S-1 1 tm218465d1_s1.htm FORM S-1

 

As filed with the Securities and Exchange Commission on March 9, 2021

 

Registration No. 333-________

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

Texas Community Bancshares, Inc.

Mineola Community Bank 401(k) Profit Sharing Plan

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 6036 Applied for
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)

 

215 West Broad Street

Mineola, Texas 75773

(903) 569-2602

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

James H. Herlocker, III

Chairman, President and Chief Executive Officer

Texas Community Bancshares, Inc.

215 West Broad Street

Mineola, Texas 75773

(903) 569-2602

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

Kip A. Weissman, Esq.

Victor L. Cangelosi, Esq.

Luse Gorman, PC

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2028

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x

 

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

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 x Smaller reporting company x Emerging growth company x

 

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 7(a)(2)(B) of the Securities Act: ¨

 

CALCULATION OF REGISTRATION FEE 

Title of Each Class of Securities to be Registered  Amount to be
Registered
  Proposed Maximum
Offering Price Per
Share
   Proposed Maximum
Aggregate Offering Price
   Amount of
Registration Fee
 
Common Stock, $0.01 par value per share  4,811,000 shares  $10.00    $48,110,000(1)   $5,249(2) 
Participation Interests  60,109 interests(2)             
(1)Estimated solely for the purpose of calculating the registration fee.
(2)The securities to be purchased by the Mineola Community Bank 401(k) Profit Sharing Plan and Trust are included in the amount shown for the common stock. Accordingly, no separate fee is required for the participation interests.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

PROSPECTUS

Texas Community Bancshares, Inc.

(Proposed Holding Company for Mineola Community Bank, S.S.B.)

Up to 4,140,000 Shares of Common Stock

(Subject to Increase to up to 4,761,000 Shares)

 

Texas Community Bancshares, Inc., which we refer to as “Texas Community Bancshares” throughout this prospectus, is offering for sale, on a best efforts basis, shares of its common stock in connection with the conversion of Mineola Community Mutual Holding Company, which we refer to as “Mineola Community MHC” throughout this prospectus, from the mutual holding company to the stock holding company form of organization. The shares we are offering represent the 100% ownership interest in Mineola Community Financial Group, Inc., which we refer to as “Mineola Community Financial Group” throughout this prospectus, owned by Mineola Community MHC. Mineola Community Financial Group is the sole stockholder of Mineola Community Bank, S.S.B., which we refer to as “Mineola Community Bank” throughout this prospectus. We expect to list the shares of Texas Community Bancshares common stock on the Nasdaq Capital Market under the symbol “TCBS.” We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

 

The shares of common stock are first being offered for sale in a subscription offering to eligible depositors and borrowers of Mineola Community Bank and to tax-qualified employee benefit plans of Mineola Community Bank. Shares not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given to natural persons residing in Franklin, Hopkins, Smith, Van Zandt, and Wood counties in Texas. Any shares of common stock not purchased in the subscription or community offerings may be offered for sale to the public through a syndicate of broker-dealers, referred to in this prospectus as the syndicated community offering. The syndicated community offering, if held, may commence before the subscription and community offerings (including any extensions) have expired. However, no shares purchased in the subscription offering or the community offering will be issued until the completion of any syndicated community offering. We may sell up to 4,761,000 shares of common stock because of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 3,060,000 shares to complete the offering.

 

The minimum purchase order is 25 shares. Generally, no individual, or individuals acting through a single qualifying account held jointly, may purchase more than 25,000 shares ($250,000) of common stock, and no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than 50,000 shares ($500,000) of common stock in all categories of the offering combined.

 

The subscription offering will expire at 4:00 p.m., Central time, on __________, 2021. We expect that the community offering, if held, will expire at the same time. We may extend the expiration date of the subscription and/or community offerings without notice to you until ________, 2021, or longer if the Federal Reserve Board approves a later date. No single extension may exceed 90 days and the offering must be completed by _________, 2023. Once submitted, orders are irrevocable unless the subscription and/or community offerings are terminated or extended, with regulatory approval, beyond _________, 2021, or the number of shares of common stock to be sold is increased to more than 4,140,000 shares or decreased to less than 3,060,000 shares. If the subscription and community offerings are extended past ________, 2021, all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold in the offering is increased to more than 4,761,000 shares or decreased to less than 3,060,000 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest. Funds received in the subscription and the community offerings will be held in a segregated account at Mineola Community Bank and will earn interest at 0.10% per annum until completion or termination of the offering.

 

Performance Trust Capital Partners, LLC, which we refer to as “Performance Trust” throughout this prospectus, will assist us in selling the shares on a best efforts basis in the subscription offering and in any community offering, and will serve as sole manager for any syndicated community offering. Performance Trust is not required to purchase any shares of common stock that we are offering for sale.

 

OFFERING SUMMARY

Price: $10.00 per Share

 

   Minimum   Midpoint   Maximum   Adjusted Maximum
Number of shares    3,060,000    3,600,000    4,140,000    4,761,000
Gross offering proceeds   $30,600,000   $36,000,000   $41,400,000   $47,610,000
Estimated offering expenses, excluding selling agent fees and expenses (1)(2)   $1,122,000   $1,122,000   $1,122,000   $1,122,000
Selling agent fees and expenses (1)   $247,370   $297,050   $346,730   $403,860
Estimated net proceeds   $29,230,630   $34,580,950   $39,931,270   $46,084,140
Estimated net proceeds per share (1)   $9.55   $9.61   $9.65   $9.68

 

 

(1)See “The Conversion and Offering—Plan of Distribution; Selling Agent and Underwriter Compensation” for a discussion of Performance Trust’s compensation for this offering and the compensation to be received by Performance Trust and the other broker-dealers that may participate in any syndicated community offering.
(2)Excludes records agent fees and expenses payable to Performance Trust, which are included in estimated offering expenses. See “The Conversion and Offering—Stock Information Center Management.”

 

This investment involves a degree of risk, including the possible loss of principal.

See “Risk Factors” beginning on page 17.

 

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Texas Department of Savings and Mortgage Lending, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

  

PERFORMANCE TRUST

CAPITAL PARTNERS

For assistance, contact the Stock Information Center at (903) 369-1000.

The date of this prospectus is ___________, 2021.

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

Page

 

SUMMARY 2
RISK FACTORS 17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA 31
FORWARD-LOOKING STATEMENTS 33
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING 35
OUR DIVIDEND POLICY 36
MARKET FOR THE COMMON STOCK 37
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE 38
CAPITALIZATION 39
PRO FORMA DATA 41
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE CHARITABLE FOUNDATION 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 47
BUSINESS OF TEXAS COMMUNITY BANCSHARES 59
BUSINESS OF MINEOLA COMMUNITY BANK, S.S.B. 60
SUPERVISION AND REGULATION 74
TAXATION 84
MANAGEMENT 85
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS 95
THE CONVERSION AND OFFERING 96
TCBS FOUNDATION, INC. 118
RESTRICTIONS ON ACQUISITION OF TEXAS COMMUNITY BANCSHARES 120
DESCRIPTION OF CAPITAL STOCK OF TEXAS COMMUNITY BANCSHARES 126
TRANSFER AGENT 128
EXPERTS 128
CHANGE IN AUDITOR 128
LEGAL MATTERS 129
WHERE YOU CAN FIND ADDITIONAL INFORMATION 129
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF MINEOLA COMMUNITY MUTUAL HOLDING COMPANY 130

 

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SUMMARY

 

The following summary explains the significant aspects of the conversion of Mineola Community MHC to the stock holding company form of organization and the offering of shares of common stock of Texas Community Bancshares, which we refer to as the “conversion and offering” throughout this prospectus. It may not contain all of the information that is important to you. Before making an investment decision, you should read this entire document carefully, including the section entitled “Risk Factors” and the consolidated financial statements and the related notes appearing elsewhere in the prospectus.

 

Our Organizational Structure and the Proposed Conversion

 

Since 2008 we have operated in a two-tier mutual holding company structure, without any public stockholders. Mineola Community MHC, a Texas-chartered mutual holding company, is the sole stockholder of Mineola Community Financial Group, a Delaware corporation, and Mineola Community Financial Group is the sole stockholder of Mineola Community Bank, a Texas-chartered stock savings bank. At December 31, 2020, Mineola Community MHC had consolidated assets of $299.6 million, deposits of $235.1 million and members’ equity of $31.9 million.

 

Pursuant to the terms of the plan of conversion and reorganization, which we refer to as the “plan of conversion” throughout this prospectus, we are converting from the mutual holding company corporate structure to the public stock holding company corporate structure. Upon completion of the conversion and offering, Mineola Community MHC and Mineola Community Financial Group will cease to exist, Texas Community Bancshares will become the successor corporation to Mineola Community MHC and Mineola Community Financial Group, and Mineola Community Bank will become a wholly-owned subsidiary of Texas Community Bancshares. The conversion will be accomplished by the merger of Mineola Community MHC with and into Mineola Community Financial Group, followed by the merger of Mineola Community Financial Group with and into Texas Community Bancshares. The shares of Texas Community Bancshares common stock being offered for sale represent the 100% ownership interest in Mineola Community Financial Group currently owned by Mineola Community MHC. Upon completion of the conversion and offering, the shares of Mineola Community Financial Group common stock owned by Mineola Community MHC will be canceled.

 

The following diagram shows our current organizational structure:

 

 

 

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After the conversion and offering are completed, we will be organized as a fully public stock holding company, as follows:

 

 

 

Our Business

 

Following the conversion and offering, Texas Community Bancshares’ business activities will be conducted primarily through Mineola Community Bank. Mineola Community Bank’s 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 Mineola Community Bank’s 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.

 

Texas Community Bancshares is a newly formed Maryland corporation. Following the completion of the conversion and offering, Texas Community Bancshares will be the holding company for Mineola Community Bank and will be subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System, which we refer to as the “Federal Reserve Board” throughout this prospectus, and by the Texas Department of Savings and Mortgage Lending.

 

Our executive offices are located at 215 West Broad Street, Mineola, Texas 75773 and our telephone number is (903) 569-2602. Our website address is www.mineolacb.com. Information on our website is not considered a part of this prospectus.

 

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 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, 2020, one- to four-family residential mortgage loans totaled $143.5 million, or 66.8% of total loans. We have also 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, 2020, these loans amounted to $54.3 million.

 

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·Grow and diversify our loan portfolio prudently. There has been 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 has arisen 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, 2020, commercial real estate loans amounted to $29.4 million, or 13.7% of total loans, and construction and land loans amounted to $22.8 million, or 10.6% of total loans.

 

Our commercial real estate loans and construction and land loans have higher credit risk than our residential mortgage loans. See “Risk Factors—Risks Related to our Lending Activities—Our commercial real estate loans involve credit risks that could adversely affect our financial condition and results of operations” and “Risk Factors—Risks Related to our Lending Activities—Our construction and land loans involve credit risks that could adversely affect our financial condition and results of operations”

 

·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 $159.4 million, or 67.8% of total deposits, as of December 31, 2020, compared to $129.9 million, or 63.6% of total deposits, as of December 31, 2019.

 

·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 0.36% and 0.32% at December 31, 2020 and 2019, 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 $5.5 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 may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. During the year ended December 31, 2020, we also granted short-term payment deferrals on loans to assist customers during the COVID-19 pandemic, as described below.

 

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·Grow organically and through opportunistic acquisitions or branching. We intend to grow our balance sheet organically on a managed basis, and the capital we are raising 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 are raising in the offering would help us fund any such opportunities that may arise. We have no current plans or intentions regarding any such expansion activities.

 

Impact of COVID-19 Pandemic

 

The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, state governments, including Texas, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures have dramatically increased unemployment in the United States and have negatively impacted many businesses, and thereby threatening the repayment ability of some of our borrowers.

 

The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”). The CARES Act also established the PPP through the SBA, which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. In addition, the Federal Reserve Board took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero.

 

We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from TDR classification under accounting principles generally accepted in the United States (“U.S. GAAP”). In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs.

 

During the year ended December 31, 2020, we granted short-term payment deferrals on 44 mortgage loans and consumer loans, totaling approximately $7.2 million in aggregate principal amount, that were otherwise performing. As of December 31, 2020, 68 of these loans, totaling $4.1 million, have returned to normal payment status. Additionally, during the year ended December 31, 2020, we granted short-term payment and interest deferrals on one commercial real estate loan totaling $1.2 million. This loan is expected to return to normal payment status on April 1, 2021.

 

Given the unprecedented uncertainty and rapidly evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are highly uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will continue to have an adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services, protracted periods of lower interest rates, increased non-interest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.

 

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For additional information, see “Risk Factors—Risks Related to the COVID-19 Pandemic—The economic impact of the COVID-19 pandemic could adversely affect our financial condition and results of operations.”

 

Reasons for the Conversion and Offering

 

Our primary reasons for converting to the fully public stock form of ownership and undertaking the stock offering are to:

 

·Enhance our regulatory capital position to support growth and help mitigate interest rate risk. A strong capital position is essential to achieving our long-term growth objectives. Although Mineola Community Bank exceeds all regulatory capital requirements in order to be categorized as well-capitalized under regulatory guidelines, the proceeds from the offering will materially enhance and strengthen our capital position, will enable us to support our planned growth, and help to mitigate interest rate risk.

 

·Transition our organization to a stock holding company structure, which gives us greater flexibility to access the capital markets compared to our existing mutual holding company structure. The stock holding company structure gives us greater flexibility to access the capital markets to support our growth through possible future equity and debt offerings. We have no current plans, agreements or understandings regarding any additional equity or debt offerings.

 

·Facilitate future mergers and acquisitions. Although we do not currently have any understandings or agreements regarding any specific acquisition transaction, the stock holding company structure will give us greater flexibility to structure mergers and acquisitions of other financial institutions or business lines as opportunities arise.

 

Terms of the Offering

 

We are offering for sale between 3,060,000 shares and 4,140,000 shares of common stock to eligible depositors of Mineola Community Bank, to our tax-qualified employee benefit plans and, to the extent shares remain available, in a community offering to the general public, with a preference given first to natural persons (including trusts of natural persons) residing in the Texas Counties of Franklin, Hopkins, Smith, Van Zandt, and Wood. If necessary, we will also offer for sale shares to the general public in a syndicated community offering. The number of shares of common stock to be sold may be increased to up to 4,761,000 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock to be offered is increased to more than 4,761,000 shares or decreased to fewer than 3,060,000 shares, or the subscription and community offerings are extended beyond __________, 2021, subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the subscription and community offerings are extended past _________, 2021, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. All subscribers will be notified by mail sent to the address the subscriber provides on the stock order form they have submitted. If you do not respond to the notice of extension, your order will be cancelled and we will promptly return your funds with interest at 0.10% per annum or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 4,761,000 shares or decreased to less than 3,060,000 shares, all subscribers’ stock orders will be canceled, their withdrawal authorizations will be canceled and funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest at 0.10% per annum. We will then resolicit subscribers, giving them an opportunity to place new orders for a period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of any syndicated community offering, if utilized.

