What changed in this filing

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Item 1. Financial Statements

2023-08-10 compared with 2023-05-15 · 527 added, 326 removed, 921 unchanged (48% of the section changed)

3 unchanged sentences

Consolidated Statements of Financial Condition

March 31, 2023 and December 31, 2022

June 30, 2023 and December 31, 2022

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

4 unchanged sentences

Securities available for sale

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

Securities held to maturity (fair values of $ 24,919 at June 30, 2023 and $ 24,615 at December 31, 2022)

Loans receivable, net of allowance for credit losses of $ 2,969 at June 30, 2023 and $ 1,755 at December 31, 2022

Net investment in direct financing leases

4 unchanged sentences

Core deposit intangible

Mortgage servicing rights, net

Deferred income taxes

Financial derivative

Liabilities and Shareholders' Equity

7 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, 3,373,723 and 3,296,843 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Common stock, $ 0.01 par value, 19,000,000 shares authorized, 3,373,723 issued and 3,323,456 outstanding at June 30, 2023 and 3,296,843 issued and outstanding at December 31, 2022

Additional paid in capital

2 unchanged sentences

Unearned Employee Stock Ownership Program (ESOP) shares, at cost

Treasury stock, at cost ( 50,267 shares at June 30, 2023)

Total shareholders' equity

3 unchanged sentences

Consolidated Statements of Operations (Unaudited)

Three Months Ended March 31, 2023 and 2022

Three and Six Months Ended June 30, 2023 and 2022

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

Three Months Ended

Six Months Ended

Interest Income

4 unchanged sentences

Deposits with banks

Financial derivative

Total interest income

12 unchanged sentences

Net appreciation on bank-owned life insurance

Total noninterest (loss) income

Total noninterest income (loss)

Noninterest Expenses

7 unchanged sentences

Total noninterest expenses

(Loss) Income Before Income Taxes

Income Tax (Benefit) Expense

Net (Loss) Income

Income (Loss) Before Income Taxes

Income Tax Expense (Benefit)

Net Income (Loss)

Earnings (loss) per share - basic

6 unchanged sentences

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Three Months Ended March 31, 2023 and 2022

Three and Six Months Ended June 30, 2023 and 2022

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

Three Months Ended

Net (Loss) Income

Other items of comprehensive income (loss)

Six Months Ended

Net Income (Loss)

Other items of comprehensive (loss) income

Debt Securities

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), 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)

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

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

See Notes to Consolidated Financial Statements

2 unchanged sentences

Consolidated Statements of Shareholders’ Equity (Unaudited)

Three Months Ended March 31, 2023 and 2022

Three and Six Months Ended June 30, 2023 and 2022

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

1 unchanged sentence

Shareholders'

Three Months Ended March 31, 2023 and 2022

Three Months Ended June 30, 2023 and 2022

Balance at April 1, 2023

Stock based compensation expense

Net changes in other comprehensive income (loss), net of tax benefit of $ 179

Cash dividend declared ($ 0.03 per share)

ESOP shares committed to be released, 3,258 shares

Treasury stock purchased, 50,267 shares

Balance at June 30, 2023

Balance at April 1, 2022

Net changes in fair value of available for sale securities, net of tax benefit of $ 612

ESOP shares committed to be released, 3,258 shares

Balance at June 30, 2022

Comprehensive

Shareholders'

Six Months Ended June 30, 2023 and 2022

Balance at January 1, 2023

3 unchanged sentences

Issuance of restricted stock awards

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

Cash dividend declared ($ 0.02 per share)

Net changes in other comprehensive income (loss), net of tax expense of $ 226

Cash dividend declared ($ 0.02 per share in Q1 and $ 0.03 per share in Q2)

ESOP shares committed to be released, 6,516 shares

Balance at March 31, 2023

Treasury stock purchased, 50,267 shares

Balance at June 30, 2023

Balance at January 1, 2022

1 unchanged sentence

ESOP shares committed to be released, 6,516 shares

Balance at March 31, 2022

Balance at June 30, 2022

See Notes to Consolidated Financial Statements

2 unchanged sentences

Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

Three Months Ended

Six Months Ended

Operating Activities

6 unchanged sentences

Net realized loss on sales of securities available for sale

Loss on sale of fixed assets

Appreciation on bank-owned life insurance

1 unchanged sentence

Stock-based compensation

Deferred income tax benefit

Deferred income tax

Loss on fair value adjustment of fair value hedges

Net change in

8 unchanged sentences

Maturities, prepayments and calls

Redemptions of restricted investments

Purchases of restricted investments

7 unchanged sentences

Payments on FHLB and other borrowings

Cash dividend declared and paid

Cash dividends declared and paid

Purchases of treasury stock

Net Cash from Financing Activities

6 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Three and Six Months Ended June 30, 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 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”), 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”) as part of a mutual to stock conversion completed on July 14, 2021.

The Company’s shares trade on the NASDAQ under the symbol TCBS.

Voting rights in the Company are held and exercised exclusively by the shareholders of the Company.

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.

2 unchanged sentences

Interim Financial Statements

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.

The interim unaudited consolidated financial statements as of June 30, 2023, and for the three and six months ended June 30, 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 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.

The results of operations for the three and six months ended June 30, 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.

P rinciples of Consolidation

Principles 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

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 credit losses.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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

24 unchanged sentences

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.

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

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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.

3 unchanged sentences

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.

For the three and six months ended June 30, 2023, the Company determined no provision for credit losses was necessary.

Allowance for Credit Losses

19 unchanged sentences

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

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)

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 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):

6 unchanged sentences

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.

Treasury Stock

Treasury stock is accounted for on the cost method and consists of 50,267 shares at June 30, 2023.

The Company had no treasury shares at December 31, 2022.

The Company adopted ASU 2022-01, Derivatives and Hedging (Topic 815) – Fair Value Hedging – Portfolio Layer Method, as of January 1, 2023.

The adoption of this standard did not have a material effect on the Company’s operating results or financial condition as of December 31, 2022.

At the inception of a derivative contract, the Company designates the derivatives as one of the three types based on the Company’s intentions and belief as to likely effectiveness as a hedge.

These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”).

For a fair value hedge, the gain or loss on the derivate, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as fair values change.

For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings.

