UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
| |
| |
| (State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
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 | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth 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 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of shares outstanding of the registrant’s Common Stock as of May 13, 2024 was
TECTONIC FINANCIAL, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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Item 1. |
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Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 |
3 |
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Consolidated Statements of Income for the Three Months Ended March 31, 2024 and 2023 |
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Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2024 and 2023 |
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6 |
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 |
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8 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
32 |
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Item 3. |
53 |
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Item 4. |
54 |
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PART II. OTHER INFORMATION |
55 |
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Item 1. |
55 |
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Item 1A. |
55 |
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Item 2. |
55 |
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Item 3. |
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Item 4. |
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Item 5. |
55 |
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Item 6. |
56 |
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57 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TECTONIC FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
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March 31, 2024 |
December 31, 2023 |
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(In thousands, except share amounts) |
(Unaudited) |
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ASSETS |
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Cash and due from banks |
$ | $ | ||||||
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Interest-bearing deposits |
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Federal funds sold |
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Total cash and cash equivalents |
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Securities available for sale |
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Securities held to maturity |
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Securities, restricted at cost |
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Loans held for sale |
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| Loans, net of allowance for credit losses of $ |
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Bank premises and equipment, net |
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Core deposit intangible, net |
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Goodwill |
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Deferred tax asset |
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Other assets |
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Total assets |
$ | $ | ||||||
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LIABILITIES |
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Demand deposits: |
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Non-interest-bearing |
$ | $ | ||||||
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Interest-bearing |
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Time deposits |
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Total deposits |
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Borrowed funds |
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Subordinated notes |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (see Note 11) |
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SHAREHOLDERS’ EQUITY |
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| Preferred stock, |
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| Common stock, $ |
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Additional paid-in capital |
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| Treasury stock, at cost; |
( |
) | ( |
) | ||||
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Retained earnings |
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Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
TECTONIC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended March 31, |
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(In thousands, except per share data and share amounts) |
2024 |
2023 |
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Interest Income |
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Loan, including fees |
$ | $ | ||||||
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Securities |
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Federal funds sold |
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Interest-bearing deposits |
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Total interest income |
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Interest Expense |
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Deposits |
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Borrowed funds |
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Total interest expense |
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Net interest income |
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Provision for credit losses |
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Net interest income after provision for credit losses |
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Non-interest Income |
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Trust income |
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Gain on sale of loans |
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Advisory income |
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Brokerage income |
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Service fees and other income |
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Rental income |
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Total non-interest income |
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Non-interest Expense |
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Salaries and employee benefits |
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Occupancy and equipment |
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Trust expenses |
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Brokerage and advisory direct costs |
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Professional fees |
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Data processing |
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Other |
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Total non-interest expense |
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Income before Income Taxes |
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Income tax expense |
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Net Income |
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Preferred stock dividends |
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Net income available to common stockholders |
$ | $ | ||||||
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Earnings per common share: |
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Basic |
$ | $ | ||||||
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Diluted |
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Weighted average common shares outstanding |
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Weighted average diluted shares outstanding |
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See accompanying notes to consolidated financial statements.
TECTONIC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three months Ended March 31, |
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(In thousands) |
2024 |
2023 |
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Net Income |
$ | $ | ||||||
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Other comprehensive (loss) income: |
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Change in unrealized loss on investment securities available for sale |
( |
) | ||||||
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Tax effect |
( |
) | ||||||
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Other comprehensive (loss) income |
( |
) | ||||||
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Comprehensive Income |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
TECTONIC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
|
(In thousands) |
Series B Preferred Stock |
Common Stock |
Additional Paid-in Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Total |
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Balance at January 1, 2023 |
$ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||
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Cumulative change in accounting principle (adoption of ASC 326) |
- | - | - | - | ( |
) | - | ( |
) | |||||||||||||||||||
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Balance at January 1, 2023, as adjusted for change in accounting principle (adoption of ASC 326) |
( |
) | ( |
) | ||||||||||||||||||||||||
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Repayments of note receivable utilized to exercise options |
- | - | - | - | - | |||||||||||||||||||||||
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Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) | - | ( |
) | |||||||||||||||||||
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Dividends paid on common stock |
- | - | - | - | ( |
) | - | ( |
) | |||||||||||||||||||
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Net income |
- | - | - | - | - | |||||||||||||||||||||||
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Other comprehensive income |
- | - | - | - | - | |||||||||||||||||||||||
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Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
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Balance at March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||
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Balance at January 1, 2024 |
$ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||
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Purchase of treasury stock at cost |
- | - | - | ( |
) | - | - | ( |
) | |||||||||||||||||||
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Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) | - | ( |
) | |||||||||||||||||||
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Dividends paid on common stock |
- | - | - | - | ( |
) | - | ( |
) | |||||||||||||||||||
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Net income |
- | - | - | - | - | |||||||||||||||||||||||
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Other comprehensive loss |
- | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||
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Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
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Balance at March 31, 2024 |
$ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | |||||||||||||||||
See accompanying notes to consolidated financial statements.
TECTONIC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31, |
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(In thousands) |
2024 |
2023 |
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Cash Flows from Operating Activities |
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Net income |
$ | $ | ||||||
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Provision for credit losses |
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Depreciation and amortization |
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Amortization of premium on loans |
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Core deposit intangible amortization |
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Securities discount/premium accretion, net |
( |
) | ( |
) | ||||
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Origination of loans held for sale |
( |
) | ( |
) | ||||
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Proceeds from payments and sales of loans held for sale |
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Gain on sale of loans |
( |
) | ||||||
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Stock based compensation |
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Deferred income taxes |
( |
) | ( |
) | ||||
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Servicing assets, net |
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Net change in: |
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Other assets |
( |
) | ||||||
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Other liabilities |
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Net cash (used in) provided by operating activities |
( |
) | ||||||
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Cash Flows from Investing Activities |
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Purchase of securities available for sale |
( |
) | ( |
) | ||||
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Principal payments, calls and maturities of securities available for sale |
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Principal payments of securities held to maturity |
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Purchase of securities, restricted |
( |
) | ( |
) | ||||
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Proceeds from sale of securities, restricted |
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Net change in loans |
( |
) | ||||||
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Purchases of premises and equipment |
( |
) | ( |
) | ||||
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Net cash (used in) provided by investing activities |
( |
) | ||||||
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Cash Flows from Financing Activities |
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Net change in demand deposits |
( |
) | ||||||
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Net change in time deposits |
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Proceeds from borrowed funds |
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Repayment of borrowed funds |
( |
) | ( |
) | ||||
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Dividends paid on common stock |
( |
) | ( |
) | ||||
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Dividends paid on Series B preferred stock |
( |
) | ( |
) | ||||
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Repayments on note receivable utilized to exercise stock options |
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Purchase of treasury stock at cost |
( |
) | ||||||
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Net cash provided by financing activities |
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Net change in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | $ | ||||||
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Non Cash Transactions |
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Transfers from loans held for sale to loans held for investment |
$ | $ | ||||||
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Lease liabilities incurred in exchange for right-of-use assets |
$ | $ | ||||||
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Supplemental disclosures of cash flow information |
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Cash paid during the period for: |
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Interest |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Organization and Significant Accounting Policies
Tectonic Financial, Inc. (the “Company,” “we,” “us,” or “our”) is a Texas corporation and registered financial holding company that offers, through its subsidiaries, banking and other financial services including trust, investment advisory, securities brokerage, factoring, third-party administration, recordkeeping and insurance services to individuals, small businesses and institutions across the United States.
We operate through
We are headquartered in Dallas, Texas. The Bank operates through its main office located at 16200 Dallas Parkway, Dallas, Texas. Our other subsidiaries operate from offices in Houston, Dallas and Frisco, Texas. Our Houston, Texas office is located at 600 Travis Street, 59th Floor, Houston, Texas, and includes the home offices of Sanders Morris and HWG, as well as Tectonic Advisors’ family office services team. Our other Dallas office, which is a branch office of Sanders Morris, is located at 5950 Sherry Lane, Suite 470, Dallas, Texas. The main office for Tectonic Advisors is in Frisco, Texas, and is located at 17 Cowboys Way, Suite 250, Frisco, Texas, and also includes a branch office of HWG.
The Bank offers a broad range of commercial and consumer banking and trust services primarily to small- to medium-sized businesses and their employees, and other institutions. The Nolan Company (“Nolan”), operating as a division within the Bank from Nolan’s office in Overland Park, Kansas, offers third party administration (“TPA”) services, and Integra Funding Solutions, LLC (“Integra”), also operating as a division within the Bank from Integra’s office in Fort Worth, Texas, offers factoring services. The Bank’s technological capabilities, including worldwide free ATM withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, allow most customers to be served regardless of their geographic location. The Bank serves its local geographic market which includes Dallas, Tarrant, Denton, Collin and Rockwall counties in Texas which encompass an area commonly referred to as the Dallas/Fort Worth Metroplex. The Bank also serves the dental and other health professional industries through a centralized loan and deposit platform that operates out of its main office in Dallas, Texas. In addition, the Bank serves the small business community by offering loans guaranteed by the U.S. Small Business Administration (“SBA”) and the U.S. Department of Agriculture (“USDA”).
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. Lending services include commercial loans to small- to medium-sized businesses and professional concerns as well as consumers. The Bank also offers trust services. The Bank’s traditional fiduciary services clients primarily consist of clients of Cain, Watters & Associates, LLC (“Cain Watters”). The Bank, Cain Watters and Tectonic Advisors entered into an advisory services agreement related to the Bank’s trust operations in April 2006, which has been amended from time to time, most recently in January 2023. See Note 12 – Related Parties, to these consolidated financial statements for more information. In addition, the Nolan division of the Bank offers TPA services and provides clients with retirement plan design and administrative services, specializing in ministerial recordkeeping, administration, actuarial and design services for retirement plans of small businesses and professional practices. We believe offering TPA services allows us to serve our clients more fully and to attract new clients to our trust platform.
Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q for the three months ended March 31, 2024 (this “Form 10-Q”) include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the SEC. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2023 in the audited financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 1, 2024.
In the opinion of management, all adjustments that were normal and recurring in nature, and considered necessary, have been included for the fair presentation of the Company’s consolidated financial position and results of operations. Operating results for the three months ended March 31, 2024, are not necessarily indicative of results that may be expected for the full year ending December 31, 2024.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period, as well as the disclosures provided. Actual results could be significantly different from those estimates. Changes in assumptions or in market conditions could significantly affect the estimates. The determination of the allowance for credit losses, the fair value of stock options, the fair values of financial instruments and other real estate owned, and the status of contingencies are particularly susceptible to significant change in recorded amounts.
Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation.
Allowance for Credit Losses. The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective on January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. Management has made a policy election to exclude accrued interest receivable on available for sale securities from the estimate of credit losses and report accrued interest separately in other assets in the Company’s consolidated balance sheets.
The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable incurred loss model under GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses for debt securities was not required.
ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), eliminates the accounting guidance for troubled debt restructurings in ASC Subtopic 310-40, Receivables -Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The Company adopted ASU 2022-02 on a modified retrospective basis effective on January 1, 2023. The adoption did not have a significant impact on the Company’s consolidated financial statements.
Earnings per Share. Basic earnings per share (“EPS”) is computed based on the weighted-average number of shares outstanding during the period. Diluted EPS is computed using the weighted-average shares and all potential dilutive shares outstanding during the period.
|
Three months ended March 31, |
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(In thousands, except per share data) |
2024 |
2023 | ||||||
|
Net income available to common shareholders |
$ | $ | ||||||
|
Average shares outstanding |
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Effect of dilutive securities |
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Average diluted shares outstanding |
||||||||
|
Basic earnings per share |
$ | $ | ||||||
|
Diluted earnings per share |
$ | $ | ||||||
As of March 31, 2024, options to purchase
Note 2. Securities
|
March 31, 2024 |
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(In thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Allowance for Credit Losses |
Estimated Fair Value |
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Securities available for sale: |
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|
U.S. Treasuries |
$ | $ | $ | $ | $ | |||||||||||||||
|
U.S. government agencies |
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Mortgage-backed securities |
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Total securities available for sale |
$ | $ | $ | $ | $ | |||||||||||||||
|
Securities held to maturity: |
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Property assessed clean energy |
$ | $ | $ | $ | $ | |||||||||||||||
|
Public improvement district/tax increment reinvestment zone |
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Total securities held to maturity |
$ | $ | $ | $ | $ | |||||||||||||||
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Securities, restricted: |
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Other |
$ | $ | $ | $ | $ | |||||||||||||||
|
December 31, 2023 |
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|
(In thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Allowance for Credit Losses |
Estimated Fair Value |
|||||||||||||||
|
Securities available for sale: |
||||||||||||||||||||
|
U.S. Treasuries |
$ | $ | $ | $ | $ | |||||||||||||||
|
U.S. government agencies |
||||||||||||||||||||
|
Mortgage-backed securities |
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|
Total securities available for sale |
$ | $ | $ | $ | $ | |||||||||||||||
|
Securities held to maturity: |
||||||||||||||||||||
|
Property assessed clean energy |
$ | $ | $ | $ | $ | |||||||||||||||
|
Public improvement district/tax increment reinvestment zone |
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|
Total securities held to maturity |
$ | $ | $ | $ | $ | |||||||||||||||
|
Securities, restricted: |
||||||||||||||||||||
|
Other |
$ | $ | $ | $ | $ | |||||||||||||||
During each of the three months ended March 31, 2024 and 2023, no securities available for sale were sold, and there were no realized gains or losses recorded on sales for each of the three months ended March 31, 2024 and 2023.
As of March 31, 2024 and December 31, 2023, securities available for sale with a fair value of $
As of March 31, 2024 and December 31, 2023, the Bank held FRB stock in the amount of $
|
March 31, 2024 |
||||||||||||||||||||||||
|
Less than 12 months |
12 months or longer |
Total |
||||||||||||||||||||||
|
(In thousands) |
Fair Value |
Unrealized |
Fair Value |
Unrealized |
Fair Value |
Unrealized |
||||||||||||||||||
|
Securities available for sale: |
||||||||||||||||||||||||
|
U.S. Treasuries |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
U.S. government agencies |
||||||||||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Beginning January 1, 2023, the Company evaluates all securities quarterly to determine if any debt securities in a loss position require an allowance for credit losses in accordance with ASC 326. The Company had a total of
As of March 31, 2024, no allowance for credit losses has been recognized on available for sale and held to maturity securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities are U.S. government agencies who continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.
|
Available for Sale |
Held to Maturity |
|||||||||||||||
|
(In thousands) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
|
Due in one year or less |
$ | $ | $ | $ | ||||||||||||
|
Due after one year through five years |
||||||||||||||||
|
Due after five years through ten years |
||||||||||||||||
|
Due after ten years |
||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||
|
Total |
$ | $ | $ | $ | ||||||||||||
Note 3. Loans and Allowance for Credit Losses
|
(In thousands) |
March 31, 2024 |
December 31, 2023 |
||||||
|
Commercial and industrial |
$ | $ | ||||||
|
Consumer installment |
||||||||
|
Real estate – residential |
||||||||
|
Real estate – commercial |
||||||||
|
Real estate – construction and land |
||||||||
|
SBA: |
||||||||
|
SBA 7(a) guaranteed |
||||||||
|
SBA 7(a) unguaranteed |
||||||||
|
SBA 504 |
||||||||
|
USDA |
||||||||
|
Factored Receivables |
||||||||
|
Gross Loans |
||||||||
|
Less: |
||||||||
|
Allowance for credit losses |
||||||||
|
Net loans |
$ | $ | ||||||
As of March 31, 2024, our loan portfolio included $
Accrued interest receivable on loans totaled $
The Company had $
Loan Origination/Risk Management.
