Texas Community Bancshares, Inc. (TCBS) is a bank holding company that operates through its wholly-owned subsidiary, Broadstreet Bank, SSB. The company provides a range of banking services to consumers and commercial customers in Mineola, Texas and the surrounding Dallas-Fort Worth Metroplex area.

Business Overview

Texas Community Bancshares was incorporated in March 2021 and became the holding company for Broadstreet Bank, SSB (formerly known as Mineola Community Bank, SSB) as part of a mutual to stock conversion completed on July 14, 2021. The company's primary source of revenue is providing loans and banking services to consumers and commercial customers in its local market area.

As of March 31, 2024, the company had total assets of $463.8 million, total deposits of $331.8 million, and total shareholders' equity of $51.5 million. The loan portfolio, including loans held for sale, totaled $270.3 million and is comprised of $255.1 million, or 94.4%, in real estate loans, $6.8 million, or 2.51%, in commercial and industrial loans, $4.5 million, or 1.7%, in consumer loans, and $3.9 million, or 1.4%, in municipal and other loans.

The real estate loan portfolio includes $157.2 million, or 58.2%, in 1-4 family residential loans, $11.2 million, or 4.4%, in multi-family loans, $42.1 million, or 16.1%, in commercial real estate loans, $16.4 million, or 6.1%, in 1-4 family construction loans, $20.8 million, or 7.7%, in other construction and development loans, and $7.4 million, or 2.7%, in farmland loans.

Financial Performance

For the three months ended March 31, 2024, Texas Community Bancshares reported a net loss of $2.7 million, compared to a net loss of $1.0 million for the same period in 2023. The net loss was primarily due to a $2.4 million, or 200.0%, decrease in noninterest income resulting from the sale of a group of 54 performing loans at a loss of $1.5 million, net of mortgage servicing rights, and a $2.3 million valuation allowance to mark $17.0 million in residential mortgage loans held for sale to fair value. Additionally, there was a $433,000, or 16.4%, increase in noninterest expenses.

Interest income increased $1.3 million, or 31.7%, to $5.4 million for the three months ended March 31, 2024, primarily due to increased interest income on loans resulting from higher yields and an increase in the average balance of loans. Interest expense increased $941,000, or 62.2%, to $2.4 million, primarily due to an increase in average interest-bearing liabilities and higher deposit and funding costs. Net interest income increased $331,000, or 12.6%, to $3.0 million.

The provision for credit losses was a reversal of $277,000 for the three months ended March 31, 2024, compared to a provision of $90,000 for the same period in 2023. The decrease in the provision was primarily due to a $12.4 million decrease in net loans and leases receivable and the removal of $17.0 million in loans held for sale from the allowance calculation.

For the full year 2023, Texas Community Bancshares reported annual net income of -$733,000, annual revenue of $19,330,000, annual operating cash flow of $2,288,000, and annual free cash flow of -$3,313,000.

Liquidity and Capital

Texas Community Bancshares maintains a strong liquidity position, with cash and cash equivalents of $21.0 million and unused borrowing capacity of $81.2 million with the Federal Home Loan Bank of Dallas as of March 31, 2024. The company also has $15 million in unused credit lines with two correspondent banks.

At March 31, 2024, the company's Tier 1 capital ratio under the community bank leverage ratio framework was 10.09%, exceeding the 9% requirement to be considered "well-capitalized" under regulatory requirements.

Loan Portfolio and Asset Quality

The company's loan portfolio includes a significant concentration in real estate loans, which accounted for 94.4% of the total loan portfolio as of March 31, 2024. This concentration exposes the company to risks related to the local real estate market, including potential declines in property values and changes in demand for residential and commercial real estate.

As of March 31, 2024, the company had $1.2 million, or 0.5% of total loans, in loans that were 30-89 days past due, and $626,000, or 0.2% of total loans, in loans that were 90 days or more past due. Nonaccrual loans totaled $1.2 million, or 0.5% of total loans, at March 31, 2024.

The allowance for credit losses was $2.8 million, or 1.10% of total loans and leases held for investment, at March 31, 2024. The company's asset quality metrics remain strong, but the high concentration in real estate loans could expose the company to increased credit risk if economic conditions in its market area deteriorate.

Risks and Challenges

Texas Community Bancshares faces several key risks and challenges, including:

1. Concentration in real estate loans: The company's significant exposure to real estate loans, particularly residential mortgages, makes it vulnerable to changes in the local real estate market.

2. Interest rate risk: The company's net interest margin and profitability are sensitive to changes in market interest rates, which could impact the yield on its interest-earning assets and the cost of its interest-bearing liabilities.

3. Competition: The company operates in a highly competitive banking environment, which could pressure its ability to maintain market share and pricing power.

4. Regulatory environment: The banking industry is subject to extensive regulation, and changes in laws and regulations could increase the company's compliance costs and operational complexity.

5. Economic conditions: Adverse economic conditions in the company's local market area or the broader economy could lead to increased credit losses, reduced loan demand, and lower profitability.

Outlook and Strategy

In response to the challenges facing the company, Texas Community Bancshares has implemented a strategic repositioning plan. As part of this plan, the company sold a block of 54 performing loans totaling $12.4 million at a loss of $1.5 million, net of mortgage servicing rights, and marked down an additional $17.0 million in residential mortgage loans to fair value as they are being held for sale.

The goal of this portfolio repositioning is to take advantage of repricing opportunities, shorten the weighted average life of the loan portfolio, and diversify the company's loan mix by increasing its commercial lending activities. This strategy is intended to increase the overall yield on the loan portfolio, reduce the concentration in residential mortgages, and better position the company to manage interest rate risk.

Additionally, the company is focused on growing its core deposit base, improving its cost of funds, and maintaining a strong liquidity position to support its lending activities and weather potential economic challenges. The company is also closely monitoring its asset quality and credit risk exposures, and is prepared to take appropriate actions to mitigate any deterioration in the loan portfolio.

Overall, Texas Community Bancshares is navigating a challenging operating environment by implementing a strategic repositioning plan aimed at improving its financial performance, managing its risk profile, and positioning the company for long-term success. While the company faces several headwinds, its strong liquidity, capital position, and proactive management approach provide a solid foundation for weathering the current market conditions.