Business context and reporting period
Texas Community Bancshares, Inc. is a bank holding company whose subsidiary, Mineola Community Bank, serves consumers and commercial customers in East Texas and the Dallas–Fort Worth area. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $4.54 | $2.93 | $8.68 | $5.69 |
| Net interest income | $2.65 | $2.49 | $5.28 | $4.80 |
| Provision for credit losses | $0.09 | $0.04 | $0.18 | $0.08 |
| Noninterest income (loss) | $0.51 | $0.45 | $(0.70) | $0.90 |
| Noninterest expense | $2.88 | $2.37 | $5.52 | $4.61 |
| Net income (loss) | $0.16 | $0.42 | $(0.86) | $0.81 |
| Diluted earnings (loss) per share | $0.05 | $0.14 | $(0.28) | $0.27 |
- Q2 net interest margin was 2.63%, down from 2.83%; six-month margin was 2.65%, down from 2.75%. The six-month net interest rate spread fell to 2.23% from 2.59%.
- At June 30, total assets were $432.2, loans and leases net of allowance were $268.8, deposits were $302.6, FHLB advances were $71.9, and shareholders’ equity was $54.5.
- Six-month cash flows: operating activities provided $1.5; investing activities used $15.4; financing activities provided $15.1. Cash and cash equivalents ended at $10.1, up $1.1 from year-end.
- Book equity declined $1.4 from year-end. The Bank’s Community Bank Leverage Ratio was 11.12%, above the 9% well-capitalized threshold.
Material changes versus comparable periods
- Q2 net income declined 61.5% year over year. Higher interest income was offset by sharply higher deposit and borrowing costs, a narrower spread, increased expenses, and a larger credit-loss provision.
- For the first half, the company swung to a net loss, principally reflecting a $1.687 securities-sale loss included in noninterest income, higher noninterest expense, and higher credit-loss provision. Net interest income increased, but did not offset these items.
- Interest expense rose to $1.89 in Q2 from $0.44 a year earlier, while Q2 interest income rose to $4.54 from $2.93. Average Q2 cost of interest-bearing liabilities increased to 2.32% from 0.66%.
- Loans and leases grew 7.0% from year-end; total deposits rose 2.2%, but core deposits fell 6.5% as customers shifted toward higher-rate certificates of deposit. Retail CDs increased 25.9%.
- FHLB advances increased 15.0% from year-end. Securities declined $11.3, partly due to a January portfolio repricing sale of $17.0 of securities at a $1.7 loss.
Outlook, risks, contingencies and unusual items
- No specific earnings, revenue, or margin guidance is provided. Management says it expects sufficient funds to meet current commitments and anticipates retaining a significant portion of maturing time deposits, based on deposit experience and pricing strategy.
- Management cites deposit competition and runoff, higher funding costs, inflation, rapidly changing rates, real-estate and construction-market conditions, credit quality, and the concentration of loans secured by local real estate as key risks. Other disclosed risks include competition, cybersecurity and operational disruption, third-party performance, and regulatory or economic changes.
- Unrealized securities losses at June 30 totaled approximately $11.3: $8.3 on available-for-sale (AFS) securities and $3.0 on held-to-maturity (HTM) securities. Management attributes these losses primarily to market-rate changes, says it intends and expects to be able to hold the securities as needed, and reported no credit-loss allowance on these portfolios.
- The company adopted CECL on January 1, 2023. The adoption increased the loan allowance by $1.025 and established a $0.254 allowance for unfunded commitments, reducing retained earnings by approximately $1.0 after tax. The loan allowance was $2.969 at June 30.
- Past-due loans totaled $4.194 at June 30, versus $2.444 at year-end. The filing reports $0.892 of nonaccrual loans and separately identifies $0.367 of nonaccrual loans with a reserve; no loans were over 90 days past due and still accruing. Residential real estate and farmland represented 65% of total loans, and construction lending remained a significant portfolio segment.
- Management reports $78.2 of unused FHLB borrowing capacity and $15.0 of correspondent-bank credit lines, none drawn at June 30, plus other potential liquidity sources. It performs monthly stress tests that assume substantial deposit runoff and no access to available credit lines; management says the modeled resources preserve operational liquidity.
- There were $25.9 of deposits potentially uninsured above the applicable $250,000 coverage threshold. Management says it monitors deposit runoff and communicates with large depositors.
- A $25.0 notional interest-rate swap hedges a portion of fixed-rate AFS securities. Management reported the hedge as highly effective and said it reduced AOCI losses. Interest-rate models estimate that an immediate 200-basis-point increase would reduce one-year net interest income 1.52% and economic value of equity 6.73%; a 200-basis-point decrease would reduce modeled net interest income 2.71% and increase modeled EVE 0.15%. The filing cautions that model assumptions limit predictive precision.
- The company purchased properties for future expansion and is constructing a Lindale branch expected to be completed in 2024. It repurchased 50,267 shares for $0.610 and declared and paid $0.168 in dividends during the first half.
- No material legal proceedings were reported. Management concluded disclosure controls were effective as of June 30, 2023, with no material quarterly change in internal controls over financial reporting.
Important facts for investors to verify
- Whether deposit pricing and migration into higher-cost CDs continue to pressure net interest margin and earnings.
- Trends in deposit balances, potentially uninsured deposits, brokered funding, FHLB borrowing, and access to contingent liquidity.
- Loan delinquency, nonaccrual and criticized classifications, construction and real-estate concentration, and the adequacy of the CECL allowance.
- Realization and accounting treatment of the securities portfolio’s unrealized losses, and the performance and ongoing effectiveness of the interest-rate hedge.
- Whether loan growth, new property and branch spending, operating costs, and any further securities repositioning support improved recurring profitability after the first-half loss.