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Item 7. Management’s Discussion and Analysis

2024-03-27 compared with 2023-03-30 · 227 added, 188 removed, 294 unchanged (59% of the section changed)

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Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the Federal Home Loan Bank of Dallas, in residential real estate loans and commercial real estate loans and, to a lesser extent, commercial loans, construction and land loans, and consumer and other loans.

Substantially all of our loans are fixed-rate loans.

We also invest in securities, which have historically consisted primarily of mortgage-backed securities and obligations issued by U.S.

government sponsored enterprises, state and municipal securities, and Federal Home Loan Bank stock.

The majority of our loans are fixed-rate loans, however, we have updated our commercial lending terms and are originating more commercial loans with adjustable rates.

We also invest in securities, which have

historically consisted primarily of mortgage-backed securities and obligations issued by U.S.

government sponsored enterprises, state and municipal securities, collateralized mortgage obligations, corporate bonds, and Federal Home Loan Bank stock.

We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts.

Mineola Community Bank is subject to comprehensive regulation and examination by the Texas Department of Savings and Mortgage Lending and the Federal Deposit Insurance Corporation and is a member of the Federal Home Loan Bank system.

Broadstreet Bank is subject to comprehensive regulation and examination by the Texas Department of Savings and Mortgage Lending and the Federal Deposit Insurance Corporation and is a member of the Federal Home Loan Bank system.

Our results of operations depend primarily on our net interest income.

Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities.

Our results of operations also are affected by our provisions for loan and lease losses, non-interest income and non-interest expense.

Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, and income from bank owned life insurance.

Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contract services, director fees, and other expenses.

Our results of operations also are affected by our provisions for credit losses, non-interest income and non-interest expense.

Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, income from bank owned life insurance, and wholesale lending fees.

Wholesale lending fees are generated from facilitating the origination of mortgage loans through the wholesale lender.

Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, technology expenses, contract services, director fees, and other expenses.

We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations.

Bank owned life insurance provides us with non-interest income that is nontaxable.

Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan and lease losses.

Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for credit losses.

At December 31, 2023, our investment in bank owned life insurance was $6.2 million, which was within this investment limit.

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Since our founding in 1934, we have operated as a community bank.

Historically, our primary lending activity has been the origination of fixed-rate residential mortgage loans to individuals in our market area funded primarily by deposits gathered from

individuals and businesses in our market area.

We expect that this will continue to be the focus of our business for the foreseeable future.

Historically, our primary lending activity has been the origination of fixed-rate residential mortgage loans to individuals in our market area funded primarily by deposits gathered from individuals and businesses in our market area.

We expect that this will continue to be a primary focus of our business for the foreseeable future.

As part of our customer focus, we generally do not sell the loans we originate but retain them in our portfolio.

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We began originating these loans in 2014, and continue to do so primarily through word-of-mouth referrals.

At December 31, 2022, these loans amounted to $61.8 million including $41.4 million of jumbo loans.

At December 31, 2023, these loans amounted to $45.1 million and included $29.2 million of jumbo loans.

● Grow and diversify our loan portfolio prudently .

There has been an influx of retirees and others from the Dallas metropolitan area into our market area.

There has been an influx of retirees and others from the Dallas metropolitan area and an influx in general into the state of Texas and our market area.

Our more rural market area offers a lower-cost of living and many recreational amenities, while being within easy reach of the cities of Dallas and Tyler and the urban amenities they offer.

We believe this movement away from major cities like Dallas has been accelerated by the work-from-home trend that accelerated due to the COVID-19 pandemic.

We believe this movement away from major cities like Dallas was accelerated by the work-from-home trend that accelerated during the COVID-19 pandemic.

In 2018, we opened our branch office in Lindale, Texas, and acquired our branch office in Edgewood, Texas, from another bank.

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The influx of population into our market area has provided opportunities for residential mortgage lending, construction and land lending, and commercial real estate lending.

Although we intend to continue our historical focus on the origination of residential mortgage loans, we intend to prudently increase our commercial real estate lending and construction and land lending so as to continue to diversify our loan portfolio.

In 2023, we began construction of a new building in Lindale to better service that market which is growing rapidly.

That location was opened, along with a branch in Tyler and a

loan production office in Canton, Texas, in February of 2024.

At December 31, 2023, commercial real estate loans amounted to $41.8 million, or 14.8% of total loans, and construction and land loans amounted to $37.5 million, or 13.3% of total loans.

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Core deposits totaled $198.5 million, or 62.6% of total deposits, as of December 31, 2023, compared to $206.7 million, or 69.8% of total deposits, as of December 31, 2022.

● Continue to manage credit risk to maintain a low level of non-performing assets.

