfolio by purchasing investments yielding higher returns, including purchases of $9.5 million during the quarter.

We had paydowns of $1.2 million and a decrease in net unrealized losses (AOCI) on the available for sale portfolio of $1.5 million, or 21.4%, to $5.5 million from $7.0 million due primarily to the realized loss on the sale of $1.7 million being removed from the total.

Gross unrealized losses on the AFS portfolio decreased from $8.9 million, or 7.6% of the portfolio’s amortized cost of $116 million at December 31, 2022, to $6.9 million, or 6.5% of the amortized cost of $105.7 million at March 31, 2023.

These unrealized losses are due to increases in market interest rates.

Securities Held to Maturity.

Securities held to maturity decreased by $4.9 million, or 14.5%, to $28.8 million at September 30, 2022 from $33.7 million at December 31, 2021.

This decrease is due primarily to principal repayments of $4.4 million and one municipal security with a principal amount of $365,000 being called.

Securities held to maturity increased by $1.2 million, or 4.3%, to $29.0 million at March 31, 2023 from $27.8 million at December 31, 2022.

This increase is due primarily to the purchase of one security of $2.1 million as part of the repricing strategy, partially offset by principal repayments of $940,000.

The HTM portfolio had gross unrealized losses of $2.9 million, or 10.0% of the amortized cost of $29.0 million at March 31, 2023 compared to $3.2 million, or 11.5% of the amortized cost of $27.8 million at December 31, 2022.

These unrealized losses are due to increases in market interest rates.

Loans and Leases Receivable, Net.

Net loans and leases receivable increased $19.8 million, or 9.0%, to $240.1 million at September 30, 2022 from $220.3 million at December 31, 2021.

Loans secured by residential real estate and farmland comprise $169.4, or 70.0% of total loans at September 30, 2022.

During the nine months ended September 30,

2022, loan originations totaled $84.3 million of which $11.7 million were renewals or refinancings of existing loans with Mineola Community Bank, resulting in originations of new loans of $72.6 million.

Originations consisted primarily of $29.3 million in one- to-four family residential mortgage loans, $31.5 million of residential construction loans (upon completion), including speculative construction loans of $10.5 million, $6.4 million in commercial real estate loans, $3.5 million in consumer loans, $4.1 million in commercial and industrial loans, $6.8 million in land & development loans, and $2.7 million in farmland loans.

During the nine months ended September 30, 2022, there were $9.5 million in loan principal paydowns and $39.8 million in loan payoffs.

PPP loans have paid down to two loans totaling $5,000 at September 30, 2022.

During the nine months ended September 30, 2022, construction loans (when fully funded upon completion) increased by $18.6 million, or 79.8%, to $41.9 million at September 30, 2022 from $23.3 million at December 31, 2021 and the construction loan balance increased $10.0 million to $21.4 million at September 30, 2022.

Net loans and leases receivable increased $8.6 million, or 3.4%, to $259.9 million at March 31, 2023 from $251.3 million at December 31, 2022.

Loans secured by residential real estate and farmland comprise $172.7 million, or 65.7% of total loans at March 31, 2023.

During the three months ended March 31, 2023, loan originations totaled $27.5 million of which $6.6 million were renewals, or refinancings of existing loans with Mineola Community Bank (including interim construction loans converting to a permanent loan), resulting in originations of new loans of $20.8 million.

Originations consisted primarily of $7.4 million in one- to-four family residential mortgage loans, $13.0 million of residential construction loans (upon completion), including four speculative construction home loans of $1.5 million and nine quadplex properties of $5.8 million, $1.7 million in commercial real estate loans, $1.2 million in consumer loans, $2.0 million in commercial and industrial loans, $883,000 in land & development loans, and $1.3 million in farmland loans.

During the three months ended March 31, 2023, there were $3.2 million in loan principal paydowns and $12.9 million in loan payoffs.

During the three months ended March 31, 2023, construction loans (when fully funded upon completion) increased by $6.3 million, or 11.7%, to $60.3 million at March 31, 2023 from $54.0 million at December 31, 2022 and the construction loan balance increased $930,000 to $24.2 million at March 31, 2023.

Construction loans continue to be a large segment of our loan portfolio.

Deposits increased $7.3 million, or 2.7%, to $282.2 million at September 30, 2022 from $274.9 million at December 31, 2021.

Core deposits (defined as all deposits other than certificates of deposit) increased $14.0 million, or 6.9%, to $216.4 million at September 30, 2022 from $202.4 million at December 31, 2021.

Certificates of deposit decreased $6.8 million, or 9.4%, to $65.8 million at September 30, 2022 from $72.6 million at December 31, 2021.

At September 30, 2022, there were no brokered deposits.

Deposits increased $1.4 million, or 0.5%, to $297.5 million at March 31, 2023 from $296.1 million at December 31, 2022.

