SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

⌧	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2022~~March 31, 2023

◻	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File No. 001-40610

Texas Community Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Maryland		86-2760335
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

215 West Broad Street, Mineola, Texas		75773
(Address of Principal Executive Offices)		(Zip Code)

(903) 569-2602

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:



Common stock, $0.01 par value per share	TCBS	The Nasdaq Stock Market LLC
(Title of Each Class)	(Trading Symbol(s))	(Name of Each Exchange on Which Registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES ⌧ NO ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ⌧ NO ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ◻		Accelerated filer ◻
Non-accelerated filer ⌧		Smaller reporting company ☒
		Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

There were ~~3,296,843~~3,373,723 shares, par value $0.01 per share, of the Registrant’s common stock outstanding as of ~~November 9, 2022.~~May 10, 2023.

Table of Contents

Texas Community Bancshares, Inc.

Form 10-Q

Table of Contents


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Statements of Financial Condition at ~~September 30, 2022~~March 31, 2023 (unaudited) and December 31, ~~2021~~2022	1

	Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	2

	Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	3

	Consolidated Statements of Shareholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	4

	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4544

Item 4.	Controls and Procedures	4544

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4544

Item 1A.	Risk Factors	4544

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4544

Item 3.	Defaults Upon Senior Securities	4544

Item 4.	Mine Safety Disclosures	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

	Signatures	47

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of Financial Condition

~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022

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


	March 31,		December 31,
	2023		2022
	(unaudited)
Assets
Cash and due from banks	$	4,939	$	6,897
Federal funds sold		1,906		2,030
Cash and cash equivalents		6,845		8,927
Interest bearing deposits in banks		2,603		2,055
Securities available for sale		98,736		107,153
Securities held to maturity (fair values of $26,082 at March 31, 2023 and $24,615 at December 31, 2022)		28,996		27,827
Loans receivable, net of allowance for credit losses of $2,859 at March 31, 2023 and $1,755 at December 31, 2022		259,826		251,274
Net investment in direct financing leases		53		64
Accrued interest receivable		1,332		1,327
Premises and equipment, net		7,259		6,299
Bank-owned life insurance		6,150		6,125
Restricted investments carried at cost		2,823		2,805
Core deposit intangible		364		397
Mortgage servicing rights, net		7		7
Deferred income taxes		2,172		2,304
Other assets		845		782
	$	418,011	$	417,346
Liabilities and Shareholders' Equity
Liabilities
Noninterest bearing	$	44,384	$	45,823
Interest bearing		253,092		250,254
Total deposits		297,476		296,077
Advances from Federal Home Loan Bank (FHLB)		62,331		62,494
Accrued expenses and other liabilities		2,755		2,905
Total liabilities		362,562		361,476
Shareholders' Equity
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		34		33
Additional paid in capital		31,218		31,099
Retained earnings		31,989		34,083
Accumulated other comprehensive loss		(5,479)		(6,999)
Unearned Employee Stock Ownership Program (ESOP) shares, at cost		(2,313)		(2,346)
Total shareholders' equity		55,449		55,870
	$	418,011	$	417,346

See Notes to Consolidated Financial Statements

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

Three Months Ended March 31, 2023 and 2022

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


	Three Months Ended
	March 31,
	2023		2022

Interest Income
Loans, including fees	$	2,780	$	2,374
Debt securities
Taxable		1,204		335
Non taxable		49		38
Dividends on restricted investments		25		5
Federal funds sold		39		9
Deposits with banks		49		6
Total interest income		4,146		2,767
Interest Expense
Deposits		986		311
Advances from FHLB		526		144
Other		2		3
Total interest expense		1,514		458
Net Interest Income		2,632		2,309
Provision for Credit Losses - loans		82		40
Provision for Credit Losses - off-balance sheet credit exposures		8		—
Provision for Credit Losses		90		40
Net Interest Income After Provision for Credit Losses		2,542		2,269
Noninterest Income
Service charges on deposit accounts		161		165
Other service charges and fees		279		256
Net loss on securities transactions		(1,687)		—
Net appreciation on bank-owned life insurance		25		25
Other income		15		7
Total noninterest (loss) income		(1,207)		453
Noninterest Expenses
Salaries and employee benefits		1,567		1,362
Occupancy and equipment expense		197		192
Data processing		221		191
Technology expense		109		88
Contract services		62		35
Director fees		98		96
Other expense		384		279
Total noninterest expenses		2,638		2,243
(Loss) Income Before Income Taxes		(1,303)		479
Income Tax (Benefit) Expense		(286)		88
Net (Loss) Income	$	(1,017)	$	391
Earnings (loss) per share - basic	$	(0.33)	$	0.13
Earnings (loss) per share - diluted	$	(0.33)	$	0.13
Weighted-average shares outstanding - basic		3,088,802		3,010,314
Weighted-average shares outstanding - diluted		3,088,802		3,010,314

See Notes to Consolidated Financial Statements

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

September 30,

December 31,

2022

2021

(unaudited)

Assets




Cash and due from banks

$
4,345

$
5,651
Federal funds sold

4,523

16,264
Cash and cash equivalents

8,868

21,915
Interest bearing deposits in banks

359

14,955
Securities available for sale

78,340

56,800
Securities held to maturity (fair values of $25,597 at September 30, 2022 and $33,673 at December 31, 2021)

28,821

33,682
Loans receivable, net of allowance for loan and lease losses of $1,686 at September 30, 2022 and $1,592 at December 31, 2021

240,120

220,162
Net investment in direct financing leases

64

105
Accrued interest receivable

1,065

931
Premises and equipment

6,325

6,215
Bank-owned life insurance

��
6,094

6,020
Foreclosed assets

—

209
Restricted investments carried at cost

2,102

2,037
Core deposit intangible

430

529
Mortgage servicing rights

7

8
Deferred income taxes

2,275

651
Other assets

827

607

$
375,697

$
364,826
Liabilities and Shareholders' Equity




Liabilities




Noninterest bearing

$
48,715

$
40,576
Interest bearing

233,486

234,357
Total deposits

282,201

274,933
Advances from Federal Home Loan Bank (FHLB)

35,015

27,571
Accrued expenses and other liabilities

2,854

2,190
Total liabilities

320,070

304,694
Shareholders' Equity

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

—

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

33

33
Additional paid in capital

31,019

30,932
Retained earnings

33,675

32,329
Accumulated other comprehensive loss

(6,722)

(686)
Unearned Employee Stock Ownership Program (ESOP) shares, at cost

(2,378)

(2,476)
Total shareholders' equity

55,627

60,132

$
375,697

$
364,826


	Three Months Ended
	March 31,
	2023		2022
Net (Loss) Income	$	(1,017)	$	391

Other items of comprehensive income (loss)
Net changes in fair value of available for sale securities, before tax		238		(3,161)
Reclassification adjustment for realized loss on sale of investment securities included in net income (loss), before tax		1,687		—
Total other items of comprehensive income (loss), before tax		1,925		(3,161)

Income tax (expense) benefit related to other items of comprehensive income (loss)		(405)		663
Total other items of comprehensive income (loss), after tax		1,520		(2,498)

Comprehensive Income (Loss)	$	503	$	(2,107)

See Notes to Consolidated Financial ~~Statement~~Statements

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of ~~Operations~~Shareholders’ Equity (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

2022

2021

2022

2021
Interest Income





Loans, including fees

$
2,531

$
2,392

$
7,336

$
7,196
Debt securities



Taxable

562

172

1,307

472
Non taxable

39

21

114

88
Dividends on restricted investments

9

6

20

15
Federal funds sold

41

12

80

17
Deposits with banks

15

10

34

45
Total interest income

3,197

2,613

8,891

7,833
Interest Expense




Deposits

300

362

908

1,152
Advances from FHLB

144

151

429

468
Other

3

3

8

8
Total interest expense

447

516

1,345

1,628
Net Interest Income

2,750

2,097

7,546

6,205
Provision for Loan and Lease Losses

48

14

125

44
Net Interest Income After Provision for Loan and Lease Losses

2,702

2,083

7,421

6,161
Noninterest Income

��




Service charges on deposit accounts

166

159

496

412
Other service charges and fees

261

260

795

752
Net gain (loss) on securities transactions

—

—

(29)

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

42

—

42

—
Net appreciation on bank-owned life insurance

26

27

75

80
Other income

4

6

22

16
Total noninterest income

499

452

1,401

1,260
Noninterest Expenses




Salaries and employee benefits

1,494

1,316

4,263

3,808
Occupancy and equipment expense

188

174

564

542
Data processing

225

196

619

644
Contract services

52

125

130

416
Director fees

96

75

287

231
Other expense

481

883

1,285

1,501
Total noninterest expenses

2,536

2,769

7,148

7,142
Income (Loss) Before Income Taxes

665

(234)

1,674

279
Income Tax Expense (Benefit)

126

(36)

328

47
Net Income (Loss)

$
539

$
(198)

$
1,346

$
232
Earnings (loss) per share - basic

$
0.18

$
(0.07)

$
0.45

$
0.08
Earnings (loss) per share - diluted

$
0.18

$
(0.07)

$
0.45

$
0.08
Weighted-average shares outstanding - basic

3,029,465

2,999,612

3,017,817

2,999,612
Weighted-average shares outstanding - diluted

3,029,465

2,999,612

3,017,817

2,999,612


									Accumulated
					Additional				Other		Unearned		Total
	Preferred		Common		Paid In		Retained		Comprehensive		ESOP		Shareholders'
Three Months Ended March 31, 2023 and 2022	Stock		Stock		Capital		Earnings		Loss		Shares		Equity
Balance at January 1, 2023	$	—	$	33	$	31,099	$	34,083	$	(6,999)	$	(2,346)	$	55,870
Cumulative change in accounting principle (adoption of ASC 326)		—		—		—		(1,010)		—		—		(1,010)
Balance at January 1, 2023 (as adjusted for change in accounting principle)		—		33		31,099		33,073		(6,999)		(2,346)		54,860
Net loss		—		—		—		(1,017)		—		—		(1,017)
Stock based compensation expense		—		—		103		—		—		—		103
Issuance of restricted stock awards		—		1		—		—		—		—		1
Net changes in fair value of available for sale securities, net of tax expense of $405		—		—		—		—		1,520		—		1,520
Cash dividend declared ($0.02 per share)		—		—		—		(67)		—		—		(67)
ESOP shares committed to be released, 3,258 shares		—		—		16		—		—		33		49
Balance at March 31, 2023	$	—	$	34	$	31,218	$	31,989	$	(5,479)	$	(2,313)	$	55,449

Balance at January 1, 2022	$	—	$	33	$	30,932	$	32,329	$	(686)	$	(2,476)	$	60,132
Net income		—		—		—		391		—		—		391
Net changes in fair value of available for sale securities, net of tax benefit of $663		—		—		—		—		(2,498)		—		(2,498)
ESOP shares committed to be released, 3,258 shares		—		—		18		—		—		33		51
Balance at March 31, 2022	$	—	$	33	$	30,950	$	32,720	$	(3,184)	$	(2,443)	$	58,076

See Notes to Consolidated Financial Statements

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Consolidated Statements of ~~Comprehensive (Loss) Income~~Cash Flows (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2022

2021

2022

2021

Net Income (Loss)

$
539

$
(198)

$
1,346

$
232

Other items of comprehensive (loss) income

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

(1,563)

51

(7,669)

10
Reclassification adjustment for realized loss on sale of investment securities included in net income (loss)

—

—

29

—

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

(1,563)

51

(7,640)

10
Income tax benefit (expense) related to other items of comprehensive (loss) income

328

(11)

1,604

(2)
Total other items of comprehensive (loss) income, after tax

(1,235)

40

(6,036)

8

Comprehensive (Loss) Income

$
(696)

$
(158)

$
(4,690)

$
240

~~See Notes to Consolidated Financial Statements~~

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Consolidated Statements of Shareholders’ Equity (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

Accumulated




Additional

Other

Unearned

Total

Preferred

Common

Paid In

Retained

Comprehensive

ESOP

Shareholders'
Three Months Ended September 30, 2022 and 2021

Stock

Stock

Capital

Earnings

(Loss) Income

Shares

Equity
Balance at July 1, 2022

$
—

$
33

$
30,978

$
33,136

$
(5,487)

$
(2,411)

$
56,249
Net Income

—

—

—

539

—

—

539
Stock based compensation expense

—

—

21

21
Net changes in fair value of available for sale securities, net of tax benefit of $328

—

—

—

—

(1,235)

—

(1,235)
ESOP shares committed to be released, 3,258 shares

—

—

20

—

—

33

53
Balance at September 30, 2022

$
—

$
33

$
31,019

$
33,675

$
(6,722)

$
(2,378)

$
55,627

Balance at July 1, 2021

$
—

$
—

$
(748)

$
32,241

$
96

$
—

$
31,589
Net Loss

—

—

—

(198)

—

—

(198)
Stock Issuance, net of conversion costs of $936

—

33

31,646

31,679
Net changes in fair value of available for sale securities, net of tax expense of $11

—

—

—

—

40

—

40
Leveraged ESOP Shares, 2,606,210 shares

—

—

—

—

—

(2,606)

(2,606)
ESOP shares committed to be released, 6,515 shares

—

—

—

—

—

65

65
Balance at September 30, 2021

$
—

$
33

$
30,898

$
32,043

$
136

$
(2,541)

$
60,569

Accumulated




Additional

Other

Unearned

Total

Preferred

Common

Paid In

Retained

Comprehensive

ESOP

Shareholders'
Nine Months Ended September 30, 2022 and 2021

Stock

Stock

Capital

Earnings

(Loss) Income

Shares

Equity
Balance at January 1, 2022

$
—

$
33

$
30,932

$
32,329

$
(686)

$
(2,476)

$
60,132
Net income

—

—

—

1,346

—

—

1,346
Stock based compensation expense

—

—

21

—

—

—

21
Net changes in fair value of available for sale securities, net of tax benefit of $1,604

—

—

—

—

(6,036)

—

(6,036)
ESOP shares committed to be released, 9,774 shares

—

—

66

—

—

98

164
Balance at September 30, 2022

$
—

$
33

$
31,019

$
33,675

$
(6,722)

$
(2,378)

$
55,627

Balance at January 1, 2021

$
—

$
—

$
—

$
31,811

$
128

$
—

$
31,939
Net income

—

—

—

232

—

—

232
Stock issuance, net of conversion costs of $1,684

—

33

30,898

—

—

—

30,931
Net changes in fair value of available for sale securities, net of tax expense of $2

—

—

—

—

8

—

8
Leveraged ESOP shares, 2,606,210 shares

—

—

—

—

—

(2,606)

(2,606)
ESOP shares earned, 6,515 shares

—

—

—

—

—

65

65
Balance at September 30, 2021

$
—

$
33

$
30,898

$
32,043

$
136

$
(2,541)

$
60,569

~~See Notes to Consolidated Financial Statements~~

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Consolidated Statements of Cash Flows (Unaudited)~~

~~Nine Months Ended September 30, 2022 and 2021~~

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


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2022		2021		2023		2022
Operating Activities
Net income	$	1,346	$	232
Net (loss) income					$	(1,017)	$	391
Adjustments to reconcile net income to net cash from operating activities
Provision for loan and lease losses		125		44
Net amortization of securities		355		318
Provision for credit losses - loans						82		40
Provision for credit losses - off-balance sheet credit exposures						8		—
Net (accretion) amortization of securities						(44)		140
Depreciation and amortization		324		328		109		109
Net realized loss on sale of investment securities		29		—
Loss on sale of fixed assets		10		—
Stock based compensation		21		—
Gain on sale of other real estate owned		(42)		—
Net realized loss on sales of securities available for sale						1,687		—
Appreciation on bank-owned life insurance		(75)		(80)		(25)		(25)
ESOP compensation expense for allocated shares		164		—		49		51
Deferred income tax		(20)		(187)
Stock-based compensation						103		—
Deferred income tax benefit						(273)		(68)
Net change in
Accrued interest receivable		(134)		173		(5)		27
Mortgage servicing rights		—		4
Other assets		(219)		(118)		(62)		(22)
Accrued expenses and other liabilities		663		4,050		(150)		30
Net Cash from Operating Activities		2,547		4,764		462		673
Investing Activities
Net change in interest bearing deposits in banks		14,596		(4,556)		(548)		9,620
Activity in available for sale securities
Purchases		(44,465)		(26,444)		(9,511)		(11,519)
Sales		10,822		—		17,027		—
Maturities, prepayments and calls		4,209		3,363		1,213		1,087
Activity in held to maturity securities
Purchases		—		(13,839)		(2,139)		—
Maturities, prepayments and calls		4,732		11,914		940		2,104
Redemptions of restricted investments						8		—
Purchases of restricted investments		(65)		(10)		(26)		(3)
Loan originations and principal collections, net		(20,075)		(3,538)		(9,652)		(4,346)
Net decrease (increase) in net investment in direct financing leases		41		(73)
Proceeds from sales of OREO and foreclosed assets		243		—
Net decrease in net investment in direct financing leases						11		11
Purchases of premises and equipment		(344)		(138)		(1,036)		(197)
Net Cash used for Investing Activities		(30,306)		(33,321)		(3,713)		(3,243)
Financing Activities
Net increase in deposits		7,268		29,335		1,399		6,742
Advances from FHLB and other borrowings		9,000		—		7,000		—
Payments on long-term FHLB and other borrowings		(1,556)		(2,684)
Proceeds from issuance of common stock net of conversion costs		—		30,997
Loan to ESOP for purchase of common stock		—		(2,606)
Payments on FHLB and other borrowings						(7,163)		(517)
Cash dividend declared and paid						(67)		—
Net Cash from Financing Activities		14,712		55,042		1,169		6,225
Net Change in Cash and Cash Equivalents		(13,047)		26,485		(2,082)		3,655
Cash and Cash Equivalents at Beginning of Period		21,915		8,073		8,927		21,915
Cash and Cash Equivalents at End of Period	$	8,868	$	34,558	$	6,845	$	25,570