● Continue to manage credit risk to maintain a low level of nonperforming assets.

Historically, we have been able to maintain a high level of asset quality.

We believe strong asset quality remains a key to our long-term financial success .

Our total non-performing assets to total assets ratio was 0.28% and 0.49% at December 31, 2022 and 2021, respectively.

Our total nonperforming assets to total assets ratio was 0.30% and 0.28% at December 31, 2023 and 2022, respectively.

Our strategy for credit risk management continues to focus on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring.

Furthermore, given the uncertainty surrounding the length and severity of the COVID-19 pandemic, management has established and will continue to use enhanced underwriting criteria for all loan types, with a particular focus on portfolio segments identified as having elevated risk.

● Continue to support our customers and our local community .

The COVID-19 pandemic has restricted the level of economic activity in our markets, resulting in dramatically increased unemployment and significant negative impacts on many businesses, thereby threatening the repayment ability of some of our borrowers.

As we have done during prior economic downturns, we are taking actions to support our customers and our local community.

For example, during the year ended December 31, 2020, we originated $5.4 million of small business loans under the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) that was signed into law in March 2020.

Under the PPP, loan amounts were forgiven if the

borrower maintains employee payrolls and meets certain other requirements.

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

The remaining PPP loans have been forgiven or paid.

During the year ended December 31, 2020, we also granted short-term payment deferrals on loans to assist customers during the COVID- 19 pandemic.

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

● Grow organically and through opportunistic acquisitions or branching.

We intend to grow our assets organically on a managed basis, and the capital we raised in the offering will enable us to increase our lending and investment capacity.

We intend to grow our assets organically on a managed basis, and the capital we raised in the offering has enabled us to increase our lending and investment capacity.

In addition to organic growth, we may also consider expansion opportunities in our market area or in contiguous markets that we believe would enhance both our franchise value and stockholder returns.

These opportunities may include acquiring other financial institutions and/or establishing loan production offices, establishing new, or de novo, branch offices and/or acquiring branch offices, and the capital we raised in the offering will help us fund any such opportunities that may arise.

We have no current plans or intentions regarding any such expansion activities.

During 2023, we opened a loan production office in Canton, Texas and opened a full-service branch in Tyler in February of 2024.

Summary of Critical Accounting Policies and Critical Accounting Estimates

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The following represent our critical accounting policies:

Allowance for Loan and Lease Losses .

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

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

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

Subsequent recoveries, if any, are credited to the allowance for loan and lease losses.

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

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

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

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

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

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

quantitative factors which could affect potential credit losses.

Allowance for Credit Losses .

Effective January 1, 2023, the Company adopted Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASC 326”), referred to as CECL.

Upon adoption of CECL, the Company made a one-time cumulative-effect adjustment that

decreased retained earnings by $1.0 million.

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

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

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

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

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

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

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

Loans are charged off when management believes that the uncollectability of the principal is confirmed.

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

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

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

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

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

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

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

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

Because each of the criteria used is subject to change, the allocation of the allowance for loan and lease losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category.

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

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

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

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

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

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

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

However, regulatory agencies are not directly involved in the process of establishing the allowance for loan and lease losses as the process is the responsibility of Mineola Community Bank and any increase or decrease in the allowance is the responsibility of management.

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

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

However, regulatory agencies are not directly involved in the process of establishing the allowance for credit losses as the process is the responsibility of the Company and any increase or decrease in the allowance is the responsibility of management.

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

The Company assesses held to maturity (HTM) securities for credit losses and due to the HTM securities primarily being issued by government-sponsored entities or being highly rated municipals, management concluded that no credit loss should be recognized for these securities for the year ended December 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 December 31, 2023, the Company did not have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

Income Taxes.

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There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.

Texas Community Bancshares files consolidated federal income tax returns with Mineola Community Bank.

Texas Community Bancshares files consolidated federal income tax returns with Broadstreet Bank.

Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws.

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Securities held to maturity

Loans receivable, net

Loans and leases receivable, net

Premises and equipment, net

Bank owned life insurance

Foreclosed assets

Restricted investments carried at cost

Bank owned life insurance

Core deposit intangible

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Net interest income

Provision for loan and lease losses

Net interest income after provision for loan and lease losses

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

Noninterest expense

Income before income taxes

Income tax expense

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

At or For the Years Ended

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Asset Quality Ratios:

Allowance for loan and lease losses as a percentage of total loans

Allowance for loan and lease losses as a percentage of non-performing loans

Allowance for loan and lease losses as a percentage of non-accrual loans

Non-accrual loans as a percentage of total loans

Allowance for credit losses as a percentage of total loans

Allowance for credit losses as a percentage of nonperforming loans

Allowance for credit losses as a percentage of nonaccrual loans

Nonaccrual loans as a percentage of total loans

Net (charge-offs) recoveries to average outstanding loans during the year

Non-performing loans as a percentage of total loans

Non-performing loans as a percentage of total assets

Total non-performing assets as a percentage of total assets

Nonperforming loans as a percentage of total loans

Nonperforming loans as a percentage of total assets

Total nonperforming assets as a percentage of total assets

Number of offices

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(3) Represents noninterest expenses divided by the sum of net interest income and noninterest income.