The Company maintains written loan origination policies, procedures, and processes which address credit quality within an acceptable level of risk at several levels including individual loan level, loan type, and loan portfolio levels.
Commercial and industrial loans, which are predominantly loans to dentists, are underwritten based on historical and projected income of the business and individual borrowers and guarantors. The Company utilizes a comprehensive global debt service coverage analysis to determine debt service coverage ratios. This analysis compares global cash flow of the borrowers and guarantors on an individual credit to existing and proposed debt after consideration of personal and business-related other expenses. Collateral is generally a lien on all available assets of the business borrower including intangible assets. Credit worthiness of individual borrowers and guarantors is established through the use of credit reports and credit scores.
Consumer loans are evaluated on the basis of credit worthiness as established through the use of credit reports and credit scores. Additional credit quality indicators include borrower debt to income ratios based on verifiable income sources.
Real estate mortgage loans are evaluated based on collateral value as well as global debt service coverage ratios based on historical and projected income from all related sources including the collateral property, the borrower, and all guarantors where applicable.
The Company originates SBA loans which are sometimes sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The
The Company also offers Business & Industry (“B&I”) program loans through the USDA.
Construction and land development loans are evaluated based on the borrower’s and guarantor’s credit worthiness, past experience in the industry, track record and experience with the type of project being considered, and other factors. Collateral value is determined generally by independent appraisal utilizing multiple approaches to determine value based on property type.
The Bank engages in third-party factoring of certain business’s accounts receivable invoices. The Bank’s factoring clients are primarily in the transportation industry. Each account debtor is credit qualified, confirming credit worthiness and stability, because the underlying debtor represents the substantive underlying credit risk. Some factored receivables are full recourse to and personally guaranteed by the factoring client. In such cases, the client is credit qualified under specific policy guidelines. Concentration limits are set and monitored for aggregate factored receivables, account debtors, and individual factoring clients. In addition, we consider the overall state of each specific industry, currently over-the-road trucking, in our evaluation of the credit worthiness of the factoring client and the underlying debtor.
For all loan types, the Company establishes guidelines for its underwriting criteria including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturity terms.
At the portfolio level, the Company monitors concentrations of loans based on several criteria including loan type, collateral type, industry, geography, and other factors. The Company also performs periodic market research and economic analysis at a local geographic and national level. Based on this research, the Company may from time to time change the minimum or benchmark underwriting criteria applied to the above loan types.
Loans are placed on non-accrual status when, in the opinion of the Company’s management, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower.
|
March 31, 2024 |
December 31, 2023 | |||||||||||||||
|
(In thousands) |
Total Non-Accrual |
Non-Accrual with No Credit Loss Allowance |
Total Non-Accrual |
Non-Accrual with No Credit Loss Allowance |
||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | ||||||||||||
|
Real estate - residential |
||||||||||||||||
|
SBA guaranteed |
||||||||||||||||
|
SBA unguaranteed |
||||||||||||||||
|
Total |
$ | $ | $ | $ | ||||||||||||
The Company did not recognize any interest income on non-accrual loans during the three ended March 31, 2024 and 2023.
From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of a principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension or a combination thereof, among other things. During the three months ended March 31, 2024, there were no loan modifications of significance. There were no loans that were modified due to the borrowers experiencing financial difficulty in the preceding twelve months that were past due for the three months ended March 31, 2024. During the three months ended March 31, 2023, the Company provided one modification to extend the maturity date of a SBA loan with an outstanding balance of $
Under ASC 326, the allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged-off against the allowance when they are deemed uncollectible. The Company’s allowance for credit losses for loans consists of two components: (1) a specific valuation allowance based on probable losses on specifically identified loans and (2) a general valuation allowance based on historical credit loss experience, general economic conditions and other qualitative risk factors both internal and external to the Company.
The Company uses the open pool life method to estimate expected losses for all of the Company’s loan pools. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council, except for the dental, SBA and USDA loans, are segregated in separate pools.
Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. In setting the specific valuation allowance, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the Company maintains an internal list of impaired loans, which along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. For certain impaired loans, the Company allocates a specific reserve primarily based on the value of the collateral securing the loan or when the discounted cash flows for the loan is lower than the carrying value of that loan. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis.
In determining the amount of the general valuation allowance, management considers factors such as historical lifetime credit loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, general economic conditions and other qualitative risk factors both internal and external to the Company and other relevant factors in accordance with ASC Topic 326, “Financial Instruments – Credit Losses.” Historical lifetime credit loss experience is determined by utilizing an open-pool (“cumulative loss rate”) methodology. Adjustments to the historical lifetime credit loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. For all loan pools, management has determined two years represents a reasonable and supportable forecast period and reverts to a historical loss rate over two years on a straight-line basis. Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type, excluding any loan that has a specific reserve allocated to it. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics.
The Bank had no collateral-dependent loans individually evaluated to determine expected credit losses as of March 31, 2024.
|
(In thousands) |
Real Estate |
|||
|
December 31, 2023 |
||||
|
Real estate – residential |
||||
|
SBA unguaranteed |
||||
|
Total |
$ | |||
During the three months ended March 31, 2024, there was one commercial and industrial dental loan that was not collateral dependent that was evaluated for impairment by calculating the net present value of the loan balance, resulting in a specific reserve of $
| Total 90 | ||||||||||||||||||||||||
| 90 Days |
Days or More |
|||||||||||||||||||||||
|
30-89 Days |
or More |
Total |
Total |
Total |
Past Due |
|||||||||||||||||||
|
(In thousands) |
Past Due |
Past Due |
Past Due |
Current |
Loans |
Still Accruing |
||||||||||||||||||
|
March 31, 2024 |
||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||
|
Real estate – residential |
||||||||||||||||||||||||
|
Real estate – commercial |
||||||||||||||||||||||||
|
Real estate – construction and land |
||||||||||||||||||||||||
|
SBA |
||||||||||||||||||||||||
|
USDA |
||||||||||||||||||||||||
|
Factored receivables |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
December 31, 2023 |
||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||
|
Real estate – residential |
||||||||||||||||||||||||
|
Real estate – commercial |
||||||||||||||||||||||||
|
Real estate – construction and land |
||||||||||||||||||||||||
|
SBA |
||||||||||||||||||||||||
|
USDA |
||||||||||||||||||||||||
|
Factored receivables |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including internal credit risk based on past experiences as well as external statistics and factors. Loans are graded in one of six categories: (i) pass, (ii) pass-watch, (iii) special mention, (iv) substandard, (v) doubtful, or (vi) loss. Loans graded as loss are charged-off.
The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits quarterly. No significant changes were made to the loan risk grading system definitions and allowance for credit loss methodology during the past year. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit. The guaranteed portion of SBA loans that are classified are included in the pass category. The Company’s methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Credits rated pass are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in this category are loans to highly credit worthy borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.
Credits rated pass-watch loans have been determined to require enhanced monitoring for potential weaknesses which require further investigation. They have no significant delinquency in the past twelve months. This rating causes the loan to be actively monitored with greater frequency than pass loans and allows appropriate downgrade transition if verifiable adverse events are confirmed. This category may also include loans that have improved in credit quality from special mention but are not yet considered pass loans.
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Guaranteed portions of SBA loans graded substandard are generally on non-accrual due to the limited amount of interest covered by the guarantee, usually 60 days maximum. However, there typically will be no exposure to loss on the principal amount of these guaranteed portions of the loan.
Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss.
Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future.
The following table summarizes the amortized cost basis of loans by year of origination and internal ratings as of March 31, 2024:
|
Term Loans by Origination Year |
Revolving | |||||||||||||||||||||||||||||||
|
(In thousands) |
2024 |
2023 |
2022 |
2021 |
2020 |
Prior |
Loans |
Total |
||||||||||||||||||||||||
|
Commercial and industrial |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Real estate–- residential |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Term Loans by Origination Year |
Revolving | |||||||||||||||||||||||||||||||
|
(In thousands) |
2024 |
2023 |
2022 |
2021 |
2020 |
Prior |
Loans |
Total |
||||||||||||||||||||||||
|
Real estate–- commercial |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Real estate – construction/land |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
SBA 7a |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Loss |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
SBA 504 |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Special mention |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Substandard |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Doubtful |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Total |
$ | - | $ | $ | $ | $ | $ | $ | - | $ | ||||||||||||||||||||||
|
Current period gross write-offs |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
USDA |
||||||||||||||||||||||||||||||||
|
Pass |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | $ | - | $ | ||||||||||||||||||
|
Pass-watch |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Special mention |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Substandard |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Doubtful |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Total |
$ | - | $ | - | $ | $ | - | $ | - | $ | $ | - | $ | |||||||||||||||||||
|
Current period gross write-offs |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
Factored Receivables |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | ||||||||||||||||||
|
Pass-watch |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Special mention |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Substandard |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Doubtful |
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Total |
$ | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | ||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | - | $ | - | $ | - | $ | - | $ | - | $ | |||||||||||||||||||
|
Total |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
- | - | - | |||||||||||||||||||||||||||||
|
Special mention |
- | - | - | |||||||||||||||||||||||||||||
|
Substandard |
- | - | ||||||||||||||||||||||||||||||
|
Doubtful |
- | - | - | - | - | |||||||||||||||||||||||||||
|
Loss |
- | - | - | - | - | - | - | |||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | - | $ | - | $ | - | $ | $ | - | $ | ||||||||||||||||||||
|
Term Loans by Origination Year |
Revolving | |||||||||||||||||||||||||||||||
|
(In thousands) |
2023 |
2022 |
2021 |
2020 |
2019 |
Prior |
Loans |
Total |
||||||||||||||||||||||||
|
Commercial and industrial |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Real estate–- residential |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Real estate–- commercial |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Real estate – construction/land |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
SBA 7a |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Loss |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
SBA 504 |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Term Loans by Origination Year |
Revolving | |||||||||||||||||||||||||||||||
|
(In thousands) |
2023 |
2022 |
2021 |
2020 |
2019 |
Prior |
Loans |
Total |
||||||||||||||||||||||||
|
USDA |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Factored Receivables |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Total |
||||||||||||||||||||||||||||||||
|
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Pass-watch |
||||||||||||||||||||||||||||||||
|
Special mention |
||||||||||||||||||||||||||||||||
|
Substandard |
||||||||||||||||||||||||||||||||
|
Doubtful |
||||||||||||||||||||||||||||||||
|
Loss |
||||||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
Current period gross write-offs |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
|
(In thousands) |
Commercial and Industrial |
Consumer Installment |
Real Estate Residential |
Real Estate Commercial |
Real Estate Construction and Land |
SBA |
USDA |
Factored Receivables |
Total |
|||||||||||||||||||||||||||
|
March 31, 2024 |
||||||||||||||||||||||||||||||||||||
|
Beginning Balance |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
|
Provision for credit losses |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Charge-offs |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Recoveries |
||||||||||||||||||||||||||||||||||||
|
Net charge-offs |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Ending balance |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
|
March 31, 2023 |
||||||||||||||||||||||||||||||||||||
|
Beginning Balance |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
|
Impact of adoption ASC 326 |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Provision for credit losses |
||||||||||||||||||||||||||||||||||||
|
Charge-offs |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
|
Recoveries |
||||||||||||||||||||||||||||||||||||
|
Net recoveries (charge-offs) |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
|
Ending balance |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Management continues to closely monitor for credit changes resulting from the uncertain forecasted economic conditions, the continued rising interest rate environment, and the persistent high inflation levels in the United States and our market areas, and potential recession in the United States and our market areas. Additional provisions for credit losses may be necessary in future periods.
Note 4. Leases
The Company leases certain office facilities and office equipment under operating leases. Certain of the leases contain provisions for renewal options, escalation clauses based on increases in certain costs incurred by the lessor, as well as free rent periods and tenant improvement allowances. The Company amortizes office lease incentives and rent escalations on a straight-line basis over the life of the respective leases. The Company has obligations under operating leases that expire between 2024 and 2034 with initial non-cancellable terms in excess of one year.
We recognize our operating leases on our consolidated balance sheet. Right-of-use assets represent our right to utilize the underlying asset during the lease term, while lease liability represents the obligation to make periodic lease payments over the life of the lease. As of March 31, 2024 and December 31, 2023, right-of-use assets totaled $
|
(In thousands) |
||||
|
2024 |
$ | |||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
2029 and thereafter |
||||
|
Total minimum rental payments |
||||
|
Less: Interest |
( |
) | ||
|
Present value of lease liabilities |
$ |
|
(In thousands) |
||||
|
2024 |
$ | |||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
thereafter |
||||
|
Total minimum rental payments |
$ |
Note 5. Goodwill and Core Deposit Intangible
|
(In thousands) |
March 31, 2024 |
December 31, 2023 |
||||||
|
Goodwill |
$ | $ | ||||||
|
Core deposit intangible, net |
||||||||
Core deposit intangible is amortized on a straight-line basis over the initial estimated lives of the deposits, which range from
|
(In thousands) |
March 31, 2024 |
December 31, 2023 |
||||||
|
Gross carrying basis |
$ | $ | ||||||
|
Accumulated amortization |
( |
) | ( |
) | ||||
|
Net carrying amount |
$ | $ | ||||||
|
(In thousands) |
||||
|
2024 |
$ | |||
|
2025 |
||||
|
Total |
$ |
Note 6. Deposits
|
(In thousands, except percentages) |
March 31, 2024 |
December 31, 2023 |
||||||||||||||
|
Non-interest bearing demand |
$ | % | $ | % | ||||||||||||
|
Interest-bearing demand (NOW) |
||||||||||||||||
|
Money market accounts |
||||||||||||||||
|
Savings accounts |
||||||||||||||||
|
Time deposits |
||||||||||||||||
|
Total |
$ | % | $ | % | ||||||||||||
The aggregate amount of demand deposit overdrafts that have been reclassified as loans as of March 31, 2024 and December 31, 2023 was insignificant.
Note 7. Borrowed Funds and Subordinated Notes
The Company has a blanket lien credit line with the FHLB with borrowing capacity of $
The Company also has a credit line with the FRB with borrowing capacity of $
As part of the BTFP, the Federal Reserve offered loans of up to one year in length to banks and other eligible depository institutions pledging U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral, which are assessed at par value. The Bank pledged AFS securities with par value of $
As of March 31, 2024 and December 31, 2023, T Bancshares had outstanding subordinated notes for $
Note 8. Benefit Plans
The Company funds certain costs for medical benefits in amounts determined at the discretion of management. The Company has a retirement savings 401(k) plan covering substantially all employees of the Bank, and a second plan covering substantially all employees of Sanders Morris, Tectonic Advisors and the Company.
