S-1/A 1 s002654x6_s1a.htm S-1/A

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As filed with the Securities and Exchange Commission on May 6, 2019.

Registration No. 333-230949

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

TECTONIC FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Texas
(State or other jurisdiction of
incorporation or organization)
6021
(Primary Standard Industrial
Classification Code Number)
82-0764846
(I.R.S. Employer
Identification No.)

16200 Dallas Parkway, Suite 190
Dallas, Texas 75248
(972) 720-9000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

A. Haag Sherman
Chairman
Tectonic Financial, Inc.
16200 Dallas Parkway, Suite 190
Dallas, Texas 75248
(972) 720-9000
(Name, address, including zip code and telephone number, including area code, of agent for service)

Copies to:

Peter G. Weinstock
Beth A. Whitaker
Hunton Andrews Kurth LLP
1445 Ross Avenue, Suite 3700
Dallas, Texas 75202
(214) 979-3000
Patrick Howard
President
and Chief Executive Officer
Tectonic Financial, Inc.
16200 Dallas Parkway, Suite 190
Dallas, Texas 75248
(972) 720-9000
Michael G. Keeley
Norton Rose Fulbright US LLP
2200 Ross Ave., Suite 3600
Dallas, Texas 75201
(214) 855-3906

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer ☒
Smaller reporting company o
Emerging growth company ☒
(Do not check if a smaller reporting company)
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒

CALCULATION OF REGISTRATION FEE

Title of Each Class of
Securities to Be Registered
Amount to be
Registered(1)
Prosed Maximum
Offering Price
Per Share(2)
Proposed Maximum
Aggregate
Offering Price(2)(3)
Amount of
Registration Fee(4)
Series B preferred stock, par value $0.01 per share
 
1,725,000
 
$
10.00
 
$
17,250,000
 
$
2,091
 

(1) Includes 225,000 shares of Series B preferred stock issuable upon the exercise of the underwriters’ option to purchase additional shares of Series B preferred stock from the registrant.
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended, based upon an estimate of the maximum offering price.
(3) Includes the offering price of any additional shares of Series B preferred stock that the underwriters have the option to purchase from the registrant.
(4) The registration fee was previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The information in this preliminary prospectus is not complete and may be changed. The securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to completion, dated May 6, 2019

PRELIMINARY PROSPECTUS

1,500,000 Shares


Tectonic Financial, Inc.

       % Fixed-to-Floating Rate
Series B Non-Cumulative Perpetual Preferred Stock

This prospectus relates to our initial public offering of our      % Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share, or Series B preferred stock, with a liquidation preference of $10.00 per share of Series B preferred stock.

We are a Texas-based financial services holding company offering banking, trust, investment advisory, securities brokerage and insurance services to high net worth individuals, small businesses and institutions across all 50 states. We are offering      shares of the Series B preferred stock.

Prior to this offering, there have been no shares of Series B preferred stock issued or outstanding and there has been no established market for the Series B preferred stock. We have filed an application to list the Series B preferred stock on the NASDAQ Global Market, or NASDAQ, under the symbol “TECTP.” If the application is approved, trading of the Series B preferred stock on NASDAQ is expected to to begin within 30 days after the date of initial issuance of the Series B preferred stock.

Dividends on the Series B preferred stock will not be cumulative or mandatory. If our board of directors does not declare a dividend on the Series B preferred stock or if our board of directors authorizes and we declare less than a full dividend in respect of any Dividend Period (as defined herein), we will have no obligation to pay a dividend or to pay full dividends for that Dividend Period at any time, whether or not dividends on the Series B preferred stock or any other class or series of our preferred stock or common stock are declared for any future Dividend Period.

We will pay dividends on the Series B preferred stock only when, as, and if declared by our board of directors. Dividends will be payable from the original date of issuance to, but excluding,       , 2024, at a rate of       % per annum, payable quarterly, in arrears, on January 1, April 1, July 1, and October 1, of each year, beginning on          , 2019. From, and including,       , 2024, dividends will be payable at a floating rate equal to three-month LIBOR (as defined herein) plus a spread of       basis points per annum, payable quarterly, in arrears, on January 1, April 1, July 1, and October 1, of each year, beginning on       , 2024. Notwithstanding the foregoing, in the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero.

We may redeem the Series B preferred stock at our option, subject to regulatory approval, at a redemption price equal to $       per share, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the redemption date, (i) in whole or in part, from time to time, on any Dividend Payment Date on or after       , 2024 or (ii) in whole, but not in part, at any time within 90 days following a Regulatory Capital Treatment Event (as defined herein).

The Series B preferred stock will rank (i) senior to our common stock, (ii) pari passu to our Series A preferred stock (as defined herein), and (iii) junior to all our existing and future indebtedness and other liabilities. See “Description of Series B Preferred Stock—Ranking.”

The Series B preferred stock will not have any voting rights, except in the limited circumstances described under “Description of Series B Preferred Stock—Voting Rights.”

Investing in the Series B preferred stock involves risks. See “Risk Factors.”

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and are eligible for reduced public company reporting requirements. See “Implications of Being an Emerging Growth Company.”

 
Per Share
Total
Public offering price
$10.00
$15,000,000
Underwriting discounts and commissions(1)
$
$
Proceeds to us, before expenses
$
$
(1)See “Underwriting” for additional information regarding the underwriting discounts and commissions and certain expenses payable to the underwriters by us.

The underwriters have an option to purchase up to an additional 225,000 shares of our Series B preferred stock at the initial public offering price less the underwriting discount within 30 days from the date of this prospectus. See “Underwriting.”

None of the Securities and Exchange Commission, any state securities commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System or any other regulatory authority has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The Series B preferred stock is not a deposit or savings account. The Series B preferred stock is not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality.

The underwriters expect to deliver the Series B preferred stock in book-entry form only through the facilities of The Depository Trust Company, or DTC, for the accounts of its participants against payment therefor on or about             , 2019, which is the second business day after the date of pricing of the Series B preferred stock (such settlement referred to as “T+2”). See “Underwriting (Conflicts of Interest).”

Sandler O’Neill + Partners, L.P.
Sanders Morris Harris LLC
American Capital Partners, LLC

The date of this prospectus is          , 2019

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About this Prospectus

In this prospectus, unless otherwise indicated or the context otherwise requires, the terms “Company,” “we,” “us,” or “our” refer to Tectonic Financial, Inc. and Tectonic Holdings, LLC on a combined basis. “Tectonic Financial” or “successor” refer to Tectonic Financial, Inc., f/k/a T Acquisition, Inc., a Texas corporation, and its consolidated subsidiaries, T Bancshares, Inc., “T Bancshares” or “predecessor,” a Texas corporation, and T Bank, N.A., or the Bank, a national banking association. We are party to a merger agreement, as amended and restated, with Tectonic Holdings, LLC, or Tectonic Holdings, a Texas limited liability company, pursuant to which we will acquire Tectonic Holdings and its subsidiaries through the merger of Tectonic Holdings with and into Tectonic Financial, with Tectonic Financial surviving, or the merger. Following the merger, we will operate through four main subsidiaries: (i) the Bank, (ii) Sanders Morris Harris LLC, or Sanders Morris, a registered broker-dealer with the Financial Industry Regulatory Authority, or FINRA, and registered investment advisor with the Securities and Exchange Commission, or the SEC, (iii) Tectonic Advisors, LLC, or Tectonic Advisors, a registered investment advisor registered with the SEC focused on managing money for relatively large, affiliated institutions, and (iv) HWG Insurance Agency LLC, or HWG, an insurance agency registered with the Texas Department of Insurance, or the TDI. Please refer to the chart on page 6 for our organizational structure.

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or on our behalf that we have referred you to. We and the underwriters have not authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you.

This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information in this prospectus or any free writing prospectus is accurate only as of the date of the applicable document regardless of its time of delivery or the time of any sales of the Series B preferred stock. Our business, financial condition, results of operations and cash flows may have changed since the date of the applicable document. Information contained on, or accessible through, our website is not part of this prospectus.

You should not interpret the contents of this prospectus or any free writing prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in the Series B preferred stock.

Unless otherwise stated, all information in this prospectus assumes that the underwriters have not exercised their option to purchase additional shares of the Series B preferred stock. References in this prospectus to “bank holding company” or “bank holding companies” also refer to financial holding company and financial holding companies, as applicable, unless we state otherwise or the context otherwise requires.

Market and Industry Data

This prospectus includes industry and trade association data, forecasts and information that we have prepared based, in part, upon data, forecasts and information obtained from independent trade associations, industry publications and surveys, government agencies and other independent information publicly available to us. Statements as to our market position are based on market data currently available to us. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed by us to be reliable. Although we believe these sources are reliable, we have not independently verified the information obtained from these sources. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. We believe our internal research is reliable, even though such research has not been verified by any independent sources. While we are not aware of any misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus. In addition, forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus.

Trademarks used in this prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the TM symbols to identify such trademarks.

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Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of the following reduced reporting obligations and other significant requirements that are otherwise generally applicable to other public companies:

we are exempt from the requirement to provide an opinion from our auditor on the effectiveness of our system of internal control over financial reporting;
we may present only two years of audited financial statements, discuss only our results of operations for two years in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” sections and provide less than five years of selected financial data in this prospectus;
we may elect not to comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;
we are permitted to provide less extensive disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and other disclosure regarding our executive compensation in this prospectus and in our future annual reports and proxy materials; and
we are not required to hold nonbinding advisory votes on executive compensation or golden parachute arrangements.

We will cease to qualify as an “emerging growth company” upon the earliest of:

the last day of the fiscal year in which we have $1.07 billion or more in annual revenues (as that amount may be periodically adjusted by the SEC);
the date on which we become a “large accelerated filer” (the fiscal year end on which the total market value of our common equity securities held by non-affiliates exceeds $700 million as of June 30 of that fiscal year);
the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or
the last day of the fiscal year following the fifth anniversary of our initial public offering.

We have elected to adopt the reduced disclosure requirements above for purposes of the registration statement of which this prospectus is a part. In addition, we expect to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the SEC and proxy statements that we use to solicit proxies from our shareholders.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, but we have irrevocably opted out of the extended transition period, and as a result, we will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for other public companies.