 

The purchase price of each share of common stock offered for sale in the offering is $10.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, a community offering or a syndicated community offering. Investors will not be charged a commission to purchase shares of common stock in the offering. Performance Trust, our marketing agent in the offering, will use its best efforts to assist us in selling shares of our common stock in the offering but is not obligated to purchase any shares of common stock in the offering.

 

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How We Determined the Offering Range and the $10.00 Per Share Purchase Price

 

The amount of common stock we are offering for sale are based on an independent appraisal of the estimated market value of Texas Community Bancshares, assuming the offering has been completed. Feldman Financial Advisors, Inc., which we refer to as “Feldman Financial” throughout this prospectus, our independent appraiser, has estimated that, as of February 26, 2021, this market value of Texas Community Bancshares was $36.5 million (inclusive of the shares to be contributed to the charitable foundation valued at $500,000 based on the offering price of $10.00 per share). Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $31.1 million and a maximum of $41.9 million. Based on this valuation range, the 100.0% ownership interest of Mineola Community MHC in Mineola Community Financial Group as of December 31, 2020 being sold in the offering and the $10.00 per share price, the number of shares of common stock being offered for sale by Texas Community Bancshares ranges from 3,060,000 shares to 4,140,000 shares. The purchase price of $10.00 per share was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. Feldman Financial will update its appraisal before we complete the conversion and offering. If, as a result of demand for the shares or changes in market conditions, Feldman Financial determines that our estimated pro forma market value has increased, we may sell up to 4,761,000 shares without further notice to you. If our pro forma market value (inclusive of the shares to be contributed to the charitable foundation valued at $500,000 based on the offering price of $10.00 per share) at that time is either below $31.1 million or above $48.1 million, then, after consulting with the Federal Reserve Board, we may: terminate the offering and promptly return all funds with interest; set a new offering range and provide all subscribers the opportunity to place a new order; or take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

 

The appraisal is based in part on Mineola Community MHC’s financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of 10 publicly traded savings banks and bank and savings and loan and bank holding companies that Feldman Financial considers comparable to Texas Community Bancshares. The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market. Assets are as of December 31, 2020 unless noted otherwise.

 

Company Name  Ticker Symbol  Headquarters  Total Assets 
          (In millions) 
CBM Bancorp, Inc.  CBMB  Baltimore, MD  $ 232 (1)
Cincinnati Bancorp, Inc.  CNNB  Cincinnati, OH  $237 
Elmira Savings Bank  ESBK  Elmira, NY  $645 
FFBW, Inc.  FFBW  Brookfield, WI  $339 
HMN Financial, Inc.  HMNF  Rochester, MN  $910 
Home Federal Bancorp, Inc. of Louisiana  HFBL  Shreveport, LA  $535 
HV Bancorp, Inc.  HVBC  Doylestown, PA  $862 
IF Bancorp, Inc.  IROQ  Watseka, IL  $713 
Mid-Southern Bancorp, Inc.  MSVB  Salem, IN  $235 
WVS Financial Corp.  WVFC  Pittsburgh, PA  $317 

 

 

(1)As of September 30, 2020.

 

In comparing Texas Community Bancshares with the peer group, Feldman Financial made downward adjustments for earnings prospects and marketing of the common stock. Feldman Financial made no adjustments for financial condition, market area, management, dividend payments, liquidity of the common stock, subscription interest, and effect of banking regulations and regulatory reform.

 

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The downward upward adjustment for earnings prospects took into consideration our less favorable efficiency ratio and lower profitability ratios relative to the peer group measures. The downward adjustment for marketing of the common stock took into consideration the volatile stock market conditions in both the overall market and the market for bank and thrift stocks and the heightened uncertainty associated with the initial public offering market in the prevailing stock market environment, including the initial public offering market for the common stock of Texas Community Bancshares.

 

The following table presents a summary of selected pricing ratios for Texas Community Bancshares (on a pro forma basis) as of and for the twelve months ended December 31, 2020, and for the peer group companies based on earnings and other information as of and for the twelve months ended December 31, 2020, with stock prices as of February 26, 2021, as reflected in the appraisal report. Compared to the average pricing of the peer group, and based upon the information in the following table, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 35.8% on a price-to-book value basis, a discount of 36.7% on a price-to-tangible book value basis, and a premium of 367.6% on a price-to-earnings basis.

 

  

Price-to-earnings multiple (1)

  Price-to-book value ratio   Price-to-tangible book
value ratio
 
Texas Community Bancshares (pro forma basis, assuming completion of the conversion and offering)              
Adjusted Maximum    250.00x  66.53%   67.16%
Maximum    166.67x  62.66%   63.25%
Midpoint    111.11x  58.69%   59.31%
Minimum    76.92x  54.11%   54.73%
               
Valuation of peer group companies, all of which are fully converted (historical basis)              
Averages    23.76x  91.45%   93.75%
Medians    12.66x  90.20%   97.18%

 

 

(1)Price-to-earnings multiples calculated by Feldman Financial in the independent appraisal are based on an estimate of “core” or recurring earnings. These ratios are different than those presented in “Pro Forma Data.”

 

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, Feldman Financial used the pricing ratios presented in the appraisal to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

 

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering—Stock Pricing and Number of Shares to be Issued.”

 

Intended Use of the Proceeds From the Offering

 

We intend to contribute at least 50% of the net proceeds from the offering to Mineola Community Bank. In addition, we intend to fund a loan to our employee stock ownership plan to finance its purchase of shares of common stock in the stock offering and to contribute $75,000 to the charitable foundation. The remainder of the net proceeds from the offering will be retained at Texas Community Bancshares. Therefore, assuming we sell 3,600,000 shares of common stock in the stock offering at the midpoint of the offering range, and we have net proceeds of $34.6 million, we intend to contribute $17.3 million to Mineola Community Bank, loan $2.9 million to our employee stock ownership plan to fund its purchase of shares of common stock, contribute $75,000 in cash to the charitable foundation, and retain the remaining $14.3 million of the net proceeds at Texas Community Bancshares.

 

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Texas Community Bancshares may use the funds it retains for investments in securities, to repurchase shares of common stock, to acquire other financial institutions or financial services companies, to pay cash dividends and for other general corporate purposes. Mineola Community Bank may use the proceeds it receives to support increased lending, enhance existing, or support growth and the development of new, products and services, or expand its branch network by establishing or acquiring new branches or by acquiring other financial institutions or financial services companies. We do not currently have any agreements or understandings regarding any acquisitions or branch transactions.

 

See “How We Intend to Use the Proceeds from the Offering” for additional information.

 

Our Contribution of Cash and Shares of Common Stock to TCBS Foundation, Inc.

 

To further our commitment to our local community, we intend to establish and fund a new charitable foundation, TCBS Foundation, Inc., which we refer to as the “charitable foundation” throughout this prospectus, as part of the conversion and offering. Assuming we receive both regulatory approval and the approval of the members of Mineola Community MHC, we intend to contribute to the new charitable foundation $75,000 in cash and 50,000 shares of our common stock, for an aggregate contribution of $575,000 based on the $10.00 per share offering price. As a result of the contribution, we expect to record an after-tax expense of approximately $454,000 during the quarter in which the conversion and offering is completed.

 

The charitable foundation will be dedicated exclusively to supporting charitable causes and community development activities in the communities in which we operate. The contribution of common stock and cash to the charitable foundation will:

 

·with respect to the contribution of shares of common stock, dilute the voting interests of purchasers of shares of our common stock in the offering; and
   
·result in an expense, and a reduction in capital, during the quarter in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, which we expect to be offset in part by a corresponding tax benefit.

 

The amount of common stock that we would offer for sale would be greater if the offering were to be completed without the establishment and funding of the charitable foundation. For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see “Risk Factors—Risks Related to the Charitable Foundation—The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in 2021” and “Risk Factors—Risks Related to the Charitable Foundation—Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits.”

 

Persons Who May Order Shares of Common Stock in the Offering

 

We are offering the shares of common stock for sale in a subscription offering in the following descending order of priority:

 

(i)To depositors with accounts at Mineola Community Bank with aggregate balances of at least $50.00 at the close of business on December 31, 2019.

 

(ii)To our tax-qualified employee benefit plans (including Mineola Community Bank’s employee stock ownership plan), which may subscribe for, in the aggregate, up to 10% of the sum of shares of common stock sold in the offering and contributed to the charitable foundation. We expect our employee stock ownership plan to purchase 8% of the sum of shares of common stock sold in the offering and contributed to the charitable foundation.

 

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(iii)To depositors with accounts at Mineola Community Bank with aggregate balances of at least $50.00 at the close of business on March 31, 2021.

 

(iv)To depositors and borrowers of Mineola Community Bank as of the close of business on ________, 2021.

 

Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to natural persons (including trusts of natural persons) residing in the Texas counties of Franklin, Hopkins, Smith, Van Zandt, and Wood. The community offering may begin concurrently with, during or promptly after the subscription offering. We may also offer for sale shares of common stock not purchased in the subscription offering and the community offering in a syndicated community offering. Performance Trust will act as sole manager for the syndicated community offering. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering, and our interpretation of the terms and conditions of the plan of conversion will be final. Any determination to accept or reject stock orders in the community offering or syndicated community offering will be based on the facts and circumstances available to management at the time of the determination.

 

If we receive orders for more shares than we are offering for sale, we may not be able to fill your order, either fully or partially. A detailed description of the subscription offering, the community offering, if any, and the syndicated community offering, if any, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

 

Limits on How Much Common Stock You May Purchase

 

The minimum number of shares of common stock that may be purchased is 25 shares.

 

Generally, no individual, or individuals acting through a single qualifying account held jointly, may purchase more than 25,000 shares ($250,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 50,000 shares ($500,000) of common stock:

 

 ●your spouse or relatives of you or your spouse living in your house;
   
  ●most companies, trusts or other entities in which you are a senior officer, partner, trustee or have a substantial beneficial interest; or
   
  ●other persons who may be your associates or persons acting in concert with you.

 

Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation of 50,000 shares ($500,000).

 

Subject to regulatory approval, we may increase or decrease the purchase and ownership limitations at any time. See the detailed description of the purchase limitations in “The Conversion and Offering—Additional Limitations on Common Stock Purchases.”

 

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

 

In the subscription offering and community offering, you may pay for your shares only by:

 

(i)personal check, bank check or money order made payable directly to Texas Community Bancshares, Inc.; or

 

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(ii)authorizing us to withdraw available funds (without any early withdrawal penalty) from your Mineola Community Bank deposit account(s), other than checking accounts or individual retirement accounts (IRAs).

 

You may not use any type of third-party check to pay for shares of common stock. Do not submit cash. Wire transfers will not be accepted. Applicable regulations prohibit Mineola Community Bank from lending funds or extending credit to any person to purchase shares of common stock in the offering. You may not submit a Mineola Community Bank line of credit check. You may not designate withdrawal from Mineola Community Bank’s accounts with check-writing privileges; rather, submit a check. If you request a direct withdrawal, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and will immediately withdraw the amount from your checking account(s). You may not authorize direct withdrawal from a Mineola Community Bank IRA. See “—Using Individual Retirement Account Funds to Purchase Shares of Common Stock.”

 

You may subscribe for shares of common stock in the subscription and community offerings by delivering a signed and completed original stock order form, together with full payment payable to Texas Community Bancshares, Inc. or authorization to withdraw funds from one or more of your Mineola Community Bank deposit accounts, provided that the stock order form is received (not postmarked) before 4:00 p.m., Central Time, on ________, 2021, which is the expiration of the subscription offering period. You may submit your stock order form and payment by mail using the stock order reply envelope provided or by overnight delivery to the address listed on the stock order form. You may hand-deliver stock order forms to our Stock Information Center, which is located at Mineola Community Bank’s main office located at 215 West Broad Street, Mineola, Texas. The Stock Information Center will be open Monday through Friday, between 10:00 a.m. and 4:00 p.m., Central Time. The Stock Information Center will not be open on bank holidays. Hand-delivered stock order forms will be accepted only at this location. We will not accept hand-delivered stock order forms at our other offices.

 

See “The Conversion and Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Payment for Shares” for a complete description of how to purchase shares in the subscription and community offerings.

 

Using Individual Retirement Account Funds to Purchase Shares of Common Stock

 

You may be able to subscribe for shares of common stock using funds in your IRA or other retirement account. If you wish to use some or all of the funds in your Mineola Community Bank IRA or other retirement account, the applicable funds must be first transferred to a self-directed account maintained by an independent custodian or trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent custodian or trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center as soon as possible, but in no event less than two weeks before the __________, 2021 offering deadline, for assistance with purchases using funds in your IRA or other retirement account you may have at Mineola Community Bank or elsewhere. Whether you may use such funds to purchase shares in the offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

 

See “The Conversion and Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Payment for Shares” and “—Using Individual Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares of common stock in the offering.

 

Market for Common Stock

 

We have never issued capital stock, and there is no established market for our common stock. Upon completion of the conversion and offering, we expect the shares of Texas Community Bancshares common stock will be listed on the Nasdaq Capital Market under the symbol “TCBS.” For information regarding the proposed market for our common stock, see “Market for the Common Stock.”

 

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Our Dividend Policy

 

Following completion of the stock offering, our board of directors will have the authority to declare dividends on our shares of common stock. The board’s determination of whether to declare a dividend and the amount of any such dividend is subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No decision has been made with respect to the amount, if any, and timing of any dividend payments. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future. For information regarding our proposed dividend policy, see “Our Dividend Policy.”

 

Purchases by Directors and Executive Officers

 

We expect our directors and executive officers, together with their associates, to subscribe for 337,500 shares of common stock in the offering, representing 11.0% of the shares to be sold at the minimum of the offering range. They will pay the same $10.00 per share purchase price that all other persons who purchase shares of common stock in the offering will pay. See “Subscriptions by Directors and Executive Officers” for more information on the proposed purchases of shares of common stock by our directors and executive officers.

 

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

 

The deadline for submitting orders to purchase shares of common stock in the subscription and community offerings is 4:00 p.m., Central time, on ___________, 2021, unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by 4:00 p.m., Central time. Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 4:00 p.m., Central time, on __________, 2021, whether or not we have been able to locate each person entitled to subscription rights. See “The Conversion and Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Expiration Date” for a complete description of the deadline for purchasing shares in the stock offering.

 

You May Not Sell or Transfer Your Subscription Rights

 

Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal or state agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe you have sold or transferred your subscription rights. On the stock order form, you cannot add the names of others for joint stock registration unless they are also named on the qualifying deposit or loan account, and you cannot delete names of others except in the case of certain orders placed through an IRA, Keogh, 401(k) or similar plan, and except if a named eligible depositor dies. Taking either of these actions may jeopardize your subscription rights. In addition, the stock order form requires that you list all deposit accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation.

