Texas Community Bancshares, Inc. (TCBS): A Community Bank Navigating Change and Growth

Rooted in Tradition, Embracing the Future

Texas Community Bancshares, Inc. (TCBS) is the holding company for Broadstreet Bank, SSB, a Texas-chartered savings bank that has been serving the northeast Texas region since 1934. The bank’s history spans nearly a century, marked by steady growth, strategic adaptations, and a commitment to providing personalized banking services to individuals and businesses within its local communities.

Broadstreet Bank, SSB was founded in 1934 as a Savings and Loan Association, opening its doors with just $4,057 in assets. Over the decades, the bank has evolved alongside the changing financial landscape, adapting its offerings and strategies to meet the evolving needs of its customer base. In 2021, the bank underwent a mutual-to-stock conversion, becoming a wholly-owned subsidiary of the newly formed Texas Community Bancshares, Inc. This transition allowed the bank to access the capital markets and pursue growth initiatives while maintaining its community-focused approach.

Texas Community Bancshares, Inc. was incorporated on March 5, 2021, as part of the mutual-to-stock conversion process. The company’s shares began trading on the NASDAQ under the symbol TCBS following the completion of the conversion on July 14, 2021. This marked a significant milestone in the bank’s history, transitioning from a mutual savings bank to a publicly-traded company.

As part of this transformation, the bank also underwent a name change from Mineola Community Bank to Broadstreet Bank, reflecting its broader regional focus and growth ambitions. The bank has expanded its presence in northeast Texas, now operating seven locations throughout the region.

The company has experienced significant growth in recent years, with total assets increasing from $299 million in 2020 to $452 million by the end of 2023. This growth trajectory demonstrates the bank’s ability to capitalize on market opportunities and expand its customer base.

However, the company has also faced challenges in recent years. In 2022, the bank incurred a $29,000 loss on the sale of investment securities as part of an investment repricing strategy. More significantly, in 2023, the bank reported a net loss of $733,000, which was attributed to a year of extraordinary internal changes, including strategic balance sheet realignment, the retirement of the former CEO, and branch growth initiatives.

Diversifying the Loan Portfolio and Navigating Market Challenges

Throughout its history, Texas Community Bancshares has demonstrated the ability to navigate market fluctuations and adapt its business model to address emerging challenges. In 2023, the company made a strategic decision to reposition its loan portfolio, selling $27.1 million in residential mortgage loans. This deliberate move was part of a broader strategy to diversify the company’s assets, reduce concentration risk, and take advantage of repricing opportunities.

The company’s total assets stood at $446.0 million as of September 30, 2024, a slight decrease of 1.3% from the $452.0 million reported at the end of 2023. This reduction was primarily driven by a $15.7 million, or 13.2%, decrease in the securities portfolio, as well as a $9.1 million, or 74.0%, decline in interest-bearing deposits in banks. However, the company’s net loans and leases increased by $13.1 million, or 4.7%, to $293.0 million, reflecting the strategic reallocation of its loan book.

The loan portfolio, totaling $296.13 million as of September 30, 2024, is primarily comprised of real estate loans (92.40%), which include 1-4 family residential loans ($143.10 million or 48.30%), commercial real estate loans ($55.50 million or 18.80%), and construction and land loans ($55.19 million or 18.60%). The commercial and industrial loan segment accounts for $7.11 million, or 2.40% of the total loan portfolio, while municipal loans and consumer/other loans make up $9.30 million (3.10%) and $6.04 million (2.10%), respectively.

The increase in the loan portfolio was primarily driven by growth in commercial real estate loans, which the company used to partially reinvest the $27.10 million in proceeds from the sale of 122 performing residential mortgage loans. This sale was part of a portfolio repositioning strategy to increase yield, shorten weighted average life, and diversify the loan concentration. The company also originated $77.80 million in new loans during the nine months ended September 30, 2024, partially offset by $37.20 million in payoffs and $9.90 million in contractual repayments.

Financials

Texas Community Bancshares has faced financial challenges in recent years. The company reported a net loss of $1.8 million for the nine months ended September 30, 2024. This loss was primarily driven by a $3.8 million pre-tax loss, net of mortgage servicing rights retained, from the sale of the residential mortgage loans. Additionally, the company incurred a $283,000 loss associated with the demolition of a previous branch building and a $78,000 write-down of two bank properties transferred to other real estate owned.