Implications of Being a Controlled Company

A. Haag Sherman, George L. Ball, Darrell W. Cain, Steven B. Clapp, Thomas Sanders, Daniel C. Wicker, other members of management and partners of Cain Watters & Associates, LLC, or Cain Watters, and certain other existing shareholders, collectively referred to in this prospectus as the Majority Shareholders, currently own more than 50% of the outstanding shares of common stock of the Company. The Majority Shareholders will continue to own more than 50% of our outstanding shares of common stock following this offering. So long as the Majority Shareholders continue to own at least a majority of our common stock, they will have the ability, if they vote in the same manner, to determine the outcome of certain matters requiring shareholder approval, including the election of directors and amendments to our certificate of formation, bylaws and other corporate

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governance documents. In any of these matters, the interests of the Majority Shareholders may differ from or conflict with the interests of our other shareholders. Moreover, this concentration of stock ownership may also adversely affect the trading price of the Series B preferred stock if investors perceive disadvantages in owning stock of a company with a controlling group.

Additionally, as the Majority Shareholders will continue to own more than 50% of our outstanding shares of common stock following this offering, we will be a “controlled company” for purposes of the NASDAQ Global Market, or NASDAQ, corporate governance standards. As a controlled company, we may elect not to comply with certain corporate governance requirements, including the requirements:

that a majority of our board of directors consists of “independent directors,” as defined under NASDAQ rules;
that director nominations are selected, or recommended for the board of directors’ selection, by either (i) the independent directors constituting a majority of the board of directors’ independent directors in a vote in which only independent directors participate, or (ii) a nominating and corporate governance committee that is composed entirely of independent directors;
that we have a compensation committee that is composed entirely of independent directors; and
that we conduct annual performance evaluations of the nominating and corporate governance committee and compensation committee.

We intend to avail ourselves of these and other exemptions for as long as we remain a “controlled company.”

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SUMMARY

The following summary highlights selected information from this prospectus and may not contain all of the information that is important to you. This summary is qualified in its entirety by reference to the more detailed information appearing elsewhere in this prospectus. As used in this prospectus, the terms “Company,” “we,” “us,” and “our” refer to Tectonic Financial and Tectonic Holdings on a combined basis, assuming the consummation of the merger (as described herein). Please refer to the chart on page 6 for our organizational structure, assuming the completion of the merger. You should carefully read this prospectus in its entirety before making a decision to invest in the Series B preferred stock, including the risks of purchasing the Series B preferred stock under the “Risk Factors” section.

Our Company

We are Tectonic Financial, Inc., a financial holding company that offers banking, trust, investment advisory, securities brokerage and insurance services to high net worth individuals, small businesses and institutions in all 50 states. We believe our diversified lines of business: (a) generate a high degree of recurring earnings; (b) create an attractive return on equity and assets; (c) complement one another to reduce earnings volatility; (d) expand the number of services that we can offer and our clients can utilize; and (e) reduce the need for additional outside capital to finance our loan growth. Our trust department and broker-dealer clientele provide a source of stable funding, which we expect to increase as a percentage of our total funding sources, to help support the growth of our Bank’s loan portfolio. Likewise, our clients’ trust portfolios benefit from advisory services provided by our registered investment advisor, and our insurance agency is expected to grow through serving certain of our Bank and investment clients. We believe that we can leverage this combination of financial services to reduce our client acquisition costs and create shareholder value through our integrated financial services platform.

As of December 31, 2018, we had, on a pro forma combined basis, $311.7 million in assets, $234.0 million in total loans held for investment, $16.3 million in loans held for sale, $250.4 million in deposits and $34.9 million in shareholders’ equity. For the year ended December 31, 2018, our pro forma combined non-interest income was $25.3 million, or 70.5% of pro forma combined gross revenue (which is net interest income plus non-interest income), and pro forma combined net interest income was $10.6 million, or 29.5% of gross revenue. Pro forma combined return on average assets and return on average equity for the year ended December 31, 2018 were 3.0% and 24.9%, respectively. Pro forma combined return on average tangible assets and return on average tangible common equity for the year ended December 31, 2018 were 3.1% and 51.6%, respectively. In addition, as of December 31, 2018, the Company’s pro forma consolidated client assets (including assets under management and advisement) totaled $3.3 billion.

We are led by an experienced management team with a history of success in growing institutions organically and making selective acquisitions to enhance growth. Notably, our team has experience accessing non-conventional, yet stable funding sources to support loan growth, reducing client acquisition costs and generating leverage and scale through proprietary technology platforms. Our leadership team includes:

A. Haag Sherman. Mr. Sherman currently serves as the Executive Chairman of the Company. Following the merger, he will serve as the Chief Executive Officer and a director of the Company. See “—Our Corporate History, Merger and Structure.” Prior to joining the Company, Mr. Sherman co-founded Salient Partners, LP (a Houston-based investment firm) in 2002 and served in various executive positions, including Chief Executive Officer and Chief Investment Officer, through October 2011. During this period, Mr. Sherman oversaw the sale of a significant equity stake in Salient to a private equity firm in early 2010 and Salient’s growth from a start-up to $17.5 billion in assets under management as of October 2011. He also co-developed most of Salient’s investment products and co-patented software that provided leverage and scale to Salient’s distribution platform. Mr. Sherman facilitated three acquisitions at Salient that expanded its business into trust and fiduciary services, master limited partnership and energy asset management and pension asset management. Mr. Sherman previously served as an executive officer and equity holder of The Redstone Companies, where he, among other things, managed a private equity portfolio (including two specialty finance companies ultimately sold to global financial institutions). Mr. Sherman is also a former securities law attorney, having represented public and private companies in corporate transactions and advised them on reporting and disclosure requirements with the SEC and stock exchanges, and is a certified public accountant. Mr. Sherman graduated cum laude from Baylor University (majoring in accounting and economics) and earned his juris doctorate (with honors) from The University of Texas at Austin.

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Patrick Howard. Mr. Howard currently serves as President, Chief Executive Officer and a director of the Company. Following the merger, he will serve as the President, Chief Operating Officer and a director of the Company. Mr. Howard has served as President and Chief Executive Officer of the Company since May 2017, as President and Chief Executive Officer of the Bank since 2010 and as the Chief Operating Officer and director of T Bancshares and the Bank since 2007. During his tenure at the Bank, he has overseen the growth of the trust platform to over $1.2 billion in assets, more than tripled the size of the loan portfolio in the last seven years through organic growth and successfully recruited and integrated a national Small Business Administration, or SBA, lending platform. He accomplished this while developing and ensuring an operating culture based on strong internal controls and regulatory compliance. In addition, prior to its acquisition by Tectonic Financial in May 2017, T Bancshares was an SEC reporting company, and Mr. Howard was jointly responsible for T Bancshares’ SEC filings and compliance. Mr. Howard previously served as the Executive Vice President and Chief Operating Officer of a savings bank that he helped grow from $50 million to $2.2 billion over an 11-year period. Mr. Howard oversaw many critical areas of the bank’s growth, including the development of alternative funding sources of $1.8 billion, the creation of a trust division with over $5.0 billion in custodial retirement plan assets, a mortgage servicing and origination platform that originated over $5 billion in residential mortgages per year at its peak, and the successful start-up and growth of its SBA loan platform (the head of which is now the head of our SBA loan platform). Mr. Howard graduated magna cum laude from the University of Texas at San Antonio.
George L. Ball. Mr. Ball is currently a director of the Company and will serve as Executive Co-Chairman and a director of the Company following the merger. Mr. Ball is also the Chief Executive Officer of Sanders Morris. Mr. Ball previously served as Chairman of The Edelman Financial Group, which was sold to a private equity firm in 2015. During his tenure, Edelman experienced significant growth (from $3 billion to $18 billion in assets under management) aided by low client acquisition costs. Further, as Chief Executive Officer of Sanders Morris’ previous parent company, Mr. Ball oversaw the acquisition of nine financial services companies. He previously served as Chairman and Chief Executive Officer of Prudential-Bache Securities, Inc. and as President of E.F. Hutton Group, Inc. Mr. Ball is a former governor of the American Stock Exchange and the Chicago Board Options Exchange. He is a graduate of Brown University and served as an officer in the U.S. Navy.

Our Competitive Strengths

In addition to our leadership team, we believe our competitive strengths include:

Well-Diversified & Recurring Revenues. Our recurring revenue stream is well-diversified, which we believe increases our returns and lowers our earnings risk relative to many of our peers. The following charts set forth on a combined pro forma basis the breakdown of our pre-tax income (assuming proportionate allocation of non-bank interest expense) for the year ended December 31, 2018:


(1) Consists primarily of Tectonic Holdings’ net gain on bargain purchase in connection with its acquisition of Sanders Morris.

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Approximately 83% of our pre-tax and pre-interest earnings (which excludes non-deposit interest expense) are generated by revenues from lending, trust, investment advisory and insurance, which we believe provide us with a diversified and stable earnings foundation. The remainder of our historical revenues derive from the gain on sale of SBA loans, brokerage services, and private placement and syndication fees. We believe that the combination of our traditional banking operations with the investment advisor services will allow us to grow and/or weather varied economic conditions and across business cycles.

Ability to Generate High Return on Equity and Assets. Given our percentage of non-interest income, we generate significantly higher returns on average tangible common equity and average assets relative to our peer group:



*Peer group consists of 49 Texas banks with asset size ranging from $250 million to $500 million.

**Considered a non-GAAP financial measure. For a reconciliation of non-GAAP measures to the most directly comparable GAAP financial measures, see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

Source: FDIC, S&P Global Market Intelligence.

We believe that our existing capital, supplemented by the proceeds from the offering and coupled with our earnings and reliable core funding (discussed below), will allow us to continue to support our attractive rate of loan growth illustrated in the chart set forth in “Ability to Generate Strong Loan Growth with Relatively Low Loan Losses.”

Ability to Generate Strong Loan Growth with Relatively Low Loan Losses. The Bank has generated attractive loan growth, with low loan losses (as a percentage of the loan portfolio), from 2012 through 2018:


Our focus on our dental and our SBA / U.S. Department of Agriculture, or USDA, lending verticals has primarily driven our loan growth. We believe that we have a competitive advantage in sourcing, underwriting, closing and servicing loans in our lending verticals because we believe we have cultivated a team of lenders with expertise in these areas. To deliver scale and service, we have a lending and technology platform that allows us

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to serve borrowers in all 50 states. We believe that our industry experience and knowledge have enabled us to develop a sophisticated understanding of the underwriting risks inherent within our loan portfolio. For example, our SBA and USDA loans are typically 75% and 80%, respectively, guaranteed by their respective government agencies. By retaining these government-guaranteed loans that present minimal risk to our balance sheet, we are mitigating risks associated with other types of loans in our portfolio. We adhere to disciplined credit risk management consisting of rigorous underwriting criteria, robust monitoring and internal supervision apparatus to determine the acceptable level of risk and adjustments to underwriting criteria if warranted. Consequently, our loss ratios have remained low, even as our lending portfolio has expanded significantly in recent years.