Core deposits (defined as all deposits other than certificates of deposit) decreased $11.6 million, or 5.6%, to $195.1 million at March 31, 2023 from $206.7 million at December 31, 2022.

Retail certificates of deposit increased $13.0 million, or 16.8%, to $90.2 million at March 31, 2023 from $77.3 million at December 31, 2022.

At March 31, 2023, there were $12.0 million in brokered deposits.

The decrease in core deposits and increase in CDs is primarily the result of the Bank offering a special CD with a higher rate in an effort to retain deposits which has also resulted in customers moving funds within the Bank to a higher yielding account.

We have also increased the rates on money market accounts as part of the retention effort during this time of rapidly rising market interest rates and a competitive deposit market.

As a result, our cost of deposits increased 37 basis points, or 34.9%, to 1.43% at March 31, 2023 compared to 1.06% at December 31, 2022.

Advances from Federal Home Loan Bank.

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

Advances from Federal Home Loan Bank decreased by $163,000, or 0.3%, to $62.3 million at March 31, 2023 from $62.5 million at December 31, 2022 due to matured advances of $6.2

million and new advances of $7.2 million for a net increase of $1.0 million, offset by scheduled monthly principal payments on amortizing advances of $1.2 million.

Total Shareholders’ Equity.

Total shareholders’ equity decreased $4.5 million, or 7.5%, to $55.6 million at September 30, 2022 from $60.1 million at December 31, 2021.

This decrease was primarily due to a $6.0 million, or 879.9%, change in accumulated other comprehensive loss representing decreases in the fair value of available for sale securities resulting primarily from rising market interest rates.

At September 30, 2022, the accumulated other comprehensive loss was $6.7 million, compared to $686,000 at December 31, 2021, partially offset by net income of $1.3 million and an additional $164,000 added to shareholders’ equity with the commitment to release 9,774 additional ESOP shares to participants during the nine months ended September 30, 2022.

In addition, there was a $21,000 charge to capital for one month of the newly adopted equity incentive plan.

At September 30, 2022, Mineola Community Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes, as permitted by the CARES Act.

At September 30, 2022, a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements.

At September 30, 2022, Mineola Community Bank was well capitalized and had a ratio of 13.00%.

Total shareholders’ equity decreased $421,000, or 0.7%, to $55.5 million at March 31, 2023 from $55.9 million at December 31, 2022.

This decrease was primarily due to a net loss for the quarter ended March 31, 2023 of $1.0 million resulting primarily from the loss on the sale of securities of $1.7 million and a one-time CECL adjustment (increase in the allowance for credit losses) of $1.0 million, net of tax, for the cumulative effect of a change in accounting principle used to estimate credit losses that was effective on January 1, 2023 and allowed to flow directly through capital instead of being charged as a provision for credit losses through the statement of operations.

These decreases were partially offset by increases including a reduction of $1.5 million, or 21.4%, in the accumulated other comprehensive loss to $5.5 million at March 31, 2023, compared to $7.0 million at December 31, 2022, primarily due to the sale of securities with unrealized losses, and an increase in equity of $49,000 with the commitment to release 3,258 additional ESOP shares to participants and a $103,000 increase in stock-based compensation related to the 2022 Equity Plan for the three months ended March 31, 2023.

The Company paid its first quarterly dividend on March 24, 2023, which amounted to $67,000.

At March 31, 2023, Mineola Community Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes, as permitted by the CARES Act.

At March 31, 2023, a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements.

At March 31, 2023, Mineola Community Bank was well capitalized and had a ratio of 11.32%.

Average Balance Sheets

3 unchanged sentences

Non-accrual loans are included in the computation of average balances.

Average yields for loans (excluding PPP loans) include loan fees of $90,000 and $134,000 for the three months ended September 30, 2022 and 2021, respectively.

No PPP loans were originated during the three months ended September 30, 2022 or 2021.

Average yields for loans (excluding PPP loans) include loan fees of $70,000 and $112,000 for the three months ended March 31, 2023 and 2022, respectively.

No PPP loans were originated during the three months ended March 31, 2023 or 2022.

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

For the Three Months Ended September 30,

For the Three Months Ended March 31,

(Dollars in thousands)

1 unchanged sentence

Loans (excluding PPP loans)

Allowance for loan and lease losses

Allowance for credit losses

Restricted stock

25 unchanged sentences

(3) Net interest margin represents net interest income divided by average total interest earning assets.

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

Net income was $539,000 for the three months ended September 30, 2022, compared to a net loss of $198,000 for the three months ended September 30, 2021, an increase of $737,000, or 372.2%.

The increase was primarily due to a $653,000, or 31.1%, increase in net interest income and a $280,000, or 12.2%, increase in net noninterest income, partially offset by a $34,000 increase in the provision for loan and lease losses and a $162,000 increase in income tax expense.

