TC Bancshares (TCBC) 1H22 Update

A look at the recent TCBC 2Q results & proxy statement

Greetings readers! I’m back and writing on consecutive weekends for the first time in awhile with a few quick observations from the TCBC 2Q22 10-Q and proxy statement. If you missed my initial post on the TCBC conversion, or would simply like a refresher, the deep dive on TCBC is available here. With that, let’s jump in!

Financial Findings

Capital levels remain high with the TCE ratio at 19.8% and a CET1 ratio of 22.0%. Shareholder’s equity took a modest hit due to AOCI losses from the available-for-sale portfolio. As of 2Q22, TBV/share stands at about $17.45 and shares trade at a valuation of ~81% of TBV.

Loans have shown 13% growth from YE21 on the back of CRE originations (17% growth), multi-family (26%), and residential loans (15%). Perhaps they have also found some traction with their recent entry into Jacksonville, but if so, like all late cycle entrants in a new geographic region, they will need to be careful they aren’t lending to the least creditworthy borrowers of the area. TCBC also noted given the rapid rise in secondary market rates, customers are increasingly choosing adjustable-rate mortgage (ARMs) products.

Similarly, deposits are up ~18% from YE21 and the mix has improved as CDs are nearly flat (22% of total deposits, down from 25%). But hold on, here’s a solid example of why it’s an a good idea to read the MD&A! In it, management discloses that $27 million worth of the increase in non-interest bearing deposits came from a customer who sold their business and subsequently moved $24 million away from TCBC. Adjusting for this, deposits are more realistically up 9% since the start of the year while core deposits represent ~77% of total deposits. Both are still quite respectable figures to be clear.

On the earnings front, an expansion in net interest income is becoming visible as interest rates help asset yields and interest expenses remain held in check. Like many thrifts, TCBC still has a ways to go before their revenues readily cover non-interest expense. In 2Q22, the efficiency ratio stood at an elevated 79%. Meanwhile annualizing 1H22 net income of $1.3 million would lead to a ROA of ~0.60% on total assets of $431 million.

Asset quality looks sound on an absolute level with a current NPL ratio of only 0.19%, but this is up modestly from 0.15% in December. Where improvement is more noticeable is in the past due loans where a total $1.5 million were past due at YE21, which is down to $1.0 million today. Similarly, special mention and substandard loans of $12.8 million and $4.3 million, respectively in December 2021 are down to $8.8 million and $4.2 million at 2Q22. While improving, I continue to be a bit worried by the material amount of special mention and substandard loans. They could distort asset quality metrics in a hurry if they deteriorated. Management will tell you they are conservative in their credit quality classifications which very well be the case.

TCBC only provisioned $61,000 for loan losses in the first half so I don’t think they are too concerned. Furthermore, the bank also recognized net recoveries (loan recoveries greater than charge-offs) of $27,500. As things stand today, the allowance for loan losses totals $4.3 million, or 1.4% of total loans, down from 1.54% at YE21.

On August 3rd, TCBC announced a 5.1% repurchase authorization, their first since crossing the one-year conversion anniversary in late July. Personally, I think they could’ve done more and opted for a 10% buyback given the excessive capital levels, but I haven’t had an opportunity to speak with management about how they’re thinking about this so perhaps they have a reason. Also recall back in June, TCBC announced a $0.05 semi-annual dividend (~0.7% yield) so the bank is demonstrating that capital returns are part of the playbook. I would just argue the magnitude of each could be ramped up.

Proxy Notes

Back in June, I noted in my TCBC deep-dive how none of the bank’s insiders participated in the conversion subscription to the maximum allotment so we shouldn’t be surprised to low levels of skin in the game as things stand today.

I also wrote I wanted to see insiders purchase shares on the open market. We got a bit of that in the first half with Peter DeSantis buying ~$34k and Matthew Brown buying ~$22k on behalf of a grandson. Aside from that, I don’t think there’s any additional takeaways that weren’t already touched on in the full write-up. Further open market purchases in significant sums would be encouraging!

Alright folks, I hope this issue helps keep you up to date on all things TC Bancshares. As always, if you have questions or feedback, don’t hesitate to reach out or leave a comment. Thanks for reading!

Disclaimer: I and others I advise are long TCBC shares. This is not investment advice nor a recommendation to buy or sell any security. Everything written is for general educational/entertainment purposes and I have not considered your specific financial situation. Always do your own research before making any kind of an investment.