Ability to Grow Client Assets Through Strategic Acquisitions and Organic Growth. Our investment services platform has grown client assets (including assets under management and advisement) through a combination of acquisitions and organic growth (which includes market appreciation/depreciation, new client assets and attracting advisors and brokers with client assets but without an upfront payment). The following table sets forth client asset growth since 2015:


* Compounded annual growth rate from $1.4 billion in February 2015
(with annual growth rates noted) through December 31, 2018

Our original assets under management at Tectonic Advisors (including assets held by the Bank as a fiduciary) were $1.4 billion as of February 1, 2015. We added a family office group in 2016 and Sanders Morris and an institutional investment team in 2017. Those acquisitions added $0.9 billion of managed and client assets. In total, our original assets, the $0.9 billion gained through acquisition and the $1.0 billion of organic growth (which represents the growth of each asset base over original assets and acquisitions) brings total client assets to $3.3 billion as of December 31, 2018. Thus, we expect to be able to use a significant portion of the proceeds from this offering to make selective acquisitions to further diversify our business and provide platforms for future growth, as our management team has successfully done in the past, as well as for corporate and general purposes.

Ability to Scale Through Technology. Our technology platform allows us to provide trust services and loans to clients in all 50 states. This allows us to grow our business by identifying additional loan verticals and serving

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potential borrowers on a national basis. Further, we are developing a proprietary technology platform that will synthesize our financial services platform and allow a client to access many of our services in a holistic manner, including investments, insurance and other financial services. We believe this new platform will provide us with the ability to serve our clients more broadly and in a comprehensive manner, while providing us with the ability to leverage our large client base to generate greater revenues with minimal additional client acquisition costs.

Our Corporate History, Merger and Structure

History. The amalgamation of the Company began in 2015 when Mr. Sherman and the partners of Cain Watters, an important referral source and client for the Bank, formed Tectonic Holdings as a holding company to acquire Tectonic Advisors. Tectonic Holdings then acquired Sanders Morris and HWG in early 2017. Tectonic Financial was formed in late 2016 for the purpose of acquiring T Bancshares. When Tectonic Financial acquired T Bancshares, Tectonic Holdings unitholders acquired one share of Tectonic Financial common stock for each unit of Tectonic Holdings owned, resulting in a mirror ownership base.

Common Ownership, Shared Management and Other Services. In addition to common ownership, Tectonic Financial has shared management and services with Tectonic Holdings under an expense sharing agreement. This arrangement allows for commonality of management and purpose within the affiliated group, consistent with, and subject to, applicable regulations. Such an arrangement, however, involves administrative costs and burdens that we will be able to alleviate because Tectonic Holdings and Tectonic Financial have agreed to merge the companies.

Merger. Tectonic Financial and Tectonic Holdings entered into a merger agreement, as amended and restated, dated March 28, 2019, providing for the merger of Tectonic Holdings with and into Tectonic Financial, with Tectonic Financial surviving. In the merger, each common unit of Tectonic Holdings outstanding immediately prior to the effective time of the merger will be converted into one share of Tectonic Financial common stock, and each option to purchase one Tectonic Holdings common unit will be converted into an option to purchase one share of Tectonic Financial common stock. Immediately after consummation of the merger, the Company will conduct a 1-for-2 reverse stock split, which will leave 6,568,750 common shares issued and outstanding immediately prior to the consummation of the offering.

In addition, immediately prior to the merger, approximately $8.0 million of Tectonic Advisors subordinated debt held by Dental Community Financial Holdings, Ltd., or DCFH, an entity that has as its general partner a corporation owned by one of the members of the board of managers of Tectonic Services, LLC, or Tectonic Services, which is the limited liability company manager of Tectonic Holdings, will be converted into 80,338 non-cumulative, perpetual preferred units of Tectonic Holdings, or the Tectonic Holdings preferred units, to obtain the desired tax and regulatory capital treatment following the merger and this offering. There are and will be no other Tectonic Holdings preferred units outstanding.

In the merger, each Tectonic Holdings preferred unit will be converted into one share of Tectonic Financial 10.0% Series A Non-Cumulative Perpetual Preferred Stock, or Series A preferred stock. Pursuant to the letter of intent by and among Tectonic Holdings, Tectonic Financial and DCFH, the Series A preferred stock would rank senior to our common stock and pari passu to the Series B preferred stock as to dividend rights and rights upon liquidation, dissolution and/or winding up. Dividends would be paid on the Series A preferred stock only when, as and if declared by our board of directors at a rate of 10% per annum (payable quarterly). The Series A preferred stock would have a liquidation preference of $100 per share. In addition, the Series A preferred stock would not be convertible into any other security of the Company. The Series A preferred stock would be redeemable at the option of the Company at any time after the fifth anniversary of the original issue date at a redemption price equal to the liquidation preference, plus any declared but unpaid dividends, subject to the requisite approval of the Federal Reserve, if any. The definitive terms of the Series A preferred stock are subject to the certificate of designation filed with our certificate of formation. See “Description of Capital Stock—Series A Preferred Stock” and “Certain Relationships and Related Party Transactions—Other Transactions—Tectonic Holdings—Related Party Loan.”

Although the shares of Series A preferred stock are not redeemable for the first five years after issuance inorder to obtain the desired Tier 1 capital treatment, we intend to offer to repurchase from DCFH such Series A preferred stock for a price equal to the aggregate liquidation preference of the Series A preferred stock, plus any declared but unpaid dividends, using a portion of the proceeds of this offering. DCFH, as the sole owner, is under no obligation to accept our repurchase offer, may require a higher repurchase price or may determine that

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it is not in DCFH’s best interest to accept any repurchase offer given the current interest rate on the Series A preferred stock. Even if DCFH accepts our repurchase offer, the repurchase of the Series A preferred stock is subject to regulatory approval. While the Series A preferred stock remains outstanding, we intend to pay dividends on the Series A preferred stock in accordance with the schedule and terms of its certificate of designation; however, such dividends are not mandatory or cumulative.

The merger has been approved by the board of directors of Tectonic Financial and the board of managers of the sole manager of Tectonic Holdings, as well as the shareholders of Tectonic Financial and the unitholders of Tectonic Holdings. No regulatory approvals are required in order to complete the merger; rather, Tectonic Financial will provide the Federal Reserve with an after-the-fact notice once the merger is completed. The merger is subject to the satisfaction of certain other customary closing conditions, as well as a requirement that the Company have a 9% pro forma Tier 1 leverage ratio upon consummation of the merger or within 60 days thereafter, which management believes will occur upon the completion of this offering. Accordingly, we believe there is no material risk that the merger does not occur immediately prior to this offering.

The merger will be accounted for as a combination of businesses under common control in accordance with Accounting Standards Codification, or ASC, Topic 805-50, Transactions Between Entities Under Common Control. Under ASC 805-50, all the assets and liabilities of Tectonic are carried over to the books of Tectonic Financial at their then current carrying amounts. Thus, no additional goodwill will be recorded as a result of the merger.

Structure. In connection with the merger and this offering, we changed our name from T Acquisition, Inc. to Tectonic Financial, Inc. Our corporate structure after the merger is illustrated by the following chart:


After the merger, we will operate our business through the following subsidiaries:

The Bank. The Bank is a full-service, nationally chartered commercial bank headquartered in Dallas, Texas providing traditional community banking services and trust services. The Bank has developed a niche practice in SBA/USDA lending and loans to the dental industry. As of December 31, 2018, the Bank had $305.8 million in assets, $258.6 million in deposits, $234.0 million in total loans held for investment, $16.3 million in loans held for sale, and $39.1 million in shareholders’ equity.
Tectonic Advisors. Tectonic Advisors is a registered investment advisor providing investment advisory services to individuals, institutions (including affiliates) and families. It advises on portfolios of assets for an asset-based fee. As of December 31, 2018, Tectonic Advisors had approximately $1.7 billion in client assets under management, or AUM (which includes $1.2 billion of AUM held by the Bank as a fiduciary).
Sanders Morris. Sanders Morris is a FINRA-regulated broker-dealer. It is also registered as a SEC investment advisor. Through Sanders Morris, we serve clients on their investment portfolios as an

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advisor or broker (often with limited powers of attorney). We also execute trades for institutions and households. As of December 31, 2018, Sanders Morris had approximately $273.0 million in client assets under management, and client brokerage assets of $1.3 billion, bringing total client assets to $1.6 billion.

HWG. HWG is an insurance agency registered with the TDI. It offers insurance principally to individuals. In particular, we offer personal lines, property and casualty (for small businesses) and death and disability insurance.

Our Business

We operate through two business segments: Banking and Investment Services.

Banking

Our Bank strives to generate an attractive risk-adjusted return on assets and capital by providing niche lending services and generating significant non-interest income through its trust services.

Lending Services. From its single location, the Bank operates three lending verticals where it has developed expertise. We believe our lending products provide an important diversity of risk and opportunity, which differentiates us from most community banks our size.

SBA and USDA. We have had an SBA/USDA lending division since 2012, growing SBA loans from 2% of the loan portfolio as of December 31, 2012 to 39% of the loan portfolio as of December 31, 2018. This division is led by a core team of professionals that have originated SBA loans together for more than 20 years. See “Risk Factors–Risks Related to Our Business–We depend on key personnel, and may have difficulty identifying, attracting and retaining necessary personnel, to execute our business strategy and successfully expand our operations.” We have business development officers, or BDOs, in Colorado, Arizona, Oregon, California, Tennessee, Utah and Florida. Their leads come from multiple sources including clients, referrals, business brokers, SBA Small Business Development Centers, loan brokers, community banks and credit unions, and franchisors. Since the formation of the Bank’s SBA lending division in 2012, there have been only seven loans with net losses totaling $775 thousand, or about 0.23%, of the total SBA and USDA loans originated of $331.1 million. There have been no losses related to claims on the SBA guarantees which we believe is due to our adherence to SBA underwriting, servicing, and liquidation guidelines.
Dental and Other Professionals. Another significant niche lending program of the Bank focuses on loans to the dental industry and other professional practices. The principal referral source of these loans is Cain Watters. Cain Watters has been highly successful in providing a variety of consulting services to dentists and dental companies for over 30 years with a national client base. Cain Watters refers loans to a variety of lenders (including the Bank), who compete on price, terms and service. The majority of our dental loans are to dentists with established practices. Based on our focus on service, we have been able to compete effectively for these loans and charge a slight rate premium over other banks active in this lending space. This portfolio has also performed reasonably well historically. We have incurred losses on only seven loans totaling $2.1 million, or 0.65%, in our 14-year history of originating over $331.8 million of dental loans.
Traditional Community Banking. The Bank offers traditional lending services, including commercial and industrial, commercial real estate, construction and, on a very limited basis, consumer loans. The majority of these loans are to commercial enterprises in the Dallas, Texas area.