Interest Income.

Interest income increased by $584,000, or 22.5%, to $3.2 million for the three months ended September 30, 2022 from $2.6 million for the three months ended September 30, 2021.

This was primarily the result of increased interest income on securities due to an increased average balance increase of 86.1% and an increase in yield of 67.1% and increased loan interest from an increased average balance of 7.1%.

Average interest earning assets overall increased by $16.5 million, or 5.0%, from $333.0 million at September 30, 2021 to $349.5 million at September 30, 2022, and the yield on those assets increased by 52 basis points, or 16.6%, from 3.14% for the three months ended September 30, 2021 to 3.66% for the three months ended September 30, 2022.

Interest income on loans (excluding PPP loans) increased $140,000, or 5.8%, from $2.4 million for the three months ended September 30, 2021 to $2.5 million for the three months ended September 30, 2022.

This was primarily due to an increase of $15.6 million, or 7.1%, in the average balance of the loan portfolio to $235.4 million for the three months ended September 30, 2022 from $219.8 million for the three months ended September 30, 2021 being offset by a decrease of five basis points, or 1.1%, in the average yield on loans from 4.35% for the three months ended September 30, 2021 to 4.30% for the three months ended September 30, 2022.

In the three months ending September 30, 2021, we originated more loans with fees that were included in interest income than in the three months ending September 30, 2022 and although loan rates have increased, we had not originated enough loans at the higher rates at September 30, 2022 to increase the weighted average cost of the entire loan portfolio.

Interest income on securities increased $408,000, or 211.4%, from $193,000 for the three months ended September 30, 2021 to $601,000 for the three months ended September 30, 2022.

This increase resulted from an increase of 94 basis points, or 67.1%, in yield from 1.40% for the three months ended September 30, 2021 to 2.34% for the three months ended September 30, 2022 and an increase in average securities of $47.5 million, or 86.1%, from $55.2 million for the three months ended September 30, 2021 to $102.7 million for the three months ended September 30, 2022.

The rate increase is reflective of the rise in market interest rates in the overall market and diversification of the securities portfolio as the Company continued to invest the net proceeds of the conversion stock offering over the periods compared.

Interest income from interest bearing deposits in banks increased $5,000, or 50.0%, from $10,000 for the three months ended September 30, 2021 to $15,000 for the three months ended September 30, 2022.

This increase resulted primarily from an increase in average yield of 166 basis points, or 691.7%, from 0.24% for the three months ended September 30, 2021 to 1.90% for the three months ended September 30, 2022, partially offset by a decrease in the average interest bearing deposits in banks of $13.8 million, or 81.2%, from $17.0 million for the three months ended September 30, 2021 to $3.2 million for the three months ended September 30, 2022.

There was also an increase in fed funds interest income of $29,000, or 241.7%, resulting from a 197 basis points, or 1,641.7%, increase in average yield on fed funds sold from 0.12% for the three months ended September 30, 2021 to 2.09% for the three months ended September 30, 2022, partially offset by a $32.5 million, or 80.4%, decrease in average fed funds balances from $40.4 million for the three months ended September 30, 2021 to $7.9 million for the three months ended September 30, 2022.

Interest Expense.

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

Interest expense on deposit accounts decreased $62,000, or 17.1%, to $300,000 for three months ended September 30, 2022 from $362,000 for the three months ended September 30, 2021, due to a decrease in the average deposit cost of 13 basis points, or 20.3%, from 0.64% for the three months ended September 30, 2021 to 0.51% for the three months ended September 30,

2022, primarily the result of lower average deposit rates in the three months ended September 30, 2022 combined with a movement of funds to more liquid and lower-cost types of accounts.

This was partially offset by an increase of $8.7 million, or 3.8%, in the average deposit account balances from $227.7 million for the three months ended September 30, 2021 to $236.4 million for the three months ended September 30, 2022, with the increase being in lower cost interest bearing transaction accounts.

Interest expense on Federal Home Loan Bank advances decreased $7,000, or 4.6%, to $144,000 for the three months ended September 30, 2022 from $151,000 for the three months ended September 30, 2021.

This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $1.0 million, or 3.5%, to $27.3 million for the three months ended September 30, 2022 from $28.3 million for the three months ended September 30, 2021.

Net Interest Income.

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

Provision for Loan and Lease Losses.

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

Noninterest Income.

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

Noninterest Expense.

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

Salary and employee benefit expenses increased by $178,000, or 13.5%, to $1.5 million for the three months ended September 30, 2022 from $1.3 million for the three months ended September 30, 2021, due to normal salary increases and a $21,000 contribution to the Equity Plan for the three months ended September 30, 2022 which did not exist in the three months ended September 30, 2021, partially offset by decreased ESOP expense in the three months ending September 30, 2022 due to initial funding costs being higher in the three months ended September 30, 2021.