The following table summarizes securities available for sale:

Percentage of

Securities available for sale:

Residential mortgage-backed

Collateralized mortgage obligations

State and municipal

Corporate bonds

Government and agency

Total securities available for sale

The following table sets forth information regarding fair values, weighted average yields and maturities of available for sale investments.

The yields have been computed on a tax equivalent basis.

Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur.

December 31, 2022

Due in One Year

One to Five Years

Five to Ten Years

After Ten Years

Total Investment Securities

Securities available for sale:

Residential mortgage-backed

Collateralized mortgage obligations

State and municipal

Corporate bonds

Government and agency

Total securities available for sale

The following table summarizes securities held to maturity:

Percentage of

Securities held to maturity:

Residential mortgage-backed

State and municipal

Total securities held to maturity

The following table sets forth information regarding amortized costs, weighted average yields and maturities of all held to maturity investments.

The yields have been computed on a tax equivalent basis.

Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur.

December 31, 2022

Due in One Year

One to Five Years

Five to Ten Years

After Ten Years

Total Investment Securities

Securities held to maturity:

Residential mortgage-backed

State and municipal

Total securities held to maturity

(4) Update to risk-weighted assets in 2022 due to calculation error.

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

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Total assets were $452.0 million as of December 31, 2023, an increase of 34.7 million, or 8.3%, when compared to total assets of $417.3 million as of December 31, 2022.

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

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

Cash, Cash Equivalents and Due From Banks.

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

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

The increase was due primarily to an increase in net loans and leases of $28.6 million, or 11.4%, to $279.9 million at December 31, 2023 from $251.3 million at December 31, 2022, an increase in cash and interest bearing deposits in banks of 14.4 million, or 130.9%, to $25.4 million at December 31, 2023 from $11.0 million at December 31, 2022, an increase in net premises and equipment of $5.3 million, or 84.1%, to $11.6 million at December 31, 2023 from $6.3 million at December 31, 2022, and an increase in restricted investments carried at cost, which is primarily FHLB stock, of $1.1 million, or 39.3%, to $3.9 million at December 31, 2023 partially offset by a decrease in securities of $15.6 million, or 11.6% to $119.3 million at December 31, 2023 from $135.0 million at December 31, 2022.

Asset growth was funded by increases in deposits of $21.1 million, or 7.1%, to $317.2 million at December 31, 2023 from $296.1 million at December 31, 2022 and increases in FHLB advances of $14.4 million, or 23.0% to $76.9 million at December 31, 2023 from $62.5 million at December 31, 2022.

The increase in net premises and equipment was primarily due to the purchase of two building adjacent to the Bank’s main office in Mineola, the purchase of a former bank building in Tyler to house our new Tyler branch office and the construction of the new branch building in Lindale.

Both of the new locations were opened by February 2024.

Cash and Cash Equivalents.

Total cash and cash equivalents (which includes fed funds sold) increased $4.1 million, or 46.1%, to $13.1 million (including $7.6 million in Fed Funds sold) at December 31, 2023 from $8.9 million (including $2.0 million in Fed Funds sold) at December 31, 2022.

This increase was primarily due to a decrease in securities of $15.6 million, or 11.6%, to $119.3 million at December 31, 2023 from $135.0 million at December 31, 2022.

The decrease in available for sale (AFS) securities of $13.8 million resulted primarily from sales of $19.8 million in 2023 as part of a repricing and balance sheet restructuring strategy.

The proceeds were primarily held in cash and cash equivalents and interest bearing deposits in banks as assets are being restructured.

These accounts provided a favorable yield while maintaining a high level of liquidity.

The Bank made a strategic decision to hold more liquid funds in 2023 due to economic conditions and liquidity concerns resulting from bank failures in the first quarter of the year and other deposit challenges.

Interest Bearing Deposits in Banks .

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

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

Interest bearing deposits in banks were $12.3 million at December 31, 2023 compared to $2.1 million as of December 31, 2022, an increase of $10.2 million, or 485.7%.

The increase was due primarily to the net decreases in securities of $15.6 million.

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 December 31, 2023, there was $3.2 million in short-term (3-6 months) Qwickrate CDs with other banks.

