tectonic20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-38910

TECTONIC FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Texas

82-0764846

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

16200 Dallas Parkway, Suite 190

Dallas, Texas 75248

(Address of principal executive offices)

(972) 720 - 9000

(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
Series B preferred stock, $0.01 par value per share	TECTP	The Nasdaq Stock Market, LLC

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. Yes ☒ No ☐

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 and post such files). Yes ☒ No ☐

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	☐

Non-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, 2022 was 7,062,319 shares.

TECTONIC FINANCIAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		Page
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	51

PART II. OTHER INFORMATION		52
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	52

SIGNATURES		53

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TECTONIC FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2022			December 31, 2021
(In thousands, except share amounts)	(Unaudited)
ASSETS
Cash and due from banks	$	6,092		$	10,203
Interest-bearing deposits		32,770			35,311
Federal funds sold		481			478
Total cash and cash equivalents		39,343			45,992
Securities available for sale		15,961			17,156
Securities held to maturity		19,639			19,673
Securities, restricted at cost		2,842			2,432
Securities, not readily marketable		100			100
Loans held for sale		25,480			33,762
Loans, net of allowance for loan losses of $4,354 and $4,152, respectively		422,028			424,595
Bank premises and equipment, net		4,708			4,729
Other real estate		1,079			1,079
Core deposit intangible, net		727			777
Goodwill		21,440			21,440
Deferred tax asset		569			405
Other assets		13,449			12,871
Total assets	$	567,365		$	585,011

LIABILITIES
Demand deposits:
Non-interest-bearing	$	102,422		$	88,876
Interest-bearing		145,408			147,909
Time deposits		196,324			207,384
Total deposits		444,154			444,169
Borrowed funds		13,200			34,521
Subordinated notes		12,000			12,000
Other liabilities		10,687			9,534
Total liabilities		480,041			500,224
Commitments and contingencies (see Note 11)

SHAREHOLDERS’ EQUITY

Preferred stock, 9.00% fixed to floating rate Series B non-cumulative, perpetual ($0.01 par value; 1,725,000 shares authorized, issued and outstanding at March 31, 2022 and December 31, 2021)		17			17
Common stock, $0.01 par value; 40,000,000 shares authorized; 7,071,953 and 7,061,953 shares issued at March 31, 2022 and December 31, 2021, respectively, and 7,062,319 and 7,061,953 shares outstanding at March 31, 2022 and December 31, 2021, respectively		71			71
Additional paid-in capital		50,306			50,176
Treasury stock, at cost; 9,634 shares as of March 31, 2022, and no shares as of December 31, 2021		(181	)		-
Retained earnings		38,307			34,851
Accumulated other comprehensive loss		(1,196	)		(328	)
Total shareholders’ equity		87,324			84,787
Total liabilities and shareholders’ equity	$	567,365		$	585,011

See accompanying notes to consolidated financial statements.

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TECTONIC FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended March 31,
(In thousands, except per share data and share amounts)	2022		2021
Interest Income
Loan, including fees	$	7,192	$	6,163
Securities		335		146
Interest-bearing deposits		22		5
Total interest income		7,549		6,314
Interest Expense
Deposits		650		661
Borrowed funds		242		289
Total interest expense		892		950
Net interest income		6,657		5,364
Provision for loan losses		327		428
Net interest income after provision for loan losses		6,330		4,936
Non-interest Income
Trust income		1,598		1,440
Advisory income		3,574		3,017
Brokerage income		2,471		2,564
Service fees and other income		2,216		2,306
Rental income		100		88
Total non-interest income		9,959		9,415
Non-interest Expense
Salaries and employee benefits		7,456		5,866
Occupancy and equipment		450		427
Trust expenses		598		564
Brokerage and advisory direct costs		528		506
Professional fees		401		450
Data processing		169		205
Other		1,357		775
Total non-interest expense		10,959		8,793
Income before Income Taxes		5,330		5,558
Income tax expense		1,045		1,260
Net Income		4,285		4,298
Preferred stock dividends		388		388
Net income available to common stockholders	$	3,897	$	3,910

Earnings per common share:
Basic	$	0.55	$	0.60
Diluted		0.53		0.59

Weighted average common shares outstanding		7,059,002		6,568,750
Weighted average diluted shares outstanding		7,311,075		6,618,840

See accompanying notes to consolidated financial statements.

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TECTONIC FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months Ended March 31,
(In thousands)	2022			2021
Net Income	$	4,285		$	4,298
Other comprehensive loss:
Change in unrealized loss on investment securities available for sale		(1,098	)		(291	)
Tax effect		(230	)		(62	)
Other comprehensive loss		(868	)		(229	)
Comprehensive Income	$	3,417		$	4,069

See accompanying notes to consolidated financial statements.

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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 Income (Loss)			Total
Balance at January 1, 2021	$	17	$	66	$	39,201	$	-		$	20,661		$	68		$	60,013
Dividends paid on Series B preferred stock		-		-		-		-			(388	)		-			(388	)
Net income		-		-		-		-			4,298			-			4,298
Other comprehensive loss		-		-		-		-			-			(229	)		(229	)
Stock based compensation		-		-		85					-			-			85
Balance at March 31, 2021	$	17	$	66	$	39,286	$	-		$	24,571		$	(161	)	$	63,779

Balance at January 1, 2022	$	17	$	71	$	50,176	$	-		$	34,851		$	(328	)	$	84,787
Exercise of stock options		-		-		43		-			-			-			43
Purchase of treasury stock at cost		-		-		-		(181	)		-			-			(181	)
Dividends paid on Series B preferred stock		-		-		-		-			(388	)		-			(388	)
Dividends paid on common stock		-		-		-		-			(441	)		-			(441	)
Net income		-		-		-		-			4,285			-			4,285
Other comprehensive loss		-		-		-		-			-			(868	)		(868	)
Stock based compensation		-		-		87					-			-			87
Balance at March 31, 2022	$	17	$	71	$	50,306	$	(181	)	$	38,307		$	(1,196	)	$	87,324

See accompanying notes to consolidated financial statements.

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TECTONIC FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months Ended March 31,
(In thousands)	2022			2021
Cash Flows from Operating Activities
Net income	$	4,285		$	4,298
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		327			428
Depreciation and amortization		60			85
Accretion of discount on loans		(6	)		(32	)
Core deposit intangible amortization		50			51
Securities premium amortization, net		1			30
Origination of loans held for sale		(15,117	)		(7,785	)
Proceeds from payments and sales of loans held for sale		134			57
Stock based compensation		87			85
Deferred income taxes		67			(333	)
Servicing assets, net		117			54
Net change in:
Other assets		(696	)		(189	)
Other liabilities		1,154			(1,830	)
Net cash used in operating activities		(9,537	)		(5,081	)
Cash Flows from Investing Activities
Purchase of securities available for sale		(75,000	)		(75,000	)
Principal payments, calls and maturities of securities available for sale		75,081			75,968
Principal payments of securities held to maturity		49			16
Purchase of securities, restricted		(2,531	)		(2,044	)
Proceeds from sale of securities, restricted		2,121			2,044
Net change in loans		25,510			(20,993	)
Purchases of premises and equipment		(39	)		-
Net cash provided by (used in) investing activities		25,191			(20,009	)
Cash Flows from Financing Activities
Net change in demand deposits		11,045			10,800
Net change in time deposits		(11,060	)		(6,143	)
Proceeds from borrowed funds		77,500			60,665
Repayment of borrowed funds		(98,821	)		(42,255	)
Dividends paid on Series B preferred stock		(388	)		(388	)
Dividends paid on common stock		(441	)		-
Exercise of stock options		43			-
Purchase of treasury stock at cost		(181	)		-
Net cash (used in) provided by financing activities		(22,303	)		22,679
Net change in cash and cash equivalents		(6,649	)		(2,411	)
Cash and cash equivalents at beginning of period		45,992			46,868
Cash and cash equivalents at end of period	$	39,343		$	44,457

Non Cash Transactions
Transfers from loans held for sale to loans held for investment	$	23,264		$	8,823
Lease liabilities incurred in exchange for right-of-use assets	$	21		$	56
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	1,144		$	1,189

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)

Note 1. Organization and Significant Accounting Policies

Tectonic Financial, Inc. (the “Company,” “we,” “us,” or “our”) is a 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 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 bank holding company for T Bank, N.A., a national banking association (the “Bank”), (ii) Sanders Morris Harris LLC (“Sanders Morris”), a registered broker-dealer with the Financial Industry Regulatory Authority (“FINRA”) and registered investment advisor with the Securities and Exchange Commission, (“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”).

We are headquartered in Dallas, Texas. The Bank operates through a main office located at 16200 Dallas Parkway, Dallas, Texas. Our other subsidiaries operate from offices in Houston, Dallas and Plano, Texas. Our Houston, Texas office is located at 600 Travis Street, 59^th 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 at 5950 Sherry Lane, Suite 470, Dallas, Texas. Our main office for Tectonic Advisors is in Plano, Texas at 6900 Dallas Parkway, Suite 625, Plano, 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, offers third party administration (“TPA”) services, and Integra Funding Solutions, LLC (“Integra”), also operating as a division within the Bank, 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 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 trust operations in April 2006, which has been amended from time to time, most recently in July 2016. 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, 2022 (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, 2021 in the audited financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022.

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, 2022 are not necessarily indicative of results that may be expected for the full year ending December 31, 2022.

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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 loan 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.

Earnings per Share. Basic earnings per share (“EPS”) is computed based on the weighted-average number of shares outstanding during each year. Diluted EPS is computed using the weighted-average shares and all potential dilutive shares outstanding during the period. The following table sets forth the computation of basic and diluted EPS for the following periods:

	Three months ended March 31,
(In thousands, except per share data)	2022		2021
Net income available to common shareholders	$	3,897	$	3,910

Average shares outstanding		7,059		6,569
Effect of dilutive securities		252		50
Average diluted shares outstanding		7,311		6,619

Basic earnings per share	$	0.55	$	0.60
Diluted earnings per share	$	0.53	$	0.59

As of March 31, 2022, options to purchase 180,000 shares of common stock, with a weighted average exercise price of $5.43, were included in the computation of diluted net earnings per share. In addition, as of March 31, 2022, 210,000 shares of restricted stock grants with a grant date fair value of $4.81 per share which vest from 2023 through 2025 were included in the diluted earnings per share calculation.

Note 2. Securities

A summary of amortized cost and fair value of securities is presented below.

	March 31, 2022
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	15,818	$	-	$	1,499	$	14,319
Mortgage-backed securities		1,656		-		14		1,642
Total securities available for sale	$	17,474	$	-	$	1,513	$	15,961

Securities held to maturity:
Property assessed clean energy	$	2,677	$	-	$	-	$	2,677
Public improvement district/tax increment reinvestment zone		16,962		-		-		16,962
Total securities held to maturity	$	19,639	$	-	$	-	$	19,639
Securities, restricted:
Other	$	2,842	$	-	$	-	$	2,842

Securities not readily marketable	$	100	$	-	$	-	$	100

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	December 31, 2021
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	15,847	$	4	$	449	$	15,402
Mortgage-backed securities		1,724		30		-		1,754
Total securities available for sale	$	17,571	$	34	$	449	$	17,156

Securities held to maturity:
Property assessed clean energy	$	2,731	$	-	$	-	$	2,731
Public improvement district/tax increment reinvestment zone		16,942		-		-		16,942
Total securities held to maturity	$	19,673	$	-	$	-	$	19,673
Securities, restricted:
Other	$	2,432	$	-	$	-	$	2,432

Securities not readily marketable	$	100	$	-	$	-	$	100

Securities available for sale consist of 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 Public Improvement District/Tax Increment Reinvestment Zone (“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 consist of Federal Reserve Bank of Dallas (“FRB”) and Federal Home Loan Bank of Dallas (“FHLB”) stock, which are carried at cost.

As of March 31, 2022 and December 31, 2021, securities available for sale with a fair value of $154,000 and $163,000, respectively, were pledged against trust deposit balances held at the Bank.