 

Delivery of Shares of Common Stock

 

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering or the next business day. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described below in “—Conditions to Completion of the Conversion.” Until a statement reflecting your ownership of shares of common stock is available and delivered to you, you may not be able to sell the shares of common stock that you purchased in the offering, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

 

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Conditions to Completion of the Conversion

 

We cannot complete the conversion and offering unless:

 

·The plan of conversion is approved by at least a majority of votes eligible to be cast by members of Mineola Community MHC (i.e., eligible depositors and borrowers of Mineola Community Bank as of the close of business on ________, 2021);

 

·The plan of conversion is approved by Mineola Community MHC, the sole stockholder of Mineola Community Financial Group;

 

·We sell at least the minimum number of shares of common stock offered in the offering;

 

·We receive approval from the Federal Reserve Board and the Texas Department of Savings and Mortgage Lending; and

 

·The Texas Department of Savings and Mortgage Lending approves an amendment to Mineola Community Bank’s articles of incorporation to provide for a liquidation account.

 

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

 

If we do not receive orders for at least 3,060,000 shares of common stock, we may take one or more steps to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

(i)increase the purchase and ownership limitations; and/or

 

(ii)seek regulatory approval to extend the offering beyond _______, 2021, as long as we resolicit subscribers who previously submitted subscriptions in the offering.

 

If we extend the offering past __________, 2021, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will cancel your stock order and promptly return your funds with interest for funds received in the subscription and community offering or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount will be given the opportunity to increase their subscriptions up to the then-applicable limit.

 

Possible Change in the Offering Range

 

Feldman Financial will update its appraisal before we complete the conversion and offering. If, as a result of demand for the shares or changes in market conditions, Feldman Financial determines that our pro forma market value has increased, we may sell up to 4,761,000 shares in the offering without further notice to you. If our pro forma market value at that time is either below $30.6 million or above $47.6 million, then, after consulting with the Federal Reserve Board and the Texas Department of Savings and Mortgage Lending, we may:

 

·terminate the stock offering and promptly return all funds (with interest paid on funds received in the subscription and community offerings);

 

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·set a new offering range; or

 

·take such other actions as may be permitted by the Federal Reserve Board, the Texas Department of Savings and Mortgage Lending and the Securities and Exchange Commission.

 

If we set a new offering range, we will promptly return funds, with interest at 0.10% per annum, for funds received for purchases in the subscription and community offerings, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. We will then resolicit subscribers, allowing them to place a new stock order for a period of time.

 

Possible Termination of the Offering

 

We may terminate the offering at any time before the special meeting of members of Mineola Community MHC that has been called to vote on the conversion, and at any time after member approval with regulatory approval. Mineola Community Financial Group must also approve the conversion in its capacity as the sole stockholder of Mineola Community Bank. If we terminate the offering, we will promptly return your funds with interest at 0.10% per annum, and we will cancel deposit account withdrawal authorizations.

 

Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion

 

We expect our employee stock ownership plan, which is a tax-qualified retirement plan operated for the benefit of Mineola Community Bank’s employees, to purchase up to 8% of the shares of common stock we sell in the offering and contribute to the charitable foundation. If market conditions warrant, in the judgment of the employee stock ownership plan’s trustee, the employee stock ownership plan’s subscription order will not be filled and the employee stock ownership plan may elect to purchase shares in the open market following the completion of the conversion, subject to the approval of the Federal Reserve Board.

 

We intend to implement one or more new stock-based benefit plans no earlier than six months after completion of the conversion. Stockholder approval of these plans would be required. We have not determined whether we would adopt the plans within or after 12 months following the completion of the conversion. If we implement stock-based benefit plans within 12 months following the completion of the conversion, the stock-based benefit plans would be limited to reserving a number of shares (i) up to 4% of the shares of common stock sold in the offering for awards of restricted stock to key employees and directors, at no cost to the recipients, and (ii) up to 10% of the shares of common stock sold in the offering for issuance pursuant to the exercise of stock options by key employees and directors. If the stock-based benefit plan is adopted more than 12 months after the completion of the conversion, it would not be subject to the percentage limitations set forth above. We have not yet determined the definitive number of shares that would be reserved for issuance under these plans. For a description of our current stock-based benefit plan, see “Management—Benefits to be Considered Following Completion of the Conversion—Stock-Based Benefit Plans.”

 

The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that are available under one or more stock-based benefit plans if such plans reserve a number of shares of common stock equal to 4% and 10% of the shares sold in the stock offering for restricted stock awards and stock options, respectively. The table shows the dilution to stockholders if all such shares are issued from authorized but unissued shares, instead of shares purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all qualifying employees.

 

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   Number of Shares to be Granted or Purchased         
           As a
Percentage of
   Dilution
Resulting
From
 
   Value of Grants (In
Thousands) (1)
 
   At Minimum of
Offering
Range
   At Adjusted
Maximum of
Offering
Range
   Common
Stock to be
Sold in the
Offering
   Issuance of
Shares for
Stock-Based
Benefit Plans
   At Minimum of
Offering
Range
   At Adjusted
Maximum of
Offering
Range
 
Employee stock ownership plan   248,800    384,880    8.0%   N/A (2)   $2,488   $3,849 
Restricted stock awards   124,400    192,440    4.0    3.83%   1,244    1,924 
Stock options   311,000    481,100    10.0    9.09%   837    1,294 
Total   684,200    1,058,420    22.0%   12.28%  $4,569   $7,067 

 

 

(1)The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value for restricted stock awards is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $2.69 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; an expected option term of ten years; no dividend yield; a risk-free rate of return of 0.93%; and expected volatility of 18.68%. The actual value of stock options granted will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.

(2)No dilution is reflected for the employee stock ownership plan because such shares are assumed to be purchased in the offering.

 

We may fund our stock-based benefit plans through open market purchases rather than with new issuances of common stock. Federal regulations do not permit us to repurchase our shares during the first year following the completion of the offering except to fund the grants of restricted stock and stock options under a stock-based benefit plan or under extraordinary circumstances.

 

Income Tax Consequences

 

Mineola Community MHC, Mineola Community Financial Group, Mineola Community Bank and Texas Community Bancshares have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion, and have received an opinion of BKD, LLP regarding the material Texas tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Mineola Community MHC, Mineola Community Financial Group, Mineola Community Bank and Texas Community Bancshares or persons eligible to subscribe in the subscription offering.

 

Emerging Growth Company Status

 

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Assuming the conversion and offering is completed during the fiscal year ending December 31, 2021, we will qualify as an emerging growth company until December 31, 2026, which is the end of the fiscal year following the fifth anniversary of the completion of the stock offering and conversion. For as long as we are an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to public companies. See “Risk Factors—Risks Related to Laws and Regulations—We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors” and “Supervision and Regulation—Emerging Growth Company Status.”

 

An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. We have elected not to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.

 

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Risk Factors

 

An investment in Texas Community Bancshares common stock is subject to risk, including risks related to our business and this offering.

 

Specific areas of risk related to our business include those related to the COVID-19 pandemic; our lending activities; market interest rates; laws and regulations; economic conditions; competitive matters; operational matters; accounting matters; and other business risks.

 

Specific risks related to this offering include those related to the future trading price of the common stock of Texas Community Bancshares; use of the net offering proceeds; our return on equity after the completion of the offering; intended new stock-based benefit plans; anti-takeover factors; forum selection provision for certain litigation; the trading market for the common stock of Texas Community Bancshares; the irrevocability of your investment decision; and potential adverse tax consequences related to subscription rights.

 

Before making an investment decision, you should read this entire document carefully, including the section entitled “Risk Factors” that immediately follows and that discusses the above risks in further detail.

 

How You Can Obtain Additional Information – Stock Information Center

 

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, call our Stock Information Center at (903) 369-1000. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Central time, and will be closed on bank holidays.

 

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RISK FACTORS

 

You should carefully consider the following risk factors in evaluating an investment in the shares of common stock. In addition to these risks and the other risks and uncertainties described elsewhere in this prospectus, there may be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or results of operations.

 

Risks Related to our Lending Activities

 

Our commercial real estate loans involve credit risks that could adversely affect our financial condition and results of operations.

 

At December 31, 2020, commercial real estate loans totaled $29.4 million, or 13.7% of our loan portfolio. Given their larger balances and the complexity of the underlying collateral, commercial real estate loans generally have more risk than the one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate loans depends on the successful management and operation of the borrower’s properties or related businesses, their repayment can be affected by adverse conditions in the local real estate market or economy. A downturn in the real estate market or the local economy could adversely impact the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of non-performing loans. In addition, the physical condition of non-owner occupied properties may be below that of owner occupied properties due to lax property maintenance standards, which have a negative impact on the value of the collateral properties. As our commercial real estate commercial loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

 

Our construction and land loans involve credit risks that could adversely affect our financial condition and results of operations.

 

At December 31, 2020, construction and land loans totaled $22.8 million, or 10.6% of our loan portfolio. Construction lending involves additional risks when compared with permanent finance lending because funds are advanced upon the security of the project, which is of uncertain value before its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. In addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. In addition, speculative construction loans, which are loans made to home builders who, at the time of loan origination, have not yet secured an end buyer for the home under construction, typically carry higher risks than those associated with traditional construction loans. These increased risks arise because of the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time. As a result, in addition to the risks associated with traditional construction loans, speculative construction loans carry the added risk that the builder will have to pay the property taxes and other carrying costs of the property until an end buyer is found. Land loans have substantially similar risks to speculative construction loans. As our construction and land loan portfolio increases, the corresponding risks and potential for losses from these loans may also increase.

 

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If our allowance for loan and lease losses is not sufficient to cover actual loan losses, our earnings could decrease.

 

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan and lease losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions or the results of our analyses are incorrect, our allowance for loan and lease losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. In addition, our emphasis on loan growth and on increasing our portfolios of commercial real estate and commercial business loans, as well as any future credit deterioration, including as a result of the COVID-19 pandemic, could require us to increase our allowance for loan and lease losses in the future. Material additions to our allowance would materially decrease our net income.

 

The Financial Accounting Standards Board has delayed the effective date of the implementation of Current Expected Credit Loss, or CECL, standard. CECL will be effective for Texas Community Bancshares and Mineola Community Bank on January 1, 2023. CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for loan and lease losses that are incurred or probable, which would likely require us to increase our allowance for credit losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.

 

In addition, bank regulators periodically review our allowance for loan and lease losses and, as a result of such reviews, we may be required to increase our provision for loan and lease losses or recognize further loan charge-offs. Any increase in our allowance for loan and lease losses or loan charge-offs as a result of such review or otherwise may have a material adverse effect on our financial condition and results of operations.

 

We are subject to environmental liability risk associated with lending activities or properties we own.

 

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans and, in doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Our policies, which require us to perform an environmental review before initiating any foreclosure action on non-residential real property, may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

 

We are subject to the risk that the SBA may not fund some or all PPP loan guarantees.

 

We are subject to credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced our PPP loans, including any issue with the eligibility of a borrower to receive a PPP loan. If a loss results from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

 

Risks Related to the COVID-19 Pandemic

 

The economic impact of the COVID-19 pandemic could adversely affect our financial condition and results of operations.

 

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 pandemic, millions of individuals have filed claims for unemployment, and stock markets have declined in value and in particular bank stocks have significantly declined in value. In response to the COVID-19 pandemic, the Federal Reserve Board has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers, and federal legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 pandemic. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

 

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Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the  COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated. Further, while jurisdictions in which we operate have gradually allowed the re-opening of businesses and other organizations and removed the sheltering restrictions, it is premature to assess whether doing so will result in a meaningful increase in economic activity and the impact of such actions on further COVID-19 cases. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

 

·demand for our products and services may decline, making it difficult to grow assets and income;

 

·if the economy is unable to reopen substantially and successfully, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

 

·collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

 

·limitations may be placed on our ability to foreclose on properties during the pandemic;

 

·our allowance for loan and lease losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

 

·the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

 

·as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

 

·our cyber security risks are increased as the result of an increase in the number of employees working remotely;

 

·a worsening of business and economic conditions or in the financial markets could result in an impairment of certain intangible assets, such as goodwill;

 

·litigation, regulatory enforcement risk and reputation risk regarding our participation in the PPP and the risk that the SBA may not fund some or all PPP loan guarantees;

 

·we rely on third-party vendors for certain services and the unavailability of a critical service due to the COVID-19 pandemic could have an adverse effect on us; and

 

·Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs;

 

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Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

 

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

 

Risks Related to Market Interest Rates

 

A continuation of the historically low interest rate environment and the possibility that we may access higher-cost funds to support our loan growth and operations may adversely affect our net interest income and profitability.

 

In recent years the Federal Reserve Board’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Our ability to reduce our interest expense may be limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease, and our interest expense may increase as we access non-core funding sources or increase deposit rates to fund our operations. A continuation of a low interest rate environment or an increase in our cost of funds may adversely affect our net interest income, which would have an adverse effect on our profitability.

 

Future changes in interest rates could reduce our profits and asset values.

 

Net income is the amount by which net interest income and non-interest income exceed non-interest expense and the provision for loan and lease losses. Net interest income makes up a majority of our income and is based on the difference between:

 

·the interest income we earn on interest-earning assets, such as loans and securities; and

 

·the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.

 

Substantially all of our loans are fixed-rate loans, and we generally do not sell the loans we originate. Furthermore, the rates we earn on our other interest-earning assets and the rates we pay on our interest-bearing liabilities are generally fixed for a contractual period of time. Like many savings institutions, our interest-bearing liabilities generally have shorter contractual maturities than our interest-earning assets. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at lower, current interest rates.

 

Furthermore, the historically low interest rate environment in recent periods has contributed significantly to our loan growth, particularly in one- to four-family residential mortgage loans where refinance volume has been relatively high. During the year ended December 31, 2020, we originated $93.1 million of one- to four-family residential mortgage loans, of which $32.6 million were refinances of existing loans with us. An increase in market interest rates may reduce our loan origination volume, particularly refinance volume, and/or reduce our interest rate spread, which would have a material adverse effect on our profitability and results of operations.

 

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In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed rate mortgage loans.

 

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.

 

We monitor interest rate risk through the use of simulation models, including estimates of the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) and our net interest income would change in the event of a range of assumed changes in market interest rates. As of December 31, 2020, in the event of an instantaneous 200 basis point increase in interest rates, we estimate that we would experience an 1.25% decrease in EVE and a 1.71% decrease in net interest income. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

 

Risks Related to Laws and Regulations

 

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

 

Mineola Community Bank is subject to extensive regulation, supervision and examination by the Texas Department of Savings and Mortgage Lending and the Federal Deposit Insurance Corporation. Mineola Community MHC and Mineola Community Financial Group are, and Texas Community Bancshares will be, subject to extensive regulation, supervision and examination by the Federal Reserve Board. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and the depositors of Mineola Community Bank, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the adequacy of the level of our allowance for loan and lease losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.