See Notes to Consolidated Financial Statements

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

Note 1 - Summary of Significant Accounting Policies

General

Texas Community Bancshares, Inc. (the “Company”), a Maryland corporation and registered bank holding company, was incorporated on March 5, 2021 ~~to become~~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. The Company’s shares began trading on the NASDAQ under the symbol TCBS on July 15, 2021. In connection with the Conversion, the Company acquired~~ ~~100% ownership of the Bank~~2021 and the Company offered and sold 3,207,759 shares of its common stock at $10.00 per share, for gross offering proceeds of $32,078. The cost of the conversion and issuance of common stock was approximately $1,684~~, which was deducted from the gross offering proceeds. The Company also contributed~~ ~~50,000 shares of its common stock and $75~~ ~~of cash to Texas Community Bancshares Foundation, Inc. (the “Foundation”), a charitable foundation formed in connection with the Conversion. The Bank’s employee stock ownership plan purchased~~ ~~260,621 shares of the common stock sold by the Company, which was 8% of the 3,257,759~~ ~~shares of common stock issued by the Company, including the shares contributed to the Foundation. The ESOP purchased the shares using a loan from the Company. The Company contributed~~ ~~$15,276 of the net proceeds from the offering to the Bank, loaned $2,606 of the net proceeds to the ESOP, contributed $75 to the Foundation and retained approximately $12,436 of the net proceeds.~~

Following the Conversion, voting rights in the Company are held and exercised exclusively by the shareholders of the Company. Deposit account holders continue to be insured by the FDIC. In connection with the Conversion, liquidation accounts were established by the Company and the Bank in an aggregate amount equal to (i) the MHC’s ownership interest in the shareholders’ equity of Mineola Community Financial Group, Inc. (the former subsidiary holding company of the Bank) as of the date of the latest statement of financial condition included in the Company’s definitive prospectus dated May 14, 2021, plus (ii) the value of the net assets of the MHC as of the date of the MHC’s latest statement of financial condition before the consummation of the Conversion (excluding the MHC’s ownership interest in Mineola Community Financial Group, Inc.). Each eligible account holder and supplemental eligible account holder is entitled to a proportionate share of the liquidation accounts in the event of a liquidation of (i) the Company and the Bank or (ii) the Bank, and only in such events. This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after conversion in the related deposit balance. The Bank may not pay a dividend on its capital stock if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements. In addition, the Company is subject to certain regulations related to the payment of dividends and the repurchase of its capital stock.

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

The ~~Bank’s~~Company’s primary source of revenue is providing loans and banking services to consumers and commercial customers in Mineola, Texas and the surrounding area and the Dallas Fort Worth Metroplex. The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (GAAP) and to general practices of the banking industry.

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

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

Interim Financial Statements

The interim unaudited consolidated financial statements as of ~~September 30, 2022,~~March 31, 2023, and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments contained in these unaudited consolidated financial statements. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission, and therefore certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted. The results of operations for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023 are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, ~~2022,~~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. The accompanying consolidated financial statements have been derived from and should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company for the year ended December 31, ~~2021.~~2022. 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, ~~2021.~~2022.

~~Principles~~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. and its wholly-owned subsidiary Mineola Financial Service Corporation, which is not actively being utilized. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

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

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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)

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

Recently Adopted Accounting Pronouncements

The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and ~~lease losses.~~held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will not be required to sell.

The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $1,025 which was recognized through an $810 adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $2,780 as of January 1, 2023. In addition, the Company recorded a $254 allowance on unfunded commitments which was recognized through a $200 adjustment to retained earnings, net of tax.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. As of December 31, 2022, the Company did not hold any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption of ASC 326 as of January 1, 2023.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined than an allowance for credit losses on available-for-sale securities was not deemed necessary.

Held to Maturity Securities

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

position require a provision for credit losses in accordance with ASC 326. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through net income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss). Changes in the allowance for credit losses are recorded as provision for or (reduction of) provision for credit losses.

Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. For the three months ended March 31, 2023, the Company determined no provision for credit losses was necessary.

Allowance for Credit Losses

The Company uses the weighted average remaining maturity (“WARM”) method to estimate expected losses for all of Company’s loan pools. These pools are as follows: construction & land; farmland; 1-4 residential & multi-family real estate; commercial real estate; agriculture; commercial; and consumer and other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council. For each of these loan pools, the Company calculates an average annual loss rate and estimates future outstanding balances based on contractual maturities and estimated prepayments. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. Relevant data to support the Company’s estimates of lifetime expected credit losses is maintained through internal and external information. The CECL model leverages the use of publicly available call report data, which allows the use of external information from peers to supplement the Company’s own historical data. The loss rate is based on historical loss rates for the peer group and the Company. Due to internal loss rates being low, a blended historical loss rate of 75% peer group and 25% Company was used. The weighted average remaining life is determined based on contracted loan payments, expected prepayments and maturity dates. The allowance model uses data from the St. Louis Federal Reserve Economic Database for reasonable and supportable forecasts.

Management has determined that between years one and two represents a reasonable and supportable forecast period and reverts to a historical loss rate in years three or four depending on the loan type. Management leverages economic projections from the St. Louis Federal Reserve Economic Database (FRED) to inform its loss driver forecasts. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics

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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)

~~Stock Incentive Plan~~

~~Compensation cost is recognized~~The following table illustrates the impact of the adoption of ASC 326:


	As Reported under ASC 326		Pre ASC 326 Adoption		Impact of ASC 326 Adoption
Assets:
Allowance for credit losses on loans	$	2,780	$	1,755	$	1,025

Liabilities:
Allowance for credit losses on OBS credit exposures (included in other liabilities)		254		—		254

The Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures effective January 1, 2023. The additional disclosures are included in Note 4 – Loans and Allowance for ~~stock options~~Credit Losses on a prospective basis and ~~restricted stock awards issued~~include loan modifications where the contractual payment terms of the borrower’s loan agreement were modified through a refinancing or restructuring. Modifications that do not impact the contractual payment terms, such as covenant waivers, insignificant payment deferrals, and any modifications made to ~~directors, based on the~~loans carried at fair value ~~of these awards~~are not included in the disclosures.

The Company uses various indicators to identify borrowers in financial difficulty. Consumer loan borrowers that are delinquent and commercial loan borrowers that are rated substandard or worse are the primary criteria used to identify borrowers who are experiencing financial difficulty.

If a borrower is current at the ~~date~~time of modification, the ~~grant. A Black-Scholes model~~loan generally remains a performing loan as long as there is ~~utilized~~demonstrated performance prior to ~~estimate~~ the ~~fair value~~modification, and payment in full under the modified terms is expected. Otherwise, the loan is placed on nonaccrual status and reported as nonperforming until there is sustained repayment performance for a reasonable period, which is generally at least six consecutive months.

Reclassifications

Certain reclassifications of ~~stock options, while~~amounts previously reported have been made to the ~~market price of the Company’s common stock at the date of the grant is used for restricted stock awards.~~accompanying financial statements to maintain consistency between periods presented. The reclassifications had no impact on net income (loss) shareholders’ equity.

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

Note 2 – Earnings Per Share

Basic earnings per share is computed by dividing net income ~~(loss)~~ by the ~~weighted–average~~weighted-average number of common shares outstanding during the period, including allocated and committed-to-be-released ESOP shares and restricted stock awards granted on August 31, 2022 and February 28, 2023, during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. ~~There were no dilutive shares as of September 30, 2022.~~

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Net Income (Loss)	$	539	$	(198)	$	1,346	$	232
Net (Loss) Income									$	(1,017)	$	391

Weighted average shares outstanding for basic earnings per share:
Average shares outstanding		3,270,504		3,257,759		3,262,054		3,257,759		3,323,324		3,257,759
Less: average unearned ESOP shares		(241,039)		(258,147)		(244,237)		(258,147)		(234,522)		(247,445)
Weighted average shares outstanding for basic earnings per share		3,029,465		2,999,612		3,017,817		2,999,612		3,088,802		3,010,314

Additional dilutive shares		—		—		—		—		—		—

Weighted average shares outstanding for dilutive earnings per share		3,029,465		2,999,612		3,017,817		2,999,612		3,088,802		3,010,314

Basic and dilutive earnings (loss) per share	$	0.18	$	(0.07)	$	0.45	$	0.08	$	(0.33)	$	0.13

Restricted stock awards for 115,964 shares of common stock were not considered in computing diluted earnings per share for 2023, because they were antidilutive. Stock options for 289,932 shares of common stock were not considered in computing diluted earnings per share for 2023, because they were nonvested.

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

Note 23 - Debt Securities

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


	September 30, 2022								March 31, 2023
			Gross		Gross		Estimated				Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
Available for Sale	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Debt Securities:
Residential mortgage-backed	$	16,437	$	—	$	(1,663)	$	14,774	$	27,864	$	148	$	(1,292)	$	26,720
Collateralized mortgage obligations		32,063		107		(2,031)		30,139		55,694		60		(2,781)		52,973
State and municipal		16,419		—		(2,543)		13,876		16,362		1		(2,163)		14,200
Corporate bonds		5,750		11		(802)		4,959		5,750		—		(907)		4,843
U.S. Government and agency		16,179		—		(1,587)		14,592
Total securities available for sale	$	86,848	$	118	$	(8,626)	$	78,340	$	105,670	$	209	$	(7,143)	$	98,736

Held to Maturity
Debt Securities:
Residential mortgage-backed	$	26,804	$	—	$	(3,157)	$	23,647	$	24,948	$	—	$	(2,851)	$	22,097
State and municipal		2,017		—		(67)		1,950		2,002		—		(61)		1,941
U.S. Government and agency										2,046		—		(2)		2,044
Total securities held to maturity	$	28,821	$	—	$	(3,224)	$	25,597	$	28,996	$	—	$	(2,914)	$	26,082


	December 31, 2021								December 31, 2022
			Gross		Gross		Estimated				Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
Available for Sale	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Debt Securities:
Residential mortgage-backed	$	19,073	$	113	$	(401)	$	18,785	$	25,573	$	—	$	(1,815)	$	23,758
Collateralized mortgage obligations		11,202		—		(126)		11,076		52,134		584		(2,474)		50,244
State and municipal		11,670		36		(167)		11,539		16,387		—		(2,606)		13,781
Corporate bonds		2,500		—		(94)		2,406		5,750		—		(935)		4,815
U.S. Government and agency		13,224		—		(230)		12,994		16,169		—		(1,614)		14,555
Total securities available for sale	$	57,669	$	149	$	(1,018)	$	56,800	$	116,013	$	584	$	(9,444)	$	107,153

Held to Maturity
Debt Securities:
Residential mortgage-backed	$	31,277	$	374	$	(392)	$	31,259	$	25,817	$	—	$	(3,132)	$	22,685
State and municipal		2,405		15		(6)		2,414		2,010		—		(80)		1,930
Total securities held to maturity	$	33,682	$	389	$	(398)	$	33,673	$	27,827	$	—	$	(3,212)	$	24,615

During the three months ended ~~September 30, 2022, there were no sales of securities. During the nine months ended September 30, 2022,~~March 31, 2023, the Company had sales of available for sale securities of ~~$10,822~~$17,027 with a loss of ~~$29.~~$1,687. During the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, the Company had no sales of available for sale securities or held to maturity securities.

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, securities with a ~~carrying~~fair value of ~~$3,182~~$3,811 and ~~$2,745,~~$3,162, respectively, were ~~pledged to secure public deposits and for other purposes required or permitted by law.~~

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

(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 ~~September 30, 2022,~~March 31, 2023, follows:


	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
			Estimated				Estimated				Estimated				Estimated
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value
Due in one year	$	—	$	—	$	—	$	—	$	—	$	—	$	395	$	395
Due from one to five years		14,159		12,939		765		762		1,657		1,558		366		366
Due in five to ten years		17,605		15,258		134		117		13,909		12,048		2,180		2,168
After ten years		6,584		5,230		1,118		1,071		6,546		5,437		1,107		1,056
Residential mortgage-backed		16,437		14,774		26,804		23,647		27,864		26,720		24,948		22,097
Collateralized mortgage obligations		32,063		30,139		—		—		55,694		52,973		—		—
Total	$	86,848	$	78,340	$	28,821	$	25,597	$	105,670	$	98,736	$	28,996	$	26,082

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


	September 30, 2022								March 31, 2023
	Less than 12 months				12 months or longer				Less than 12 months				12 months or longer
			Gross				Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Category (number of securities)	Value		Losses		Value		Losses		Value		Losses		Value		Losses
Residential mortgage-backed (73,14)	$	24,816	$	(2,561)	$	13,607	$	(2,259)
Collateralized mortgage obligations (13)		23,183		(2,031)		—		—
State and municipal (23,1)		14,754		(2,564)		1,072		(46)
Corporate bonds (11)		4,448		(802)		—		—
U.S. Government and agency (7,7)		8,337		(820)		6,255		(767)
Residential mortgage-backed (15,70)									$	5,915	$	(40)	$	32,881	$	(4,103)
Collateralized mortgage obligations (20,5)										37,272		(1,108)		8,620		(1,673)
State and municipal (4,18)										1,842		(51)		13,245		(2,173)
Corporate bonds (2,10)										914		(86)		3,929		(821)
U.S. Government and agency (1,0)										2,044		(2)		—		—
Total	$	75,538	$	(8,778)	$	20,934	$	(3,072)	$	47,987	$	(1,287)	$	58,675	$	(8,770)


	December 31, 2021								December 31, 2022
	Less than 12 months				12 months or longer				Less than 12 months				12 months or longer
			Gross				Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Category (number of securities)	Value		Losses		Value		Losses		Value		Losses		Value		Losses
Residential mortgage-backed (20,5)	$	22,903	$	(624)	$	5,666	$	(169)
Collateralized mortgage obligations (5)		11,076		(126)		—		—
State and municipal (9)		8,416		(173)		—		—
Corporate bonds (2)		906		(94)		—		—
U.S. Government and agency (13)		12,994		(230)		—		—
Residential mortgage-backed (66,21)									$	16,889	$	(1,253)	$	21,888	$	(3,694)
Collateralized mortgage obligations (11,5)										22,133		(797)		8,790		(1,677)
State and municipal (15,9)										8,638		(1,267)		7,073		(1,419)
Corporate bonds (10,2)										3,963		(787)		852		(148)
U.S. Government and agency (1,13)										2,809		(181)		11,746		(1,433)
Total	$	56,295	$	(1,247)	$	5,666	$	(169)	$	54,432	$	(4,285)	$	50,349	$	(8,371)

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

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Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

less. 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:


	Residential mortgage-backed		State and municipal		U.S Government and agency
AAA	$	24,948	$	1,868	$	2,046
Baa2		—		134		—

	$	24,948		2,002	$	2,046

Mortgage-backed ~~Securities~~securities and Collateralized Mortgage Obiligations

The unrealized losses on the Company’s investments in residential mortgage-backed securities and collateralized mortgage obligations were caused by market interest rate increases and decreases in prepayment speeds. Interest rates ~~have risen~~rose sharply throughout 2022 and caused increases in unrealized losses on securities. The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements. The contractual cash flows of many of these investments are guaranteed by agencies of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in market interest rates and decreases in prepayment speeds and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at ~~September 30, 2022 or~~ December 31, ~~2021.~~2022.

