Texas Community Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022. The company is a bank holding company whose subsidiary, Mineola Community Bank, serves consumers and commercial customers in Mineola, Texas, surrounding markets, and the Dallas–Fort Worth area. Amounts below are in millions unless otherwise noted.
Financial results and condition
- Q3 earnings: Net income was $456,000, down 15.4% from $539,000 a year earlier. Interest income rose 56.3% to $4.98 million, but interest expense rose 377% to $2.13 million. Net interest income increased 3.4% to $2.84 million.
- First nine months: Net loss was $401,000 versus net income of $1.35 million in 2022; diluted loss per share was $0.13 versus earnings per share of $0.45. Interest income increased to $13.66 million from $8.89 million, while interest expense increased to $5.53 million from $1.35 million. Net interest income grew 7.7% to $8.13 million.
- Noninterest items and expenses: Nine-month noninterest income was a loss of $104,000, chiefly due to a $1.69 million loss on securities sales, versus income of $1.40 million in 2022. Noninterest expense rose 16.9% to $8.35 million, including higher compensation, technology, service, and other costs. The nine-month income-tax line was a $138,000 benefit.
- Margins: Net interest margin declined to 2.80% for Q3 from 3.15% a year earlier and to 2.70% for the first nine months from 2.88%. Management attributed margin pressure to funding costs repricing faster than yields on earning assets.
- Balance sheet at September 30: Total assets were $436.7 million, up 4.6% from year-end 2022. Net loans were about $268.9 million, up 7.0%; deposits were $299.9 million, up 1.3%; and FHLB advances were $79.4 million, up 27.0%. Shareholders’ equity was $53.3 million, down 4.7%.
- Cash flow and liquidity: Nine-month operating cash flow was $2.97 million, investing cash flow was negative $18.34 million, and financing cash flow was positive $18.86 million. Cash and cash equivalents ended at $12.42 million, up $3.50 million. The Bank reported $75.3 million of unused FHLB borrowing capacity and $15 million of unused correspondent-bank credit lines; it also described access to other liquidity sources.
- Credit and capital: The allowance for credit losses was $2.93 million at quarter-end. Nonaccrual loans totaled approximately $1.08 million, and $80,000 of loans were over 90 days past due and still accruing. The Bank’s community bank leverage ratio was 11.16%, above the 9% threshold cited for well-capitalized status.
Material changes and notable items
- The company adopted CECL on January 1, 2023. The adoption increased the loan-loss allowance by $1.03 million and established a $254,000 allowance for unfunded commitments; the combined after-tax cumulative adjustment reduced retained earnings by about $1.01 million.
- In January, the company sold 16 available-for-sale securities for $17.0 million, recording a $1.69 million loss, as part of a strategy to reprice investments toward higher yields. Available-for-sale securities were $92.5 million at quarter-end, down from $107.2 million at year-end.
- Unrealized losses remained material: gross losses were $9.8 million on available-for-sale securities and $3.7 million on held-to-maturity securities. Management attributed the declines primarily to interest-rate movements, said it did not intend to sell the securities, and reported no securities credit-loss provision for the period.
- Deposits shifted toward higher-cost funding: core deposits declined $20.0 million while retail certificates of deposit rose $23.7 million. The reported cost of deposits reached 1.98% at quarter-end, compared with 1.06% at December 31, 2022. Potentially uninsured deposits were reported at $24.5 million, or 8.2% of deposits.
- The company repurchased 127,417 shares for $1.58 million through September 30 and declared $265,000 of dividends. It also invested $4.36 million in premises and equipment, including property purchases and construction of a Lindale branch expected to be completed in 2024.
Outlook, commentary, and risks
- The filing provides no numerical earnings or balance-sheet guidance. Management said it expects sufficient funds for current commitments and anticipates retaining a significant portion of maturing time deposits, while noting it monitors deposit runoff daily and conducts quarterly liquidity stress tests.
- Management described lending and strategic decisions as cautiously optimistic. It reported easing mortgage demand amid higher rates, partially offset by commercial real estate lending, and highlighted continued monitoring of local housing conditions. Construction loans remain a significant portfolio segment; management reported $58.3 million of construction loans when fully funded upon completion.
- Key disclosed risks include deposit retention and funding costs, interest-rate changes and margin pressure, real-estate loan concentration and property values, loan demand and credit losses, inflation and operating costs, competition, cyber and third-party risks, and regulatory changes. A modeled parallel 200-basis-point rate increase indicated a 0.46% decline in annual net interest income and a 10.79% decline in economic value of equity; management cautioned that model assumptions limit predictive precision.
- The company reported effective disclosure controls as of September 30, 2023, no material quarterly changes in internal control over financial reporting, and no material pending legal proceedings.
Important facts for investors to verify
- Whether deposit mix, deposit pricing, and potentially uninsured balances remain manageable, and how the Bank’s FHLB borrowing evolves.
- Whether asset yields can keep pace with deposit and borrowing costs, given the year-over-year decline in net interest margin.
- Whether the securities repricing strategy produces enough additional income to offset the realized loss, and how unrealized losses and liquidity needs develop.
- Credit trends in real-estate, construction, and commercial lending, including delinquencies, criticized loans, and future allowance estimates under CECL.
- Completion costs and timing for the Lindale branch and other property investments, as well as the effect of share repurchases and dividends on capital.