Securities Available for Sale.

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

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

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

Securities available for sale decreased by $13.8 million, or 12.9%, to $93.3 million at December 31, 2023 from $107.2 million at December 31, 2022.

The decrease in securities resulted primarily from sales of securities as part of an investment repricing strategy adopted in January 2023 to take advantage of then current market interest rate spreads.

In 2023, twenty securities were sold totaling $19.8 million at a loss of $1.7 million in order to reprice the portfolio by purchasing investments yielding higher returns or making loans, including purchases of $10.3 million during the period.

During 2023, we had purchases of securities of $10.3 million and received paydowns of $6.2 million.

The AFS portfolio is comprised of 26.7% residential mortgage backed securities, 53.4% collateralized mortgage obligations, 14.3% state and municipal securities and 5.6% corporate bonds.

Net unrealized losses decreased on the available for sale portfolio by $1.3 million, or 18.6%, to $5.7 million, net of tax, from $7.0 million, net of tax, due primarily to decreases in unrealized losses from changes in market interest rates being partially offset by the realized loss related to the securities sold being removed from the total.

Gross unrealized losses on the AFS portfolio consisting of 81 securities decreased from $8.9 million, or 7.7% of the portfolio’s amortized cost of $116.0 million at December 31, 2022, to $7.2 million, or 7.2% of the amortized cost of $100.5 million at December 31, 2023.

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

The total net unrealized losses as reflected in the other comprehensive losses (AOCI) was further reduced by $94,000 from purchases of derivatives hedged against a portion of the AFS portfolio.

The total accumulated other comprehensive losses decreased by $1.4 million to $5.6 million at December 31, 2023 from $7.0 million at December 31, 2022.

Securities Held to Maturity.

Securities held to maturity decreased by $1.8 million, or 6.5%, to $26.0 million at December 31, 2023 from $27.8 million at December 31, 2022.

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

This decrease is primarily due to principal repayments of $3.8 million partially offset by a purchase of $2.1 million.

The portfolio is comprised of 85.7% residential mortgage backed securities, 7.6% state and municipal securities and 6.7% U.S.

government and agency bonds.

Loans and Leases Receivable, Net.

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

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

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

Net loans and leases receivable increased $28.6 million, or 11.4%, to $279.9 million at December 31, 2023 from $251.3 million at December 31, 2022, including payment of the last PPP loan of $2,000 bringing the PPP total to zero at December 31, 2023.

Loans secured by residential real estate, multifamily and farmland comprise $189.8 million, or 67.1%, of total loans and commercial real estate loans total $41.8 million, or 14.8%, of total loans at December 31, 2023.

During the twelve months ended December 31, 2023, loan originations totaled $114.3 million of which $25.6 million were renewals, or refinancings of existing loans with Broadstreet Bank (including interim construction loans converting to a permanent loan), resulting in net originations of $88.7 million.

Originations consisted primarily of $29.6 million in one-to-four family residential mortgage loans, $9.1 million in multifamily loans, construction loans of $46.2 million (when fully funded upon completion), $13.5 million in commercial real estate loans, $4.4 million in consumer loans, $6.1 million in commercial and industrial loans, $2.0 million in land & development loans, $2.0 million in farmland loans and $1.4 million in municipal loans.

Originated construction loans included $7.1 million in commercial construction, $25.0 million in residential construction loans, including 27 speculative construction home loans of $8.4 million, and four multi-family construction loans totaling $14.1 million.

During the year ended December 31, 2023, construction loans (when fully funded upon completion) increased by $307,000, or 0.57%, to $54.3 million at December 31, 2023 from $54.0 million at December 31, 2022.

The total construction loan portfolio consisting of 82 loans had funded balances of $31.5 million at December 31, 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 with the majority of the loans being originated in our primary market.

During the year ended December 31, 2023, there were $13.6 million in loan principal paydowns and $68.8 million in loan payoffs.

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

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

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

Deposits increased $21.1 million, or 7.1%, to $317.2 million at December 31, 2023 from $296.1 million at December 31, 2022.

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

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

Core deposits (defined as all deposits other than certificates of deposit) decreased $8.2 million, or 4.0%, to $198.5 million at December 31, 2023 from $206.7 million at December 31, 2022.

Retail certificates of deposit increased $29.3 million, or 37.9%, to $106.7 million at December 31, 2023 from $77.4 million at December 31, 2022.

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

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

The decrease in core deposits and increase in CDs was primarily the result of the Bank offering a special CD to retain deposits, which resulted in some customers moving funds to the higher yielding time deposit from a transaction account.

