Texas Community Bancshares, Inc. quarterly report, Q2 FY2022

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Texas Community Bancshares, Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. Unless noted otherwise, amounts are in U.S. dollars. The company is a bank holding company whose principal subsidiary, Mineola Community Bank, serves Mineola, Texas and surrounding markets.

Financial results and position

  • Q2 earnings: Net income was $416,000, up 121% from $188,000 in Q2 2021. Diluted EPS was $0.14; the filing reports no EPS for the 2021 comparison period because the company had no shares outstanding then.
  • First-half earnings: Net income was $807,000, up 88% from $430,000. Diluted EPS was $0.27.
  • Net interest income and margins: Q2 net interest income increased 19% to $2.486 million; net interest margin rose to 2.83% from 2.69%. First-half net interest income increased 17% to $4.796 million, while net interest margin edged down to 2.75% from 2.76%.
  • Other income and expenses: Q2 noninterest income was $449,000, versus $426,000; noninterest expense increased 5.5% to $2.368 million. First-half noninterest income rose 11.5% to $902,000 and expenses rose 5.4% to $4.612 million.
  • Assets and lending: Total assets were $373.7 million, up 2.4% from year-end. Net loans and leases rose 4.6% to $230.4 million. Deposits increased 5.0% to $288.6 million; core deposits rose 8.7%, while certificates of deposit declined 5.6%. No brokered deposits were reported.
  • Profitability and credit costs: First-half provision for loan and lease losses was $77,000, compared with $30,000 a year earlier. The allowance was $1.639 million, about 0.71% of loans and leases before the allowance. Nonaccrual loans were $1.570 million, down slightly from $1.590 million at year-end; no interest income was recognized on nonaccrual loans in the reported periods.
  • Cash flow and liquidity: First-half operating cash flow was $1.6 million; investing activities used $17.7 million and financing activities provided $12.6 million. Cash and cash equivalents ended at $18.4 million, down from $21.9 million at year-end. The company reported $107.8 million of unused FHLB borrowing capacity and $15.0 million of unused correspondent-bank credit lines.
  • Debt and capital: FHLB advances were $26.5 million, down from $27.6 million at year-end. The bank’s community bank leverage ratio was 12.76%, above the 9% well-capitalized threshold. Consolidated shareholders’ equity fell 6.5% to $56.2 million, primarily due to the decline in securities’ fair value recorded in accumulated other comprehensive loss.

Material changes and notable items

  • Available-for-sale securities increased to $68.9 million, while held-to-maturity securities declined to $30.0 million. Rising market interest rates drove a $6.1 million first-half pretax decline in the fair value of available-for-sale securities; after tax, the first-half other comprehensive loss was $4.8 million. Management attributed unrealized securities losses to interest rates and other market factors, not credit deterioration, and reported no securities as other-than-temporarily impaired.
  • Construction lending grew: construction loans when fully funded upon completion increased to $35.0 million from $23.3 million at year-end. Management cited strong housing demand, while identifying construction lending as a significant portfolio segment.
  • Q2 and first-half net income benefited from higher net interest income, including greater securities income and lower deposit costs. Loan interest income was approximately flat year over year as increased average loan balances were offset by lower loan yields.
  • Noninterest expense increases included salaries and benefits, ESOP expense, and director fees. First-half noninterest income also included a $29,000 securities-sale loss.
  • First-half net income was more than offset in comprehensive income by the securities-related loss: comprehensive loss was $3.994 million, versus comprehensive income of $398,000 in the 2021 period.

Outlook, risks and contingencies

  • The filing gives no quantified earnings or revenue guidance. Management said it expects sufficient funds to meet current funding commitments and anticipates retaining a significant portion of maturing time deposits, based on deposit-retention experience and current pricing strategy.
  • Interest-rate risk is material. In the company’s model, an immediate parallel 200-basis-point rate increase would reduce estimated 12-month net interest income by 2.47% and economic value of equity by 8.53%; a 200-basis-point decrease would reduce net interest income by 2.30% but increase estimated economic value of equity by 1.02%. Management cautioned that model assumptions limit predictive accuracy and actual results may differ. The company reported no hedging activities.
  • Other disclosed risks include real-estate loan concentration, construction-loan demand and building costs, local economic and property-market conditions, deposit and funding competition, credit losses, inflation and rate changes, CECL implementation, staffing and expense control, cyber and third-party risks, and regulatory changes.
  • The company was preparing for CECL adoption on January 1, 2023; model data inputs were still in process. Management stated the existing allowance was adequate at June 30, 2022.
  • Commitments to extend credit were $36.1 million, up from $27.4 million at year-end; contractual amounts do not necessarily represent future cash needs. The filing reports no material pending legal proceedings and no material change in risk factors.

Key facts for investors to verify

  • Whether loan growth—especially construction and real-estate lending—changes portfolio concentration or credit performance; monitor nonaccruals, criticized loans and the allowance.
  • How rising rates affect deposit pricing, loan yields, net interest margin, securities values and the interest-rate sensitivity estimates.
  • Whether deposit growth and available borrowing capacity remain adequate as loan funding needs and customer withdrawals change.
  • The extent and timing of securities-loss realization, and whether the company’s ability and intent to hold securities until recovery remain unchanged.
  • CECL implementation progress and the eventual effect on the allowance and reported earnings.
  • The filing’s comparative-period context: the company completed its conversion and began Nasdaq trading in July 2021, so 2021 EPS is not presented as comparable public-company EPS.