Under the plans, the Company matches
The amount of employer contributions charged to expense under the two plans was $
Note 9. Income Taxes
Income tax expense was approximately $
Net deferred tax assets totaled $
The Company files U.S. federal and state income tax returns.
Note 10. Stock Compensation Plans
The Company’s board of directors and common stock shareholders adopted the Tectonic Financial, Inc. 2017 Equity Incentive Plan (the “Plan”) in May 2017 in connection with the Company’s acquisition of TBI. The Plan was amended and restated by the Company’s board of directors and common stock shareholders effective March 27, 2019 in connection with the Company’s initial public offering. The Plan is administered by the Compensation Committee of the Company’s board of directors and authorizes the granting of stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants in order to promote the success of the Company’s business. Incentive stock options may be granted only to employees of the Company, or a parent or subsidiary of the Company. The Company reserved
The Company accounts for stock-based employee compensation plans using the fair value-based method of accounting. The fair value of each stock option award is estimated on the date of grant by a third party using a closed form option valuation (Black-Scholes) model. The fair value of each grant award was estimated on the date of grant by a third party using the market approach based on the application of latest 12-month Company metrics to guideline public company multiples.
On September 27, 2021,
There were
The number of options outstanding as of each March 31, 2024 and December 31, 2023 was
As of March 31, 2024, all
The Company granted restricted stock awards totaling
As of March 31, 2024,
Note 11. Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying consolidated balance sheets. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
|
(In thousands) |
March 31, 2024 |
December 31, 2023 |
||||||
|
Undisbursed loan commitments |
$ | $ | ||||||
|
Standby letters of credit |
||||||||
|
Total |
$ | $ | ||||||
Allowance For Credit Losses – Off-Balance-Sheet Credit Exposures. The allowance for credit losses for off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur, and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 4 – Loans and Allowance for Credit Losses, as if such commitments were funded.
|
(In thousands) |
Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
||||||
|
Beginning balance |
$ | $ | ||||||
|
Impact of adopting ASC 326 |
||||||||
|
Provision for off-balance sheet credit exposure |
||||||||
|
Ending balance |
$ | $ | ||||||
The Company is involved in various regulatory inspections, inquiries, investigations and proceedings, and litigation matters that arise from time to time in the ordinary course of business. The process of resolving matters through litigation or other means is inherently uncertain, and it is possible that an unfavorable resolution of these matters, will adversely affect the Company, its results of operations, financial condition and cash flows. The Company’s regular practice is to expense legal fees as services are rendered in connection with legal matters, and to accrue for liabilities when payment is probable.
The Company, through its wholly owned subsidiary Sanders Morris, has uncommitted financing arrangements with clearing brokers that finance its customer accounts, certain broker-dealer balances, and firm trading positions. Although these customer accounts and broker-dealer balances are not reflected on the consolidated balance sheets for financial reporting purposes, Sanders Morris has generally agreed to indemnify these clearing brokers for losses they may sustain in connection with the accounts, and therefore, retains risk on these accounts. Sanders Morris is required to maintain certain cash or securities on deposit with its clearing brokers. Deposits with clearing organizations were $
Employment Agreements
The Company is party to amended and restated employment agreements with Patrick Howard, President and Chief Operating Officer of the Company, and Ken Bramlage, Executive Vice President and Chief Financial Officer of the Company. In addition, the Company entered into an employment agreement with A. Haag Sherman, Chief Executive Officer of the Company, in connection with the Company’s merger with Tectonic Holdings and its initial public offering. Messrs. Sherman and Howard’s employment agreements have a
Note 12. Related Parties
Advisors’ service agreements: In January 2006, the Company entered into a services agreement (the “Tectonic Advisors-CWA Services Agreement”) with Cain Watters. The owners of Cain Watters together hold approximately
CWA Fee Allocation Agreement: In January 2006, Tectonic Advisors entered into an agreement (the “Fee Allocation Agreement”) with Cain Watters with reference to its advisory agreement with the Bank. Tectonic Advisors had $
As of March 31, 2024 and December 31, 2023 certain officers, directors and their affiliated companies had depository accounts with the Bank totaling approximately $
Note 13. Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and, accordingly, the Company’s business, results of operations and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under GAAP, regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.
Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and tier 1 capital to risk-weighted assets, common equity Tier 1 (“CET1”) capital to total risk-weighted assets, and of tier 1 capital to average assets. To be categorized as “well-capitalized” under the prompt corrective action framework, the Bank must maintain (i) a Total risk-based capital ratio of
|
BASEL III Minimum for Capital Adequacy Requirements |
BASEL III Additional Capital Conservation Buffer |
BASEL III Ratio with Capital Conservation Buffer |
||||||||||
|
Total Risk Based Capital (total capital to risk weighted assets) |
% | % | % | |||||||||
|
Tier 1 Risk Based Capital (tier 1 to risk weighted assets) |
% | % | % | |||||||||
|
Common Equity Tier 1 Risk Based ( CET1 to risk weighted assets) |
% | % | % | |||||||||
|
Tier 1 Leverage Ratio (tier 1 to average assets) |
% | % | % | |||||||||
Accordingly, a financial institution may be considered “well-capitalized” under the FDIC’s prompt corrective action framework, but not satisfy the buffered Basel III capital ratios. As of March 31, 2024 and December 31, 2023, the Company met the definition of “well-capitalized” under the applicable regulations of the Federal Reserve and the Bank’s regulatory capital ratios were in excess of the capital conservation buffer and the levels established for “well-capitalized” institutions under the FDIC’s regulatory framework for prompt corrective action and the Basel III capital guidelines.
|
Actual |
Minimum Capital Required–- Basel III |
Required to be Considered Well Capitalized |
||||||||||||||||||||||
|
(In thousands, except percentages) |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||
|
As of March 31, 2024 |
||||||||||||||||||||||||
|
Total Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
|
Tectonic Financial, Inc. (consolidated) |
$ | % | $ | % | $ | % | ||||||||||||||||||
|
T Bank, N.A. |
||||||||||||||||||||||||
|
Tier 1 Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
|
Tectonic Financial, Inc. (consolidated) |
||||||||||||||||||||||||
|
T Bank, N.A. |
||||||||||||||||||||||||
|
Common Equity Tier 1 (to Risk Weighted Assets) |
||||||||||||||||||||||||
|
Tectonic Financial, Inc. (consolidated) |
||||||||||||||||||||||||
|
T Bank, N.A. |
||||||||||||||||||||||||
|
Tier 1 Capital (to Average Assets) |
||||||||||||||||||||||||
|
Tectonic Financial, Inc. (consolidated) |
||||||||||||||||||||||||
|
T Bank, N.A. |
||||||||||||||||||||||||
|
As of December 31, 2023 |
||||||||||||||||||||||||
|
Total Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
|
Tectonic Financial, Inc. (consolidated) |
$ | % | $ | % | $ | % | ||||||||||||||||||
|
T Bank, N.A. |
||||||||||||||||||||||||
|
Tier 1 Capital (to Risk Weighted Assets) |
||||||||||||||||||||||||
|
Tectonic Financial, Inc. (consolidated) |
||||||||||||||||||||||||
|
T Bank, N.A. |
||||||||||||||||||||||||
|
Common Equity Tier 1 (to Risk Weighted Assets) |
||||||||||||||||||||||||
|
Tectonic Financial, Inc. (consolidated) |
||||||||||||||||||||||||
|
T Bank, N.A. |
||||||||||||||||||||||||
|
Tier 1 Capital (to Average Assets) |
||||||||||||||||||||||||
|
Tectonic Financial, Inc. (consolidated) |
||||||||||||||||||||||||
|
T Bank, N.A. |
||||||||||||||||||||||||
Dividend Restrictions. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared (including those on the Series A preferred stock) would cause the regulatory capital of the Bank and/or the Company to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. As of March 31, 2024, approximately $
In addition to the regulatory requirements of the federal banking agencies, Sanders Morris and Tectonic Advisors are subject to the regulatory framework applicable to registered investment advisors under the SEC’s Division of Investment Management, and additionally, Sanders Morris is regulated by FINRA, which, among other requirements, imposes minimums on its net regulatory capital.
Note 14. Operating Segments
The Company’s reportable segments consist of “Banking,” “Other Financial Services,” and “HoldCo” operations.
The “Banking” segment consists of operations relative to the Company’s full service banking operations, including providing depository and lending services to individual and business customers, and other related banking services, along with services provided through the factoring operations of the Bank’s Integra division.
The “Other Financial Services” segment includes managed and directed brokerage, investment advisory services, including related trust company operations, third party administration, and life and disability insurance brokerage services to both individuals and businesses.
The “HoldCo” operations include the operations and subordinated debt held at the Bank’s immediate parent, as well as the activities of the financial holding company which serves as TBI’s parent.
|
(In thousands) |
Banking |
Other Financial Services |
HoldCo |
Consolidated |
||||||||||||
|
Three Months Ended March 31, 2024 |
||||||||||||||||
|
Income Statement |
||||||||||||||||
|
Total interest income |
$ | $ | $ | $ | ||||||||||||
|
Total interest expense |
||||||||||||||||
|
Provision for credit losses |
||||||||||||||||
|
Net interest income (loss) after provision for credit losses |
( |
) | ||||||||||||||
|
Non-interest income |
||||||||||||||||
|
Depreciation and amortization expense |
||||||||||||||||
|
All other non-interest expense |
||||||||||||||||
|
Income (loss) before income tax |
$ | $ | $ | ( |
) | $ | ||||||||||
|
Goodwill and other intangibles |
$ | $ | $ | $ | ||||||||||||
|
Total assets |
$ | $ | $ | $ | ||||||||||||
|
(In thousands) |
Banking |
Other Financial Services |
HoldCo |
Consolidated |
||||||||||||
|
Three Months Ended March 31, 2023 |
||||||||||||||||
|
Income Statement |
||||||||||||||||
|
Total interest income |
$ | $ | $ | $ | ||||||||||||
|
Total interest expense |
||||||||||||||||
|
Provision for credit losses |
||||||||||||||||
|
Net interest income (loss) after provision for credit losses |
( |
) | ||||||||||||||
|
Non-interest income |
||||||||||||||||
|
Depreciation and amortization expense |
||||||||||||||||
|
All other non-interest expense |
||||||||||||||||
|
Income (loss) before income tax |
$ | $ | $ | ( |
) | $ | ||||||||||
|
Goodwill and other intangibles |
$ | $ | $ | $ | ||||||||||||
|
Total assets |
$ | $ | $ | $ | ||||||||||||
Note 15. Fair Value of Financials Instruments
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
|
|
● |
Level 1 Inputs–- Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
|
|
● |
Level 2 Inputs–- Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. |
|
|
● |
Level 3 Inputs–- Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. |
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities in the Level 1 or Level 3 inputs.
|
(In thousands) |
Level 1 Inputs |
Level 2 Inputs |
Level 3 Inputs |
Total Fair Value |
||||||||||||
|
As of March 31, 2024 |
||||||||||||||||
|
Securities available for sale: |
||||||||||||||||
|
U.S. Treasuries |
$ | $ | $ | $ | ||||||||||||
|
U.S. government agencies |
||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||
|
As of December 31, 2023 |
||||||||||||||||
|
Securities available for sale: |
||||||||||||||||
|
U.S. Treasuries |
$ | $ | $ | $ | ||||||||||||
|
U.S. government agencies |
||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||
Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods. During the three months ended March 31, 2024 and 2023,
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Financial assets measured at fair value on a non-recurring basis during the reported periods include impaired loans and loans held for sale.
Collateral dependent loan. The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent loans primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount. During the reported periods, there was no allowance for credit losses for collateral-dependent loans.
The valuation of our not readily marketable investment securities which are classified as Level 3 are based on the Company’s own assumptions and inputs that are both significant to the fair value measurement, and are unobservable.
Our assessment of the significance of a particular input to the Level 3 fair value measurements in their entirety requires judgment and considers factors specific to the assets. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future.
Loans held for sale. Loans held for sale include the guaranteed portion of SBA and USDA loans and are reported at the lower of cost or estimated fair value. Fair value for SBA and USDA loans is based on market indications available in the market. There were no impairments reported for the periods presented.
Non-financial assets measured at fair value on a non-recurring basis during the reported periods include other real estate owned which, upon initial recognition, was re-measured and reported at fair value through a charge-off to the allowance for credit losses. Additionally, foreclosed assets which, subsequent to their initial recognition, are re-measured at fair value through a write-down included in other non-interest expense. Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets on at least an annual basis. The fair value of foreclosed assets, upon initial recognition and impairment, are re-measured using Level 2 inputs based on observable market data. Estimated fair value of other real estate is based on appraisals. Appraisers are selected from the list of approved appraisers maintained by management. As of March 31, 2024 and December 31, 2023, there were no foreclosed assets. There were no foreclosed assets re-measured during each of the three months ended March 31, 2024 and 2023.
The methods and assumptions used to estimate fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, restricted securities, accrued interest receivable and accrued interest payable. The estimated fair value of demand and savings deposits is the carrying amount since rates are regularly adjusted to market rates and amounts are payable on demand. For borrowed funds and variable rate loans or deposits that re-price frequently and fully, the estimated fair value is the carrying amount. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. For loans held for sale, the estimated fair value is based on market indications for similar assets in the active market. The estimated fair value of other financial instruments and off-balance-sheet loan commitments approximate cost and are not considered significant to this presentation.
The Company adds a servicing asset when loans are sold and the servicing is retained, and uses the amortization method for the treatment of the servicing asset. The servicing asset is carried at lower of cost or fair value. Loan servicing assets do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using a discounted cash flow model having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy. During the three months ended March 31, 2024, there was no sale of loans. During the three months ended March 31, 2023, the Company added servicing assets totaling $
FASB ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value approximates carrying value for cash and cash equivalents and accrued interest. The methodologies for other financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are discussed below.
Securities held to maturity. The securities in this category include PACE and PID/TIRZ investments. These investment contracts or bonds originate under a contractual obligation between the property owners, the local county administration, and a third-party administrator and sponsor. The fair value of these investments are estimated using observable market inputs in a discounted cash flow analysis.
Loans. The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.
Deposits. The fair values of demand deposits, savings deposits are, by definition, equal to the amount payable on demand and, therefore, approximate their carrying amounts. The fair values for time deposits are estimated using a discounted cash flow calculation that utilizes interest rates currently being offered on time deposits with similar contractual maturities.
Borrowed Funds. The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments. The estimated fair value approximates carrying value for variable-rate junior subordinated deferrable interest debentures that reprice quarterly.