As of March 31, 2022 and December 31, 2021, the Bank held FRB stock in the amount of $1.6 million and $1.2 million, respectively. The Bank held FHLB stock in the amount of $1.3 million at each of March 31, 2022 and December 31, 2021. The FRB stock and FHLB stock were classified as restricted securities.

As of March 31, 2022 and December 31, 2021, the Company held an income interest in a private investment, which is not readily marketable, accounted for under the cost method in the amount of $100,000.

The table below indicates the length of time individual investment securities have been in a continuous loss position as of March 31, 2022:

	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government agencies	$	3,397	$	282	$	10,923	$	1,217	$	14,320	$	1,499
Mortgage-backed securities		1,562		14		-		-		1,562		14
Total	$	4,959	$	296	$	10,923	$	1,217	$	15,882	$	1,513

The number of investment positions in this unrealized loss position totaled seventeen as of March 31, 2022. The Company does not believe these unrealized losses are “other than temporary” as (i) it does not have the intent to sell the securities prior to recovery and/or maturity and, (ii) it is more likely than not that the Company will not have to sell the securities prior to recovery and/or maturity. Accordingly, as of March 31, 2022, no impairment loss has been realized in the Company’s consolidated statements of income.

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The amortized cost and estimated fair value of securities available for sale as of March 31, 2022 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities are shown separately since they are not due at a single maturity date.

	Available for Sale
(In thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	6	$	6
Due after one year through five years		1,996		1,823
Due after five years through ten years		10,157		9,300
Due after ten years		3,659		3,190
Mortgage-backed securities		1,656		1,642
Total	$	17,474	$	15,961

Note 3. Loans and Allowance for Loan Losses

Major classifications of loans held for investment are as follows:

(In thousands)	March 31, 2022		December 31, 2021
Commercial and industrial	$	88,329	$	83,348
Consumer installment		1,285		1,099
Real estate – residential		2,088		5,452
Real estate – commercial		62,596		62,966
Real estate – construction and land		3,026		2,585
SBA:
SBA 7(a) guaranteed		145,042		145,983
SBA 7(a) unguaranteed		56,390		52,524
SBA 504		30,170		35,348
USDA		803		806
Factored Receivables		36,653		38,636
Gross Loans		426,382		428,747
Less:
Allowance for loan losses		4,354		4,152
Net loans	$	422,028	$	424,595

During the second quarter of 2020, the Company began participating in the Paycheck Protection Program (“PPP”) which was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in response to the COVID-19 pandemic and administered by the SBA. The PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA. Therefore, no allowance for loan losses is allocated to PPP loans. Included in SBA 7(a) guaranteed loans at March 31, 2022 and December 31, 2021, were $13.1 million and $34.1 million of loans originated under the PPP, respectively.

As of March 31, 2022, our loan portfolio included $74.7 million of loans, approximately 17.5% of our total funded loans (18.1% of total funded loans, net of PPP loans) to the dental industry, as compared to $67.3 million of loans, or 15.7% of total funded loans (17.1% of total funded loans, net of PPP loans), as of December 31, 2021. The Bank believes that these loans are to credit worthy borrowers and are diversified geographically.

The Company serves the small business community by offering loans promulgated under the SBA’s 7(a) and 504 loan programs, and loans guaranteed by the USDA. SBA 7(a) and USDA loans are typically guaranteed by each agency in amounts ranging from 75% to 80% of the principal balance. For SBA construction loans, the Company records the guaranteed funded portion of the loans as held for sale. When the SBA loans are fully funded, the Company may sell the guaranteed portion into the secondary market, on a servicing-retained basis, or reclassify from loans held for sale to loans held for investment if the Company determines that holding these loans provide better long-term risk adjusted returns than selling the loans. In calculating gain on the sale of loans, the Company performs an allocation based on the relative fair values of the sold portion and retained portion of the loan. The Company’s assumptions are validated by reference to external market information.

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The Company had $25.5 million and $33.8 million of non-PPP SBA loans held for sale as of March 31, 2022 and December 31, 2021, respectively. There were no loans sold for the three months ended March 31, 2022 and 2021. For the three months ended March 31, 2022, the Company elected to reclassify $23.3 million of the SBA 7(a) loans held for sale to loans held for investment.

Loan Origination/Risk Management.

The Company maintains written loan origination policies, procedures, and processes which address credit quality 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 two primary SBA loan programs that the Company offers are the basic SBA 7(a) loan guaranty program and the SBA 504 loan program in conjunction with junior lien financing from a Certified Development Company (“CDC”). The SBA has designated the Bank as a “Preferred Lender.” As an SBA Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority from the SBA.

The SBA 7(a) program serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Loan proceeds under this program can be used for most business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements and debt refinancing. Loan maturity is generally up to 10 years for non-real estate collateral and up to 25 years for real estate collateral. The SBA 7(a) loan is approved and funded by a qualified lender, partially guaranteed by the SBA and subject to applicable regulations. In general, the SBA guarantees up to 75% (100% for PPP loans) of the loan amount depending on loan size. The Company is required by the SBA to service the loan and retain a contractual minimum of 5% on all SBA 7(a) loans, but generally retains 25% (the unguaranteed portion). The servicing spread is 1% of the guaranteed portion of the loan that is sold in the secondary market. Included in the SBA 7(a) loans reflected in this Form 10-Q are the PPP loans originated by the Company and outstanding as of March 31, 2022.

The SBA 504 program is an economic development-financing program providing long-term, low down payment loans to businesses. Typically, a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower. Debenture limits are $5.0 million for regular 504 loans and $5.5 million for those 504 loans that meet a public policy goal.

The Company also offers Business & Industry (“B&I”) program loans through the USDA. These loans are similar to the SBA product, except they are guaranteed by the USDA. The guaranteed amount is generally 80%. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the SBA 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market. These loans can be utilized for rural commercial real estate and equipment. The loans can have maturities up to 30 years and the rates can be fixed or variable.

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.

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T Bank engages, as a third-party factor, in the purchase 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, given the underlying debtor represents the substantive underlying credit risk. Some accounts receivable purchases 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 management’s opinion, 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.

Non-accrual loans, segregated by class of loans, were as follows:

(In thousands)	March 31, 2022		December 31, 2021
Non-accrual loans:
Real estate – commercial	$	146	$	149
SBA guaranteed		2,356		2,039
SBA unguaranteed		63		-
Total	$	2,565	$	2,188

The restructuring of a loan is considered a “troubled debt restructuring” (“TDR”) if due to the borrower’s financial difficulties, the Company has granted a concession that the Company would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modification of loan terms may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in collateral and other actions intended to minimize potential losses.

Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 310-40 Receivables – Troubled Debt Restructurings by Creditors, and Interagency Statements issued by the federal banking regulators, in consultation with the FASB, certain short-term loan modifications and additional accommodations made on a good faith basis in response to COVID-19 (as defined by the guidance) to borrowers who were current prior to any relief are not considered TDRs. Additionally, under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, banks may elect to suspend the requirement for certain loan modifications to be categorized as a TDR. In response to the COVID-19 pandemic, the Company has implemented prudent modifications allowing for primarily short-term payment deferrals or other payment relief to borrowers with pandemic-related economic hardships, where appropriate, that complies with the above guidance. As such, the Company's TDR loans noted above do not include loans with modifications to borrowers impacted by COVID-19. As of March 31, 2022, there was one loan remaining on COVID-19 deferment with an outstanding balance of approximately $470,000.

As of March 31, 2022 and December 31, 2021, there were no loans identified as TDRs. There were no new TDRs during the three months ended March 31, 2022 or the year ended December 31, 2021.

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Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The Company’s impaired loans and related allowance is summarized in the following table:

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
(In thousands)	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
March 31, 2022											Three Months Ended
SBA	$	2,771	$	2,141	$	-	$	2,141	$	-	$	2,761	$	-
Total	$	2,771	$	2,141	$	-	$	2,141	$	-	$	2,761	$	-

December 31, 2021											Year Ended
Commercial and industrial	$	-	$	-	$	-	$	-	$	-	$	73	$	4
SBA		3,658		3,071		-		3,071		-		6,333		21
Total	$	3,658	$	3,071	$	-	$	3,071	$	-	$	6,406	$	25

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The Company’s past due loans are as follows:

											Total 90
	30-89 Days		90 Days or		Total		Total		Total		Days Past Due
(In thousands)	Past Due		More Past Due		Past Due		Current		Loans		Still Accruing
March 31, 2022
Commercial and industrial	$	-	$	-	$	-	$	88,329	$	88,329	$	-
Consumer installment		-		-		-		1,285		1,285		-
Real estate – residential		-		-		-		2,088		2,088		-
Real estate – commercial		2,087		-		2,087		60,509		62,596		-
Real estate – construction and land		264		-		264		2,762		3,026		-
SBA		379		2,040		2,419		229,183		231,602		-
USDA		-		-		-		803		803		-
Factored Receivables		1,062		263		1,325		35,328		36,653		263
Total	$	3,792	$	2,303	$	6,095	$	420,287	$	426,382	$	263

December 31, 2021
Commercial and industrial	$	4	$	-	$	4	$	83,344	$	83,348	$	-
Consumer installment		-		-		-		1,099		1,099		-
Real estate – residential		-		-		-		5,452		5,452		-
Real estate – commercial		219		-		219		62,747		62,966		-
Real estate – construction and land		-		-		-		2,585		2,585		-
SBA		1,762		-		1,762		232,093		233,855		-
USDA		-		-		-		806		806		-
Factored receivables		1,743		400		2,143		36,493		38,636		400
Total	$	3,728	$	400	$	4,128	$	424,619	$	428,747	$	400

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.

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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 loan 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 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 Company’s internal ratings of its loans as of the dates indicated:

			Pass-		Special
(In thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
March 31, 2022
Commercial and industrial	$	87,096	$	1,233	$	-	$	-	$	-	$	88,329
Consumer installment		1,285		-		-		-		-		1,285
Real estate – residential		1,878		-		-		210		-		2,088
Real estate – commercial		62,450		-		-		146		-		62,596
Real estate – construction and land		3,026		-		-		-		-		3,026
SBA		205,760		20,381		4,128		1,333		-		231,602
USDA		803		-		-		-		-		803
Factored Receivables		36,653		-		-		-		-		36,653
Total	$	398,951	$	21,614	$	4,128	$	1,689	$	-	$	426,382

December 31, 2021
Commercial and industrial	$	82,105	$	1,243	$	-	$	-	$	-	$	83,348
Consumer installment		1,099		-		-		-		-		1,099
Real estate – residential		5,242		-		-		210		-		5,452
Real estate – commercial		62,817		-		-		149		-		62,966
Real estate – construction and land		2,585		-		-		-		-		2,585
SBA		213,630		16,265		2,659		1,301		-		233,855
USDA		806		-		-		-		-		806
Factored Receivables		38,636		-		-		-		-		38,636
Total	$	406,920	$	17,508	$	2,659	$	1,660	$	-	$	428,747

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The activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2022 and 2021 is presented below. Management has evaluated the adequacy of the allowance for loan losses by estimating the losses in various categories of the loan portfolio.

