Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding
Texas Community Bancshares, Inc.'s("the Company") consolidated financial condition at March 31, 2022and consolidated results of operations for the three months ended March 31, 2022and 2021. 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.
Caution 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 objectives, intentions and expectations;
? statements regarding our business plans, prospects, growth and
? 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 related to the COVID-19 pandemic, including the severity, scope and
? duration of the associated economic downturn either nationally or in our market
areas, which are worse than expected;
? government action in response to the COVID-19 pandemic and its effects on our
business and operations;
? general economic conditions, whether nationally or in our market areas, which are
worse than expected;
? variations in the returns on our assets resulting from changes in market interest
? fluctuations in demand for construction loans in our market area due to
increased cost of construction materials and their availability;
changes in the level and direction of defaults and write-offs and
? changes in loan and lease allowance adequacy estimates
estimated costs and provisions related to the implementation of the
? The Current Expected Credit Loss (CECL) methodology, the new standard
estimate the provision for losses on loans and leases, greater than
? risks related to a high concentration of loans secured by real estate located in our market area; 29 Table of Contents
? our ability to control costs when hiring employees in a highly competitive environment
? our ability to control costs and expenses, in particular those related to
operation of a listed company;
? our ability to access cost-effective financing;
? fluctuations in real estate values and residential and commercial real estate
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 institutions and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins
and yields, our mortgage banking income, the fair value of
? 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 are granting;
? adverse changes in the securities or sub-mortgage markets;
changes in laws or government regulations or policies affecting
? institutions, including changes in regulatory fees, capital requirements and
? changes in the quality or composition of our loan or investment portfolios;
? technological changes that may be more difficult or costly than expected;
? the inability of third-party vendors to operate as intended;
? a failure or breach of our operational or security systems or infrastructure,
including cyber attacks;
? our ability to manage market risk, credit risk and operational risk;
? our ability to successfully enter new markets and capitalize on growth
? changes in consumer spending, borrowing and saving habits;
changes in accounting policies and practices, as they may be adopted by the bank
? regulatory bodies,
changes to our compensation and benefit plans, and our ability to retain
? members of our senior management team and to meet staffing needs in response
at the request of the product or the implementation of the strategic plan
? changes in financial condition, results of operations or future prospects
issuers of securities held by us.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. 30
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 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 may 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 significant accounting policies:
Allowance for Loan and Lease Losses. The allowance for loan and lease losses is a reserve for estimated probable credit losses on individually evaluated loans determined to be impaired as well as estimated probable credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan and lease losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan and lease losses. A provision for loan and lease losses, which is a charge against earnings, is recorded to bring the allowance for loan and lease losses to a level that, in management's judgment, is adequate to absorb probable losses in the loan portfolio. Management's evaluation process used to determine the appropriateness of the allowance for loan and lease losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan and lease losses and therefore the appropriateness of the allowance for loan and lease losses could change significantly. The allocation methodology applied by the Company is designed to assess the appropriateness of the allowance for loan and lease losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the allowance for loan and lease losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for loan and lease losses was adequate at
March 31, 2022and December 31, 2021. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for loan and lease losses. As a result of such reviews, we may have to adjust our allowance for loan and lease losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan and lease losses as the process is the responsibility of the Company and any increase or decrease in the allowance is the responsibility of management. 31 Table of Contents
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 the financial situation at
Total Assets. Total assets were
$369.0 millionat March 31, 2022, an increase of $4.2 million, or 1.2%, from $364.8 millionat December 31, 2021. The increase was due primarily to increases in net loans of $4.3 million, or 2.0%, from $220.3 millionat December 31, 2021to $224.6 millionat March 31, 2022. Cash and Cash Equivalents. Cash and cash equivalents increased $3.7 million, or 16.9%, to $25.6 million(which includes fed funds sold of $19.7 million) at March 31, 2022from $21.9 million(which includes fed funds sold of $16.3 million) at December 31, 2021. This increase is primarily due to an increase in deposits of $6.8 million, partially offset by loan funding.