 

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

 

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are suspected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on pursuing acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations. Furthermore, these rules and regulations continue to evolve and expand. We have not been subject to fines or other penalties, or have suffered business or reputational harm, as a result of money laundering activities in the past.

 

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We are subject to stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

 

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and defines “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%, and the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount.

 

The application of these capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements. Specifically, following the completion of the offering, Mineola Community Bank’s ability to pay dividends to Texas Community Bancshares will be limited if it does not have the capital conservation buffer required by the capital rules, which may further limit the ability of Texas Community Bancshares to pay dividends to its stockholders. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements.”

 

Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.

 

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

 

The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

 

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

Texas Community Bancshares will be an emerging growth company. For as long as it continues to be an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to public companies that are not emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company, Texas Community Bancshares also will not be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors audit our internal control over financial reporting. Investors may find our common stock less attractive since we have chosen to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

 

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Risks Related to Economic Conditions

 

A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our operations, financial condition and earnings.

 

Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans. A deterioration in economic conditions, especially local conditions, as a result of the COVID-19 pandemic or otherwise, could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations, and could more negatively affect us compared to a financial institution that operates with more geographic diversity:

 

·demand for our products and services may decline;

 

·loan delinquencies, problem assets and foreclosures may increase;

 

·collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

 

·the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

 

Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, civil unrest, an outbreak of hostilities or other international or domestic calamities, an epidemic or pandemic, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

Risks Related to Competitive Matters

 

Strong competition within our market area may limit our growth and profitability.

 

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms and unregulated or less regulated non-banking entities. Many of these competitors are substantially larger than us and have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates and/or more attractive terms than loans we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete for business and qualified employees in our market areas. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest-earning assets. For additional information see “Business of Mineola Community Bank—Competition.”

 

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Our small size makes it more difficult for us to compete.

 

Our small asset size makes it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from such activities as securities and insurance brokerage. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

 

Risks Related to Operational Matters

 

We face significant operational risks because of our reliance on technology. Our information technology systems may be subject to failure, interruption or security breaches.

 

Information technology systems are critical to our business. Our business requires us to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and our own business, operations, plans and business strategies. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. Our computer systems, data management and internal processes, as well as those of third parties, are integral to our performance. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. There have been increasing efforts by third parties to breach data security at financial institutions. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. Although we take protective measures and believe that we have not experienced any of the data breaches described above, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.

 

If there is a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, loss of customers and damage to our reputation, and face regulatory action or civil litigation. Any of these events could have a material adverse effect on our financial condition and results of operations. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits.

 

In addition, we outsource a majority of our data processing requirements to third-party providers. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with our contractual agreements with them, or we also could be adversely affected if such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. If our third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected, which could have a material adverse effect on our financial condition and results of operations. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. To our knowledge, the services and programs provided to us by third parties have not experienced any material security breaches. However, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.

 

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We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

 

We depend on the services of the members of our senior management team who direct our strategy and operations. Our executive officers and lending personnel possess substantial expertise, extensive knowledge of our markets and key business relationships, and have been integral in the restructuring of our operations, including the implementation of a more aggressive sales culture within our institution. Any one of them could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management.”

 

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.

 

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which may include Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

 

Risks Related to Accounting Matters

 

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

 

In preparing this prospectus, as well as periodic reports we will be required to file under the Securities Exchange Act of 1934 upon the completion of the offering, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for loan and lease losses, the valuation of acquired loans, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans, valuation allowances associated with the realization of deferred tax assets and our determinations with respect to amounts owed for income taxes.

 

Changes in accounting standards could affect reported earnings.

 

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our consolidated financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

 

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Other Risks Related to Our Business

 

We are a community bank and our ability to maintain our reputation is critical to the success of our business. The failure to do so may materially adversely affect our performance.

 

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, cybersecurity incidents and questionable or fraudulent activities of our customers. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental regulation, all of which could adversely affect our business and operating results.

 

Legal and regulatory proceedings and related matters could adversely affect us.

 

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, reputation, or our financial condition and results of our operations.

 

Risks Related to the Offering

 

The future price of our shares of common stock may be less than the $10.00 purchase price per share in the offering.

 

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in federal tax laws, new regulations, investor perceptions of Texas Community Bancshares and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

 

Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.

 

We intend to contribute between $14.6 million and $20.0 million of the net proceeds of the offering (or $23.0 million at the adjusted maximum of the offering range) to Mineola Community Bank. We may use the remaining net proceeds to invest in short-term investments and for general corporate purposes, including repurchasing shares of our common stock and paying dividends. We also expect to use a portion of the net proceeds we retain to fund a loan to our employee stock ownership plan to purchase shares of common stock in the offering. Mineola Community Bank may use the net proceeds it receives to fund new loans, expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, except for the funding the loan to the employee stock ownership plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have broad discretion in determining the amount of the net proceeds we apply to different uses and when we apply or reinvest such proceeds. Also, certain of these uses, such as opening new branches or acquiring other financial institutions, may require the approval of our bank regulators. We have not established a timetable for investing the net proceeds, and we cannot predict how long we will require to invest the net proceeds. Our failure to reinvest these funds effectively would reduce our profitability and may adversely affect the value of our common stock.

 

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The cost of additional finance and accounting systems, procedures, compliance and controls in order to satisfy our new public company reporting requirements will increase our expenses.

 

As a result of the completion of the conversion and offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. The Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

 

Our return on equity may be low following the stock offering. This could negatively affect the trading price of our shares of common stock.

 

Net income divided by average stockholders’ equity, known as “return on equity,” is a ratio many investors use to compare the performance of financial institutions. Our return on equity may be lower than our peers until we are able to leverage the additional capital we receive from the stock offering. Our return on equity also will be negatively affected by added expenses associated with our employee stock ownership plan and the stock-based benefit plans we currently sponsor and intend to adopt. Our return on average equity was 2.38% for the year ended December 31, 2020, with consolidated members’ equity of $31.9 million at December 31, 2020. Our pro forma consolidated stockholders’ equity as of December 31, 2020, assuming completion of the offering, is estimated to be between $57.5 million at the minimum of the offering range and $66.9 million at the adjusted maximum of the offering range. Until we can increase our net interest income and non-interest income and leverage the capital raised in the stock offering, our return on equity may be low, which may reduce the market price of our shares of common stock.

 

Our stock-based benefit plans will increase our expenses and reduce our income.

 

We intend to adopt one or more new stock-based benefit plans after the conversion, subject to stockholder approval, which will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants under the new stock-based benefit plans. The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards granted under the plans, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time. If we adopt stock-based benefit plans within 12 months following the conversion, the shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans would be limited to 4% and 10%, respectively, of the sum of shares of our common stock sold in the offering and contributed to the charitable foundation. If we adopt stock-based benefit plans more than 12 months after the completion of the conversion, we may adopt plans that allow for greater amounts of awards and options and, therefore, we could award restricted shares of common stock or grant options in excess of these amounts, which would further increase costs.

 

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In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for our employee stock ownership plan and for our new stock-based benefit plans, assuming such plans had been implemented at the beginning of the year, is estimated to be approximately $577,000 ($456,000 after tax) at the adjusted maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our proposed stock-based plans, see “Management—Benefits to be Considered Following Completion of the Conversion.”

 

The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.

 

We intend to adopt one or more new stock-based benefit plans following the stock offering. These plans may be funded either through open market purchases of our common stock or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of our common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of our stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is to fund the new stock-based benefit plans through open market purchases, stockholders would experience a 9.09% dilution in ownership interest if newly issued shares of our common stock are used to fund stock options in an amount equal to 10% of the sum of shares sold in the offering and contributed to the charitable foundation, and all such stock options are exercised, and a 3.85% dilution in ownership interest if newly issued shares of our common stock are used to fund shares of restricted common stock in an amount equal to 4% of the sum of shares sold in the offering and contributed to the charitable foundation. Such dilution would also reduce earnings per share. If we adopt the plans more than 12 months following the conversion, new stock-based benefit plans would not be subject to these size limitations and stockholders could experience even greater dilution.

 

Although the implementation of new stock-based benefit plans would be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

We have not determined when we will adopt one or more new stock-based benefit plans. Stock-based benefit plans adopted more than 12 months following the completion of the conversion may exceed regulatory restrictions on the size of stock-based benefit plans adopted within 12 months, which would further increase our costs.

 

If we adopt stock-based benefit plans more than 12 months following the completion of the conversion, then grants of shares of common stock or stock options under our proposed stock-based benefit plans may exceed 4% and 10%, respectively, of the sum of shares of common stock sold in the offering and contributed to the charitable foundation. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our expenses and reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.” Although the implementation of stock-based benefit plans would be subject to stockholder approval, the timing of the implementation of such plans will be at the discretion of our board of directors.

 

Our stock value may be negatively affected by applicable regulations that restrict stock repurchases.

 

Applicable regulations generally restrict us from repurchasing our shares of common stock during the first year following the offering. Stock repurchases are a capital management tool that can enhance the value of a company’s stock, and our inability to repurchase our shares of common stock during the first year following the stock offering may negatively affect our stock price.

  

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Various factors may make takeover attempts more difficult to achieve.

 

Certain provisions of our articles of incorporation and bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of Texas Community Bancshares without our board of directors’ approval. Under regulations applicable to the conversion, for a period of three years following completion of the conversion, no person may offer to acquire or acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board and receive the Federal Reserve Board’s non-objection before acquiring control of a bank holding company. There also are provisions in our articles of incorporation and bylaws that we may use to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of our outstanding shares of common stock. Furthermore, shares of restricted stock and stock options that we may grant to employees and directors, stock ownership by our management and directors and other factors may make it more difficult for companies or persons to acquire control of Texas Community Bancshares without the consent of our board of directors, and may increase the cost of an acquisition. Taken as a whole, these statutory or regulatory provisions and provisions in our articles of incorporation and bylaws could result in our being less attractive to a potential acquirer and therefore could adversely affect the market price of our common stock. For additional information, see “Restrictions on Acquisition of Texas Community Bancshares” and “Management—Benefits to be Considered Following Completion of the Conversion.”

 

Our articles of incorporation provide that, subject to limited exception, state and federal courts in the State of Maryland are the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, and other employees.

 

The articles of incorporation of Texas Community Bancshares provide that, unless Texas Community Bancshares consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of Texas Community Bancshares, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Texas Community Bancshares to Texas Community Bancshares or its stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Maryland General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine will be conducted in a state or federal court located within the State of Maryland, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. This exclusive forum provision does not apply to claims arising under the federal securities laws. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum it finds favorable for disputes with Texas Community Bancshares and its directors, officers, and other employees or may cause a stockholder to incur additional expense by having to bring a claim in a judicial forum that is distant from where the stockholder resides, or both. In addition, if a court were to find this exclusive forum provision to be inapplicable or unenforceable in a particular action, we may incur additional costs associated with resolving the action in another jurisdiction, which could have a material adverse effect on our financial condition and results of operations.

 

There may be a limited trading market in our shares of common stock, which would hinder your ability to sell our common stock and may lower the market price of our common stock.

 

We expect that our common stock will be listed on the on the Nasdaq Capital Market under the symbol “TCBS” upon conclusion of the conversion and offering, subject to completion of the offering and compliance with certain conditions, including having 300 unrestricted “round lot” stockholders (stockholders owning at least 100 shares that are not subject to resale restrictions) and at least three companies making a market for our common stock. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. If you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Purchasers of common stock in this offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the offering and may have an adverse impact on the price at which the common stock can be sold.

 

 

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You may not revoke your decision to purchase Texas Community Bancshares common stock in the subscription or community offerings after you send us your order.

 

Funds submitted or automatic withdrawals authorized in connection with the purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering, including any extension of the expiration date and consummation of a syndicated community offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by Feldman Financial, among other factors, there may be one or more delays in completing the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond __________, 2021, or the number of shares to be sold in the offering is increased to more than 4,761,000 shares or decreased to fewer than 3,060,000 shares.

 

The distribution of subscription rights could have adverse income tax consequences.

 

If the subscription rights granted in connection with the stock offering are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.

 

Risks Related to the Charitable Foundation

 

The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in 2021.

 

We intend to establish and fund a new charitable foundation in connection with the conversion and offering. We intend to contribute $75,000 in cash and 50,000 shares, for an aggregate contribution of $575,000 based on the $10.00 per share offering price, to the charitable foundation. The contribution will have an adverse effect on our net income for the quarter and year in which we make the issuance and contribution to the charitable foundation. The after-tax expense of the contribution is expected to reduce net income in the year of the contribution by approximately $454,000.

 

Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits.

 

We may not have sufficient profits to be able to fully use the tax deduction from our contribution to the charitable foundation. Under the Internal Revenue Code, an entity is permitted to deduct up to 10% of its taxable income (generally income before federal income taxes and charitable contributions expense) in any one year for charitable contributions. Any contribution in excess of the 10% limit may be deducted for federal income tax purposes over each of the five years following the year in which the charitable contribution is made. Accordingly, a charitable contribution could, if necessary, be deducted over a six-year period and expires thereafter.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

The summary information presented below at each date or for each of the periods presented is derived in part from the consolidated financial statements of Mineola Community MHC. The financial condition data at December 31, 2020 and 2019 and the operating data for the years ended December 31, 2020 and 2019 are derived from the audited consolidated financial statements of Mineola Community MHC included elsewhere in this prospectus. The information at and for the years ended December 31, 2018 was derived in part from the audited consolidated financial statements of Mineola Community MHC that are not included in this prospectus. The following information is only a summary, and should be read in conjunction with the consolidated financial statements and related notes of Mineola Community MHC beginning on page F-1 of this prospectus.

