Texas Community Bancshares, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are to FY2021 unless noted. The company operates Mineola Community Bank, a Texas community bank focused on deposits and lending, principally in residential and commercial real estate. Figures below are in U.S. dollars; “million” is abbreviated as “m.”
Financial performance and condition
- Profitability: Net income was $1.754m, up from $0.518m; diluted EPS was $0.58 versus $0.17. Net interest income rose 22.2% to $10.283m. Net interest margin increased to 2.89% from 2.66%; return on average assets was 0.47% versus 0.15%, and return on average equity was 4.01% versus 1.39%.
- Revenue and expenses: Interest income increased 20.0% to $12.566m, while interest expense rose 7.9% to $2.283m. Noninterest income was $1.868m, up 8.8%; noninterest expense increased 3.1% to $9.766m. The efficiency ratio improved to 80.37% from 93.48%. Income tax expense was $0.423m.
- Assets and lending: Total assets grew 14.4% to $417.346m. Net loans and leases were approximately $251.3m, up 14.1%; total loans were $253.1m before the allowance. Residential real estate accounted for 64.2% of loans, construction and land 14.3%, and commercial real estate 13.3%. Approximately 95% of loans were secured by real estate.
- Credit quality: Nonperforming assets declined to $1.182m from $1.799m; nonperforming assets were 0.28% of total assets versus 0.49%. Nonaccrual loans were $1.181m, or 0.47% of loans. The allowance for loan and lease losses was $1.755m, or 0.69% of loans; the provision was $0.208m versus $0.050m in FY2021.
- Deposits, debt and liquidity: Deposits increased 7.7% to $296.077m. FHLB advances rose to $62.494m from $27.571m; the year-end weighted-average rate was 3.40%. Cash and cash equivalents were $8.927m, down from $21.915m. The bank reported $73.4m of unused FHLB borrowing capacity and no outstanding balances on three other disclosed credit lines. Uninsured deposits totaled $17.4m; $12.0m of callable brokered certificates were fully insured.
- Cash flow: Operating activities provided $3.129m; investing activities used $72.184m; financing activities provided $56.067m. Cash and cash equivalents fell by $12.988m during the year.
- Capital and equity: Shareholders’ equity was $55.870m, down from $60.132m, principally reflecting a $6.313m after-tax decline in available-for-sale securities’ value recorded in other comprehensive loss. The bank’s community bank leverage ratio was 12.31%, above the 9% threshold cited for well-capitalized status.
Material changes versus FY2021
- Net income increased substantially as net interest income and noninterest income grew; the provision for loan losses, operating costs and taxes also increased.
- Loans grew $31.0m, while securities increased by approximately $44.5m. Available-for-sale securities reached $107.153m, but their unrealized losses increased amid rising interest rates.
- FHLB advances increased approximately $34.9m. Management said borrowings and deposits helped fund securities purchases and loan growth.
- Core deposits, as defined by management, rose to $206.7m, or 69.8% of deposits, from $159.4m, or 58.0%. Total deposits grew more modestly, with $12.0m of callable brokered deposits included.
- Nonperforming assets improved, while the allowance-to-loans ratio declined from 0.72% to 0.69%.
Outlook, risks and notable items
- Management intends to remain a community bank, grow and diversify lending prudently, increase core deposits, maintain asset quality and consider opportunistic expansion. It reported no current plans or intentions for acquisitions or new expansion activities. The filing provides no numerical earnings or revenue guidance.
- Interest-rate risk is material. In the company’s model, an immediate parallel 200-basis-point rate increase was estimated to raise 12-month net interest income by 2.48% but reduce economic value of equity by 7.46%; a 200-basis-point decrease was estimated to reduce net interest income by 7.85%. Management cautions that model assumptions limit predictive value.
- Key exposures include fixed-rate lending, rising funding costs, competition for deposits, real estate and construction credit risk, borrower cash flows, collateral values, and the ability to retain deposits. Management highlighted speculative construction loans of $9.2m and a largest development loan of $8.0m; both were reported performing at year-end.
- Available-for-sale securities had $9.444m of gross unrealized losses at year-end. Management attributed the declines mainly to interest-rate movements, said it did not intend to sell the securities, and reported no securities impairment charges.
- The bank had $43.327m of commitments to extend credit and $49.1m of time deposits scheduled to mature within one year. Management anticipated sufficient funds to meet commitments and expected to retain a substantial portion of maturing time deposits.
- The company adopted the CECL credit-loss standard on January 1, 2023 and stated it did not expect a material impact; the amount was not provided in this filing. Subsequent events included a $0.55m building purchase in January 2023, approval of a $0.02-per-share dividend, and stock awards and options issued in February 2023.
- The independent auditor gave an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal controls, consistent with the company’s stated reporting exemption. No pending legal proceedings were identified as expected to have a material adverse effect.
Important facts for investors to verify
- Deposit stability, especially retention and repricing of the $49.1m of near-term time-deposit maturities, and the bank’s reliance on FHLB advances and brokered deposits.
- Changes in net interest margin and funding costs as interest rates and deposit competition evolve; compare actual results with the disclosed interest-rate sensitivity estimates.
- Credit performance and concentrations in real estate, construction and land lending, including speculative construction exposure and classified assets.
- Whether securities’ unrealized losses recover, and the effects of portfolio values on reported equity and regulatory capital.
- The actual CECL adoption effect, subsequent quarterly results, and the company’s capacity to fund loan commitments and planned operations.