Loan Commitments, Standby and Commercial Letters of Credit. Our lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.
|
March 31, 2024 |
||||||||
|
(In thousands) |
Carrying Amount |
Estimated Fair Value |
||||||
|
Financial assets: |
||||||||
|
Level 1 inputs: |
||||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Level 2 inputs: |
||||||||
|
Securities available for sale |
||||||||
|
Securities, restricted |
||||||||
|
Loans held for sale |
||||||||
|
Accrued interest receivable |
||||||||
|
Level 3 inputs: |
||||||||
|
Securities held to maturity |
||||||||
|
Securities not readily marketable |
||||||||
|
Loans, net |
||||||||
|
Servicing asset |
||||||||
|
Financial liabilities: |
||||||||
|
Level 1 inputs: |
||||||||
|
Non-interest bearing deposits |
||||||||
|
Level 2 inputs: |
||||||||
|
Interest bearing deposits |
||||||||
|
Borrowed funds |
||||||||
|
Subordinated notes |
||||||||
|
Accrued interest payable |
||||||||
|
December 31, 2023 |
||||||||
|
(In thousands) |
Carrying Amount |
Estimated Fair Value |
||||||
|
Financial assets: |
||||||||
|
Level 1 inputs: |
||||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Level 2 inputs: |
||||||||
|
Securities available for sale |
||||||||
|
Securities, restricted |
||||||||
|
Loans held for sale |
||||||||
|
Accrued interest receivable |
||||||||
|
Level 3 inputs: |
||||||||
|
Securities held to maturity |
||||||||
|
Securities not readily marketable |
||||||||
|
Loans, net |
||||||||
|
Servicing asset |
||||||||
|
Financial liabilities: |
||||||||
|
Level 1 inputs: |
||||||||
|
Non-interest bearing deposits |
||||||||
|
Level 2 inputs: |
||||||||
|
Interest bearing deposits |
||||||||
|
Borrowed funds |
||||||||
|
Subordinated notes |
||||||||
|
Accrued interest payable |
||||||||
Note 16. Recent Accounting Pronouncements
ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. ASU 2023-07 is not expected to have a significant impact on our financial statements.
ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. ASU 2023-09 is effective for us on January 1, 2025, though early adoption is permitted. ASU 2023-09 is not expected to have a significant impact on our financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q for the three months ended March 31, 2024 (this “Form 10-Q”), as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 1, 2024 (the “2023 Form 10-K”).
Cautionary Notice Regarding Forward-Looking Statements
Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including our current views, expectations, intentions, beliefs, or strategies regarding the future. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may differ materially from those in or implied by such forward-looking statements due to the factors discussed under the section entitled “Risk Factors,” in our 2023 Form 10-K, including, but not limited to, the following:
|
● |
potential recession in the United States and our market areas; |
|
● |
the impacts related to or resulting from bank failures and any continuation of uncertainty in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other mitigation efforts taken by governmental agencies in response thereto; |
|
● |
liquidity risks, including those related to having enough liquid assets to meet depositor demands; |
|
● |
risks associated with generating deposits from retail sources without a branch network so that we can fund our loan portfolio and growth; |
|
● |
our ability to maintain a strong core deposit base or other low-cost funding sources; |
|
● |
risks associated with higher cost deposits relative to our peer group, which has an impact on our net interest margin and profits; |
|
● |
increased competition for deposits and related changes in deposit customer behavior; |
|
● |
risks associated with the persistent inflationary pressures, or the resurgence of elevated levels of inflation, in the United States and our market areas, and its impact on market interest rates, the economy and credit quality; |
|
● |
the adequacy of the allowance for credit losses; |
|
● |
the impact of changes in market interest rates, whether due to continued elevated interest rates or potential reduction in interest rates and a resulting decline in net interest income; |
|
● |
fluctuation in the value of our investment securities; |
|
● |
changes in the economy generally and the regulatory response thereto; |
|
● |
changes in the economy of the State of Texas, our primary market; |
|
● |
increases in unemployment rates in the United States and our market areas; |
|
● |
risks associated with implementing aspects of our expansion strategy, whether through additional services and products or acquisitions; |
|
● |
the need to hold more capital in order to comply with consolidated capital ratios; |
|
● |
our ability to raise additional capital, particularly during times of stress; |
|
● |
competition from other banks, financial institutions and wealth and investment management firms and our ability to retain our clients; |
|
● |
risks associated with having one referral source, Cain Watters & Associates, LLC (“Cain Watters”), comprise a substantial part of our business; |
|
● |
our reliance on key personnel and the ability to attract and retain the personnel necessary to implement our business plan; |
|
● |
risks specific to commercial loans and borrowers (particularly dental and U.S. Small Business Administration (“SBA”) loans), including the risk of declines in commercial real estate prices or deterioration in value of the general business assets that secure such loans; |
|
● |
our ability to continue to originate loans (including SBA loans); |
|
● |
impairment of our goodwill or other intangible assets; |
|
● |
claims and litigation pertaining to our fiduciary responsibilities; |
|
● |
generating investment returns for our wealth management, brokerage and other customers that are satisfactory to them; |
|
● |
our ability to manage our credit risk; |
|
● |
regulatory scrutiny related to our loan portfolio, including commercial real estate; |
|
● |
the earnings capacity of our borrowers; |
|
● |
our inability to identify and address potential conflicts of interest; |
|
● |
our ability to maintain effective internal control over financial reporting; |
|
● |
the accuracy of estimates and assumptions; |
|
● |
the development of an active, liquid market for the Series B preferred stock; |
|
● |
the soundness of other counterparty financial institutions and certain securities brokerage firms; |
|
● |
technological change in the banking, investment, brokerage and insurance industry; |
|
● |
our ability to protect against and manage cyber incidents or other failures, disruptions or breaches of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber attacks; |
|
● |
our reliance on communications, information, operating and financial control systems technology and related services from third-party service providers; |
|
● |
severe weather, natural disasters and epidemics and pandemics; |
|
● |
the effects of acts of war or terrorism, or the threat thereof, geopolitical instability or other external events; |
|
● |
environmental liabilities; |
|
● |
regulation of the financial services industry; |
|
● |
legislative changes or the adoption of tax reform policies; |
|
● |
uncertainty regarding United States fiscal debt and budget matters; |
|
● |
political instability and changes in tariffs and trade barriers; |
|
● |
compliance with laws and regulations, supervisory actions, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), capital requirements, the Bank Secrecy Act, anti-money laundering laws, consumer laws, and other statutes and regulations; |
|
● |
regulation of broker-dealers and investment advisors; |
|
● |
the enactment of regulations relating to privacy, information security and data protection; |
|
● |
legal and regulatory examinations, proceedings, investigations and inquiries, fines and sanctions; |
|
● |
future issuances of preferred stock or debt securities and its impact on the Series B preferred stock; |
|
● |
our ability to manage our existing and future preferred stock and indebtedness; |
|
● |
our ability to pay dividends; |
|
● |
the continuation of securities analysts coverage of the company; |
|
● |
our management and board of directors have significant control over our business; |
|
● |
risks related to being a “controlled company” under NASDAQ rules; |
|
● |
the costs and expenses of being a public company; and |
|
● |
changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, current and future governmental monetary and fiscal policies, including the uncertain impacts of ongoing quantitative tightening and current and future policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the Biden administration. |
Due to these and other possible uncertainties and risks, the Company can give no assurance that the results contemplated in the forward-looking statements will be realized and readers are cautioned not to place undue reliance on any such forward-looking statements. Any forward-looking statement reflects only information known to us as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by applicable law. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.
Other Available Information
We file or furnish with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Section 13(a) or 15(d) of the Exchange Act. Electronic copies of our SEC filings are available to the public at the SEC’s website at www.sec.gov. In addition, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports required by Section 13(a) or 15(d) of the Exchange Act are available through our website, www.t.financial, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
The Company routinely posts important information for investors on its website, www.t.financial. The Company intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company’s website, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.
Our website and the information contained on or accessible through our website is not incorporated by reference into, and is not a part of, this Form 10-Q.
General
We are a Texas corporation and registered financial holding company headquartered in Dallas, Texas. We provide a wide array of financial products and services including banking, trust, investment advisory, securities brokerage, third party administration, qualified plan recordkeeping and insurance services to individuals, small businesses and institutions across the United States.
The following discussion and analysis presents our consolidated financial condition as of March 31, 2024 and December 31, 2023, and our consolidated results of operations for the three months ended March 31, 2024 and 2023. The discussion should be read in conjunction with our financial statements and the notes related thereto in this Form 10-Q and in the audited financial statements in our 2023 Form 10-K.
We operate through four main direct and indirect subsidiaries: (i) T Bancshares, Inc. (“TBI”), which was incorporated under the laws of the State of Texas on December 23, 2002 to serve as the registered bank holding company for T Bank, N.A. a national banking association (the “Bank”), (ii) Sanders Morris LLC (“Sanders Morris”), a registered broker-dealer with the Financial Industry Regulatory Authority (“FINRA”), and registered investment advisor with the SEC, (iii) Tectonic Advisors, LLC (“Tectonic Advisors”), a registered investment advisor registered with the SEC focused generally on managing money for relatively large, affiliated institutions, and (iv) HWG Insurance Agency LLC (“HWG”), an insurance agency registered with the Texas Department of Insurance (“TDI”).
Critical Accounting Policies and Estimates
We prepare consolidated financial statements based on accounting principles generally accepted in the United States (“GAAP”) and to customary practices within the financial services industry. These policies, in certain areas, require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain at the time we make the accounting estimate and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements.
As discussed in Note 1 – Organization and Significant Accounting Policies in the accompanying notes to consolidated financial statements, the Company adopted ASU 2016-13, Financial Instruments–- Credit Losses (Topic 326) (ASC 326): Measurement of Credit Losses on Financial Instruments, effective on January 1, 2023, pursuant to the delayed adoption allowable for smaller reporting companies, and replaces allowance allocations calculated in accordance with ASC Topic 310, Receivables, and allowance allocations calculated in accordance with FASB ASC Topic 450, Contingencies discussed in the 2023 Form 10-K. Upon adoption of the current expected credit loss (“CECL”) methodology, the Company recorded an increase of $1.4 million to the allowance for credit losses for loans and $237,505 to the allowance for credit losses for unfunded commitments. In addition, the Company recognized a cumulative effect reduction to retained earnings totaling $1.3 million, net of a recorded deferred tax asset of $341,662. See the discussion in Note 1–- Organization and Significant Accounting Policies and Note 3–- Loans and Allowance for Credit Losses in the accompanying notes to consolidated financial statements for more details on the impact of the Company’s adoption of the CECL methodology, including related accounting policies.
Performance Summary
Net income available to common shareholders decreased $1.6 million, or 37.2%, to $2.7 million for the three months ended March 31, 2024, compared to $4.3 million for the three months ended March 31, 2023. Earnings per diluted common share were $0.37 and $0.59 for the three months ended March 31, 2024 and 2023, respectively. The decrease in net income available to common shareholders for the three months ended March 31, 2024 was primarily the result of a $1.1 million increase in non-interest expense, an $839,000 increase in the provision for credit losses and a $203,000 decrease in non-interest income, partly offset by a $59,000 increase in net interest income and a $436,000 decrease in income tax expense. Details of the changes in the various components of net income are discussed below. For the three months ended March 31, 2024, annual return on average assets was 1.67%, compared to 2.87% for the same period in the prior year, and annual return on average equity was 11.50%, compared to 19.70% for the same period in the prior year.
Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, this Form 10-Q contains financial information determined by methods other than in accordance with GAAP, which includes return on average tangible common equity. We calculate return on average tangible common equity as net income available to common shareholders (net income less dividends paid on preferred stock) divided by average tangible common equity. We calculate average tangible common equity as average shareholders’ equity less average goodwill, average core deposit intangible and average preferred stock. The most directly comparable GAAP financial measure for tangible common equity is average total shareholders’ equity. We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, measures and ratios prepared in accordance with GAAP.
The following table presents non-GAAP reconciliations of annual return on average tangible common equity as of and for the periods indicated:
|
(Dollars in thousands) |
As of and Ended March 31, 2024 |
As of and Ended March 31, 2023 |
||||||
|
Income available to common shareholders (a) |
$ | 2,673 | $ | 4,326 | ||||
|
Average shareholders’ equity |
$ | 107,013 | $ | 97,055 | ||||
|
Less: average goodwill |
21,440 | 21,440 | ||||||
|
Less: average core deposit intangible |
341 | 551 | ||||||
|
Less: average preferred stock |
17,250 | 17,250 | ||||||
|
Average tangible common equity (b) |
$ | 67,982 | $ | 57,814 | ||||
|
Annual return on average tangible common equity (a)/(b) |
15.81 | % | 30.35 | % | ||||
Total assets increased $100.3 million, or 14.8%, to $777.6 million as of March 31, 2024, from $677.3 million as of December 31, 2023. This increase was primarily due to increases of $67.8 million in cash and cash equivalents and $36.9 million in loans held for investment, partly offset by decreases of $3.8 million in loans held for sale. Substantially all loans are secured by specific collateral, including business assets, consumer assets, and commercial real estate.
Shareholders’ equity increased $1.6 million, or 1.5%, to $108.5 million as of March 31, 2024, from $106.9 million as of December 31, 2023. See the analysis of shareholders’ equity in the section captioned “Capital Resources and Regulatory Capital Requirements” included below.
Results of Operations for the Three Months Ended March 31, 2024 and 2023
Details of the changes in the various components of net income are discussed below.
Net Interest Income
Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in net interest income result from changes in volume and spread, and are reflected in net interest margin, as well as changes in average interest rates. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets, and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
The following tables present the changes in net interest income and identifies the changes due to differences in the average volume of interest-earning assets and interest–bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.
|
Three Months Ended |
||||||||||||
|
March 31, 2024 vs March 31, 2023 |
||||||||||||
|
Increase (Decrease) Due to Change in |
||||||||||||
|
(In thousands) |
Rate |
Average Volume |
Total |
|||||||||
|
Interest-bearing deposits and federal funds sold |
$ | 193 | $ | 65 | $ | 258 | ||||||
|
Securities |
83 | 21 | 104 | |||||||||
|
Loans, net of unearned discount (1) |
1,597 | 1,426 | 3,023 | |||||||||
|
Total earning assets |
1,873 | 1,512 | 3,385 | |||||||||
|
Savings and interest-bearing demand |
3 | (3 | ) | - | ||||||||
|
Money market deposit accounts |
512 | 370 | 882 | |||||||||
|
Time deposits |
1,204 | 1,010 | 2,214 | |||||||||
|
FHLB and other borrowings |
(9 | ) | 181 | 172 | ||||||||
|
Subordinated notes |
56 | 2 | 58 | |||||||||
|
Total interest-bearing liabilities |
1,766 | 1,560 | 3,326 | |||||||||
|
Changes in net interest income |
$ | 107 | $ | (48 | ) | $ | 59 | |||||
|
(1) |
Average loans include non-accrual. |
Net interest income increased $59,000, or 0.8%, from $7.0 million for the three months ended March 31, 2023 to $7.1 million for the three months ended March 31, 2024. The increase in net interest income was primarily due to increases in the average volume of and average yield on loans, interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and securities. The impact of these items was partly offset by increases in the average interest volume of and cost of interest-bearing liabilities. Net interest margin for the three months ended March 31, 2024 and 2023 was 4.13% and 4.58%, respectively, a decrease of 45 basis points.
The average volume of interest-earning assets increased $67.4 million, or 10.8%, from $624.0 million for the three months ended March 31, 2023, to $691.4 million for the three months ended March 31, 2024. The increase for the three months ended March 31, 2024 included a $61.5 million, or 12.8%, increase in the average volume of loans, a $4.1 million, or 4.2%, increase in the average volume of interest-bearing deposits and federal funds sold and a $1.8 million, or 3.5%, increase in securities.
