Texas Community Bancshares Inc. (NASDAQ:TCBS) is a bank holding company that has been serving the financial needs of Northeast Texas communities for over 90 years. With a focus on personalized service and a deep understanding of its local markets, the company has built a reputation as a trusted financial partner for individuals and businesses alike.

Business Overview and History

Texas Community Bancshares, Inc. was incorporated on March 5, 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 shares began trading on the NASDAQ under the symbol TCBS following this conversion.

The bank's history dates back to 1934 when it was established as a Savings and Loan Association with just $4,057 in assets. Over the decades, the institution has experienced significant growth, evolving into a $452 million bank with seven locations serving Northeast Texas communities.

In 2022, the bank faced some challenges, including a $29,000 loss on the sale of investment securities as part of an investment repricing strategy. The company also experienced an increase in noninterest expenses, with occupancy and equipment expenses rising 9% and other non-interest expenses increasing 33% compared to the prior year. Despite these headwinds, Texas Community Bancshares reported net income of $1.75 million in 2022, up from $518,000 in 2021, demonstrating its resilience and ability to navigate challenging market conditions.

The bank's asset quality remained strong, with a nonperforming asset ratio of just 0.3% at the end of 2022, reflecting the company's prudent risk management practices. Additionally, the company's capital levels exceeded regulatory well-capitalized thresholds, providing a solid foundation for future growth and expansion.

Today, Texas Community Bancshares operates seven locations across Northeast Texas, providing a comprehensive suite of banking services, including personal and business banking, loans, and investment options. The company's asset base has grown significantly, reaching $452.04 million as of December 31, 2023, a testament to its successful execution of its strategic growth initiatives.

Financials

Texas Community Bancshares' financial performance has been a mixed bag in recent years. In the fiscal year 2023, the company reported a net loss of $733,000, a significant decline from the previous year's net income of $1.75 million. This was primarily driven by a $1.69 million loss on the sale of investment securities as part of the company's balance sheet repositioning strategy.

However, the company's net interest income has remained relatively stable, growing from $10.24 million in 2022 to $10.90 million in 2023, indicating the strength of its core banking operations. The company's net interest margin, a key metric in the banking industry, stood at 2.70% in 2023, a slight improvement from the previous year's 2.67%.

For the most recent fiscal year (2023), Texas Community Bancshares reported annual revenue of $11.42 million, with a net loss of $733,000. The company generated annual operating cash flow of $2.29 million, but reported negative free cash flow of $3.31 million.

In the most recent quarter (Q3 2024), the company showed signs of improvement. Quarterly revenue reached $3.75 million, representing a 3.24% increase compared to Q3 2023. Net income for the quarter was $515,000, a 12.9% increase year-over-year. This positive trend suggests that the company's strategic initiatives may be starting to bear fruit.

For the nine months ended September 30, 2024, Texas Community Bancshares reported a net loss of $1.82 million, compared to a net loss of $401,000 for the same period in 2023. The increase in net loss was primarily due to a $2.50 million decrease in noninterest income, largely driven by a $3.85 million pre-tax loss on the sale of $27.10 million in residential mortgage loans. However, net interest income increased $1.30 million, or 16.0%, to $9.36 million, while noninterest expenses increased $651,000, or 7.9%, to $9.00 million. The company's net interest margin improved to 2.95% for the nine-month period in 2024, up from 2.70% in the prior year.

Liquidity

Texas Community Bancshares maintains a strong liquidity position, with cash and cash equivalents totaling $17.75 million as of September 30, 2024. The company's debt-to-equity ratio stood at 1.20 as of the same date, indicating a moderate level of leverage.

In terms of available credit lines, Texas Community Bancshares has access to a $10 million unsecured line of credit and a $3 million secured line of credit with Texas Independent Bankers Bank. Additionally, the company has a $5 million line of credit with First Horizon Bank. These credit facilities provide the company with additional financial flexibility to support its operations and potential growth initiatives.

The company's regulatory capital ratios, which determine its classification as "well-capitalized" by banking regulators, were well above the required thresholds, providing a solid foundation for future growth and stability.