U.S. Government and ~~Agency~~agency

The unrealized losses on the Company’s investments in U.S. government and agency securities were caused by market interest rate increases. Interest rates ~~have risen~~rose sharply throughout 2022 and caused increases in unrealized losses on securities. The Company has no plans to sell these securities and will continue to monitor the unrealized losses’ effect on the financial statements. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at ~~September 30, 2022 or~~ December 31, ~~2021.~~2022.

Municipal Securities and Corporate Bonds

The unrealized losses on the Company’s investments in state and municipal securities and corporate bonds were caused by market interest rate increases. Interest rates ~~have risen~~rose sharply throughout 2022 and caused increases in unrealized losses on securities. The Company has no plans to sell these securities and will continue to monitor the effect of the unrealized ~~losses’ effect~~losses on the financial statements. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in fair value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at ~~September 30, 2022 or~~ December 31, ~~2021.~~2022.

Table of Contents

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)

~~Other-Than-Temporary Impairment~~Other-than-temporary impairment

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) evaluation by the Company of (a) its intent to sell a debt security prior to recovery and (b) whether it is more likely than not the Company will have to sell the debt security prior to recovery. As of ~~September 30, 2022 and~~ December 31, ~~2021,~~2022, no investment securities were ~~other-than- temporarily~~other-than-temporarily impaired.

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

Note 34 - Loans and ~~Leases~~Allowance for Credit Losses

A summary of the balances of loans and leases follows:

September 30,

December 31,

2022

2021
Real estate

$
229,213

$
209,946
Agriculture

190

234
Commercial

7,067

6,141
Consumer and other

5,400

5,538
Subtotal

241,870

221,859
Less allowance for loan and lease losses

(1,686)

(1,592)
Loans and leases, net

$
240,184

$
220,267

~~Paycheck Protection Program Loans~~

In March 2020, the United States government passed legislation designed to help the nation’s economy recover from the coronavirus disease 2019 (“COVID‐19”) pandemic. This legislation is called the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which provides economy‐wide financial stimulus in the form of financial aid to individuals, businesses, nonprofit entities, states and municipalities. The CARES Act temporarily added a new program titled the “Paycheck Protection Program” (PPP) to the U.S. Small Business Administration’s loan program. The CARES Act permits the SBA to guarantee 100 percent of these loans and also provides for forgiveness of up to the full principal amount of these loans. As of September 30, 2022, the Company originated $5,484 in PPP loans of which $5,479 had been forgiven. Additionally, the Company recognized $0 and $5 of PPP loan interest in interest income during the nine months ended September 30, 2022 and 2021, respectively, and $0 and $1 for the three months ended September 30, 2022 and 2021, respectively.


	March 31,		December 31,
	2023		2022
Real estate:
Construction and land	$	42,476	$	36,257
Farmland		8,798		7,558
1-4 Residential & multi-family		163,907		162,785
Commercial real estate		34,653		33,678
Total Real Estate		249,834		240,278
Agriculture		191		189
Commercial		7,351		7,031
Consumer and other		5,362		5,595
Subtotal		262,738		253,093
Less allowance for credit losses		(2,859)		(1,755)
Loans and leases, net	$	259,879	$	251,338

1214

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

The following tables set forth information regarding the activity in the allowance for ~~loan and lease~~credit losses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023:


		March 31, 2023
	Real Estate
	Construction and Land		Farmland		1-4 Residential & multi-family		Commercial real estate		Agriculture		Commercial		Consumer and other		Total
Allowance for credit losses:
Beginning balance prior to adoption of ASC 326	$	262	$	31	$	812	$	227	$	1	$	359	$	63	$	1,755
Impact of adopting ASC 326		92		28		677		133		2		61	$	32		1,025
Provision for credit losses		65		10		(19)		6		76		(58)		2		82
Loans charged-off		—		—		—		—		—		—		(5)		(5)
Recoveries		—		—		—		—		—		—		2		2
Balance, March 31, 2023	$	419	$	69	$	1,470	$	366	$	79	$	362	$	94	$	2,859

Balance, March 31, 2023 allocated to loans and leases individually evaluated	$	6	$	4	$	17	$	7	$	—	$	360	$	6	$	400

Balance, March 31, 2023 allocated to loans and leases collectively evaluated	$	413	$	65	$	1,453	$	359	$	79	$	2	$	88	$	2,459

Loans and leases receivable:
Balance, March 31, 2023 loans and leases individually evaluated	$	366	$	326	$	2,286	$	653	$	—	$	2,828	$	38	$	6,497
Balance, March 31, 2023 loans and leases collectively evaluated		42,110		8,472		161,621		34,000		191		4,523		5,324		256,241
Balance, March 31, 2023	$	42,476	$	8,798	$	163,907	$	34,653	$	191	$	7,351	$	5,362	$	262,738

The following tables present the balances in the allowance for loan losses for the three months ended March 31, 2022 ~~and 2021~~ and the year ended December 31, ~~2021:~~

September 30, 2022








Consumer


Real Estate

Agriculture

Commercial

and Other

Total
Allowance for loan and lease losses:










Three-months ended

Beginning balance, July 1, 2022

$
1,208

$
1

$
367

$
63

$
1,639
Charge-offs

—

—

—

(8)

(8)
Recoveries

—

—

—

7

7
Provision (credit)

53

—

—

(5)

48
Ending balance, September 30, 2022

$
1,261

$
1

$
367

$
57

$
1,686

Nine-months ended










Balance, January 1, 2022

$
1,178

$
1

$
357

$
56

$
1,592
Charge-offs

—

—

—

(44)

(44)
Recoveries

—

—

—

13

13
Provision

83

—

10

32

125
Balance, September 30, 2022

$
1,261

$
1

$
367

$
57

$
1,686
Balance, September 30, 2022 allocated to loans and leases individually evaluated for impairment

$
—

$
—

$
300

$
—

$
300
Balance, September 30, 2022 allocated to loans and leases collectively evaluated for impairment

$
1,261

$
1

$
67

$
57

$
1,386
Loans and leases receivable:










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

$
998

$
—

$
424

$
—

$
1,422
Balance, September 30, 2022 loans and leases collectively evaluated for impairment

228,215

190

6,643

5,400

240,448
Balance, September 30, 2022

$
229,213

$
190

$
7,067

$
5,400

$
241,870

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.

1315

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

September 30, 2021








Consumer


Real Estate

Agriculture

Commercial

and Other

Total
Allowance for loan and lease losses:










Three-months ended

Beginning balance, July 1, 2021

$
1,170

$
—

$
362

$
52

$
1,584
Charge-offs

—

—

—

(9)

(9)
Recoveries

—

—

—

3

3
Provision (credit)

8

2

(7)

11

14
Ending balance, September 30, 2021

$
1,178

$
2

$
355

$
57

$
1,592

Nine-months ended










Balance, January 1, 2021

$
1,171

$
2

$
355

$
33

$
1,561
Charge-offs

—

—

—

(30)

(30)
Recoveries

—

—

—

17

17
Provision (credit)

7

—

—

37

44
Balance, September 30, 2021

$
1,178

$
2

$
355

$
57

$
1,592


December 31, 2021








Consumer


Allowance for loan and lease losses:

Real Estate

Agriculture

Commercial

and Other

Total
Balance, December 31, 2021 allocated to loans and leases individually evaluated for impairment

$
8

$
—

$
300

$
—

$
308
Balance, December 31, 2021 allocated to loans and leases collectively evaluated for impairment

$
1,170

$
1

$
57

$
56

$
1,284
Loans and leases receivable:










Balance, December 31, 2021 loans and leases individually evaluated for impairment

$
2,437

$
—

$
474

$
33

$
2,944
Balance, December 31, 2021 loans and leases collectively evaluated for impairment

207,509

234

5,667

5,505

218,915
Balance, December 31, 2021

$
209,946

$
234

$
6,141

$
5,538

$
221,859


	March 31, 2022
							Consumer
	Real Estate		Agriculture		Commercial		and Other		Total
Allowance for loan and lease losses:
Balance, January 1, 2022	$	1,178	$	1	$	357	$	56	$	1,592
Charge-offs		—		—		—		(26)		(26)
Recoveries		—		—		—		4		4
Provision (credit)		4		—		6		30		40
Balance, March 31, 2022	$	1,182	$	1	$	363	$	64	$	1,610

	December 31, 2022
							Consumer
Allowance for loan and lease losses:	Real Estate		Agriculture		Commercial		and Other		Total
Balance, December 31, 2022 allocated to loans and leases individually evaluated for impairment	$	—	$	—	$	300	$	—	$	300
Balance, December 31, 2022 allocated to loans and leases collectively evaluated for impairment	$	1,332	$	1	$	59	$	63	$	1,455
Loans and leases receivable:
Balance, December 31, 2022 loans and leases individually evaluated for impairment	$	945	$	—	$	531	$	—	$	1,476
Balance, December 31, 2022 loans and leases collectively evaluated for impairment		239,333		189		6,500		5,595		251,617
Balance, December 31, 2022	$	240,278	$	189	$	7,031	$	5,595	$	253,093

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:


	Nonaccrual		Nonaccrual with Reserve		Loans Past Due Over 90 Days Still Accruing
Real estate
Construction and land	$	—	$	—	$	—
Farmland		165		—		—
1‑4 Residential & multi-family		1,579		—		—
Commercial real estate		194		—		—
Agriculture		—		—		—
Commercial		7		377		—
Consumer and other		5		—		—
Total	$	1,950	$	377	$	—

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

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


	Nonaccrual
Real estate
Construction and land	$	—
Farmland		165
1‑4 Residential & multi-family		548
Commercial real estate		70
Agriculture		—
Commercial		398
Consumer and other		—
Total	$	1,181

The Company did not 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:


	Real Estate		Accounts Receivable and Inventory		Other
Real estate
Farmland	$	165	$	—	$	—
1-4 Residential & multi-family		1,738		—		—
Commercial real estate		194		—		—
Commercial		—		527		—
Consumer and other		—		—		12
Total	$	2,097	$	527	$	12

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

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

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


			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With no related allowance
Real estate
Farmland	$	165	$	223	$	—	$	179
1‑4 Residential & multi-family		710		765		—		843
Commercial real estate		70		76		—		97
Commercial		142		145		—		90
Consumer and other		—		—		—		17

With a related allowance
Commercial		389		417		300		425

Total
Real estate
Farmland		165		223		—		179
1-4 Residential & multi-family		710		765		—		843
Commercial real estate		70		76		—		670
Commercial		531		562		300		503
Consumer and other		—		—		—		17
	$	1,476	$	1,626	$	300	$	2,212

Internal Risk Categories

A loan is considered collateral-dependent when based on current information and events; it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans (nonaccrual loans), loans performing but with deterioration that leads to doubt regarding collectability and also includes loans modified in troubled debt restructurings when concessions have been granted to borrowers experiencing financial difficulties.

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

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral-dependent loans, excluding assisted living loans which are evaluated using a market price valuation methodology, where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the allowance for credit losses is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the loan exceeds the fair value of the underlying collateral less estimated costs to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

Table of Contents

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. All of the Company’s loans and leases are evaluated using pass rated or reservable criticized as the primary credit quality indicator. The term reservable criticized refers to those loans and leases that are internally classified or listed by the Company as special mention, substandard, doubtful or loss. These assets pose an elevated risk and may have a high probability of default or total loss.

The classifications of loans and leases reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits quarterly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each quarterly reporting period.

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

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

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

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. 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. Credits rated doubtful are generally also placed on nonaccrual.

Credits rated loss are those that are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Pass rated ~~refer~~refers to loans that are not considered criticized. In addition to this primary credit quality indicator, the Company uses other credit quality indicators for certain types of loans.

The Company evaluates the loan risk grading system definitions and allowance for loan and lease loss methodology on an ongoing basis. No significant changes were made during the ~~nine months ended September 30, 2022 or during the~~ year ended December 31, ~~2021.~~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:

1519

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

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

September 30, 2022

Special


Pass

Mention

Substandard

Doubtful

Loss

Total
Real estate












Construction and land

$
25,513

$
507

$
94

$
—

$
—

$
26,114
Farmland

7,128

—

329

—

—

7,457
1‑4 residential & multi-family

160,670

9

1,220

—

—

161,899
Commercial real estate

33,633

—

110

—

—

33,743
Agriculture

190

—

—

—

—

190
Commercial

6,638

—

27

402

—

7,067
Consumer and other

5,371

—

29

—

—

5,400
Total

$
239,143

$
516

$
1,809

$
402

$
—

$
241,870

December 31, 2021

Special


Pass

Mention

Substandard

Doubtful

Loss

Total
Real estate












Construction and land

$
17,560

$
—

$
90

$
—

$
—

$
17,650
Farmland

6,083

—

359

—

—

6,442
1‑4 residential & multi-family

151,708

556

1,904

—

—

154,168
Commercial real estate

30,418

—

1,268

—

—

31,686
Agriculture

234

—

—

—

—

234
Commercial

5,652

—

52

437

—

6,141
Consumer and other

5,478

12

48

—

—

5,538
Total

$
217,133

$
568

$
3,721

$
437

$
—

$
221,859

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

September 30, 2022

December 31, 2021

Non-

Non-


Performing

performing

Total

Performing

performing

Total
Real estate












Construction and land

$
26,114

$
—

$
26,114

$
17,650

$
—

$
17,650
Farmland

7,292

165

7,457

6,250

192

6,442
1‑4 residential & multi-family

161,340

559

161,899

153,400

768

154,168
Commercial real estate

33,633

110

33,743

31,563

123

31,686
Agriculture

190

—

190

234

—

234
Commercial

6,643

424

7,067

5,667

474

6,141
Consumer and other

5,400

—

5,400

5,505

33

5,538
Total

$
240,612

$
1,258

$
241,870

$
220,269

$
1,590

$
221,859


	Term Loans Amortized Cost Basis by Origination Year
		2023		2022		2021		2020		2019		Prior		Total
Construction and land
Risk rating
Pass		$	2,673	$	33,238	$	3,369	$	1,113	$	283	$	1,336	$	42,012
Special mention			—		364		100		—		—		—		464
Substandard			—		—		—		—		—		—		—
Doubtful			—		—		—		—		—		—		—
Loss			—		—		—		—		—		—		—
		$	2,673	$	33,602	$	3,469	$	1,113	$	283	$	1,336	$	42,476

Farmland
Risk rating
Pass		$	1,315	$	2,774	$	1,204	$	514	$	1,011	$	1,654	$	8,472
Special mention			—		—		—		—		—		—		—
Substandard			—		—		—		—		161		165		326
Doubtful			—		—		—		—		—		—		—
Loss			—		—		—		—		—		—		—
		$	1,315	$	2,774	$	1,204	$	514	$	1,172	$	1,819	$	8,798

1-4 Residential & multi-family
Risk rating
Pass		$	7,353	$	29,198	$	38,254	$	47,033	$	10,643	$	29,139	$	161,620
Special mention			—		—		—		—		—		8		8
Substandard			—		184		864		—		288		943		2,279
Doubtful			—		—		—		—		—		—		—
Loss			—		—		—		—		—		—		—
		$	7,353	$	29,382	$	39,118	$	47,033	$	10,931	$	30,090	$	163,907

Commercial real estate
Risk rating
Pass		$	1,543	$	5,805	$	10,282	$	3,324	$	6,698	$	6,348	$	34,000
Special mention			—		459		—		—		—		—		459
Substandard			—		126		—		—		—		68		194
Doubtful			—		—		—		—		—		—		—
Loss			—		—		—		—		—		—		—
		$	1,543	$	6,390	$	10,282	$	3,324	$	6,698	$	6,416	$	34,653

Agriculture
Risk rating
Pass		$	14	$	95	$	82	$	—	$	—	$	—	$	191
Special mention			—		—		—		—		—		—		—
Substandard			—		—		—		—		—		—		—
Doubtful			—		—		—		—		—		—		—
Loss			—		—		—		—		—		—		—
		$	14	$	95	$	82	$	—	$	—	$	—	$	191

Commercial
Risk rating
Pass		$	838	$	1,621	$	840	$	542	$	433	$	247	$	4,521
Special mention			595		355		1,145		8		—		188		2,291
Substandard			150		4		7		88		290		—		539
Doubtful			—		—		—		—		—		—		—
Loss			—		—		—		—		—		—		—
		$	1,583	$	1,980	$	1,992	$	638	$	723	$	435	$	7,351