Changes in the fair value of derivatives not designated or that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.

Accrued settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged.

Accrued settlements on derivatives not designated or that do not qualify for hedge accounting are reported in non-interest income.

Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship.

This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.

The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

effective in offsetting changes in fair values or cash flows of the hedged items.

The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income.

When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability.

When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position.

The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements.

All the contracts to which the Company is a party settle monthly or semi-annually.

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.

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

Note 2 – Earnings Per Share

4 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

1 unchanged sentence

Three Months Ended

Net (Loss) Income

Six Months Ended

Net Income (Loss)

Weighted average shares outstanding for basic earnings per share:

10 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 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:

March 31, 2023

June 30, 2023

Available for Sale

25 unchanged sentences

Total securities held to maturity

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

During the six months ended June 30, 2023, the Company had sales of available for sale securities of $ 17,027 with a loss of $ 1,687 .

During the three months ended June 30, 2023, the Company had no sales of available for sale securities or held to maturity securities.

During the three and six months ended June 30, 2022, the Company had sales of available for sale securities of $ 10,822 with a loss of $ 29 .

At June 30, 2023 and December 31, 2022, securities with a fair value of $ 4,359 and $ 3,162 , respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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:

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

March 31, 2023

June 30, 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

At June 30, 2023, the Company had investment securities with approximately $ 10,067 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 market interest rates and not the issuers’ financial condition or downgrades by rating agencies.

In addition, approximately 12.4 % of the principal balance from the Company’s investment portfolio will mature and be repaid to the Company within five years or less.

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

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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

Mortgage-backed securities and Collateralized Mortgage Obligations

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.

17 unchanged sentences

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 December 31, 2022.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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 December 31, 2022.

Other than temporary impairment

14 unchanged sentences

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 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 credit losses for the three months ended March 31, 2023:

March 31, 2023

The following tables set forth information regarding the activity in the allowance for credit losses for the three and six months ended June 30, 2023:

June 30, 2023

Allowance for credit losses:

1-4 Residential

& multi-family

Allowance for credit losses:

Three months ended

Beginning balance, April 1, 2023

Provision for credit losses

Loans charged-off

Balance, June 30, 2023

Six months ended

Beginning balance prior to adoption of ASC 326

Impact of adopting ASC 326

Impact of adopting ASC 326 on January 1, 2023

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

Balance, June 30, 2023

Balance, June 30, 2023 allocated to loans and leases individually evaluated

Balance, June 30, 2023 allocated to loans and leases collectively evaluated

Loans and leases receivable:

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.

Balance, June 30, 2023 loans and leases individually evaluated

Balance, June 30, 2023 loans and leases collectively evaluated

Balance, June 30, 2023

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

March 31, 2022

The following tables present the balances and activity in the allowance for loan and lease losses as of and for the three and six months ended June 30, 2022 and the year ended December 31, 2022, and the allowance for loan and lease 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.

June 30, 2022

Allowance for loan and lease losses:

Balance, January 1, 2022

Provision (credit)

Balance, March 31, 2022

Three months ended

Beginning balance, April 1, 2022

Ending balance, June 30, 2022

Six months ended

Beginning balance, January 1, 2022

Balance, June 30, 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.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 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:

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days and still accruing as of June 30, 2023:

Due Over 90 Days Still Accruing

Construction and land

2 unchanged sentences

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:

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

Construction and land

1‑4 Residential & multi-family

1 unchanged sentence

Consumer and other

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

The Company did no t recognize any interest income on nonaccrual loans during the periods ended June 30, 2023 or June 30, 2022.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2023:

1-4 Residential & multi-family

Commercial real estate

Consumer and other

The Company had $ 1,605 in collateral-dependent loans as of June 30, 2023.

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

10 unchanged sentences

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.

Impaired loans include nonperforming loans (nonaccrual loans), loans performing but with deterioration

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

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.

4 unchanged sentences

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.

14 unchanged sentences

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt.

Based upon available information, positive action by the Company is required to avert or minimize loss.

Based upon available information, positive action by the Company is

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

required to avert or minimize loss.

Credits with this classification have often become collateral dependent and any shortage in collateral or other likely loss amount is recorded as a specific valuation allowance.

5 unchanged sentences

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 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:

No significant changes were made during the period ended June 30, 2023 or the year ended December 31, 2022.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

Based on the most recent analysis performed, the risk category of loans by class of loans as of June 30, 2023 and gross chargeoffs for the six months then ended are as follows:

Term Loans Amortized Cost Basis by Origination Year

10 unchanged sentences

Special mention

Current period gross charge-offs

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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:

4 unchanged sentences

Consumer and other

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

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:

The following table presents the amortized cost of performing and non-performing loans as of June 30, 2023:

Term Loans Amortized Cost Basis by Origination Year

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Consumer and other

Non-performing

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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:

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Consumer and other

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

March 31, 2023

The following is an aging analysis for loans as of June 30, 2023 and December 31, 2022:

June 30, 2023

Construction and land

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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)

December 31, 2022

5 unchanged sentences

Consumer and other

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

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

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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:

No interest income was recognized for loans on nonaccrual status for the three and six months ended June 30, 2023 and 2022.

The following table presents interest income recognized on loans that are collateral-dependent and individually reviewed for the three and six months ended June 30, 2023 and 2022:

Three Months Ended

Six Months Ended

1-4 Residential & multi-family

Commercial real estate

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.

During the three and six months ended June 30, 2023, there were no modifications of loans to borrowers in financial difficulty.

During the three and six months ended June 30, 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.

At June 30, 2023 and December 31, 2022, the Company had a recorded investment of $ 343 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.

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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

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)

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

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.

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

At June 30, 2023 and December 31, 2022, the following financial instruments were outstanding whose contract amounts represent credit risk:

Contract Amount

March 31, 2023

June 30, 2023

December 31, 2022

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Commitments generally have fixed expiration dates or other termination clauses and may

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

require payment of a fee.

The commitments for equity lines of credit may expire without being drawn upon.

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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.

At June 30, 2023, 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 financial statements.

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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 June 30, 2023 and December 31, 2022, the Bank’s CBLR ratio was 11.12 % 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.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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 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.”

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.

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

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● 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.

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

These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 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.