We increased the rate 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 average cost of deposits increased 145 basis points, or 231.4%, to 2.08% at December 31, 2023, compared to 0.63% at December 31, 2022.

At December 31, 2023, there were 171 accounts with balances in excess of the $250,000 FDIC insurance limit with a total balance of $79.9 million, or 25.2% of deposits.

The amount that was over $250,000 was $37.2 million, or 11.8%, that was potentially uninsured, including certificates of deposit of $8.6 million and $28.6 million in checking, MMDA and savings accounts.

Advances from the Federal Home Loan Bank.

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

Advances from the Federal Home Loan Bank increased by $14.4 million, or 23.0%, to $76.9 million at December 31, 2023 from $62.5 million at December 31, 2022 primarily to fund loan growth and increases in net premises and equipment while keeping a larger amount of cash on hand to mitigate risk primarily related to economic uncertainty and deposit volatility.

Shareholders’ Equity.

Total shareholders’ equity decreased $2.2 million, or 3.9%, to $53.7 million at December 31, 2023 from $55.9 million at December 31, 2022.

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

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

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

This decrease was primarily due to a $733,000 net loss for the year ended December 31, 2023 resulting primarily from the loss on the sale of securities of $1.4 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 equity instead of being charged as a provision expense for credit losses through the consolidated statement of operations.

The Company also repurchased 174,842 shares of its common stock for a decrease of $2.2 million and paid quarterly dividends totaling $368,000, partially offset by a decrease in the net other comprehensive loss of $1.4 million, an increase in equity of $193,000 for the 2023 funding of the Broadstreet Bank leveraged ESOP with the release of 14,844 additional ESOP shares to participants and $528,000 related to the partial vesting of the 2022 Equity Incentive Plan for the year ended December 31, 2023.

At December 31, 2023, the unallocated ESOP contra equity account was $2.2 million.

At December 31, 2023, Broadstreet Bank opted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes.

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

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

At December 31, 2023, Broadstreet Bank’s community bank leverage ratio was 10.76%.

Average Balance Sheets

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All average balances are daily average balances.

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

Nonaccrual loans are included in the computation of average balances.

Average yields for loans (excluding PPP loans) include loan fees of $631,000 and $399,000 for the years ended December 31, 2023 and 2022, respectively.

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

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

For the Years Ended December 31,

For the Year Ended December 31,

(Dollars in thousands)

1 unchanged sentence

Loans (excluding PPP loans)

Allowance for loan and lease losses

Allowance for credit losses

Restricted stock

1 unchanged sentence

Federal funds sold

Financial derivative

Total interest-earning assets

34 unchanged sentences

Interest-earning assets:

Loans (excluding PPP loans)

Restricted stock

13 unchanged sentences

Comparison of Operating Results for the Years Ended December 31, 2023 and December 31, 2022

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

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

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

Net loss was $733,000 for the year ended December 31, 2023, compared to net income of $1.8 million for the year ended December 31, 2022, a decrease of $2.5 million, or 138.9%.

The decrease was primarily due to a decrease in noninterest income of $1.5 million, or 78.9%, primarily due to the sale of securities at a loss of $1.7 million, an increase in noninterest expense of $2.2 million, or 22.4%, due primarily to extraordinary items specific to the year ended December 31, 2023 including expenses related to the retirement of the former CEO, benefit plan termination, the Bank name change and expenses related to the new branches, and an increase of $148,000, or 71.2%, in the provision for credit losses.

These items were partially offset by an increase of $781,000, or 7.6%, increase in net interest income and a decrease of $627,000, or 148.2%, in income tax expense.

Interest Income.

Interest income increased $6.4 million, or 50.8%, to $19.0 million for the year ended December 31, 2023 from $12.6 million at December 31, 2022.

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

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

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

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

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

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

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

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

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

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

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

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

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

This was primarily the result of increased interest income on securities and loans resulting from an increase in the average balance and average yield on both for the year ended December 31, 2023.

There was an increase in average interest earning assets of $49.9 million, or 14.0%, to $405.1 million at December 31, 2023 from $355.2 million at December 31, 2022 and an increase of 115 basis points, or 32.4%, in average yield on interest–earning assets from 3.54% at December 31, 2022 to 4.68% at December 31, 2023.

The interest income increase is partially due to an increase in the average balance of securities of $18.9 million, or 18.1%, from $104.6 million, for the year ended December 31, 2022 to $123.5 million for the year ended December 31, 2023 and an increase in the average yield on securities of 189 basis points, or 85.2%, from 2.21% for the year ended December 31, 2022 to 4.10% for the year ended December 31, 2023.

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

In 2023, the Company sold twenty securities totaling $19.8 million at a loss of $1.7 million as part of a repricing strategy to increase interest income and restructure the portfolio.