Directors’ fees also increased $21,000, or 28.0%, to $96,000 for the three months ended September 30, 2022 from $75,000 for the three months ended September 30, 2021 due to the addition of four new directors and two new advisory directors.

This was partially offset by a decrease of $446,000, or 37.0%, in data processing, contract services and other fees combined, primarily due to higher expenses related to the stock conversion transaction during the three months ended September 30, 2021.

Income Tax Expense.

Income tax expense increased by $162,000, or 450.0%, to $126,000 for the three months ended September 30, 2022 from a tax benefit of $36,000 primarily due to higher income before taxes.

The effective tax rate was 19.0% and 15.4% for the three months ended September 30, 2022 and 2021, respectively.

The effective tax rate was higher for the three months ended September 30, 2022 due to taxable income increasing at a faster rate than tax exempt income.

Average Balance Sheets

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated.

No tax-equivalent yield adjustments have been made, as the effects would be immaterial.

All average balances are daily average balances.

Non-accrual loans are included in the computation of average balances.

Average yields for loans (excluding PPP loans) include loan fees of $304,000 and $429,000 for the nine months ended September 30, 2022 and 2021, respectively.

No PPP loans were originated during the nine months ended September 30, 2022 or 2021.

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

For the Nine Months Ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans (excluding PPP loans)

Allowance for loan and lease losses

Restricted stock

Interest-bearing deposits in banks

Federal funds sold

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Regular savings and other deposits

Money market deposits

Certificates of deposit

Total interest-bearing deposits

Advances from the Federal Home Loan Bank

Other liabilities

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Other noninterest-bearing liabilities

Total liabilities

Total shareholders' equity

Total liabilities and shareholders' equity

Net interest income

Net interest rate spread (1)

Net interest-earning assets (2)

Net interest margin (3)

Average interest-earning assets to interest-bearing liabilities

(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3) Net interest margin represents net interest income divided by average total interest-earning assets.

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

Net income was $1.3 million for the nine months ended September 30, 2022, compared to net income of $232,000 for the nine months ended September 30, 2021, an increase of $1.1 million, or 550.0%.

The increase was primarily due to a $1.3 million, or 21.0%, increase in net interest income and a $141,000 increase in noninterest income, offset by a $81,000 increase in the provision for loan and lease losses and an increase in income tax expense of $281,000.

Comparison of the Operating Results for the Three Months Ended March 31, 2023 and March 31, 2022

The Company had a net loss of $1.0 million for the three months ended March 31, 2023, compared to net income of $391,000 for the three months ended March 31, 2022, a decrease of $1.4 million, or 350.0%.

The net loss was primarily due to a $1.7 million, or 340.0%, decrease in noninterest income resulting primarily from the sale of securities at a net loss of $1.7 million.

Additionally, there was a $395,000 increase in noninterest expense and a $50,000 increase in provision for credit losses, partially offset by a $323,000 increase in net interest income and a decrease in income tax expense of $374,000.

Interest Income.

Interest income increased $1.1 million, or 14.1%, for the nine months ended September 30, 2022 from $7.8 million at September 30, 2021 to $8.9 million at September 30, 2022.

This was primarily the result of increased interest income on securities and fed funds sold due primarily to the continued investment of the net proceeds from the conversion stock offering and increased yields on those investments resulting primarily from rising market interest rates.

Average interest earning assets increased by $39.5 million, or 12.8%, from $309.3 million at September 30, 2021 to $348.8 million at September 30, 2022, and a small increase in the yield on interest earning assets of 2 basis points, or 0.6%, from 3.38% on September 30, 2021 to 3.40% on September 30, 2022.

Interest income on loans increased $146,000, or 2.0%, to $7.3 million for the nine months ended September 30, 2022 from $7.2 million for the nine months ending September 30, 2021.

Average loans increased $14.3 million, or 6.6%, from $215.5 million at September 30, 2021 to $229.8 million at September 30, 2022, being offset by a 19 basis point, or 4.3%, decrease in loan yield to 4.26% for the nine months ended September 30, 2022 from 4.45% for the nine months ended September 30, 2021.

In the nine months ending September 30, 2021, we originated more loans with fees that were included in interest income than in the three months ending September 30 2022 and although loan rates have increased, we had not originated enough loans at the higher rates at September 30, 2022 to increase the weighted average cost of the entire loan portfolio.

Interest income on securities increased $861,000, or 153.8%, from $560,000 for the nine months ended September 30, 2021 to $1.4 million for the nine months ended September 30, 2022.

This increase resulted from an increase in average securities of $48.2 million, or 94.7%, from $50.9 million for the nine months ended September 30, 2021 to $99.1 million for the nine months ended September 30, 2022 and an increase of 44 basis points, or 29.9%, in average yield from 1.47% for the nine months ended September 30, 2021 to 1.91% for the nine months ended September 30, 2022.

