Texas Community Bancshares, Inc. — FY 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, compared with FY 2020. The company is a bank holding company operating primarily through Mineola Community Bank, a Texas-chartered savings bank serving communities in East Texas. Its core business is gathering deposits and making mostly fixed-rate residential real estate loans. The company completed its mutual-to-stock conversion on July 14, 2021; its shares began trading on Nasdaq as TCBS the following day.
Financial performance and condition
| Metric | FY 2021 / Dec. 31, 2021 | FY 2020 / Dec. 31, 2020 |
|---|---|---|
| Total assets | $364.8 million | $299.6 million |
| Loans, net | $220.3 million | $213.2 million |
| Deposits | $274.9 million | $235.1 million |
| FHLB advances | $27.6 million | $30.8 million |
| Stockholders’ equity | $60.1 million | $31.9 million |
| Net interest income | $8.4 million | $8.3 million |
| Net income | $518,000 | $749,000 |
| Net interest margin | 2.66% | 3.14% |
| Return on average assets | 0.15% | 0.26% |
| Return on average equity | 1.39% | 2.35% |
- Revenue and profitability: Interest income was $10.5 million and noninterest income was $1.7 million. Net income fell 30.8%; pretax income was $611,000. Basic and diluted EPS were both $0.17; FY 2020 EPS is not applicable because shares were not then outstanding.
- Margins and costs: Net interest margin declined 48 basis points to 2.66%, as lower asset yields outweighed lower funding costs. The efficiency ratio rose to 93.48% from 85.51%.
- Cash flow: Operating activities generated $1.8 million; investing activities used $52.8 million; financing activities provided $64.9 million. Cash and cash equivalents increased $13.8 million to $21.9 million. Financing included $39.8 million of deposit growth and $30.9 million of net stock issuance proceeds.
- Liquidity and funding: In addition to $21.9 million cash and cash equivalents, the company reported $15.0 million in interest-bearing bank deposits. It had $104.5 million of unused FHLB borrowing capacity, plus $15.0 million in unused lines of credit. Management said it expects adequate funds for current commitments. No brokered deposits were reported.
- Credit quality and capital: Nonperforming assets were $1.8 million, or 0.49% of assets, versus $1.1 million, or 0.36%, a year earlier. Nonaccrual loans rose to $1.6 million from $873,000. The allowance was $1.6 million, 0.72% of loans. The bank’s community bank leverage ratio was 12.89%; it reported exceeding applicable capital requirements and being well-capitalized.
- Cash distributions: The company had not paid cash dividends through the filing date.
Material changes versus FY 2020
- Assets grew 21.8%, deposits 16.9%, and net loans 3.3%. Core deposits rose 27.0% to $202.4 million and increased to 73.6% of deposits.
- Equity increased by $28.2 million, primarily due to the conversion and stock offering. The offering generated $30.9 million net proceeds; the ESOP was established with a $2.6 million company loan.
- Net interest income increased 1.5%, but net income declined by $231,000. Noninterest expense rose 12.5% to $9.5 million, while the loan-loss provision fell to $50,000 from $484,000.
- Available-for-sale securities increased to $56.8 million from $13.0 million. The portfolio had $1.0 million of net unrealized losses before tax at year-end; the after-tax reduction to accumulated other comprehensive income was $814,000.
- FHLB advances declined $3.2 million. Nonperforming loans increased, while classified assets declined to $4.2 million from $4.4 million.
Outlook, commentary, risks and unusual items
- Strategy: Management plans to continue community banking, grow and diversify lending prudently, increase core deposits, maintain credit quality, and consider opportunistic expansion. It reported no current plans for acquisitions or new branches and gave no quantified financial guidance.
- COVID-19: The filing describes continued uncertainty around pandemic-related economic effects. No COVID-related loan deferrals were granted in 2021; prior modified loans had returned to normal payments by year-end. Management identified potential effects including weaker loan demand, credit deterioration, and higher losses or expenses.
- Concentration and rate risk: Approximately 95% of loans were secured by real estate; residential lending represented 69.3% of loans. Substantially all loans were fixed-rate. Under the company’s modeled parallel-rate scenarios, a 200-basis-point increase was estimated to reduce first-year net interest income 2.40% and economic value of equity 5.74%. Management cautions that model assumptions limit predictive value.
- Unusual expenses: FY 2021 included $575,000 to fund the TCBS Foundation and $202,000 of ESOP expense, as well as higher public-company audit, reporting, and professional costs. These conversion-related and public-company costs contributed to the decline in earnings.
- Commitments and contingencies: Outstanding loan commitments were $27.4 million. Time deposits of $43.9 million were scheduled to mature within one year. The company reported no pending legal proceeding expected to have a material adverse effect. CECL adoption is scheduled for January 1, 2023; management had not determined its financial impact.
- Controls and audit: Management concluded disclosure controls were effective. The auditor gave an unqualified opinion on the financial statements; the company, as an emerging growth company, did not provide an auditor’s opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether earnings and margins recover as conversion-related costs subside, given FY 2021’s lower net income and 93.48% efficiency ratio.
- Trends in nonaccrual loans and problem credits, the adequacy of the allowance, and exposure to real estate and larger borrower relationships.
- Deposit stability, uninsured deposits of $28.3 million, upcoming time-deposit maturities, and reliance on available borrowing capacity if deposits leave.
- Interest-rate sensitivity, fixed-rate asset duration, and the effect of further securities valuation changes on equity and liquidity.
- The eventual CECL implementation effect and whether the stated growth and diversification strategy can be achieved without weakening credit quality or margins.