(In thousands)	Commercial and Industrial		Consumer Installment		Real Estate Residential			Real Estate Commercial		Real Estate Construction and Land		SBA			USDA		Factored Receivables			Total
Three months ended:
March 31, 2022
Beginning Balance	$	1,154	$	15	$	76		$	869	$	40	$	1,324		$	20	$	654		$	4,152
Provision for loan losses		59		2		(47	)		32		10		123			-		148			327
Charge-offs		-		-		-			-		-		(43	)		-		(103	)		(146	)
Recoveries		-		-		-			-		-		5			-		16			21
Net recoveries (charge-offs)		-		-		-			-		-		(38	)		-		(87	)		(125	)
Ending balance	$	1,213	$	17	$	29		$	901	$	50	$	1,409		$	20	$	715		$	4,354

March 31, 2021
Beginning Balance	$	928	$	91	$	52		$	527	$	100	$	1,225		$	18	$	-		$	2,941
Provision for loan losses		109		9		(6	)		54		11		250			1		-			428
Charge-offs		-		-		-			-		-		(215	)		-		-			(215	)
Recoveries		-		-		-			-		-		4			-		-			4
Net charge-offs		-		-		-			-		-		(211	)		-		-			(211	)
Ending balance	$	1,037	$	100	$	46		$	581	$	111	$	1,264		$	19	$	-		$	3,158

The Company’s allowance for loan losses as of March 31, 2022 and December 31, 2021 by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:

(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, 2022
Loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans collectively evaluated for impairment		1,213		17		29		901		50		1,409		20		715		4,354
Ending balance	$	1,213	$	17	$	29	$	901	$	50	$	1,409	$	20	$	715	$	4,354

December 31, 2021
Loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans collectively evaluated for impairment		1,154		15		76		869		40		1,324		20		654		4,152
Ending balance	$	1,154	$	15	$	76	$	869	$	40	$	1,324	$	20	$	654	$	4,152

The Company’s recorded investment in loans as of March 31, 2022 and December 31, 2021 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:

(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, 2022
Loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	2,141	$	-	$	-	$	2,141
Loans collectively evaluated for impairment		88,329		1,285		2,088		62,596		3,026		229,461		803		36,653		424,241
Ending balance	$	88,329	$	1,285	$	2,088	$	62,596	$	3,026	$	231,602	$	803	$	36,653	$	426,382

December 31, 2021
Loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	3,071	$	-	$	-	$	3,071
Loans collectively evaluated for impairment		83,348		1,099		5,452		62,966		2,585		230,784		806		38,636		425,676
Ending balance	$	83,348	$	1,099	$	5,452	$	62,966	$	2,585	$	233,855	$	806	$	38,636	$	428,747

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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 2022 and 2027 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, 2022 and December 31, 2021, right-of-use assets totaled $1.2 million and $1.4 million, respectively, and are reported as other assets on our accompanying consolidated balance sheets. The related lease liabilities totaled $1.3 million and $1.4 million, respectively, and are reported in other liabilities on our accompanying consolidated balance sheet. As of March 31, 2022, the weighted average remaining lease term is forty-nine months, and the weighted average discount rate is 3.70%.

As of March 31, 2022, the minimum rental commitments under these noncancelable operating leases are as follows (in thousands):

2022	$	370
2023		275
2024		209
2025		204
2026		207
2027 and thereafter		54
Total minimum rental payments		1,319
Less: Interest		(56	)
Present value of lease liabilities	$	1,263

The Company currently receives rental income from eleven tenants in its headquarters building for office space the Company does not occupy. Aggregate future minimum rentals to be received under non-cancelable leases as of March 31, 2022 were $634,000 through 2027.

Note 5. Goodwill and Core Deposit Intangible

Goodwill and core deposit intangible assets were as follows:

(In thousands)	March 31, 2022		December 31, 2021
Goodwill	$	21,440	$	21,440
Core deposit intangible, net		727		777

During the year ended December 31, 2021, the Company recorded goodwill of $10.7 million in connection with the acquisition of Integra. See Note 17, Acquisition, to these consolidated financial statements for more information regarding the Company’s acquisition of Integra

Core deposit intangible is amortized on a straight line basis over the initial estimated lives of the deposits, which range from five to twelve years. The core deposit intangible amortization totaled $50,000 and $51,000 for the three months ended March 31, 2022 and 2021, respectively.

The carrying basis and accumulated amortization of the core deposit intangible as of March 31, 2022 and December 31, 2021 were as follows:

(In thousands)	March 31, 2022			December 31, 2021
Gross carrying basis	$	1,708		$	1,708
Accumulated amortization		(981	)		(931	)
Net carrying amount	$	727		$	777

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The estimated amortization expense of the core deposit intangible remaining as of March 31, 2022 is as follows:

(In thousands)
2022 remaining	$	158
2023		210
2024		210
2025		149
Total	$	727

Note 6. Deposits

Deposits were as follows:

(In thousands, except percentages)	March 31, 2022				December 31, 2021
Non-interest bearing demand	$	102,422	19	%	$	88,876	20	%
Interest-bearing demand (NOW)		7,884	1			6,459	1
Money market accounts		128,831	30			133,536	30
Savings accounts		8,693	2			7,914	2
Time deposits		196,324	48			207,384	47
Total	$	444,154	100	%	$	444,169	100	%

As of March 31, 2022, the scheduled maturities of time deposits were as follows:

(In thousands)
2022	$	124,475
2023		55,962
2024		9,214
2025		5,816
2026		857
Total	$	196,324

The aggregate amount of demand deposit overdrafts that have been reclassified as loans as of March 31, 2022 and December 31, 2021 was insignificant.

Note 7. Borrowed Funds and Subordinated Notes

The Company has a blanket lien credit line with the FHLB with borrowing capacity of $44.5 million secured by commercial loans. The Company determines its borrowing needs and utilizes overnight advance accordingly at varying terms. The Company had no borrowings with FHLB as of March 31, 2022 and December 31, 2021.

The Company also has a credit line with the FRB with borrowing capacity of $23.0 million, which is secured by commercial loans. The Company had no borrowings under this line from the FRB as of March 31, 2022 and December 31, 2021. As part of the CARES Act, the FRB offered secured discounted borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility (“PPPLF”). As of March 31, 2022, the Bank had pledged $13.2 million of PPP loans to the FRB under the PPPLF to borrow $13.2 million of funds at a rate of 0.35%, with maturities through May 2026. PPP loans pledged as collateral for the PPPLF are excluded from the average assets used in the Company’s leverage ratio calculation.

As of March 31, 2022 and December 31, 2021, the Company also had subordinated notes totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an interest rate of 7.125% payable semi-annually and maturing on July 20, 2027, and $4.0 million issued in 2018 bearing an interest rate of 7.125% payable semi-annually 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.

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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 100% of the employee’s contribution on the first 1% of the employee’s compensation, and 50% of the employee’s contribution on the next 5% of the employee’s compensation. An eligible employee may contribute up to the annual maximum contribution allowed for a given year under guidance from the Internal Revenue Service. At its discretion, the Company may also make additional annual contributions to the plans. Any discretionary contributions are allocated to employees in the proportion of employee contributions to the total contributions of all participants in the plans. No discretionary contributions were made during the three months ended March 31, 2022 and 2021.

The amount of employer contributions charged to expense under the two plans was $188,000 and $163,000 for the three months ended March 31, 2022 and 2021, respectively, and is included in salaries and employee benefits on the consolidated statements of income. The accrued payable to the plans as of March 31, 2022 was $5,000, and there was no accrued payable as of December 31, 2021.

Note 9. Income Taxes

Income tax expense was approximately $1.0 million and $1.3 million for the three months ended March 31, 2022 and 2021, respectively. The Company’s effective income tax rate was 19.6% and 22.7% for the three months ended March 31, 2022 and 2021, respectively.

Net deferred tax assets totaled $569,000 and $405,000 at March 31, 2022 and December 31, 2021, respectively.

The Company files U.S. federal and state income tax returns.

Note 10. Stock Compensation Plans

The board of directors and shareholders adopted the Tectonic Financial, Inc. 2017 Equity Incentive Plan (“Plan”) in May 2017 in connection with the Company’s acquisition of TBI. The Plan was amended and restated by the Company and its 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 750,000 authorized shares of common stock for the Plan. The term of each stock option is no longer than 10 years from the date of the grant.

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.

There were no stock options granted, vested, or forfeited during the three months ended March 31, 2022 and 2021. During the three months ended March 31, 2022, options on 10,000 shares of the Company’s common stock were exercised at $4.30 per share. There were no options exercised during the three months ended March 31, 2021.

The number of options outstanding as of March 31, 2022 and December 31, 2021 was 180,000 and 190,000, respectively, and the weighted average exercise price as of March 31, 2022 and December 31, 2021 was $5.43 and $5.37, respectively. The weighted average contractual life as of March 31, 2022 and December 31, 2021 was 5.12 years and 5.62 years, respectively. Stock options outstanding at the end of the period had immaterial aggregate intrinsic values. The weighted-average grant date fair value of the options as of March 31, 2022 and December 31, 2021 was $1.95 and $1.94, respectively.

As of March 31, 2022, all 180,000 stock options outstanding were vested, and unrecognized compensation cost totaled $143,000, all of which was related to the right of repurchase period for the 40,000 shares of restricted stock issued and exercised in 2021. The Company recorded compensation expense on a straight-line basis over the vesting periods, and for the 40,000 shares of restricted stock granted September 27, 2021, over the right of repurchase period. The Company recorded salaries and employee benefits expense on our consolidated statements of income in connection with the Plan of approximately $17,000 and $16,000 for the three months ended March 31, 2022 and 2021, respectively, related to the stock options.

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The Company granted restricted stock awards totaling 210,000 shares of common stock on September 30, 2020. The vesting schedules vary by award, with all of the awards vesting over a three-year period from 2023 through 2025.

As of March 31, 2022, all 210,000 awarded shares of restricted stock were outstanding, and the grant date fair value was $4.81. None of the restricted stock awards were vested as of March 31, 2022 and December 31, 2021. The weighted average contractual life as of March 31, 2022 and December 31, 2021 was 2.22 years and 2.46 years, respectively. The Company is recording compensation expense on a straight-line basis over the respective vesting periods. The Company recorded salaries and employee benefits expense on our consolidated statements of income in connection with the Plan of approximately $69,000 for each of the three months ended March 31, 2022 and 2021, related to the restricted stock awards. As of March 31, 2022, there was $567,000 of unrecognized compensation cost related to the restricted stock awards.

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 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.

The following table summarizes loan commitments:

(In thousands)	March 31, 2022		December 31, 2021
Undisbursed loan commitments	$	39,390	$	33,704
Standby letters of credit		282		282
Total	$	39,672	$	33,986

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 $250,000 as of March 31, 2022 and December 31, 2021.

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 four year term and Mr. Bramlage’s employment agreement has a three year term. Each employment agreement is automatically renewable for an additional one-year term unless either party elects not to renew.

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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 31% of the voting ownership in the Company. Under the Tectonic Advisors-CWA Services Agreement, Cain Watters pays the Company for due diligence and research services on investment alternatives available to Cain Watters’ clients. The Company earned $77,000 and $304,000 during the three months ended March 31, 2022 and March 31, 2021, respectively, under the Tectonic Advisors-CWA Services Agreement. These fees are included in investment advisory and other related services in the accompanying consolidated statements of income. The Company had $19,000 and $76,000 in fees receivable related to these services at March 31, 2022 and December 31, 2021, respectively, which is included in other assets on the consolidated balance sheets.

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 $214,000 and $225,000 payable to Cain Watters related to this agreement at March 31, 2022 and December 31, 2021, respectively, which are included in other liabilities on the accompanying consolidated balance sheets.

As of March 31, 2022 and December 31, 2021, certain officers, directors and their affiliated companies had depository accounts with the Bank totaling approximately $7.9 million and $9.2 million, respectively. None of those deposit accounts have terms more favorable than those available to any other depositor. There were no loans outstanding to directors of the Bank or their affiliated companies as of March 31, 2022 and December 31, 2021.

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 10%; (ii) a Tier 1 risk-based capital ratio of 8%; (iii) a Tier 1 leverage ratio of 5%; and (iv) a CET1 risk-based capital ratio of 6.5%.

The Basel III minimum capital ratio requirements and additional capital conservation buffers as applicable to the Company and the Bank as of March 31, 2022 are summarized in the table below.

	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)		8.0	%		2.5	%		10.5	%
Tier 1 Risk Based Capital (tier 1 to risk weighted assets)		6.0	%		2.5	%		8.5	%
Common Equity Tier 1 Risk Based ( CET1 to risk weighted assets)		4.5	%		2.5	%		7.0	%
Tier 1 Leverage Ratio (tier 1 to average assets)		4.0	%		-	%		4.0	%

Accordingly, a financial institution may be considered “well capitalized” under the prompt corrective action framework, but not satisfy the buffered Basel III capital ratios. As of March 31, 2022, the Bank’s regulatory capital ratios are in excess of the capital conservation buffer and the levels established for “well capitalized” institutions under the Basel III Rules.