The rate increase is reflective of market rate increases and the diversification of the securities portfolio as the net proceeds of the conversion stock offering continued to be invested into higher yielding investments.

Interest income from interest bearing deposits in banks declined $11,000, or 24.4%, from $45,000 for the nine months ended September 30, 2021 to $34,000 for the nine months ended September 30, 2022.

This decline resulted from a decrease in average deposits in banks of $13.6 million, or 70.1%, from $19.4 million for the nine months ended September 30, 2021 to $5.8 million for the nine months ended September 30, 2022, partially offset by 48 basis points, or 154.8%, increase in average yield from 0.31% for the nine months ended September 30, 2021 to 0.79% for the nine months ended September 30, 2022.

There was also an increase of $63,000 in fed funds interest income for the nine months ended September 30, 2022 primarily from an increase of 68 basis points, or 680.0%, in average yield on fed funds sold from 0.10% for the nine months ended September 30, 2021 to 0.78% for the nine months ended September 30, 2022, partially offset by a $8.6 million, or 38.6%, decrease in average fed funds sold from $22.3 million for the nine months ended September 30, 2021 to $13.7 million for the nine months ended September 30, 2022.

The increases in yields on deposits in banks and fed funds is reflective of the sharp increase in market rates.

Interest income increased $1.3 million, or 46.4%, from $2.8 million for the three months ended March 31, 2022 to $4.1 million for the three months ended March 31, 2023.

This was primarily the result of increased interest income on securities and loans due to increased yields and an increase in the average balance of loans and securities.

Average interest earning assets increased by $46.7 million, or 13.5%, from $345.8 million for the three months ended March 31, 2022 to $392.5 million at March 31, 2023, and an increase in the yield on interest earning assets of 102 basis points, or 32.0%, from 3.20% for the three months ended March 31, 2022 to 4.22% for the three months ended March 31, 2023.

Interest income on loans increased $406,000, or 17.1%, to $2.8 million for the three months ended March 31, 2023 from $2.4 million for the three months ended March 31, 2022.

This increase resulted from an increase in average loans of $32.9 million, or 14.7%, from $223.9 million for the three months ended March 31, 2022 to $256.8 million for the three months ended March 31, 2023, with an increase in loan yield of 9 basis points, or 2.1%, to 4.33% for the three months ended March 31, 2023 from 4.24% for the three months ended March 31, 2022.

The increase in loan yield was due primarily to increased market interest rates.

Interest income on securities increased $880,000, or 235.9%, from $373,000 for the three months ended March 31, 2022 to $1.3 million for the three months ended March 31, 2023.

This increase resulted from an increase in the average balance of securities of $32.6 million, or 34.6%, from $94.2 million for the three months ended March 31, 2022 to $126.8 million for the three months ended March 31, 2023 and an increase of 237 basis points, or 149.6%, in average yield from 1.58% for the three months ended March 31, 2022 to 3.95% for the three months ended March 31, 2023.

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

In January 2023, the Company sold 16 securities totaling $17.0 million at a loss of $1.7 million as part of a repricing strategy to increase interest income.

The securities consisted of 14 US Treasuries and two mortgage-backed securities that were purchased when rates were very low.

This was strictly a strategy to maximize income.

According to our analysis, we should recoup the loss in approximately 1.5 years by replacing the securities sold with securities purchased at then prevailing market interest rates.

The Federal Reserve increased rates 450 basis points, or 900%, between March 31, 2022 and March 31, 2023.

We believe the timing of the securities sale was optimal.

Interest income from interest bearing deposits in banks increased $43,000, or 716.7%, from $6,000 for the three months ended March 31, 2022 to $49,000 for the three months ended March 31, 2023.

This increase resulted from an increase in average yield of 389 basis points, or 1,397.0%, from 0.28% for the three months ended March 31, 2022 to 4.16% for the three months ended March, 31, 2023, partially offset by a decrease in average interest bearing deposits of $3.9 million, or 45.3% from $8.6 million for the three months ended March 31, 2022 to $4.7 million for the three months ended March 31, 2023.

There was also an increase of $30,000 in fed funds interest income for the three months ended March 31, 2023 primarily from an increase of 439 basis points, or 2,269.3%, in average yield on fed funds sold from 0.19% for the three months ended March 31, 2022 to 4.58% for the three months ended March 31, 2023, partially offset by a $15.2 million, or 81.7%, decrease in average fed funds sold from $18.6 million for the three months ended March 31, 2022 to $3.4 million for the three months ended March 31, 2023.

The increases in yields on deposits in banks and fed funds is reflective of the sharp increase in market interest rates.

Interest Expense.