The average yield on interest-earning assets increased 123 basis points from 7.09% for the three months ended March 31, 2023 to 8.32% for the three months ended March 31, 2024 due to the increasing market interest rate environment over the respective periods. The average yield for loans increased 129 basis points from 7.95% for the three months ended March 31, 2023 to 9.24% for the three months ended March 31, 2024. The average yield on interest-bearing deposits and fed funds sold increased 83 basis points from 4.67% for the three months ended March 31, 2023, to 5.50% for the three months ended March 31, 2024, and the average yield on securities increased 65 basis points from 3.46% for the three months ended March 31, 2023 to 4.11% for the three months ended March 31, 2024.
The average volume of interest-bearing liabilities increased $116.2 million, or 26.7%, from $434.6 million for the three months ended March 31, 2023, to $550.8 million for the three months ended March 31, 2024. The increase for the three months ended March 31, 2024 included a $101.5 million, or 24.4%, increase in the average volume of interest-bearing deposits and a $14.8 million, or 200.3%, increase in the average volume of FHLB and other borrowings. The average rate paid on interest-bearing liabilities increased 164 basis points from 3.61% for the three months ended March 31, 2023 to 5.25% for the three months ended March 31, 2024. The average interest rate paid on interest-bearing deposits increased 171 basis points from 3.43% for the three months ended March 31, 2023, to 5.14% for the three months ended March 31, 2024. The average volume of non-interest-bearing deposits decreased $61.0 million, or 48.9%, from $124.9 million for the three months ended March 31, 2023 to $63.9 million for the three months ended March 31, 2024. The average cost of FHLB and other borrowings decreased 48 basis points from 5.39% for the three months ended March 31, 2023 to 4.91% for the three months ended March 31, 2024 and the average cost of the subordinated debt increased 187 basis points from 8.96% for the three months ended March 31, 2023 to 10.83% for the three months ended March 31, 2024 due to the applicable interest rates on the outstanding subordinated debt transitioning from fixed to floating.
The following table sets forth our average balances of assets, liabilities and shareholders’ equity, in addition to the major components of net interest income and our net interest margin, for the three months ended March 31, 2024 and 2023.
|
Three Months Ended March 31, |
||||||||||||||||||||||||
|
2024 |
2023 |
|||||||||||||||||||||||
|
(In thousands, except percentages) |
Average Balance |
Interest |
Average Yield |
Average Balance |
Interest |
Average Yield |
||||||||||||||||||
|
Assets |
||||||||||||||||||||||||
|
Interest-bearing deposits and federal funds sold |
$ | 97,996 | $ | 1,339 | 5.50 | % | $ | 93,886 | $ | 1,081 | 4.67 | % | ||||||||||||
|
Securities |
52,442 | 536 | 4.11 | 50,687 | 432 | 3.46 | ||||||||||||||||||
|
Loans, net of unearned discount (1) |
540,998 | 12,423 | 9.24 | 479,498 | 9,400 | 7.95 | ||||||||||||||||||
|
Total earning assets |
691,436 | 14,298 | 8.32 | 624,071 | 10,913 | 7.09 | ||||||||||||||||||
|
Cash and other assets |
50,123 | 47,870 | ||||||||||||||||||||||
|
Allowance for credit losses |
(6,299 | ) | (4,964 | ) | ||||||||||||||||||||
|
Total assets |
$ | 735,260 | $ | 666,977 | ||||||||||||||||||||
|
Liabilities and Shareholders’ Equity |
||||||||||||||||||||||||
|
Savings and interest-bearing demand |
$ | 9,872 | 12 | 0.47 | % | $ | 12,664 | 12 | 0.37 | % | ||||||||||||||
|
Money market deposit accounts |
148,354 | 1,912 | 5.18 | 120,178 | 1,030 | 3.48 | ||||||||||||||||||
|
Time deposits |
358,457 | 4,679 | 5.25 | 282,365 | 2,465 | 3.54 | ||||||||||||||||||
|
Total interest-bearing deposits |
516,683 | 6,603 | 5.14 | 415,207 | 3,507 | 3.43 | ||||||||||||||||||
|
FHLB and other borrowings |
22,126 | 270 | 4.91 | 7,369 | 98 | 5.39 | ||||||||||||||||||
|
Subordinated notes |
12,000 | 323 | 10.83 | 12,000 | 265 | 8.96 | ||||||||||||||||||
|
Total interest-bearing liabilities |
550,809 | 7,196 | 5.25 | 434,576 | 3,870 | 3.61 | ||||||||||||||||||
|
Non-interest-bearing deposits |
63,886 | 124,927 | ||||||||||||||||||||||
|
Other liabilities |
13,552 | 10,419 | ||||||||||||||||||||||
|
Total liabilities |
628,247 | 569,922 | ||||||||||||||||||||||
|
Shareholders’ equity |
107,013 | 97,055 | ||||||||||||||||||||||
|
Total liabilities and shareholders’ equity |
$ | 735,260 | $ | 666,977 | ||||||||||||||||||||
|
Net interest income |
$ | 7,102 | $ | 7,043 | ||||||||||||||||||||
|
Net interest spread |
3.07 | % | 3.48 | % | ||||||||||||||||||||
|
Net interest margin |
4.13 | % | 4.58 | % | ||||||||||||||||||||
|
(1) |
Includes non-accrual loans. |
Provision for Credit Losses
As discussed in Note 1–- Organization and Significant Accounting Policies in the accompanying notes to consolidated financial statements, the Company adopted the CECL accounting standard effective on January 1, 2023. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans and held-to-maturity debt securities, as well as off-balance sheet credit exposures. Provision for credit losses is determined by management as the amount to be added to the allowance for credit losses for various types of financial instruments to bring the allowance for credit losses to a level deemed appropriate by management to absorb expected credit losses over the lives of the respective financial instruments. Management actively monitors the Company’s asset quality and provides appropriate provisions based on such factors as historical loss experience, current conditions and reasonable and supportable forecasts.
Financial instruments are charged-off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, forecasted economic conditions continue to remain uncertain due to the continued elevated interest rate environment and persistent inflationary pressures in the United States and our marker areas. Accordingly, future provisions to the allowance for credit losses may be necessary if economic conditions differ from the assumptions used in making the determination.
The following table presents the components of provision for credit losses for the periods indicated:
|
Three Months Ended March 31, |
||||||||
|
(In thousands) |
2024 |
2023 |
||||||
|
Provision for credit losses related to: |
||||||||
|
Loans |
$ | 773 | $ | 43 | ||||
|
Held to maturity securities |
- | - | ||||||
|
Off-balance sheet credit exposures |
144 | 35 | ||||||
|
Total |
$ | 917 | $ | 78 | ||||
Provision expense for loans is generally reflective of change in loan volume and mix as well as charge-offs or specific reserves taken during the respective period. Provision expense is also impacted by the economic outlook and changes in macroeconomic variables. The provision expense recorded for the three months ended March 31, 2024 was driven by the loss rate and charge-offs. See “Allowance for Credit Losses,” below, for further analysis of our provision for credit losses related to loans.
Changes in the allowance for off-balance sheet credit exposures are generally driven by the remaining unfunded loan commitments expected to fund loans and to changes in the assumptions to project loss rates. The credit provision for the three months ended March 31, 2024 was due to decreased outstanding loan commitments to fund.
Non-Interest Income
The components of non-interest income were as follows for the periods indicated:
|
|
|
Three Months Ended March 31, |
|
|||||
|
(In thousands) |
|
2024 |
|
|
2023 |
|
||
|
Trust income |
|
$ |
1,739 |
|
|
$ |
1,513 |
|
|
Gain on sale of loans |
|
|
- |
|
|
|
581 |
|
|
Advisory income |
|
|
3,938 |
|
|
|
3,451 |
|
|
Brokerage income |
|
|
1,782 |
|
|
|
1,890 |
|
|
Service fees and other income |
|
|
2,950 |
|
|
|
3,216 |
|
|
Rental income |
|
|
89 |
|
|
|
50 |
|
|
Total |
|
$ |
10,498 |
|
|
$ |
10,701 |
|
Total non-interest income for the three months ended March 31, 2024 decreased $203,000, or 1.9%, compared to the same period in the prior year. Material changes in the various components of non-interest income are discussed below.
Trust Income. Trust income is earned for trust services on the value of managed and non-managed assets held in custody. Volatility in the bond and equity markets impacts the market value of trust assets and the related fees. Trust income for the three months ended March 31, 2024 increased $226,000, or 14.9%, compared to the same period in the prior year. The increase in trust income between the periods is due to an increase in the value of trust assets over the three months ended March 31, 2024 compared to the same period in the prior year. Volatility related to impacts of geo-political instability related to the wars in Ukraine and the Middle East, the potential for continued supply-chain disruptions, and regulatory action, including elevated market interest rates by the Federal Reserve aimed at tempering inflationary pressures in the United States, all of which are likely to impact the bond and equity markets, or other factors, could result in future net decreases in the average values of our assets held in custody, and/or in a decrease in net flows to our assets held in custody, decreasing our trust income.
Gain on sale of loans. The gain on sale of loans primarily reflects the gain from the sale of the guaranteed portion of SBA 7(a) and USDA loans originated by the Bank’s SBA lending group. For the three months ended March 31, 2024, gain on sale of loans decreased $581,000, or 100%, compared to the same period in the prior year, during which there was a gain on sale of loans resulting from the sale of $5.8 million of USDA loans. There were no loan sales, and therefore no gain on sale of loans, during the three months ended March 31, 2024.
Advisory income. Advisory fees are typically based on a percentage of the underlying average asset values for a given period, where each percentage point represents 100 basis points. These revenues are of a recurring nature but are directly affected by increases and decreases in the values of the underlying assets. For the three months ended March 31, 2024, advisory income increased $487,000, or 14.1%, compared to the same period in the prior year. The increase in advisory income between the two periods is due to increases in advisory assets between the two periods from net inflows and market appreciation of our advisory assets. Similar to our trust income, changes in the value of our assets under management will result in comparable changes in our advisory income. Volatility related to regulatory action, including the effects of the persistent inflationary pressures in the United States and of elevated market interest rates by the Federal Reserve aimed at tempering such inflationary pressures, as well as supply chain disruptions related to geo-political instability, including the ongoing wars in Ukraine and the Middle East, are likely to continue to put pressure on the financial markets and the value of and/or net inflows to our assets under management, potentially decreasing our advisory income.
Brokerage income. Brokerage revenues are generally based on a per share fee or commission to trade a share of a particular stock, bond or other security. In addition, brokerage revenues, in this context, include private placements, participation in syndication of public offerings, and certain other brokerage revenues, including interest earned on margin lending. Brokerage revenue is dependent on the volume of trading, and on private placement and syndication activity during the period, and in the case of margin lending, on asset volumes and interest rates. Brokerage income for the three months ended March 31, 2024 decreased $108,000, or 5.7%, compared to the same period in the prior year. The majority of the decrease was related primarily to a decrease of $278,000 in margin lending income, a decrease of $41,000 in insurance commissions, a decrease of $26,000 in other brokerage commissions, and a decrease in federates rebates of $11,000 during the three months ended March 31, 2024 over the same period in the prior year, offset by increases in fees from general over-the-counter trading of $212,000, in private placement commissions of $27,000, a decrease in losses from trading errors of $15,000, and other individually immaterial fluctuations netting to an increase of $6,000. Expectations of economic disruption related to geo-political factors and the potential for interest rates to remain elevated in the mid-term, among other factors, could lead to continued stagnant offering activity given price uncertainty in the face of volatile markets.
The table below reflects a rollforward of our client assets from December 31, 2022 through March 31, 2024, which includes both advisory and brokerage assets, and the inflows and outflows and net market appreciation from December 31, 2023 through March 31, 2024. Our brokerage and advisory assets experienced an increase of approximately $1.5 billion, or 25.8%, between March 31, 2023 and March 31, 2024, related to positive net flows and market appreciation.
|
(In thousands) |
Client Assets |
|||
|
As of December 31, 2022 |
$ | 5,199,471 | ||
|
Client inflows |
619,906 | |||
|
Client outflows |
(215,940 | ) | ||
|
Net flows |
403,966 | |||
|
Market appreciation |
243,679 | |||
|
As of March 31, 2023 |
$ | 5,847,116 | ||
|
Client inflows |
1,795,441 | |||
|
Client outflows |
(1,330,343 | ) | ||
|
Net flows |
465,098 | |||
|
Market appreciation |
577,478 | |||
|
As of December 31, 2023 |
$ | 6,889,692 | ||
|
Client inflows |
473,804 | |||
|
Client outflows |
(584,269 | ) | ||
|
Net flows |
(110,465 | ) | ||
|
Market appreciation |
578,423 | |||
|
As of March 31, 2024 |
$ | 7,357,650 | ||
Service fees and other income. Service fees includes fees for deposit-related services, loan servicing, third-party administration fees, and other income. Service fees and other income for the three months ended March 31, 2024 decreased $266,000, or 8.3%, compared to the same period in the prior year. The decrease was the result of decreases in other income from the recovery of unclaimed funds at Sanders Morris of $264,000 during the three months ended March 31, 2023, a decrease in pension administration fees of $14,000, a decrease in loan service fees of $28,000, and a decrease in consulting fees at Sanders Morris Harris of $13,000, offset by an increase in T Bank service fees of $48,000, primarily from the Bank’s Integra factoring division, and other immaterial fluctuations netting to an increase of $5,000.
Rental income. The Company receives monthly rental income from tenants leasing space in the Bank building. Rental income for the three months ended March 31, 2024 increased $39,000, or 78.0%, compared to the same period in the prior year. The increase was related to concessions given to tenants during the three months ended March 31, 2023.
Non-Interest Expense
The components of non-interest expense were as follows for the periods indicated:
|
Three Months Ended March 31, |
||||||||
|
(In thousands) |
2024 |
2023 |
||||||
|
Salaries and employee benefits |
$ | 8,642 | $ | 7,863 | ||||
|
Occupancy and equipment |
533 | 470 | ||||||
|
Trust expenses |
610 | 552 | ||||||
|
Brokerage and advisory direct costs |
520 | 471 | ||||||
|
Professional fees |
434 | 523 | ||||||
|
Data processing |
282 | 208 | ||||||
|
Other |
1,753 | 1,581 | ||||||
|
Total |
$ | 12,774 | $ | 11,668 | ||||
Total non-interest expense for the three months ended March 31, 2024 increased $1.1 million, or 9.5%, compared to the same period in the prior year, due to increases in salaries and employee benefits, occupancy expense, trust expense, brokerage expense, data processing expense and other expenses, which were partially offset by decreases professional fees expense. Material changes in the various components of non-interest income are discussed below.