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The regulatory capital ratios of the Company and the Bank are as follows:

	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, 2022
Total Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)	$	70,405		19.29	%	$	38,320		10.50	%	$	36,496		10.00	%
T Bank, N.A.		71,093		19.65			37,982		10.50			36,174		10.00
Tier 1 Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		66,051		18.10			31,021		8.50			29,196		8.00
T Bank, N.A.		66,739		18.45			30,748		8.50			28,939		8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		48,801		13.37			25,547		7.00			23,722		6.50
T Bank, N.A.		66,739		18.45			25,322		7.00			23,513		6.50
Tier 1 Capital (to Average Assets)
Tectonic Financial, Inc. (consolidated)		66,051		12.28			21,519		4.00			26,899		5.00
T Bank, N.A.		66,739		12.55			21,267		4.00			26,584		5.00

As of December 31, 2021
Total Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)	$	66,946		18.55	%	$	37,894		10.50	%	$	36,089		10.00	%
T Bank, N.A.		67,454		18.87			37,542		10.50			35,754		10.00
Tier 1 Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		62,794		17.40			30,676		8.50			28,871		8.00
T Bank, N.A.		63,302		17.70			30,391		8.50			28,604		8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		45,544		12.62			25,263		7.00			23,458		6.50
T Bank, N.A.		63,302		17.70			25,028		7.00			23,240		6.50
Tier 1 Capital (to Average Assets)
Tectonic Financial, Inc. (consolidated)		62,794		11.82			21,245		4.00			26,557		5.00
T Bank, N.A.		63,302		12.06			21,002		4.00			26,252		5.00

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, 2022, approximately $3.3 million was available for the declaration of dividends by the Bank to the Company without prior approval of regulatory agencies and still maintain its “well capitalized” status. In addition, as a Texas corporation, we are restricted under the Texas Business Organizations Code from paying dividends under certain conditions. Under Texas law, we cannot pay dividends to shareholders if the dividends exceed our surplus or if after giving effect to the dividends, we would be insolvent.

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.

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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.

The tables below present the financial information for each segment that is specifically identifiable, or based on allocations using internal methods, for the three months ended March 31, 2022 and 2021:

(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated
Three Months Ended March 31, 2022
Income Statement
Total interest income	$	7,549	$	-	$	-		$	7,549
Total interest expense		673		-		219			892
Provision for loan losses		327		-		-			327
Net interest income (loss) after provision for loan losses		6,549		-		(219	)		6,330
Non-interest income		255		9,704		-			9,959
Depreciation and amortization expense		95		16		-			111
All other non-interest expense		3,578		6,815		455			10,848
Income (loss) before income tax	$	3,130	$	2,873	$	(674	)	$	5,330

Goodwill and other intangibles	$	19,817	$	2,350	$	-		$	22,167
Total assets	$	556,766	$	10,224	$	375		$	567,365

(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated
Three Months Ended March 31, 2021
Income Statement
Total interest income	$	6,314	$	-	$	-		$	6,314
Total interest expense		731		-		219			950
Provision for loan losses		428		-		-			428
Net interest income (loss) after provision for loan losses		5,155		-		(219	)		4,936
Non-interest income		184		9,146		85			9,415
Depreciation and amortization expense		92		39		-			131
All other non-interest expense		2,135		6,178		349			8,662
Income (loss) before income tax	$	3,112	$	2,929	$	(483	)	$	5,558

Goodwill and other intangibles	$	9,307	$	2,350	$	-		$	11,657
Total assets	$	527,551	$	10,467	$	411		$	538,429

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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.

The following table summarizes securities available for sale measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
As of March 31, 2022
Securities available for sale:
U.S. government agencies	$	-	$	14,319	$	-	$	14,319
Mortgage-backed securities		-		1,642		-		1,642

As of December 31, 2021
Securities available for sale:
U.S. government agencies	$	-	$	15,402	$	-	$	15,402
Mortgage-backed securities		-		1,754		-		1,754

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, 2022, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

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.

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Impaired loans. As of March 31, 2022 and December 31, 2021, there were no impaired loans that were reduced by specific valuation allowances.

The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent impaired 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 were no discounts for collateral-dependent impaired 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 loan 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, 2022 and December 31, 2021, foreclosed assets totaled $1.1 million consisting of two loans that were foreclosed during 2021 and were recorded at fair value. There were no foreclosed assets during the three months ended March 31, 2022 and 2021, and there were no foreclosed assets re-measured during the three months ended March 31, 2022 and 2021.

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, 2022 and 2021, the Company had no sale of loans and did not add any servicing assets. There was no allowance provision for servicing assets for the three months ended March 31, 2022 and 2021.

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.

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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. These investments have no readily determinable fair value.

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.

Carrying amounts and estimated fair values of other financial instruments by level of valuation input were as follows:

	March 31, 2022
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	39,343	$	39,343
Level 2 inputs:
Securities available for sale		15,961		15,961
Securities, restricted		2,842		2,842
Loans held for sale		25,480		28,268
Accrued interest receivable		2,033		2,033
Level 3 inputs:
Securities held to maturity		19,639		19,639
Securities not readily marketable		100		100
Loans, net		422,028		426,611
Servicing asset		626		626
Financial liabilities:
Level 1 inputs:
Non-interest bearing deposits		102,422		102,536
Level 2 inputs:
Interest bearing deposits		341,732		334,054
Borrowed funds		25,200		25,200
Accrued interest payable		309		309

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	December 31, 2021
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	45,992	$	45,992
Level 2 inputs:
Securities available for sale		17,156		17,156
Securities, restricted		2,432		2,432
Loans held for sale		33,762		37,549
Accrued interest receivable		2,268		3,787
Level 3 inputs:
Securities held to maturity		19,673		19,673
Securities not readily marketable		100		100
Loans, net		424,595		430,810
Servicing asset		503		503
Financial liabilities:
Level 1 inputs:
Non-interest bearing deposits		88,876		87,670
Level 2 inputs:
Interest bearing deposits		355,293		359,606
Borrowed funds		46,521		46,521
Accrued interest payable		561		561

Note 16. Recent Accounting Pronouncements

FASB Accounting Standards Update (“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 3126-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 will be effective for us on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-02 is not expected to have a significant impact on our financial statements.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and 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 an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 became effective for most public companies on January 1, 2020, subject to a company’s election to defer implementation due to the COVID-19 pandemic. On July 17, 2019, the FASB proposed to delay the implementation of the current expected credit loss standard (“CECL”) for certain companies including smaller reporting companies (“SRCs”) as defined by the SEC. The Company falls within the definition of an SRC under applicable rules promulgated by the SEC. The proposed delay by FASB was subject to a comment period. At the October 16, 2019 FASB meeting, the FASB voted unanimously to delay the effective date of CECL adoption for SRCs to January 1, 2023. The Company has developed processes for assessment and documentation, model development and validation. While the Company generally expects that the implementation of ASU 2016-13 may increase their allowance for loan losses balance, the adoption of the CECL methodology will be significantly influenced by the composition, characteristics and quality of the loan portfolio along with the prevailing economic conditions and forecasts as of the adoption date.

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Note 17. Acquisition

On July 1, 2021, we, through our wholly-owned subsidiary TBI, acquired Integra through the merger of Integra with and into TBI, with TBI surviving the merger. Integra’s activity will be reported within our Banking segment. Integra is a factoring company that provides financing to smaller transportation companies across the United States principally by purchasing their accounts receivable at a discount and then collecting such receivables at face value. We believe that the addition of this small business lending vertical will provide the Bank with additional breadth in its lending platform and enable the Bank to continue to prudently grow its balance sheet and generate relatively attractive returns on its assets.

Pursuant to the terms of and subject to the conditions set forth in the Agreement and Plan of Merger by and between the Company and Integra (the “Merger Agreement”), the transaction provided for the payment to the members of Integra of (a) an amount of cash equal to (i) approximately $2.5 million, subject to certain adjustments described in the Merger Agreement which totaled $726,721, and (b) 453,203 shares of the Company’s common stock. In addition, the Company incurred $115,726 of expenses related to the acquisition of Integra, which is reported in non-interest expense on our consolidated statements of income.

A summary of the fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill, which represents the expected synergies from the Integra merger, and is not deductible for tax purposes, is as follows:

(In thousands)
Assets acquired:
Factored receivables	$	33,442
Other assets		270
Premises and equipment		24
Loans receivable		1,103
		34,839
Liabilities assumed:
Deposits		2,535
Other liabilities		253
Borrowings		28,927
		31,715
Fair value of net assets acquired		3,124
Consideration:
Cash paid		3,185
Common stock		10,650
Total consideration		13,835
Goodwill	$	10,711

The contractual value of the factored receivables acquired was $34.3 million. The amount above represents the contractual value of the receivables less the purchased deferred discount of $397,000 and the fair value adjustment of $492,000. The value for the common stock was based on an earnings based multiple plus a control premium.

Supplemental Pro Forma Information (unaudited)

The following table presents financial information regarding the former Integra operations included in the Company’s consolidated Statements of Income for the three months ended March 31, 2022. In addition, the table presents unaudited condensed pro forma financial information assuming that the Integra acquisition was completed as of January 1, 2021. Integra was a subchapter S corporation and as such, income tax on its earnings was paid by its shareholders. The results shown below for the period prior to the acquisition include an estimate for income tax at the Company’s statutory rate.

The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been obtained had the acquisition occurred on January 1, 2021, nor is it indicative of future results.

(In thousands)	Integra for the Three Months ended March 31, 2022		Actual Consolidated for the Three Months Ended March 31, 2022		Pro Forma Combined for the Three Months Ended March 31, 2021
Net interest income	$	1,837	$	6,330	$	5,973
Noninterest income		154		9,959		9,529
Noninterest expense		768		10,959		9,287
Net income after income taxes		966		4,285		4,818

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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, 2022 (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, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022 (the “2021 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 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 2021 Form 10-K, and under the section entitled “Risk Factors” in this Form 10-Q, including, but not limited to, the following:

●

changes in interest rates, including the recent significant increases in market interest rates;

●

risks associated with the uncertain inflationary outlook in the United States and our market areas;

●

the potential for a recession and the negative and adverse impact a recession would have on our earnings, capital and financial position resulting from higher losses on the Bank’s loan and factored receivables portfolios; a decline in the equity and fixed income markets that would reduce assets under management and capital markets activity, thereby reducing the earnings at Sanders Morris and Tectonic Advisors, as well as earnings on trust assets at the Bank;

●

changes in the economy generally and the regulatory response thereto;

●

changes in the economy of the State of Texas, our primary market;

●

risks associated with the COVID-19 global pandemic (“COVID-19”), or any current or future variants of COVID-19, including, among others, business disruption for our customers, customers’ ability to fulfill their financial obligations to the Company, our employees’ ability to conduct banking and other transactions, the response of governmental authorities to the COVID-19 pandemic, or any current or future variants thereof, and our participation in COVID-19-related government programs such as the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (the “SBA”) and created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”);

●

risks associated with implementing aspects of our expansion strategy, whether through additional services and products or acquisitions;

●

liquidity risks, including those related to having enough liquid assets to meet depositor demands;

●

the need to hold more capital in order to comply with consolidated capital ratios;

●

competition from other banks, financial institutions and wealth and investment management firms and our ability to retain our clients;

●

the adequacy of our allowance for loan losses;

●

risks associated with generating deposits from retail sources without a branch network so that we can fund our loan portfolio and growth;

●

risks associated with higher cost deposits relative to our peer group, which has an impact on our net interest margin and profits;

●

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 SBA 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 maintain a strong core deposit base or other low-cost funding sources;

●

our ability to manage our credit risk;

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●

regulatory scrutiny related to our loan portfolio, including commercial real estate;

●

the earning capacity of our borrowers;

●

fluctuation in the value of our investment securities;

●

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;

●

fluctuations in the market price of the Series B preferred stock;

●

our ability to raise additional capital, particularly during times of stress;

●

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 fraudulent activity, breaches of our information security, and cybersecurity attacks;

●

our reliance on communications, information, operating and financial control systems technology and related services from third-party service providers;

●

natural disasters and epidemics and pandemics, such as COVID-19, or any current or future variants thereof;

●

the effects of terrorism and acts of war or threat thereof, including the current conflict in Ukraine, and efforts by the U.S. to combat it;

●

environmental liabilities;

●

regulation of the financial services industry;

●

legislative changes or the adoption of tax reform policies;

●

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, monetary and fiscal matters, including the policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the Biden administration.