Interest-bearing deposits in banks. Interest-bearing deposits in banks were
Securities Available for Sale. Securities available for sale increased by
$7.2 million, or 12.7%, to $64.0 millionat March 31, 2022from $56.8 millionat December 31, 2021. The increase in securities for the quarter included the investment of $11.5 millionin available for sale securities, including purchases of $6.0 millionin U.S. Governmentdebt securities, $3.3 millionin municipals, and $2.2 millionin corporate bonds, partially reduced by paydowns of $1.1 million, and unrealized losses on the available for sale portfolio of $3.2 milliondue primarily to the increase in market interest rates during the period.
Securities held to maturity. Held-to-maturity securities decreased by
Loans and Leases Receivable, Net. Loans and leases receivable, net, increased
$4.3 million, or 2.0%, to $224.6 millionat March 31, 2022from $220.3 millionat December 31, 2021. Loans secured by residential real estate and farmland comprise $161.7, or 71.5% of the net loans at March 31, 2022. During the three months ended March 31, 2022, loan originations totaled $31.0 millionof which $3.9 millionwere renewals or refinancings of existing loans with Mineola Community Bank, resulting in originations of new loans of $27.1 million. Originations consisted primarily of $11.4 millionin one- to-four family residential mortgage loans, $11.8 millionof residential construction loans (upon completion), including speculative construction loans of $4.9 million, $4.2 millionin commercial real estate loans, $964,000in consumer loans, $1.6 millionin commercial and industrial loans, $676,000in land & development
loans, 32 Table of Contents and
$406,000in farmland loans. During the three months ended March 31, 2022, there were $3.4 millionin loan principal paydowns and $16.4 millionin loan payoffs. PPP loans have paid down to 3 loans totaling $9,000at March 31, 2022. During the three months ended March 31, 2022, construction loans in process increased by $6.1 millionto $29.4 millionat March 31, 2022from $23.3 millionat December 31, 2021. Construction loans continue to be a large segment of our portfolio which is a reflection of the strong housing demand in our primary market area. Deposits. Deposits increased $6.8 million, or 2.5%, to $281.7 millionat March 31, 2022from $274.9 millionat December 31, 2021. Core deposits (defined as all deposits other than certificates of deposit) increased $8.5 million, or 4.2%, to $210.9 millionat March 31, 2022from $202.4 millionat December 31, 2021. Certificates of deposit decreased $1.9 million, or 2.6%, to $70.7 millionat March 31, 2022from $72.6 millionat December 31, 2021. At March 31, 2022, there were no brokered deposits. Advances from Federal Home Loan Bank. Advances from Federal Home Loan Bankdecreased by $518,000or 1.9%, to $27.1 millionat March 31, 2022from $27.6 millionat December 31, 2021due to scheduled monthly payments of principal on amortizing advances. Total Shareholders' Equity. Total shareholders' equity decreased $2.0 million, or 3.3%, to $58.1 millionat March 31, 2022from $60.1 millionat December 31, 2021. This decrease was primarily due to a $2.5 million, or 364.1%, 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 March 31, 2022, this unrealized loss was $3.2 million, compared to $686,000at December 31, 2021, partially offset by net income of $391,000for the three months ended March 31, 2022. An additional $51,000was added to shareholders' equity with the commitment to release 3,258 additional ESOP shares to participants. At March 31, 2022, Mineola Community Bankopted to use the community bank leverage ratio framework (Tier 1 capital to average assets) for regulatory capital purposes, as permitted by the CARES Act. At March 31, 2022, a community bank leverage ratio of at least 9.0% is required to be considered "well capitalized" under regulatory requirements. At March 31, 2022, Mineola Community Bankwas well capitalized and had a ratio of 12.84% 33 Table of Contents Average Balance Sheets
The following table sets forth average consolidated statements of financial condition, 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
$112,000and $134,000for the three months ended March 31, 2022and 2021, respectively. No PPP loans were originated during the three months ended March 31, 2022or 2021. We have not recorded deferred loan fees, as we have determined them to be immaterial. For the
Three months completed
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)
$ 223,898 $ 2,374
(1,593) (1,562) PPP loans 11 - - % 1,367 4 1.17 % Securities 94,207 373 1.58 % 47,761 178 1.48 % Restricted stock 2,037 5 0.98 % 2,023 4 0.79 %
Interest-bearing deposits in banks 8,630 6