Salaries and employee benefits. Salaries and employee benefits for the three months ended March 31, 2024 increased $779,000, or 9.9%, compared to the same period in the prior year. The increase was primarily due to increases in salaries and related payroll expenses in our Banking segment of $782,000, due to increases in staff headcount and related signing bonuses, primarily in the Bank’s SBA division, as well as cost of living and merit increases. The increase in salaries and employee benefits in the HoldCo segment of $483,000 was partially offset by the decrease in Tectonic Advisors, within the Other Financial Services segment, of $427,000, which was due to the technology and accounting teams moving from Tectonic Advisors to HoldCo effective with the third quarter of 2023. The balance of the increase of approximately $56,000 is due to an increase in headcount and merit increases, and insurance benefit premiums. Within the Other Financial Services segment, salaries and employee benefits at the Bank’s trust department and Nolan division increased $85,000 and $138,000, respectively, due to an increase in headcount, staffing changes, and merit and cost of living increases, as well as increase in benefit premiums. These increases were offset by a decrease of $282,000 at Sanders Morris, due to a decrease in payroll taxes of $122,000, due to an over-accrual of payroll taxes at year-end, a decrease in commission and bonuses of $93,000, a decrease in other employee benefits of $41,000 and other net immaterial decreases of $26,000.
Occupancy and equipment expense. Occupancy and equipment expenses for the three months ended March 31, 2024 increased $63,000, or 13.4%, compared to the same period in the prior year. The increase was related to increases totaling $41,000 at the Holdco segment, primarily due to the technology team moving from the Other Financial Services segment to the Holdco segment effective with the third quarter of 2023. The increase in the Other Financial Services segment of $12,000 is due to an increase in rent and common area maintenance at Sanders Morris of $34,000, offset by a decrease in depreciation of $7,000, a decrease in parking expense of $2,000, and other immaterial decreases of $2,000. This increase was offset by a decrease at the Bank’s Nolan division of $7,000 primarily from decreases in telephone and internet expense of $3,000 and in depreciation expense of $4,000, and at Tectonic Advisors of $5,000, from individually immaterial decreases. The increase in the Banking segment of $10,000 is due to an increase in depreciation of $5,000 and an increase is facility expenses of $6,000, offset by a decrease in telephone and internet expense of $2,000 for the three months ended March 31, 2024 over the same period in the prior year.
Trust expenses. Trust expenses are incurred in our other financial services segment, and include advisory fees paid on the common trust funds managed by the Company based on the value of the assets held in custody. Volatility in the bond and equity markets impacts the market value of trust assets and the related expenses. The monthly advisory fees are assessed based on the market value of assets at month-end. Trust expenses for the three months ended March 31, 2024 increased $58,000, or 10.5%, compared to the same period in the prior year due to an increase in the value of trust assets for the three months ended March 31, 2024 over the value during the same period in the prior year.
Brokerage and advisory direct costs. Brokerage and advisory direct costs for the three months ended March 31, 2024 increased $49,000, or 10.4%, compared to the same period in the prior year. The increase for the three months ended March 31, 2024 related primarily to increases in clearing fees and advisory clearing fees at Sanders Morris of $55,000, offset by a decrease in information services of $3,000 and other immaterial decreases of $3,000.
Professional fees. Professional fees, which include legal, consulting, audit and tax fees, for the three months ended March 31, 2024 decreased $89,000, or 17.0%, compared to the same period in the prior year. The decreases were the result of increases of $64,000 and $29,000 in our Banking and HoldCo segments, respectively, offset by a decrease of $4,000 in our Other Financial Services segment. The decrease in the Banking segment was primarily due to a decrease in legal of $60,000, primarily for loan collections and various other matters, including our regulatory filings and a $6,000 decrease in audit and tax consulting fees, offset by an increase in professional fees of $2,000. The decrease in the Holdco segment was primarily due to a decrease in audit and tax consulting of $65,000, offset by an increase in professional fees of $36,000. The increase in our Other Financial Services segment was primarily due to an increase in professional fees of $9,000 and $6,000 at Tectonic and the Bank’s Nolan division, respectively, offset by a decrease in professional fees of $9,000 at Sanders Morris, as well as other immaterial fluctuations netting to a $2,000 increase compared to the same period in the prior year.
Data processing. Data processing includes costs related to the Company’s operating systems. Data processing expenses for the three months ended March 31, 2024 increased $74,000, or 35.6%, compared to the same period in the prior year. The increase was the result of a increase of $66,000 in our Banking segment and an increase of $8,000 in our Other Financial Services segment. The increase in our Banking segment resulted from a reduction of discounts provided by the Bank’s core system vendor related to the change in the core system during 2021. The increase in our Other Financial Services segment was related to an increase in costs at the Bank’s trust division of $8,000.
Other. Other expenses include costs for insurance, Federal Deposit Insurance Corporation (“FDIC”) and Office of the Comptroller of the Currency (“OCC”) assessments, director fees, regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expenses for the three months ended March 31, 2024 increased $172,000, or 10.9%, compared to the same period in the prior year. The increase included increases of $176,000 and $60,000 in our Banking and HoldCo segments, respectively, offset by a decrease in our Other Financial Services segment of $64,000. The increase of $176,000 in our in our Banking segment included an increase of $78,000 for advertising and marketing expense, an increase of $29,000 in software licenses, an increase of $26,000 in regulatory expenses, an increase of $17,000 in travel expenses, an increase of $16,000 in bank charges, and other immaterial increases of $9,000. The increase of $60,000 in our Holdco segment was primarily the result of an increase of $26,000 in software licenses related to technology initiatives across the company, an increase of $14,000 in postage, related to SBA, an increase of $12,000 in travel expenses, as well as other immaterial fluctuations netting to a $7,000 increase compared to the same period in the prior year. The decrease of $64,000 in the Other Financial Services segment was related to a decrease of $95,000 in advertising and marketing, due to changes in our fee sharing agreement with Cain Waters during 2023, a decrease of $35,000 in software, licenses, and computer services, a decrease of $26,000 in donations, a decrease of $14,000 in insurance premiums, offset by an increase in errors and commissions of $109,000, and a net decrease in immaterial accounts of $3,000.
Income Taxes
Income tax expense for the three months ended March 31, 2024 was approximately $848,000, for an effective income tax rate of 21.7%, compared to $1.3 million, for an effective income tax rate of 21.4% for the same period in the prior year. The effective tax rates is affected by the income tax effects of nondeductible expenses related to stock options among other things.
Segment Reporting
We have three operating segments: Banking, Other Financial Services and HoldCo. Our primary operating segments are Banking and Other Financial Services.
Our Banking segment includes both commercial and consumer banking services, and factoring services through the Bank’s Integra division. Commercial banking services are provided primarily to small to medium-sized businesses and their employees, which includes a wide array of lending and cash management products. Consumer banking services include lending and depository services. Factoring services are provided primarily to small over-the-road trucking businesses.
Our Other Financial Services segment includes Tectonic Advisors, Sanders Morris, the Bank’s trust division, which includes the Bank’s Nolan division and a participant directed recordkeeping team, and HWG. Through these business divisions, we offer investment advisory and brokerage services to individuals and businesses, private trust services, and financial management services, including personal wealth management, retirement plan design and administrative services, and insurance brokerage services.
Our HoldCo segment includes the Bank’s immediate parent and related subordinated debt, as well as operations of the financial holding company that serves as parent for the group overall. Our principal source of revenue is dividends from our subsidiaries.
The following table presents key metrics related to our segments as of the periods indicated:
|
Three Months Ended March 31, 2024 |
||||||||||||||||
|
(In thousands) |
Banking |
Other Financial Services |
HoldCo |
Consolidated |
||||||||||||
|
Revenue (1) |
$ | 7,789 | $ | 10,134 | $ | (323 | ) | $ | 17,600 | |||||||
|
Income (Loss) Before Taxes |
$ | 1,804 | $ | 3,631 | $ | (1,526 | ) | $ | 3,909 | |||||||
|
Three Months Ended March 31, 2023 |
||||||||||||||||
|
(In thousands) |
Banking |
Other Financial Services |
HoldCo |
Consolidated |
||||||||||||
|
Revenue (1) |
$ | 8,192 | $ | 9,817 | $ | (265 | ) | $ | 17,744 | |||||||
|
Income (Loss) Before Taxes |
$ | 4,016 | $ | 2,895 | $ | (913 | ) | $ | 5,998 | |||||||
|
(1) |
Net interest income plus non-interest income |
Banking
Income before taxes for the three months ended March 31, 2024 decreased $2.2 million, or 55.1%, compared to the same period in the prior year. The decrease was primarily the result of a $970,000 increase in non-interest expense, a $839,000 increase in the provision for credit losses and a $520,000 decrease in non-interest income, partly offset by a $117,000 increase net interest income.
Net interest income increased $117,000, or 1.6%, for the three months ended March 31, 2024, compared to the same period in the prior year. The increase in net interest income was primarily due to increases in the average volume of and average yield on loans, interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and securities. The impact of these items was partly offset by increases in the average interest volume of and cost of interest-bearing liabilities. The average yield on interest earning assets was impacted by changes in market interest rates and changes in the mix of interest-earning assets. See “Net Interest Income,” above, for further analysis of net interest income.
The provision for credit losses increased $839,000 for the three months ended March 31, 2024, compared to the same period in the prior year. The increase was primarily a result of increased specific reserves and net loan charge-offs during the three months ended March 31, 2024. See “Provision for Credit Losses,” above, and “Allowance for Credit Losses,” below, for further analysis of credit loss provision related to loans and off-balance sheet commitments.
Non-interest income for the three months ended March 31, 2024 decreased $520,000, or 58.8%, compared to the same period in the prior year primarily due to a $581,000 gain on sale of a USDA loan during the three months ended March 31, 2023, partly offset by a $22,000 increase in deposit and factoring fees and a $39,000 increase in rental income related to concessions given to tenants during the three months ended March 31, 2023. See the analysis of non-interest income included in the section captioned “Non-Interest Income” included elsewhere in this discussion.
Non-interest expense for the three months ended March 31, 2024 increased $970,000, or 23.7%, compared to the same period in the prior year. Salaries and employee benefits increased $782,000 primarily related to increases in annual merit and market increases, and increases in staff due to the expansion of our SBA lending and Integra factoring. Occupancy and equipment expense increased $10,000 due primarily to increase in facilities repairs and maintenance and lease expense. Professional fees decreased $64,000 primarily due to higher legal fees expensed for the three months ended March 31, 2023 related to loan collections and various other matters. Data processing expense increased $66,000 as a result of a reduction of discounts provided by the Bank’s core system vendor related to the change in the core system during 2021. Other expenses increased $176,000 which included increases of $81,000 for advertising and marketing costs, $29,000 for software development primarily in our lending and Integra divisions and $28,000 for FDIC insurance premiums related to increase in the base rate during the second quarter of 2023, among other things. See “Non-Interest Expense,” above, for further analysis of non-interest expense.
Other Financial Services
Income before taxes for the three months ended March 31, 2024 increased $736,000, or 25.4%, compared to the same period in the prior year. The increase was the result of an increase in noninterest income of $317,000 and a decrease in noninterest expense of $419,000 compared to the three months ended March 31, 2023.
Non-interest income for the three months ended March 31, 2024 increased $317,000, or 3.2% compared to the same period in the prior year. The increase for the three months ended March 31, 2024 was primarily the result of increases in Trust income and Advisory income of $226,000 and $487,000, respectively. The increases in trust and advisory income are related to increases in assets under management compared to those for the three months ended March 31, 2024, which were the result of net inflows of assets under custody and management, and increases in asset values from market appreciation. These increases were offset by decreases in brokerage income and service fees and other income of $108,000 and $288,000, respectively, compared to the same period in the prior year. The decrease in brokerage income was the result of a decrease of $275,000 in margin lending, a decrease of $41,000 in insurance commissions, and a decrease in federated rebates of $11,000, and other individually immaterial decreases of $8,000. These decreases were partially offset by increases in brokerage commissions from general over-the counter trading of $185,000, an increase in private placements of $27,000, a decrease in the cost of trading errors of $15,000. The decrease in service fees and other income is due to a decrease in third party administration fees from the Bank’s Nolan division of $14,000, and a decrease in consulting fees, primarily a Sanders Morris, of $13,000, and a recovery of unclaimed funds at Sanders Morris of $264,000 during the three months ended March 31, 2023, offset by an increase in other income of $3,000. See ”Non-Interest Income,” above, for further analysis of non-interest income.
Non-interest expense for the three months ended March 31, 2024 decreased $419,000, or 6.1%, compared to the same period in the prior year. The decrease was primarily related to decreases in salaries and employee benefits of $486,000 and in other expenses of $64,000. These decreases were offset by increases in trust expense of $58,000, in Brokerage and advisory direct costs of $49,000, and in occupancy and equipment expense of $12,000, as well as less material increases in professional fees and data processing expense, totaling $11,000. The decrease in salaries and employee benefits was related to a decrease of $427,000 at Tectonic Advisors primarily from the transition of accounting and technology personnel to Tectonic Financial within the HoldCo segment, and a decrease of $283,000 at Sanders Morris due to a decrease in salaries and incentive bonuses and stock compensation expense of $310,000 and a decrease in benefits expenses of $41,000, offset by an increase in bonus earnouts of $68,000. These decreases in salaries and benefits were offset by increases of $85,000 at the Bank’s trust department and of $138,000 at the Bank’s Nolan division. These increases related to an increase in headcount, staffing changes, and merit and cost of living increases, as well as increases in benefit premiums. The decrease in other expenses related to a decrease in marketing expense of $95,000, due to changes in our fee sharing agreement with Cain Watters during 2023, and decreases in software licenses of $20,000, and in computer services of $15,000, which were primarily the result of a shifting of these costs to the HoldCo division. Donations expense decreased by $26,000, related to timing differences, insurance expense decreased $14,000, related to decreases in premiums for certain of our business coverages, and there were $26,000 of other individually immaterial decreases. These decreases were offset by an increase in costs related to errors and omissions of $109,000 from a non-recurring trading error at Tectonic Advisors, as well as an increase in employee recruitment costs of $22,000 across Tectonic Advisors, Sanders Morris, and the Bank’s Nolan division. The increase in trust expense related to increases in assets under management, and the increase in brokerage and advisory direct costs was driven by an increase in clearing fees at Sanders Morris of $55,000, which was offset by individually immaterial decreases totaling $6,000. The decrease in occupancy and equipment expense of $12,000 was driven by an increase in rent expense at Sanders Morris. See ”Non-Interest Expense,” above, for further analysis of non-interest expense.
HoldCo
The loss before taxes for the three months ended March 31, 2024 increased $613,000, or 67.1%, compared to the same period in the prior year. Interest expense increased by $58,000, solely due to increases in interest rates on our subordinated debt. Non-interest expense increased $555,000 for the three months ended March 31, 2024, primarily due to increases in salaries and employee benefits of $483,000 related to the transition of accounting and technology personnel to Tectonic Financial, which is within the Company’s HoldCo segment, from Tectonic Advisors, whose activity is within the Company’s Other Financial Services segment, to better reflect the function of those personnel given they serve departments across the Company, as well as an increase in headcount. In addition, occupancy and equipment expense increased $41,000, and other expenses increased by $60,000, respectively. The increases in occupancy and equipment expense were related primarily to increases in rent and common area maintenance costs and parking expense at Tectonic Financial’s Houston office, as well as repairs and maintenance costs related to renovation of the technology team’s workspace. The decrease in the Holdco segment was primarily due to a decrease in audit and tax consulting of $65,000, related primarily to higher audit fees during the three months ended March 31, 2023 compared to the three months ended March 31, 2024, partially offset by an increase in professional fees of $36,000, primarily due to a reversal of a 2022 accrual for $20,000 that reduced professional fees for the three months ended March 31, 2023. See “Non-Interest Income,” above, and “Non-Interest Expense,” above, for further analyses of non-interest income and non-interest expense, respectively.