Consumer and other
Risk rating
Pass		$	942	$	2,394	$	1,591	$	245	$	31	$	121	$	5,324
Special mention			—		—		1		—		—		—		1
Substandard			—		11		26		—		—		—		37
Doubtful			—		—		—		—		—		—		—
Loss			—		—		—		—		—		—		—

1620

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

		$	942		$	2,405		$	1,618		$	245		$	31		$	121		$	5,362
Current period gross charge-offs		$	5		$	—		$	—		$	—		$	—		$	—		$	5

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

September 30, 2022












Recorded

90 Days

Investment

30‑89 Days

and

Total

Total

> 90 Days and

Past Due

Greater

Past Due

Current

Loans

Still Accruing
Real estate












Construction and land

$
1,220

$
—

$
1,220

$
24,894

$
26,114

$
—
Farmland

164

—

164

7,293

7,457

—
1‑4 residential & multi-family

185

—

185

161,714

161,899

—
Commercial real estate

—

—

—

33,743

33,743

—
Agriculture

—

—

—

190

190

—
Commercial

5

3

8

7,059

7,067

3
Consumer and other

22

—

22

5,378

5,400

—
Total

$
1,596

$
3

$
1,599

$
240,271

$
241,870

$
3

December 31, 2021












Recorded

90 Days

Investment

30‑89 Days

and

Total

Total

> 90 Days and

Past Due

Greater

Past Due

Current

Loans

Still Accruing
Real estate












Construction and land

$
1,620

$
—

$
1,620

$
16,030

$
17,650

$
—
Farmland

—

—

—

6,442

6,442

—
1‑4 residential & multi-family

305

—

305

153,863

154,168

—
Commercial real estate

—

—

—

31,686

31,686

—
Agriculture

—

—

—

234

234

—
Commercial

30

—

30

6,111

6,141

—
Consumer and other

19

—

19

5,519

5,538

—
Total

$
1,974

$
—

$
1,974

$
219,885

$
221,859

$
—

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

September 30,

December 31,

2022

2021
Real estate




Construction and land

$
—

$
—
Farmland

165

192
1‑4 residential & multi-family

559

768
Commercial real estate

110

123
Agriculture

—

—
Commercial

424

474
Consumer and other

—

33
Total

$
1,258

$
1,590


	December 31, 2022
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
Real estate
Construction and land	$	35,608	$	649	$	—	$	—	$	—	$	36,257
Farmland		7,231		—		327		—		—		7,558
1‑4 Residential & multi-family		160,472		9		2,304		—		—		162,785
Commercial real estate		33,482		—		196		—		—		33,678
Agriculture		189		—		—		—		—		189
Commercial		6,496		—		146		389		—		7,031
Consumer and other		5,562		—		33		—		—		5,595
Total	$	249,040	$	658	$	3,006	$	389	$	—	$	253,093

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. The Company also evaluates credit quality based on the aging status of the loan, which is subsequently presented. The following table presents the amortized cost of performing and non-performing loans as of March 31, 2023:


	Term Loans Amortized Cost Basis by Origination Year
		2023		2022		2021		2020		2019		Prior		Total
Construction and land
Performing		$	2,673	$	33,602	$	3,469	$	1,113	$	283	$	1,336	$	42,476
Non-performing			—		—		—		—		—		—		—
		$	2,673	$	33,602	$	3,469	$	1,113	$	283	$	1,336	$	42,476

Farmland
Performing		$	1,315	$	2,774	$	1,204	$	514	$	1,172	$	1,654	$	8,633
Non-performing			—		—		—		—		—		165		165
		$	1,315	$	2,774	$	1,204	$	514	$	1,172	$	1,819	$	8,798

1-4 Residential & multi-family
Performing		$	7,353	$	29,198	$	38,254	$	47,033	$	10,743	$	29,587	$	162,168
Non-performing			—		184		864		—		188		503		1,739
		$	7,353	$	29,382	$	39,118	$	47,033	$	10,931	$	30,090	$	163,907

Commercial real estate
Performing		$	1,543	$	6,264	$	10,282	$	3,324	$	6,698	$	6,348	$	34,459
Non-performing			—		126		—		—		—		68		194
		$	1,543	$	6,390	$	10,282	$	3,324	$	6,698	$	6,416	$	34,653

Agriculture
Performing		$	14	$	95	$	82	$	—	$	—	$	—	$	191
Non-performing			—		—		—		—		—		—		—
		$	14	$	95	$	82	$	—	$	—	$	—	$	191

Commercial
Performing		$	1,433	$	1,980	$	1,985	$	550	$	433	$	435	$	6,816
Non-performing			150		—		7		88		290		—		535
		$	1,583	$	1,980	$	1,992	$	638	$	723	$	435	$	7,351

Consumer and other
Performing		$	942	$	2,400	$	1,618	$	245	$	31	$	121	$	5,357

1721

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

Non-performing			—			5			—			—			—			—			5
		$	942		$	2,405		$	1,618		$	245		$	31		$	121		$	5,362

~~A loan is considered impaired when~~

The following table sets forth information regarding the credit risk profile based on ~~current information and events; it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms~~payment activity of the ~~loan. Impaired~~loan and lease portfolio at December 31, 2022:


	December 31, 2022
		Performing		Non- performing		Total
Real estate
Construction and land		$	36,257	$	—	$	36,257
Farmland			7,393		165		7,558
1‑4 Residential & multi-family			162,237		548		162,785
Commercial real estate			33,608		70		33,678
Agriculture			189		—		189
Commercial			6,633		398		7,031
Consumer and other			5,595		—		5,595
Total		$	251,912	$	1,181	$	253,093

The following is an aging analysis for loans ~~include nonperforming loans (nonaccrual loans), loans performing but with deterioration that leads~~as of March 31, 2023 and December 31, 2022:


	March 31, 2023
		30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater		Total Past Due		Current		Total Loans
Real estate
Construction and land		$	1,048	$	—	$	—	$	1,048	$	41,428	$	42,476
Farmland			—		161		165		326		8,472		8,798
1‑4 Residential & multi-family			132		—		1,197		1,329		162,578		163,907
Commercial real estate			—		—		126		126		34,527		34,653
Agriculture			—		—		—		—		191		191
Commercial			1,163		8		—		1,171		6,180		7,351
Consumer and other			17		10		5		32		5,330		5,362
Total		$	2,360	$	179	$	1,493	$	4,032	$	258,706	$	262,738

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to ~~doubt regarding collectability~~Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and ~~also includes loans modified~~2022

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


	December 31, 2022
											Recorded
			90 Days								Investment
	30‑89 Days		and		Total				Total		> 90 Days and
	Past Due		Greater		Past Due		Current		Loans		Still Accruing
Real estate
Construction and land	$	930	$	—	$	930	$	35,327	$	36,257	$	—
Farmland		162		—		162		7,396		7,558		—
1‑4 Residential & multi-family		1,215		—		1,215		161,570		162,785		—
Commercial real estate		126		—		126		33,552		33,678		—
Agriculture		—		—		—		189		189		—
Commercial		—		1		1		7,030		7,031		1
Consumer and other		10		—		10		5,585		5,595		—
Total	$	2,443	$	1	$	2,444	$	250,649	$	253,093	$	1

All interest accrued but not collected for loans that are placed on nonaccrual or charged‐off is reversed against interest income. The interest on these loans is accounted for on the cash‐basis or cost‐recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. No interest income was recognized for loans on nonaccrual status for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

The following table presents interest income recognized on ~~impaired~~ loans that are collateral-dependent and individually reviewed for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2022

2021

2022

2021
Real estate








1-4 residential & multi-family

$
3

$
4

$
7

$
23
Commercial real estate

—

22

13

51
Commercial

—

6

—

20
Consumer and other

—

—

—

1

$
3

$
32

$
20

$
95

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

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

Unpaid

Average

Recorded

Principal

Related

Recorded


Investment

Balance

Allowance

Investment
With no related allowance








Real estate








Farmland

$
165

$
223

$
—

$
179
1‑4 residential & multi-family

723

771

—

850
Commercial real estate

110

117

—

117
Commercial

11

14

—

24

With a related allowance






Commercial

413

436

300

425

Total








Real estate








Farmland

165

223

—

179
1-4 residential & multi-family

723

771

—

850
Commercial real estate

110

117

—

117
Commercial

424

450

300

449

$
1,422

$
1,561

$
300

$
1,595

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

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


			Unpaid				Average		2023		2022
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With no related allowance
Real estate
Farmland	$	192	$	240	$	—	$	96
1‑4 residential & multi-family		977		1,027		—		488
Commercial real estate		123		125		—		62
Commercial		37		42		—		19
Consumer and other		33		33		—		17

With a related allowance
Real estate
1-4 Residential & multi-family									$	2	$	2
Commercial real estate		1,145		1,145		8		573		—		13
Commercial		437		442		300		219		2		—
									$	4	$	15
Total
Real estate
Farmland		192		240		—		96
1-4 residential & multi-family		977		1,027		—		488
Commercial real estate		1,268		1,270		8		635
Commercial		474		484		300		238
Consumer and other		33		33		—		17
	$	2,944	$	3,054	$	308	$	1,474

During the ~~nine~~three months ended ~~September 30,~~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 nine months ended September 30, 2022, there were~~

There have been no subsequently defaulted troubled debt restructurings. ~~At September 30, 2022 and December 31, 2021, the~~The Company ~~had~~has no commitments to loan additional funds to borrowers whose loans have been modified but may on occasion extend financing to these borrowers.

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had a recorded investment of ~~$375~~$390 and ~~$493,~~$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.

Note 45 - Off-Balance-Sheet Activities

The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. 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

Table of Contents

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

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the following financial instruments were outstanding whose contract amounts represent credit risk:


	Contract Amount
	September 30,		December 31,		Contract Amount
	2022		2021		March 31, 2023		December 31, 2022
Commitments to extend credit	$	40,794	$	27,374	$	35,496	$	43,327

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. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

The ~~Company~~Bank is party to an agreement with the Federal Reserve Bank of Boston that provides the ~~Company~~Bank with a federal funds line of credit in an amount tied to securities on deposit with that bank. The ~~Company~~Bank pays no fees for this line of credit and has not drawn upon it. The ~~Company~~Bank is party to agreements with its correspondent banks that provide the ~~Company~~Bank with lines for up to $15,000 federal funds ~~line~~lines of credit to support overnight funding needs. The ~~Company~~Bank pays no fees for ~~this line~~these lines of credit and has not drawn upon ~~it. The lines renew annually.~~ ~~At September 30, 2022,~~them. One line renews annually and the ~~Company had unused borrowing capacity~~other line is in effect until either party changes the terms of ~~$100,500 with~~ the ~~Federal Home Loan Bank of Dallas.~~agreement.

At ~~September 30, 2022,~~March 31, 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 ~~statements of~~ financial ~~condition.~~statements.

Note 56 - Supplemental Cash Flow Information

Supplemental disclosure of cash flow information is as follows:


	Nine Months Ended
	September 30,				March 31,
	2022		2021		2023		2022
Supplemental cash flow information:
Loan originations to facilitate the sale of foreclosed assets	$	8	$	—

Cash paid for
Interest on deposits	$	924	$	1,190	$	883	$	326
Interest on FHLB advances		429		472		476		145
Other interest		8		8		2		3
Income taxes		190		275

Note 67 - Minimum Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.

Table of Contents

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 Bank has opted into the Community Bank Leverage Ratio (CBLR) framework, beginning with the Call Report filed for the first quarter of 2020. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Bank’s CBLR ratio was ~~13.00%~~11.32% and ~~12.89%~~12.31%, respectively, which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be “well-capitalized.”

Under the ~~CLBR~~CBLR framework, banks and their bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, are eligible to opt into the CBLR framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules (generally applicable capital rules) and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Accordingly, ~~beginning January 1, 2022,~~ qualifying community banking organizations that exceed the 9% CBLR are considered to have met: (i) the generally applicable risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; (iii) any other applicable capital or leverage requirements. ~~A qualifying~~Qualifying community banking ~~organization~~organizations that ~~elects~~elect to be under the CBLR framework generally would be exempt from the current capital framework, including risk-based capital requirements and capital conservation buffer requirements.

On April 6, 2020, the federal banking regulators, implementing the applicable provisions of the CARES Act, issued interim rules which modified the CBLR framework so that: (i) beginning second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (ii) community banking organizations had until January 1, 2022 before the CBLR requirement is reestablished at greater than 9%. Under the interim rules, the minimum CBLR was 8% beginning in the second quarter of 2020 and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The interim rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable community bank leverage ratio.

Note 78 - Fair Value Measurements

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Authoritative guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

●

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.

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2023 and 2022

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

●

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

●

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 ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 or the year ended December 31, ~~2021.~~2022.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market- based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Available for Sale Securities – Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things.

~~Impaired~~Collateral-dependent Loans – ~~Impaired~~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
	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
Financial assets
Available for sale securities
Residential mortgage-backed	$	—	$	26,720	$	—	$	26,720
Collateralized mortgage obligations		—		52,973		—		52,973
State and municipal		—		14,200		—		14,200
Corporate bonds		—		4,843		—		4,843
Total financial assets	$	—	$	98,736	$	—	$	98,736

December 31, 2022

Level 1

Level 2

Level 3

Total

Inputs

Fair Value

Financial assets

2326

Table of Contents

Texas Community Bancshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

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

Available for sale securities
Residential mortgage-backed	$	—	$	23,758	$	—	$	23,758
Collateralized mortgage obligations		—		50,244		—		50,244
State and municipal		—		13,781		—		13,781
Corporate bonds		—		4,815		—		4,815
U.S. Government and agency		—		14,555		—		14,555
Total financial assets	$	—	$	107,153	$	—	$	107,153

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; 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
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
Financial assets
Collateral-dependent loans	$	—	$	—	$	77	$	77
	$	—	$	—	$	77	$	77


	December 31, 2022
	Level 1		Level 2		Level 3		Total Fair
	Inputs		Inputs		Inputs		Value
Financial assets
Impaired loans	$	—	$	—	$	89	$	89
	$	—	$	—	$	89	$	89

During the three months ended March 31, 2023 and 2022, certain collateral-dependent loans were remeasured and reported at fair value through a specific allocation of the allowance for credit losses based upon the fair value of the underlying collateral. At March 31, 2023, collateral-dependent loans with a carrying value of $377 were reduced by specific valuation allowance allocations totaling $300 to a reported fair value of $77. At December 31, 2022, impaired loans with a carrying value of $389 were reduced by specific valuation allowance allocations totaling $300 to a reported fair value of $89. The fair value of impaired loans is determined based on collateral valuations utilizing Level 3 valuation inputs. There was no charge to the provision for loan losses as a result of the valuation allowances for the three months ended March 31, 2023 and 2022.

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


				Significant	Range of
	Fair Value at		Principal Valuation	Unobservable	Significant Input
Instrument	March 31, 2023		Technique	Inputs	Values

Collateral-dependent loans	$	77	Appraisal of collateral (1)	Appraisal adjustment	10-25	%

Table of Contents

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)

Foreclosed Assets – Fair values are valued at the time the loan is foreclosed upon and the asset is transferred from loans. The value is based upon primarily third-party appraisals, less estimated costs to sell. The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Such discounts are typically significant and result in Level 3 classification of the inputs for determining fair value. Foreclosed assets are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same or similar factors above.