Interest income on securities increased $2.7 million, or 118.5%, from $2.3 million for the year ended December 31, 2022 to $5.1 million for the year ended December 31, 2023.

Interest income on net loans and leases increased $2.7 million, or 26.7%, to $12.8 million for the year ended December 31, 2023 from $10.1 million for the year ended December 31, 2022 primarily due to an increase of $33.4 million, or 14.2%, in the average balance of the loan portfolio from $234.8 million for the year ended December 31, 2022 to $268.2 million for the year ended December 31, 2023, and an increase of 50 basis points, or 11.6%, in the average yield on loans from 4.29% for the year ended December 31, 2022 to 4.79% for the year ended December 31, 2023.

The increased yield on loans is primarily due to increased market rates, increased loan fees and changes in the loan portfolio to include more commercial and other higher-yielding loans for the year ended December 31, 2023 than were originated in 2022.

Dividends on restricted investments including stock in the Federal Home Loan Bank and Texas Independent Bank (TIB) increased $121,000, or 318.4%, from $38,000 for the year ended December 31, 2022 to $159,000 for the year ended December 31, 2023.

This increase resulted primarily from an increase in yield of 333 basis points, or 184.4%, from 1.81% for the year ended December 31, 2022 to 5.14% for the year ended December 31, 2023 and an increase in average balance of $1.0 million, or 47.6%, from $2.1 million for the year ended December 31, 2022 to $3.1 million for the year ended December 31, 2023.

We were required to purchase $706,000 in FHLB stock to fully secure advance obligations obtained during the period.

Interest income from interest bearing deposits in banks increased $413,000, or 1,059.0%, from $39,000 for the year ended December 31, 2022 to $452,000 for the year ended December 31, 2023, resulting primarily from the increase in average yield of 427 basis points, or 490.2%, from 0.87% for the year ended December 31, 2022 to 5.14% for the year ended December 31, 2023 and an increase in average interest bearing deposits of $4.3 million, or 95.6% from $4.5 million for the year ended December 31, 2022 to $8.8 million for the year ended December 31, 2023.

There was also an increase of $88,000 in fed funds interest income for the year ended December 31, 2023 primarily from an increase of 419 basis points, or 456.8%, in average yield on fed funds sold from 0.92% for the year ended December 31, 2022 to 5.11% for the year ended December 31, 2023, partially offset by a $7.1 million, or 65.7%, decrease in average fed funds sold from $10.8 million for the year ended December 31, 2022 to $3.7 million for the year ended December 31, 2023.

The fed funds were used to fund asset growth.

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

Interest income from the fair value hedge was $277,000 for the year ended December 31, 2023.

The Company entered into an interest rate swap agreement in the year ended December 31, 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 21 – Derivatives of the accompanying consolidated financial statements.

Interest Expense.

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

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

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

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

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

Interest expense increased $5.6 million, or 243.5%, to $7.9 million for the year ended December 31, 2023 from $2.3 million for the year ended December 31, 2022 due primarily to an increase in the average yield on interest bearing liabilities of 157 basis points, or 187.3%, from 0.84% for the year ended December 31, 2022 to 2.41% for the year ended December 31, 2023 and an increase in the average balance of interest-bearing liabilities of $56.2 million, or 20.7%, from $272.0 million for the year ended December 31, 2022 to $328.2 million for the year ended December 31, 2023 primarily due to an increase in deposit and funding costs.

Interest expense on deposit accounts increased $3.8 million, or 257.2%, to $5.3 million for the year ended December 31, 2023 from $1.5 million for the year ended December 31, 2022, due to an increase in the average deposit cost of 145 basis points, or 231.4%, from 0.63% for the year ended December 31, 2022 to 2.08% for the year ended December 31, 2023 and an increase in average interest-bearing deposits of $17.7 million, or 7.4%, from $238.7 million for the year ended December 31, 2022 to $256.4 million for the year ended December 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 and savings accounts.

Part of the migration to higher yielding accounts resulted from a deposit retention strategy offering a special higher interest rate CD and higher money market rates in order to retain deposits.

As rates continued to rise, the Bank continued to be competitive on deposit rates.

At December 31, 2023, market rates have leveled off some and the Bank’s deposit rates are starting to decrease.

Interest expense on Federal Home Loan Bank advances increased $1.8 million, 229.6%, to $2.6 million for the year ended December 31, 2023 from $777,000 for the year ended December 31, 2022.

This increase was due primarily to the increase in the average balance of Federal Home Loan Bank advances of $38.4 million, or 117.1%, to $71.2 million for the year ended December 31, 2023 from $32.8 million for the year ended December 31, 2022 and an increase in average yield of 123 basis points, or 51.9%, from 2.37% for the year ended December 31, 2022 to 3.60% for the year ended December 31, 2023.