0.28 % 21,601 20 0.37 % Federal funds sold 18,617 9 0.19 % 3,258 - 0.12 % Total interest-earning assets 345,807 2,767 3.20 % 286,562 2,603 3.63 % Noninterest-earning assets 20,965 20,976 Total assets
$ 366,772 $ 307,538Interest-bearing liabilities:
Interest-bearing demand deposits
$ 74,14361 0.33 % $ 62,05554 0.35 % Regular savings and other deposits 79,151 71
0.36 % 63,376 60 0.38 % Money market deposits 11,403 8 0.28 % 9,850 11 0.45 % Certificates of deposit 71,665 171 0.95 % 75,771 276 1.46 %
Total interest-bearing deposits 236,362 311
0.53 % 211,052 401 0.76 % Advances from FHLB 27,236 144 2.11 % 30,407 160 2.10 % Other liabilities 459 3 2.35 % 412 3 2.91 %
Total interest-bearing liabilities 264,057 458 0.69 % 241,871 564 0.93 % Noninterest-bearing demand deposits 53,276 30,939 Other noninterest-bearing liabilities 3,205 2,620 Total liabilities 320,538 275,430 Total shareholders' and members' equity 46,234 32,108 Total liabilities and shareholders' and members' equity
$ 366,772 $ 307,538Net interest income $ 2,309 $ 2,039Net interest rate spread (1) 2.51 % 2.70 %
Net interest-earning assets (2)
$ 81,750 $ 44,691Net interest margin (3) 2.67 % 2.85 % Average interest-earning assets to interest-bearing liabilities 130.96 % 118.48 %
The net interest rate spread represents the difference between the weighted average yield (1) of interest-bearing assets and the weighted average rate of
(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. 34 Table of Contents
Comparison of operating results for the three months ended
Net Income. Net income was
$391,000for the three months ended March 31, 2022, compared to net income of $242,000for the three months ended March 31, 2021, an increase of $149,000, or 61.6%. The increase was primarily due to a $270,000increase in net interest income and a $70,000increase in noninterest income, partially offset by a $115,000increase in noninterest expense, a $38,000increase in the provision for loan and lease losses and an increase in income tax expense of $38,000. Interest Income. Interest income increased at $164,000, or 6.3%, for the three months ended March 31, 2022. This was primarily the result of increased interest income on securities and fed funds due primarily to the investment of proceeds from the Conversion, but was offset by a decrease in loan interest income of $23,000due to decreased loan yield. Interest income on loans was $2.4 millionfor the three months ended March 31, 2022and 2021. Loan interest income remained flat with an $11.8 million, or 5.6%, increase in average loans from $212.1 millionat March 31, 2021to $223.9 millionat March 31, 2022being offset by a 28 basis point, or 6.2%, decrease in loan yield to 4.24% for the three months ended March 31, 2022from 4.52% for the three months ended March 31, 2021. Interest income on securities increased $195,000, or 109.6%, from $178,000for the three months ended March 31, 2021to $373,000for the three months ended March 31, 2022. This increase resulted from an increase of 10 basis points, or 6.8%, in yield from 1.48% for the three months ended March 31, 2021to 1.58% for the three months ended March 31, 2022and an increase in average securities of $46.4 million, or 97.1 %, from $47.8 millionfor the three months ended March 31, 2021to $94.2 millionfor the three months ended March 31, 2022. The rate increase is reflective of the beginning of market rate increases and the diversification of our securities portfolio as we continue to invest Conversion proceeds into higher yielding investments. Interest income from interest bearing deposits in banks declined $14,000, or 70.0%, from $20,000for the three months ended March 31, 2021to $6,000for the three months ended March 31, 2022. This decline resulted from a decrease of nine basis points, or 24.9%, in average yield from 0.37% for the three months ended March 31, 2021to 0.28% for the three months ended March 31, 2022, combined with a $13.0 million, or 60%, decrease in average deposits in banks from $21.6 millionfor the three months ended March 31, 2021to $8.6 millionfor the three months ended March 31, 2022. There was also an increase of $9,000in fed funds interest for the three months ended March 31, 2022primarily from an increase of seven basis points, or 57.5%, in average yield on fed funds from 0.12% for the three months ended March 31, 2021to 0.19% for the three months ended March 31, 2022, and a $15.3 million, or 463.6%, increase in average fed funds from $3.3 millionfor the three months ended March 31, 2021to $18.6 millionfor the three months ended March 31, 2022. This increase is reflective of the increase in the fed funds market rate. Average interest earning assets increased by $59.2 million, or 20.7%, from $286.6 millionat March 31, 2021to $345.8 millionat March 31, 2022, which was offset by a decrease in the yield on interest earning assets of 43 basis points, or 11.9%, from 3.63% on March 