Despite these challenges, the company’s net interest income increased by $1.3 million, or 16.0%, to $9.4 million for the nine months ended September 30, 2024, compared to the same period in 2023. This improvement was driven by a 76-basis-point expansion in the average yield on interest-earning assets, which increased from 4.54% to 5.30%. The company’s net interest margin also increased by 25 basis points, from 2.70% to 2.95%, as it effectively managed the repricing of its interest-earning assets and interest-bearing liabilities.

For the most recent fiscal year (2023), Texas Community Bancshares reported revenue of $11.42 million and a net loss of $733,000. Operating cash flow (OCF) for 2023 was $2.29 million, while free cash flow (FCF) was negative $3.31 million.

In the most recent quarter (Q3 2024), the company showed signs of improvement, with revenue of $5.70 million and net income of $515,000. OCF for the quarter was $869,000, and FCF was $858,000. The company experienced a 15.0% increase in revenue for Q3 2024 compared to Q3 2023, driven by higher interest income on loans due to increased yields and loan balances. Net income increased 12.9% year-over-year due to the higher net interest income, partially offset by an increase in the provision for credit losses.

Liquidity

Texas Community Bancshares has consistently maintained strong capital levels, with Broadstreet Bank, SSB exceeding all regulatory capital requirements and being categorized as well-capitalized as of September 30, 2024. The bank’s community bank leverage ratio, a key measure of capital adequacy, stood at 10.59% at the end of the third quarter, well above the 9.0% threshold required to be considered well-capitalized.

Deposits, a crucial source of funding for the bank, increased by $9.1 million, or 2.9%, to $326.3 million as of September 30, 2024, compared to $317.2 million at the end of 2023. The company has also maintained a diverse liquidity position, with access to various funding sources, including the Federal Home Loan Bank of Dallas, correspondent bank lines of credit, and the ability to sell securities or loans as needed.

The company’s deposit base increased $9.10 million, or 2.90%, to $326.30 million as of September 30, 2024, from $317.20 million at December 31, 2023. Core deposits, defined as all deposits other than certificates of deposit, grew $6.40 million, or 3.20%, to $204.90 million. Retail certificates of deposit increased $3.00 million, or 2.80%, to $109.50 million. Additionally, the bank had $12.00 million in brokered deposits as of September 30, 2024.

The cost of interest-bearing deposits increased 50 basis points, or 24.10%, to 2.58% for the nine months ended September 30, 2024, compared to 2.08% at December 31, 2023. The cost of total deposits increased 11 basis points, or 5.30%, from 2.09% at December 31, 2023, to 2.20% at September 30, 2024, reflecting the strategic effort to increase non-interest bearing deposits.

As of September 30, 2024, Texas Community Bancshares had a debt-to-equity ratio of 1.20 and cash and cash equivalents of $17.75 million. The company has significant available credit lines, including $74.20 million in unused borrowing capacity with the Federal Home Loan Bank of Dallas, a $10.00 million unsecured line of credit and $3.00 million secured line of credit with Texas Independent Bankers Bank, and a $5.00 million line of credit with First Horizon Bank.

Maintaining Strong Capital Levels and Liquidity

Texas Community Bancshares has consistently maintained strong capital levels, with Broadstreet Bank, SSB exceeding all regulatory capital requirements and being categorized as well-capitalized as of September 30, 2024. The bank’s community bank leverage ratio, a key measure of capital adequacy, stood at 10.59% at the end of the third quarter, well above the 9.0% threshold required to be considered well-capitalized.

Deposits, a crucial source of funding for the bank, increased by $9.1 million, or 2.9%, to $326.3 million as of September 30, 2024, compared to $317.2 million at the end of 2023. The company has also maintained a diverse liquidity position, with access to various funding sources, including the Federal Home Loan Bank of Dallas, correspondent bank lines of credit, and the ability to sell securities or loans as needed.

Weathering Challenges and Embracing Opportunities

Texas Community Bancshares has not been immune to the broader challenges facing the banking industry, reporting a net loss of $1.8 million for the nine months ended September 30, 2024. This loss was primarily driven by a $3.8 million pre-tax loss, net of mortgage servicing rights retained, from the sale of the residential mortgage loans. Additionally, the company incurred a $283,000 loss associated with the demolition of a previous branch building and a $78,000 write-down of two bank properties transferred to other real estate owned.