● Level 3 Inputs – Significant unobservable inputs that reflect an entity ’ s own assumptions that market participants would use in pricing the assets or liabilities.

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 three months ended March 31, 2023 or the year ended December 31, 2022.

There were no changes in valuation techniques during either the six months ended June 30, 2023 or the year ended December 31, 2022.

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

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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.

Derivative Instruments – As discussed in Note 10 “Derivatives” within this Item 1 of this Quarterly Report, the Company records derivative instruments at fair value on a recurring basis.

The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain poritions of the Company’s interest-bearing assets and liabilities.

The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2.

Third-party valuations are validated by the Company using the Bloomberg Valuation Service’s derivative pricing functions.

No significant differences were identified udirng the validation as of June 30, 2023.

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.

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

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

The following table summarizes financial assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

June 30, 2023

Financial assets

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Corporate bonds

Financial derivatives

Total financial assets

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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

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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).

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

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

(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 June 30, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

June 30, 2023

Financial assets

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Impaired loans

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 .

During the six months ended June 30, 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 June 30, 2023, collateral-dependent loans with a carrying value of $ 367 were reduced by specific valuation allowance allocations totaling $ 300 to a reported fair value of $ 67 .

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 losses as a result of the valuation allowances for the three months ended March 31, 2023 and 2022.

There was no charge to the provision for credit losses - loans as a result of the valuation allowances for the three and six months ended June 30, 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

March 31, 2023

June 30, 2023

Collateral-dependent loans

1 unchanged sentence

Appraisal adjustment

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)

Fair Value at

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

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

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

March 31, 2023

June 30, 2023

Carrying Value

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Restricted investments carried at cost

Mortgage servicing rights

Financial liabilities

FHLB advances

Interest payable

Accrued interest payable

December 31, 2022

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FHLB advances

Interest payable

Accrued 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.

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.

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

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

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.

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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FHLB advances – Current market rates for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Interest payable – The carrying value approximates the fair value.

Accrued interest payable – The carrying value approximates the fair value.

Note 9 - Employee Stock Ownership Plan

In connection with the Conversion, the Company established an Employee Stock Ownership Plan for the exclusive benefit of eligible employees.

In connection with the conversion to an entity owned by shareholders, the Company established an Employee Stock Ownership Plan for the exclusive benefit of eligible employees.

The ESOP borrowed funds from the Company in an amount sufficient to purchase 260,621 shares (approximately 8.0 % of the common stock issued in connection with the conversion).

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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

ESOP compensation was $ 38 and $ 87 for the three and six months ended June 30, 2023 and $ 60 and $ 111 for the three and six months ended June 30, 2022.

Texas Community Bancshares, Inc.

1 unchanged sentence

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

Six Months Ended June 30, 2023 and 2022

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

A summary of the ESOP shares as of June 30, 2023 and December 31, 2022 are as follows:

June 30, 2023

December 31, 2022

Shares allocated to participants

Shares committed to be released to participants

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Fair value of unreleased shares

Note 10 - Stock-Based Compensation

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 $ 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 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;

those option awards have vesting periods of five years and have 10 -year contractual terms.

The Company has a policy of using shares held as treasury stock to satisfy share option exercises.

Currently, the Company does not have treasury shares and will issue new shares to satisfy expected stock option exercises.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions determined by management.

Expected volatility is based on historical volatility of the Company’s common stock.

The Company uses historical data when available to estimate option exercise and post-vesting termination behavior.

Due to lack of historical data, the Company estimated the expected term of options granted is 7.5 years.

This represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.

The Company’s accounting policy is to recognize forfeitures as they occur.

The risk-free interest rate for the expected term of the options is based on the 7 -year U.S.

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

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 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.

The fair value of the stock was determined using the closing stock price of the Company on grant date.

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

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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Note 10 - Derivatives

The Company is exposed to economic risks arising from its business operations and uses derivatives primarily to manage risk associated with changing interest rates.

The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge).

Fair Value Hedges – Derivatives are designated as fair value hedges when they are used to manage exposure to changes in the fair value of certain financial assets and liabilities, referred to as the hedged items, which fluctuate in value as a result of movements in interest rates.

Available for Sale Securities – The Company has a swap agreement to hedge the interest rate risk on a portion of its fixed rate available for sale (AFS) securities.

At June 30, 2023, the aggregate notional amount of the related hedged items of the AFS securities totaled $ 25 million and the fair value of the swaps associated with the derivative related to hedged items was an unrealized gain of $ 550 .

The Company applies hedge accounting in accordance with ASC 815, Derivatives and Hedging , and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded within other interest income on the Company’s Consolidated Statements of Operations.

The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows on the derivative hedging instrument with the changes in fair value or cash flows on the designated hedged item or transactions for the risk being hedged.

If a hedging relationship ceases to qualify for hedge accounting, the relationship is discontinued and future changes in the fair value of the derivative instrument are recognized in current period earnings.

For a discontinued or terminated fair value hedging relationship, all remaining basis adjustments to the carrying amount of the hedged item are amortized to interest income or expense over the remaining life of the hedged item consistent with the amortization of other discounts or premiums.

Previous balances deferred in AOCI from discontinued or terminated cash flow hedges are reclassified to interest income or expense as the hedged transactions affect earnings or over the originally specified term of the hedging relationship.

The Company’s hedges continue to be highly effective and had no material impact on the Consolidated Statements of Operations.

Texas Community Bancshares, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023 and 2022

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

The following table summarizes key elements of the Company’s derivative instruments as of June 30, 2023, segregated by derivatives that are considered accounting hedges and those that are not:

June 30, 2023

Notional Amount

Derivatives designated as hedges:

Fair Value Hedges

The following table summarizes the carrying value of the Company’s hedged assets in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of June 30, 2023:

Carrying Amount of Hedged Assets Amount

Cumulative Amount of Basis Adjustments Included in the Carrying Amount of the Hedged Assets

Line items on the Consolidated Statements of Financial Condition in which the hedged items is included:

Securities available for sale

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 March 31, 2023 and consolidated results of operations for the three months ended March 31, 2023 and 2022.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (“the Company”) consolidated financial condition at June 30, 2023 and consolidated results of operations for the three and six months ended June 30, 2023 and 2022.