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As of December 31, 2018, our loan portfolio at cost basis by lending segment was as follows:


As of December 31, 2018, our loan portfolio at cost basis by loan type is shown below and is geographically diverse with some concentration in the fast growing Texas market.



Trust Services. We provide trust services to individuals, individual retirement plans (IRAs) and defined contribution and benefit plans established by small businesses for their owners and employees. We have approximately 2,000 trust accounts in 48 states. For ease of administration, the Bank has established common pooled funds to comingle our clients’ capital to invest in stocks, bonds, exchange-traded funds or other

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investments and thereby provide a smaller investor with broader diversification and access to professional investment advisors. The Bank generates fees by providing administrative services to the common pooled funds and providing trust services to the plans and the individual investors. The Bank has approximately $1.2 billion in market value of trust assets as of December 31, 2018.

Third Party Administration. In January 2019, the Bank acquired The Nolan Company, or Nolan, a third-party administrator, or TPA, based in Overland Park, Kansas. Founded in 1979, Nolan provides clients with retirement plan design and administrative services, specializing in independent ministerial recordkeeping, administration, actuarial and design services for retirement plans of small businesses and professional practices. Nolan has clients in 50 states and is the administrator for over 800 retirement plans, 551 of which are also clients of the Bank, which is over 54% of the retirement plans we service in our trust department. We believe that the addition of TPA services will allow us to serve our clients more fully and to attract new clients to our trust platform.

Funding. To fund its loan and securities portfolio, the Bank offers a wide range of deposit services including demand deposits, regular savings accounts, money market accounts, individual retirement accounts, and certificates of deposit with fixed rates and a range of maturity options. In addition, our Bank can access uninvested cash as deposits from customers of its trust department. As of December 31, 2018, our Bank had access to $24 million from the funds of trust clients with $12 million held at the Bank and $12 million held at a third party money market mutual fund but accessible by the Bank.

Our strategy includes the development of a mechanism whereby we may utilize the cash balances of Sanders Morris clients to assist the Bank in meeting its funding needs. Sanders Morris clients’ and their entities’ funds at the Bank totaled $7.0 million as of December 31, 2018. Once we develop this strategy, we believe a portion of the approximately $134.6 million as of December 31, 2018 of Sanders Morris client cash equivalent funds could be deposited at the Bank to meet current and future funding needs. In addition, the Bank anticipates implementing participant-directed retirement accounts into its trust line of business. The Bank intends to offer its money market account insured by the Federal Deposit Insurance Corporation, or the FDIC, as an investment option for those retirement plans. We believe, based on management’s past experience, that up to 5% of retirement assets under participant direction are invested in FDIC insured accounts like those we plan to offer. Based on current trust client balances, that could equate to additional funding over time.

Prior to 2018, we believed wholesale funding sources were more cost effective to fund growth than retail deposits, especially considering the costs associated with employee and branch overhead. With rising interest rates, we began an increased emphasis on capturing transaction account balances in connection with our lending clients, and have added additional staff to grow that funding source. In particular, we have increased training of our loan production staff and are coordinating the sale efforts of both lenders and electronic banking officers to increase our treasury management business.

As of December 31, 2018, the Bank had total deposits of approximately $258.6 million. Time deposits of $250 thousand and over totaled $31.6 million as of December 31, 2018. The Bank had no brokered deposits as of December 31, 2018. The following chart illustrates the breakdown of our deposits by type:


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Investment Services

We provide a variety of investment and insurance services to our clients through one or more subsidiaries, including investment advisory, asset management, stock and bond investments, institutional trading, private investments and access to public offerings and other investments. By providing our clients with a broad array of investment products and services, we believe that we can attract clients seeking differentiated investment solutions and retain them over a longer period of time. These services include:

Investment Advisory. Tectonic Advisors provides investment advisory services to individuals, institutions (including affiliates) and families principally for an asset-based fee. In so doing, it makes recommendations on retaining investment managers, making investments in exchange traded funds, or ETFs, or other passive investments and/or providing advice on the allocation of assets among investment managers and asset classes. Tectonic Advisors has approximately $1.7 billion in assets under management and advisement as of December 31, 2018, including the Bank’s $1.2 billion in trust assets. Tectonic provides investment advisory services on the Bank’s trust assets under a long-term agreement. Pursuant to this agreement, Tectonic Advisors provides investment advice, asset allocation advice and third party manager research for the construction of portfolios. Tectonic Advisors provides advice on approximately eight common pooled funds, which are combined in various manners to develop different portfolios for investors (ranging from a conservative allocation to an aggressive allocation). In addition, Sanders Morris has approximately $273.0 million under advisement, bringing the Company’s total assets under advisement to $2.0 billion as of December 31, 2018. Tectonic Advisors also advises on assets for Cain Watters. Cain Watters is a key strategic relationship for us, our advisory business and our Bank, and the partners of Cain Watters own approximately 31.1% of our Company prior to this offering. See “Certain Relationships and Related Party Transactions—Other Transactions—Tectonic Holdings—Support Services Agreement” and “Certain Relationships and Related Party Transactions—Other Transaction—Tectonic Holdings—Management—Agreements.”

In providing investment advisory services to individuals and families, Tectonic Holdings and Sanders Morris’ financial advisor first determines the risk profile of the investor, which includes the age, investment time horizon, tolerance for risk and investment objectives. Once determined, the financial advisor makes a recommendation on asset allocation and populates each asset class (e.g., domestic equity, international equity, fixed income, etc.) with either mutual funds, exchange traded funds, common stocks and/or bonds to provide exposure to each such asset class. The asset allocation and investments populating each asset class are revisited periodically based on interaction with the client, his or her changing risk profile, investment performance, changing market conditions and/or other factors, as the financial advisor deems appropriate.

Brokerage. We conduct our broker-dealer activities through Sanders Morris, which is headquartered in Houston, Texas. Sanders Morris, whose direct predecessor was founded in 1987, is regulated as a broker-dealer by FINRA. As of December 31, 2018, Sanders Morris has approximately $2.3 million in net tangible capital to support its broker-dealer activities. In addition, Sanders Morris has nearly $1.3 billion in client brokerage assets domiciled at our clearing firm, Pershing LLC, or Pershing, as of December 31, 2018.

Through Sanders Morris, we manage stocks and other securities for high net worth clients on a limited discretionary basis in consideration for brokerage commissions based on trading activity. In addition, Sanders Morris’ institutional trading group provides institutional trading and other services to money managers, institutions, individuals and family accounts. This group provides trading, proprietary trading ideas and research, structured solutions and other financial services, typically in consideration of a commission based on trading activity. It competes on the basis of service and solutions.

We also provide clients with access to private investments that are sourced by us in consideration for a placement fee or commission. In so doing, Sanders Morris sources what it believes are quality investment opportunities, conducts due diligence on the investment opportunity and then determines whether the investment is suitable for investors. In many transactions, the senior investment professionals of Sanders Morris invest in the opportunities on the same terms and conditions. Sanders Morris believes that by providing its clients with sound private placements, it has a competitive advantage over many institutions that do not have access to such investments.

Sanders Morris also participates in syndicates of public offerings, typically as a selling group member. As a selling group member, Sanders Morris typically is acting on a best efforts basis and not as an underwriter. As a

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selling group member, Sanders Morris places the securities in the public offering with its clients and generates a selling group commission, typically 3% to 4%. Sanders Morris can also participate in public offerings as an underwriter, which means that Sanders Morris takes investment risk on the placement of the securities but earns a higher commission.

Finally, we provide access to margin loans offered through our clearing firm, Pershing. In doing so, we make a spread between the interest rate charged to our clients and our cost of funds. We anticipate our margin lending to increase over time.

Insurance Agency. Through our insurance agency, HWG, we offer personal lines, property and casualty (for small businesses) and death and disability insurance as a broker. Tectonic Holdings, and through it, HWG, has an agreement with Cain Watters under which Cain Watters agrees to refer, as it deems appropriate, its clients to HWG so that HWG may present insurance products and solutions as a broker for sale to clients of Cain Watters. See “Certain Relationships and Related Party Transactions—Other Transactions—Tectonic Holdings—CWA Insurance Contribution Agreement.” We believe that Cain Watters clients have a need for disability, life and property and casualty insurance. While the Cain Watters clients are under no obligation to conduct business with us, we believe that over time we will capture some of these revenues on the basis of familiarity of service and price. We will also have the opportunity to sell insurance as a broker to clients of Sanders Morris, Tectonic Advisors and the Bank.

Our Growth Strategy

We are building an integrated banking and investment services platform that we believe will generate shareholder value through the following initiatives:

Lowering client acquisition costs; integration of technology. Client acquisition costs are one of the biggest challenges for financial services firms. By adopting a holistic approach to managing our clients’ financial needs and implementing innovative technology to provide a comprehensive suite of financial products, we believe we can become increasingly profitable on each incremental dollar of revenue generated from the same client because the initial client acquisition cost is spread over more revenues. Accordingly, we will continue to execute on our plan to refer clients across our financial services platform.
Selective acquisitions to further diversify financial products. We believe that we can expand our business through selective acquisitions of companies or talented personnel. We aim to find companies and/or individuals who fit our culture, including our focus on regulatory compliance and managed growth. We will seek acquisitions that expand either the services we offer, the scope of our service offerings and/or our referral sources. We believe that such acquisitions will further solidify our client relationships. From time to time, we evaluate and engage in discussions with potential acquisition candidates and may enter into letters of intent, although we do not have any current plans, arrangements or understandings to make any acquisitions.

