Texas Community Bancshares, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Texas Community Bancshares is the holding company for Mineola Community Bank, a community bank serving Mineola, Texas, surrounding areas and the Dallas–Fort Worth Metroplex. This unaudited filing covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Income-statement comparisons are with Q1 2021. Amounts below are in millions unless stated otherwise.
Key financial metrics
- Profitability: Net income was $0.391 million, up 61.6% from $0.242 million. Diluted EPS was $0.13; Q1 2021 EPS is reported as not applicable because shares were not then outstanding. Income before taxes was $0.479 million.
- Revenue and margins: Net interest income rose 13.2% to $2.309 million. Net interest margin declined to 2.67% from 2.85%; net interest rate spread was 2.51%, down from 2.70%. Noninterest income was $0.453 million versus $0.383 million. Noninterest expense increased 5.4% to $2.243 million.
- Credit costs: Provision for loan and lease losses was $40,000 versus $2,000. The allowance was $1.610 million, or approximately 0.71% of gross loans and leases. Nonperforming loans were $1.448 million, down from $1.590 million at year-end; no loans over 90 days past due were reported as still accruing.
- Cash flow: Operating activities provided $0.673 million, investing activities used $3.243 million and financing activities provided $6.225 million. Cash and cash equivalents rose $3.655 million to $25.570 million.
- Balance sheet and liquidity: Total assets were $368.986 million, up 1.2% from year-end. Net loans and leases were approximately $224.6 million, up about 2.0%. Deposits increased 2.5% to $281.676 million; core deposits rose 4.2% to $210.9 million, and there were no brokered deposits. The bank had $27.053 million of FHLB advances and $106.3 million of unused FHLB borrowing capacity. Separate $10 million and $5 million credit lines were undrawn.
- Capital and securities: The bank’s community bank leverage ratio was 12.84%, above the 9% well-capitalized threshold. Shareholders’ equity was $58.076 million, down from $60.132 million, primarily due to a $2.498 million after-tax decline in accumulated other comprehensive income associated with securities valuation.
Material changes versus comparable periods
- Net income improved by $149,000. Management attributed the increase mainly to higher net interest income and fee income, partly offset by increased operating expenses, loan-loss provision and taxes.
- Interest income increased 6.3%, principally as the larger securities portfolio generated more income. Lower deposit costs reduced total interest expense by 18.8%.
- Average interest-earning assets grew 20.7%, but their average yield fell to 3.20% from 3.63%; the resulting net interest margin contracted.
- Loans grew during the quarter. Originations were $31.0 million, including renewals/refinancings; construction loans in process increased to $29.4 million from $23.3 million.
- Available-for-sale securities increased to $63.978 million, while their unrealized loss widened substantially amid rising market rates. Management said it did not intend to sell the securities and did not expect to be required to sell before recovery of amortized cost.
Outlook, risks and unusual items
- No numerical earnings or growth guidance is provided. Management said it expects sufficient funds for current funding commitments and expects to retain a significant portion of maturing time deposits, based on deposit experience and pricing strategy.
- Management identifies interest-rate risk, real-estate loan concentration, construction-loan demand and costs, credit quality, funding access, competition, inflation, economic conditions, cybersecurity and third-party service providers among the risks that could affect results.
- Interest-rate models estimate that an immediate parallel 200-basis-point increase would reduce annual net interest income by 4.72% and economic value of equity by 6.04%; a 200-basis-point decrease is estimated to increase net interest income by 1.39% and EVE by 0.09%. The filing cautions that model assumptions limit predictive precision.
- The loan portfolio is predominantly real-estate related: residential real estate and farmland were 71.5% of net loans. Management noted strong local housing demand and construction lending activity.
- CECL is scheduled to take effect for the company on January 1, 2023. The company planned to work with a vendor on data and model preparation; the financial impact had not yet been determined.
- No material legal proceedings, material changes to disclosed risk factors, or material changes in internal control over financial reporting were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile the MD&A’s description of noninterest income: the statements show an increase from $383,000 to $453,000, although one MD&A passage calls it a decrease.
- Track unrealized securities losses and equity sensitivity as interest rates change, including whether any securities might need to be sold before recovery.
- Monitor construction and real-estate loan concentration, criticized credits, nonperforming loans and the adequacy of the allowance, especially as CECL adoption approaches.
- Assess whether deposit growth and retention, available borrowing capacity and interest-rate sensitivity support liquidity and earnings under changing market conditions.