In addition, financial markets and global supply chains may be adversely affected by the current or anticipated impact of military conflict, including the current Russian invasion of Ukraine, terrorism or other geopolitical events.

You should not 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 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 https://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.

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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 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 Mach 31, 2022 and December 31, 2021, and our consolidated results of operations for the three months ended March 31, 2022 and 2021. 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 2021 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 bank holding company for T Bank, N.A. a national banking association (the “Bank”), (ii) Sanders Morris Harris 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.

Accounting policies related to the allowance for loan losses are considered to be critical as these policies involve considerable subjective judgment and estimation by management. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance, which includes allowance allocations calculated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, Receivables, and allowance allocations calculated in accordance with FASB ASC Topic 450, Contingencies. The analysis is based on sound, reliable and well documented information and is designed to support an allowance that is adequate to absorb all estimated incurred losses in our loan portfolio. 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. Refer to the 2021 Form 10-K for additional information regarding critical accounting policies.

Performance Summary

Net income available to common shareholders decreased $13,000, or 0.3%, to $3.9 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. Earnings per diluted common share were $0.53 and $0.59 for the three months ended March 31, 2022 and 2021, respectively.

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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.

For the three months ended March 31, 2022, annual return on average assets was 2.97%, compared to 3.38% for the same period in the prior year, and annual return on average tangible common equity was 34.28%, compared to 49.85% for the same period in the prior year. The lower annual return ratios for the three months ended March 31, 2022 were due to a slight decrease in income which was outpaced by increases in average assets and average tangible common equity compared to the same period in the prior year. The growth in average tangible common equity between the two periods is primarily related to shares of Company common stock issued for the Company’s acquisition of Integra Funding Solutions, LLC, a Texas limited liability company (“Integra”), on July 1, 2021, and earnings, net of preferred stock and common stock dividends paid, from March 31, 2021 to March 31, 2022. The growth in average assets is primarily attributable to growth in loans and to assets acquired from the Company’s acquisition of Integra.

The following table presents non-GAAP reconciliations of annual return on average tangible common equity:

(Dollars in thousands, except percentages)	As of and for the Three Months Ended March 31, 2022			As of and for the Three Months Ended March 31, 2021
Income available to common shareholders	$	3,897		$	3,910

Average shareholders’ equity	$	85,553		$	60,716
Less: average goodwill		21,440			10,729
Less: average core deposit intangible		760			928
Less: average preferred stock		17,250			17,250
Average tangible common equity	$	46,103		$	31,809
Annual return on average tangible common equity		34.28	%		49.85	%

Total assets decreased $17.6 million, or 3.0%, to $567.4 million as of March 31, 2022, from $585.0 million as of December 31, 2021. This decrease was primarily due to a decrease of $8.3 million for loans held for sale, the forgiveness of $24.0 million of PPP loans by the SBA during the period and a decrease of $6.6 million for cash and due from banks, partly offset by an increase of $21.4 million for non-PPP SBA loans, net of allowance for loan losses. Substantially all loans outside of those made under the PPP are secured by specific collateral, including business assets, consumer assets, and commercial real estate.

Shareholders’ equity increased $2.5 million, or 3.0%, to $87.3 million as of March 31, 2022, from $84.8 million as of December 31, 2021. See analysis of shareholders’ equity in the section captioned “Capital Resources and Regulatory Capital Requirements” included elsewhere in this discussion.

Results of Operations for the Three Months Ended March 31, 2022 and 2021

Details of the changes in the various components of net income are discussed below.

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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 the 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 Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The effective federal funds rate was at zero to 0.25% throughout 2021, and was raised by 0.25% during March 2022, to an effective rate of 0.25% to 0.50% as of March 31, 2022.

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, 2022 and 2021

	Three Months Ended
	March 31, 2022 vs March 31, 2021
	Increase (Decrease) Due to Change in
(In thousands)	Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	5		$	12		$	17
Securities		72			117			189
Loans, net of unearned discount ⁽¹⁾		815			214			1,029
Total earning assets		892			343			1,235

Savings and interest-bearing demand		-			2			2
Money market deposit accounts		(1	)		25			24
Time deposits		(111	)		74			(37	)
FHLB and other borrowings		2			(49	)		(47	)
Total interest-bearing liabilities		(110	)		52			(58	)

Changes in net interest income	$	1,002		$	291		$	1,293

(1)

Average loans include non-accrual.

Net interest income increased $1.3 million, or 24.1%, from $5.4 million for the three months ended March 31, 2021 to $6.7 million for the three months ended March 31, 2022. Net interest margin for the three months ended March 31, 2022 and 2021 was 5.00% and 4.47%, respectively, an increase of 53 basis points. The increase in net interest income and margin was primarily due to the increase in the average yield in interest-earning assets attributable to the factored receivables acquired in the Integra acquisition and increase in SBA loan volume, which was partly offset by a decrease of the recognition of PPP-related SBA fees. Other changes included a decrease in average rates paid on interest-bearing deposits and an increase in average volume of interest-bearing deposits, which replaced the Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings as PPP loans have been forgiven by the SBA and paid off.

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The average volume of interest-earning assets increased $52.3 million, or 10.7%, from $487.2 million for the three months ended March 31, 2021 to $539.5 million for the three months ended March 31, 2022. The average volume of loans increased $13.5 million, or 3.1%, from $438.8 million for the three months ended March 31, 2021 to $452.2 million for the three months ended March 31, 2022. The increase in the average volume of loans included increases of $56.4 million for organic loan growth and $37.0 million for factored receivables related to the Integra acquisition during the third quarter of 2021, partly offset by an $80.0 million decrease of PPP loans. The average yield for loans increased 75 basis points from 5.70% for the three months ended March 31, 2021 to 6.45% for the three months ended March 31, 2022. During the three months ended March 31, 2022, we recognized $2.0 million of interest income related to the factored receivables, with an average yield of 22.0%. Total average volume of PPP loans was $23.3 million and $103.3 million for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, we recognized $172,000 in PPP loan related deferred fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. This was a decrease of $1.5 million from the same period in the prior year. As a result of the inclusion of these net fees in interest income, the average yield on PPP loans decreased to 4.0% during the three months ended March 31, 2022, from 7.4% for the same period in the prior year. The average volume of interest-bearing deposits held at the Federal Reserve Bank of Dallas (“FRB”) increased $24.8 million as a result of the increase in non-interest-bearing deposits during the current and prior quarters. The average volume of securities increased $14.0 million due to the purchase of Public Improvement District/Tax Increment Reinvestment Zone (“PID/TIRZ”) investments during the second quarter of 2021. The average yield on securities increased 112 basis points from 2.28% for the three months ended March 31, 2021 to 3.40% for the three months ended March 31, 2022.

The average volume of interest-bearing liabilities increased $3.7 million, or 0.9%, from $390.3 million for the three months ended March 31, 2021 to $393.9 million for the three months ended March 31, 2022. The average volume of interest-bearing deposits increased $59.7 million, and the average interest rate paid on interest-bearing deposits decreased 17 basis points from 0.91% for the three months ended March 31, 2021 to 0.74% for the three months ended March 31, 2022. The average volume of non-interest bearing deposits increased $40.4 million, or 72.1%, from $56.0 million for the three months ended March 31, 2021 to $96.5 million for the three months ended March 31, 2022. The average cost of deposits during the three months ended March 31, 2021 was impacted by decreases in interest rates paid on time deposits. The average volume of FHLB and other borrowings decreased $56.1 million, or 68.3%, from $82.1 million for the three months ended March 31, 2021 to $26.1 million for the three months ended March 31, 2022, consisting mostly of funding from the PPPLF, at an interest rate of 0.35%, used to fund the PPP loans.

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, 2022 and 2021.

	Three Months Ended March 31,
	2022								2021
(In thousands, except percentages)	Average Balance			Interest		Average Yield			Average Balance			Interest		Average Yield
Assets
Interest-bearing deposits and federal funds sold	$	47,292		$	22		0.19	%	$	22,468		$	5		0.09	%
Securities		39,948			335		3.40			25,939			146		2.28
Loans, net of unearned discount ⁽¹⁾		452,237			7,192		6.45			438,784			6,163		5.70
Total earning assets		539,477			7,549		5.68			487,191			6,314		5.26
Cash and other assets		50,081								31,128
Allowance for loan losses		(4,129	)							(2,945	)
Total assets	$	585,429							$	515,374
Liabilities and Shareholders’ Equity
Savings and interest-bearing demand	$	14,579			9		0.25	%	$	12,091			7		0.23	%
Money market deposit accounts		135,106			122		0.37			107,089			98		0.37
Time deposits		206,182			519		1.02			176,968			556		1.27
Total interest-bearing deposits		355,867			650		0.74			296,148			661		0.91
FHLB and other borrowings		26,059			23		0.36			82,113			70		0.35
Subordinated notes		12,000			219		7.40			12,000			219		7.40
Total interest-bearing liabilities		393,926			892		0.92			390,261			950		0.99
Non-interest-bearing deposits		96,467								56,044
Other liabilities		9,483								8,353
Total liabilities		499,876								454,689
Shareholders’ equity		85,553								60,716
Total liabilities and shareholders’ equity	$	585,429							$	515,374

Net interest income				$	6,657							$	5,364
Net interest spread							4.76	%							4.27	%
Net interest margin							5.00	%							4.47	%

(1)

Includes non-accrual loans.

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Provision for Loan Losses

For the three months ended March 31, 2022, the provision for loan losses totaled $327,000, compared to $428,000 for the three months ended March 31, 2021. We determined a provision for loan losses that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date.

For additional information concerning this determination, see the section captioned “Allowance for Loan Losses” elsewhere in this discussion.

Non-Interest Income

The components of non-interest income were as follows:

	Three Months Ended March 31,
(In thousands)	2022		2021
Trust income	$	1,598	$	1,440
Advisory income		3,574		3,017
Brokerage income		2,471		2,564
Service fees and other income		2,216		2,306
Rental income		100		88
Total	$	9,959	$	9,415

Total non-interest income for the three months ended March 31, 2022 increased $544,000, or 5.8%, 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, 2022 increased $158,000, or 11.0%, compared to the same period in the prior year. The increase in trust income between the periods is due to an increase in the average market value of the trust assets for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. During the three months ended March 31, 2021, there was continued uncertainty related to the economic impacts of the ongoing COVID-19 pandemic, which led to volatility in asset values. In addition, there was an increase in net flows to assets held in custody during 2021, as shown in the rollforward of client assets below, which increased the value of our assets during the three months ended March 31, 2022 over the values during the three months ended March 31, 2021. Volatility related to impacts of geo-political instability related to the war in Ukraine, regulatory action, including increases in market interest rates by the Federal Reserve aimed at tempering inflation, or continuing effects of the COVID-19 pandemic, including supply-chain disruptions, 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.

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, 2022, advisory income increased $557,000, or 18.5%, compared to the same period in the prior year. The increase in advisory income between the two periods is due to an increase in the average market value of the advisory assets for the three months ended March 31, 2022 as compared to the same period in the prior year. Similar to our trust income, changes in the value of our assets under management will result in comparable changes in our advisory income. Net inflows to our assets under management throughout 2021, as well as market appreciation, in part from a decrease in volatility related to decreased uncertainty as to the effects of the ongoing COVID-19 pandemic between the two periods, resulted in an increase in asset values, and an increase in our advisory income. Volatility related to regulatory action, including the effects of inflation and of increases in market interest rates by the Federal Reserve aimed at tempering inflation, as well as supply chain disruptions related to geo-political instability, including the war in Ukraine, and/or disruptions related to continuing world-wide effects of the COVID-19 pandemic, are likely to impact the financial markets and the value of and/or net inflows to our assets under management, potentially decreasing our advisory income.