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

September 30, 2022


Level 1

Level 2

Level 3

Total

Inputs

Inputs

Inputs

Fair Value
Financial assets








Available for sale securities








Residential mortgage-backed

$
—

$
14,774

$
—

$
14,774
Collateralized mortgage obligations

—

30,139

—

30,139
State and municipal

—

13,876

—

13,876
Corporate bonds

—

4,959

—

4,959
U.S. Government and agency

—

14,592

—

14,592
Total financial assets

$
—

$
78,340

$
—

$
78,340

December 31, 2021


Level 1

Level 2

Level 3

Total

Inputs

Inputs

Inputs

Fair Value
Financial assets








Available for sale securities








Residential mortgage-backed

$
—

$
18,785

$
—

$
18,785
Collateralized mortgage obligations

—

11,076

—

11,076
State and municipal

—

11,539

—

11,539
Corporate bonds

—

2,406

—

2,406
U.S. Government and agency

—

12,994

—

12,994
Total financial assets

$
—

$
56,800

$
—

$
56,800

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

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

September 30, 2022

Level 1

Level 2

Level 3

Total Fair


Inputs

Inputs

Inputs

Value
Financial assets








Impaired loans

$
—

$
—

$
113

$
113

$
—

$
—

$
113

$
113

December 31, 2021

Level 1

Level 2

Level 3

Total Fair


Inputs

Inputs

Inputs

Value
Financial assets

Impaired loans

$
—

$
—

$
1,274

$
1,274
Nonfinancial assets








Foreclosed assets

—

—

209

209

$
—

$
—

$
1,483

$
1,483

During the nine months ended September 30, 2022 and the year ended December 31, 2021, certain impaired loans were remeasured and reported at fair value through a specific allocation of the allowance for loan and lease losses based upon the fair value of the underlying collateral. At September 30, 2022, impaired loans with a carrying value of $413 were reduced by specific valuation allowance allocations totaling $300 to a reported fair value of $113~~. At December 31, 2021, impaired loans with a carrying value of~~ $1,582 were reduced by specific valuation allowance allocations totaling $308 to a reported fair value of $1,274. The fair value of impaired loans is determined based on collateral valuations utilizing Level 3 valuation inputs. There was no charge to the provision for loan and lease losses as a result of the valuation allowances for the three and nine months ended September 30, 2022 and 2021.

Significant

Range of

Fair Value at

Principal Valuation

Unobservable

Significant Input

Instrument

September 30, 2022

Technique

Inputs

Values

Impaired loans

$
113

Appraisal of collateral (1)

Appraisal adjustment

10-25
%

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

Significant

Range of

Significant

Range of

Fair Value at

Principal Valuation

Unobservable

Significant Input

Fair Value at

Principal Valuation

Unobservable

Significant Input

Instrument

December 31, 2021

Technique

Inputs

Values

December 31, 2022

Technique

Inputs

Values

Impaired loans

1,274

Appraisal of collateral (1)

Appraisal adjustment

10-25

Appraisal of collateral (1)

Appraisal adjustment

10-25

Foreclosed assets

209

Appraisal of collateral (1)

Appraisal adjustment

10-25

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

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


	September 30, 2022										March 31, 2023
	Level 1		Level 2		Level 3		Total		Total		Level 1		Level 2		Level 3		Total		Total
	Inputs		Inputs		Inputs		Fair Value		Carrying Value		Inputs		Inputs		Inputs		Fair Value		Carrying Value
Financial assets
Cash and cash equivalents	$	8,868	$	—	$	—	$	8,868	$	8,868	$	6,845	$	—	$	—	$	6,845	$	6,845
Interest bearing deposits in banks		359		—		—		359		359		2,603		—		—		2,603		2,603
Securities held to maturity		—		25,597		—		25,597		28,821		—		26,082		—		26,082		28,996
Loans, net		—		—		239,962		239,962		240,120		—		—		246,823		246,823		259,826
Net investment in direct financing leases		—		—		64		64		64		—		—		53		53		53
Interest receivable		1,065		—		—		1,065		1,065
Accrued interest receivable												1,332		—		—		1,332		1,332
Restricted investments carried at cost		—		2,102		—		2,102		2,102		—		2,823		—		2,823		2,823
Mortgage servicing rights		—		—		7		7		7		—		—		7		7		7
Financial liabilities
Deposits		—		—		281,835		281,835		282,201		—		—		298,635		298,635		297,476
FHLB advances		—		—		33,922		33,922		35,015		—		—		61,423		61,423		62,331
Interest payable		113		—		—		113		113		485		—		—		485		485


	December 31, 2021										December 31, 2022
	Level 1		Level 2		Level 3		Total		Total		Level 1		Level 2		Level 3		Total		Total
	Inputs		Inputs		Inputs		Fair Value		Carrying Value		Inputs		Inputs		Inputs		Fair Value		Carrying Value
Financial assets
Cash and cash equivalents	$	21,915	$	—	$	—	$	21,915	$	21,915	$	8,927	$	—	$	—	$	8,927	$	8,927
Interest bearing deposits in banks		14,955		—		—		14,955		14,955		2,055		—		—		2,055		2,055
Securities held to maturity		—		33,673		—		33,673		33,682		—		24,615		—		24,615		27,827
Loans, net		—		—		224,354		224,354		220,162		—		—		251,794		251,794		251,274
Net investment in direct financing leases		—		—		105		105		105		—		—		64		64		64
Interest receivable		931		—		—		931		931
Accrued interest receivable												1,327		—		—		1,327		1,327
Restricted investments carried at cost		—		2,037		—		2,037		2,037		—		2,805		—		2,805		2,805
Mortgage servicing rights		—		—		8		8		8		—		—		7		7		7
Financial liabilities
Deposits		—		—		274,995		274,995		274,933		—		—		298,050		298,050		296,077
FHLB advances		—		—		28,259		28,259		27,571		—		—		60,825		60,825		62,494
Interest payable		128		—		—		128		128		332		—		—		332		332

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

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

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

Table of Contents

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)

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

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

~~Interest~~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.

Mortgage servicing rights – Fair values are estimated using discounted cash flows based on current market rates of interest.

Deposits – The fair values disclosed for demand deposits (for example, interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

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.

Note 89 - Employee Stock Ownership Plan

In connection with the Conversion, 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). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Company and dividends received by the ESOP. Contributions will be applied to repay interest on the loan first, and then the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 20 years.

Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation. Participants will vest in their accrued benefits determined by the years of service for vesting purposes. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Company or the Bank. Forfeitures will be reallocated to remaining participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP.

The debt of the ESOP is eliminated in consolidation. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports the compensation expense equal to the average market price of the shares for the respective period,

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

and the shares become outstanding for earnings per share computations. Dividends on unallocated ESOP shares, if any, are recorded as a reduction of debt and accrued interest. ESOP compensation was $5349 and ~~$164~~$51 for the three ~~and nine~~ months ended ~~September 30, 2022, respectively,~~March 31, 2023 and ~~$102 for the three and nine months ended September 30, 2021.~~2022.

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


	September 30,		December 31,
	2022		2021		March 31, 2023		December 31, 2022
Shares allocated to participants		13,031		—	$	26,062	$	26,062
Shares committed to be released to participants		9,774		13,031
Unreleased shares		237,816		247,590
Total		260,621		260,621
Fair value of unreleased shares	$	3,691	$	3,838

Table of Contents

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)

Shares committed to be released to participants		3,258		—
Shares distributed to retiring participant		(220)		(220)
Unreleased shares		231,301		234,559
Total		260,401		260,401
Fair value of unreleased shares	$	3,160	$	3,600

Note 910 - 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 ~~$21~~$103 for the three ~~and nine~~ months ended ~~September 30,~~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 ~~August 31, 2022, the non-employee directors~~February 28, 2023, management of the Company were granted ~~97,728~~192,204 stock options with a cost of ~~$6.50~~$6.14 per option and an exercise price of ~~$16.00~~.$15.67. These options will vest annually over a five year period ending ~~August 31, 2027~~February 28, 2028 and will expire on ~~August 31, 2032.~~February 28, 2033. Compensation expense for the stock options for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023, was ~~$11.~~

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

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

	~~2022~~
~~Expected volatility~~		~~30.25~~	%
~~Expected dividends~~		-	%
~~Expected term (in years)~~		~~7.50~~
~~Risk-free rate~~		~~3.25~~	%

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

Weighted-Average

Weighted-Average

Remaining

Options

Options

Exercise Price


Contractual Term

Outstanding at December 31, 2021



-


$
-


-

Granted

97,728



16.00


4.9

Exercised

-

-

-

Forfeited or expired

-

-

-

Outstanding at September 30, 2022

97,728

$
16.00

4.9

.

Exercisable at September 30, 2022

-

$
-

-

Weighted-Average

Grant Date
Non-Vested Options

Options


Fair Value
Non-vested at December 31, 2021



-


$
-
Granted

97,728


6.50
Vested

-

-
Exercised

-

-
Forfeited

-

-
Non-vested at September 30, 2022

97,728

$
6.50

As of September 30, 2022, there was $624,645 of total unrecognized compensation cost related to non-vested stock options granted under the plan. The cost is expected to be recognized over a weighted-average period of ~~five~~ ~~years.~~$52.

Restricted Stock Awards

The Equity Plan also permits the grant of restricted stock to its ~~directors.~~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 ~~August 31, 2022, the non-employee directors~~February 28, 2023, management of the Company were granted ~~39,084~~76,880 shares of Company stock ~~at a fair market value of $16.00~~when the stock price was $15.67 per share. These stock awards will vest in five equal annual installments through ~~August 31, 2027.~~February 28, 2028. Compensation expense for the ~~stock awards for the~~ three months ~~and nine months~~ ended ~~September 30, 2022~~March 31, 2023 was ~~$10.~~

~~Table of Contents~~

~~Texas Community Bancshares, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~Three and Nine Months Ended September 30, 2022 and 2021~~

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

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

Weighted-Average

Grant Date
Non-Vested Shares

Shares

Fair Value
Non-vested at December 31, 2021

-

$
-
Granted

39,084

16.00
Vested

-

-
Exercised

-

-
Forfeited

-

-
Non-vested at September 30, 2022

39,084

$
16.00

As of September 30, 2022, there was $614,922 of total unrecognized compensation cost related to non-vested restricted stock granted under the plan. The cost is expected to be recognized over a weighted-average period of ~~five~~ ~~years.~~

~~Note 10 - Recently Issued But Not Yet Effective Accounting Pronouncements~~

Accounting Standards Update (ASU) 2016‐13, “Financial Instruments ‐ Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016‐13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. ASU 2016‐13 is effective for the Company on January 1, 2023. The Company has contracted with a third-party vendor recommended by the Current Expected Credit Losses (“CECL”) team. Management is analyzing loan data used in the CECL model and corresponding results for the quarter ended September 30, 2022, and re-evaluating the Company’s internal and external factors, including economic and peer data for use in the third quarter calculation. A parallel run using the new CECL model and the current allowance for loan and lease losses model will be run for the September 30, 2022 data. At this time, the CECL process and data is still being updated.$51.

~~In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) which provides temporary optional expedients~~

Click or tap here to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). The guidance was effective upon issuance and generally can be applied through December 31, 2022. ASU No. 2020-04 has not had and is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2021, the FASB issued ASU No. 2021-01 Reference Rate Reform (Topic 848), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. ASU 2021-01 has not had and is not expected to have a significant impact on the Company’s consolidated financial statements.

enter text.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding Texas Community Bancshares, Inc.’s (“the Company”) consolidated financial condition at ~~September 30, 2022~~March 31, 2023 and consolidated results of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~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.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:

●

statements of our goals, intentions and expectations;

●

statements regarding our business plans, prospects, growth and operating strategies;

●

statements regarding the quality of our loan and investment portfolios; and

●

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

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

●

~~conditions relating~~our ability to ~~the COVID-19 pandemic, including the severity, scope~~control costs and ~~duration~~manage liquidity through a period of ~~the associated economic slowdown either nationally or in our market areas, that are worse than expected;~~high inflation and rapidly rising interest rates;

●

~~government action in response~~our ability to ~~the COVID-19 pandemic~~maintain our deposit base cost-effectively and ~~its effects on our business and operations;~~access cost-effective funding;

●

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

●

changes in yields on our assets resulting from changes in market interest rates;

●

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

●

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

●

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

●

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

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●

our ability to control costs when hiring employees in a highly competitive environment;

●

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

●

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

●

~~our ability to access cost-effective funding;~~

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●

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

●

demand for loans and deposits in our market area;

●

our ability to implement and change our business strategies;

●

competition among depository and other financial ~~institutions;~~institutions and brokers;

●

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

●

adverse changes in the securities or secondary mortgage markets;

●

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;

●

changes in the quality or composition of our loan or investment portfolios;

●

technological changes that may be more difficult or expensive than expected;

●

the inability of third-party providers to perform as expected;

●

a failure or breach of our operational or security systems or infrastructure, including cyberattacks;

●

our ability to manage market risk, credit risk and operational risk;

●

our ability to enter new markets successfully and capitalize on growth opportunities;

●

changes in consumer spending, borrowing and savings habits;

●

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

●

changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or strategic plan ~~implementation~~implementation;

●

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any

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

Summary of Critical Accounting Policies; Critical Accounting Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. 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

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to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The Jumpstart Our Business Startups Act of 2012 (JOBS Act) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we had the option to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. However, we have determined not to take advantage of the benefits of this extended transition period.

The following represent our critical accounting policies:

Allowance for ~~Loan and Lease~~Credit Losses. Effective January 1, 2023, the Company adopted ASC 326, referred to as CECL. Upon adoption of CECL, the Company made a one-time cumulative-effect adjustment that decreased retained earnings by $1.0 million. This adjustment was the result of a $1.0 million increase in the allowance for loan losses from $1.8 million at December 31, 2022 to $2.8 million upon adoption of the new CECL methodology on January 1, 2023 and an increase of $254,000 in the allowance for unfunded commitments. The adjustment was primarily a result of incorporating forward-looking estimated loss estimates and an allowance for off-balance sheet commitments (unfunded commitments).The allowance for credit losses applies to any financial asset carried at amortized cost, including unfunded commitments. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. The Company uses the weighted average remaining maturity (WARM) method to estimate future expected losses for all of the Company’s loan ~~and lease~~pools. The allowance for credit losses on loans is a reserve for estimated probable credit losses on individually evaluated loans determined to be impaired as well as estimated probable credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for ~~loan and lease~~credit losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for ~~loan and lease~~credit losses. A provision for ~~loan and lease~~credit losses, which is a charge against earnings, is recorded to bring the allowance for ~~loan and lease~~credit losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for ~~loan and lease~~credit losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated ~~loan and lease~~credit losses and therefore the appropriateness of the allowance for ~~loan and lease~~credit losses could change significantly.

The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for ~~loan and lease~~credit losses on loans and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical peer and Company loss rates, reasonable and supportable forecasts, and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions, reasonable and supportable forecasts, and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the ~~allocation of the~~ allowance for ~~loan and lease~~credit losses ~~is made for analytical purposes and~~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~~credit losses on loans was adequate at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for ~~loan and lease~~credit losses. As a result of such reviews, we may have to adjust our allowance for ~~loan and lease~~credit losses. However, regulatory agencies are not directly involved in the process of establishing the ~~allowance for loan and lease losses as the~~

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

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

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

The CECL standard also requires for credit losses on available for sale (AFS) securities to be recorded through an allowance for credit losses rather a write-down of the individual security. As of March 31, 2023, the Company did not have an allowance for credit losses on AFS securities based upon the decline in fair value being attributable to changes in market interest rates and not credit quality.

Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.

The Company files consolidated federal income tax returns with its subsidiaries. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

Comparison of Financial Condition at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022

Total Assets. Total assets were ~~$375.7~~$418.0 million at ~~September 30, 2022,~~March 31, 2023, an increase of ~~$10.9 million,~~$700,000, or ~~3.0%~~0.2%, from ~~$364.8~~$417.3 million at December 31, ~~2021.~~2022. The increase was due primarily to increases in net loans and leases of ~~$19.8~~$8.6 million, or ~~9.0%~~3.4%, from ~~$220.2~~$251.3 million at December 31, ~~2021~~2022 to ~~$240.1~~$259.9 million at ~~September 30, 2022~~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 ~~$16.7~~$7.3 million, or ~~18.5%~~5.4%, from ~~$90.5~~$135.0 million at December 31, ~~2021~~2022 to ~~$107.2~~$127.7 million at ~~September 30, 2022, partially offset by~~March 31, 2023 and decreases in cash, fed funds sold and deposits in ~~banks.~~banks totaling $1.6 million, or 14.5%. The $1.0 million increase in net premises and equipment was primarily due to the purchase of two buildings adjacent to the Bank’s main office in Mineola and the beginning phases of construction of the new branch building in Lindale at the current location which should be completed in 2024.

Cash and Cash Equivalents. Cash and cash equivalents decreased ~~$13.0~~$2.1 million, or ~~59.4%~~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 ~~$4.5 million) at September 30, 2022 from $21.9 million (which includes fed funds sold of $16.3~~$2.0 million) at December 31, ~~2021.~~2022. This decrease was primarily the result of ~~increases~~funding the increase in net loans and leases of ~~$19.8~~$8.6 million and ~~increases~~the increase in net premises and equipment of $1.0 million, partially offset by a decrease in securities of ~~$16.7~~$7.3 million ~~partially offset by~~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 ~~$7.3~~$1.4 million and ~~a decrease~~an increase in interest bearing deposits in banks of ~~$14.6 million.~~

~~Interest Bearing Deposits in Banks.~~ Interest bearing deposits in banks were $359,000 at September 30, 2022 compared to $15.0 million at December 31, 2021, a decrease of $14.6 million, or 97.3%. The decrease was primarily the result of funding increases in net loans and leases of $19.8 million and increases in securities of $16.7 million, partially offset by an increase in deposits of $7.3 million and the use of cash and cash equivalents of $13.0 million.