31, 2021to 3.20% on March 31, 2022. Interest Expense. Total interest expense decreased $106,000, or 18.8%, to $458,000for the three months ended March 31, 2022from $564,000for the three months ended March 31, 2021due to a decrease in the average cost of interest-bearing liabilities of 24 basis points, or 25.6 %, from 0.93% for the three months ended March 31, 2021to 0.69% for the three months ended March 31, 2022, primarily due to a decrease in deposit costs. Interest expense on deposit accounts decreased $90,000, or 22.4%, to $311,000for three months ended March 31, 2022from $401,000for the three months ended March 31, 2021, due to a decrease in the average deposit cost of 23 basis points, or 30.7%, from 0.76% for the three months ended March 31, 2021to 0.53% for the three months ended March 31, 2022, primarily the result of an overall decrease in market interest rates. This was partially offset by an increase of $25.3 million, or 12.0%, in the average deposit account balances from $211.1 millionfor the three months ended March 31, 2021to $236.4 millionfor the three months ended March 31, 2022, with the increase being in lower cost interest-bearing transaction accounts.
Interest expense on
primarily to the decrease in the average balance of
Federal Home Loan Bankadvances of $3.2 million, or 10.4%, to $27.2 millionfor the three months ended March 31, 2022from $30.4 millionfor the three months ended March 31, 2021. The average rate was flat at 2.11% for the three months ended March 31, 2022and 2.10% for the three months ended March 31, 2021. Net Interest Income. Net interest income increased $270,000, or 13.2%, to $2.3 millionfor the three months ended March 31, 2022from $2.0 millionfor the three months ended March 31, 2021primarily due to a decrease in the average cost of funds of 24 basis points, or 25.6%, from 0.93% for the three months ended March 31, 2021to 0.69% for the three months ended March 31, 2022combined with an increase in the average balance of net interest-earning assets from $44.7 millionfor the three months ended March 31, 2021to $81.7 millionfor the three months ended March 31, 2022, which offset a 19 basis point, or 7.2%, decrease in the net interest rate spread from 2.70% for the three months ended March 31, 2021to 2.51% for the three months ended March 31, 2022. Net interest margin decreased 18 basis points, or 6.2%, to 2.67% for the three months ended March 31, 2022from 2.85% for the three months ended March 31, 2021. Provision for Loan and Lease Losses. Based on management's analysis of the adequacy of the allowance for loan and lease losses, the provision for loan and lease losses was $40,000for the three months ended March 31, 2022, compared to $2,000for the three months ended March 31, 2021, an increase of $38,000, primarily due to an increase in loan volume. Noninterest Income. Noninterest income decreased $70,000, or 18.3%, to $453,000for the three months ended March 31, 2022from $383,000for the three months ended March 31, 2021, due primarily to an increase of $68,000, or 19.3%, in service charges and fees from $353,000for the three months ended March 31, 2021to $421,000for the three months ended March 31, 2022. The increase is partially due to an increase in the number of deposit accounts combined with increased ATM use. Noninterest Expense. Noninterest expense increased $115,000, or 5.4%, to $2.2 millionfor the three months ended March 31, 2022from $2.1 millionfor the three months ended March 31, 2021primarily due to increases in salaries and employee benefits, director fees and other expenses partially offset by decreases in contract services and data processing. Salary and employee benefit expenses increased by $132,000, or 10.7%, to $1.4 millionfor the three months ended March 31, 2022from $1.2 millionfor the three months ended March 31, 2021, due to normal salary increases and an increase in health insurance cost, as well as the additional $51,000expense for the quarter for the ESOP plan that was not in existence in 2021. Directors' fees also increased $21,000, or 28.0%, to $96,000for the three months ended March 31, 2022from $75,000for the three months ended March 31, 2021due to the addition of four new directors and two new advisory directors. These increases were partially offset by decreases in data processing, contract services and other expenses. These expenses were higher in the three months ended March 31, 2021due partially to additional expenses related to the Conversion. Income Tax Expense. Income tax expense increased by $38,000, or 76.0%, to $88,000for the three months ended March 31, 2022from $50,000for the three months ended March 31, 2021, primarily due to higher income before taxes. The effective tax rate was 18.4% and 17.1% for the three months ended March 31, 2022and 2021, respectively.
