Texas Community Bancshares, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Texas Community Bancshares is the holding company for Mineola Community Bank, serving consumers and commercial customers in Mineola, Texas, surrounding areas, and the Dallas–Fort Worth Metroplex. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
- Results: Net loss was $1.017 million, or $0.33 per diluted share, versus net income of $391,000, or $0.13 per share, in Q1 2022. The loss included a $1.687 million realized loss on securities sales.
- Interest income and margins: Interest income rose to $4.146 million from $2.767 million. Interest expense increased to $1.514 million from $458,000. Net interest income was $2.632 million, up 13.0%; net interest margin was 2.68%, compared with 2.67%, while the net interest rate spread narrowed to 2.29% from 2.51%.
- Credit costs: Provision for credit losses was $90,000, versus $40,000. The allowance for loan losses was $2.859 million at quarter-end. Nonaccrual loans were $1.950 million, with a further $377,000 of nonaccrual loans reported with a reserve; no loans over 90 days past due were still accruing.
- Expenses and taxes: Noninterest expense increased 18.2% to $2.638 million. The company recorded an income tax benefit of $286,000, versus tax expense of $88,000.
- Balance sheet: Total assets were $418.0 million, up 0.2% from year-end. Net loans and leases were approximately $259.9 million, up 3.4%. Deposits were $297.5 million, up 0.5%; FHLB advances were $62.3 million. Shareholders’ equity was $55.4 million, versus $55.9 million at year-end.
- Cash flow: Operating activities provided $462,000; investing activities used $3.713 million; financing activities provided $1.169 million. Cash and cash equivalents ended at $6.845 million, down $2.082 million during the quarter.
- Liquidity and capital: The Bank reported $87.8 million of unused FHLB borrowing capacity and $15.0 million of correspondent-bank lines, with no amounts drawn on those lines. Its community bank leverage ratio was 11.32%, above the 9% well-capitalized threshold.
Material changes versus comparable periods
- Net income swung from profit to loss, principally because the company sold 16 available-for-sale securities for $17.0 million and recognized a $1.7 million loss. Management described the sale as an investment repricing strategy and estimated that higher-yielding replacements could recoup the loss in approximately 1.5 years.
- Higher asset yields and average earning-asset balances lifted interest income, but deposit and borrowing costs rose sharply. Average interest-bearing deposit cost increased to 1.56% from 0.53%; average FHLB borrowing cost rose to 3.51% from 2.11%.
- At January 1, 2023, adoption of CECL increased the loan allowance by $1.025 million and established a $254,000 allowance for off-balance-sheet exposures. The net-of-tax cumulative adjustment reduced retained earnings by approximately $1.010 million. Q1 2023 results use CECL; prior-year figures use the earlier accounting method.
- Core deposits declined $11.6 million while retail certificates of deposit increased $13.0 million. Management attributed the shift partly to higher-rate deposit offers amid competition for funding.
- Construction and land loans increased; total construction loans when fully funded were $60.3 million, and residential real estate and farmland made up 65.7% of loans.
Outlook, management commentary, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said quarterly results are not necessarily indicative of full-year results.
- Management reported daily monitoring of liquidity and deposit runoff, monthly stress tests—including a scenario with 35% CD runoff, 20% runoff of other deposits, and no access to credit lines—and stated those tests indicated liquidity resources remained adequate under the modeled scenario. Management anticipated retaining a significant portion of maturing time deposits, subject to pricing and market conditions.
- At quarter-end, deposits above $250,000 totaled $66.9 million; $27.4 million, or 9.2% of deposits, potentially exceeded FDIC insurance limits. The company said it was communicating with large depositors and reviewing coverage.
- Available-for-sale securities had $5.5 million of net unrealized losses, equal to 9.9% of capital; held-to-maturity securities had $2.9 million of gross unrealized losses. Management attributed declines primarily to interest rates, stated it did not intend to sell the securities, and reported no Q1 provision for securities credit losses.
- Key risks identified include interest-rate and funding-cost changes, deposit retention and liquidity, real-estate loan concentration and values, construction-loan demand, credit losses, inflation, competition, cybersecurity and third-party risks, and regulatory changes. Interest-rate modeling estimated that a parallel 200-basis-point increase would raise projected first-year net interest income 3.32% but reduce economic value of equity 7.61%; a 200-basis-point decrease was estimated to reduce net interest income 7.71% and EVE 2.26%. These are model estimates, not forecasts.
- The company purchased two buildings near its main office and began planning construction of a new Lindale branch, expected by management to be completed in 2024. It also paid its first quarterly dividend of $0.02 per share and granted stock options and restricted stock under its equity plan.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. The filing reported no material legal proceedings.
Important facts for investors to verify
- Whether higher-yielding replacement securities generate sufficient income to recover the $1.687 million realized sale loss on management’s estimated timetable.
- Subsequent trends in deposit balances, deposit pricing, potentially uninsured deposits, and use of wholesale or borrowed funding.
- Changes in loan delinquencies, nonaccrual loans, criticized credits, construction exposure, and the CECL allowance as economic forecasts evolve.
- Actual liquidity available under stress, including borrowing capacity, collateral requirements, and the behavior of deposits and securities values.
- Progress, costs, and timing for the Lindale branch project and the effect of ongoing compensation, technology, and other operating expenses.