In addition to acquiring wealth managers and/or financial services companies that augment or expand the Company’s present lines of business, the Company’s acquisition focus may also include targets that expand the services that the Company provides, such as new lines of business for the Bank and/or the Investment Services segments. These acquisitions may include: banks, specialty finance companies (e.g., factoring companies, specialty lending companies, etc.) and/or wealth managers, TPAs, record-keepers and/or broker-dealers that provide the Company with greater scale, geographic scope and/or new areas of focus.

Finally, we will seek to make acquisitions on reasonable terms to ensure proper deployment of, and return on, capital. We believe that we can attract firms and individuals to join us given our reputations in the industry and success in growing financial services firms. Towards that end, we recently acquired Nolan, a TPA, which will enhance services offered by the Bank’s trust department to its defined contribution and benefit plan clients.

Increase lower risk earnings. A significant and growing portion of our income is generated by activities that we believe pose modest to little balance sheet risk and that will provide more resilience during times of economic stress. These activities include: SBA and USDA lending, servicing, advisory income, trust income and brokerage activities. Generally, SBA and USDA loans average higher yields

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than our non-government guaranteed loan portfolio. We made the strategic decision in May 2017 to retain more of the guaranteed portions of our SBA and USDA loans on balance sheet to augment interest income rather than selling them to generate gains on sale. We anticipate that this percentage of our income will continue to increase in the future, as the impact of retaining more of the guaranteed portion of the SBA and USDA loans continues.

Focus on niche lending areas. We believe that our banking business has been successful by focusing on areas of niche lending, which provide us with the ability to earn an above market interest rate in return for providing superior service, creative financing structures, and expertise in that area of lending. Our first initiative on niche lending involved making loans to dentists and dental practices. We have since expanded to making SBA and USDA loans. We continue to look at niche lending opportunities that allow us to expand our business, as well as for clients that are willing to pay a modest interest rate premium in exchange for superior service and expertise. Our management expertise and corporate structure allow us to explore and execute upon these non-traditional lending strategies that include loan portfolio acquisitions, loan participations, and non-traditional assets that offer above average risk adjusted returns to the Bank.
Expand our core deposits. We have the ability to sweep client cash balances in our trust department (up to the FDIC guaranteed insurance limit) to fund the Bank’s loan portfolio, providing the Bank with a relatively steady, consistent funding source that requires no additional fixed or variable costs like a branch network. We intend to expand our trust services to offer participant-directed retirement accounts and an FDIC-insured investment option, which we believe has the potential to increase the amount of cash available for sweep by the Bank. We also believe there is significant potential to gather deposits from the clients of Sanders Morris who, as of December 31, 2018, had approximately $134.6 million in cash or cash equivalent balances domiciled at Pershing. Clients of Sanders Morris or their affiliates had $7.0 million on deposit with the Bank as of December 31, 2018. In return, we anticipate that our trust and brokerage clients would receive a market rate of interest on their cash accounts, plus a guarantee on such deposits by the FDIC. See “Risk Factors—Risks Related to Our Business—We depend on wholesale funding sources, which causes our cost of funds to be higher when compared to other financial institutions and poses future funding risks if placed under Prompt Corrective Action, or PCA, which may require us to liquidate loans.”

Our Market Area

We are based in Dallas, Texas, which is our largest market. The Bank’s principal banking markets include the Texas counties of Dallas, Tarrant, Denton, Collin and Rockwall. However, our business is also national in scope. Our national business includes: banking for small businesses (particularly dental practices), SBA and USDA loans and trust services. In these business lines, we have clients in 49 states, with the highest concentration in Texas.

For both our traditional community banking products and services and our investment services, our primary market areas are the Dallas-Fort Worth-Arlington, Texas metropolitan statistical area, or MSA, or the Dallas MSA, and the Houston-The Woodlands-Sugarland, Texas MSA, or the Houston MSA, which rank as the fourth and fifth largest MSAs in the United States as of July 2017, as published by the U.S. Census Bureau. The Houston MSA and Dallas MSA were the first and second, respectively, fastest growing MSAs in the United States from 2010 to 2017, according to the U.S. Census Bureau.

 
2010-2019
Population Change
2019-2024
Projected Population Change
National
 
6.64
%
 
3.56
%
Texas
 
15.17
%
 
6.95
%
Dallas-Fort-Worth-Arlington, TX
 
17.89
%
 
7.65
%
Houston-The Woodlands-Sugar Land, TX
 
19.80
%
 
8.01
%

Source: S&P Global Market Intelligence

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Recent Developments

We expect to report pro forma combined net income of approximately $2.0 million for the three months ended March 31, 2019, as compared to $3.2 million on a pro forma combined basis for the three months ended March 31, 2018. The net income for the three months ended March 31, 2018 includes gain on bargain purchase of approximately $1.7 million related to the acquisition of Sanders Morris. Net income for the three month period ended March 31, 2018 absent this gain was approximately $1.4 million. The resulting $600 thousand increase in net income is primarily attributable to loan growth and the corresponding increase in net interest income and increased service fees, offset by expenses related to infrastructure build out.

As of March 31, 2019, total loans, excluding loans held for sale, were $238 million, representing a $36 million increase from March 31, 2018, due to increased SBA loan originations. Total deposits were $257 million as of March 31, 2019, representing an increase of $37 million from March 31, 2018.

Our expected net income for the three month period ending March 31, 2019 is a preliminary estimate and subject to closing procedures, which we expect to complete after the completion of this offering. These closing procedures could result in material changes to our preliminary estimate indicated above. The above unaudited pro forma combined interim financial information as of and for the three months ended March 31, 2019 and 2018 has been prepared to reflect the merger, as if Tectonic Holdings had been merged with and into Tectonic Financial on January 1, 2018 and its results included in the three month periods ended March 31, 2019 and 2018. The foregoing estimate constitutes a forward-looking statement and is subject to risks and uncertainties, including those described under “Risk Factors” in this prospectus. Accordingly, our final results for the three month period ending March 31, 2019 may not be consistent with the foregoing estimates. See “Risk Factors—Risks Related to Our Business—There are material limitations with making preliminary estimates of our financial results for the period ended March 31, 2019 prior to the completion of our and our auditors' financial review procedures for such period.” and “Cautionary Note Regarding Forward-Looking Statements.”

The Bank’s net interest margin declined from 4.36% in the fourth quarter of 2018 to 4.17% in the first quarter of 2019, a decline of 19 basis points. When we acquired the Bank, we applied purchase accounting to value the Bank’s assets at “fair value,” which resulted in a discount or premium being applied to certain loans and securities. As a result, net interest margin may fluctuate from quarter to quarter, driven in part by the prepayment of loans and securities with associated discounts (resulting in a gain and higher net interest margin) and premiums (resulting in a loss or lower net interest margin). In the fourth quarter of 2018, loan payoffs with associated discounts (partially offset by the repayment of PACE securities with a premium) boosted net interest margin. The Bank did not have a commensurate positive impact in the first quarter of 2019. If the impact of prepayments were excluded, management believes that net interest margin declined modestly from the third quarter of 2018 to the fourth quarter of 2018, but slightly increased from the fourth quarter of 2018 to the first quarter of 2019.

In addition, the Bank’s loan portfolio saw its non-performing loans to loans improve from 108 basis points as of December 31, 2018 to 57 basis points as of March 31, 2019. The decrease was a result of $1.1 million of total payments the Bank received from the SBA during the first quarter of 2019 for the guaranteed balance of SBA loans that were on nonaccrual status as of December 31, 2018.

Risks Relating to Our Company and an Investment in the Series B Preferred Stock

An investment in the Series B preferred stock involves substantial risks and uncertainties. Investors should carefully consider all of the information in this prospectus, including the detailed discussion of these and other risks under “Risk Factors” prior to investing in the Series B preferred stock. In summary form, these risks include some of the following risks:

the Series B preferred stock will be an equity security and will be subordinate to our existing and future indebtedness and potentially to future issuances of preferred stock;
dividends on the Series B preferred stock are discretionary and non-cumulative, and our ability to pay dividends is subject to restrictions;
holders of the Series B preferred stock will have limited voting rights;

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we may not be able to successfully implement aspects of our expansion strategy, whether by new products or acquisitions, which may adversely affect our ability to maintain our historical earnings trends;
we are combining Tectonic Holdings with Tectonic Financial prior to the closing of this offering, which may create additional risks;
a substantial portion of our business is dependent on the prospects of the dental and SBA lending industries and changes in either of these industries may adversely affect our growth and profitability;
there may be a negative impact on originations and referrals by, and our contractual relationship with, Cain Watters, whether due to a material adverse effect on its business or due to a change in relationship with us;
limitations of SBA and USDA loan programs could adversely impact our future performance;
we will be a controlled company under the NASDAQ rules after the closing of this offering and the Majority Shareholders will have the ability, if they vote in the same manner, to determine the outcome of certain matters requiring shareholder approval;
we are highly dependent on our management, loan producers (especially our SBA team), financial advisors and brokers, not all of our key personnel are subject to employment agreements and thus we have a risk of loss of key personnel through them being hired away by a competitor or through retirement;
a substantial majority of our loans and operations are in the Dallas and Houston MSAs, and therefore our business is particularly vulnerable to a downturn in the economy of these MSAs;
declining values of collateral securing our loan portfolio and/or poorly estimating the level of the allowance for loan losses (based on estimates of future loan losses) would have a material adverse effect on us;
poor accuracy of our estimates and assumptions regarding the performance of our securities portfolio could adversely impact earnings;
inability to attract deposits on reasonable terms would have a material and negative impact on us;
an increase in interest rates on deposits not offset by a corresponding increase in interest rates on our loan portfolio would have a material adverse effect on us;
an active, liquid trading market for the Series B preferred stock may not develop, and you may not be able to sell your Series B preferred stock at or above the public offering price, or at all; and
we have borrowings (at the parent and subsidiary levels), which could limit growth and create additional risk, including the complete loss of your investment.

Such statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity.

Corporate Information

Our principal executive offices are located at 16200 Dallas Parkway, Suite 190, Dallas, Texas 75248, and our telephone number at that address is (972) 720-9000. Our website address is www.tbank.com. In connection with the merger and this offering, we changed our name from T Acquisition, Inc. to Tectonic Financial, Inc. The information contained on our website is not a part of, or incorporated by reference into, this prospectus.

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THE OFFERING

The following summary contains summary information about the Series B preferred stock and this offering and is not intended to be complete. It does not contain all the information that you should consider before deciding whether to invest in the Series B preferred stock. For a complete understanding of the Series B preferred stock, you should read the section of this prospectus entitled “Description of Series B Preferred Stock.”

