Texas Community Bancshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Amounts below are in millions unless stated otherwise. The company is a bank holding company whose primary business is community banking in East Texas and the Dallas-Fort Worth area.
Financial performance and condition
- Net loss: $2.685 million, or $0.90 per basic share, compared with a $1.017 million loss, or $0.33 per share, in Q1 2023.
- Net interest income: $2.963 million, up 12.6% year over year. Net interest margin was 2.79%, versus 2.68%; net interest spread was 2.31%, versus 2.29%.
- Interest income and expense: Interest income rose 31.7% to $5.418 million; interest expense rose 62.2% to $2.455 million. Average cost of interest-bearing deposits increased to 2.56% from 1.56% a year earlier.
- Noninterest items and expenses: Noninterest loss was $3.562 million, compared with a $1.207 million loss in Q1 2023. Noninterest expense rose 16.4% to $3.071 million. The provision for credit losses was a $277,000 reversal, versus $90,000 expense.
- Cash flow: Operating activities provided $694,000; investing activities used $6.688 million; financing activities provided $13.923 million. Cash and cash equivalents increased $7.929 million to $20.989 million.
- Balance sheet: Assets were $463.8 million, up 2.6% from year-end. Deposits were $331.8 million, up 4.6%; FHLB advances were $76.5 million. Shareholders’ equity was $51.5 million, down from $53.7 million.
- Loans and credit: Loans and leases, including $14.7 million of loans held for sale, totaled approximately $267.5 million, down from $279.9 million at year-end. The allowance for credit losses was $2.823 million; management reported a 1.10% allowance-to-loans-and-leases-held-for-investment ratio. Nonaccrual loans totaled $1.238 million; none were over 90 days past due and still accruing.
- Liquidity and capital: The Bank reported $81.2 million of unused FHLB borrowing capacity and $15 million of unused correspondent-bank lines. Its Community Bank Leverage Ratio was 10.09%, above the 9% threshold for well-capitalized status. The parent company reported $9.8 million of standalone liquid assets.
Material changes and unusual items
- Management repositioned the loan portfolio to reduce residential mortgage concentration and seek higher yields, shorter weighted-average life, and greater diversification. It sold 54 performing loans totaling $12.4 million at a $1.5 million loss, net of mortgage servicing rights, and marked 81 additional residential loans totaling $17.0 million down to $14.7 million fair value while held for sale. Management reported no plans to sell additional loans beyond those held for sale.
- A $283,000 loss related to demolition of the former Lindale branch building also affected results. The loan-sale loss, fair-value write-down, and demolition loss were significant contributors to the larger quarterly net loss.
- Deposits increased $14.6 million, including $11.3 million growth in core deposits. Potentially uninsured deposits were $49.2 million, or 14.8% of total deposits. The company also reported $12.0 million of brokered deposits.
- The securities portfolio had $9.9 million of gross unrealized losses, which management attributed primarily to higher market interest rates. The company said it did not intend to sell the securities and considered it likely it could hold them until recovery or maturity. A $25 million interest-rate swap hedged part of the available-for-sale portfolio; management reported that it offset about $442,000 of unrealized losses.
- Q1 included a $0.04-per-share dividend and repurchases of 11,000 shares for $154,000, according to the equity statement and MD&A.
Outlook, commentary, and risks
- The filing provides no quantitative earnings or revenue guidance. Management said it expected sufficient funds for current commitments and anticipated retaining a significant portion of maturing time deposits, based on deposit-retention experience and current pricing.
- Management described asset quality as strong, while emphasizing cautious lending, active liquidity monitoring, and efforts to expand commercial and commercial real-estate lending to diversify the portfolio.
- Key stated risks include interest-rate changes and pressure on funding costs and margins; deposit retention and potentially uninsured balances; real-estate loan concentration and market values; credit-loss estimates; local construction demand; competition, operating costs, cybersecurity and third-party risks, and regulatory changes.
- Interest-rate models estimated that an immediate parallel 200-basis-point increase would raise 12-month net interest income by 5.2% and increase economic value of equity by 0.75%; a 200-basis-point decrease was estimated to reduce net interest income by 6.8% and economic value of equity by 10.85%. The filing cautions that model assumptions limit predictive accuracy.
- The company reported no material legal proceedings, effective disclosure controls as of March 31, 2024, and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the timing and realized economics of the loan portfolio repositioning, including performance and sale plans for the $14.7 million of loans held for sale.
- Monitor deposit costs, retention, uninsured-deposit balances, and use of wholesale or other borrowing as funding conditions change.
- Track nonaccrual and criticized loans, construction and real-estate concentrations, charge-offs, and any subsequent allowance adjustments.
- Assess the effect of securities’ unrealized losses and changing interest rates on liquidity, capital, and reported earnings.
- Reconcile the share-repurchase disclosures: the filing reports 11,000 shares repurchased in March in the narrative and equity statement, while the repurchase table’s quarterly total is 58,425 shares and its monthly rows do not clearly reconcile to that total.