Financial Condition
Investment Securities
The primary purpose of the Company’s investment portfolio is to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against borrowings, and to control interest rate risk. In managing the portfolio, the Company seeks to attain the objectives of safety of principal, liquidity, diversification, and maximized return on investment.
As of March 31, 2024, securities available for sale consisted of U.S. Treasuries, U.S. government agency securities and mortgage-backed securities guaranteed by U.S. government agencies. Securities held to maturity consist of Property Assessed Clean Energy (“PACE”) and PID/TIRZ investments. These investment contracts or bonds located in Texas, California and Florida, originate under a contractual obligation between the property owners, the local county or city administration, and a third-party administrator and sponsor. PACE assessments are created to fund the purchase and installation of energy saving improvements to the property such as solar panels. PID/TIRZ assessments are used to pay for the development costs of a residential subdivision. Generally, as a property assessment, the total assessment is repaid in installments over a period of 5 to 32 years by the then current property owner(s). Each installment is collected by the County or City Tax Collector where the property is located. The assessments are an obligation of the property.
Securities, restricted consisted of FRB stock, having an amortized cost and fair value of $2.2 million as of March 31, 2024 and December 31, 2023, and FHLB stock, having an amortized cost and fair value of $2.0 million as of March 31, 2024 and December 31, 2023, respectively.
The following table presents the amortized cost and fair values of the Company’s securities portfolio as of the dates indicated:
|
As of March 31, 2024 |
As of December 31, 2023 |
|||||||||||||||
|
(In thousands) |
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
||||||||||||
|
Securities available for sale: |
||||||||||||||||
|
U.S. Treasuries |
$ | 3,928 | $ | 3,918 | $ | 3,906 | $ | 3,894 | ||||||||
|
U.S. government agencies |
15,630 | 13,529 | 15,644 | 13,627 | ||||||||||||
|
Mortgage-backed securities |
7,272 | 6,902 | 5,731 | 5,456 | ||||||||||||
|
Total securities available for sale |
$ | 26,830 | $ | 24,349 | $ | 25,281 | $ | 22,977 | ||||||||
|
Securities held to maturity: |
||||||||||||||||
|
Property assessed clean energy |
$ | 1,324 | $ | 1,347 | $ | 1,326 | $ | 1,254 | ||||||||
|
Public improvement district/TIRZ |
22,895 | 22,898 | 22,868 | 22,595 | ||||||||||||
|
Total securities held to maturity |
$ | 24,219 | $ | 24,245 | $ | 24,194 | $ | 23,849 | ||||||||
|
Securities, restricted: |
||||||||||||||||
|
Other |
$ | 4,203 | $ | 4,203 | $ | 4,176 | $ | 4,176 | ||||||||
The Company evaluates all available for sale securities in unrealized loss positions to determine if any securities resulted from credit factors or other factors. In making this assessment, the Company considers the underlying risk characteristics, including credit ratings, and other qualitative factors for each security type in the portfolio. The issuers of these securities are U.S government agencies and continue to make timely principal and interest payments under the contractual terms of the securities. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. Due to the low risk in these U.S. government guaranteed securities, no allowance for credit losses for available-for-sale securities was recognized as of March 31, 2024.
The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of securities available for sale and securities held to maturity as of March 31, 2024. Yields are calculated based on amortized cost. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities classified as securities, restricted include stock in the FRB and the FHLB, which have no maturity date. These securities have been included in the total column only and are not included in the total yield.
|
One Year or Less |
After One Year Through Five Years |
After Five Years Through Ten Years |
After Ten Years |
Total | ||||||||||||||||||||||||||||||||||||
|
(In thousands, except percentages) |
Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
Amount |
Yield |
||||||||||||||||||||||||||||||
|
Securities available for sale: |
||||||||||||||||||||||||||||||||||||||||
|
U.S. Treasuries |
$ | 3,928 | 4.20 | % | $ | - | - | % | $ | - | - | % | $ | - | - | % | $ | 3,928 | 4.20 | % | ||||||||||||||||||||
|
U.S. government agencies |
- | - | % | 11,997 | 3.62 | % | 590 | 1.68 | % | 3,043 | 0.94 | % | 15,630 | 0.94 | % | |||||||||||||||||||||||||
|
Mortgage-backed securities |
10 | 3.32 | % | 2,488 | 2.67 | % | 1,170 | 4.90 | % | 3,604 | 3.65 | % | 7,272 | 3.79 | % | |||||||||||||||||||||||||
|
Total |
$ | 3,938 | 4.20 | % | $ | 14,485 | 1.42 | % | $ | 1,760 | 2.32 | % | $ | 6,647 | 2.62 | % | $ | 26,830 | 2.19 | % | ||||||||||||||||||||
|
Securities held to maturity: |
||||||||||||||||||||||||||||||||||||||||
|
Property assessed clean energy |
$ | - | - | % | $ | - | - | % | $ | 366 | 6.87 | % | $ | 958 | 7.24 | % | $ | 1,324 | 7.14 | % | ||||||||||||||||||||
|
Public improvement district/TIRZ |
- | - | % | 1,447 | 4.12 | % | - | - | % | 21,448 | 6.27 | % | 22,895 | 6.13 | % | |||||||||||||||||||||||||
|
Total |
$ | - | - | % | $ | 1,447 | 4.12 | % | $ | 366 | 6.87 | % | $ | 22,406 | 6.32 | % | $ | 24,219 | 6.19 | % | ||||||||||||||||||||
Loan Portfolio Composition
Total loans excluding allowance for credit losses, increased $37.3 million to $538.4 million at March 31, 2024, compared to $501.1 million at December 31, 2023. The increase includes $34.4 million for SBA loans, $4.7 million increase in factored receivables, partly offset by a $1.5 million decrease in real estate loans and $270,000 decrease in consumer loans. SBA loans comprise the largest group of loans in our portfolio totaling $303.4 million, or 56.3%, of the total loans at March 31, 2024, compared to $268.9 million, or 53.7% of the total loans at December 31, 2023. Real estate loans totaled $120.1 million, or 22.3%, of the total loans at March 31, 2024, compared to $121.7 million, or 24.3% of the total loans at December 31, 2023.
The following table sets forth the composition of our loans held for investment as of the dates indicated:
|
(In thousands, except percentages) |
March 31, 2024 |
December 31, 2023 |
||||||||||||||
|
Commercial and industrial |
$ | 82,491 | 15.3 | % | $ | 82,483 | 16.5 | % | ||||||||
|
Consumer installment |
630 | 0.1 | 900 | 0.2 | ||||||||||||
|
Real estate – residential |
9,260 | 1.7 | 8,181 | 1.6 | ||||||||||||
|
Real estate – commercial |
73,683 | 13.7 | 68,792 | 13.7 | ||||||||||||
|
Real estate – construction and land |
37,153 | 7.0 | 44,663 | 8.9 | ||||||||||||
|
SBA 7(a) guaranteed |
179,007 | 33.2 | 162,144 | 32.4 | ||||||||||||
|
SBA 7(a) unguaranteed |
68,504 | 12.7 | 64,858 | 12.9 | ||||||||||||
|
SBA 504 |
55,854 | 10.4 | 41,906 | 8.4 | ||||||||||||
|
USDA |
2,125 | 0.4 | 2,124 | 0.4 | ||||||||||||
|
Factored Receivables |
29,735 | 5.5 | 25,044 | 5.0 | ||||||||||||
|
Total Loans |
$ | 538,442 | 100.0 | % | $ | 501,095 | 100.0 | % | ||||||||
|
Maturity Distribution of Loan Portfolio at March 31, 2024 |
||||||||||||||||||||
|
(In thousands) |
One Year |
Over One |
Over Five |
Over Fifteen Years |
Total Loans Receivable |
|||||||||||||||
|
Commercial and industrial |
$ | 5,722 | $ | 13,159 | $ | 63,610 | $ | - | $ | 82,491 | ||||||||||
|
Consumer installment |
155 | 475 | - | - | 630 | |||||||||||||||
|
Real estate – residential |
200 | 7,851 | - | 1,209 | 9,260 | |||||||||||||||
|
Real estate – commercial |
32,966 | 34,986 | 5,731 | - | 73,683 | |||||||||||||||
|
Real estate – construction and land |
35,952 | 1,201 | - | - | 37,153 | |||||||||||||||
|
SBA 7(a) guaranteed |
160,820 | 15,999 | 1,309 | 879 | 179,007 | |||||||||||||||
|
SBA 7(a) unguaranteed |
60,442 | 7,208 | 320 | 534 | 68,504 | |||||||||||||||
|
SBA 504 |
29,621 | 23,747 | 2,486 | - | 55,854 | |||||||||||||||
|
USDA |
2,125 | - | - | - | 2,125 | |||||||||||||||
|
Factored Receivables |
29,735 | - | - | - | 29,735 | |||||||||||||||
|
Total |
$ | 357,738 | $ | 104,626 | $ | 73,456 | $ | 2,622 | $ | 538,442 | ||||||||||
|
Loans Due After One Year at March 31, 2024 |
||||||||||||
|
(In thousands) |
Fixed Rate |
Floating or Adjustable Rate |
Total |
|||||||||
|
Commercial and industrial |
$ | 74,405 | $ | 2,364 | $ | 76,769 | ||||||
|
Consumer installment |
475 | - | 475 | |||||||||
|
Real estate – residential |
7,600 | 1,460 | 9,060 | |||||||||
|
Real estate – commercial |
7,320 | 33,397 | 40,717 | |||||||||
|
Real estate – construction and land |
993 | 208 | 1,201 | |||||||||
|
SBA 7(a) guaranteed |
3,997 | 14,190 | 18,187 | |||||||||
|
SBA 7(a) unguaranteed |
1,578 | 6,484 | 8,062 | |||||||||
|
SBA 504 |
- | 26,233 | 26,233 | |||||||||
|
USDA |
- | - | - | |||||||||
|
Factored Receivables |
- | - | - | |||||||||
|
Total |
$ | 96,368 | $ | 84,336 | $ | 180,704 | ||||||
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is less than their average contractual terms due to prepayments.
Non-performing Assets
Our primary business segments are Banking and Other Financial Services, and as outlined above, the Banking segment’s primary business is lending. That activity entails potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers and factor clients which are beyond our control. While we have instituted underwriting guidelines and policies and credit review procedures to protect us from avoidable credit losses, some losses will inevitably occur.
Loans are considered past due when principal and interest payments have not been received as of the date such payments are contractually due. Loans are placed on non-accrual status when management has concerns relating to the ability to collect the loan interest and generally when such loans are 90 days or more past due.
Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for possible loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties.
Nonperforming assets include nonaccrual loans, accruing loans and factored receivables greater than 90 days past due, and foreclosed assets. The following table sets forth certain information regarding non-performing loans by type, including ratios of such loans to total assets as of the dates indicated:
|
March 31, 2024 |
December 31, 2023 |
|||||||||||||||
|
(In thousands, except percentages) |
Amount |
Loan Category to Total Assets |
Amount |
Loan Category to Total Assets |
||||||||||||
|
Non-accrual loans: |
||||||||||||||||
|
Commercial and industrial |
$ | 691 | 0.13 | % | $ | 93 | 0.02 | % | ||||||||
|
Real estate–- residential |
125 | 0.02 | 128 | 0.02 | ||||||||||||
|
SBA guaranteed |
3,238 | 0.60 | 1,951 | 0.39 | ||||||||||||
|
SBA unguaranteed |
910 | 0.17 | 251 | 0.05 | ||||||||||||
|
Total non-accrual loans |
4,964 | 0.92 | 2,423 | 0.48 | ||||||||||||
|
Real estate – residential past due 90 days |
- | - | - | - | ||||||||||||
|
Factored receivables past due 90 days |
139 | 0.03 | 147 | 0.03 | ||||||||||||
|
Foreclosed assets |
- | - | - | - | ||||||||||||
|
Total non-performing assets |
$ | 5,103 | 0.95 | % | $ | 2,570 | 0.51 | % | ||||||||
Allowance for Credit Losses
As discussed in Note 1 – Organization and Significant Accounting Policies in the accompanying notes to consolidated financial statements, our policies and procedures related to accounting for credit losses changed on January 1, 2023 in connection with the adoption of the CECL methodology as codified in ASC 326. In the case of loans and securities, allowances for credit losses are contra-asset valuation accounts, calculated in accordance with ASC 326, that are deducted from the amortized cost basis of these assets to present the net amount expected to be collected. When management deems all or a portion of a loan to be uncollectible, the appropriate amount is charged-off against the allowance. Subsequent recoveries, if any, are credited to the allowance. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of other liabilities in our consolidated balance sheets. The amount of each allowance account represents management’s best estimate of CECL on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting policies, refer to Note 1 – Organization and Significant Accounting Policies and Note 3–- Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statements.
The Company uses the open pool life method to estimate expected losses for all of the Company’s loan pools. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council, except for the dental, SBA and USDA loans, are segregated in separate pools. For dental and SBA 7(a) loans, the Company adjust the pool life for expected prepayment speeds.
For all loan pools, management has determined two years represents a reasonable and supportable forecast period and reverts to a historical loss rate over two years on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the two year forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics. See the discussion of “Q-Factors,” below.
The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The allowance for credit losses for each segment is measured through the use of the open pool method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Management qualitatively adjusts model results for risk factors (“Q-Factor”) that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factors and other qualitative adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) staff experience; (iii) changes in volume and trends in classified loans, delinquencies and nonaccruals; (iv) concentration risk; (v) trends in underlying collateral values; (vi) external factors such as competition, legal and regulatory environment; and (vii) economic conditions.
Upon the adoption of ASC 326 effective on January 1, 2023, the total amount of the allowance for credit losses for loans estimated using the CECL methodology increased $1.4 million compared to the total amount of the allowance for credit losses for loans estimated as of December 31, 2022 using the prior incurred loss model under GAAP.
