Texas Community Bancshares, Inc. — Q3 2022 Form 10-Q
Business context and period. The unaudited filing covers the quarter and nine months ended September 30, 2022. The company is a bank holding company whose subsidiary, Mineola Community Bank, provides consumer and commercial banking services in Mineola, Texas, nearby areas, and the Dallas–Fort Worth Metroplex. Amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $2.750 | $2.097 | $7.546 | $6.205 |
| Provision for loan and lease losses | $0.048 | $0.014 | $0.125 | $0.044 |
| Noninterest income | $0.499 | $0.452 | $1.401 | $1.260 |
| Noninterest expense | $2.536 | $2.769 | $7.148 | $7.142 |
| Net income (loss) | $0.539 | $(0.198) | $1.346 | $0.232 |
| Diluted earnings (loss) per share | $0.18 | $(0.07) | $0.45 | $0.08 |
- Margins and earnings: Net interest margin was 3.15% for Q3, up from 2.52%; for the nine months it was 2.88%, versus 2.68%. Q3 net income improved primarily on higher net interest income and lower noninterest expense. Nine-month net income also benefited from higher net interest income.
- Balance sheet at September 30: Assets were $375.7, up 3.0% from December 31, 2021. Net loans and leases were $240.1, up 9.0%; deposits were $282.2, up 2.7%; FHLB advances were $35.0, up from $27.6. Shareholders’ equity was $55.6, down from $60.1.
- Cash flow, nine months: Operating activities provided $2.5; investing activities used $30.3, mainly for loan growth and securities purchases; financing activities provided $14.7. Cash and cash equivalents declined $13.0 to $8.9.
- Liquidity and capital: The Bank reported a 13.00% community bank leverage ratio and was categorized as well-capitalized. It had $100.5 of unused FHLB borrowing capacity and unused $10.0 and $5.0 correspondent-bank credit lines. Management said it expected adequate funds for current commitments and anticipated retaining a significant portion of maturing time deposits.
Material changes and notable items
- Interest income rose 22.5% in Q3 and 14.1% for the nine-month period, reflecting a larger securities portfolio and higher market yields. Loan yields were lower year over year for both periods, which partly offset loan growth.
- Interest expense fell 13.4% in Q3 and 17.4% for the nine months, primarily because deposit costs declined. The filing also notes that rapidly rising rates may change funding costs and asset yields over time.
- Higher interest rates drove substantial unrealized securities losses. Available-for-sale securities had a $7.669 pretax fair-value decline for the nine months; accumulated other comprehensive loss reached $6.722, contributing to the decrease in equity. Held-to-maturity securities had a fair value of $25.597 versus a carrying amount of $28.821. Management attributed the declines mainly to market rates, said it did not intend to sell the securities, and reported no securities considered other-than-temporarily impaired.
- Loans were concentrated in real estate; residential real estate and farmland together represented 70.0% of total loans. Construction loans increased materially, including construction loans upon completion of $41.9, up from $23.3 at year-end. Management identified construction demand, building costs and the real-estate concentration as risks.
- Credit indicators included an allowance for loan and lease losses of $1.686, nonaccrual loans of $1.258, and $1.599 of loans past due but not on nonaccrual. The allowance increased from $1.592 at year-end. The filing reports no troubled-debt-restructuring modifications during the nine months.
- One-time or unusual items included a $0.042 gain on sale of foreclosed real estate and a $0.029 loss on securities sales in the nine-month period. The company also began recognizing expense under its 2022 equity incentive plan, with $0.021 of stock-based compensation reported.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management’s forward-looking statements are subject to economic and competitive uncertainties. Risks cited include interest-rate movements, inflation and liquidity or funding costs; loan demand and credit quality; real-estate values and construction exposure; competition and employee costs; regulatory changes; operational, cybersecurity and third-party risks; and the implementation cost and estimates for CECL. CECL was scheduled to become effective for the company on January 1, 2023; model analysis and parallel testing were still underway, and management said the process and data were being updated.
The company reported no material pending legal proceedings. Management concluded disclosure controls were effective as of September 30, 2022, with no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether deposit pricing and deposit retention remain favorable as market rates change, and how that affects net interest margin and liquidity.
- Whether loan growth—especially construction and real-estate lending—changes delinquency, nonaccrual, charge-off or allowance trends.
- How securities fair values and accumulated other comprehensive loss evolve, and whether liquidity needs could require securities sales.
- The final CECL methodology, transition impact on the allowance and earnings, and any related implementation costs.
- Whether management’s stated liquidity resources and well-capitalized status are maintained as funding needs and asset growth develop.