Product Segments and Operations

Texas Community Bancshares operates primarily through its wholly-owned subsidiary, Broadstreet Bank, SSB. The company's operations are focused on traditional community banking activities, including commercial and retail lending, deposit gathering, and investments in securities.

As of September 30, 2024, the company's loan portfolio totaled $296.13 million, with real estate loans making up the largest portion at $273.65 million, or 92.4% of the total loan portfolio. This included $153.56 million in 1-4 family residential and multi-family loans, $55.55 million in commercial real estate loans, and $55.19 million in construction and land loans. The remaining loan portfolio included $86 million in agriculture loans, $7.11 million in commercial loans, $9.25 million in municipal loans, and $6.04 million in consumer and other loans.

The company's deposit base totaled $326.31 million as of September 30, 2024, an increase of $9.07 million, or 2.9%, from December 31, 2023. The deposit portfolio consisted of $44.21 million in noninterest-bearing demand deposits and $282.09 million in interest-bearing deposits, including $109.50 million in certificates of deposit, $70.17 million in interest-bearing demand deposits, $44.68 million in regular savings and other deposits, and $44.86 million in money market deposits.

Texas Community Bancshares also maintains a securities portfolio, which totaled $103.60 million as of September 30, 2024, a decrease of $15.70 million, or 13.2%, from December 31, 2023. The portfolio included $80.67 million in available-for-sale securities and $22.93 million in held-to-maturity securities. The available-for-sale portfolio was primarily composed of residential mortgage-backed securities, collateralized mortgage obligations, state and municipal bonds, and corporate bonds.

Geographic Markets

Texas Community Bancshares primarily operates in the state of Texas, with a focus on the northeast Texas region and the Dallas-Fort Worth Metroplex. As a small-cap regional bank, the company's operations are confined to the US market. This geographic concentration allows the company to leverage its deep understanding of local market conditions and maintain strong relationships with its customer base.

Strategic Initiatives and Outlook

Texas Community Bancshares has been proactively implementing strategic initiatives to adapt to the evolving banking landscape. In 2023, the company undertook a portfolio repositioning strategy, selling $27.10 million in residential mortgage loans to diversify its loan portfolio and focus on higher-yielding commercial real estate and municipal loans.

This shift in loan mix, coupled with the company's efforts to enhance its deposit base and manage interest rate risk, has positioned Texas Community Bancshares for improved financial performance going forward. The company's management has expressed cautious optimism about the future, highlighting the potential for increased lending activity and a focus on cost management to drive profitability.

Industry Trends

The banking industry has seen modest growth in recent years, with a compound annual growth rate (CAGR) of around 3-5% for regional banks similar to Texas Community Bancshares. The industry continues to face challenges such as margin compression, increased regulatory scrutiny, and competition from fintech firms. Despite these headwinds, Texas Community Bancshares' focus on personalized service and deep community roots may provide a competitive advantage in its local markets.

Risks and Challenges

As with any financial institution, Texas Community Bancshares faces a range of risks and challenges that could impact its future performance. These include interest rate fluctuations, increasing competition from larger regional and national banks, and potential regulatory changes that could impact the company's operations.

Additionally, the company's geographic concentration in Northeast Texas exposes it to regional economic conditions, which could pose challenges if the local economy experiences a downturn. The company's management has acknowledged these risks and is working to diversify its loan portfolio and expand its customer base to mitigate potential vulnerabilities.

Conclusion

Texas Community Bancshares' long history of serving its local communities, coupled with its strategic initiatives to adapt to the changing banking landscape, position the company for potential future growth and stability. While the company has faced some financial headwinds in recent years, its focus on improving its loan mix, enhancing its deposit base, and managing interest rate risk suggest a path forward for improved profitability and shareholder value creation.

As the banking industry continues to evolve, Texas Community Bancshares' commitment to personalized service and its deep understanding of its local markets could prove to be a competitive advantage, allowing the company to navigate the challenges and capitalize on the opportunities that lie ahead. The recent improvements in quarterly performance, including increased revenue and net income, indicate that the company's strategic initiatives may be gaining traction. However, investors should remain cautious and monitor the company's progress in returning to sustained profitability and growth in the coming quarters.