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

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

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

Management believes the allowance for credit losses on loans was adequate at June 30, 2023 and December 31, 2022.

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

1 unchanged sentence

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.

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.

As of June 30, 2023, the Company did not

have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

Income Taxes.

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

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

Comparison of Financial Condition at June 30, 2023 and December 31, 2022

Total Assets.

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.

Total assets were $432.2 million at June 30, 2023, an increase of $14.9 million, or 3.6%, from $417.3 million at December 31, 2022.

The increase was due primarily to increases in net loans and leases of $17.5 million, or 7.0%, from $251.3 million at December 31, 2022 to $268.8 million at June 30, 2023, an increase of $3.2 million, or 50.8%, in net premises and equipment, and increases in cash, fed funds sold and interest bearing deposits in banks totaling $4.1 million, or 37.3%, to $15.1 million at June 30, 2023 from $11.0 million at December 31, 2022, partially offset by a decrease in securities of $11.3 million, or 8.4%, from $135.0 million at December 31, 2022 to $123.7 million at June 30, 2023.

The $3.2 million, or 50.8%, increase in net premises and equipment was primarily due to the purchase of two buildings adjacent to the Bank’s main office in Mineola, the purchase of a building that had recently been a bank branch in Tyler and the construction of the new branch building in Lindale at the current location, which should be completed in 2024.

Cash and Cash Equivalents.

Cash and cash equivalents 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.

Cash and cash equivalents increased $1.1 million, or 12.4%, to $10.0 million (which includes fed funds sold of $4.6 million) at June 30, 2023 from $8.9 million (which includes fed funds sold of $2.0 million) at December 31, 2022.

This increase was primarily the result of a decrease in securities of $11.3 million resulting primarily from the sale of a group of securities in January 2023 as part of an investment repricing strategy, an increase in deposits of $6.5 million, or, 2.2%, and an increase in FHLB advances of $9.4 million, or 15.0%, partially offset primarily by an increase in loans of $17.5 million, an increase in net premises and equipment of $3.2 million, dividends paid of $168,000, stock repurchases of $610,000 and an increase in interest bearing deposits in banks of $3.0 million.

Interest Bearing Deposits in Banks.

Interest bearing deposits in banks were $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.

Interest bearing deposits in banks were $5.1 million at June 30, 2023, compared to $2.1 million at December 31, 2022, an increase of $3.0 million, or 142.9%.

The increase was primarily the result of the purchase of $5.0 million in Qwickrate Certificates of Deposit (CDs), partially offset by cash needed for loan funding and property purchases.

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

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

At June 30, 2023, there was $5.0 million in short-term (3-6 months) Qwickrate CDs with other banks.

Securities Available for Sale.

Securities available for sale decreased by $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.

Securities available for sale decreased by $11.4 million, or 10.6%, to $95.8 million at June 30, 2023 from $107.2 million at December 31, 2022.

The decrease in securities resulted primarily from

the sale of a group of securities as part of an investment repricing strategy adopted in January 2023 to take advantage of then current market interest rate spreads.

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

We received paydowns of $2.9 million and a decrease in net unrealized losses on the available for sale portfolio of $418,000, or 6.0%, to $6.6 million from $7.0 million due primarily to the realized loss of $1.3 million, net of tax, related to the sale of securities being removed from the total, partially offset by increased unrealized losses from rising rates.

Gross unrealized losses on the AFS portfolio consisting of 84 securities decreased from $8.9 million, or 7.6% of the portfolio’s amortized cost of $116.0 million at December 31, 2022, to $8.3 million, or 8.0% of the amortized cost of $104.2 million at June 30, 2023.

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

The total net unrealized losses as refected in the other comprehensive losses (AOCI) was further reduced by $434,000 to $6.1 million at June 30, 2023 from purchases of derivatives hedged against a portion of the AFS portfolio.

This was a total reduction in other comprehensive losses of $852,000, or 12.2%, from $7.0 million at December 31, 2022 to $6.1 million at June 30, 2023.

Securities Held to Maturity.

Securities held to maturity increased by $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.

Securities held to maturity increased by $43,000, or 0.2%, to $27.9 million at June 30, 2023 from $27.8 million at December 31, 2022.

This increase is due primarily to the purchase of one security of $2.1 million as part of the repricing strategy, partially offset by paydowns of $2.0 million.

The HTM portfolio had 70 securities with gross unrealized losses of $3.0 million, or 10.8%, of the amortized cost of $27.9 million at June 30, 2023 compared to $3.2 million, or 11.5%, of the amortized cost of $27.8 million at December 31, 2022.

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

Loans and Leases Receivable, Net.

Net loans and leases receivable increased $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.

Net loans and leases receivable increased $17.5 million, or 7.0%, to $268.8 million at June 30, 2023 from $251.3 million at December 31, 2022.

Loans secured by residential real estate and farmland comprise $176.8 million, or 65.0% of total loans at June 30, 2023.

During the six months ended June 30, 2023, loan originations totaled $52.4 million of which $11.1 million were renewals, or refinancings of existing loans with Mineola Community Bank (including interim construction loans converting to a permanent loan), resulting in originations of new loans of $41.3 million.

Originations consisted primarily of $17.0 million in one-to-four family residential mortgage loans, $22.2 million of residential construction loans (upon completion), including 21 speculative construction home loans of $5.9 million and nine quadplex properties of $5.8 million, $2.5 million in commercial real estate loans, $2.5 million in consumer loans, $2.7 million in commercial and industrial loans, $2.7 million in land & development loans, and $1.6 million in farmland loans.

During the six months ended June 30, 2023, there were $7.3 million in loan principal payments and $25.9 million in loan payoffs.

During the six months ended June 30, 2023, construction loans (when fully funded upon completion) increased by $9.2 million, or 17.0%, to $63.2 million at June 30, 2023 from $54.0 million at December 31, 2022.

The total construction loan portfolio consisting of 108 loans had funded balances of $39.7 million at June 30, 2023 compared to 98 loans at December 31, 2022 with funded balances of $30.7 million.

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

Deposits 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.

Deposits increased $6.5 million, or 2.2%, to $302.6 million at June 30, 2023 from $296.1 million at December 31, 2022.