Total interest expense decreased $283,000, or 17.4%, to $1.3 million for the nine months ended September 30, 2022 from $1.6 million for the nine months ended September 30, 2021 due to a decrease in the average cost of interest-bearing liabilities of 18 basis points, or 20.9%, from 0.86% for the nine months ended September 30, 2021 to 0.68% for the nine months ended September 30, 2022, primarily due to a decrease in deposit costs.

Interest expense on deposit accounts decreased $244,000, or 21.2%, to $908,000 for the nine months ended September 30, 2022 from $1.2 million for the nine months ended September 30, 2021, due to a decrease in the average deposit cost of 18 basis points, or 26.1%, from 0.69% for the nine months ended September 30, 2021 to 0.51% for the nine months ended September 30, 2022.

This was partially offset by an increase of $15.1 million, or 6.8%, in the average interest bearing

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

Interest expense on Federal Home Loan Bank advances decreased $39,000, or 8.3%, to $429,000 for the nine months ended September 30, 2022 from $468,000 for the nine months ended September 30, 2021.

This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $2.4 million, or 8.1%, to $27.1 million for the nine months ended September 30, 2022 from $29.5 million for the nine months ended September 30, 2021.

The average yield was 2.11% for the nine months ended September 30, 2022 and 2.12% for the nine months ended September 30, 2021.

Total interest expense increased $1.1 million, or 230.6%, to $1.5 million for the three months ended March 31, 2023 from $458,000 for the three months ended March 31, 2022 due to an increase in the average cost of interest-bearing liabilities of 124 basis points, or 178.9%, from 0.69% for the three months ended March 31, 2022 to

1.93% for the three months ended March 31, 2023, primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $675,000, or 217.0%, to $986,000 for the three months ended March 31, 2023 from $311,000 for the three months ended March 31, 2022, due to an increase in the average deposit cost of 104 basis points, or 196.7%, from 0.53% for the three months ended March 31, 2022 to 1.56% for the three months ended March 31, 2023 and an increase in average interest-bearing deposits of $16.2 million, or 6.8% from $236.4 million for the three months ended March 31, 2022 to $252.6 million for the three months ended March 31, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction accounts.

Part of the migration to higher yielding accounts results from a deposit retention strategy of offering a special higher interest rate CD and higher money market rates implemented during the quarter ended March 31, 2023.

The speed of the market rate increases created a competitive deposit market quickly, especially after the four consecutive 75 basis point raises from June to November.

Interest expense on Federal Home Loan Bank advances increased $382,000, or 265.3%, to $526,000 for the three months ended March 31, 2023 from $144,000 for the three months ended March 31, 2022.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $32.7 million, or 120.0%, to $59.9 million for the three months ended March 31, 2023 from $27.2 million for the three months ended March 31, 2022 and an increase in average yield of 140 basis points, or 66.0%, from 2.11% for the three months ended March 31, 2022 to 3.51% for the three months ended March 31, 2023.

The increase in average advances was primarily to fund an investment strategy initiated in 2022 and to fund loans.

At March 31, 2023, we have lengthened our short-term advances as they have matured and are holding onto any excess liquidity in interest bearing accounts.

The Company believes this to be prudent given the uncertainty in the market, including consumer behavior and interest rates, and management concerns about regulatory response and public perceptions in light of recent large regional bank failures.

Net Interest Income.

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

Net interest margin increased 20 basis points, or 7.5%, to 2.88% for the nine months ended September 30, 2022 from 2.68% for the nine months ended September 30, 2021.

Provision for Loan and Lease Losses.

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

Net interest income increased $323,000, or 13.0%, to $2.6 million for the three months ended March 31, 2023 from $2.3 million for the three months ended March 31, 2022 due primarily to the increase in interest-earning assets of $46.7 million, or 13.5%, to 392.5 million at March 31, 2023 from $345.8 million at March 31, 2022, partially offset by a decrease in net interest rate spread of 22 basis points, or 8.6%, from 2.51% for the three months ended March 31, 2022 to 2.29% for the three months ended March 31, 2023.

Net interest margin had a one basis point increase to 2.68% for the three months ended March 31, 2023.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $90,000 for the three months ended March 31, 2023, compared to $40,000 for the three months ended March 31, 2022, an increase of $50,000, or 125.0%, primarily due to an increase in loans and leases and the adoption of ASC 326.

See the CECL section in the financial statements for further explanation of the Bank’s transition to the new methodology.

Noninterest Income.

Noninterest income increased $141,000, or 7.7%, to $1.4 million for the nine months ended September 30, 2022 from $1.3 million for the nine months ended September 30, 2021, due primarily to an increase of $127,000, or 10.9%, in service charges and fees from $1.2 million for the nine months ended September 30, 2021 to $1.3 million for the nine months ended September 30, 2022.

The increase is primarily due to an $84,000 increase in service charges primarily due to waiving fees during part of 2021 on deposit accounts and increases in the number of deposit accounts.