~~Securities Available for Sale.~~ Securities available for sale increased by $21.5 million, or 37.9%, to $78.3 million at September 30, 2022 from $56.8 million at December 31, 2021. The increase in securities resulted primarily from purchases of $44.5 million, sales of $10.8 million, paydowns of $4.2 million, and unrealized losses on the available for sale portfolio of $7.6 million due primarily to the increase in market interest rates during the period.

~~Securities Held to Maturity.~~ Securities held to maturity decreased by $4.9 million, or 14.5%, to $28.8 million at September 30, 2022 from $33.7 million at December 31, 2021. This decrease is due primarily to principal repayments of $4.4 million and one municipal security with a principal amount of $365,000 being called.

~~Loans and Leases Receivable, Net.~~ Net loans and leases receivable increased $19.8 million, or 9.0%, to $240.1 million at September 30, 2022 from $220.3 million at December 31, 2021. Loans secured by residential real estate and farmland comprise $169.4, or 70.0% of total loans at September 30, 2022. During the nine months ended September 30,$548,000.

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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. The Bank utilizes the Qwickrate listing service, which is a resource where banks can purchase and sell Certificates of Deposit (CDs) with other banks, to invest excess funds easily in CDs at a competitive rate. At March 31, 2023, there was $1.7 million in short-term (1-3 months) Qwickrate CDs with other banks.

Securities Available for Sale. Securities available for sale decreased by $8.5 million, or 7.9%, to $98.7 million at March 31, 2023 from $107.2 million at December 31, 2022. The decrease in securities resulted primarily from the sale of a group of securities as part of an investment repricing strategy adopted in January 2023 to take advantage of current market spreads. We sold 16 securities totaling $17.0 million at a loss of $1.7 million in order to reprice the portfolio by purchasing investments yielding higher returns, including purchases of $9.5 million during the quarter. We had paydowns of $1.2 million and a decrease in net unrealized losses (AOCI) on the available for sale portfolio of $1.5 million, or 21.4%, to $5.5 million from $7.0 million due primarily to the realized loss on the sale of $1.7 million being removed from the total. Gross unrealized losses on the AFS portfolio decreased from $8.9 million, or 7.6% of the portfolio’s amortized cost of $116 million at December 31, 2022, to $6.9 million, or 6.5% of the amortized cost of $105.7 million at March 31, 2023. These unrealized losses are due to increases in market interest rates.

Securities Held to Maturity. Securities held to maturity increased by $1.2 million, or 4.3%, to $29.0 million at March 31, 2023 from $27.8 million at December 31, 2022. This increase is due primarily to the purchase of one security of $2.1 million as part of the repricing strategy, partially offset by principal repayments of $940,000. The HTM portfolio had gross unrealized losses of $2.9 million, or 10.0% of the amortized cost of $29.0 million at March 31, 2023 compared to $3.2 million, or 11.5% of the amortized cost of $27.8 million at December 31, 2022. These unrealized losses are due to increases in market interest rates.

Loans and Leases Receivable, Net. Net loans and leases receivable increased $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 ~~$84.3~~$27.5 million of which ~~$11.7~~$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 ~~$72.6~~$20.8 million. Originations consisted primarily of ~~$29.3~~$7.4 million in one- to-four family residential mortgage loans, ~~$31.5~~$13.0 million of residential construction loans (upon completion), including four speculative construction home loans of ~~$10.5~~$1.5 million ~~$6.4~~and nine quadplex properties of $5.8 million, $1.7 million in commercial real estate loans, ~~$3.5~~$1.2 million in consumer loans, ~~$4.1~~$2.0 million in commercial and industrial loans, ~~$6.8 million~~$883,000 in land & development loans, and ~~$2.7~~$1.3 million in farmland loans. During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, there were ~~$9.5~~$3.2 million in loan principal paydowns and ~~$39.8~~$12.9 million in loan payoffs. ~~PPP loans have paid down to two loans totaling $5,000 at September 30, 2022.~~ During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, construction loans (when fully funded upon completion) increased by ~~$18.6~~$6.3 million, or ~~79.8%~~11.7%, to ~~$41.9~~$60.3 million at ~~September 30, 2022~~March 31, 2023 from ~~$23.3~~$54.0 million at December 31, ~~2021~~2022 and the construction loan balance increased ~~$10.0 million~~$930,000 to ~~$21.4~~$24.2 million at ~~September 30, 2022.~~March 31, 2023. Construction loans continue to be a large segment of our loan portfolio.

Deposits. Deposits increased ~~$7.3~~$1.4 million, or ~~2.7%~~0.5%, to ~~$282.2~~$297.5 million at ~~September 30, 2022~~March 31, 2023 from ~~$274.9~~$296.1 million at December 31, ~~2021.~~2022. Core deposits (defined as all deposits other than certificates of deposit) ~~increased $14.0~~decreased $11.6 million, or ~~6.9%~~5.6%, to ~~$216.4~~$195.1 million at ~~September 30, 2022~~March 31, 2023 from ~~$202.4~~$206.7 million at December 31, ~~2021. Certificates~~2022. Retail certificates of deposit ~~decreased $6.8~~increased $13.0 million, or ~~9.4%~~16.8%, to ~~$65.8~~$90.2 million at ~~September 30, 2022~~March 31, 2023 from ~~$72.6~~$77.3 million at December 31, ~~2021.~~2022. At ~~September 30, 2022,~~March 31, 2023, there were no$12.0 million in brokered deposits. The decrease in core deposits and increase in CDs is primarily the result of the Bank offering a special CD with a higher rate in an effort to retain deposits which has also resulted in customers moving funds within the Bank to a higher yielding account. We have also increased the rates on money market accounts as part of the retention effort during this time of rapidly rising market interest rates and a competitive deposit market. As a result, our cost of deposits increased 37 basis points, or 34.9%, to 1.43% at March 31, 2023 compared to 1.06% at December 31, 2022.

Advances from Federal Home Loan Bank. Advances from Federal Home Loan Bank ~~increased~~decreased by ~~$7.4 million,~~$163,000, or ~~26.8%~~0.3%, to ~~$35.0~~$62.3 million at ~~September 30, 2022~~March 31, 2023 from ~~$27.6~~$62.5 million at December 31, ~~2021~~2022 due to matured advances of $6.2

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million and new advances of ~~$12.0~~$7.2 million ~~less maturities~~for a net increase of $3$1.0 million, ~~and~~offset by scheduled monthly principal payments ~~of principal~~ on amortizing advances of ~~$1.6~~$1.2 million.

Total Shareholders’ Equity. Total shareholders’ equity decreased ~~$4.5 million,~~$421,000, or ~~7.5%~~0.7%, to ~~$55.6~~$55.5 million at ~~September 30, 2022~~March 31, 2023 from ~~$60.1~~$55.9 million at December 31, ~~2021.~~2022. This decrease was primarily due to a ~~$6.0~~net loss for the quarter ended March 31, 2023 of $1.0 million ~~or 879.9%, change in accumulated other comprehensive loss representing decreases in the fair value of available for sale securities~~ resulting primarily from ~~rising market interest rates. At September 30, 2022,~~the 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 ~~was $6.7~~to $5.5 million at March 31, 2023, compared to ~~$686,000~~$7.0 million at December 31, ~~2021, partially offset by net income~~2022, primarily due to the sale of ~~$1.3 million~~securities with unrealized losses, and an ~~additional $164,000 added to shareholders’~~increase in equity of $49,000 with the commitment to release ~~9,774~~3,258 additional ESOP shares to participants ~~during~~and a $103,000 increase in stock-based compensation related to the ~~nine~~2022 Equity Plan for the three months ended ~~September 30, 2022. In addition, there was a $21,000 charge~~March 31, 2023. The Company paid its first quarterly dividend on March 24, 2023, which amounted to ~~capital for one month of the newly adopted equity incentive plan.~~$67,000.

At ~~September 30, 2022,~~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 ~~September 30, 2022,~~March 31, 2023, a community bank leverage ratio of at least 9.0% is required to be considered “well capitalized” under regulatory requirements. At ~~September 30, 2022,~~March 31, 2023, Mineola Community Bank was well capitalized and had a ratio of ~~13.00%~~11.32%.

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Average Balance Sheets

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances. Average yields for loans (excluding PPP loans) include loan fees of ~~$90,000~~$70,000 and ~~$134,000~~$112,000 for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. No PPP loans were originated during the three months ended ~~September 30, 2022~~March 31, 2023 or ~~2021.~~2022. We have not recorded deferred loan fees, as we have determined them to be immaterial.


	For the Three Months Ended September 30,												For the Three Months Ended March 31,
	2022						2021						2023						2022
	Average						Average						Average						Average
	Outstanding				Average		Outstanding				Average		Outstanding				Average		Outstanding				Average
	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate

	(Dollars in thousands)												(Dollars in thousands)
	(Unaudited)
Interest-earning assets:
Loans (excluding PPP loans)	$	235,403	$	2,531	4.30	%	$	219,838	$	2,391	4.35	%	$	256,757	$	2,780	4.33	%	$	223,898	$	2,374	4.24	%
Allowance for loan and lease losses		(1,640)						(1,590)
Allowance for credit losses														(1,767)						(1,593)
PPP loans		6		—	—	%		189		1	2.12	%		1		—	—	%		11		—	—	%
Securities		102,671		601	2.34	%		55,168		193	1.40	%		126,781		1,253	3.95	%		94,207		373	1.58	%
Restricted stock		2,044		9	1.76	%		2,031		6	1.18	%		2,649		25	3.78	%		2,037		5	0.98	%
Interest-bearing deposits in banks		3,158		15	1.90	%		16,963		10	0.24	%
Interest bearing deposits in banks														4,708		49	4.16	%		8,630		6	0.28	%
Federal funds sold		7,856		41	2.09	%		40,393		12	0.12	%		3,405		39	4.58	%		18,617		9	0.19	%
Total interest-earning assets		349,498		3,197	3.66	%		332,992		2,613	3.14	%
Noninterest-earning assets		21,626						21,180
Total interest earning assets														392,534		4,146	4.22	%		345,807		2,767	3.20	%
Noninterest earning assets														22,330						20,965
Total assets	$	371,124					$	354,172					$	414,864					$	366,772

Interest-bearing liabilities:
Interest-bearing demand deposits	$	75,856		70	0.37	%	$	71,668		60	0.33	%
Interest bearing demand deposits													$	64,109		58	0.36	%	$	74,143		61	0.33	%
Regular savings and other deposits		81,271		71	0.35	%		71,311		66	0.37	%		63,078		55	0.35	%		79,151		71	0.36	%
Money market deposits		12,165		11	0.36	%		9,281		7	0.30	%		28,313		170	2.40	%		11,403		8	0.28	%
Certificates of deposit		67,060		148	0.88	%		75,418		229	1.21	%		97,052		703	2.90	%		71,665		171	0.95	%
Total interest-bearing deposits		236,352		300	0.51	%		227,678		362	0.64	%
Total interest bearing deposits														252,552		986	1.56	%		236,362		311	0.53	%
Advances from FHLB		27,342		144	2.11	%		28,279		151	2.12	%		59,923		526	3.51	%		27,236		144	2.11	%
Other liabilities		508		3	2.36	%		410		3	2.93	%		526		2	1.52	%		459		3	2.61	%
Total interest-bearing liabilities		264,202		447	0.68	%		256,367		516	0.80	%
Noninterest-bearing demand deposits		59,315						48,569
Other noninterest-bearing liabilities		4,318						4,421
Total interest bearing liabilities														313,001		1,514	1.93	%		264,057		458	0.69	%
Noninterest bearing demand deposits														55,916						53,276
Other noninterest bearing liabilities														3,292						3,205
Total liabilities		327,835						309,357						372,209						320,538
Total shareholders’ equity		43,289						44,815						42,655						46,234
Total liabilities and shareholders' equity	$	371,124					$	354,172					$	414,864					$	366,772
Net interest income			$	2,750					$	2,097					$	2,632					$	2,309
Net interest rate spread ⁽¹⁾					2.98	%					2.33	%					2.29	%					2.51	%
Net interest-earning assets ⁽²⁾	$	85,296					$	76,625
Net interest earning assets ⁽²⁾													$	79,533					$	81,750
Net interest margin ⁽³⁾					3.15	%					2.52	%					2.68	%					2.67	%
Average interest-earning assets to interest-bearing liabilities					132.28	%					129.89	%
Average interest earning assets to interest bearing liabilities																	125.41	%					130.96	%

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

(2)	Net ~~interest-earning~~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~~interest earning assets.

3637

Table of Contents

Comparison of the Operating Results for the Three Months Ended ~~September 30,~~March 31, 2023 and March 31, 2022 ~~and September 30, 2021~~

Net Income. ~~Net income was $539,000~~The Company had a net loss of $1.0 million for the three months ended ~~September 30, 2022,~~March 31, 2023, compared to a net ~~loss~~income of ~~$198,000~~$391,000 for the three months ended ~~September 30, 2021, an increase~~March 31, 2022, a decrease of ~~$737,000,~~$1.4 million, or ~~372.2%~~350.0%. The ~~increase~~net loss was primarily due to a ~~$653,000,~~$1.7 million, or ~~31.1%~~340.0%, decrease in noninterest income resulting primarily from the sale of securities at a net loss of $1.7 million. Additionally, there was a $395,000 increase in noninterest expense and a $50,000 increase in provision for credit losses, partially offset by a $323,000 increase in net interest income and a ~~$280,000, or 12.2%, increase in net noninterest income, partially offset by a $34,000 increase in the provision for loan and lease losses and a $162,000 increase~~decrease in income tax ~~expense.~~expense of $374,000.

Interest Income. Interest income increased ~~by $584,000, or 22.5%, to $3.2 million for the three~~ months ended September 30, 2022 from $2.6 million for the three months ended September 30, 2021. This was primarily the result of increased interest income on securities due to an increased average balance increase of 86.1% and an increase in yield of 67.1% and increased loan interest from an increased average balance of 7.1%. Average interest earning assets overall increased by $16.5$1.3 million, or ~~5.0%~~46.4%, from $333.0 million at September 30, 2021 to $349.5 million at September 30, 2022, and the yield on those assets increased by 52 basis points, or 16.6%, from 3.14% for the three months ended September 30, 2021 to 3.66% for the three months ended September 30, 2022.

Interest income on loans (excluding PPP loans) increased $140,000, or 5.8%, from $2.4 million for the three months ended September 30, 2021 to $2.5 million for the three months ended September 30, 2022. This was primarily due to an increase of $15.6 million, or 7.1%, in the average balance of the loan portfolio to $235.4 million for the three months ended September 30, 2022 from $219.8 million for the three months ended September 30, 2021 being offset by a decrease of five basis points, or 1.1%, in the average yield on loans from 4.35% for the three months ended September 30, 2021 to 4.30% for the three months ended September 30, 2022. In the three months ending September 30, 2021, we originated more loans with fees that were included in interest income than in the three months ending September 30, 2022 and although loan rates have increased, we had not originated enough loans at the higher rates at September 30, 2022 to increase the weighted average cost of the entire loan portfolio.

Interest income on securities increased $408,000, or 211.4%, from $193,000 for the three months ended September 30, 2021 to $601,000 for the three months ended September 30, 2022. This increase resulted from an increase of 94 basis points, or 67.1%, in yield from 1.40% for the three months ended September 30, 2021 to 2.34% for the three months ended September 30, 2022 and an increase in average securities of $47.5 million, or 86.1%, from $55.2 million for the three months ended September 30, 2021 to $102.7 million for the three months ended September 30, 2022. The rate increase is reflective of the rise in market interest rates in the overall market and diversification of the securities portfolio as the Company continued to invest the net proceeds of the conversion stock offering over the periods compared.