Core deposits (defined as all deposits other than certificates of deposit) decreased $13.4 million, or 6.5%, to $193.3 million at June 30, 2023 from $206.7 million at December 31, 2022.

Retail certificates of deposit increased $20.0 million, or 25.9%, to $97.3 million at June 30, 2023 from $77.3 million at December 31, 2022.

At June 30, 2023, there were $12.0 million in brokered deposits.

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

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

As a result, our cost of deposits increased 64 basis points, or 60.4%, to 1.70% at June 30, 2023 compared to 1.06% at December 31, 2022.

At June 30, 2023, there were 152 accounts with balances in excess of $250,000 with a total of $63.9 million, or 21.1% of deposits.

The amount that was over $250,000 was $25.9 million, or 8.6%, that was potentially uninsured, including certificates of deposit of $6.9 million and $19.0 million in checking, MMDA and savings accounts.

Advances from Federal Home Loan Bank.

Advances from Federal Home Loan Bank 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.

Advances from Federal Home Loan Bank increased by $9.4 million, or 15.0%, to $71.9 million at June 30, 2023 from $62.5 million at December 31, 2022 due to additional advances of $11.0 million, offset by scheduled monthly principal payments on amortizing advances of $1.6 million.

The advances were purchased to help fund loan growth and real estate purchases.

Total Shareholders’ Equity.

Total shareholders’ equity decreased $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%.

Total shareholders’ equity decreased $1.4 million, or 2.5%, to $54.5 million at June 30, 2023 from $55.9 million at December 31, 2022.

This decrease was primarily due to a net loss for the six months ended June 30, 2023 of $857,000 resulting primarily from the loss on the sale of securities of $1.3 million, net of tax, and a one-time CECL adjustment (increase in the allowance for credit losses) of $1.0 million, net of tax, for the cumulative effect of a change in accounting principle used to estimate credit losses that was effective on January 1, 2023.

The CECL cumulative effect adjustment flowed directly through capital instead of being charged as a provision expense for credit losses through the statement of operations.

These decreases were partially offset by increases in equity including a net reduction of $852,000, or 12.2%, in the accumulated other comprehensive loss from $7.0 million at December 31, 2022 to $6.1 million at June 30, 2023;

a net decrease in the unrealized losses on AFS securities of $418,000 primarily due to removing unrealized losses associated with the sale of securities partially offset by increases in the unrealized losses due to rising rates;

and a net increase of $434,000 from the change in the fair value of cash flow hedges on $25.0 million of the securities in the AFS portfolio.

An increase in equity of $285,000 came from stock plan vesting of the 2022 Equity Plan for the six months ended June 30, 2023, and an increase of $87,000 with the commitment to release 6,516 additional ESOP shares to participants.

In the six months ended June 30, 2023, the Company paid quarterly dividends totaling $168,000 and repurchased 50,267 shares of TCBS stock at a cost of $610,000.

At June 30, 2023, Mineola Community Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes, as permitted by the CARES Act.

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

At June 30, 2023, Mineola Community Bank was well capitalized and had a ratio of 11.12%.

Average Balance Sheets

2 unchanged sentences

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 $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.

Nonaccrual loans are only included in the computation of average balances.

Average yields for loans include loan fees of $143,000 and $103,000 for the three months ended June 30, 2023 and 2022, respectively.

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

For the Three Months Ended March 31,

For the Three Months Ended June 30,

(Dollars in thousands)

5 unchanged sentences

Federal funds sold

Financial derivative

Total interest earning assets

22 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 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%.

Comparison of the Operating Results for the Three Months Ended June 30, 2023 and June 30, 2022

The Company had a net income of $160,000 for the three months ended June 30, 2023, compared to net income of $416,000 for the three months ended June 30, 2022, a decrease of $256,000, or 61.5%.

The decrease was primarily due to a decrease in net interest income of $166,000, or 6.7%, primarily due to a 50 basis point, or 18.7%, decrease in net interest rate spread primarily due to the rapid increase in market interest rates between periods and the inability to reprice interest earning assets at the same speed as interest bearing liabilities.

Additionally, there was a $56,000 increase in provision for credit losses primarily due to an increase in the balance of the average loan portfolio of $36.6 million, or 15.9%, a $511,000, or 21.6%, increase in noninterest expense only being partially offset by a $62,000, or 13.8%, increase in noninterest income and a decrease in income tax expense of $83,000.

Interest Income.

Interest income increased $1.6 million, or 55.0%, to $4.5 million for the three months ended June 30, 2023 from $2.9 million for the three months ended June 30, 2022.

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

Average interest earning assets increased by $52.4 million, or 14.9%, from $351.0 million for the three months ended June 30, 2022 to $403.4 million at June 30, 2023, and an increase in the yield on interest earning assets of 116 basis points, or 34.9%, from 3.34% for the three months ended June 30, 2022 to 4.50% for the three months ended June 30, 2023.

Interest income on loans increased $668,000, or 27.5%, to $3.1 million for the three months ended June 30, 2023 from $2.4 million for the three months ended June 30, 2022.

This increase resulted from an increase in average loans of $36.6 million, or 15.9%, from $229.9 million for the three months ended June 30, 2022 to $266.5 million for the three months ended June 30, 2023, with an increase in loan yield of 42 basis points, or 10.0%, to 4.65% for the three months ended June 30, 2023 from 4.23% for the three months ended June 30, 2022.

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

Interest income on securities increased $813,000, or 181.9%, from $447,000 for the three months ended June 30, 2022 to $1.3 million for the three months ended June 30, 2023.

This increase resulted from an increase in the average balance of securities of $26.0 million, or 25.9%, from $100.3 million for the three months ended June 30, 2022 to $126.3 million for the three months ended June 30, 2023 and an increase of 221 basis points, or 123.9%, in average yield from 1.78% for the three months ended June 30, 2022 to 3.99% for the three months ended June 30, 2023.

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

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

A portion of these funds have been reinvested into these higher yielding securities accounting for part of the difference in the 221 basis point yield increase between June 30, 2022 and June 30, 2023.

The Federal Reserve increased rates 450 basis points, or 900%, between March 30, 2022 and March 30, 2023.

Interest income from interest bearing deposits in banks increased $66,000, or 507.7%, from $13,000 for the three months ended June 30, 2022 to $79,000 for the three months ended June 30, 2023.