 

   At December 31, 
   2020   2019   2018 
             
   (In thousands) 
Selected Financial Condition Data:               
Total assets   $299,638   $267,559   $251,822 
Cash and cash equivalents    8,073    5,530    10,655 
Interest bearing deposits in banks    14,015    19,060    13,839 
Securities available for sale    12,966    10,715    14,120 
Securities held to maturity    34,328    39,179    39,313 
Loans receivable, net    213,239    177,202    158,563 
Premises and equipment, net    6,383    6,084    6,303 
Foreclosed real estate    209        24 
Restricted investments carried at cost    2,024    1,994    1,944 
Bank owned life insurance    5,908    5,787    4,685 
Core deposit intangible    661    794    926 
Total deposits    235,140    204,224    197,661 
Advances from the Federal Home Loan Bank    30,768    31,142    23,539 
Total members’ equity    31,939    31,054    29,763 

 

   For the Years Ended December 31, 
   2020   2019   2018 
             
   (In thousands) 
Selected Operating Data:               
Interest income   $10,802   $10,025   $8,314 
Interest expense    2,509    2,642    1,982 
Net interest income    8,294    7,383    6,332 
Provision for loan and lease losses    484    160    16 
Net interest income after provision for loan and lease losses    7,809    7,223    6,316 
Noninterest income    1,557    1,625    1,476 
Noninterest expense    8,424    7,561    6,805 
Income before income taxes    942    1,287    987 
Income tax expense    193    230    157 
Net income   $749   $1,057   $831 

 

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   At or For the Years Ended December 31, 
   2020   2019   2018 
Performance Ratios:               
Return on average assets    0.26%   0.41%   0.38%
Return on average equity    2.38%   3.48%   2.83%
Interest rate spread (1)    2.95%   2.84%   2.85%
Net interest margin (2)    3.14%   3.06%   3.08%
Noninterest expense to average assets    2.96%   2.92%   3.01%
Efficiency ratio (3)    85.51%   83.94%   87.15%
Average interest-earning assets to average interest-bearing liabilities    119.96%   119.71%   118.40%
                
Capital Ratios:               
Average equity to average assets    10.91%   11.82%   13.41%
Total capital to risk-weighted assets    19.16%   21.10%   22.30%
Tier 1 capital to risk-weighted assets    18.68%   20.30%   21.60%
Common equity tier 1 capital to risk-weighted assets    18.68%   20.30%   21.60%
Tier 1 capital to average assets    10.50%   11.40%   12.80%
                
Asset Quality Ratios:               
Allowance for loan and lease losses as a percentage of total loans    0.73%   0.62%   0.61%
Allowance for loan and lease losses as a percentage of non-performing loans    178.81%   128.67%   155.93%
Allowance for loan and lease losses as a percentage of non-accrual loans    178.81%   128.67%   155.93%
Non-accrual loans as a percentage of total loans    0.41%   0.48%   0.39%
Net (charge-offs) recoveries to average outstanding loans during the year    (0.01)%   (0.02)%   (0.01)%
Non-performing loans as a percentage of total loans    0.41%   0.48%   0.39%
Non-performing loans as a percentage of total assets    0.29%   0.32%   0.25%
Total non-performing assets as a percentage of total assets    0.36%   0.32%   0.26%
                
Other Data:               
Number of offices    6    6    5 
Number of full-time employees    61    58    52 
Number of part-time employees    2    5    3 
   
(1)Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2)Represents net interest income as a percentage of average interest-earning assets.
(3)Represents noninterest expenses divided by the sum of net interest income and noninterest income.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus 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 to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;

 

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

 

·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 losses;

 

·our ability to access cost-effective funding;

 

·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;

 

·inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of 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;

 

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·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;

 

·our ability to retain key employees; and

 

·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. See “Risk Factors” beginning on page 17. 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.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $29.2 million and $39.9 million, or $46.1 million if the offering range is increased by 15%.

 

We intend to use the net proceeds as follows:

 

   Based Upon the Sale at $10.00 Per Share of: 
   3,060,000 Shares   3,600,000 Shares   4,140,000 Shares  

4,761,000 Shares (1)

 
   Amount   Percent of Net Proceeds   Amount   Percent of Net Proceeds   Amount   Percent of Net Proceeds   Amount   Percent of Net Proceeds 
                                 
   (Dollars in thousands) 
Gross offering proceeds   $30,600        $36,000        $41,400        $47,610      
Less: offering expenses    1,369         1,419         1,469         1,526      
Net offering proceeds   $29,231    100.0%  $34,581    100.0%  $39,931    100.0%  $46,084    100.0%
                                         
Distribution of net proceeds:                                        
To Mineola Community Bank   $14,616    50.0%  $17,291    50.0%  $19,966    50.0%  $23,042    50.0%
To fund cash contribution to charitable foundation   $75    0.3%  $75    0.2%  $75    0.2%  $75    0.2%
To fund loan to employee stock ownership plan   $2,488    8.5%  $2,920    8.5%  $3,352    8.4%  $3,849    8.3%
Retained by Texas Community Bancshares   $12,052    41.2%  $14,295    41.3%  $16,538    41.4%  $19,119    41.5%

     
(1)As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

 

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will reduce Mineola Community Bank’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if all the shares offered were not sold in the subscription and community offerings and instead a portion of the shares were sold in a syndicated community offering.

 

Texas Community Bancshares may use the proceeds it retains from the offering:

 

·to invest in securities;

 

·to repurchase shares of its common stock;

 

·to finance the potential acquisition of financial institutions or financial services companies, although we do not currently have any agreements or understandings regarding any specific acquisition transaction;

 

·to pay cash dividends to stockholders; and

 

·for other general corporate purposes.

 

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under current federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund the granting of restricted stock awards (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans.

 

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Mineola Community Bank may use the net proceeds it receives from the offering:

 

·to fund new loans;

 

·to invest in securities;

 

·to enhance existing products and services, hire additional employees and support growth and the development of new products and services;

 

·to expand its banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any understandings or agreements to acquire a financial institution or other entity; and

 

·for other general corporate purposes.

 

Initially, a substantial portion of the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. We have not determined specific amounts of the net proceeds that would be used for the purposes described above. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions. The use of the proceeds may also change depending on our ability to receive regulatory approval to establish new branches or acquire other financial institutions.

 

We expect our return on equity may be low until we are able to reinvest effectively the additional capital raised in the offering. Until we can increase our net interest income and non-interest income, our return on equity may be below the industry average, which may negatively affect the value of our common stock. See “Risk Factors—Risks Related to the Offering—Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.”

 

OUR DIVIDEND POLICY

 

Following completion of the stock offering, our board of directors will have the authority to declare dividends on our shares of common stock. The board’s determination of whether to declare a dividend and the amount of any such dividend is subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No decision has been made with respect to the amount, if any, and timing of any dividend payments. We cannot assure you that we will pay dividends in the future, or, if dividends are paid, that any such dividends will not be reduced or eliminated in the future.

 

Texas Community Bancshares will not be permitted to pay dividends on its common stock if its stockholders’ equity would be reduced below the amount of the liquidation account established by it in connection with the conversion. The source of dividends will depend on the net proceeds retained by Texas Community Bancshares and earnings thereon, and dividends from Mineola Community Bank. In addition, Texas Community Bancshares will be subject to state law limitations and federal bank regulatory policy on the payment of dividends. Maryland law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

 

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After the completion of the conversion, Mineola Community Bank will not be permitted to pay dividends on its capital stock owned by Texas Community Bancshares, its sole stockholder, if Mineola Community Bank’s stockholder’s equity would be reduced below the amount of the liquidation account established in connection with the conversion. In addition, Mineola Community Bank will not be permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. Mineola Community Bank must provide notice to the Federal Reserve Board and file an application with the Texas Department of Savings and Mortgage Lending for approval of a capital distribution if the total capital distributions for the applicable calendar year exceed the sum of its net income for that year to date plus its retained net income for the preceding two years, or it would not be at least adequately capitalized following the distribution.

  

Any payment of dividends by Mineola Community Bank to Texas Community Bancshares that would be deemed to be drawn from its bad debt reserves established before 1988, if any, would require a payment of taxes at the then-current tax rate by Mineola Community Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distribution. Mineola Community Bank does not intend to make any distribution that would create such a federal tax liability.

 

We intend to file a consolidated federal tax return with Mineola Community Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal tax purposes. Additionally, during the three-year period following the conversion, we will not be permitted to make any capital distribution to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

 

MARKET FOR THE COMMON STOCK

 

Texas Community Bancshares has never issued capital stock. Upon completion of the conversion and offering, we expect the shares of common stock of Texas Community Bancshares will be listed on the Nasdaq Capital Market under the symbol “TCBS.” In order to list our stock on the Nasdaq Capital Market, we are required to have at least three broker-dealers who will make a market in our common stock.

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

At December 31, 2020, Mineola Community Bank exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth the historical equity capital and regulatory capital of Mineola Community Bank at December 31, 2020, and the pro forma equity capital and regulatory capital of Mineola Community Bank after giving effect to the sale of shares of common stock at $10.00 per share. The table also compares historical and pro forma capital levels to those required to be considered “well capitalized.” The table assumes that Mineola Community Bank receives 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

      Mineola Community                                                                  
      Bank Historical at       Mineola Community Bank Pro Forma at December 31, 2020 Based Upon the Sale in the Offering of:  
      December 31, 2020       3,060,000 Shares       3,600,000 Shares       4,140,000 Shares       4,761,000 Shares (1)  
    Amount     Percent of Assets     Amount     Percent of Assets     Amount     Percent of Assets     Amount     Percent of Assets     Amount     Percent of Assets  
                                                             
    (Dollars in thousands)  
Equity   $ 31,435       10.49 %   $ 42,319       13.52 %   $ 44,346       14.06 %   $ 46,373       14.59 %   $ 48,704       15.18 %
                                                                                 

Tier 1 leverage capital  (2)(3)

  $ 30,645       10.50 %   $ 41,529       13.61 %   $ 43,556       14.16 %   $ 45,583       14.70 %   $ 47,914       15.31 %

Tier 1 leverage requirement

    14,593       5.00       15,261       5.00       15,384       5.00       15,507       5.00       15,649       5.00  
Excess   $ 16,052       5.50 %   $ 26,268       8.61 %   $ 28,172       9.16 %   $ 30,076       9.70 %   $ 32,265       10.31 %
                                                                                 

Tier 1 risk-based capital (2)(3)

  $ 30,645       18.68 %   $ 41,529       24.91 %   $ 43,556       26.05 %   $ 45,583       27.18 %   $ 47,914       28.47 %

Tier 1 risk-based requirement

    13,124       8.00       13,338       8.00       13,377       8.00       13,417       8.00       13,462       8.00  
Excess   $ 17,521       10.68 %   $ 28,191       16.91 %   $ 30,179       18.05 %   $ 32,166       19.18 %   $ 34,452       20.47 %
                                                                                 

Total risk-based capital (2)(3)

  $ 32,206       19.63 %   $ 43,090       25.84 %   $ 45,117       26.98 %   $ 47,144       28.11 %   $ 49,475       29.40 %

Total risk-based requirement

    16,405       10.00       16,673       10.00       16,722       10.00       16,771       10.00       16,828       10.00  
Excess   $ 15,801       9.63 %   $ 26,417       15.84 %   $ 28,395       16.98 %   $ 30,373       18.11 %   $ 32,647       19.40 %
                                                                                 

Common equity tier 1 risk-based capital (2)(3)

  $ 30,645       18.68 %   $ 41,529       24.91 %   $ 43,556       26.05 %   $ 45,583       27.18 %   $ 47,914       28.47 %

Common equity tier 1  risk-based requirement

    10,663       6.50       10,837       6.50       10,869       6.50       10,901       6.50       10,938       6.50  
Excess   $ 19,982       12.18 %   $ 30,692       18.41 %   $ 32,687       19.55 %   $ 34,682       20.68 %   $ 36,976       21.97 %
                                                                                 

Reconciliation of capital infused into Mineola Community Bank:

                                                                 
Net proceeds     $ 14,616             $ 17,291             $ 19,966             $ 23,042          
Less:  Common stock acquired by
employee stock ownership plan
      (2,488 )             (2,920 )             (3,352 )             (3,849 )        

Less:  Common stock acquired by stock-based incentive plans

      (1,244 )             (1,460 )             (1,676 )             (1,924 )        
Pro forma increase     $ 10,884             $ 12,911             $ 14,938             $ 17,269          

 

 

(1)As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Tier 1 leverage capital levels are shown as a percentage of total average assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(3)Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

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CAPITALIZATION

 

The following table presents the historical consolidated capitalization of Mineola Community MHC at December 31, 2020 and the pro forma consolidated capitalization of Texas Community Bancshares after giving effect to the conversion and offering based upon the assumptions set forth in the “Pro Forma Data” section.

 

  

Mineola Community

  

Texas Community Bancshares Pro Forma at December 31, 2020 Based Upon the Sale in the Offering at $10.00 per share of:

 
   MHC at December 31, 2020  

3,060,000 Shares

  

3,600,000 Shares

  

4,140,000 Shares

  

4,761,000 Shares (1)

 
                     
                     
     
   (Dollars in thousands) 
Deposits (2)   $235,140   $235,140   $235,140   $235,140   $235,140 
Borrowed funds    30,768    30,768    30,768    30,768    30,768 
Total deposits and borrowed funds   $265,908   $265,908   $265,908   $265,908   $265,908 
                          
Stockholders’ equity:                         

Preferred stock, $0.01 par value, 1,000,000

shares authorized (post-conversion) (3)

                    

Common stock, $0.01 par value, 19,000,000 shares authorized

(post-conversion); shares to be issued as reflected (3)(4)

       31    37    42    48 
Additional paid-in capital (3)        29,200    34,544    39,889    46,036 
Retained earnings (4)    31,811    31,811    31,811    31,811    31,811 
Accumulated other comprehensive income    128    128    128    128    128 
Stock contribution to charitable foundation        500    500    500    500 
Less: After-tax expense of contribution to charitable foundation (5)        (454)   (454)   (454)   (454)
Less: Common stock held by employee stock ownership plan (6)        (2,488)   (2,920)   (3,352)   (3,849)
Less: Common stock to be acquired by stock-based benefit plans (7)        (1,244)   (1,460)   (1,676)   (1,924)
Total stockholders’ equity   $31,939   $57,484   $62,186   $66,888   $72,296 
Total tangible stockholders’ equity (8)   $31,278   $56,823   $61,525   $66,227   $71,635 
                          
Pro Forma Shares Outstanding                         
Shares offered for sale        3,060,000    3,600,000    4,140,000    4,761,000 
Shares issued to charitable foundation        50,000    50,000    50,000    50,000 
Total shares outstanding        3,110,000    3,650,000    4,190,000    4,811,000 
                          
Total stockholders’ equity as a percentage of total assets    10.66%   17.68%   18.85%   19.99%   21.26%
Tangible stockholders’ equity as a percentage of tangible assets    10.46%   17.51%   18.69%   19.83%   21.11%

     
(1)As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Does not reflect withdrawals from deposit accounts to purchase shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3)No effect has been given to the issuance of additional shares of Texas Community Bancshares common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 10% of the sum of shares of common stock sold in the offering and contributed to the charitable foundation will be reserved for issuance upon the exercise of options under the plans.
(4)The retained earnings of Mineola Community Bank will be substantially restricted after the conversion. See “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”

 

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(5)Represents the expense of the contribution to the charitable foundation based on a 21% tax rate. The realization of the deferred tax benefit is limited annually to a maximum deduction for charitable donations equal to 10% of our annual taxable income, subject to our ability to carry forward any unused portion of the deduction for five years following the year in which the contribution is made.
(6)Assumes that 8% of the sum of shares sold in the offering and contributed to the charitable foundation will be acquired by the employee stock ownership plan financed by a loan from Texas Community Bancshares. The loan will be repaid principally from Mineola Community Bank’s contributions to the employee stock ownership plan. Since Texas Community Bancshares will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on the consolidated financial statements of Texas Community Bancshares. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(7)Assumes a number of shares of common stock equal to 4% of the sum of shares of common stock to be sold in the offering and contributed to the charitable foundation will be purchased for grant by one or more stock-based benefit plans. The funds to be used by such plans to purchase the shares will be provided by Texas Community Bancshares. The dollar amount of common stock to be purchased is based on the $10.00 per share purchase price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the purchase price in the offering. Texas Community Bancshares will accrue compensation expense to reflect the vesting of shares pursuant to such stock-based benefit plans and will credit capital in an amount equal to the charge to operations. Implementation of such plans will require stockholder approval.
(8)Total tangible stockholders’ equity, a non-GAAP financial measure, equals total stockholders’ equity minus core deposit intangible of $661,000 at December 31, 2020.

