10-K: TC Bancshares Reports Full Year 2023 Results, Net Income Impacted by Rising Interest Rates

TC Bancshares, Inc. reports a decrease in net income for 2023, primarily due to increased interest expenses and a decline in mortgage-related fee income.

Summary

• TC Bancshares, Inc. reported a net income of $266,000 for the year ended December 31, 2023, a significant decrease from the $1.8 million reported in 2022.
• The decrease in net income was primarily due to a substantial increase in interest expenses, which rose to $6.9 million in 2023 from $1.4 million in 2022, driven by multiple Federal Reserve rate hikes.
• Net interest income remained relatively flat at $13.9 million, as increased interest income was offset by higher funding costs.
• Non-interest income decreased by 40.8% to $1.2 million, mainly due to a decline in gains from the sale of mortgage loans.
• Total assets grew by 8.6% to $466.6 million, with net loans increasing by $37.9 million to $372.1 million.
• Total deposits increased by 12.4% to $369.9 million, driven by growth in savings accounts and certificates of deposit.
• The company repurchased $6.1 million of common stock during 2023, contributing to a decrease in total stockholders' equity to $79.6 million.
• The allowance for credit losses was $4.8 million, representing 1.28% of total loans.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While the company shows growth in assets, loans, and deposits, the significant decrease in net income and compression of net interest margin due to rising interest rates are concerning. The company's reliance on short-term funding and exposure to interest rate risk also contribute to a negative sentiment. The company's expansion efforts and strong capital position are positive, but the overall financial performance is weaker than the previous year.

Positives

• Total assets increased by 8.6% to $466.6 million.
• Total loans increased by 11.3% to $378.1 million.
• Total deposits increased by 12.4% to $369.9 million.
• The company opened two new branch locations in Savannah, Georgia, and Jacksonville, Florida, which contributed to deposit growth.
• The bank's capital levels exceeded all regulatory requirements to be considered well capitalized.

Negatives

• Net income decreased significantly to $266,000 in 2023 from $1.8 million in 2022.
• Interest expense increased dramatically to $6.9 million in 2023, up from $1.4 million in 2022.
• Net interest margin decreased to 3.31% in 2023 from 3.58% in 2022.
• Non-interest income fell by 40.8% to $1.2 million due to reduced mortgage loan sales.
• Total stockholders' equity decreased by $5.7 million to $79.6 million due to stock repurchases and dividends.

Risks

• The company faces risks related to commercial real estate, construction, and land development loans, which have higher credit risks.
• A downturn in the local real estate market could negatively impact the value of collateral securing loans.
• The company's profitability is heavily dependent on the economic conditions in its primary market areas.
• Changes in interest rates could reduce profits and asset values.
• Strong competition within the market areas may limit growth and profitability.
• The company is subject to extensive regulation, which may adversely affect operations.
• Operational risks, including cybersecurity breaches, could harm the business.
• The company's management team has limited experience managing a public company.
• The company is an emerging growth company, which may make its stock less attractive to investors.
• The company is subject to risks related to public health issues, including COVID-19 and associated economic slowdown.

Future Outlook

The company expects to continue to focus on originating one-to-four family residential real estate loans, commercial and multi-family residential real estate loans, commercial and industrial loans, construction and land development loans and consumer loans. The company also plans to continue to build depth and expertise as needed with increases in its size and complexity.

Management Comments

• Management believes there is a significant opportunity for a community-focused bank to provide a full range of financial services to commercial and retail customers in our market areas.
• Management believes that the increased capital resulting from the completion of our stock offering enables us to compete more effectively with other financial institutions.
• Management intends on increasing our loan outstandings through our expanded footprint with an experienced lending and credit staff, without compromising our credit standards.
• Management believes that these new branch offices, coupled with our existing branch footprint, will provide the Company with a solid core deposit base for our future.
• Management believes that strong asset quality is a critical key to our long-term financial success.

Industry Context

The report highlights the challenges faced by community banks in a rising interest rate environment, including increased funding costs and reduced mortgage activity. The company's expansion into new markets reflects a broader trend of community banks seeking growth opportunities in competitive landscapes. The report also notes the impact of recent bank failures and the Federal Reserve's response, which has heightened concerns about asset quality, particularly in commercial real estate lending.

Comparison to Industry Standards

• The company's net interest margin compression of 27 basis points is consistent with the challenges faced by many banks with similar balance sheet structures in a rising rate environment.
• The company's loan growth of 11.3% is above the average for many community banks, indicating a more aggressive growth strategy.
• The company's deposit growth of 12.4% is also above average, reflecting the success of its new branch openings and competitive deposit rates.
• The company's allowance for credit losses of 1.28% of total loans is within the range of industry standards, but may need to be adjusted based on future economic conditions.
• The company's reliance on longer-term fixed rate earning assets funded by short-term interest-bearing liabilities is a common strategy for community banks, but it exposes them to interest rate risk.

Related Party Transactions

• At December 31, 2023 and 2022, deposits from directors, executive officers, and their related interests aggregated approximately $2.4 million and $753,000, respectively.
• During 2023, new loans and advancements to related parties totaled $319,453, with repayments of $43,712, resulting in an ending balance of $450,277.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the impact on future dividends.
• Depositors may benefit from higher interest rates on savings accounts and certificates of deposit.
• Employees may benefit from the company's growth and expansion, but may also face increased competition for talent.
• Customers may benefit from the company's expanded branch network and continued focus on customer service.
• Creditors may be concerned about the company's exposure to interest rate risk and potential credit losses.

Next Steps

• The company intends to continue to build and maintain a high quality and diversified loan portfolio.
• The company seeks to increase its core deposit base in order to provide a stable source of funds to support its loan and overall balance sheet growth.
• The company will continue to develop loyalty with its community and its customers.
• The company plans to continue to build depth and expertise as needed with increases in its size and complexity.

Key Dates

Keywords

net income, interest expense, loan portfolio, deposits, mortgage loans, credit losses, interest rates, regulatory capital, commercial real estate, community bank