Interest income from interest bearing deposits in banks increased $5,000, or 50.0%, from $10,000 for the three months ended September 30, 2021 to $15,000 for the three months ended September 30, 2022. This increase resulted primarily from an increase in average yield of 166 basis points, or 691.7%, from 0.24% for the three months ended September 30, 2021 to 1.90% for the three months ended September 30, 2022, partially offset by a decrease in the average interest bearing deposits in banks of $13.8 million, or 81.2%, from $17.0 million for the three months ended September 30, 2021 to $3.2 million for the three months ended September 30, 2022. There was also an increase in fed funds interest income of $29,000, or 241.7%, resulting from a 197 basis points, or 1,641.7%, increase in average yield on fed funds sold from 0.12% for the three months ended September 30, 2021 to 2.09% for the three months ended September 30, 2022, partially offset by a $32.5 million, or 80.4%, decrease in average fed funds balances from $40.4 million for the three months ended September 30, 2021 to $7.9 million for the three months ended September 30, 2022.

~~Interest Expense.~~ Total interest expense decreased $69,000, or 13.4%, to $447,000 for the three months ended September 30, 2022 from $516,000 for the three months ended September 30, 2021 due primarily to a decrease in the average cost of interest-bearing liabilities of 12 basis points, or 15.0%, from 0.80% for the three months ended September 30, 2021 to 0.68% for the three months ended September 30, 2022, primarily due to decreased deposit costs for the period as a result of lower deposit rates in the last quarter of 2021 and the first half of 2022. Interest expense on deposit accounts decreased $62,000, or 17.1%, to $300,000 for three months ended September 30, 2022 from $362,000 for the three months ended September 30, 2021, due to a decrease in the average deposit cost of 13 basis points, or 20.3%, from 0.64% for the three months ended September 30, 2021 to 0.51% for the three months ended September 30,

~~Table of Contents~~

2022, primarily the result of lower average deposit rates in the three months ended September 30, 2022 combined with a movement of funds to more liquid and lower-cost types of accounts. This was partially offset by an increase of $8.7 million, or 3.8%, in the average deposit account balances from $227.7 million for the three months ended September 30, 2021 to $236.4 million for the three months ended September 30, 2022, with the increase being in lower cost interest bearing transaction accounts.

Interest expense on Federal Home Loan Bank advances decreased $7,000, or 4.6%, to $144,000 for the three months ended September 30, 2022 from $151,000 for the three months ended September 30, 2021. This decrease was due primarily to the decrease in the average balance of Federal Home Loan Bank advances of $1.0 million, or 3.5%, to $27.3 million for the three months ended September 30, 2022 from $28.3 million for the three months ended September 30, 2021.

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

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

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

~~Noninterest Expense.~~ ~~Noninterest expense decreased $233,000, or 8.4%, to $2.5 million for the three months ended September 30, 2022~~ from $2.8 million for the three months ended ~~September 30, 2021, primarily due~~March 31, 2022 to ~~decreases in other expenses and contract services that were higher in 2021 due to the stock conversion transaction, partially offset by increases in salaries, employee benefits and director fees.~~

~~Salary and employee benefit expenses increased by $178,000, or 13.5%, to $1.5 million for the three~~ ~~months ended September 30, 2022 from $1.3~~$4.1 million for the three months ended September 30, 2021, due to normal salary increases and a $21,000 contribution to the Equity Plan for the three months ended September 30, 2022 which did not exist in the three months ended September 30, 2021, partially offset by decreased ESOP expense in the three months ending September 30, 2022 due to initial funding costs being higher in the three months ended September 30, 2021. Directors’ fees also increased $21,000, or 28.0%, to $96,000 for the three months ended September 30, 2022 from $75,000 for the three months ended September 30, 2021 due to the addition of four new directors and two new advisory directors. This was partially offset by a decrease of $446,000, or 37.0%, in data processing, contract services and other fees combined, primarily due to higher expenses related to the stock conversion transaction during the three months ended September 30, 2021.

~~Income Tax Expense.~~ ~~Income tax expense increased by $162,000, or 450.0%, to $126,000 for the three~~ months ended September 30, 2022 from a tax benefit of $36,000 primarily due to higher income before taxes. The effective tax rate was 19.0% and 15.4% for the three months ended September 30, 2022 and 2021, respectively. The effective tax rate was higher for the three months ended September 30, 2022 due to taxable income increasing at a faster rate than tax exempt income.

~~Table of Contents~~

~~Average Balance Sheets~~

The following table sets forth average balances, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances. Average yields for loans (excluding PPP loans) include loan fees of $304,000 and $429,000 for the nine months ended September 30, 2022 and 2021, respectively. No PPP loans were originated during the nine months ended September 30, 2022 or 2021. We have not recorded deferred loan fees, as we have determined them to be immaterial.

For the Nine Months Ended September 30,

2022

2021

Average

Average

Outstanding

Average

Outstanding

Average

Balance

Interest

Yield/Rate

Balance

Interest

Yield/Rate

(Dollars in thousands)

(Unaudited)

Interest-earning assets:

Loans (excluding PPP loans)

$
229,773

$
7,336

4.26
%
$
215,452

$
7,190

4.45
%
Allowance for loan and lease losses

(1,619)

—

—

(1,571)

—

—

PPP loans

8

—

—
%

722

6

1.11
%
Securities

99,074

1,421

1.91
%

50,887

560

1.47
%
Restricted stock

2,041

20

1.31
%

2,027

15

0.99
%
Interest-bearing deposits in banks

5,758

34

0.79
%

19,414

45

0.31
%
Federal funds sold

13,744

80

0.78
%

22,344

17

0.10
%
Total interest-earning assets

348,779

8,891

3.40
%

309,275

7,833

3.38
%
Noninterest-earning assets

21,501

21,233





Total assets

$
370,280

$
330,508





Interest-bearing liabilities:









Interest-bearing demand deposits

$
75,694

195

0.34
%
$
69,030

175

0.34
%
Regular savings and other deposits

80,556

214

0.35
%

68,354

193

0.38
%
Money market deposits

11,858

28

0.31
%

9,497

28

0.39
%
Certificates of deposit

69,498

471

0.90
%

75,646

756

1.33
%
Total interest-bearing deposits

237,606

908

0.51
%

222,527

1,152

0.69
%
Advances from the Federal Home Loan Bank

27,099

429

2.11
%

29,502

468

2.12
%
Other liabilities

457

8

2.33
%

391

8

2.73
%
Total interest-bearing liabilities

265,162

1,345

0.68
%

252,420

1,628

0.86
%
Noninterest-bearing demand deposits

56,920

38,404

Other noninterest-bearing liabilities

3,770

3,509

Total liabilities

325,852

294,333

Total shareholders' equity

44,428

36,175

Total liabilities and shareholders' equity

$
370,280

$
330,508

Net interest income

$
7,546

$
6,205



Net interest rate spread ⁽¹⁾

2.72
%

2.52
%
Net interest-earning assets ⁽²⁾

$
83,617

$
56,855

Net interest margin ⁽³⁾

2.88
%

2.68
%
Average interest-earning assets to interest-bearing liabilities

131.53
%

122.50
%

~~(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.~~

~~Table of Contents~~

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

~~Net Income.~~ ~~Net income was $1.3 million for the nine months ended September 30, 2022, compared to net income of $232,000 for the nine~~ months ended September 30, 2021, an increase of $1.1 million, or 550.0%. The increase was primarily due to a $1.3 million, or 21.0%, increase in net interest income and a $141,000 increase in noninterest income, offset by a $81,000 increase in the provision for loan and lease losses and an increase in income tax expense of $281,000.

~~Interest Income.~~ ~~Interest income increased $1.1 million, or 14.1%, for the nine months ended September 30, 2022 from $7.8 million at September 30, 2021 to $8.9 million at September 30, 2022.~~March 31, 2023. This was primarily the result of increased interest income on securities and ~~fed funds sold~~loans due ~~primarily~~ to ~~the continued investment of the net proceeds from the conversion stock offering and~~ increased yields ~~on those investments resulting primarily from rising market interest rates.~~and an increase in the average balance of loans and securities. Average interest earning assets increased by ~~$39.5~~$46.7 million, or ~~12.8%~~13.5%, from ~~$309.3~~$345.8 million for the three months ended March 31, 2022 to $392.5 million at ~~September 30, 2021 to $348.8 million at September 30, 2022,~~March 31, 2023, and ~~a small~~an increase in the yield on interest earning assets of 2102 basis points, or ~~0.6%~~32.0%, from ~~3.38% on September 30, 2021~~3.20% for the three months ended March 31, 2022 to ~~3.40% on September 30, 2022.~~4.22% for the three months ended March 31, 2023.

Interest income on loans increased ~~$146,000,~~$406,000, or ~~2.0%~~17.1%, to ~~$7.3~~$2.8 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~$7.2~~$2.4 million for the nine months ending September 30, 2021. Average loans increased $14.3 million, or 6.6%, from $215.5 million at September 30, 2021 to $229.8 million at September 30, 2022, being offset by a 19 basis point, or 4.3%, decrease in loan yield to 4.26% for the ninethree months ended September 30, 2022 from 4.45% for the nine months ended September 30, 2021. In the nine months ending September 30, 2021, we originated more loans with fees that were included in interest income than in the three months ending September 30 2022 and although loan rates have increased, we had not originated enough loans at the higher rates at September 30, 2022 to increase the weighted average cost of the entire loan portfolio.

~~Interest income on securities increased $861,000, or 153.8%, from $560,000 for the nine months ended September 30, 2021 to $1.4 million for the nine months ended September 30,~~March 31, 2022. This increase resulted from an increase in average ~~securities~~loans of ~~$48.2~~$32.9 million, or ~~94.7%~~14.7%, from ~~$50.9~~$223.9 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~$99.1~~$256.8 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2023, with an increase in loan yield of 9 basis points, or 2.1%, to 4.33% for the three months ended March 31, 2023 from 4.24% for the three months ended March 31, 2022. The increase in loan yield was due primarily to increased market interest rates.

Interest income on securities increased $880,000, or 235.9%, from $373,000 for the three months ended March 31, 2022 to $1.3 million for the three months ended March 31, 2023. This increase resulted from an increase in the average balance of securities of $32.6 million, or 34.6%, from $94.2 million for the three months ended March 31, 2022 to $126.8 million for the three months ended March 31, 2023 and an increase of 44237 basis points, or ~~29.9%~~149.6%, in average yield from ~~1.47%~~1.58% for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~1.91%~~3.95% for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. The rate increase is reflective of market rate increases and the diversification of the securities portfolio to include higher yielding commercial mortgage-backed securities, subordinated bank debt and other bonds with interest rates that are not tied to conventional residential mortgage loan rates. In January 2023, the Company sold 16 securities totaling $17.0 million at a loss of $1.7 million as part of a repricing strategy to increase interest income. The securities consisted of 14 US Treasuries and two mortgage-backed securities that were purchased when rates were very low. This was strictly a strategy to maximize income. According to our analysis, we should recoup the ~~net proceeds~~loss in approximately 1.5 years by replacing the securities sold with securities purchased at then prevailing market interest rates. The Federal Reserve increased rates 450 basis points, or 900%, between March 31, 2022 and March 31, 2023. We believe the timing of the ~~conversion stock offering continued to be invested into higher yielding investments.~~securities sale was optimal.

Interest income from interest bearing deposits in banks ~~declined $11,000,~~increased $43,000, or ~~24.4%~~716.7%, from ~~$45,000~~$6,000 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~$34,000~~$49,000 for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. This ~~decline~~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 ~~in banks~~ of ~~$13.6~~$3.9 million, or ~~70.1%,~~45.3% from ~~$19.4~~$8.6 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~$5.8~~$4.7 million for the ~~nine~~three months ended September 30, 2022, partially offset by 48 basis points, or 154.8%, increase in average yield from 0.31% for the nine months ended September 30, 2021 to 0.79% for the nine months ended September 30, 2022.March 31, 2023. There was also an increase of ~~$63,000~~$30,000 in fed funds interest income for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 primarily from an increase of 68439 basis points, or ~~680.0%~~2,269.3%, in average yield on fed funds sold from ~~0.10%~~0.19% for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~0.78%~~4.58% for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, partially offset by a ~~$8.6~~$15.2 million, or ~~38.6%~~81.7%, decrease in average fed funds sold from ~~$22.3~~$18.6 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~$13.7~~$3.4 million for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. The increases in yields on deposits in banks and fed funds is reflective of the sharp increase in market interest rates.

Interest Expense. Total interest expense ~~decreased $283,000,~~increased $1.1 million, or ~~17.4%~~230.6%, to ~~$1.3~~$1.5 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~$1.6 million~~$458,000 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 due to ~~a decrease~~an increase in the average cost of interest-bearing liabilities of 18124 basis points, or 20.9%, from 0.86% for the nine months ended September 30, 2021 to 0.68% for the nine months ended September 30, 2022, primarily due to a decrease in deposit costs. Interest expense on deposit accounts decreased $244,000, or 21.2%, to $908,000 for the nine months ended September 30, 2022 from $1.2 million for the nine months ended September 30, 2021, due to a decrease in the average deposit cost of 18 basis points, or 26.1%178.9%, from 0.69% for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~0.51% for the nine months ended September 30, 2022. This was partially offset by an increase of $15.1 million, or 6.8%, in the average interest bearing~~

4038

Table of Contents

1.93% for the three months ended March 31, 2023, primarily due to an increase in deposit ~~account balances~~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 ~~$222.6~~$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 ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~$237.6~~$252.6 million for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, with the increase being in higher yielding certificates of deposit and money market deposits, offset by a decrease in lower cost interest-bearing transaction accounts. Part of the migration to higher yielding accounts results from a deposit retention strategy of offering a special higher interest rate CD and higher money market rates implemented during the quarter ended March 31, 2023. The speed of the market rate increases created a competitive deposit market quickly, especially after the four consecutive 75 basis point raises from June to November.

Interest expense on Federal Home Loan Bank advances ~~decreased $39,000,~~increased $382,000, or ~~8.3%~~265.3%, to ~~$429,000~~$526,000 for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~$468,000~~$144,000 for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. This ~~decrease~~increase was due primarily to the ~~decrease~~increase in the average balance of Federal Home Loan Bank advances of ~~$2.4~~$32.7 million, or ~~8.1%~~120.0%, to ~~$27.1~~$59.9 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~$29.5~~$27.2 million for the ~~nine~~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 ~~September 30, 2021.~~March 31, 2023. The increase in average ~~yield~~advances was ~~2.11% for the nine months ended September 30,~~primarily to fund an investment strategy initiated in 2022 and ~~2.12% for~~to fund loans. At March 31, 2023, we have lengthened our short-term advances as they have matured and are holding onto any excess liquidity in interest bearing accounts. The Company believes this to be prudent given the ~~nine months ended September 30, 2021.~~uncertainty in the market, including consumer behavior and interest rates, and management concerns about regulatory response and public perceptions in light of recent large regional bank failures.

Net Interest Income. Net interest income increased ~~$1.3 million,~~$323,000, or ~~21.6%~~13.0%, to ~~$7.5~~$2.6 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~$6.2~~$2.3 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 due primarily ~~due~~ to anthe increase in interest-earning assets of ~~$26.7~~$46.7 million, or ~~46.9%~~13.5%, ~~in the average balance of net interest-earning assets~~to 392.5 million at March 31, 2023 from ~~$56.9~~$345.8 million ~~for the nine months ended September 30, 2021 to $83.6 million for the nine months ended September 30,~~at March 31, 2022, ~~and~~partially offset by a ~~20 basis points, or 7.9%, increase~~decrease in ~~the~~ net interest rate spread of 22 basis points, or 8.6%, from ~~2.52%~~2.51% for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~2.72%~~2.29% for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. Net interest margin ~~increased 20~~had a one basis ~~points, or 7.5%,~~point increase to ~~2.88% for the nine months ended September 30, 2022 from~~ 2.68% for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2023.

Provision for ~~Loan and Lease~~Credit Losses. Based on management’s analysis of the adequacy of the allowance for ~~loan and lease~~credit losses, the provision for ~~loan and lease~~credit losses was ~~$125,000~~$90,000 for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~$44,000~~$40,000 for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, an increase of ~~$81,000,~~$50,000, or ~~184.1%~~125.0%, primarily due to an increase in loans and leases ~~an $18,000 increase~~and the adoption of ASC 326. See the CECL section in ~~net consumer credit losses to $31,000~~the financial statements for ~~the nine months ended September 30, 2022 and diversification~~further explanation of the ~~loan portfolio.~~Bank’s transition to the new methodology.