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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 interest rates. Brokerage income for the three months ended March 31, 2022 decreased $93,000, or 3.6%, compared to the same period in the prior year. The majority of the decrease was related to a decrease of $710,000 in commission income from general over-the-counter trading during the three months ended March 31, 2022 over the same period in the prior year, which were offset by increases in commissions from syndicated offering activity of $520,000 and an increase in income from margin lending of $145,000, as well as other immaterial changes in brokerage income. These fluctuations were primarily the result of normal variances in general trading activity related to changing market conditions, with the increase in income from margin lending being influenced by an increase in interest rates on margin lending. Private offering and syndicated public offering activity did recover somewhat during 2021, but expectations of economic disruption related to geo-political factors and increases in market interest rates by the Federal Reserve, among other factors, are expected to lead to economic uncertainty and volatility, which is likely to decrease offering activity given price uncertainty in the face of volatile markets.

The table below reflects a rollforward of our client assets from March 31, 2021 through March 31, 2022, which includes both advisory and brokerage assets, and the inflows and outflows and net market appreciation from December 31, 2020 through March 31, 2022. Our brokerage and advisory assets experienced an increase of approximately $725.7 million, or 14.7%, between March 31, 2021 and March 31, 2022, related to positive net flows and market appreciation.

(In thousands)	Client Assets
As of December 31, 2020	$	4,524,376
Client inflows		519,177
Client outflows		(437,760	)
Net flows		81,417
Market appreciation		335,882
As of March 31, 2021	$	4,941,675
Client inflows		2,123,450
Client outflows		(1,765,995	)
Net flows		357,455
Market appreciation		310,182
As of December 31, 2021	$	5,609,312
Client inflows		865,781
Client outflows		(581,614	)
Net flows		284,167
Market depreciation		(226,134	)
As of March 31, 2022	$	5,667,345

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, 2022 decreased $90,000, or 3.9%, compared to the same period in the prior year. The decrease was the result of decreases in income distributions from an interest in securities not readily marketable of $85,000 and a decrease in income from loan servicing fees related to the Bank’s loan servicing fees and rights of $105,000, as well as a decrease in pension administration fees of $33,000 and a decrease in other income from errors at Sanders Morris of $32,000. These decreases were offset by an increase in service fees from the Bank’s Integra factoring division of $154,000, which was acquired effective July 1, 2021, and other immaterial fluctuations netting to an increase of $11,000. The decrease in third-party administration fees was primarily due to timing differences in completion of plan administration work between the two periods, pushing a larger portion of the work and related revenue into later quarters in the current year, compared to 2021.

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, 2022 increased $12,000, or 13.6%, compared to the same period in the prior year. The increase was primarily due to a new tenant moving into vacant space during the second quarter 2021.

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Non-Interest Expense

The components of non-interest expense were as follows:

	Three Months Ended March 31,
(In thousands)	2022		2021
Salaries and employee benefits	$	7,456	$	5,866
Occupancy and equipment		450		427
Trust expenses		598		564
Brokerage and advisory direct costs		528		506
Professional fees		401		450
Data processing		169		205
Other		1,357		775
Total	$	10,959	$	8,793

Total non-interest expense for the three months ended March 31, 2022 increased $2.2 million, or 24.6%, compared to the same period in the prior year, due to increases in salaries and employee benefits, occupancy expense, trust expenses, and other expenses, which were partially offset by decreases brokerage and advisory direct costs, professional fees, and data processing 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, 2022 increased $1.6 million, or 27.1%, compared to the same period in the prior year. The increase was primarily due to increases in bonuses, salaries, and related payroll expenses in our Banking segment, and in our Other Financial Services segment, primarily within the Bank’s Nolan division, as well as increases at Tectonic Advisors and Sanders Morris. In addition, health insurance and other employee benefits costs increased for the three months ended March 31, 2022 across the Company by $104,000, compared to the same period in the prior year due primarily to increases in headcount and rate increases. The increases in salary, bonus, and other related payroll costs during the three months ended March 31, 2022 relate primarily to an increase in salary and bonus expenses in our Banking segment of $954,000, $508,000 of which is related to the acquisition of the Bank’s Integra division in July 2021, and the remainder of which is related to merit increases in salaries and an increase in headcount, including in the Bank’s SBA division. Salaries and bonuses in our Other Financial Services segment increased $483,000, of which $303,000 is related to the Bank’s Nolan division, related to increases in headcount in response to growth in plan administration work in 2022, as well as increases in salaries at Tectonic Advisors of $98,000 due to merit increases and additional headcount in our investment operations team resulting from increases in our assets under management, and an increase in salary, commission, earnouts and incentive bonuses at Sanders Morris totaling $72,000, and an increase in stock compensation expense of $17,000, and an increase in salary and bonus expense at the Bank’s trust division of $11,000 over the same period in the prior year.

Occupancy and equipment expense. Occupancy and equipment expense for the three months ended March 31, 2022 increased $23,000, or 5.4%, compared to the same period in the prior year. The increase was related to increases totaling $71,000 at our Banking segment, offset by a decrease of $48,000 in our Other Financial Services segment. The increase of $71,000 at our Banking segment included an increase of $50,000 related to the acquisition of the Bank’s Integra division in July 2021, as well as increases in the Bank’s facilities expense of $21,000. The decrease of $47,000 in our Other Financial Services segment included decreases in depreciation expense of $23,000, facilities expense of $12,000, utilities and common area maintenance expense of $9,000, and in repairs expense of $7,000, partially offset by immaterial net increases of $3,000.

Trust expenses. Trust expenses are advisory fees paid to a fund advisor to advise the Company on the common trust funds managed by the Company, and are 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, 2022 increased $34,000, or 6.0%, 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, 2022 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, 2022 increased $22,000, or 4.3%, compared to the same period in the prior year. The increase for the three months ended March 31, 2022 related primarily to increases in information and other service fees at Tectonic Advisors of $34,000 and at Sanders Morris of $6,000, and an increase in fees related to advisory assets at Sanders Morris of $17,000 and in execution charges on brokerage transactions of $4,000, offset by decreases in brokerage and exchange clearing fees at Sanders Morris of approximately $21,000, and decreases in referral fees of $18,000, compared to the same period in the prior year.

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Professional fees. Professional fees, which include legal, consulting, audit and tax fees, for the three months ended March 31, 2022 decreased $49,000, or 10.9%, compared the same period in the prior year. The decreases were the result of decreases of $80,000 and $6,000 in our Other Financial Services and Holdco segments, respectively, offset by an increase of $37,000 in our Banking segment. The decrease in our Other Financial Services segment was primarily due to a decrease of $102,000 at the Bank’s trust department, which was primarily due to a decrease in consulting fees related to our participant directed plan services team, where staff increases have allowed us to reduce our reliance on consultants. This decrease was offset by an increase at the Bank’s Nolan division of $17,000 and legal fees at Tectonic Advisors of $4,000. The increase of $37,000 in our Banking segment for the three months ended March 31, 2022, which included an increase of $10,000 related to the Bank’s Integra division, was related to an increase in audit and tax consulting fees of $49,000, offset by a net decrease in legal and professional fees of $12,000.

Data processing. Data processing includes costs related to the Company’s operating systems. Data processing expense for the three months ended March 31, 2022 decreased $36,000, or 17.6%, compared to the same period in the prior year. The decrease was the result of a decrease of $42,000 in our Banking segment, offset by an increase of $6,000 in our Other Financial Services segment. The decrease in our Banking segment was primarily related to the conversion of the Bank’s core accounting system during the three months ended March 31, 2021, which increased expense during that earlier period. The increase in our Other Financial Services segment was related to an increase in costs at the Bank’s trust division of $11,000, offset by a decrease at the Bank’s Nolan division of $5,000.

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, 2022 increased $582,000, or 75.1%, compared to the same period in the prior year. The increase included increases of $339,000 and $161,000 in our Banking and Other Financial Services segments, respectively, and an increase in our Holdco segment of $82,000. The increase of $339,000 in our Banking segment included an increase of $124,000 related to other expenses at the Bank’s Integra division which was acquired in July 2021 and includes increases in marketing and advertising costs of $39,000, bank charges of $32,000, software costs of $12,000, and other operating costs of $41,000. Other increases in our Banking segment included an increase of $88,000 in software licenses, an increase of $36,000 in employee recruitment related primarily to growth, an increase in business insurance expense of $19,000, and an increase in bank service charges of $20,000, and other individually immaterial increases. The increase of $161,000 in our Other Financial Services segment was related to an increase in our marketing, advertising and public relations costs of $89,000, which includes marketing initiatives at Tectonic Advisors related to assets under management attributable to Cain Watters clients, and other marketing initiatives across the Company, as well as increases in travel, meals, and lodging of $25,000, and a net increase of $19,000 in software, licenses, and computer services related to technology initiatives across the company, and other individually smaller fluctuations which increased other expenses by $28,000. The increase of $82,000 in our Holdco segment was primarily the result of an increase of $67,000 in marketing and public relations initiatives across the Company, as well as other immaterial fluctuations netting to a $15,000 increase compared to the same period in the prior year.

Income Taxes

Income tax expense for the three months ended March 31, 2022 was approximately $1.0 million, compared to $1.3 million for the same period in the prior year. The effective income tax rate was 19.6% for the three months ended March 31, 2022, compared to 22.7% for the same period in the prior year.

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 operating 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 a TPA services unit 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.

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A third operating segment, HoldCo, 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:

	Three Months Ended March 31, 2022
(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated
Revenue(1)	$	7,131	$	9,704	$	(219	)	$	16,616
Income (loss) before taxes	$	3,131	$	2,873	$	(674	)	$	5,330

	Three Months Ended March 31, 2021
(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated
Revenue(1)	$	5,767	$	9,146	$	(134	)	$	14,779
Income (loss) before taxes	$	3,112	$	2,929	$	(483	)	$	5,558

(1)

Net interest income plus non-interest income

Banking

Income before taxes for the three months ended March 31, 2022 increased $19,000, or 0.6%, compared to the same period in the prior year. The increase was primarily the result of a $1.3 million increase in net interest income, a $101,000 decrease in the provision for loan losses, and a $71,000 increase in non-interest income, partly offset by a $1.4 million increase in non-interest expense.

Net interest income for the three months ended March 31, 2022 increased $1.3 million, or 23.2%, compared to the same period in the prior year, primarily due to an increase in interest-earning assets attributable to the factored receivables, related to the acquisition of Integra during the third quarter of 2021, and an increase in non-PPP SBA loan volume, partly offset by a decrease of the recognition of PPP-related SBA fees. Other changes included a decrease in average rates paid on interest-bearing deposits and an increase in average volume of interest-bearing deposits, which replaced the Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings as PPP loans have been forgiven by the SBA and paid off. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.

The provision for loan losses for the three months ended March 31, 2022 totaled $327,000, compared to $428,000 for the same period in the prior year. See “Allowance for Loan Losses” included elsewhere in this discussion.

Non-interest income for the three months ended March 31, 2022 increased $71,000, or 38.6%, compared to the same period in the prior year. The increase was due to the recording of $154,000 for factoring service fees for the three months ended March 31, 2022, related to the Integra acquisition during the third quarter of 2021, a $12,000 increase in rental income and a $10,000 increase in deposit servicing fees, partly offset by a $105,000 decrease in loan servicing fees. 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, 2022 increased $1.4 million, or 64.9%, compared to the same period in the prior year. The increases included salaries and employee benefits of $1.0 million for annual merit increases and increases in staff (including $564,000 for the addition of Integra), and incentive bonuses, occupancy and equipment expense of $70,000 (including $62,000 for the addition of Integra), professional fees of $37,000 (including $10,000 for the addition of Integra), and other expenses of $339,000 (including $112,000 for the addition of Integra, $100,000 for software development, $36,000 for employee recruiting fees, $22,000 for FDIC insurance premiums, $22,000 for other real estate expenses, $18,000 for other insurance premiums, and $29,000 for various other expenses), partly offset by a decrease in data processing of $86,000 (related to the Bank’s core system conversion costs during the three months ended March 31, 2021, and $22,000 for the operations of Integra for the three months ended March 31, 2022). See the analysis of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.