Despite these headwinds, the company has remained steadfast in its commitment to serving its local communities and positioning itself for long-term success. The strategic repositioning of the loan portfolio, along with ongoing efforts to diversify revenue streams and optimize operations, are positioning Texas Community Bancshares to capitalize on emerging opportunities in the market.

Navigating the Interest Rate Environment and Strengthening Net Interest Margin

The company’s net interest income increased by $1.3 million, or 16.0%, to $9.4 million for the nine months ended September 30, 2024, compared to the same period in 2023. This improvement was driven by a 76-basis-point expansion in the average yield on interest-earning assets, which increased from 4.54% to 5.30%. The company’s net interest margin also increased by 25 basis points, from 2.70% to 2.95%, as it effectively managed the repricing of its interest-earning assets and interest-bearing liabilities.

Texas Community Bancshares has also actively managed its interest rate risk, utilizing interest rate swaps to hedge a portion of its fixed-rate securities portfolio. At September 30, 2024, the aggregate notional amount of the related hedged items totaled $25.0 million, with the fair value of the swaps associated with the derivative-related hedged items recording an unrealized loss of $148,000.

Investing in Growth and Efficiency

In addition to its strategic portfolio repositioning, Texas Community Bancshares has continued to invest in the growth and efficiency of its operations. The company opened a new branch in Tyler, Texas, during the period, and completed the construction of a new branch building in Lindale, Texas. These investments in physical infrastructure are part of the company’s broader strategy to expand its geographic footprint and better serve its customers.

The company has also made investments in technology and data processing, focused on enhancing the customer experience and improving operational efficiency. During the nine months ended September 30, 2024, technology expenses increased by $18,000, or 5.2%, as the company implemented a new tap debit card program.

Navigating Leadership Transitions and Maintaining Shareholder Alignment

Texas Community Bancshares has navigated several leadership changes in recent years, including the retirement of its former CEO in 2023. The company has demonstrated its ability to manage these transitions effectively, with Jason Sobel assuming the role of President and CEO in October 2023. Sobel’s extensive experience in the banking industry and his familiarity with the company’s operations have been instrumental in ensuring a smooth transition.

The company has also remained focused on maintaining strong alignment with its shareholders. In 2023, the company initiated a share repurchase program, authorizing the repurchase of up to 164,840 shares, or approximately 5% of its outstanding common stock. As of September 30, 2024, the company had repurchased 244,770 shares under this program.

Looking Ahead: Navigating Challenges and Capitalizing on Opportunities

Texas Community Bancshares is navigating a dynamic market environment, marked by rising interest rates, increased competition, and evolving customer expectations. The company’s strategic actions, including the repositioning of its loan portfolio and investments in technology and infrastructure, position it to capitalize on emerging opportunities while mitigating risks.

As the company continues to execute its growth strategy, it will be essential for Texas Community Bancshares to maintain its strong capital position, prudent risk management practices, and unwavering commitment to its local communities. By leveraging its experienced leadership team, diversified revenue streams, and a resilient business model, the company is poised to navigate the challenges ahead and deliver long-term value for its shareholders.

The company’s asset quality remains strong, with the allowance for credit losses to loans and leases held for investment at 1.07% as of September 30, 2024. The company recorded a provision for credit losses of $110,000 for the nine months ended September 30, 2024, a decrease of $102,000, or 48.10%, compared to the same period in 2023. This decrease was primarily due to the sale of the $27.10 million in residential mortgage loans, which accounted for a $244,000 decrease in the provision when the loans were sold or transferred to held-for-sale.

Texas Community Bancshares operates primarily in the northeast Texas region and the Dallas-Fort Worth Metroplex area, with no significant operations outside of these local geographic markets. The banking industry in these markets has seen moderate loan growth and increasing net interest margins due to rising interest rates, offset by concerns about a potential economic slowdown.

As the company moves forward, it will continue to focus on its core strengths in community banking while adapting to the evolving financial landscape. With its strong capital position, diverse funding sources, and strategic initiatives underway, Texas Community Bancshares is well-positioned to weather near-term challenges and pursue long-term growth opportunities in its target markets.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.