This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
Overview
Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the Federal Home Loan Bank of Dallas, in residential real estate loans and commercial real estate loans and, to a lesser extent, commercial loans, construction and land loans, and consumer and other loans. Substantially all of our loans are fixed-rate loans. We also invest in securities, which have historically consisted primarily of mortgage-backed securities and obligations issued by U.S. government sponsored enterprises, state and municipal securities, and Federal Home Loan Bank stock. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. Mineola Community Bank is subject to comprehensive regulation and examination by the Texas Department of Savings and Mortgage Lending and the Federal Deposit Insurance Corporation and is a member of the Federal Home Loan Bank system.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan and lease losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts, other service charges and fees, and income from bank owned life insurance. Non-interest expense currently consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contract services, director fees, and other expenses.
We invest in bank owned life insurance to provide us with a funding source to offset some costs of our benefit plan obligations. Bank owned life insurance provides us with non-interest income that is nontaxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan and lease losses. At December 31, 2022, our investment in bank owned life insurance was $6.1 million, which was within this investment limit.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Our current business strategy consists of the following:
Continue to serve our community as a community bank. Since our founding in
? 1934, we have operated as a community bank. Historically, our primary lending
activity has been the origination of fixed-rate residential mortgage loans to
individuals in our market area funded primarily by deposits gathered from
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individuals and businesses in our market area. We expect that this will continue
to be the focus of our business for the foreseeable future. As part of our
customer focus, we generally do not sell the loans we originate but retain them
in our portfolio. When customers have questions regarding their loans, they are
able to deal directly with us rather than another institution. At December 31,
2022, one- to four-family residential mortgage loans totaled $162.8 million, or
64.3% of total loans. This amount includes one- to four-family residential
mortgage loans originated in the Dallas Metroplex. We have originated one- to
four-family residential mortgage loans secured primarily by owner-occupied
properties primarily located in the northern and eastern sections of the Dallas
Metroplex. We began originating these loans in 2014, and continue to do so
primarily through word-of-mouth referrals. At December 31, 2022, these loans
amounted to $61.8 million including $41.4 million of jumbo loans.
Grow and diversify our loan portfolio prudently. There has been an influx of
retirees and others from the Dallas metropolitan area into our market area. Our
more rural market area offers a lower-cost of living and many recreational
amenities, while being within easy reach of the cities of Dallas and Tyler and
the urban amenities they offer. We believe this movement away from major cities
like Dallas has been accelerated by the work-from-home trend that accelerated
due to the COVID-19 pandemic. In 2018, we opened our branch office in Lindale,
Texas, and acquired our branch office in Edgewood, Texas, from another bank.
? These offices are located in growth areas of our market area because of their
closer proximity to Tyler and Dallas, respectively. The influx of population
into our market area has provided opportunities for residential mortgage
lending, construction and land lending, and commercial real estate lending.
Although we intend to continue our historical focus on the origination of
residential mortgage loans, we intend to prudently increase our commercial real
estate lending and construction and land lending so as to continue to diversify
our loan portfolio. At December 31, 2022, commercial real estate loans amounted
to $33.7 million, or 13.3% of total loans, and construction and land loans
amounted to $36.3 million, or 14.3% of total loans.
Our commercial real estate loans and construction and land loans have higher credit risk than our residential mortgage loans.
Continue to grow core deposits. We consider our core deposits to include
statement savings accounts, money market accounts, negotiable orders of
withdrawal (NOW) accounts, other savings deposits and checking accounts. We
? will continue our efforts to increase our core deposits to provide a stable
source of funds to support loan growth at costs consistent with improving our
interest rate spread and net interest margin. Core deposits totaled $206.7
million, or 69.8% of total deposits, as of December 31, 2022, compared to
$159.4 million, or 58.0% of total deposits, as of December 31, 2021.
Continue to manage credit risk to maintain a low level of non-performing
assets. Historically, we have been able to maintain a high level of asset
quality. We believe strong asset quality remains a key to our long-term
financial success. Our total non-performing assets to total assets ratio was
0.28% and 0.49% at December 31, 2022 and 2021, respectively. Our strategy for
? credit risk management continues to focus on having an experienced team of
credit professionals, well-defined policies and procedures, appropriate loan
underwriting criteria and active credit monitoring. Furthermore, given the
uncertainty surrounding the length and severity of the COVID-19 pandemic,
management has established and will continue to use enhanced underwriting
criteria for all loan types, with a particular focus on portfolio segments
identified as having elevated risk.
Continue to support our customers and our local community. The COVID-19
pandemic has restricted the level of economic activity in our markets,
resulting in dramatically increased unemployment and significant negative
impacts on many businesses, thereby threatening the repayment ability of some
of our borrowers. As we have done during prior economic downturns, we are
? taking actions to support our customers and our local community. For example,
during the year ended December 31, 2020, we originated $5.4 million of small
business loans under the Small Business Administration's ("SBA") Paycheck
Protection Program ("PPP"), created by the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act") that was signed into law in March 2020.
Under the PPP, loan amounts were forgiven if the
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borrower maintains employee payrolls and meets certain other requirements. As of
December 31, 2022, only two small PPP loans totaling $2,000 were outstanding.
The remaining PPP loans have been forgiven or paid. During the year ended
December 31, 2020, we also granted short-term payment deferrals on loans to
assist customers during the COVID-19 pandemic. There were no COVID-19 related
deferrals granted in the years ended December 31, 2021 or 2022.
Grow organically and through opportunistic acquisitions or branching. We intend
to grow our assets organically on a managed basis, and the capital we raised in
the offering will enable us to increase our lending and investment capacity. In
addition to organic growth, we may also consider expansion opportunities in our
market area or in contiguous markets that we believe would enhance both our
? franchise value and stockholder returns. These opportunities may include
acquiring other financial institutions and/or establishing loan production
offices, establishing new, or de novo, branch offices and/or acquiring branch
offices, and the capital we raised in the offering will help us fund any such
opportunities that may arise. We have no current plans or intentions regarding
any such expansion activities.
Summary of Critical Accounting Policies and Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. GAAP. 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 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. We 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 Losses. The allowance for loan and lease losses is a reserve for estimated probable credit losses on individually evaluated loans determined to be impaired as well as estimated probable credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan and lease losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan and lease losses. A provision for loan and lease losses, which is a charge against earnings, is recorded to bring the allowance for loan and lease losses to a level that, in management's judgment, is adequate to absorb probable losses in the loan portfolio. Management's evaluation process used to determine the appropriateness of the allowance for loan and lease losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan and lease losses and therefore the appropriateness of the allowance for loan and lease losses could change significantly.
The allocation methodology applied by Mineola Community Bank is designed to assess the appropriateness of the allowance for loan and lease losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and
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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 December 31, 2022. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for loan and lease losses. As a result of such reviews, we may have to adjust our allowance for loan and lease losses. However, regulatory agencies are not directly involved in the process of establishing the allowance for loan and lease losses as the process is the responsibility of Mineola Community Bank and any increase or decrease in the allowance is the responsibility of management.
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.
Texas Community Bancshares files consolidated federal income tax returns with Mineola Community Bank. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. 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.
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