 

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PRO FORMA DATA

 

The following tables summarize historical data of Mineola Community MHC and pro forma data of Texas Community Bancshares at and for the year ended December 31, 2020. This information is based on assumptions set forth below and in the tables and related footnotes, and should not be used as a basis for projections of market value of the shares of common stock following the conversion.

 

The net proceeds disclosed in the tables are based upon the following assumptions:

 

(i)all of the shares of common stock will be sold in the subscription and community offerings;

 

(ii)our employee stock ownership plan will purchase 8% of the sum of shares of common stock sold in the offering and contributed to the charitable foundation with a loan from Texas Community Bancshares. The loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, as may be adjusted annually) over 20 years. Interest income that we earn on the loan will offset the interest paid by Mineola Community Bank. The effect on earnings for the employee stock ownership plan is the cost of amortizing the loan over 20 years, net of historical expense for the period;

 

(iii)our directors, executive officers, and their associates will purchase 337,500 shares of common stock;

 

(iv)we will contribute $75,000 in cash and 50,000 shares of common stock to the charitable foundation;

 

(v)we will pay Performance Trust a fee equal to 1.0% of the aggregate dollar amount of common stock sold in the subscription and community offerings, excluding common stock sold to our employee stock ownership and to our directors, executive officers and employees and their associates and excluding shares of common stock contributed to the charitable foundation; and

 

(vi)total expenses of the offering, other than the fees and commissions to be paid to Performance Trust and other broker-dealers, will be $1.1 million.

 

We calculated pro forma consolidated net income for the period as if the estimated net proceeds we received had been invested at the beginning of the period at an assumed interest rate of 0.36% (0.28% on an after-tax basis). This represents the yield on the five-year U.S. Treasury Note at December 31, 2020, which, in light of current market interest rates, we consider to reflect more accurately the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate federal regulations require that we assume in presenting pro forma data.

 

We further believe that the reinvestment rate is factually supportable because:

 

·the yield on the U.S. Treasury Note can be determined and/or estimated from third-party sources; and

 

·we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

 

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. For pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

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The pro forma data gives effect to the implementation of one or more stock-based benefit plans. We have assumed that stock-based benefit plans will acquire for restricted stock awards a number of shares of common stock equal to 4% of the sum of shares of common stock sold in the stock offering and contributed to the charitable foundation at the same price for which they were sold in the stock offering. We have assumed that awards of common stock granted under such plans vest over a five-year period.

 

We also have assumed that options will be granted under stock-based benefit plans to acquire shares of common stock equal to 10% of the sum of shares of common stock sold in the stock offering and contributed to the charitable foundation. In preparing the tables below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.69 for each option.

 

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of the shares of common stock sold in the stock offering and that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the completion of the stock offering.

 

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute 50% of the net proceeds from the stock offering to Mineola Community Bank, to fund a loan to the employee stock ownership plan, and to make the cash contribution to the charitable foundation. We will retain the remainder of the net proceeds from the stock offering for future use.

 

The pro forma data does not give effect to:

 

·withdrawals from deposit accounts to purchase shares of common stock in the stock offering;

 

·our results of operations after the stock offering; or

 

·changes in the market price of the shares of common stock after the stock offering.

 

The following pro forma data may not be representative of the financial effects of the offering at the date on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation accounts to be established in the conversion or, in the unlikely event of a liquidation of Mineola Community Bank, to the tax effect of the recapture of the bad debt reserve. See “The Conversion and Offering – Liquidation Rights.”

 

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   At or for Year Ended December 31, 2020 Based on Sale at $10.00 Per Share of: 
   3,060,000 Shares   3,600,000 Shares   4,140,000 Shares  

4,761,000 Shares (1)

 
                 
       (Dollars in thousands, except per share amounts) 
Gross proceeds of offering   $30,600   $36,000   $41,400   $47,610 
Market value of shares issued to charitable foundation    500    500    500    500 
Pro forma market capitalization   $31,100   $36,500   $41,900   $48,110 
                     
Gross proceeds of offering   $30,600   $36,000   $41,400   $47,610 
Expenses    (1,369)   (1,419)   (1,469)   (1,526)
Estimated net proceeds    29,231    34,581    39,931    46,084 
Cash contribution to charitable foundation    (75)   (75)   (75)   (75)
Common stock purchased by employee stock ownership plan    (2,488)   (2,920)   (3,352)   (3,849)
Common stock purchased by stock-based benefit plans    (1,244)   (1,460)   (1,676)   (1,924)
Estimated net proceeds, as adjusted   $25,424   $30,126   $34,828   $40,236 
                     
For the Year Ended December 31, 2020                    
Consolidated net earnings:                    
Historical   $749   $749   $749   $749 
Income on adjusted net proceeds    72    86    99    114 
Employee stock ownership plan (2)    (98)   (115)   (132)   (152)
Stock awards (3)    (197)   (231)   (265)   (304)
Stock options (4)    (159)   (186)   (214)   (245)
Pro forma net income   $367   $303   $237   $162 
                     
Earnings per share (5):                    
Historical   $0.26   $0.22   $0.19   $0.17 
Income on adjusted net proceeds    0.03    0.03    0.03    0.03 
Employee stock ownership plan (2)    (0.03)   (0.03)   (0.03)   (0.03)
Stock awards (3)    (0.07)   (0.07)   (0.07)   (0.07)
Stock options (4)    (0.06)   (0.06)   (0.06)   (0.06)
Pro forma earnings per share (5)   $0.13   $0.09   $0.06   $0.04 
                     
Offering price to pro forma net earnings per share    76.92x   111.11x   166.67x   250.00x
Number of shares used in earnings per share calculations    2,873,640    3,372,600    3,871,560    4,445,364 
                     
At December 31, 2020                    
Stockholders’ equity:                    
Historical   $31,939   $31,939   $31,939   $31,939 
Estimated net proceeds    29,231    34,581    39,931    46,084 
Shares issued to charitable foundation    500    500    500    500 
After-tax cost of charitable foundation    (454)   (454)   (454)   (454)
Common stock purchased by employee stock ownership plan (2)    (2,488)   (2,920)   (3,352)   (3,849)
Common stock acquired by stock-based benefit plans (3)    (1,244)   (1,460)   (1,676)   (1,924)
Pro forma stockholders’ equity (6)   $57,484   $62,186   $66,888   $72,296 
Intangible assets   $661   $661   $661   $661 
Pro forma tangible stockholders’ equity (6)   $56,823   $61,525   $66,227   $71,635 
                     
Stockholders’ equity per share (7):                    
Historical   $10.27   $8.75   $7.62   $6.64 
Estimated net proceeds    9.40    9.47    9.53    9.58 
Shares issued to charitable foundation    0.16    0.14    0.12    0.10 
After-tax cost of charitable foundation    (0.15)   (0.12)   (0.11)   (0.09)
Common stock purchased by employee stock ownership plan (2)    (0.80)   (0.80)   (0.80)   (0.80)
Common stock acquired by stock-based benefit plans (3)    (0.40)   (0.40)   (0.40)   (0.40)
Pro forma stockholders’ equity per share (6) (7)   $18.48   $17.04   $15.96   $15.03 
Intangible assets   $0.21   $0.18   $0.15   $0.14 
Pro forma tangible stockholders’ equity per share (6) (7)   $18.27   $16.86   $15.81   $14.89 
                     
Offering price as percentage of pro forma stockholders’ equity per share    54.11%   58.69%   62.66%   66.53%

Offering price as percentage of pro forma tangible stockholders’ equity per

share

   54.73%   59.31%   63.25%   67.16%

Number of shares outstanding for pro forma book value per share

calculations

   3,110,000    3,650,000    4,190,000    4,811,000 
   
(1)As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Assumes that 8% of the sum of shares of common stock sold in the offering and contributed to the charitable foundation will be purchased by the employee stock ownership plan. For purposes of these tables, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Texas Community Bancshares. Mineola Community Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Mineola Community Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 718-40, “Compensation – Stock Compensation -- Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Mineola Community bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective federal income tax rate of 21%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 12,440, 14,600, 16,760 and 19,244 shares were committed to be released during the year ended December 31, 2020 at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for net income per share calculations.

 

43

 

 

(3)Assumes that one or more stock-based benefit plans purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering and contributed to the charitable foundation. Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Texas Community Bancshares or through open market purchases. Shares in the stock-based benefit plan are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by Texas Community Bancshares. The tables assume that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the plan is amortized as an expense during the year ended December 31, 2020, and (iii) the plan expense reflects an effective federal income tax rate of 21%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the sum of shares sold in the offering and contributed to the charitable foundation) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 3.85%.
(4)Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 10% of the sum of shares to be sold in the offering and contributed to the charitable foundation. Stockholder approval of the plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.69 for each option and that the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options using an effective federal income tax rate of 21%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 9.09%.
(5)Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See footnote 2, above. The number of shares of common stock actually sold may be more or less than the assumed amounts.
(6)The retained earnings of Mineola Community Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering – Liquidation Rights” and “Supervision and Regulation – Federal Banking Regulation – Capital Distributions.”
(7)Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the offering and (ii) the number of shares to be contributed to the charitable foundation. The number of shares actually sold may be more or less than the assumed amounts.

 

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COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE CHARITABLE FOUNDATION

 

As reflected in the table below, if the charitable foundation is not established and funded in connection with the conversion, a greater number of shares of common stock would be sold in the offering. At the minimum, midpoint, maximum, and adjusted maximum of the valuation range, the amount of the stock sold in the offering is $30.6 million, $36.0 million, $41.4 million and $47.6 million, respectively, with the charitable foundation, as compared to $31.1 million, $36.5 million, $41.9 million and $48.1 million, respectively, without the charitable foundation. However, due to the size of the contribution to the charitable foundation, Feldman Financial determined that the additional capital that would be received, assuming the offering occurs without the charitable foundation, was immaterial to the pro forma valuation; and accordingly, the valuation is unchanged with or without the charitable foundation.

 

For comparative purposes only, set forth below are certain pricing ratios, financial data and ratios at and for the year ended December 31, 2020, at the minimum, midpoint, maximum, and adjusted maximum of the offering range, assuming the offering was completed at the beginning of the period, with and without the charitable foundation.

 

  

Minimum of Offering Range

  

Midpoint of Offering Range

  

Maximum of Offering Range

  

Adjusted Maximum of Offering Range

 
  

With Foundation

  

Without Foundation

  

With Foundation

  

Without Foundation

  

With Foundation

  

Without Foundation

  

With Foundation

  

Without Foundation

 
                                 
   (Dollars in thousands, except per share amounts) 
Estimated offering amount   $30,600   $31,100   $36,000   $36,500   $41,400   $41,900   $47,610   $48,110 
Pro forma market capitalization    31,100    31,100    36,500    36,500    41,900    41,900    48,110    48,110 
Pro forma total assets    325,183    325,632    326,885    330,334    334,587    335,036    339,995    340,444 
Pro forma total liabilities    267,699    267,699    267,699    267,699    267,699    267,699    267,699    267,699 
Pro forma stockholders’ equity    57,484    57,933    62,186    62,635    66,888    67,337    72,296    72,745 
Pro forma net income (1)   367    369    303    305    237    239    162    164 
Pro forma stockholders’ equity per share   $18.48   $18.63   $17.04   $17.16   $15.96   $16.07   $15.03   $15.12 
Pro forma net income per share   $0.13   $0.13   $0.09   $0.09   $0.06   $0.06   $0.04   $0.04 
                                         
Pro forma pricing ratios:                                        
Offering price as a percentage of pro forma stockholders’ equity per share    54.11%   53.68%   58.69%   58.28%   62.66%   62.23%   66.53%   66.14%
Offering price to pro forma net income per share    76.92    76.92   111.11   111.11   166.67   166.67   250.00    250.00x
Offering price to pro forma assets per share    9.56%   9.55%   11.06%   11.05%   12.52%   12.51%   14.15%   14.13%
                                         
Pro forma financial ratios:                                        
Return on assets    0.11%   0.11%   0.09%   0.09%   0.07%   0.07%   0.05%   0.05%
Return on equity    0.64%   0.64%   0.49%   0.49%   0.35%   0.35%   0.22%   0.22%
Equity to assets    17.68%   17.79%   18.85%   18.96%   19.99%   20.10%   21.26%   21.37%

 

(footnote on following page)

 

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(1)The following table shows the estimated after-tax expense associated with the contribution to the charitable foundation, as well as pro forma net income, pro forma net income per share, pro forma income on assets and pro forma income on stockholders’ equity assuming the contribution to the charitable foundation was expensed during the year ended December 31, 2020.

 

  

Minimum of Offering Range

 
  

Midpoint of Offering Range

 
  

Maximum of Offering Range

 
  

Adjusted Maximum of Offering Range

 
 
After-tax expense of stock and cash contribution to charitable foundation   $454   $454   $454   $454 
Pro forma net loss   $(87)  $(151)  $(217)  $(292)
Pro forma net loss per share   $(0.03)  $(0.04)  $(0.06)  $(0.07)
Offering price to pro forma net income per share    (333.33)x   (250.00)x   (166.67)x   (142.86)x
Pro forma loss as a percentage of assets    (0.03)%   (0.05)%   (0.06)%   (0.09)%
Pro forma loss as a percentage of stockholders’ equity    (0.15)%   (0.24)%   (0.32)%   (0.40)%

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

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 at December 31, 2020 and 2019 and for the years ended December 31, 2020 and 2019 is derived in part from the audited consolidated financial statements that appear elsewhere in this prospectus. You should read the information in this section in conjunction with the other business and financial information contained in this prospectus, including the consolidated financial statements and related notes of Mineola Community MHC appearing elsewhere in this prospectus.

 

Overview

 

Texas Community Bancshares will succeed to both Mineola Community MHC and Mineola Community Financial Group as the holding company for Mineola Community Bank upon the completion of the conversion and offering. Like Mineola Community MHC and Mineola Community Financial Group, Texas Community Bancshares will conduct its operations primarily through Mineola Community Bank.

 

Mineola Community Bank’s 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 Mineola Community Bank’s 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, 2020, our investment in bank owned life insurance was $5.9 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.

 

Impact of COVID-19 Pandemic

 

The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, state governments, including Texas, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures have dramatically increased unemployment in the United States and have negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.

 

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The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”). The CARES Act also established the PPP through the SBA, which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. In addition, the Federal Reserve Board took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero.