Securities offered
1,500,000 shares of   % Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock.
Underwriters’ option to purchase additional shares of Series B preferred stock
225,000 shares of Series B preferred stock.
Dividends
Holders of the Series B preferred stock will be entitled to receive, only when, as, and if declared by our board of directors, out of assets legally available under applicable law for payment, non-cumulative cash dividends based on the liquidation preference of $10.00 per share of Series B preferred stock, and no more, at a rate equal to   % per annum, for each quarterly Dividend Period (as defined below) occurring from, and including, the original issue date of the Series B preferred stock to, but excluding        , 2024, or the Fixed Rate Period, and thereafter, three-month LIBOR (as defined herein) plus a spread of       basis points per annum, for each quarterly Dividend Period beginning         , 2024, or the Floating Rate Period; provided, that in the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero. A “Dividend Period” means the period from, and including, each Dividend Payment Date (as defined below) to, but excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, the original issue date of the shares of Series B preferred stock to, but excluding, the next succeeding Dividend Payment Date.

Although we intend to pay dividends on the Series B preferred stock, dividends on the Series B preferred stock will not be cumulative or mandatory. If our board of directors does not declare a dividend on the Series B preferred stock or if our board of directors authorizes and we declare less than a full dividend in respect of any Dividend Period, the holders of the Series B preferred stock will have no right to receive any dividend or a full dividend and we will have no obligation to pay a dividend or to pay full dividends for that Dividend Period at any time, whether or not dividends on the Series B preferred stock or any other class or series of our preferred stock or common stock are declared for any future Dividend Period.

See “Description of Series B Preferred Stock—Dividends.”

Dividend payment dates
When, as, and if declared by our board of directors, we will pay cash dividends on the Series B preferred

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stock quarterly, in arrears, on January 1, April 1, July 1, and October 1 of each year, or each such date, a Dividend Payment Date, beginning on          , 2019. Subject to adjustment to the extent a Dividend Payment Date is not a business day.

See “Description of Series B Preferred Stock—Dividends.”

Priority regarding dividends
While any share of Series B preferred stock remains outstanding, unless the full dividends for the most recently completed Dividend Period on all outstanding shares of the Series B preferred stock have been declared and paid in full or declared and a sum sufficient for the payment of those dividends has been set aside:
(1)no dividend will be declared and paid or set aside for payment and no distribution will be declared and made or set aside for payment on any Junior Stock (as defined herein), subject to certain exceptions;
(2)no shares of Junior Stock will be repurchased, redeemed, or otherwise acquired for consideration by us, directly or indirectly, subject to certain exceptions, nor will any monies be paid to or made available for a sinking fund for the redemption of any such securities by us; and
(3)no shares of Parity Stock (as defined herein) will be repurchased, redeemed or otherwise acquired for consideration by us, subject to certain exceptions.

See “Description of Series B Preferred Stock—Priority Regarding Dividends.”

Redemption
The Series B preferred stock is not subject to any mandatory redemption, sinking fund or other similar provisions.

Subject to certain terms and conditions, including the receipt of approval from the Federal Reserve, we may redeem the Series B preferred stock at our option, at a redemption price equal to $10.00 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the redemption date, (i) in whole or in part, on any Dividend Payment Date on or after         , 2024 with not less than 30 days’ and not more than 60 days’ notice prior to the date of redemption specified in the notice, or (ii) in whole, but not in part, at any time within 90 days following a Regulatory Capital Treatment Event (as defined herein). See “Description of Series B Preferred Stock—Redemption.”

The holders of Series B preferred stock do not have the right to require the redemption of the Series B preferred stock.

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Liquidation rights
Upon our voluntary or involuntary liquidation, dissolution or winding up, the holders of the then outstanding shares of Series B preferred stock are entitled to be paid out of our assets legally available for distribution to our shareholders, before any distribution of assets is made to holders of common stock or any other Junior Stock, a liquidating distribution in the amount of a liquidation preference of $10.00 per share, plus the sum of any declared and unpaid dividends for prior Dividend Periods prior to the Dividend Period in which the liquidation distribution is made and any declared and unpaid dividends for the then current Dividend Period in which the liquidation distribution is made to the date of such liquidation distribution. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series B preferred stock will have no right or claim to any of our remaining assets.

Distributions will be made only to the extent that our assets are legally available after satisfaction of all liabilities to depositors and creditors and subject to the rights of holders of any securities ranking senior to the Series B preferred stock. If our remaining assets are not sufficient to pay the full liquidating distributions to the holders of all outstanding Series B preferred stock and all Parity Stock, then we will distribute our assets to those holders pro rata in proportion to the full liquidating distributions to which they would otherwise have received.

See “Description of Series B Preferred Stock—Liquidation Rights.”

Voting rights
Holders of the Series B preferred stock will have no voting rights with respect to matters that generally require the approval of our common shareholders. Holders of the Series B preferred stock will have voting rights only with respect to (i) authorizing, creating or issuing any capital stock ranking senior to the Series B preferred stock as to dividends or the distribution of assets upon liquidation, dissolution or winding up, or reclassifying any authorized capital stock into any such shares of such capital stock or issuing any obligation or security convertible into or evidencing the right to purchase any such shares of capital stock, (ii) amending, altering or repealing any provision of the Certificate of Designation creating the Series B preferred stock, or the designation, or our Amended and Restated Certificate of Formation, or our certificate of formation, including by merger, consolidation or otherwise, so as to adversely affect the rights, powers, or preferences of the Series B preferred stock, (iii) the election of two directors, if dividends have not been declared and paid for the equivalent of at least six or more quarterly Dividend

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Periods, whether or not for consecutive Dividend Periods, (voting as a class with holders of shares of any other series of preferred stock ranking equally as to the payment of dividends and having equivalent voting rights) and (iv) as otherwise required by applicable law.

See “Description of Series B Preferred Stock—Voting Rights.”

Ranking
With respect to the payment of dividends and distributions upon our liquidation, dissolution or winding up, the Series B preferred stock will rank:
senior and prior to our common stock and any other class or series of preferred stock that by its terms is designated as ranking junior to the Series B preferred stock;
pari passu with the Series A preferred stock and all future series of preferred stock that by its terms is designated as ranking equal to the Series B preferred stock or which do not state they are junior or senior to the Series B preferred; and
junior to all existing and future indebtedness and other liabilities of the Company and any class or series of preferred stock that is expressly designated as ranking senior to the Series B preferred stock (subject to any requisite consents prior to issuance).
No maturity
The Series B preferred stock does not have any maturity date, and we are not required to redeem the Series B preferred stock at any time. Accordingly, the Series B preferred stock will remain outstanding perpetually, unless and until we decide to redeem it and, if required, receive prior approval of the Federal Reserve to do so.
Preemptive and conversion rights
None.
Use of proceeds
We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $   million (or approximately $   million if the underwriter exercises its option to purchase additional shares in full). We intend to use approximately (x) $1.9 million of the net proceeds from this offering to repay our bank stock loan, and (y) $8.0 million of the net proceeds from this offering to offer to repurchase in full, as promptly as practicable after this offering and subject to the receipt of any requisite regulatory approval, the Series A preferred stock. We intend to contribute the remaining proceeds (estimated at $   million; $   million if the underwriters’ option to purchase additional shares is exercised), to the Bank to support its capital position, to finance potential

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strategic acquisitions to the extent such opportunities arise and for other general corporate purposes, which could include other growth initiatives. We do not have any current plan to make any acquisitions or establish any new bank branches. The precise amounts and timing of our use of proceeds will depend upon market conditions and other factors. See “Use of Proceeds.”

Listing
We have filed an application to list the Series B preferred stock on NASDAQ under the symbol “TECTP.”
Directed share program
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to the directors, officers and employees and other related persons of our company and its subsidiaries, including associated persons of our broker dealer subsidiary. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

Securities owned by directors and executive
officers

As of March 1, 2019, our directors and named executive officers beneficially owned 49.95% of our outstanding common stock, and our directors, executive officers and affiliates (including partners of Cain Watters) beneficially owned 77.45% of our outstanding common stock. Following the completion of this offering, our directors and named executive officers will continue to beneficially own approximately 49.87% of our common stock. See “Principal Shareholders.”

Tax consequences
For discussion of certain U.S. federal tax consequences relating to the Series B preferred stock, see “Material U.S. Federal Income Tax Considerations.”
Risk factors
Investing in shares of the Series B preferred stock involves a high degree of risk. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in the Series B preferred stock.
Conflicts of interest
Sanders Morris, an underwriter in this offering, is a wholly-owned subsidiary of Tectonic Holdings. As a result of the merger, Sanders Morris will be a wholly-owned subsidiary of Tectonic Financial. Steven B. “Brad” Clapp, Thomas R. Sanders, and Daniel C. Wicker are directors of Tectonic Holdings and Tectonic Financial and will be directors of Tectonic Financial following the merger. Darrell W. Cain is Co-Chairman of Tectonic Holdings and a director of Tectonic Financial and will be a director of Tectonic Financial following the merger. A. Haag Sherman, who is Chief Executive Officer and a director of Tectonic Holdings,

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Chairman of Tectonic Financial, a beneficial owner of more than 10% of Tectonic Financial’s issued and outstanding common stock and a beneficial owner of more than 10% of Tectonic Holdings’ issued and outstanding common units, and who will serve as Chief Executive Officer and a director of Tectonic Financial following the merger, is an associated person of Sanders Morris. George L. Ball, who is Co-Chairman of Tectonic Holdings and a director of Tectonic Financial, and who will serve as Executive Co-Chairman of Tectonic Financial following the merger, is also an associated person of Sanders Morris. Therefore, Sanders Morris is deemed to have a “conflict of interest” under FINRA Rule 5121. Accordingly, this offering is being made in compliance with the requirements of FINRA Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the member primarily responsible for managing the public offering does not have a conflict of interest, is not an affiliate of any member that has a conflict of interest and meets the requirements of paragraph (f)(12)(E) of FINRA Rule 5121. Sanders Morris will not confirm sales of the securities to any account over which it exercises discretionary authority without the specific written approval of the account holder. See “Underwriting (Conflicts of Interest).”

Registrar and transfer agent
Broadridge Corporate Issuer Solutions, Inc.