There was also a $42,000 gain on the sale of real estate owned in the nine months ended September 30, 2022, partially offset by a $29,000 loss on the sale of securities during the nine months ended September 30, 2022.

Noninterest income decreased $1.7 million, or 340.0%, to a loss of $1.2 million for the three months ended March 31, 2023 from income of $453,000 for the three months ended March 31, 2022, due primarily to a $1.7 million loss on the sale of securities during the three months ended March 31, 2023.

This was partially offset by two income items that were not in the quarter ended March 31, 2022.

There was additional loan fee income from the wholesale lending program of $24,000 and rental income of $7,600 on two newly acquired buildings located adjacent to the current Bank premises that were purchased in January of 2023 for future expansion.

Noninterest Expense.

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

Salary and employee benefit expenses increased by $455,000, or 11.9%, to $4.3 million for the nine months ended September 30, 2022 from $3.8 million for the nine months ended September 30, 2021, due to normal salary and benefits increases and an increase in the ESOP contribution expense of $61,000 and a new $21,000 contribution expense for the Equity Plan in the nine months ending September 30, 2022.

The Equity Plan was not in existence and the ESOP was not fully funded for the nine months ending September 30, 2021.

Directors’ fees increased $56,000, or 24.2%, to $287,000 for the nine months ended September 30, 2022 from $231,000 for the nine months ended September 30, 2021 due to the addition of four new directors and two new advisory directors in 2022.

These increases were offset primarily by a combined decrease in data processing, contract services and other expenses of $527,000.

These expenses were higher in the nine months ended September 30, 2021 due partially to additional expenses related to the stock conversion.

Noninterest expense increased $395,000, or 18.2%, to $2.6 million for the three months ended March 31, 2023 from $2.2 million primarily due to increases in salaries and employee benefits, data processing, contract services, and other expenses.

Salary and employee benefit expenses increased by $205,000, or 16.7%, to $1.6 million for the three months ended March 31, 2023 from $1.4 million for the three months ended March 31, 2022, due to normal salary and benefits increases and an increase in compensation expense of $103,000 for stock awards and stock options awarded under the 2022 Equity Plan, which was approved by shareholders on August 31, 2022.

The Equity Plan was not in existence during the three months ended March 31, 2022.

Technology expenses increased $21,000, or 23.9%, to $109,000 for the three months ended March 31, 2023, primarily due to higher costs.

Other expenses increased $105,000, or 37.6%, primarily due to an increase of $53,000 in audit and accounting expenses, a $22,000 increase in insurance expenses and

$25,000 in fund expenses on a restricted investment.

Data processing costs also increased $30,000, or 13.4%, to $221,000 for the three months ended March 31, 2023 from $191,000 for the three months ended March 31, 2022.

Contract services increased $27,000, or 22.7%, to $62,000 for the three months ended March 31, 2023 from $35,000 for the three months ended March 31, 2022.

Both of these increases are reflective of the price increases in all types of services that the Company incurred in 2022, primarily as a result of general wage and inflationary pressures.

Income Tax Expense.

Income tax expense increased by $281,000, or 597.9%, to $328,000 for the nine months ended September 30, 2022 from $47,000 for the nine months ended September 30, 2021, primarily due to higher income before taxes.

The effective tax rate was 19.59% and 16.85% for the nine months ended September 30, 2022 and 2021, respectively.

The effective tax rate was higher for the nine months ended September 30, 2022 due to taxable income increasing at a faster rate than tax exempt income.

Income tax expense decreased by $374,000, or 425.0%, to an income tax benefit of $286,000 for the three months ended March 31, 2023 from an income tax expense of $88,000 for the three months ended March 31, 2022, due to the net loss at March 31, 2023.

The effective tax rate was 21.95% and 18.37% for the three months ended March 31, 2023 and 2022, respectively.

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

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business.

Federal Reserve Bank of Boston provides the Company with a federal funds line of credit.

Federal Reserve Bank of Boston provides the Bank with a federal funds line of credit.

Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures.

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We are also able to borrow from the Federal Home Loan Bank of Dallas.

At September 30, 2022, we had outstanding advances of $35.0 million from the Federal Home Loan Bank of Dallas.

At September 30, 2022, we had unused borrowing capacity of $100.5 million with the Federal Home Loan Bank of Dallas.

In addition, at September 30, 2022, we had a $10.0 million line of credit with Texas Independent Bankers Bank and a $5.0 million line of credit with First Horizon Bank.

At September 30, 2022, there was no outstanding balance under either of these facilities.

At March 31, 2023, we had outstanding advances of $62.3 million from the Federal Home Loan Bank of Dallas.

At March 31, 2023, we had unused borrowing capacity of $87.8 million with the Federal Home Loan Bank of Dallas.

In addition, at March 31, 2023, we had a $10.0 million line of credit with Texas Independent Bankers Bank and a $5.0 million line of credit with First Horizon Bank.