The following table sets forth the allocation of the allowance for credit losses as of the date indicated and the percentage of allocated possible loan losses in each category to total gross loans as of the dates indicated:
|
(In thousands, except percentages) |
March 31, 2024 |
December 31, 2023 |
||||||||||||||
|
Allocated: |
Amount |
Loan Category to Gross Loans |
Amount |
Loan Category to Gross Loans |
||||||||||||
|
Commercial and industrial |
$ | 2,231 | 15.3 | % | $ | 2,495 | 16.5 | % | ||||||||
|
Consumer installment |
15 | 0.1 | 18 | 0.2 | ||||||||||||
|
Real estate – residential |
91 | 1.7 | 71 | 1.6 | ||||||||||||
|
Real estate – commercial |
746 | 13.7 | 616 | 13.7 | ||||||||||||
|
Real estate – construction and land |
142 | 7.0 | 143 | 8.9 | ||||||||||||
|
SBA |
2,814 | 56.3 | 2,484 | 53.7 | ||||||||||||
|
USDA |
22 | 0.4 | 19 | 0.4 | ||||||||||||
|
Factored Receivables |
669 | 5.5 | 462 | 5.0 | ||||||||||||
|
Total allowance for credit losses |
$ | 6,730 | 100.0 | % | $ | 6,308 | 100.0 | % | ||||||||
The table below presents a summary of the Company’s net loan loss experience and provisions to the allowance for credit losses for the periods indicated:
|
As of and for the Three Months Ended |
||||||||
|
March 31, |
||||||||
|
(In thousands, except percentages) |
2024 |
2023 | ||||||
|
Average total loans outstanding |
$ | 540,998 | $ | 479,498 | ||||
|
Gross loans held for investment outstanding at end of period |
$ | 538,442 | $ | 455,186 | ||||
|
Allowance for credit losses at beginning of period |
$ | 6,308 | $ | 4,513 | ||||
|
Impact of adopting ASC 326 |
- | 1,390 | ||||||
|
Provision for credit losses |
773 | 43 | ||||||
|
Charge offs: |
||||||||
|
SBA 7(a) |
56 | - | ||||||
|
Factored receivables |
357 | 109 | ||||||
|
Total charge-offs |
413 | 109 | ||||||
|
Recoveries: |
||||||||
|
SBA 7(a) |
13 | 4 | ||||||
|
Factored receivables |
49 | 32 | ||||||
|
Total recoveries |
62 | 36 | ||||||
|
Net charge-offs |
(351 | ) | (73 | ) | ||||
|
Allowance for credit losses at end of period |
$ | 6,730 | $ | 5,873 | ||||
|
Ratio of allowance for loans to end of period loans |
1.25 | % | 1.29 | % | ||||
|
Ratio of net charge-offs to average loans |
0.07 | % | 0.02 | % | ||||
Sources of Funds
General
Deposits, loan and investment security repayments and prepayments, proceeds from the sale of securities, and cash flows generated from operations are the primary sources of our funds for lending, investing, and other general purposes. Loan repayments are generally a relatively stable source of funds, while deposit inflows and outflows tend to fluctuate with prevailing interest rates, markets and economic conditions, and competition.
Deposits
Deposits are attracted principally from our primary geographic market area with the exception of time deposits, which, due to the Company’s attractive rates, are attracted from across the nation. The Company offers a broad selection of deposit products, including demand deposit accounts, NOW accounts, money market accounts, regular savings accounts, term certificates of deposit and retirement savings plans (such as IRAs). Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit, and the associated interest rates. Management sets the deposit interest rates periodically based on a review of deposit flows and a survey of rates among competitors and other financial institutions. The Company relies on customer service and long-standing relationships with customers to attract and retain deposits, and also on CD listing services. As of March 31, 2024, deposits includes a $50.0 million brokered deposit through an Insured Cash Sweep One-Way Buy agreement.
Total deposits increased $94.0 million, or 17.8%, to $620.9 million as of March 31, 2024, as compared to $526.9 million as of December 31, 2023. The following table sets forth our average deposit account balances, the percentage of each type of deposit to total deposits, and average cost of funds for each category of deposits for the periods indicated:
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For the three months ended March 31, |
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2024 |
2023 |
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(In thousands, except percentages) |
Average Balance |
Percent of Deposits |
Average Rate |
Average Balance |
Percent of Deposits |
Average Rate |
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Non-interest-bearing deposits |
$ | 63,886 | 11.0 | % | 0.00 | % | $ | 124,927 | 23.1 | % | 0.00 | % | ||||||||||||
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Savings and interest-bearing demand |
9,872 | 1.7 | 0.47 | 12,664 | 2.3 | 0.37 | ||||||||||||||||||
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Money market accounts |
148,354 | 25.6 | 5.18 | 120,178 | 22.3 | 3.48 | ||||||||||||||||||
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Time deposits |
358,457 | 61.7 | 5.25 | 282,365 | 52.3 | 3.54 | ||||||||||||||||||
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Total deposits |
$ | 580,569 | 100.00 | % | 4.57 | % | $ | 540,134 | 100.00 | % | 2.63 | % | ||||||||||||
The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit of $250,000 as of March 31, 2024:
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(In thousands) |
Over $250,000 |
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Maturing |
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|
Three months or less |
$ | 18,446 | ||
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Over three months to six months |
15,722 | |||
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Over six months to 12 months |
50,771 | |||
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Over 12 months |
13,330 | |||
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Total |
$ | 98,269 | ||
Estimated amount of uninsured deposits totaled approximately $59.5 million, or 9.6% of total deposits as of March 31, 2024.
Borrowings
The table below presents balances of each of the borrowing facilities as of the dates indicated:
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(In thousands) |
March 31, 2024 |
December 31, 2023 |
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Borrowings: |
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FHLB borrowings |
$ | - | $ | - | ||||
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FRB borrowings |
21,000 | - | ||||||
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Subordinated notes |
12,000 | 12,000 | ||||||
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Total |
$ | 33,000 | $ | 12,000 | ||||
The Company has a credit line with the FHLB with borrowing capacity of $54.9 million secured by commercial loans. The Company determines its borrowing needs and renews the advances accordingly at varying terms. The Company had no borrowings with FHLB as of March 31, 2024 and December 31, 2023.
The Company also has a credit line with the FRB with borrowing capacity of $41.3 million, secured by commercial loans. The Company had no borrowings under this line from the FRB as of March 31, 2024 and December 31, 2023.
As part of the BTFP, the FRB offered loans of up to one year in length to banks and other eligible depository institutions pledging U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral, which are assessed at par value. The Bank pledged AFS securities with par value of $21.2 million to provide additional liquidity to meet the needs of depositors as of March 31, 2024. The Company had $21.0 million borrowings related to the BTFP as of March 31, 2024.
As of March 31, 2024 and December 31, 2023, the Company also had subordinated notes totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an interest rate of three month CME Term SOFR plus a spread adjustment of 0.26161% plus 5.125%, with interest payable quarterly and maturing on July 20, 2027, at which all principal is due, and $4.0 million issued in 2018 bearing a fixed interest rate of three-month CME Term SOFR plus a spread adjustment of 0.26161% plus 4.348%, payable quarterly, and maturing on March 31, 2028. The subordinated notes are unsecured and subordinated in right of payment to the payment of our existing and future senior indebtedness and structurally subordinated to all existing and future indebtedness of our subsidiaries.
Capital Resources and Regulatory Capital Requirements
Shareholders’ equity increased $1.6 million, or 1.5%, to $108.5 million as of March 31, 2024, from $106.9 million as of December 31, 2023. The increase included net income of $3.1 million and $21,000 related to stock compensation expenses. The increases were partly offset by a $140,000 net after-tax increase in accumulated other comprehensive loss, the repurchase of common stock in the amount of $249,000 and dividends paid on the Series B preferred stock and paid on the common stock in the amounts of $388,000 and $710,000, respectively.
Together with the Bank, the Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and, accordingly, the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of March 31, 2024, the Company and the Bank met all capital adequacy requirements to which they were subject. As of March 31, 2024 and December 31, 2023, the Company met the definition of “well-capitalized” under the applicable regulations of the Federal Reserve and the Bank’s regulatory capital ratios were in excess of the capital conservation buffer and the levels established for “well-capitalized” institutions under the FDIC’s regulatory framework for prompt corrective action and the Basel III capital guidelines.
Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).
The following table presents our regulatory capital ratios, as well as those of the Bank, as of the dates indicated:
|
(In thousands, except percentages) |
March 31, 2024 |
December 31, 2023 |
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Amount |
Ratio |
Amount |
Ratio |
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Tectonic Financial, Inc. |
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Tier 1 Capital (to Average Assets) |
$ | 88,636 | 12.39 | % | $ | 86,847 | 13.97 | % | ||||||||
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Common Equity Tier 1 (to Risk Weighted Assets) |
71,386 | 15.24 | 69,597 | 15.74 | ||||||||||||
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Tier 1 Capital (to Risk Weighted Assets) |
88,636 | 18.92 | 86,847 | 19.65 | ||||||||||||
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Total Capital (to Risk Weighted Assets) |
94,506 | 20.18 | 92,385 | 20.90 | ||||||||||||
|
T Bank, N.A. |
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Tier 1 Capital (to Average Assets) |
$ | 89,972 | 12.72 | % | $ | 87,488 | 14.26 | % | ||||||||
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Common Equity Tier 1 (to Risk Weighted Assets) |
89,972 | 19.43 | 87,488 | 20.04 | ||||||||||||
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Tier 1 Capital (to Risk Weighted Assets) |
89,972 | 19.43 | 87,488 | 20.04 | ||||||||||||
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Total Capital (to Risk Weighted Assets) |
95,777 | 20.68 | 92,957 | 21.29 | ||||||||||||
In addition to the regulatory requirements of the federal banking agencies, Sanders Morris and Tectonic Advisors are subject to the regulatory framework applicable to registered investment advisors under the SEC’s Division of Investment Management.
Sanders Morris is regulated by FINRA, which, among other requirements, imposes minimums on its net regulatory capital. As of March 31, 2024, Sanders Morris is in compliance with its net regulatory capital requirement.
Liquidity
Our liquidity relates to our ability to maintain a steady flow of funds to support our ongoing operating, investing and financing activities. Our board of directors establishes policies and analyzes and manages liquidity to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. Liquidity management is viewed from a long-term and a short-term perspective as well as from an asset and liability perspective. We monitor liquidity through a regular review of loan and deposit maturities and forecasts, incorporating this information into a detailed projected cash flow model.
The Bank’s liquidity is monitored by its management, the Asset-Liability Committee and its board of directors who review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.
The Company’s primary sources of funds are retail, small business, custodial, wholesale commercial deposits, loan repayments, maturity of investment securities, other short-term borrowings, and other funds provided by operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions, and competition. The Company will maintain investments in liquid assets based upon management’s assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the asset/liability management program.
As of March 31, 2024 the Company had approximately $118.8 million held in an interest-bearing account at the FRB. The Company has the ability to borrow funds as members of the FHLB and the FRB. As of March 31, 2024, the Company’s borrowing capacity with the FHLB was $54.9 million based upon loan collateral pledged to the FHLB, of which none was utilized as of March 31, 2024.
The borrowing capacity on the discount line of credit with the FRB was $41.3 million, of which none was utilized as of March 31, 2024. During March 2023, the Federal Reserve created the BTFP, which was made available to banks in response to liquidity concerns in the United States banking system. The BTFP allows the whole par value of available for sale securities to be included as the collateral value. As of March 31, 2024, securities with a par value of $21.2 million were pledged to the Federal Reserve under this program, of which $21.0 million was borrowed against. In addition, the Company has approximately $177.1 million of SBA guaranteed loans held for investment that could be sold to investors.
Management believes that the Company has adequate liquidity to meet its obligations. However, if general economic conditions, potential recession in the United States and our market areas, the impacts related to or resulting from recent bank failures and any continuation of the recent uncertainty in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other mitigation efforts taken by government agencies in response thereto, increased competition for deposits and related changes in deposit customer behavior, changes in market interest rates, the persistence of the current inflationary environment in the United States and our market areas, or other events, cause these sources of external funding to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company’s operations and growth.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets. Our exposure to credit loss in the event of non-performance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We follow the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of credit extended is based on management’s credit evaluation of the customer and, if deemed necessary, may require collateral.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
As of March 31, 2024, we had commitments to extend credit and standby letters of credit of approximately $59.3 million and $162,000, respectively.
Allowance For Credit Losses–- Off-Balance-Sheet Credit Exposures. The allowance for credit losses for off-balance sheet credit exposures is calculated under the CECL model, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. Off-balance sheet credit exposures primarily consist of amounts available under outstanding commitments to extend credit and letters of credit detailed above. The allowance for credit losses for off-balance sheet credit exposures is estimated by loan segment at each balance sheet date using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur based on historical utilization rates. Upon adoption of ASC 326 on January 1, 2023, the impact of adoption was $238,000 to the allowance for credit losses for off-balance-sheet credit exposure. The allowance for credit losses on off-balance-sheet credit exposures totaled $337,000 and $192,000 at March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024 and 2023, we recognized a credit loss expense related to off-balance-sheet credit exposures totaling $144,000 and $35,000, respectively. Further information regarding our policies and methodology used to estimate the allowance for credit losses for off-balance-sheet credit exposures is presented in Note 11 – Commitments and Contingencies in the accompanying notes to consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability management policy provides management with guidelines for effective funds management and we have established a measurement system for monitoring the net interest rate sensitivity position.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage exposure to interest rates by structuring the balance sheet in the ordinary course of business. We use no off-balance-sheet financial instruments to manage interest rate risk.
Our exposure to interest rate risk is managed by the Bank’s Asset Liability Committee in accordance with policies approved by the Bank’s board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, liquidity, business strategies and other factors.
The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. We employ methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
On at least an annual basis, we run various stress tests to measure the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously, and ramped rates change over a twelve-month and twenty-four month horizon based upon parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Additionally, we run non-parallel simulation involving analysis of interest income and expense under various changes in the shape of the yield curve.
The following table summarizes the impact of an instantaneous, sustained simulated change in net interest income over a 12-month horizon as of March 31, 2024:
|
Change in Interest Rates (basis points) |
% Change in Net Interest Income |
||
|
+200 |
10.85 | ||
|
+100 |
5.47 | ||
|
-100 |
(6.15 |
) |
|
|
-200 |
(11.32 |
) |
We have found that, historically, interest rates on deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis, meaning that process by which we measure the gap between interest rate sensitive assets verses interest rate sensitive liabilities. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this Form 10-Q have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession. Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in market interest rates by the Federal Reserve generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, an evaluation was performed by the Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) were effective at the end of the period covered by this Form 10-Q.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2024 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of its business. Based on the information presently available, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business’s financial condition or results of operations of the Company on a consolidated basis.
Item 1A. Risk Factors.
In evaluating an investment in any of our securities, investors should consider carefully, among other things, information under the heading “Cautionary Notice Regarding Forward-Looking Statements” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-Q and the risk factors previously disclosed under the heading “Risk Factors” in Part I, Item 1A of our 2023 Annual Report on Form 10-K. Management believes there have been no material changes in the risk factors disclosed under Item 1A., “Risk Factors,” of the Company’s 2023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None during the quarter ended March 31, 2024.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the three months ended March 31, 2024, none of the directors or officers of the Company
Item 6. Exhibits and Financial Statement Schedules.
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Exhibit No. |
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Description of Exhibit |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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3.5 |
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31.1 |
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Rule 13a-14(a) Certification of Principal Executive Officer* |
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31.2 |
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Rule 13a-14(a) Certification of Principal Financial Officer* |
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32.1 |
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101.INS |
Inline XBRL Instance Document* |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document* |
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101.CAL |
Inline XBRL Taxonomy Extension Label Calculation Linkbase Document* |
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101.DEF |
Inline XBRL Taxonomy Definition Linkbase* |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document* |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase* |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* |
Filed herewith |
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** |
Furnished herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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TECTONIC FINANCIAL, INC. |
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Date: May 15, 2024 |
By: |
/s/ A. Haag Sherman |
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A. Haag Sherman Chief Executive Officer/Principal Executive Officer |
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By: |
/s/ Ken Bramlage |
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Ken Bramlage Executive Vice President and Chief Financial Officer/Principal Financial Officer |