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Other Financial Services

Income before taxes for the three months ended March 31, 2022 decreased $56,000, or 1.9%, compared to the same period in the prior year. The increase during the three months ended March 31, 2022 was the result of an increase of $558,000 in non-interest income for the three months ended March 31, 2022, offset by an increase of $614,000 in non-interest expense.

Non-interest income for the three months ended March 31, 2022 increased $558,000, or 6.1%, compared to the same period in the prior year. The increase was primarily due to increases in advisory and trust income totaling $715,000 for the three months ended March 31, 2022, related to net inflows to our assets under management throughout 2021, as well as an increase in asset values compared to the same period in the prior year, when there was continued uncertainty as to the effects of the ongoing COVID-19 pandemic. These increases were offset by a decrease in brokerage income and service fees and other income of $93,000 and $64,000, respectively. The decrease in brokerage income was primarily the result of a decrease in commissions earned from general over-the-counter trading of $710,000 compared to the same period in the prior year, which was partially offset by an increase in commissions earned from offering activity of $475,000 and an increase in income from margin lending of $145,000 related to increases in market interest rates during the three months ended March 31, 2022, and other immaterial decreases. The decrease in service fees and other income was primarily related to decreases in revenue at the Bank’s Nolan division of $33,000 due primarily to timing differences compared to the flow of revenue during the same period in the prior year, and in a decrease in errors at Sanders Morris of $31,000. See also 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, 2022 increased $614,000, or 9.9%, compared to the same periods in the prior year. These increases were related to increases in salaries and employee benefits of $519,000, an increase in other expenses of $160,000, and increases in trust expenses and brokerage and advisory direct costs. These increases were offset by decreases in occupancy and equipment expense and in professional fees. Salaries and employee benefits expense in our Other Financial Services segment increased $519,000, of which $324,000 is related to promotions, merit increases and increases in headcount at the Bank’s Nolan division, in response to growth in plan administration work in 2022, as well as increases in salaries, bonuses, and commissions at Tectonic Advisors and Sanders Morris of $183,000 from additional headcount in our investment operations team related to increases in our assets under management, and an increase in salary, commission, earnouts, incentive bonuses, and stock compensation from merit increases and increases in advisory and syndicated offering activity. In addition, salary and benefits expense at the Bank’s trust division increased by $12,000 over the same period in the prior year. The increases in other expenses included an increase in marketing advertising and public relations expense of $89,000, related to initiatives across the segment aimed at supporting growth in our assets under management and our brokerage and third party administration services, increases in travel, meals, and lodging of $25,000, and a net increase of $19,000 in software, licenses, and computer services related to technology initiatives, and other immaterial fluctuations. Our trust expense increased by $34,000, and our brokerage and advisory direct costs increase by $22,000. The decreases in our occupancy and equipment expense and professional fees were primarily related to a decrease in information services expenses, and a decrease in professional fees related to consulting fees in our participant directed plan services team related to staffing increases, which reduced our reliance upon consultants, respectively. See also the analysis of non-interest income included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.

HoldCo

The loss before taxes for the three months ended March 31, 2022 increased $191,000, or 39.5%, compared to the same period in the prior year. The increase in the loss was due to a decrease in service fees and other income related to a decrease in distributions from securities not readily marketable of $85,000, an increase in salaries and benefits expense of $29,000 related to an increase in salary, bonuses, and related payroll taxes of $46,000, offset by a decrease in stock compensation expense of $17,000, and an increase in other expenses of $83,000, primarily related to an increase in costs for branding initiatives at our parent company of $67,000. These increases were offset by a decrease in professional fees of $6,000.

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.

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As of March 31, 2022, securities available for sale consisted of 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 not readily marketable consists of an income interest in a private investment.

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, 2022				As of December 31, 2021
(In thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	15,818	$	14,319	$	15,847	$	15,402
Mortgage-backed securities		1,656		1,642		1,724		1,754
Total securities available for sale	$	17,474	$	15,961	$	17,571	$	17,156

Securities held to maturity:
PACE investments	$	2,677	$	2,677	$	2,731	$	2,731
PID/TIRZ investments		16,962		16,962		16,942		16,942
Total securities held to maturity	$	19,639	$	19,639	$	19,673	$	19,673

Securities, restricted:
Other	$	2,842	$	2,842	$	2,432	$	2,432

Securities not readily marketable	$	100	$	100	$	100	$	100

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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, 2022. 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 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.

	Maturing
						After One Year					After Five Years
	One Year					Through					Through					After
	or Less					Five Years					Ten Years					Ten Years					Total
(In thousands, except percentages)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

Securities available for sale:
U.S. government agencies	$	-		-	%	$	2,001		0.54	%	$	10,157		1.07	%	$	3,660		0.83	%	$	15,818		0.95	%
Mortgage-backed securities		-		-			970		3.17			-		-			686		2.45			1,656		2.87
Total	$	-		-	%	$	2,971		1.40	%	$	10,157		1.07	%	$	4,346		1.09	%	$	17,474		1.13	%
Securities held to maturity:
PACE investments	$	-		-	%	$	-		-	%	$	-		-	%	$	2,678		7.32	%	$	2,678		7.32	%
PID/TIRZ investments		-					2,736		4.12			-		-			14,226		6.02			16,962		5.71
Total	$	-		-	%	$	2,736		4.12	%	$	-		-	%	$	16,904		6.22	%	$	19,640		5.93	%
Securities, restricted:
Other	$	-		-	%	$	-		-	%	$	-		-	%	$	-		-	%	$	2,842		-	%
Securities not readily marketable	$	-		-	%	$	-		-	%	$	-		-	%	$	-		-	%	$	100		-	%

Loan Portfolio Composition

Total loans excluding allowance for loan losses, decreased $2.3 million, or 0.5%, to $426.4 million at March 31, 2022, compared to $428.7 million at December 31, 2021. The decrease included $21.0 million of PPP loans forgiven by the SBA or repaid during the period, partly offset by increase of $18.7 million for organic loan growth. Total outstanding PPP loans were $13.1 million at March 31, 2022. SBA loans comprise the largest group of loans in our portfolio totaling $231.6 million, or 54.3% (52.9% excluding PPP loans) of the total loans at March 31, 2022, compared to $233.9 million, or 54.5% (50.6% excluding PPP loans) at December 31, 2021. Commercial and industrial loans totaled $88.3 million, or 20.7% (21.4% excluding PPP loans), of the total loans at March 31, 2022, compared to $83.3 million, or 19.4% (21.1% excluding PPP loans), at December 31, 2021. Commercial and construction real estate loans totaled $65.6 million, or 15.4% (15.9% excluding PPP loans), of the total loans at March 31, 2022, compared to $65.6 million, or 15.3% (16.6% excluding PPP loans), at December 31, 2021.

The following table sets forth the composition of our loans held for investment:

(In thousands, except percentages)	March 31, 2022				December 31, 2021
Commercial and industrial	$	88,329	20.7	%	$	83,348	19.4	%
Consumer installment		1,285	0.3			1,099	0.3
Real estate – residential		2,088	0.5			5,452	1.3
Real estate – commercial		62,596	14.7			62,966	14.7
Real estate – construction and land		3,026	0.7			2,585	0.6
SBA 7(a) guaranteed		145,042	34.0			145,983	34.0
SBA 7(a) unguaranteed		56,390	13.2			52,524	12.3
SBA 504		30,170	7.1			35,348	8.2
USDA		803	0.2			806	0.2
Factored Receivables		36,653	8.6			38,636	9.0
Total Loans	$	426,382	100.0	%	$	428,747	100.0	%

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At origination, the Company determines whether holding the guaranteed portion of SBA 7(a) and USDA loans provide better long-term risk adjusted returns than selling the loans, and records as either held for investment or held for sale. The Company records held for sale loans at the lower of cost or fair value. Loans held for sale totaled $25.5 million and $33.8 million at March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, the Company elected to reclassify $23.3 million of the SBA 7(a) loans held for sale to held for investment.

Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. As of March 31, 2022, our loan portfolio included $74.7 million of loans, approximately 17.5% of our total funded loans (18.1% excluding PPP loans), to the dental industry, compared to $67.3 million, or approximately 15.7% of our total funded loans (17.1% excluding PPP loans), as of December 31, 2021. We believe that these loans are to credit worthy borrowers and are diversified geographically.

As of March 31, 2022, 58.2% of the Company’s loan portfolio, or $248.1 million, matures or re-prices within one year or less. The following table presents the contractual maturity ranges for the Company’s loan portfolio as of March 31, 2022 and December 31, 2021, and also presents for each maturity range the portion of loans that have fixed interest rates or variable interest rates over the life of the loan in accordance with changes in the interest rate environment as represented by the base rate:

	Maturity Distribution of Loan Portfolio at March 31, 2022
(In thousands)	One Year or Less		Over One Year Through Five Years		Over Five Years Through Fifteen Years		Over Fifteen Years		Total Loans Receivable
Commercial and industrial	$	12,526	$	11,980	$	63,683	$	140	$	88,329
Consumer installment		317		968		-		-		1,285
Real estate – residential		124		1,964		-		-		2,088
Real estate – commercial		17,867		36,636		6,514		1,579		62,596
Real estate – construction and land		2,003		745		278		-		3,026
SBA 7(a) guaranteed		116,366		26,183		2,493		-		145,042
SBA 7(a) unguaranteed		47,939		7,361		864		226		56,390
SBA 504		13,466		13,044		3,660		-		30,170
USDA		803		-		-		-		803
Factored Receivables		36,653		-		-		-		36,653
Total	$	248,064	$	98,881	$	77,492	$	1,945	$	426,382

	Loans Due After One Year at March 31, 2022
(In thousands)	Fixed Rate		Floating or Adjustable Rate		Total
Commercial and industrial	$	74,461	$	1,342	$	75,803
Consumer installment		968		-		968
Real estate – residential		1,964		-		1,964
Real estate – commercial		7,891		36,838		44,729
Real estate – construction and land		1,023		-		1,023
SBA 7(a) guaranteed		16,603		12,073		28,676
SBA 7(a) unguaranteed		1,410		7,041		8,451
SBA 504		-		16,704		16,704
USDA		-		-		-
Factored Receivables		-		-		-
Total	$	104,320	$	73,998	$	178,318

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	Maturity Distribution of Loan Portfolio at December 31, 2021
(In thousands)	One Year or Less		Over One Year Through Five Years		Over Five Years Through Fifteen Years		Over Fifteen Years		Total Loans Receivable
Commercial and industrial	$	12,430	$	11,047	$	59,730	$	141	$	83,348
Consumer installment		109		990		-		-		1,099
Real estate – residential		211		5,241		-		-		5,452
Real estate – commercial		10,411		34,651		16,325		1,579		62,966
Real estate – construction and land		1,178		677		730		-		2,585
SBA 7(a) guaranteed		98,524		47,024		435		-		145,983
SBA 7(a) unguaranteed		47,460		4,659		177		228		52,524
SBA 504		16,880		14,786		3,682		-		35,348
USDA		806		-		-		-		806
Factored Receivables		38,636		-		-		-		38,636
Total	$	226,645	$	119,075	$	81,079	$	1,948	$	428,747

	Loans Due After One Year at December 31, 2021
(In thousands)	Fixed Rate		Floating or Adjustable Rate		Total
Commercial and industrial	$	69,707	$	1,211	$	70,918
Consumer installment		990		-		990
Real estate – residential		5,241		-		5,241
Real estate – commercial		10,191		42,364		52,555
Real estate – construction and land		1,407		-		1,407
SBA 7(a) guaranteed		35,278		12,181		47,459
SBA 7(a) unguaranteed		730		4,334		5,064
SBA 504		-		18,468		18,468
USDA		-		-		-
Factored Receivables		-		-		-
Total	$	123,544	$	78,558	$	202,102

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. The COVID-19 pandemic has contributed to an increased risk of delinquencies, defaults and foreclosures. Through the date of this filing, the Company has not experienced any loan charge-offs caused by the economic impact from COVID-19.

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. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the original loan contract.

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.