This increase resulted from an increase in average yield of 327 basis points, or 349.0%, from 0.94% for the three months ended June 30, 2022 to 4.21% for the three months ended June 30, 2023 and an increase in average interest bearing deposits of $2.0 million, or 35.3% from $5.5 million for the three months ended June 30, 2022 to $7.5 million for the three months ended June 30, 2023.

There was also an increase of $1,000 in fed funds interest income for the three months ended June 30, 2023 primarily from an increase of 426 basis points, or 528.3%, in average yield on fed funds sold from 0.81% for the three months ended June 30, 2022 to 5.07% for the three months ended June 30, 2023, partially offset by a $12.4 million, or 84.1%, decrease in average fed funds sold from $14.9 million for the three months ended June 30, 2022 to $2.4 million for the three months ended June 30, 2023.

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

Interest income from the fair value hedge increased $33,000 for the six months ended June 30, 2023.

The Company entered into an interest rate swap agreement in the six months ended June 30, 2023 to convert a portion of its

interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position.

Refer to additional detail regarding the fair value hedge in Note 10 – Derivatives.

Interest Expense.

Total interest expense increased $1.5 million, or 330.8%, to $1.9 million for the three months ended June 30, 2023 from $441,000 for the three months ended June 30, 2022 due to an increase in the average cost of interest-bearing liabilities of 166 basis points, or 252.3%, from 0.66% for the three months ended June 30, 2022 to 2.32% for the three months ended June 30, 2023, primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $949,000, or 318.5 %, to $1.2 million for the three months ended June 30, 2023 from $298,000 for the three months ended June 30, 2022, due to an increase in the average deposit cost of 147 basis points, or 295.9%, from 0.50% for the three months ended June 30, 2022 to 1.97% for the three months ended June 30, 2023 and an increase in average interest-bearing deposits of $13.7 million, or 5.7% from $240.1 million for the three months ended June 30, 2022 to $253.8 million for the three months ended June 30, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction accounts.

Part of the migration to higher yielding accounts results from a deposit retention strategy of offering a special higher interest rate CD and higher money market rates implemented during the quarter ended December 31, 2022.

The speed of the market rate increases created a competitive deposit market quickly, especially after the four consecutive 75 basis point raises from June 2022 to November 2022.

Interest expense on Federal Home Loan Bank advances increased $495,000, or 351.1%, to $636,000 for the three months ended June 30, 2023 from $141,000 for the three months ended June 30, 2022.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $43.5 million, or 162.7%, to $70.2 million for the three months ended June 30, 2023 from $26.7 million for the three months ended June 30, 2022 and an increase in average yield of 151 basis points, or 71.7%, from 2.11% for the three months ended June 30, 2022 to 3.63% for the three months ended June 30, 2023.

The increase in average advances was primarily to fund loan growth.

At June 30, 2023, we have lengthened our short-term advances as they have matured and are holding onto any excess liquidity in interest bearing accounts.

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

Net Interest Income.

Net interest income increased $166,000, or 6.7%, to $2.7 million for the three months ended June 30, 2023 from $2.5 million for the three months ended June 30, 2022 due primarily to the increase in interest-earning assets of $52.4 million, or 14.9%, to $403.4 million at June 30, 2023 from $351.0 million at June 30, 2022, partially offset by a decrease in net interest rate spread of 50 basis points, or 18.7%, from 2.68% for the three months ended June 30, 2022 to 2.18% for the three months ended June 30, 2023.

Net interest margin had a 20 basis point decrease to 2.63% for the three months ended June 30, 2023 from 2.83% for the three months ended June 30, 2022.

The decrease in net interest rate spread was primarily due to the rapid increase in rates between periods and the inability to reprice interest earning assets at the same speed as interest bearing liabilities with the average yield on interest earning assets increasing by 116 basis points, or 34.9%, compared to the average increase on interest bearing liabilities increasing by 166 basis points, or 252.3%.

Provision for Credit Losses.

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

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

Noninterest Income.

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

service charges and fees from 274,000 for the three months ended June 30, 2022 to $259,000 for the three months ended June 30, 2023 due primarily to a decrease in ATM fees of $13,000.

Noninterest Expense.

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

Salary and employee benefit expenses increased by $277,000, or 19.7%, to $1.7 million for the three months ended June 30, 2023 from $1.4 million for the three months ended June 30, 2022, due primarily to compensation expenses due to normal salary and benefits increases and a one-time expense related to hiring a new Bank president in March 2023 and an increase of $182,000 for stock options and awards granted under the 2022 Equity Plan, which was approved by shareholders and effective on August 31, 2022.

The Equity Plan was not in existence during the three months ended June 30, 2022.

Occupancy expenses increased 21,000, or 11.4% due primarily to increases in depreciation, property taxes and utilities.

Technology expenses increased $8,000, or 7.5%, to $115,000 for the three months ended June 30, 2023 from $107,000 for the three months ended June 30, 2022 and data processing expenses increased $18,000, or 8.9%, to $221,000 for the three months ended June 30, 2023 from $203,000 for the three months ended June 30, 2022 primarily due to cost increases from the providers.

Other expenses increased $161,000, or 48.8%, primarily due to an increase of $19,000 in audit and accounting expenses, a $35,000 increase in insurance expenses due to rate increases and the addition of new properties, a $57,000 increase in other operating expenses primarily due to a one time fee associated with hiring, an increase in FDIC assessment expenses of $23,000 primarily due to an overall increase in the FDIC assessment rate, an $8,000 increase in marketing expense and an $8,000 increase in investment expense.

Contract services increased $22,000, or 51.2%, to $65,000 for the three months ended June 30, 2023 from $43,000 for the three months ended June 30, 2022.

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

Income Tax Expense.

Income tax expense decreased by $83,000, or 72.8%, to $31,000 for the three months ended June 30, 2023 from $114,000 for the three months ended June 30, 2022, due to the decrease in net income before taxes of $339,000 from $530,000 for the three months ended June 30, 2022 to $191,000 for the three months ended June 30, 2023.

The effective tax rate was 16.23% and 21.51% for the three months ended June 30, 2023 and 2022, respectively.