The increase in average advances was primarily to fund an investment strategy, loan growth and liquidity.

At December 31, 2023, we have lengthened our advances as they have matured and are holding excess liquidity in interest bearing accounts.

The Company believed 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 the 2023 bank failures.

Net Interest Income .

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

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

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

Provision for Loan and Lease Losses.

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

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

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

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

Net interest income increased $781,000, or 7.6%, to $11.1 million for the year ended December 31, 2023 from $10.3 million for the year ended December 31, 2022, primarily due to an increase in interest-earning assets of $49.9 million, or 14.0%, to $405.1 million at December 31, 2023 from $355.2 million at December 31, 2022, partially offset by a decrease in net interest rate spread of 43 basis points, or 15.8%, from 2.70% for the year ended December 31, 2022 to 2.27% for the year ended December 31, 2023.

Net interest margin had a 16 basis point decrease to 2.73% for the year ended December 31, 2023 from 2.89% for the year ended December 31, 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 $356,000 for the year ended December 31, 2023, compared to $208,000 for the year ended December 31, 2022, an increase of $148,000, or 71.2%, primarily due to an increase in loans and leases and the adoption of ASC 326 on January 1, 2023.

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

Noninterest Income.

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

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

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

Noninterest income decreased $1.5 million, or 78.9%, to $352,000 for the year ended December 31, 2023 from $1.9 million for the year ended December 31, 2022.

This decrease is primarily due to a loss on the sale of securities of $1.7 million during the year ended December 31, 2023, partially offset by two income items that were new to the Bank in the year ended December 31, 2023 including an increase of $175,000 in wholesale lending fees to $190,000 for the year ended December 31, 2023 from $15,000 for the year ended December 31, 2022 and $23,000 in rental income on space that was already leased in one of the buildings we purchased in 2023.

Noninterest Expense.

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

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

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

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

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

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

Noninterest expense increased $2.2 million, or 22.4%, to $12.0 million for the year ended December 31, 2023 from $9.8 million for the year ended December 31, 2022 primarily due to the increase in salary and employee benefits, occupancy and equipment costs, data processing, technology expenses, contract services, director fees and other expenses.

Salary and employee benefit expenses increased by $1.3 million, or 22.4%, to $7.1 million for the year ended December 31, 2023 from $5.8 million for the year ended December 31, 2022, due primarily to increased expenses of $444,000 for restricted stock awards and options granted under the 2022 Equity Incentive Plan that was approved by stockholders on August 31, 2022.

The funding cost increased from $84,000 for the year ended December 31, 2022 to $528,000 for the year ended December 31, 2023 because this was the first year for the majority of the plan to be in existence.

There was an extraordinary increase in the deferred incentive plan expense of $664,000, or 241.5%, primarily due to vesting related to participants retiring, reaching retirement age and the termination of the plan as of December 31, 2023.

The remaining $192,000 increase was due to normal increases in wages, insurance costs and payroll taxes.

Occupancy and equipment expenses increased by $66,000, or 8.6%, primarily due to normal costs related to owning and occupying more property in the year ended December 31, 2023 and normal increases in property taxes.

Directors’ fees increased $16,000, or 4.2%, from $383,000 for the year ended December 31, 2022 to $399,000 for the year ended December 31, 2023 due to a reporting change.

Data (core) processing expense increased by $89,000, or 10.6%, to $927,000 for the year ended December 31, 2023 from $838,000 for the year ended December 31, 2022 and other technology expenses increased $74,000, or 18.5%, primarily due to increases in the number of users, workstations and accounts, and price increases levied by our core processor and other technology providers.

Contract services and other expenses combined increased $715,000, or 44.7%, from $1.6 million for the year ended December 31, 2022 to $2.3 million for the year ended December 31, 2023 including a $58,000 increase in audit and accounting expenses due partially to normal increases and partially to increased complexity and review, a $71,000 increase in FDIC assessments due to an overall increase in the assessment rate, an $88,000 increase in insurance cost due to increases in asset size, property additions and normal risk and rate increases.

The Bank had $206,000 in nonrecurring retirement and recruitment expenses related to the retirement of the former CEO.

Increases for the year ended December 31, 2023 were primarily related to growth, including branch completion, bank name change, asset size, recruitment and leadership change and price increases in all types of services the Company incurred due to inflationary pressures.

Income Tax Expense.

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

Income tax expense decreased by $627,000, or 148.2%, from a $423,000 expense for the year ended December 31, 2022 to a $204,000 tax benefit for the year ended December 31, 2023 due primarily to the decrease in taxable income.