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following table sets forth unaudited selected pro forma condensed combined financial and operating data as of and for the year ended December 31, 2018 and as of and for the year ended December 31, 2017 and selected pro forma ratios as of and for the periods indicated, and is for illustrative purposes only. The unaudited pro forma condensed combined selected financial data has been derived from the unaudited pro forma condensed combined financial statements as of and for the year ended December 31, 2018 and 2017 included elsewhere in this prospectus, which has been prepared with the merger of Tectonic Holdings with and into Tectonic Financial accounted for as a combination of businesses under common control in accordance with ASC Topic 805-50, Transactions Between Entities Under Common Control. Under ASC 805-50, all the assets and liabilities of Tectonic Holdings are carried over to the books of Tectonic Financial at their then current carrying amounts.

On May 15, 2017, T Bancshares was acquired by Tectonic Financial, or the acquisition. We refer to T Bancshares as the predecessor in the periods before the acquisition and Tectonic Financial as the successor in periods after the acquisition. We applied purchase accounting on such date. See Note 18, “Acquisition and Asset Purchase,” in our audited financial statements found elsewhere in this prospectus, for additional discussion regarding the acquisition, including purchase accounting adjustments. The successor was formed in October 2016. The successor had no activity from January 1, 2017 through May 15, 2017. Therefore, the consolidated statements of income, changes in shareholders’ equity and cash flows included in the successor columns include a full calendar year, but are not representative of a full year of operations.

The selected unaudited pro forma condensed combined financial statements for the year ended December 31, 2018 are derived from the audited financial statements for each Tectonic Financial and Tectonic Holdings included elsewhere in this prospectus. The selected pro forma condensed combined financial statements for the year ended December 31, 2017 are derived from the audited financial statements for each of Tectonic Financial, which includes for predecessor the period from January 1, 2017 through May 15, 2017 and for the successor the period from January 1, 2017 through December 31, 2017, and Tectonic Holdings included elsewhere in this prospectus. The selected unaudited pro forma condensed combined results set forth below and elsewhere in this prospectus are not necessarily indicative of our future performance. The performance, asset quality and capital ratios are unaudited and derived from our audited and unaudited financial statements as of and for the periods presented. Average balances have been calculated using daily averages.

You should read the following financial data in conjunction with the other information contained in this prospectus, including under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the financial statements and related notes included elsewhere in this prospectus, for both Tectonic Financial and Tectonic Holdings.

 
Pro Forma Combined As of and
for the Year Ended
(Dollars in thousands)
December 31, 2018
December 31, 2017
Income Statement Data:
 
 
 
 
 
 
Interest income
$
14,954
 
$
11,815
 
Interest expense
 
4,360
 
 
2,226
 
Net interest income
 
10,594
 
 
9,589
 
Provision for loan losses
 
725
 
 
735
 
Net interest income after provision
 
9,869
 
 
8,854
 
Noninterest income
 
25,267
 
 
21,819
 
Noninterest expense
 
24,530
 
 
22,054
 
Income before income taxes
 
10,606
 
 
8,619
 
Income tax expense
 
2,021
 
 
2,190
 
Net income
 
8,585
 
 
6,429
 
Less: Preferred dividends
 
803
 
 
1,083
 
Net income available to common shareholders
$
7,782
 
$
5,346
 

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Pro Forma Combined As of and
for the Year Ended
(Dollars in thousands, except share data)
December 31, 2018
December 31, 2017
Balance Sheet Data:
 
 
 
 
 
 
Cash and due from banks
$
18,458
 
$
18,646
 
Investments
 
21,252
 
 
21,877
 
Loans held for sale
 
16,345
 
 
16,143
 
Loans held for Investment, net of unearned discount
 
234,033
 
 
198,880
 
Allowance for loan losses (“ALLL”)
 
874
 
 
386
 
Goodwill and other intangible assets, net
 
9,760
 
 
9,961
 
Total assets
 
311,655
 
 
278,683
 
Noninterest-bearing deposits
 
41,143
 
 
35,584
 
Interest-bearing deposits
 
59,618
 
 
59,437
 
Time deposits
 
149,613
 
 
118,135
 
Borrowings and subordinated debentures
 
18,915
 
 
29,000
 
Common shareholders’ equity
 
26,836
 
 
21,205
 
Total shareholders’ equity
 
34,870
 
 
29,239
 
 
 
 
 
 
 
 
Per Share Data
 
 
 
 
 
 
Basic earnings per share
$
1.19
 
$
0.82
 
Diluted earnings per share
 
1.19
 
 
0.82
 
Book value per share
 
5.31
 
 
4.49
 
Tangible book value per share(1)
 
2.60
 
 
1.73
 
Shares outstanding end of period
 
6,568,750
 
 
6,517,500
 
Weighted average common shares outstanding – basic
 
6,564,771
 
 
6,517,500
 
Weighted average common shares outstanding – diluted
 
6,564,771
 
 
6,517,500
 
 
 
 
 
 
 
 
Annualized Performance Ratios:
 
 
 
 
 
 
Return on average assets
 
2.97
%
 
2.61
%
Return on average common equity
 
32.40
 
 
29.00
 
Return on average tangible common equity(1)
 
51.61
 
 
37.44
 
Yield on earning assets(2)
 
5.71
 
 
5.25
 
Yield on loans(2)
 
6.05
 
 
5.59
 
Cost of funds(2)
 
1.40
 
 
0.83
 
Cost of deposits(2)
 
1.36
 
 
0.81
 
Net interest margin(2)
 
4.41
 
 
4.49
 
Efficiency ratio(1),(3)
 
67.84
 
 
69.82
 
Loans to deposits(2)
 
100.25
 
 
98.48
 
 
 
 
 
 
 
 
Investment Services Data(4)
 
 
 
 
 
 
Assets under administration
$
3,312,851
 
$
3,522,013
 
Assets under management
 
2,027,024
 
 
1,936,550
 
Client assets in custody
 
1,170,852
 
 
1,264,418
 
Client brokerage assets
 
1,303,241
 
 
1,602,559
 
 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
Nonperforming loans to total loans(2)
 
1.08
%
 
1.16
%
Nonperforming assets to total assets(3)
 
0.82
 
 
0.87
 
Allowance for loan losses to nonperforming loans, net of SBA guarantees(2)
 
265.10
 
 
312.17
 
Allowance for loan losses to total loans(2)
 
0.34
 
 
0.18
 
Net charge-offs to average total loans(2)
 
0.10
 
 
0.19
 

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Pro Forma Combined As of and
for the Year Ended
 
December 31, 2018
December 31, 2017
Capital Ratios(3):
 
 
 
 
 
 
Tier 1 leverage ratio
 
8.65
%
 
7.54
%
Common equity Tier 1 capital ratio
 
7.57
 
 
4.81
 
Tier 1 risk-based capital ratio
 
11.16
 
 
8.25
 
Total risk-based capital ratio
 
11.55
 
 
8.41
 
Tangible common equity to tangible assets(1)
 
5.66
 
 
4.18
 
(1)Considered a non-GAAP financial measure. For a reconciliation of non-GAAP measures to the most directly comparable GAAP financial measures, see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”
(2)Calculation derived from the Bank’s balance sheet and income statement for the period stated.
(3) Calculations based on “Unaudited Pro Forma Condensed Combined Financial Information,” found elsewhere in this prospectus, for the period indicated.
(4) Calculated, on a combined basis, for Tectonic Financial and Tectonic Holdings. Note that Tectonic Holdings’ assets under management includes client assets in custody at Tectonic Financial. In order to avoid duplicating these assets in assets under administration, Tectonic Financial’s client assets in custody are not included in pro forma combined assets under administration.

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Tectonic Financial has entered into a merger agreement, as amended and restated, with Tectonic Holdings, pursuant to which Tectonic Holdings will merge with and into Tectonic Financial, with Tectonic Financial as the surviving entity.

The following unaudited pro forma condensed combined statements of income for the year ended December 31, 2018 and the year ended December 31, 2017, has been prepared to reflect the merger, as if Tectonic Holdings had been merged with and into Tectonic Financial on January 1, 2017 and its results included in the year ended December 31, 2018 and the full fiscal year of 2017, after giving effect to the adjustments reflected in the notes following the table. The unaudited pro forma condensed combined balance sheet includes the historical results of Tectonic Financial for the year ended December 31, 2018, with the pro forma adjustments to reflect the assumption that the merger had occurred on January 1, 2017.

The unaudited pro forma condensed combined statement of income presented below from January 1, 2017 through May 15, 2017 relates to the predecessor and is derived from audited consolidated financial statements that are included elsewhere in this prospectus. The unaudited pro forma condensed combined statement of income for the period from January 1, 2017 through December 31, 2017, and the unaudited pro forma condensed combined balance sheet data as of December 31, 2017, relate to the successor and are derived from audited consolidated financial statements that are included elsewhere in this prospectus.

The unaudited pro forma condensed combined statement of income has been prepared with the merger of Tectonic Holdings with and into Tectonic Financial accounted for as a combination of businesses under common control in accordance ASC Topic 805-50, Transactions Between Entities Under Common Control. Under ASC 805-50, all the assets and liabilities of Tectonic are carried over to the books of Tectonic Financial at their then current carrying amounts.

The unaudited pro forma condensed combined statement of income is presented for illustrative purposes only and is not intended to present future results of operations. The unaudited pro forma condensed combined statement of income is based upon assumptions and adjustments that we believe are reasonable. These adjustments, which are described above and in the accompanying footnotes, have been applied in a manner to give effect to the transaction. The assumptions and adjustments are subject to change as future events materialize and fair value estimates are refined.

The unaudited pro forma condensed combined financial information should be read together with the following:

the accompanying notes to the unaudited pro forma condensed combined financial information;
the selected unaudited pro forma condensed combined financial information;
predecessor’s audited consolidated financial statements and accompanying notes for the period from January 1, 2017 through May 15, 2017, included elsewhere in this prospectus;
Tectonic Financial’s audited financial statements and accompanying notes as of and for the years ended December 31, 2018 and 2017, included elsewhere in this prospectus; and
Tectonic Holdings’ audited financial statements and accompanying notes as of and for the years ended December 31, 2018 and 2017, included elsewhere in this prospectus.

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The following unaudited pro forma condensed combined statement of income for the year ended December 31, 2018 combines our consolidated historical income statement and Tectonic Holdings assuming the companies had been combined as of January 1, 2017, pursuant in each case to ASC 805-50. See “Risk Factors—Risks Related to Our Business—There are material limitations with making estimates of our combined financial results, use of combined financial results for predecessor and successor.”

Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 2018

(Dollars in thousands, except share data)
Tectonic Financial,
Inc.
Tectonic
Holdings, LLC
Pro Forma
Adjustments
Pro Forma
Combined
Interest Income:
 
 
 
 
 
 
 
 
 
 
 
 
Loan, including fees
$
13,947
 
$
 
$
 
 
$
13,947
 
Securities
 
815
 
 
 
 
 
 
 
815
 
Federal funds sold
 
9
 
 
 
 
 
 
 
9
 
Interest-bearing deposits
 
183
 
 
 
 
 
 
 
183
 
Total interest
 
14,954
 
 
 
 
 
 
14,954
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
3,126
 
 
 
 
 
 
 
3,126
 
Borrowed funds
 
1,234
 
 
803
 
 
(803
)(4)
 
1,234
 
Total interest expense:
 
4,360
 
 
803
 
 
(803
)
 
4,360
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
10,594
 
 
(803
)
 
803
 
 
10,594
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for Loan Loss
 
725
 
 
 
 
 
 
725
 
Net interest income after provision for loan losses
 
9,869
 
 
(803
)
 
803
 
 
9,869
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest Income
 
 
 
 
 
 
 
 
 
 
 
 
Trust income
 
9,162
 
 
 
 
 
 
 
9,162
 
Gain on sale of loans
 
183
 
 
 
 
 
 
 
183
 
Loan servicing fees, net
 
176
 
 
 
 
 
 
 
176
 
Advisory income
 
 
 
8,900
 
 
(4,459
)(1)
 
4,441
 
Brokerage income
 
 
 
8,710
 
 
 
 
 
8,710
 
Rental income
 
303
 
 
 
 
 
 
 
303
 
Service fees and other income
 
355
 
 
2,231
 
 
(294
)(2)
 
2,292
 
Total non-interest income
 
10,179
 
 
19,841
 
 
(4,753
)
 
25,267
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest Expense:
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
5,705
 
 
8,787
 
 
 
 
 
14,492
 
Occupancy and equipment
 
866
 
 
929
 
 
 
 
 
1,795
 
Trust expenses
 
6,439
 
 
 
 
(4,459
)(1)
 
1,980
 
Brokerage and advisory direct costs
 
 
 
1,559
 
 
 
 
 
1,559
 
Professional fees
 
524
 
 
341
 
 
 
 
 
865
 
Data processing
 
939
 
 
 
 
 
 
 
939
 
Other
 
1,075
 
 
2,119
 
 
(294
)(2)
 
2,900
 
Total non-interest expense
 
15,548
 
 
13,735
 
 
(4,753
)
 
24,530
 
Income before income taxes
 
4,500
 
 
5,303
 
 
803
 
 
10,606
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
1,012
 
 
 
 
1,009
(3)
 
2,021
 
Net Income
 
3,488
 
 
5,303
 
 
(206
)(3)
 
8,585
 
Preferred stock dividends
 
 
 
 
 
(803
)
 
(803
)
Net income available to common shareholders
$
3,488
 
$
5,303
 
$
(1,009
)
$
7,782
 
Earnings per common share
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share
$
0.53
 
$
0.81
 
 
 
 
 
 
 
Weighted-average shares used in computation of basic and diluted earnings per share
 
6,565,877
 
 
6,563,528
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro forma basic and diluted earnings per share
 
 
 
 
 
 
 
 
 
$
1.19
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro forma weighted-average shares used in computation of basic and diluted earnings per share
 
 
 
 
 
 
 
 
 
 
6,564,771
 

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Notes to Unaudited Pro Forma Condensed Combined Statement of Income

(1) Advisory income at Tectonic Advisors, a subsidiary of Tectonic Holdings, has been eliminated against trust expenses at the Company in the amount of $4,459 for the year ended December 31, 2018.
(2) Service agreements between Tectonic Holdings and Tectonic Financial have been eliminated in the amount of $294 for the year ended December 31, 2018.
(3) Tectonic Holdings is a limited liability company treated as a partnership for federal income tax purposes, and therefore, does not pay taxes. An adjustment to income tax expense of $1,009 has been recognized to record the tax effect of the results of Tectonic Holdings as though the companies had been combined as of January 1, 2018, assuming a tax rate of 21.0% applied to taxable income for the year ended December 31, 2018.
(4) Gives effect to the restatement of interest expense on the subordinated debt totaling $803 to preferred dividends in the same amount, such conversion of the Tectonic Advisors subordinated debt to Tectonic Holdings preferred units to Series A preferred stock to occur in connection with the merger.

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The following unaudited pro forma condensed combined statement of income for the year ended December 31, 2017 combines our consolidated historical income statement and Tectonic Holdings assuming the companies had been combined as of January 1, 2017, pursuant in each case to ASC 805-50. See “Risk Factors—Risks Related to Our Business—There are material limitations with making estimates of our combined financial results, use of combined financial results for predecessor and successor.”

Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 2017

(Dollars in thousands)
Predecessor
(For the period
from January 1,
2017 through
May 15,
2017)
Successor
(For the year
ended
December 31,
2017)
Combined
(For the year
ended
December 31,
2017)
Tectonic
Holdings, LLC
(For the year
ended
December 31,
2017)
Pro Forma
Adjustments
Pro Forma
Combined
(For the year
ended
December 31,
2017)
Interest Income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan, including fees
$
3,770
 
$
7,071
 
$
10,841
 
$
 
$
 
 
$
10,841
 
Securities
 
328
 
 
548
 
 
876
 
 
 
 
 
 
 
876
 
Federal funds sold
 
1
 
 
4
 
 
5
 
 
 
 
 
 
 
5
 
Interest-bearing deposits
 
29
 
 
64
 
 
93
 
 
 
 
 
 
 
93
 
Total Interest Income
 
4,128
 
 
7,687
 
 
11,815
 
 
 
 
 
 
 
11,815
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
473
 
 
1,128
 
 
1,601
 
 
 
 
 
 
 
1,601
 
Borrowed funds
 
28
 
 
597
 
 
625
 
 
1,083
 
 
(1,083
)(4)
 
625
 
Total interest expense
 
501
 
 
1,725
 
 
2,226
 
 
1,083
 
 
(1,083
)
 
2,226
 
Net interest income
 
3,627
 
 
5,962
 
 
9,589
 
 
(1,083
)
 
1,083
 
 
9,589
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for Loan Loss
 
(8
)
 
743
 
 
735
 
 
 
 
 
 
 
735
 
Net interest income after provision for loan losses
 
3,635
 
 
5,219
 
 
8,854
 
 
(1,083
)
 
1,083
 
 
8,854
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trust income
 
3,293
 
 
5,756
 
 
9,049
 
 
 
 
 
 
$
9,049
 
Gain on sale of loans
 
1,436
 
 
208
 
 
1,644
 
 
 
 
 
 
 
1,644
 
Loan servicing fees, net
 
237
 
 
301
 
 
538
 
 
 
 
 
 
 
538
 
Advisory income
 
 
 
 
 
 
 
7,493
 
 
(4,380
)(1)
 
3,113
 
Brokerage income
 
 
 
 
 
 
 
6,222
 
 
 
 
 
6,222
 
Rental income
 
109
 
 
182
 
 
291
 
 
 
 
 
 
 
291
 
Service fees and other income
 
19
 
 
242
 
 
261
 
 
920
 
 
(219
)(2)
 
962
 
Total non-interest Income
 
5,094
 
 
6,689
 
 
11,783
 
 
14,635
 
 
(4,599
)
 
21,819
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest Expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
3,528
 
 
3,622
 
 
7,150
 
 
3,876
 
 
 
 
$
11,026
 
Occupancy and equipment
 
328
 
 
537
 
 
865
 
 
584
 
 
 
 
 
1,449
 
Trust expenses
 
2,317
 
 
4,014
 
 
6,331
 
 
 
 
(4,380
)(1)
 
1,951
 
Brokerage and advisory direct costs
 
 
 
 
 
 
 
2,280
 
 
 
 
 
2,280
 
Professional fees
 
269
 
 
193
 
 
462
 
 
453
 
 
 
 
 
915
 
Data processing
 
355
 
 
602
 
 
957
 
 
 
 
 
 
 
957
 
Other(2)
 
697
 
 
645
 
 
1,342
 
 
2,353
 
 
(219
)(2)
 
3,476
 
Total non-interest Expense
 
7,494
 
 
9,613
 
 
17,107
 
 
9,546
 
 
(4,599
)
 
22,054
 
Income before income taxes
 
1,235
 
 
2,295
 
 
3,530
 
 
4,006
 
 
1,083
 
 
8,619
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
196
 
 
402
 
 
598
 
 
 
 
1,592
(3)
 
2,190
 
Net Income
$
1,039
 
$
1,893
 
$
2,932
 
$
4,006
 
$
(509
)
$
6,429
 

27

TABLE OF CONTENTS

Notes to Unaudited Pro Forma Condensed Combined Statement of Income

(1) Advisory income at Tectonic Advisors, a subsidiary of Tectonic Holdings, has been eliminated against trust expenses at the Company in the amount of $4,380 for the year ended December 31, 2017.
(2) Service agreements between Tectonic Holdings and Tectonic Financial have been eliminated in the amount of $219 for the year ended December 31, 2017.
(3) Tectonic Holdings is a limited liability company treated as a partnership for federal income tax purposes, and therefore, does not pay taxes. An adjustment to income tax expense of $1,592 has been recognized to record the tax effect of the results of Tectonic Holdings as though the companies had been combined as of January 1, 2017, assuming a tax rate of 34.6% applied to taxable income for the year ended December 31, 2017.
(4) Gives effect to the restatement of interest expense on the subordinated debt totaling $1,083 to preferred dividends in the same amount, such conversion of the Tectonic Advisors subordinated debt to Tectonic Holdings preferred units to Series A preferred stock to occur in connection with the merger.

28

TABLE OF CONTENTS

The following unaudited pro forma condensed combined statement of financial condition as of December 31, 2018 combines our consolidated historical statement of financial condition with that of Tectonic Holdings, assuming the companies had been combined as of January 1, 2017, in each case pursuant to ASC 805-50. See “Risk Factors—Risks Related to Our Business—There are material limitations with making estimates of our combined financial results, use of combined financial results for predecessor and successor.”

Unaudited Pro Forma Condensed Combined Statement of Financial Condition as of December 31, 2018

(Dollars in thousands, except share data)
Tectonic Financial,
Inc.
Tectonic
Holdings, LLC
Pro Forma
Adjustments