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

Average Balance Sheets

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

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

All average balances are daily average balances.

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

Average yields for loans (excluding PPP loans) include loan fees of $214,000 and $215,000 for the six months ended June 30, 2023 and 2022, respectively.

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

For the Six Months Ended June 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

Financial derivative

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

The Company had a net loss of $857,000 for the six months ended June 30, 2023, compared to net income of $807,000 for the six months ended June 30, 2022, a decrease of $1.7 million, or 206.2%.

The net loss was primarily due to a $1.6 million, or 177.2%, decrease in noninterest income resulting primarily from the sale of securities at a net loss of $1.7 million.

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Interest Income.

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.

Interest income increased $3.0 million, or 52.5%, from $5.7 million for the six months ended June 30, 2022 to $8.7 million for the six months ended June 30, 2023.

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

Average interest earning assets increased by $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.

Average interest earning assets increased by $49.9 million, or 14.3%, from $348.4 million for the six months ended June 30, 2022 to $398.3 million at June 30, 2023, and an increase in the yield on interest earning assets of 109 basis points, or 33.4%, from 3.27% for the six months ended June 30, 2022 to 4.36% for the six months ended June 30, 2023.

Interest income on loans increased $1.1 million, or 22.9%, to $5.9 million for the six months ended June 30, 2023 from $4.8 million for the six months ended June 30, 2022.

This increase resulted from an increase in average loans of $34.8 million, or 15.3%, from $226.9 million for the six months ended June 30, 2022 to $261.7 million for the six months ended June 30, 2023, with an increase in loan yield of 25 basis points, or 6.0%, to 4.49% for the six months ended June 30, 2023 from 4.24% for the six months ended June 30, 2022.

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

Interest income on securities increased $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.

Interest income on securities increased $1.7 million, or 206.5%, from $820,000 for the six months ended June 30, 2022 to $2.5 million for the six months ended June 30, 2023.

This increase resulted from an increase in the average balance of securities of $29.3 million, or 30.1%, from $97.2 million for the six months ended June 30, 2022 to $126.5 million for the six months ended June 30, 2023 and an increase of 228 basis points, or 135.0%, in average yield from 1.69% for the six months ended June 30, 2022 to 3.97% for the six months ended June 30, 2023.

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 30, 2022 and March 30, 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.

Interest income from interest bearing deposits in banks increased $109,000, or 573.7%, from $19,000 for the six months ended June 30, 2022 to $128,000 for the six months ended June 30, 2023.

This increase primarily resulted from the purchase of certificates of deposits (CDs) through Qwickrate at competitive rates.

The increase in average yield of 365 basis points, or 675.3%, from 0.54% for the six months ended June 30, 2022 to 4.19% for the six months ended June 30, 2023, was partially offset by a decrease in average interest bearing deposits of $1.0 million, or 13.6% from $7.1 million for the six months ended June 30, 2022 to $6.1 million for the six months ended June 30, 2023.

There was also an increase of $31,000 in fed funds interest income for the six months ended June 30, 2023 primarily from an increase of 432 basis points, or 919.1%, in average yield on fed funds sold from 0.47% for the six months ended June 30, 2022 to 4.79% for the six months ended June 30, 2023, partially offset by a $13.8 million, or 82.5%, decrease in average fed funds sold from $16.7 million for the six months ended June 30, 2022 to $2.9 million for the six months ended June 30, 2023.

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

Dividends from restricted investments increased $50,000, or 454.5%, from $11,000 for the six months ended June 30, 2022 to $61,000 for the six months ended June 30, 2023.

This increase primarily resulted from a $52,000, or 742.9%, increase in dividends on FHLB stock from $7,000 for the six months ending June 30, 2022 to $59,000 for the six months ending June 30, 2023.

During the six months ending June 30, 2023 we were required to purchase $459,000

in FHLB stock to fully secure advance obligations obtained during the period.

This brought the FHLB stock balance at June 30, 2023 to $2.9 million compared to $2.0 million at June 30, 2022.

Interest income from the fair value hedge increased $33,000 for the six months ended June 30, 2023.

The Company entered into an interest rate swap agreement in the six months ended June 30, 2023 to convert a portion of its interest rate exposure from fixed rates to floating rates to help manage the interest rate risk position.

Refer to additional detail regarding the fair value hedge in Note 10 – Derivatives.

Interest Expense.

Total interest expense increased $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.

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.

Total interest expense increased $2.5 million, or 278.4%, to $3.4 million for the six months ended June 30, 2023 from $898,000 for the six months ended June 30, 2022 due to an increase in the average cost of interest-bearing liabilities of 145 basis points, or 213.6%, from 0.68% for the six months ended June 30, 2022 to 2.13% for the six months ended June 30, 2023, primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $1.6 million, or 267.3%, to $2.2 million for the six months ended June 30, 2023 from $609,000 for the six months ended June 30, 2022, due to an increase in the average deposit cost of 125 basis points, or 245.9%, from 0.51% for the six months ended June 30, 2022 to 1.76% for the six months ended June 30, 2023 and an increase in average interest-bearing deposits of $14.9 million, or 6.3% from $238.2 million for the six months ended June 30, 2022 to $253.2 million for the six months ended June 30, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction accounts.

Part of the migration to higher yielding accounts resulted from a deposit retention strategy of offering a special higher interest rate CD and higher money market rates implemented during the quarter ended December 31, 2022.

Interest expense on Federal Home Loan Bank advances increased $877,000, or 307.7%, to $1.2 million for the six months ended June 30, 2023 from $285,000 for the six months ended June 30, 2022.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $38.1 million, or 141.2%, to $65.1 million for the six months ended June 30, 2023 from $27.0 million for the six months ended June 30, 2022 and an increase in average yield of 146 basis points, or 69.2%, from 2.11% for the six months ended June 30, 2022 to 3.57% for the six months ended June 30, 2023 The increase in average advances was primarily to fund an investment strategy initiated in 2022 and to fund loans.

At June 30, 2023, we have lengthened our short-term advances as they have matured and are holding onto any excess liquidity in interest bearing accounts.

Net Interest Income.

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.

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

Net interest margin had a 10 basis point decrease to 2.65% for the six months ended June 30, 2023 from 2.75% for the six months ended June 30, 2022.