Cash and capital resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business.
Federal Reserve Bank of Bostonprovides the Company 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 March 31, 2022, we had outstanding advances of $27.1 millionfrom the Federal Home Loan Bank of Dallas. At March 31, 2022, we had unused borrowing capacity of $106.3 millionwith the Federal Home Loan Bank
Dallas. In addition, 36 Table of Contents at March 31, 2022, we had a $10.0 millionline of credit with Texas Independent Bankers Bankand a $5.0 millionline of credit with First Horizon Bank. At March 31, 2022, there was no outstanding balance under either 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 three months ended March 31, 2022and 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 Bankmay declare and pay to Texas Community Bancshares, Inc.is governed by applicable banking laws and regulations. At March 31, 2022, Texas Community Bancshares, Inc.(on a stand-alone, unconsolidated basis) had liquid assets of $13.4 million. At March 31, 2022, Mineola Community Bankexceeded 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.
Market risk management
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 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.
We have sought to manage our interest rate risk 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:
? maintain capital levels above the thresholds of well-capitalized companies
status under federal regulations;
? maintain a high level of liquidity;
? increase our base deposit account volume;
37 Table of Contents
? manage our portfolio of marketable securities so as to reduce the
maturity and effective life of the portfolio;
the management of our borrowings from the
? amortize advances so as to reduce average loan maturities;
? continue to diversify our loan portfolio by adding more
loans, which generally have shorter maturities and/or lump sum payments.
By following these strategies, we believe we are in a better position to react to rising and falling market interest rates.
We did not engage in hedging activities, such as futures or options. We do not expect to enter 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 Treasuryyield 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.
The tables below show the calculation of the estimated changes in our monthly net interest income that would result from designated immediate changes in
At March 31, 2022 Change in Interest Rates Net Interest Income Year Year 1 Change from
(basis points) (1) 1 Forecast Level (Dollars in thousands) 400 $ 7,800 (11.96) % 300 8,120 (8.34) % 200 8,441 (4.72) % 100 8,690 (1.91) % Level 8,859 - (100) 9,031 1.94 % (200) 8,983 1.39 %
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that at
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. 38 Table of Contents
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 Treasuryyield curve. At March 31, 2022 EVE as a Percentage of Present Value of Assets (3) Estimated Increase Increase Change in Interest Estimated (Decrease) in EVE (Decrease)
Rate (basis points) (1) EVE (2) Amount Percentage EVE Ratio (4) (basis points)
(Dollars in thousands) 400
$ 56,665 $ (11,313)(16.64) % 17.58 % (88) 300 60,249 (7,729) (11.37) % 18.04 % (42) 200 63,870 (4,108) (6.04) % 18.45 % (1) 100 66,756 (1,222) (1.80) % 18.65 % 19 Level 67,978 - - % 18.46 % - (100) 69,311 1,333 1.96 % 18.21 % (25) (200) 68,036 58 0.09 % 17.43 % (103)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of the expected cash flows of the assets,
off-balance sheet liabilities and contracts.
(3) The present value of assets represents the present value of inflows
cash flow on interest-earning assets.
(4) EVE Ratio represents EVE divided by the current value of assets.
The table above indicates that at
March 31, 2022, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 6.04% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.09% increase in EVE. 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 may also not reflect the fair values of financial instruments. For example, a decline in market interest rates may increase the fair value of our loans, mortgage servicing rights, deposits and borrowings.
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