 

We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from TDR classification under accounting principles generally accepted in the United States (“U.S. GAAP”). In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs.

 

During the year ended December 31, 2020, we had granted short-term payment deferrals on 44 mortgage loans and consumer loans, totaling approximately $7.2 million in aggregate principal amount, that were otherwise performing. As of December 31, 2020, all of these loans had returned to normal payment status. Additionally, during the year ended December 31, 2020, we granted short-term payment and interest deferrals on one commercial real estate loan totaling $1.2 million. This loan is expected to return to normal payment status on April 1, 2021.

 

Given the unprecedented uncertainty and rapidly evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are highly uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services, protracted periods of lower interest rates, increased non-interest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.

 

For additional information, see “Risk Factors—Risks Related to the COVID-19 Pandemic—The economic impact of the COVID-19 pandemic could adversely affect our financial condition and results of operations.”

 

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 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, 2020, one- to four-family residential mortgage loans totaled $143.5 million, or 66.8% of total loans. We have also 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, 2020, these loans amounted to $54.3 million.

 

  · 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 has arisen 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, 2020, commercial real estate loans amounted to $29.4 million, or 13.7% of total loans, and construction and land loans amounted to $22.8 million, or 10.6% of total loans.

 

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Our commercial real estate loans and construction and land loans have higher credit risk than our residential mortgage loans. See “Risk Factors—Risks Related to our Lending Activities—Our commercial real estate loans involve credit risks that could adversely affect our financial condition and results of operations” and “Risk Factors—Risks Related to our Lending Activities—Our construction and land loans involve credit risks that could adversely affect our financial condition and results of operations”

 

·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 $159.4 million, or 67.8% of total deposits, as of December 31, 2020, compared to $129.9 million, or 63.6% of total deposits, as of December 31, 2019.

 

·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 0.36% and 0.32% at December 31, 2020 and 2019, 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 $5.5 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 may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. During the year ended December 31, 2020, we also granted short-term payment deferrals on loans to assist customers during the COVID-19 pandemic, as described below.

 

·Grow organically and through opportunistic acquisitions or branching. We intend to grow our balance sheet organically on a managed basis, and the capital we are raising 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 are raising in the offering would help us fund any such opportunities that may arise. We have no current plans or intentions regarding any such expansion activities.

 

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Summary of Significant Accounting Policies

 

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 significant 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 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 losses and therefore the appropriateness of the allowance for loan and lease losses could change significantly.

 

The allocation methodology applied by Mineola Community Bank is designed to assess the appropriateness of the allowance for loan and lease losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. 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, 2020. 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.

 

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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.

 

Mineola Community MHC 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.

 

Comparison of Financial Condition at December 31, 2020 and December 31, 2019

 

Total Assets. Total assets were $299.6 million as of December 31, 2020, an increase of $32.1 million, or 12.0%, compared to total assets of $267.6 million at December 31, 2019. The increase was due primarily to a $36.0 million increase in loans receivable, net.

 

Cash and Due From Banks. Cash and due from banks increased $2.1 million, or 55.9%, to $6.0 million at December 31, 2020 from $3.8 million at December 31, 2019, primarily due to an increase in deposits, partially offset by purchases of investment securities available-for-sale and by use of cash to fund loan portfolio growth during the year.

 

Interest Bearing Deposits in Banks. Interest bearing deposits in banks were $14.0 million as of December 31, 2020, a decrease of $5.0 million, or 26.5%, when compared to interest bearing deposits in banks of $19.1 million at December 31, 2019. The decrease was due primarily to the maturity of certificates of deposit of $7.7 million.

 

Securities Available for Sale. Securities available for sale increased by $2.3 million, or 21.0%, to $13.0 million at December 31, 2020 from $10.7 million at December 31, 2019, primarily due to purchases of mortgage-backed securities of $5.2 million and a $173,000 increase in unrealized holding net gains, partially offset by principal repayments of $3.1 million.

 

Securities Held to Maturity. Securities held to maturity decreased by $4.9 million, or 12.4%, to $34.3 million at December 31, 2020 from $39.2 million at December 31, 2019, primarily due to purchases of mortgage-backed securities of $7.2 million, calls on municipal securities of $1.8 million, and principal paydowns of $10.3 million.

 

Loans Receivable, Net. Loans receivable, net, increased $36.0 million, or 20.3%, to $213.2 million at December 31, 2020 from $177.2 million at December 31, 2019. During the year ended December 31, 2020, loan originations totaled $123.3 million, including $67.0 million of one- to four-family residential mortgage loans of which $28.0 million were refinances. During the year ended December 31, 2020, one- to four-family residential mortgage loan originations included $29.4 million of one- to four-family residential mortgage loan originations secured by properties located in the northern and eastern sections of the Dallas Metroplex. Additionally, construction loan originations totaled $23.6 million during the year ended December 31, 2020. At December 31, 2020, $6.7 million of originated construction loans remained unfunded. Furthermore, $11.8 million of commercial real estate mortgage loans, $4.5 million of land loans, $6.1 million of commercial loans, and $4.1 million of consumer and other loans were originated during the year ended December 31, 2020. We originated 106 PPP loans, totaling $5.5 million, during the year ended December 31, 2020. At December 31, 2020, 68 PPP loans, totaling $4.1 million, remained outstanding. During the year ended December 31, 2020, loan principal repayments totaled $81.5 million.

 

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The largest increases in our loan portfolio were in the one- to four-family residential mortgage loan and commercial real estate loan portfolios. The increase in these loan portfolios reflects our strategy to grow the balance sheet through originations of one- to four-family residential mortgage loans while also diversifying into higher yielding commercial real estate loans to improve net margins and manage interest rate risk. Currently, we hold all loans we originate in our portfolio. However, we have the option to sell selected, conforming 15-year and 30-year fixed rate one- to four-family residential mortgage loans into the secondary market on a servicing-retained basis, which would provide us a source of revenue from loan servicing income and gains on the sale of loans.

 

Deposits. Deposits increased $30.9 million, or 15.1%, to $235.1 million at December 31, 2020 from $204.2 million at December 31, 2019. Core deposits (defined as all deposits other than certificates of deposit) increased $29.5 million, or 22.8%, to $159.1 million at December 31, 2020 from $129.5 million at December 31, 2019, primarily as a result of a $21.0 million, or 30.5%, increase in demand deposits to $90.1 million on December 31, 2020 from $69.3 million on December 31, 2019. Certificates of deposit increased $1.4 million, or 1.9%, to $75.8 million at December 31, 2020 from $74.3 million at December 31, 2019. At December 31, 2020 and 2019, we had no brokered deposits. The increase in deposits during 2020 were larger than normal due to several factors, primarily as a result of excessive amounts of liquidity in the market provided through government stimulus in response to the COVID-19 pandemic. Furthermore, the volatility in the stock market and general economic uncertainty led consumers to deposit their funds in safer, insured deposit accounts.

 

Advances from the Federal Home Loan Bank. Advances from the Federal Home Loan Bank decreased by $374,000, or 1.2%, to $30.8 million at December 31, 2020 from $31.1 million at December 31, 2019, primarily due to maturing advances of $3.2 million with a weighted average cost of 1.61% and amortizing principal payments of $2.2 million. This was offset by the purchase of two amortizing advances totaling $5 million at a weighted average cost of 1.09%.

 

Total Members’ Equity. Total members’ equity increased $885,000, or 2.9%, to $31.9 million at December 31, 2020 from $31.1 million at December 31, 2019, due to net income of $749,000 for the year ended December 31, 2020 and an increase in other comprehensive income of $136,000 related to net changes in unrealized holding gains/losses in the available-for-sale securities portfolio.

 

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Average Balance Sheets

 

The following tables set forth average balance sheets, 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 monthly average balances. Management does not believe that the use of monthly average balances rather than daily average balances would result in material differences. Non-accrual loans are included in the computation of average balances. Average yields for loans (excluding PPP loans) include loan fees of $583,000 and $281,000 for the years ended December 31, 2020 and 2019, respectively. Average yield for PPP loans include $212,000 in loan fees for the year ended December 31, 2020. We have not recorded deferred loan fees, as we have determined them to be immaterial.

 

   For the Years Ended December 31, 
   2020   2019 
   Average Outstanding Balance   Interest   Average Yield/Rate   Average Outstanding Balance   Interest   Average Yield/Rate 
                         
     
   (Dollars in thousands) 
Interest-earning assets:                              
Loans (excluding PPP loans)   $193,765   $9,372    4.84%  $170,502   $8,402    4.93%
Allowance for loan and lease losses    (1,205)             (1,026)          
PPP loans    3,422    248    7.25%            
Securities    48,777    898    1.84%   49,749    1,061    2.13%
Restricted stock    2,008    38    1.89%   1,962    60    3.06%
Interest bearing deposits in banks    15,791    241    1.53%   18,420    466    2.53%
Federal funds sold    1,866    5    0.27%   1,702    36    2.12%
Total interest-earning assets    264,424    10,802    4.09%   241,309    10,025    4.15%
Noninterest-earning assets    20,082              17,628           
Total assets   $284,506             $258,937           
                               
Interest-bearing liabilities:                              
Interest-bearing demand deposits   $49,345    177    0.36%  $42,564    163    0.38%
Regular savings and other deposits    52,223    238    0.46%   45,333    251    0.55%
Money market deposits    10,862    87    0.80%   10,571    158    1.49%
Certificates of deposit    74,935    1,304    1.74%   78,386    1,473    1.88%
Total interest-bearing deposits    187,365    1,806    0.96%   176,854    2,045    1.16%
Advances from the Federal Home Loan Bank    32,738    691    2.11%   24,413    585    2.40%
Other liabilities    332    11    3.31%   309    12    3.88%
Total interest-bearing liabilities    220,435    2,508    1.14%   201,576    2,642    1.31%
Noninterest-bearing demand deposits    29,183              24,072           
Other noninterest-bearing liabilities    3,005              2,689           
Total liabilities    252,623              228,337           
Total members’ equity    31,883              30,600           
Total liabilities and members’ equity   $284,506             $258,937           
Net interest income        $8,294             $7,383      
Net interest rate spread (1)              2.95%             2.84%
Net interest-earning assets (2)   $43,989             $39,733           
Net interest margin (3)              3.14%             3.06%
Average interest-earning assets to interest-bearing liabilities              119.96%             119.71%

________________

(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.

 

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Rate/Volume Analysis

 

The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current year volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.

 

   Years Ended December 31, 2020 vs. 2019 
   Increase (Decrease) Due to   Total Increase 
   Volume   Rate   (Decrease) 
             
   (In thousands) 
Interest-earning assets:               
Loans (excluding PPP loans)   $1,146   $(176)  $970 
PPP loans    248        248 
Securities    (21)   (142)   (163)
Restricted stock    1    (23)   (22)
Interest bearing deposits in banks    (67)   (158)   (225)
Federal funds sold and other    3    (34)   (31)
Total interest-earning assets    1,310    (533)   777 
                
Interest-bearing liabilities:               
Interest-bearing demand deposits    26    (12)   14 
Regular savings and other deposits    38    (51)   (13)
Money market deposits    4    (75)   (71)
Certificates of deposit    (65)   (104)   (169)
Total deposits    3    (242)   (239)
Advances from the Federal Home Loan Bank    199    (93)   106 
Other interest-bearing liabilities    1    (2)   (1)
Total interest-bearing liabilities    203    (337)   (134)
                
Change in net interest income   $1,107   $(196)  $911 

 

Comparison of Operating Results for the Years Ended December 31, 2020 and December 31, 2019

 

Net Income. Net income was $749,000 for the year ended December 31, 2020, compared to net income of $1.1 million for the year ended December 31, 2019, a decrease of $308,000, or 29.2%. The decrease was primarily due to a $68,000 decrease in non-interest income and $863,000 increase in non-interest expense, partially offset by a $586,000 increase in net interest income after provision for loan and lease losses.

 

Interest Income. Interest income increased $777,000, or 7.8%, to $10.8 million for the year ended December 31, 2020 from $10.0 million for the year ended December 31, 2019, primarily due to a $970,000 increase in interest and fees on loans, net of PPP loans. The increase in interest and fees on loans, net of PPP loans, was primarily due to an increase of $23.3 million in the average balance of the loan portfolio to $193.8 million for the year ended December 31, 2020 from $170.5 million for the year ended December 31, 2019, partially offset by a $440,000, or 27.1%, decrease in interest and dividend income on investments and deposits with banks to $1.2 million for the year ended December 31, 2020 from $1.6 million for the year ended December 31, 2019. The weighted average yield for the loan portfolio, net of PPP loans, decreased by nine basis points from 4.93% for the year ended December 31, 2019 to 4.84% for the year ended December 31, 2020, primarily due to the decrease in market interest rates caused by the Federal Reserve Board interest rate reduction in March 2020 in response to the COVID-19 pandemic. PPP loans contributed an additional $248,000 in interest and fees for the year ended December 31, 2020.

 

Average interest-earning assets increased $23.1 million, to $264.4 million for the year ended December 31, 2020 from $241.3 million for the year ended December 31, 2019. The yield on interest earning-assets decreased six basis points to 4.09% for the year ended December 31, 2020 from 4.15% for the year ended December 31, 2019.

 

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Interest Expense. Total interest expense decreased $134,000, or 5.0%, to $2.5 million for the year ended December 31, 2020 from $2.6 million for the year ended December 31, 2019. Interest expense on deposit accounts decreased $239,000, or 11.7%, to $1.8 million for the year ended December 31, 2020 from $2.0 million for the year ended December 31, 2019, primarily due to an increase in the average balance of interest-bearing deposits to $187.4 million for the year ended December 31, 2020 from $176.9 million for the year ended December 31, 2019. This increase in average balance was more than offset by a decrease in the weighted average rate on interest-bearing deposits to 0.96% for the year ended December 31, 2020 from 1.16% for the year ended December 31, 2019.

 

Interest expense on Federal Home Loan Bank advances increased $106,000, or 18.1%, to $691,000 for the year ended December 31, 2020 from $585,000 for the year ended December 31, 2019. The average balance of Federal Home Loan Bank advances increased $8.3 million, or 34.1%, to $32.7 million for the year ended December 31, 2020 from $24.4 million for the year ended December 31, 2019. The increase in the average balance was primarily due to the use of advances to fund loan originations.

 

Net Interest Income. Net interest income increased $911,000, or 12.3%, to $8.3 million for the year ended December 31, 2020 from $7.4 million for the year ended December 31, 2019, primarily due to a $23.1 million increase in the average balance of interest-earning assets during the year ended December 31, 2020, together with an increase in the interest rate spread to 2.95% for the year ended December 31, 2020 from 2.84% for the year ended December 31, 2019 and an increase in the net interest margin to 3.14% for the year ended December 31, 2020 from 3.06% for the year ended December 31, 2019. The increase in the interest rate spread and the net interest margin was primarily due to the increase in the average balance of interest-earning assets to $264.4 million for the year ended December 31, 2020 from $241.3 million for the year ended December 31, 2019 and a decrease in the weighted average rate paid on interest-bearing liabilities to 1.14% for the year ended December 31, 2020 from 1.31% for the year ended December 31, 2019, partially offset by an increase in the average balances on interest-bearing liabilities and a decrease in yields on interest-earning assets.

