Texas Community Bancshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company is the holding company for Mineola Community Bank, S.S.B. The mutual-to-stock conversion was completed July 14, 2021, and shares began trading as TCBS on July 15. Financial comparisons are with periods before the conversion.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $2.097 | $2.084 | $6.205 | $6.003 |
| Provision for loan and lease losses | $0.014 | $0.066 | $0.044 | $0.211 |
| Noninterest income | $0.452 | $0.412 | $1.260 | $1.362 |
| Noninterest expense | $2.769 | $2.184 | $7.142 | $6.219 |
| Net income (loss) | $(0.198) | $0.208 | $0.232 | $0.781 |
| Net interest margin | 2.52% | 3.07% | 2.68% | 3.07% |
- Q3 basic and diluted loss per share was $0.07; nine-month earnings per share was $0.08. 2020 per-share figures were not applicable.
- Q3 interest income was $2.613 million, down 3.0%; lower yields more than offset growth in average earning assets. Nine-month interest income was $7.833 million, down 1.0%. Lower funding costs reduced interest expense by 15.3% in Q3 and 14.9% year to date.
- At September 30, assets were $358.9 million, up 19.8% from year-end 2020; loans and leases, net, were $216.8 million. Investment securities totaled approximately $72.0 million.
- Deposits were $264.5 million, up 12.5%; core deposits increased 19.1% and certificates of deposit declined 1.5%. There were no brokered deposits. FHLB advances were $28.1 million, down from $30.8 million.
- Cash and cash equivalents were $34.6 million, and interest-bearing bank deposits were $18.6 million. The bank reported $101.7 million of unused FHLB borrowing capacity and undrawn lines of $10 million and $5 million. The parent company reported $13.4 million in standalone liquid assets.
- Nine-month cash flows were $4.764 million from operating activities, $(33.321) million used in investing, and $55.042 million from financing. Financing included $30.997 million of net stock-issuance proceeds and a $29.335 million increase in deposits.
- Shareholders’ and members’ equity was $60.6 million. The bank’s Community Bank Leverage Ratio was 13.07% versus 10.49% at year-end 2020; it was categorized as well-capitalized.
Changes, outlook, and risks
- Q3 net loss and the decline in nine-month earnings were primarily driven by a $575,000 contribution expense to initially fund the TCBS Foundation, established in connection with the conversion. Public-company and conversion-related costs also increased.
- The conversion offering sold 3,207,759 shares at $10 per share for approximately $32.1 million gross proceeds. Net proceeds after offering expenses were approximately $30.4 million. The company funded an ESOP loan of $2.6 million, contributed $75,000 to the foundation, invested $15.3 million in the bank, and retained $12.4 million.
- Management reported no specific earnings or growth guidance. It said it expects sufficient funds for current commitments and anticipates retaining a significant portion of maturing time deposits. Management plans to continue purchasing securities with cash and bank deposits despite lower yields.
- Management cited interest-rate risk, COVID-19 and economic uncertainty, real-estate loan concentration and market conditions, construction costs and demand, credit quality and allowance estimates, funding access, competition, operating costs, cybersecurity, and implementation of the CECL standard as risks. CECL was scheduled to become effective for the company January 1, 2023; management was still assessing its impact.
- At September 30, nonaccrual loans were $1.407 million, compared with $0.873 million at year-end 2020; loans more than 90 days past due but still accruing were $1.253 million. The allowance was $1.592 million, or 0.73% of loans. Commitments to extend credit totaled $28.451 million.
- Interest-rate sensitivity modeling estimated a 6.08% increase in one-year net interest income for an immediate 200-basis-point rate increase, and a 3.30% decrease in economic value of equity. Management cautioned that model assumptions limit predictive precision. No material legal proceedings or material changes in risk factors were reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the $575,000 foundation contribution and other conversion/public-company costs are nonrecurring, and the ongoing expense base after conversion.
- Whether deposit growth linked partly to tax refunds and COVID-19 relief payments is sustainable, and how deposit costs and balances respond to changing rates.
- Loan performance and collateral quality, especially real-estate and construction exposures, nonaccruals, past-due loans, and the adequacy of the allowance.
- The effect of continued low asset yields and the securities investment strategy on net interest margin and future earnings.
- The composition and availability of liquidity and borrowing facilities, and the eventual impact of CECL implementation.