The effective tax rate was 21.77% and 19.43% for the years ended December 31, 2023 and 2022, respectively.

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

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

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

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

5 unchanged sentences

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

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

● managing our borrowings from the Federal Home Loan Bank of Dallas;

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

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

● continuing to diversify our loan portfolio by adding more commercial-related loans, which typically have shorter maturities, adjustable rates, and fee income;

● Derivatives.

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

We have not engaged in hedging activities, such as engaging in futures or options.

We do not anticipate entering into similar transactions in the future.

Net Interest Income.

13 unchanged sentences

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

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

The table above indicates that at December 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 2.27% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.40% increase in net interest income.

Net Economic Value .

17 unchanged sentences

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

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

The table above indicates that at December 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience an 11.19% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 1.76% decrease in EVE.

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

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At December 31, 2023, we had unused borrowing capacity of $72.6 million with the Federal Home Loan Bank of Dallas.

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

In addition, at December 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 December 31, 2023, there was no outstanding balance with any of these facilities.

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

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

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

The levels of these assets depend on our operating, financing, lending, and investing activities during any given period.

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Texas Community Bancshares, Inc.

is a separate legal entity from Mineola Community Bank and it must provide for its own liquidity to pay any dividends to stockholders and for other corporate purposes.

is a separate legal entity from Broadstreet Bank and it must provide for its own liquidity to pay any dividends to stockholders and for other financial purposes.

Its primary source of income is dividends received from Broadstreet Bank.

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

is governed by applicable banking laws and regulations.

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

(on an unconsolidated basis) had cash and cash equivalents totaling $10.3 million.

At December 31, 2022, Mineola Community Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date.

Liquidity management and asset quality continue to be high priorities.

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

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

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

We run stress tests quarterly in multiple scenarios,

which include deposit runoff combined with the inability to access our available lines of credit and a reduction in the availability of FHLB advances.

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

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

We 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 December 31, 2023, there were 171 accounts with balances in excess of $250,000 with a total of $79.9 million, or 25.2% of deposits.

The amount that was over $250,000 was $37.2 million, or 11.7%, that was potentially uninsured, including certificates of deposit of $8.6 million and $28.6 million in checking, MMDA and savings accounts.

We have also been communicating with our depositors in general to help ease any concerns they may have in light of 2023 regional bank failures.

At December 31, 2023, the weighted average life (WAL) of our securities portfolio is 5.2 years.

The gross unrealized losses on the AFS securities is $7.2 million, or 7.2% of the $100.5 million AFS portfolio and 12.1% of Tier 1 capital.

Unrealized losses on the HTM securities were $2.6 million, or 10.1% of the $26.0 million HTM portfolio and 4.4% of Tier 1 capital.

The total gross unrealized losses are $9.8 million, or 7.8% of the $126.5 million securities portfolio and are 16.5% of Tier 1 capital.

The securities portfolio includes $60.2 million, or 47.5%, 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 net unrealized loss on AFS securities and derivative combined, and the corresponding other comprehensive loss, net of tax, was $5.6 million, or 9.4% of Tier 1 capital.

Over the next 24 months from December 31, 2023, we anticipate $43.4 million in incoming cash flow from the securities portfolio with $21.9 million in 2024 and 21.5 million in 2025.

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

At December 31, 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 December 31, 2023, the derivatives were highly effective and offset the unrealized loss on AFS securities by $94,000 bringing the accumulated other comprehensive loss from $5.7 million to $5.6 million.

Our asset quality remains strong.

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

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

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

The Bank has raised in-house mortgage rates while continuing to offer secondary market options to moderate loan funding and we have seen a decrease in mortgage demand due to higher market interest rates.

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

The decrease in mortgage demand has been offset by increases in commercial real estate lending.

We are currently utilizing listed CDs (Qwickrate) with terms of 3-6 months with full FDIC insurance in order to keep funds liquid while also earning a higher return than holding balances in fed funds.

We are not currently utilizing the Bank Term Funding Program.

The following are the various liquidity sources we had available at December 31, 2023 that we could use as needed:

● FHLB borrowing capacity of $72.6 million

● $15 million in credit lines with 2 correspondent banks

● Federal Reserve discount window

● Qwickrate CD Program

● Brokered deposits

● The ability to sell securities.

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

● The ability to sell some of our BOLI assets

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

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

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Impact of Inflation and Changing Prices

The consolidated financial statements and related data presented in this prospectus have been prepared in accordance with U.S.

The consolidated financial statements and related data have been prepared in accordance with U.S.

GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

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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-K

Item 7. Management’s Discussion and Analysis