 

Provision for Loan and Lease Losses. Based on management’s analysis of the adequacy of allowance for loan and lease losses, a provision of $484,000 was recorded for the year ended December 31, 2020, compared to a provision of $160,000 for the year ended December 31, 2019. The $324,000, or 203.3%, increase in the provision was primarily due to loan portfolio growth and a $200,000 specific provision for one loan relationship, with an outstanding balance of $566,000 at December 31, 2020, that migrated to the doubtful classification.

 

Noninterest Income. Noninterest income remained relatively flat, decreasing $68,000, or 4.2%, to $1.6 million for the year ended December 31, 2020. A $68,000 decrease in gains on the sale of securities, a $96,000 decrease in gains on sale of foreclosed assets and a $40,000 decrease in service charges on deposit accounts were partially offset by a $117,000 increase in income from other service charges and fees.

 

Noninterest Expense. Noninterest expense increased $863,000, or 11.4%, to $8.4 million for the year ended December 31, 2020 from $7.6 million for the year ended December 31, 2019, primarily due to increases in salaries and employee benefits, data processing, and other expenses. Salary and employee benefit expenses, including director fees, increased by $451,000, or 9.5%, due to normal salary increases, an increase in the cost of insurance benefits, and a $100,000 increase in loan officer incentive expenses due to increased loan production. Data processing expense increased by $155,000 primarily due to additional products and an increase in the number of loan and deposit accounts, and was partially offset by a $48,000 decrease in contract services due to changing the service provider for our card services. Other expenses increased by $308,000 primarily due to an $89,000 expense for the Small Town Strong program that we started to help local small businesses pay rent and utility expenses at the onset of the COVID-19 pandemic, $30,000 in expenses for cleaning supplies, sanitizing, modifying customer areas, employee testing and other expenses specifically related to the pandemic, and $84,000 in professional fees.

 

Income Tax Expense. Income tax expense decreased by $37,000, or 16.3%, to $193,000 for the year ended December 31, 2020 from $230,000 for the year ended December 31, 2019. The effective tax rate was 20.5% and 17.9% for the years ended December 31, 2020 and 2019, respectively. The increase in the effective tax rate was primarily due to an increase in non-deductible tax items in 2020 as compared to 2019.

 

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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 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 quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

 

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

 

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.

 

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

 

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At December 31, 2020 
 

Change in Interest Rates (basis points) (1)

    

Net Interest Income Year 1 Forecast

    

Year 1 Change from Level

 
             
      (Dollars in thousands)      
 400   $7,176    (8.12)%
 300    7,425    (4.93)%
 200    7,676    (1.71)%
 100    7,838    0.36%
 Level    7,810     
 (100)   7,924    1.46%
 (200)   7,940    1.66%
  
(1)Assumes an immediate uniform change in interest rates at all maturities.

 

The table above indicates that at December 31, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 1.71% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 1.66% increase in net interest income.

 

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 tables below set 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 December 31, 2020 
                EVE as a Percentage of
Present Value of Assets (3)
 
Change in Interest       Estimated Increase       Increase 
Rates (basis points)   Estimated   (Decrease) in EVE       (Decrease) 
(1)   EVE (2)   Amount   Percent   EVE Ratio (4)   (basispoints) 
                      
  
(Dollars in thousands) 
 400   $34,355   $(1,926)   (10.35)%   12.34%   3 
 300    36,281    (1,560)   (5.32)%   12.64%   33 
 200    37,841    (898)   (1.25)%   12.79%   48 
 100    38,739    418    1.09%   12.74%   43 
 Level    38,321        %   12.31%    
 (100)   37,185    (1,136)   (2.96)%   11.72%   (59)
 (200)   41,866    4,701    9.30%   12.96%   65 

   

  

(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.

 

The table above indicates that at December 31, 2020, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 1.25% decrease in EVE, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 9.3% increase in EVE.

 

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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.

 

Liquidity and Capital Resources

 

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. 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 December 31, 2020, we had outstanding advances of $30.8 million from the Federal Home Loan Bank of Dallas. At December 31, 2020, we had unused borrowing capacity of $84.0 million with the Federal Home Loan Bank of Dallas. In addition, at December 31, 2020, we had a $10.0 million line of credit with Texas Independent Bankers Bank and a $5.0 million line of credit with First Horizon Bank. At December 31, 2020, 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 years ended December 31, 2020 and 2019 included as part of the consolidated financial statements appearing elsewhere in this prospectus.

 

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.

 

At December 31, 2020, 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. See Note 16 of the notes to consolidated financial statements.

 

The net proceeds from the offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net proceeds from the offering, which will increase our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the offering, as well as other factors associated with the offering, our return on equity will be adversely affected following the offering. See “Historical and Pro Forma Capital Compliance” and “Risk Factors—Risks Related to the Offering—Our return on equity may be low following the stock offering. This could negatively affect the trading price of our shares of common stock.”

 

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, unused lines of credit and swap transactions. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2020, we had outstanding commitments to originate loans of $22.4 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in less than one year from December 31, 2020 totaled $45.2 million. Management expects that a substantial portion of these time deposits will be retained. However, if a substantial portion of these time deposits is not retained, we may utilize advances from the Federal Home Loan Bank of Dallas or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

 

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

 

Recent Accounting Pronouncements

 

See Note 20 to the notes to the consolidated financial statements for a description of recent accounting pronouncements that may affect our financial condition and results of operations.

 

Impact of Inflation and Changing Price

 

The consolidated financial statements and related data presented in this prospectus have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

BUSINESS OF TEXAS COMMUNITY BANCSHARES

 

Texas Community Bancshares is a Maryland corporation that was organized in March 2021. Upon completion of the conversion, it will become the holding company of Mineola Community Bank and will succeed to all of the business and operations of Mineola Community MHC and Mineola Community Financial Group, each of which will cease to exist upon completion of the conversion. Upon completion of the conversion and offering, Texas Community Bancshares will own all of the issued and outstanding capital stock of Mineola Community Bank. We intend to contribute at least 50% of the net offering proceeds to Mineola Community Bank, to fund a loan to our employee stock ownership plan to finance its purchase of shares of common stock in the stock offering, and fund the cash component of the contribution to the charitable foundation. Texas Community Bancshares will retain the remainder of the net offering proceeds. We intend to use and invest those proceeds as discussed under “How We Intend to Use the Proceeds from the Offering.” The executive offices of Texas Community Bancshares are located at 215 West Broad Street, Mineola, TX 75773, and its telephone number is (903) 569-2602.

 

After the conversion and the offering are completed, Texas Community Bancshares, as the holding company of Mineola Community Bank, will be authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies. We currently have no understandings or agreements to acquire other financial institutions or financial services companies, although we may determine to do so in the future.

 

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Following the conversion and offering, our cash flow will depend on earnings from the investment of the net offering proceeds and from any dividends we receive from Mineola Community Bank. Mineola Community Bank is subject to regulatory limitations on the amount of dividends that it may pay. Initially, Texas Community Bancshares will not own or lease any property, but instead will pay a fee to Mineola Community Bank for the use of its premises, furniture and equipment. The officers of Texas Community Bancshares will be persons who are the current officers of Mineola Community Bank. We will use, however, the support staff of Mineola Community Bank from time to time. We will pay a fee to Mineola Community Bank for the time devoted to Texas Community Bancshares by employees of Mineola Community Bank; however, these individuals will not be separately compensated by Texas Community Bancshares. Texas Community Bancshares may hire additional employees, as appropriate, to the extent it expands its business in the future.

 

Texas Community Bancshares will be a bank holding company and subject to comprehensive regulation by the Federal Reserve Board.

 

BUSINESS OF MINEOLA COMMUNITY BANK, S.S.B.

 

Mineola Community Bank is a Texas-chartered stock savings bank headquartered in Mineola, Texas. In 2008, Mineola Community Bank converted from the mutual to the stock form of ownership in connection with its reorganization into the mutual holding company structure.

 

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 Mineola Community Bank’s 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.

 

Mineola Community Bank is subject to comprehensive regulation and examination by the Texas Department of Savings and Mortgage Lending and by the Federal Deposit Insurance Corporation. Mineola Community Bank is a member of the Federal Home Loan Bank system. Our website address is www.mineolacb.com. Information on our website is not considered a part of this prospectus.

 

Market Area

 

We consider Franklin County, Hopkins County, Smith County, Van Zandt County and Wood County, and contiguous areas, as our primary market area for originating loans and gathering deposits. Our main office and five branch offices are located in these counties. Our branch office in Winnsboro, Texas, is in Wood County, but the Winnsboro city limits also lie within Franklin County and Hopkins County.

 

Mineola, Texas, located in Wood County, is approximately 80 miles east of Dallas, Texas, and approximately 35 miles north of Tyler, Texas, two notable population centers. Our Edgewood branch office, located in Van Zandt County, is approximately 50 miles east of Dallas and our Lindale branch office, located in Smith County, is approximately 20 miles north of Tyler. The Tyler metropolitan area is a growing regional economic center with a large, diversified employment base spread across varied economic sectors. Tyler Junior College and The University of Texas at Tyler are located in Tyler.

 

Mineola has become an attractive, lower-cost of living, retirement area for residents of the Dallas area. There are major hospital facilities located in Tyler and numerous recreational facilities located in the vicinity of Mineola including well-known bass fishing lakes, golf courses, and other recreational facilities, all of which have contributed to the influx of population. The work-from-home trend that has arisen due to the COVID-19 pandemic has also contributed to area’s population growth.

 

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Major employers in our primary market area include Morton Salt Company (which operates a salt mine in Grand Saline, TX), Sanderson Farms, Inc. (which operates a poultry feed mill in Mineola), local school districts, local governments, Walmart, Inc., Exxon Mobil Corporation, hospitals and other healthcare facilities, and numerous small manufacturing firms. Although there is some oil exploration business in Wood County, the economy of primary market area is not heavily dependent on it.

 

According to published statistics, the 2021 estimated populations of Franklin County, Hopkins County, Smith County, Van Zandt County and Wood County is approximately 11,000, 38,000, 236,000, 57,000 and 46,000, respectively. The 2021 to 2026 estimated population growth rates in Franklin County, Hopkins County, Smith County, Van Zandt County and Wood County are 0.6%, 1.0%, 1.2%, 1.1% and 1.1%, respectively, compared to 1.3% statewide and 0.6% nationwide. Estimated 2021 median household incomes in Franklin County, Hopkins County, Smith County, Van Zandt County and Wood County is approximately $60,608, $57,317, $62,538, $59,221 and $52,787, respectively, compared to $65,383 statewide and $67,761 nationwide. The 2021 to 2026 estimated median household income growth rates for Franklin County, Hopkins County, Smith County, Van Zandt County and Wood County are 1.5%, 1.2%, 1.8%, 1.7% and 1.0%, respectively, compared to 1.3% statewide and 1.7% nationwide. Estimated 2021 per capita incomes for Franklin County, Hopkins County, Smith County, Van Zandt County and Wood County $32,188, $29,030, are approximately $32,348, $30,068 and $29,963, respectively, compared to $33,701 statewide and $37,689 nationwide. The 2021 to 2026 estimated per capita income growth rates for Franklin County, Hopkins County, Smith County, Van Zandt County and Wood County are 1.6%, 1.5%, 2.0%, 2.0% and 1.2%, respectively, compared to 1.6% statewide and 2.1% nationwide. The December 2020 unemployment rates for Franklin County, Hopkins County, Smith County, Van Zandt County and Wood County are 6.3%, 5.3%, 6.4%, 6.0% and 6.6%, respectively, compared to 7.1% statewide and 6.5% nationwide.

 

Competition

 

We face intense competition within our local market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions that include money center banks, regional banks, community banks and credit unions. We compete for loans with banks, savings institutions, mortgage brokers, consumer finance companies and credit unions. We compete for deposits with banks, savings institutions, credit unions, money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2020 (the most recent date for which data is available), our deposit market share in Smith County was 0.6% (24th among 24 Federal Deposit Insurance Corporation-insured institutions with offices in the county), 8.4% in Van Zandt County (6th among 8 Federal Deposit Insurance Corporation-insured institutions with offices in the county) and 15.4% in Wood County (3rd among 7 Federal Deposit Insurance Corporation-insured institutions with offices in the county). These are the counties in which our offices are located.

 

Lending Activities

 

General. Our historical lending activity consists primarily of originating one- to four-family residential mortgage loans, commercial real estate loans, and construction and land loans. To a substantially lesser extent, we originate agricultural loans, commercial loans, and consumer and other loans. Substantially all of the loans we originate are fixed rate loans.

 

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. In addition to the loans disclosed in the table below, we had loans in process of $6.8 million and $7.0 million at December 31, 2020 and December 31, 2019, respectively. We had no loans held for sale at December 31, 2020 and December 31, 2019, respectively.

  

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   At December 31, 
   2020   2019 
   Amount   Percent   Amount   Percent 
                 
   (Dollars in thousands) 
Real estate loans:                    
One- to four-family residential   $143,463    66.78%  $127,733    71.62%
Multi-family    383    0.18    411    0.23 
Construction & land    22,795    10.61    15,602    8.75 
Commercial    29,403    13.69    20,417    11.45 
Farmland    5,616    2.61    5,140    2.88 
Agriculture loans    358    0.17    722    0.40 
Commercial loans    4,593    2.14    3,978    2.23 
Consumer and other    4,149    1.93    4,352    2.44 
PPP loans    4,072    1.89         
Total loans    214,832    100.00%   178,355    100.00%
Less:                    
Net deferred loan fees                   
Allowance for losses    1,561         1,104      
Total loans, net   $213,271        $177,251      

 

Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at December 31, 2020. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Because the tables present contractual maturities and do not reflect repricing or the effect of prepayments, actual maturities may differ.

 

   One- to Four-Family Residential Real Estate   Multi-Family Real Estate   Commercial Real Estate   Construction and Land   Farmland 
                     
   (In thousands) 
Amounts due in:                         
One year or less  $1,197   $   $5,553   $17,033   $316 
After one year through five years   8,017    102    9,248    2,209    3,534 
After five years through 15 years   31,692    281    13,597    3,160    1,159 
After 15 years   102,557        1,005    393    607 
Total  $143,463   $383   $29,403   $22,795   $5,616 

 

   Commercial   Agriculture   Consumer   PPP   Other   Total 
                         
   (In thousands) 
Amounts due in:                              
One year or less   $1,826   $305   $1,192   $   $108   $27,530 
After one year through five years    2,031    53    2,636    4,072    160    32,062 
After five years through 15 years    736        32        21    155,240 
After 15 years                         
Total   $4,593   $