Provision for Credit Losses.

Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $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.

Based on management’s analysis of the adequacy of the allowance for credit losses, the provision for credit losses was $183,000 for the six months ended June 30, 2023, compared to $77,000 for the six months ended June 30, 2022, an increase of $106,000, or 137.7%, primarily due to an increase in loans and leases and the adoption of ASC 326.

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

Noninterest Income.

Noninterest income decreased $1.7 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.

Noninterest income decreased $1.6 million, or 177.2%, to a loss of $696,000 for the six months ended June 30, 2023 from income of $902,000 for the six months ended June 30, 2022, due primarily to a $1.7 million loss on the sale of securities during the six months ended June 30, 2023.

This was partially offset by two income items that were not in the quarter ended June 30, 2022.

There was additional loan fee income from the wholesale lending program of $68,000 and rental income of $14,000 on two newly acquired buildings located adjacent to the current Bank premises that were purchased in January of 2023 for future expansion.

Noninterest Expense.

Noninterest expense increased $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.

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

Salary and employee benefit expenses increased by $482,000, or 17.4%, to $3.3 million for the six months ended June 30, 2023 from $2.8 million for the six months ended June 30, 2022, due to normal salary and benefits increases and an increase in compensation expense of $285,000 for stock awards and stock options awarded under the 2022 Equity Plan, which was approved by shareholders on August 31, 2022.

The Equity Plan was not in existence during the six months ended June 30, 2022.

Technology expenses increased $29,000, or 14.9%, to $224,000 for the six months ended June 30, 2023, primarily due to higher costs.

Other expenses increased $266,000, or 43.7%, primarily due to an increase of $72,000 in audit and accounting expenses, a $67,000 increase in insurance expenses and $58,000 in other operating expenses primarily due to a one time fee associated with hiring.

Data processing costs also increased $48,000, or 12.2%, to $442,000 for the six months ended June 30, 2023 from $394,000 for the six months ended June 30, 2022.

Contract services increased $49,000, or 62.8%, to $127,000 for the six months ended June 30, 2023 from $78,000 for the six months ended June 30, 2022.

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

Income Tax Expense.

Income tax expense decreased by $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.

Income tax expense decreased by $457,000, or 226.2%, to an income tax benefit of $255,000 for the six months ended June 30, 2023 from an income tax expense of $202,000 for the six months ended June 30, 2022, due to the net loss at June 30, 2023.

The effective tax rate was 22.93% and 20.02% for the six months ended June 30, 2023 and 2022, respectively.

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

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

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

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

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

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

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.

At June 30, 2023, we had outstanding advances of $71.9 million from the Federal Home Loan Bank of Dallas.

At June 30, 2023, we had unused borrowing capacity of $78.2 million with the Federal Home Loan Bank of Dallas.

In addition, at June 30, 2023, we had a $10.0 million line of credit with Texas Independent Bankers Bank and a $5.0 million line of credit with First Horizon Bank.

At June 30, 2023, there was no outstanding balance under any of these facilities.

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

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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 three months ended March 31, 2023 and 2022 included as part of the consolidated financial statements included in this report.

For additional information, see the consolidated statements of cash flows for the six months ended June 30, 2023 and 2022 included as part of the consolidated financial statements included in this report.

We are committed to maintaining a strong liquidity position.

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Its primary source of income is dividends received from Mineola Community Bank.

The amount of dividends that Mineola Community Bank may declare and pay to Texas Community Bancshares, Inc.

The amount of dividends that Mineola Community Bank may

declare and pay to Texas Community Bancshares, Inc.

is governed by applicable banking laws and regulations.

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

At June 30, 2023, Texas Community Bancshares, Inc.

(on a stand-alone, unconsolidated basis) had liquid assets of $12.4 million.

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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 are closely monitoring our assets, liabilities, capital and investment portfolio unrealized losses for possible issues and opportunities related to the current economic and market conditions.

We have contacted some of our large depositors and had discussions with them regarding how to have FDIC coverage to the fullest legal extent, which is over $250,000 for many depositors depending on the type of account ownership.

At June 30, 2023, there were 152 accounts with balances in excess of $250,000 with a total of $63.9 million, or 21.1% of deposits.

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.

At June 30, 2023, the weighted average life (WAL) of our securities portfolio is 5.6 years.

The unrealized losses on the AFS securities is $8.3 million, or 8.0% of the $104.2 million AFS portfolio.

Unrealized losses on the HTM securities is $3.0 million, or 10.7% of the $27.9 million HTM portfolio.

The total unrealized losses are $11.3 million, or 8.6% of the $132.0 million securities portfolio, which includes $63.4 million, or 48.0%, that are agency issued and guaranteed by the U.S.

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

The gross unrealized losses on the AFS portfolio is 13.7% of capital and the total gross unrealized loss is 18.6% of capital.

The net unrealized loss on AFS securities, and the corresponding other comprehensive loss, was $6.6 million, or 10.9% of capital.

Over the next 24 months from June 30, 2023, we expect to realize $7.7 million, $21.8 million, and 12.8 million in cash flow from the securities portfolio in 2023, 2024 and 2025, respectively, with $17.2 million of that being over the next 12 months.

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

At June 30, 2023, the Bank entered into interest rate swap agreements with a total notional amount of $25 million to hedge the risk of changes in the fair value of fixed rate AFS securities for changes in the SOFR benchmark rate.

At June 30, 2023 the derivatives were highly effective and offset the unrealized loss on AFS securities by $434,000 bringing the net other comprehensive loss from $6.6 million to $6.1 million.

Our asset quality remains strong.

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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.

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

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

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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:

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

● FHLB borrowing capacity of $78.2 million

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● 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.

At June 30, 2023, Mineola Community Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

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

Management of Market Risk

Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates.

Therefore, a principal part of our operations is to

manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates.

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

Our most significant form of market risk is interest rate risk.

As a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates.

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

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

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

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

● expanding our wholesale lending program to be able to meet customer loan needs while managing the weighted average life and interest rate risk in the loan portfolio.

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

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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 March 31, 2023

At June 30, 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 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.

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

Net Economic Value .

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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 March 31, 2023

At June 30, 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 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.

The table above indicates that at June 30, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 6.73% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.15% increase in EVE.

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

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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