At March 31, 2023, there was no outstanding balance under any of these facilities.

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

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cash flows from operating activities, investing activities, and financing activities.

For additional information, see the consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 included as part of the consolidated financial statements included in this report.

For additional information, see the consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 included as part of the consolidated financial statements included in this report.

We are committed to maintaining a strong liquidity position.

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is governed by applicable banking laws and regulations.

At September 30, 2022, Texas Community Bancshares, Inc.

At March 31, 2023, Texas Community Bancshares, Inc.

(on a stand-alone, unconsolidated basis) had liquid assets of $13.1 million.

At September 30, 2022, Mineola Community Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

Liquidity management and asset quality continue to be high priorities.

With continued volatility in the market, recent banking sector events and market interest rate increases, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning.

We are monitoring deposit runoff and threats of deposit runoff daily.

We have been able to maintain our deposit base through this cycle with some new product offerings and competitive interest rates, which has increased our funding costs.

We run stress tests monthly with a severe scenario of 35% CD runoff and 20% other deposit runoff combined with the inability to access our available lines of credit.

The scenarios indicate that we are able to maintain our operational liquidity with a designated buffer with our liquidity resources available.

We are closely monitoring our assets and liabilities, along with any investment portfolio unrealized

losses due to increases in market interest rates, for possible issues and opportunities related to the current economic and market conditions.

We have been contacting our large depositors and having discussions with them about any concerns they may have and helping to insure that they have FDIC coverage to the fullest legal extent, which is over $250,000 for many depositors depending on the type of account ownership.

At March 31, 2023, accounts with balances in excess of $250,000 totaled $66.9 million, or 22.5% of deposits, with $27.4 million, or 9.2%, exceeding $250,000 and potentially uninsured.

Certificates of deposit totaled $7.1 million of that uninsured balance with the remaining $20.3 million in checking and savings.

We have also been communicating with our depositors in general to help ease any fears they may have in light of recent bank failures.

At March 31, 2023, the weighted average life (WAL) of our securities portfolio is 5.5 years.

At March 31, 2023, the net unrealized losses, and corresponding AOCI, on the AFS securities is $5.5 million, or 5.5% of the $98.7 million AFS total and 9.9% of capital.

These losses are the result of market interest rate increases and we continue to monitor the portfolio for other risks.

Over the next 36 months from March 31, 2023, we expect to realize $11.5 million, $21.9 million, and 21.6 million in cash flow from the securities portfolio in 2023, 2024 and 2025, respectively.

See the Securities section of the management discussion and analysis for more information.

Our asset quality remains strong.

We are being optimistically cautious with our lending and strategic decisions, staying focused on long-term goals and taking advantage of opportunities while being diligent about recognizing and mitigating risk.

With the CECL implementation, our allowance for credit losses increased to 1.09% due to the change in methodology.

This adds a deeper level of coverage for any losses we may experience.

The Bank has raised in-house mortgage rates while continuing to offer secondary market options to moderate loan funding.

Mortgage demand has remained surprisingly strong due primarily to relatively low inventory levels.

We are monitoring housing supply and demand, primarily in our Mineola and Lindale markets where home sales and new home construction has been active, for indicators of a significant change in the local housing markets.

We are currently utilizing listed CDs (Qwickrate) with terms of 1-3 months with full FDIC insurance in order to keep funds liquid while also earning a higher return than holding balances in fed funds.

We are not currently utilizing the Bank Term Funding Program.

The following are the various liquidity sources we have available at March 31, 2023 that we could use as needed depending on the nature and severity of the situation:

● FHLB borrowing capacity of $87.8 million

● $15 million in credit lines with 2 correspondent banks

● Federal Reserve discount window

● Qwickrate CD Program

● Brokered deposits

● The ability to sell securities.

We have run an analysis of securities that could be sold with minimal losses to provide liquidity.

● The ability to sell a group of loans in the secondary market on an as needed basis

● The ability to sell some of our BOLI assets

At March 31, 2023, Mineola Community Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category.

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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.

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.

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

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

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

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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.

We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

A basis point equals one-hundredth of one percent, and 100 basis points equals one percent.

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

At September 30, 2022

At March 31, 2023

Change in Interest Rates

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

The table above indicates that at September 30, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 2.11% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 1.86% decrease in net interest income.

The net interest income decreases in both interest rate scenarios due to the assets and liabilities repricing at different speeds in a rates up and rates down environment.

The table above indicates that at March 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 3.32% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 7.71% decrease in net interest income.

Net Economic Value .

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

At September 30, 2022

At March 31, 2023

EVE as a Percentage of

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(4) EVE Ratio represents EVE divided by the present value of assets.

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

The table above indicates that at March 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 7.61% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 2.26% decrease in EVE.

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

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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-Q

Item 1. Financial Statements