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Nonperforming assets include nonaccrual loans, loans modified under restructurings as a result of the borrower experiencing financial difficulties (“TDR”), factored receivables greater than 90 days past due and foreclosed assets. The following table sets forth certain information regarding non-performing assets and restructured loans by type, including ratios of such loans to total assets as of the dates indicated:

	March 31, 2022					December 31, 2021
(In thousands, except percentages)	Amount		Loan Category to Total Assets			Amount		Loan Category to Total Assets
Non-accrual loans:
Real estate – commercial	$	146		0.03	%	$	149		0.03	%
SBA guaranteed		2,356		0.42			2,039		0.35
SBA unguaranteed		63		0.01			-		-
Total non-accrual loans		2,565		0.45			2,188		0.37
Factored Receivables past due 90 days		263		0.05			400		0.07
Foreclosed assets		1,079		0.19			1,079		0.18
Total non-performing assets	$	3,907		0.69	%	$	3,667		0.63	%
Restructured loans on non-accrual	$	-		-	%	$	-		-	%

Restructured loans are considered “troubled debt restructurings” if, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a troubled debt restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current market rate for new debt with similar risk, or a reduction of the face amount of debt, either forgiveness of principal or accrued interest. As of March 31, 2022 and December 31, 2021, we had no loans considered to be a troubled debt restructuring.

As noted in Note 3, “Loans and Allowance for Loan Losses,” Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, provides financial institutions the option to suspend troubled debt restructuring accounting under GAAP in certain circumstances and the Company has elected that option. The Company has worked proactively with customers experiencing financial challenges from the COVID-19 pandemic. As of March 31, 2022 and December 31, 2021, the amount of loans remaining in COVID-19 related deferment was not significant.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”) is a valuation allowance for credit losses in the loan portfolio. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance, which includes allowance allocations calculated in accordance with FASB ASC Topic 310, Receivables, and allowance allocations calculated in accordance with FASB ASC Topic 450, Contingencies. The analysis is based on sound, reliable and well documented information and is designed to support an allowance that is adequate to absorb all estimated incurred losses in our loan portfolio.

In estimating the specific and general exposure to loss on impaired loans, we have considered a number of factors, including the borrower’s character, overall financial condition, resources and payment record, the prospects for support from any financially responsible guarantors, and the realizable value of any collateral.

We also consider other internal and external factors when determining the allowance for loan losses, which include, but are not limited to, changes in national and local economic conditions, loan portfolio concentrations, and trends in the loan portfolio. Given the level of economic disruption and uncertainty within the State of Texas and the nation as a whole, arising from the COVID-19 pandemic and volatility, the Company qualitatively adjusted the analysis for the allowance for loan losses for these and other risk factors as discussed in Item 1.A. “Risk Factors” of the 2021 Form 10-K. Based on an analysis performed by management at March 31, 2022, the allowance for loan losses is believed to be adequate to cover estimated loan losses in the portfolio as of that date based on the loan loss methodology employed by management. However, management’s judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, charge-offs in future periods may exceed the allowance for loan losses or significant additional increases in the allowance for loan losses may be required.

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Senior management and the Directors’ Loan Committee review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.

The allowance for loan losses totaled $4.4 million and $4.2 million, as of March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, the Company had one SBA charge-off of $43,000 and factored receivable charge-offs of $103,000, and recoveries of $4,000 for SBA loans and $17,000 for factored receivables. During the three months ended March 31, 2021, the Company had one SBA charge-off of $215,000 and recoveries of $4,000.

The table below presents a summary of the Company’s net loan loss experience and provisions to the ALLL for the period indicated:

	As of and for the Three Months Ended
	March 31,
(In thousands, except percentages)	2022			2021
Average total loans outstanding	$	452,237		$	438,784
Gross loans held for investment outstanding at end of period	$	426,382		$	430,179
Allowance for loan losses at beginning of period	$	4,152		$	2,941
Provision for loan losses		327			428
Charge offs:
SBA 7(a)		43			215
Factored receivables		103			-
Total charge-offs		146			215
Recoveries:
SBA 7(a)		4			4
Factored receivables		17			-
Total recoveries		21			4
Net charge-offs		(125	)		(211	)
Allowance for loan losses at end of period	$	4,354		$	3,158
Ratio of allowance to end of period loan		1.02	%		0.73	%
Ratio of net charge-offs to average loans (annualized)		0.03	%		0.05	%

The following table sets forth the allocation of the allowance as of the date indicated and the percentage of allocated possible loan losses in each category to total gross loans as of the date indicated:

(In thousands, except percentages)	March 31, 2022					December 31, 2021
Allocated:	Amount		Loan Category to Gross Loans			Amount		Loan Category to Gross Loans
Commercial and industrial	$	1,213		20.7	%	$	1,154		19.4	%
Consumer installment		17		0.3			15		0.3
Real estate – residential		29		0.5			76		1.3
Real estate – commercial		901		14.7			869		14.7
Real estate – construction and land		50		0.7			40		0.6
SBA		1,409		54.3			1,324		54.5
USDA		20		0.2			20		0.2
Factored Receivables		715		8.6			654		9.0
Total allowance for loan losses	$	4,354		100.0	%	$	4,152		100.0	%

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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. During the second quarter of 2020, we received $40.0 million in brokered deposits through an Insured Cash Sweep One-Way Buy agreement to provide liquidity to fund PPP loan originations. This brokered deposit is included in our money market accounts as of March 31, 2022.

Total deposits were $444.2 million as of March 31, 2022, unchanged from December 31, 2021. 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:

	For the three months ended March 31,
	2022								2021
(In thousands, except percentages)	Average Balance		Percent of Deposits			Average Rate			Average Balance		Percent of Deposits			Average Rate
Non-interest-bearing deposits	$	96,467		21.3	%		0.00	%	$	56,044		15.9	%		0.00	%
Savings and interest-bearing demand		14,579		3.2			0.25			12,091		3.4			0.23
Money market accounts		135,106		29.9			0.37			107,089		30.4			0.37
Time deposits		206,182		45.6			1.02			176,968		50.3			1.27
Total deposits	$	452,334		100.00	%		0.74	%	$	352,192		100.00	%		0.91	%

The following table provides information on the maturity distribution of the insured time deposits and the time deposits exceeding the FDIC insurance limit as of March 31, 2022:

	As of March 31, 2022
(Dollars in thousands)	Insured		Uninsured		Total
Maturing
Three months or less	$	13,824	$	20,294	$	34,118
Over three months to six months		36,775		16,308		53,083
Over six months to 12 months		47,117		27,104		74,221
Over 12 months		31,838		3,064		34,902
Total	$	129,554	$	66,770	$	196,324

Borrowings

The table below presents balances of each of the borrowing facilities as of the dates indicated:

	March 31,		December 31,
(In thousands)	2022		2021
Borrowings:
FRB borrowings (PPPLF)	$	13,200	$	34,521
Subordinated notes		12,000		12,000
	$	25,200	$	46,521

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The Company has a credit line with the FHLB with borrowing capacity of $44.5 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, 2022 and December 31, 2021.

The Company also has a credit line with the FRB with borrowing capacity of $23.0 million, which is secured by commercial loans. There were no outstanding borrowings against the FRB line of credit as of March 31, 2022 and December 31, 2021.

In connection with the PPPLF, $13.2 million of PPP loans was pledged to the Federal Reserve and borrowed as of March 31, 2022, at an interest rate of 0.35%.

Capital Resources and Regulatory Capital Requirements

Shareholders’ equity increased $2.5 million, or 3.0%, to $87.3 million as of March 31, 2022, from $84.8 million as of December 31, 2021. The increase included net income of $4.3 million, $87,000 related to stock compensation expense and the issuance of common stock related to exercise of stock options in the amount of $43,000. The increases were partly offset by an $868,000 net after-tax decrease in other comprehensive income related to the decrease in market value of the securities available for sale due to the recent significant increases in market interest rates, the repurchase of common stock in the amount of $181,000 and dividends paid on the Series B preferred stock and paid on the common stock in the amounts of $388,000 and $441,000, 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, 2022, the Company and the Bank met all capital adequacy requirements to which they were subject. As of March 31, 2022, the Bank qualified as “well capitalized” under the prompt corrective action regulations of Basel III and the OCC.

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, 2022					December 31, 2021
	Amount		Ratio			Amount		Ratio
Tectonic Financial, Inc.
Tier 1 Capital (to Average Assets)	$	66,051		12.28	%	$	62,794		11.82	%
Common Equity Tier 1 (to Risk Weighted Assets)		48,801		13.37			45,544		12.62
Tier 1 Capital (to Risk Weighted Assets)		66,051		18.10			62,794		17.40
Total Capital (to Risk Weighted Assets)		70,405		19.29			66,946		18.55

T Bank, N.A.
Tier 1 Capital (to Average Assets)	$	66,739		12.55	%	$	63,302		12.06	%
Common Equity Tier 1 (to Risk Weighted Assets)		66,739		18.45			63,302		17.70
Tier 1 Capital (to Risk Weighted Assets)		66,739		18.45			63,302		17.70
Total Capital (to Risk Weighted Assets)		71,093		19.65			67,454		18.87

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Sanders Morris is regulated by FINRA, which, among other requirements, imposes minimums on its net regulatory capital. As of March 31, 2022, 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, 2022 the Company had approximately $32.8 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, 2022, the Company’s borrowing capacity with the FHLB was $44.5 million based upon loan collateral pledged to the FHLB, of which none was utilized as of March 31, 2022. In addition, the Company had $15.8 million of unpledged securities that could be pledged to the FHLB as collateral to increase the borrowing capacity. The borrowing capacity with the FRB was $23.0 million, of which none was utilized as of March 31, 2022. In addition, the Company has approximately $132.0 million of SBA guaranteed loans held for investment that could be sold to investors.

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.

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, 2022, we had commitments to extend credit and standby letters of credit of approximately $39.4 million and $282,000, respectively.

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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, 2022:

Change in Interest Rates (basis points)	% Change in Net Interest Income
+200	10.79
+100	5.39
-100	(5.71	)
-200	(16.28	)

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.

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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(e) 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, 2022 that has materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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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.

There have been no material changes in the risk factors disclosed under Item 1A., “Risk Factors,” of the Company’s 2021 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None during the quarter ended March 31, 2022.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits and Financial Statement Schedules.

Exhibit No.		Description of Exhibit

3.1		Amended and Restated Certificate of Formation (incorporated by reference from Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-1/A filed with the SEC on May 9, 2019 (File No. 333-230949))
3.2		Certificate of Designation of 10.0% Series A Non-Cumulative Perpetual Preferred Stock (incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on May 16, 2019 (File No. 001-38910))
3.3		Certificate of Designation of 9.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock (incorporated by reference from Exhibit 3.2 to the Current Report on Form 8-K filed with the SEC on May 16, 2019 (File No. 001-38910))
3.4		Certificate of Amendment to effect Reverse Stock Split (incorporated by reference from Exhibit 3.3 to the Current Report on Form 8-K filed with the SEC on May 16, 2019 (File No. 001-38910))
3.5		Amended and Restated Bylaws (incorporated by reference from Exhibit 3.5 to Amendment No. 1 to the Registration Statement on Form S-1/A filed with the SEC on May 6, 2019 (File No. 333-230949))
31.1		Rule 13a-14(a) Certification of Principal Executive Officer*
31.2		Rule 13a-14(a) Certification of Principal Financial Officer*
32.1		Section 1350 Certification**

101.INS		Inline XBRL Instance Document*
101.SCH		Inline XBRL Taxonomy Extension Schema Document*
101.CAL		Inline XBRL Taxonomy Extension Label Calculation Linkbase Document*
101.DEF		Inline XBRL Taxonomy Definition Linkbase*
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase*
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith
**	Furnished herewith

Table of Contents

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.

	TECTONIC FINANCIAL, INC.

Date: May 16, 2022	By:	/s/ A. Haag Sherman

		A. Haag Sherman Chief Executive Officer/Principal Executive Officer

	By:	/s/ Ken Bramlage

		Ken Bramlage Executive Vice President and Chief Financial Officer/Principal Financial Officer