Noninterest Income. Noninterest income ~~increased $141,000,~~decreased $1.7 million, or ~~7.7%~~340.0%, to ~~$1.4 million for the nine months ended September 30, 2022 from $1.3 million for the nine~~ ~~months ended September 30, 2021, due primarily to an increase~~a loss of ~~$127,000, or 10.9%, in service charges and fees from~~ $1.2 million for the ~~nine~~three months ended ~~September 30, 2021 to $1.3 million~~March 31, 2023 from income of $453,000 for the ~~nine~~three months ended ~~September 30, 2022. The increase is~~March 31, 2022, due primarily ~~due~~ to ~~an $84,000 increase in service charges primarily due to waiving fees during part of 2021 on deposit accounts and increases in the number of deposit accounts. There was also~~ a ~~$42,000 gain on the sale of real estate owned in the nine months ended September 30, 2022, partially offset by a $29,000~~$1.7 million loss on the sale of securities during the ~~nine~~three months ended ~~September 30,~~March 31, 2023. This was partially offset by two income items that were not in the quarter ended March 31, 2022. There was additional loan fee income from the wholesale lending program of $24,000 and rental income of $7,600 on two newly acquired buildings located adjacent to the current Bank premises that were purchased in January of 2023 for future expansion.

Noninterest Expense. Noninterest expense ~~remained flat at $7.1~~increased $395,000, or 18.2%, to $2.6 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from $2.2 million primarily due to increases in salaries and employee benefits, ~~and director fees being offset by decreases in~~data processing, contract services, ~~data processing~~ and other expenses.

Salary and employee benefit expenses increased by ~~$455,000,~~$205,000, or ~~11.9%~~16.7%, to ~~$4.3~~$1.6 million for the ~~nine~~ three months ended ~~September 30, 2022~~March 31, 2023 from ~~$3.8~~$1.4 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, due to normal salary and benefits increases and an increase in ~~the ESOP contribution~~compensation expense of ~~$61,000~~$103,000 for stock awards and ~~a new $21,000 contribution expense for~~stock options awarded under the 2022 Equity Plan, ~~in the nine months ending September 30,~~which was approved by shareholders on August 31, 2022. The Equity Plan was not in existence ~~and~~during the ~~ESOP was not fully funded~~three months ended March 31, 2022. Technology expenses increased $21,000, or 23.9%, to $109,000 for the ~~nine~~three months ~~ending September 30, 2021. Directors’ fees~~ended March 31, 2023, primarily due to higher costs. Other expenses increased ~~$56,000,~~$105,000, or ~~24.2%~~37.6%, primarily due to an increase of $53,000 in audit and accounting expenses, a $22,000 increase in insurance expenses and

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$25,000 in fund expenses on a restricted investment. Data processing costs also increased $30,000, or 13.4%, to ~~$287,000~~$221,000 for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~$231,000~~$191,000 for the ~~nine~~three months ended ~~September 30, 2021 due~~March 31, 2022. Contract services increased $27,000, or 22.7%, to $62,000 for the addition of four new directors and two new advisory directors in 2022. These increases were offset primarily by a combined decrease in data processing, contract services and other expenses of $527,000. These expenses were higher in the ninethree months ended ~~September 30, 2021 due partially to additional expenses related to~~March 31, 2023 from $35,000 for the ~~stock conversion.~~three months ended March 31, 2022. Both of these increases are reflective of the price increases in all types of services that the Company incurred in 2022, primarily as a result of general wage and inflationary pressures.

Income Tax Expense. Income tax expense ~~increased~~decreased by ~~$281,000,~~$374,000, or ~~597.9%~~425.0%, to ~~$328,000~~an income tax benefit of $286,000 for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~$47,000~~an income tax expense of $88,000 for the ~~nine~~three months ended ~~September 30, 2021, primarily~~March 31, 2022, due to ~~higher income before taxes.~~the net loss at March 31, 2023. The effective tax rate was ~~19.59%~~21.95% and ~~16.85%~~18.37% for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The increase in effective tax rate was ~~higher for the nine months ended September 30, 2022~~primarily due to taxable income increasing at a faster rate than ~~tax exempt~~nontaxable income.

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Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Federal Reserve Bank of Boston provides the ~~Company~~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. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We are also able to borrow from the Federal Home Loan Bank of Dallas. At ~~September 30, 2022,~~March 31, 2023, we had outstanding advances of ~~$35.0~~$62.3 million from the Federal Home Loan Bank of Dallas. At ~~September 30, 2022,~~March 31, 2023, we had unused borrowing capacity of ~~$100.5~~$87.8 million with the Federal Home Loan Bank of Dallas. In addition, at ~~September 30, 2022,~~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 ~~September 30, 2022,~~March 31, 2023, there was no outstanding balance under ~~either~~any of these facilities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. For additional information, see the consolidated statements of cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ included as part of the consolidated financial statements included in this report.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

Texas Community Bancshares, Inc. is a separate legal entity from Mineola Community Bank, and must provide for its own liquidity to pay its operating expenses and other financial obligations. 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. is governed by applicable banking laws and regulations. At ~~September 30, 2022,~~March 31, 2023, Texas Community Bancshares, Inc. (on a stand-alone, unconsolidated basis) had liquid assets of ~~$13.4~~$13.1 million.

Liquidity management and asset quality continue to be high priorities. With continued volatility in the market, recent banking sector events and market interest rate increases, liquidity management and analysis is a key factor in daily asset and liability management and strategic planning. We are monitoring deposit runoff and threats of deposit runoff daily. We have been able to maintain our deposit base through this cycle with some new product offerings and competitive interest rates, which has increased our funding costs. We run stress tests monthly with a severe scenario of 35% CD runoff and 20% other deposit runoff combined with the inability to access our available lines of credit. The scenarios indicate that we are able to maintain our operational liquidity with a designated buffer with our liquidity resources available. We are closely monitoring our assets and liabilities, along with any investment portfolio unrealized

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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 ~~September 30, 2022,~~March 31, 2023, accounts with balances in excess of $250,000 totaled $66.9 million, or 22.5% of deposits, with $27.4 million, or 9.2%, exceeding $250,000 and potentially uninsured. Certificates of deposit totaled $7.1 million of that uninsured balance with the remaining $20.3 million in checking and savings. We have also been communicating with our depositors in general to help ease any fears they may have in light of recent bank failures.

At March 31, 2023, the weighted average life (WAL) of our securities portfolio is 5.5 years. At March 31, 2023, the net unrealized losses, and corresponding AOCI, on the AFS securities is $5.5 million, or 5.5% of the $98.7 million AFS total and 9.9% of capital. These losses are the result of market interest rate increases and we continue to monitor the portfolio for other risks. Over the next 36 months from March 31, 2023, we expect to realize $11.5 million, $21.9 million, and 21.6 million in cash flow from the securities portfolio in 2023, 2024 and 2025, respectively. See the Securities section of the management discussion and analysis for more information.

Our asset quality remains strong. We are being optimistically cautious with our lending and strategic decisions, staying focused on long-term goals and taking advantage of opportunities while being diligent about recognizing and mitigating risk. With the CECL implementation, our allowance for credit losses increased to 1.09% due to the change in methodology. This adds a deeper level of coverage for any losses we may experience. The Bank has raised in-house mortgage rates while continuing to offer secondary market options to moderate loan funding. Mortgage demand has remained surprisingly strong due primarily to relatively low inventory levels. We are monitoring housing supply and demand, primarily in our Mineola and Lindale markets where home sales and new home construction has been active, for indicators of a significant change in the local housing markets.

We are currently utilizing listed CDs (Qwickrate) with terms of 1-3 months with full FDIC insurance in order to keep funds liquid while also earning a higher return than holding balances in fed funds. We are not currently utilizing the Bank Term Funding Program.

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

●

FHLB borrowing capacity of $87.8 million

●

$15 million in credit lines with 2 correspondent banks

●

Federal Reserve discount window

●

Qwickrate CD Program

●

Brokered deposits

●

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

●

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

●

The ability to sell some of our BOLI assets

At March 31, 2023, Mineola Community Bank exceeded all of its regulatory capital requirements, and was categorized as well-capitalized at that date. Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category.

Management of Market Risk

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

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manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Risk Management and Interest Rate Risk Management Officer is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling program, prepared on a 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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We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:

●

maintaining capital levels that exceed the thresholds for well-capitalized status under federal regulations;

●

maintaining a high level of liquidity;

●

growing our volume of core deposit accounts;

●

managing our investment securities portfolio so as to reduce the average maturity and effective life of the portfolio;

●

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

●

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

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

We have not engaged in hedging activities, such as engaging in futures or options. We do not anticipate entering into similar transactions in the future.

Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by ~~200 and~~ 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

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


At September 30, 2022
At March 31, 2023						At March 31, 2023
Change in Interest Rates		Net Interest Income Year		Year 1 Change from			Net Interest Income Year		Year 1 Change from
(basis points) ⁽¹⁾		1 Forecast		Level			1 Forecast		Level
(Dollars in thousands)	(Dollars in thousands)					(Dollars in thousands)
400		$	11,395	(6.82)	%		$	14,319	4.57	%
300			11,667	(4.60)	%			14,214	3.80	%
200			11,971	(2.11)	%			14,148	3.32	%
100			12,157	(0.59)	%			13,954	1.91	%
Level			12,229	—				13,693	—
(100)			12,193	(0.29)	%			13,243	(3.28)	%
(200)			12,001	(1.86)	%			12,637	(7.71)	%
(300)			11,579	(5.31)	%			12,059	(11.94)	%
(400)								11,676	(14.73)	%

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

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The table above indicates that at ~~September 30, 2022,~~March 31, 2023, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a ~~2.11% decrease~~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 ~~1.86%~~7.71% decrease in net interest income. ~~The net interest income decreases in both interest rate scenarios due to the assets and liabilities repricing at different speeds in a rates up and rates down environment.~~

Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (net economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

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


At September 30, 2022
At March 31, 2023											At March 31, 2023
								EVE as a Percentage of										EVE as a Percentage of
								Present Value of Assets ⁽³⁾										Present Value of Assets ⁽³⁾
				Estimated Increase						Increase				Estimated Increase						Increase
Change in Interest		Estimated		(Decrease) in EVE						(Decrease)		Estimated		(Decrease) in EVE						(Decrease)
Rates (basis points) ⁽¹⁾		EVE ⁽²⁾		Amount		Percent		EVE Ratio ⁽⁴⁾		(basis points)		EVE ⁽²⁾		Amount		Percent		EVE Ratio ⁽⁴⁾		(basis points)
(Dollars in thousands)	(Dollars in thousands)										(Dollars in thousands)
400		$	66,485	$	(12,783)	(16.13)	%	19.79	%	(114)		$	50,652	$	(10,364)	(16.99)	%	14.29	%	(89)
300			70,214		(9,054)	(11.42)	%	20.26	%	(67)			53,550		(7,466)	(12.24)	%	14.63	%	(55)
200			73,840		(5,428)	(6.85)	%	20.65	%	(28)			56,374		(4,642)	(7.61)	%	14.92	%	(26)
100			76,960		(2,308)	(2.91)	%	20.90	%	(3)			58,922		(2,094)	(3.43)	%	15.11	%	(7)
Level			79,268		—	—	%	20.93	%	—			61,016		—	—	%	15.18	%	—
(100)			79,875		607	0.77	%	20.55	%	(38)			60,732		(284)	(0.47)	%	14.69	%	(49)
(200)			79,292		24	0.03	%	19.92	%	(101)			59,637		(1,379)	(2.26)	%	14.04	%	(114)
(300)			76,933		(2,335)	(2.95)	%	18.91	%	(202)			57,646		(3,370)	(5.52)	%	13.24	%	(194)
(400)													56,525		(4,491)	(7.36)	%	12.68	%	(250)

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

(2)	EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

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

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Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, mortgage servicing rights, deposits and borrowings.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Management of Market Risk” in Item 2 above.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of ~~September 30, 2022.~~March 31, 2023. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 2022.~~March 31, 2023.

During the quarter ended ~~September 30, 2022,~~March 31, 2023, there were no changes in the Company’s internal controls over financial reporting that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At ~~September 30, 2022,~~March 31, 2023, we were not involved in any legal proceedings the outcome of which we believe would be material to our consolidated financial condition or results of operations.

Item 1A. Risk Factors

~~In addition to~~Not applicable, as the ~~other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under the heading “Risk Factors” contained in the Prospectus. The~~ Company ~~believes that the risk factors applicable to it have not changed materially from those disclosed in the Prospectus.~~is a “smaller reporting company.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


Exhibit
Number		Description

3.1		Articles of Incorporation of Texas Community Bancshares, Inc. ⁽¹⁾

3.2		Amended and Restated Bylaws of Texas Community Bancshares, Inc. ⁽²⁾

~~10.1~~		~~Texas Community Bancshares, Inc. 2022 Equity Incentive Plan~~⁽³⁾

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following materials for the quarter ended ~~September 30, 2022,~~March 31, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss) ~~Income,~~, (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

(1)	Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (Commission File No. 333-254053), as filed on March 9, 2021.

(2)	Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (Commission File No. 001-40610), as filed on January 26, ~~2022.~~

~~(3)~~

~~Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement (Commission File No. 001-40610) as filed on July 20,~~ 2022.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		TEXAS COMMUNITY BANCSHARES, INC.


Date: ~~November 14, 2022~~May 15,2023		/s/ James H Herlocker, III
		James H. Herlocker, III
		Chairman, President and Chief Executive Officer


Date: ~~November 14, 2022~~May 15, 2023		/s/ Julie Sharff
		Julie Sharff, CPA
		Chief Financial Officer


	September 30, 2021
							Consumer
	Real Estate		Agriculture		Commercial		and Other		Total
Allowance for loan and lease losses:
Three-months ended
Beginning balance, July 1, 2021	$	1,170	$	—	$	362	$	52	$	1,584
Charge-offs		—		—		—		(9)		(9)
Recoveries		—		—		—		3		3
Provision (credit)		8		2		(7)		11		14
Ending balance, September 30, 2021	$	1,178	$	2	$	355	$	57	$	1,592

Nine-months ended
Balance, January 1, 2021	$	1,171	$	2	$	355	$	33	$	1,561
Charge-offs		—		—		—		(30)		(30)
Recoveries		—		—		—		17		17
Provision (credit)		7		—		—		37		44
Balance, September 30, 2021	$	1,178	$	2	$	355	$	57	$	1,592

	December 31, 2021
							Consumer
Allowance for loan and lease losses:	Real Estate		Agriculture		Commercial		and Other		Total
Balance, December 31, 2021 allocated to loans and leases individually evaluated for impairment	$	8	$	—	$	300	$	—	$	308
Balance, December 31, 2021 allocated to loans and leases collectively evaluated for impairment	$	1,170	$	1	$	57	$	56	$	1,284
Loans and leases receivable:
Balance, December 31, 2021 loans and leases individually evaluated for impairment	$	2,437	$	—	$	474	$	33	$	2,944
Balance, December 31, 2021 loans and leases collectively evaluated for impairment		207,509		234		5,667		5,505		218,915
Balance, December 31, 2021	$	209,946	$	234	$	6,141	$	5,538	$	221,859


	September 30, 2022						December 31, 2021
			Non-						Non-
	Performing		performing		Total		Performing		performing		Total
Real estate
Construction and land	$	26,114	$	—	$	26,114	$	17,650	$	—	$	17,650
Farmland		7,292		165		7,457		6,250		192		6,442
1‑4 residential & multi-family		161,340		559		161,899		153,400		768		154,168
Commercial real estate		33,633		110		33,743		31,563		123		31,686
Agriculture		190		—		190		234		—		234
Commercial		6,643		424		7,067		5,667		474		6,141
Consumer and other		5,400		—		5,400		5,505		33		5,538
Total	$	240,612	$	1,258	$	241,870	$	220,269	$	1,590	$	221,859


				Weighted-Average
		Weighted-Average		Remaining
Options	Options	Exercise Price		Contractual Term
Outstanding at December 31, 2021	-	$	-	-
Granted	97,728		16.00	4.9
Exercised	-		-	-
Forfeited or expired	-		-	-
Outstanding at September 30, 2022	97,728	$	16.00	4.9
	.
Exercisable at September 30, 2022	-	$	-	-


		Weighted-Average
		Grant Date
Non-Vested Options	Options	Fair Value
Non-vested at December 31, 2021	-	$	-
Granted	97,728		6.50
Vested	-		-
Exercised	-		-
Forfeited	-		-
Non-vested at September 30, 2022	97,728	$	6.50


		Weighted-Average
		Grant Date
Non-Vested Shares	Shares	Fair Value
Non-vested at December 31, 2021	-	$	-
Granted	39,084		16.00
Vested	-		-
Exercised	-		-
Forfeited	-		-
Non-vested at September 30, 2022	39,084	$	16.00