TECTONIC FINANCIAL, INC. This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see "Cautionary Statement Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. Our actual results could differ significantly from those anticipated in these estimates and in the forward-looking statements as a result of certain factors, including those discussed in the section of this Form 10-K captioned "Risk Factors," and elsewhere in this Form 10-K. Company Overview
We are a financial holding company headquartered in
We operate through four main direct and indirect subsidiaries: (i)T Bancshares, Inc. ("T Bancshares") which was incorporated under the laws of theState of Texas onDecember 23, 2002 to serve as the bank holding company for the Bank, (ii)Sanders Morris Harris LLC ("Sanders Morris"), a registered broker-dealer withFINRA , and registered investment advisor with theSEC , (iii)Tectonic Advisors, LLC ("Tectonic Advisors ") a registered investment advisor registered with theSEC focused generally on managing money for relatively large, affiliated institutions and investment advisors, as well as for their clients, and (iv)HWG Insurance Agency LLC ("HWG"), an insurance agency registered with theTexas Department of Insurance ("TDI"). 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 Bank's traditional fiduciary services clients primarily consist of clients ofCain Watters & Associates L.L.C. ("Cain Watters"). The Bank also offers lending services, including commercial loans to small-to medium-sized businesses and professional concerns, as well as consumers,The Nolan Company ("Nolan"), operating from its office inOverland Park, Kansas as a division within the Bank, offers third party administration ("TPA") services, andIntegra Funding Solutions, LLC ("Integra"), operating from itsFort Worth, Texas office 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 includesDallas ,Tarrant ,Denton ,Collin andRockwall counties which encompass an area commonly referred to as theDallas/Fort Worth Metroplex . The Bank also provides focused services to the dental and other health professional industries through a centralized loan and deposit platform that operates out of its main office inDallas, Texas . In addition, the Bank serves the small business community by offering loans guaranteed by theSmall Business Administration ("SBA") and theU.S. Department of Agriculture ("USDA"). Sanders Morris provides brokerage, advisory, and wealth management services to high and ultra-high net worth individuals in a broad geographic area that includesTexas , with a concentration of clients in theHouston, Texas metroplex area, as well as clients acrossthe United States .Tectonic Advisors provides advisory and wealth management services primarily to affiliated institutions and their clients, including the Bank, Cain Watters, and their clients, under long-standing advisory and due diligence agreements. We have three operating segments: Banking,Other Financial Services andHoldCo . Our banking operating segment encompasses both commercial and consumer banking services, as well as factoring services. OurOther Financial Services segment includes the activities ofTectonic Advisors , Sanders Morris, the Bank's Trust Division, which includes Nolan, and HWG. OurHoldCo operating segment includes the Bank's immediate parent,T Bancshares , and related subordinated debt, as well as operations of the financial holding company that serves as parent for the group overall. See the section entitled Segment Reporting, below, for more information. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,T Bancshares , the Bank,Tectonic Advisors , Sanders Morris, and through Sanders Morris, HWG. All intercompany transactions and balances are eliminated in consolidation. 62
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Recent Developments Related to the COVID-19 Pandemic
The Company has been, and may continue to be, impacted by the ongoing outbreak of the COVID-19 pandemic. InMarch 2020 , COVID-19 was declared a pandemic by theWorld Health Organization and a national emergency by the President ofthe United States . Efforts to limit the spread of COVID-19 have included shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts ofthe United States and, in particular, the markets in which we operate. Throughout 2021, the spread of the Delta and Omicron variants of COVID-19 resulted in increased infection rates, fueling fears of a virus resurgence. As a result, significant uncertainty remains about the duration of the pandemic as well as the timing and extent of the economic recovery. We continue to evaluate protocols and processes in place to execute our business continuity plans and help promote the health and safety of our employees and customers, including restricting employee travel, encouraging employees to work from home where possible, continuing drive-thru only service at our bank location with specific needs facilitated by appointment, and implementing social distancing guidelines within our offices. Many of these measures remain in place due to the continued prevalence of the virus. While all industries could experience adverse effects related to the COVID-19 pandemic, our loan portfolio includes customers in industries such as dental, travel, hotel, leisure, retail, convenience store, restaurant and entertainment, which industries have all been adversely impacted by the COVID-19 pandemic. While the Company has not experienced any material losses related to such industries in the portfolio, management recognizes that these industries may take longer to recover and continues to monitor these customers closely. The commercial credit area continues to communicate regularly with the borrowers and monitors their activity closely. This information is used to analyze the performance of these loans and to anticipate any potential issues that these loans may develop so that risk ratings may be appropriately adjusted in a timely manner. See the section captioned "Allowance for Loan Losses" included elsewhere in this discussion for further analysis of the provision for loan losses. Actions were taken by the federal government, the President, and theFederal Reserve to mitigate the economic effects of COVID-19. OnMarch 27, 2020 , the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the PPP, a program administered by the SBA, designed to aid small- and medium-sized businesses, sole proprietors and other self-employed persons for payroll and certain other permitted expenses, through federally guaranteed loans distributed through banks. OnDecember 27, 2020 , the Coronavirus Response and Relief Supplemental Appropriations Act ("Coronavirus Relief Act") was signed into law and extended the authority of lenders to make PPP loans throughMarch 31, 2021 . The PPP application period was later extended to the earlier ofMay 31, 2021 , or such date when all PPP funds are exhausted. As an SBA Preferred Lender, we originated 922 PPP loans totaling$98.3 million during 2020 and 694 PPP loans totaling$66.2 million during 2021, to both existing and new customers. As ofDecember 31, 2021 , the Bank had outstanding PPP loans totaling$34.1 million in its loan portfolio. As a result of the COVID-19 pandemic, we also implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers by deferring loan payments. For borrowers requiring a longer-term modification following the short-term loan modification program, we worked with eligible borrowers to modify such loans under Section 4013 of the CARES Act. As ofDecember 31, 2021 , there were two loans in the COVID-19 related deferment with an aggregate balance of approximately$679,000 , down from 11 loans with an aggregate balance of approximately$4.3 million as ofDecember 31, 2020 . We believe our response to the pandemic has allowed and continues to allow us to appropriately support our associates and clients and their communities. Despite the overall improvements in the economic and public health outlooks inthe United States during 2021, the financial markets remain reactionary, in part due to the lingering effects of the pandemic, and the emergence of the Delta variant during the second quarter and the Omicron variant during the fourth quarter. The result of this is continuing uncertainty about the future impact of the pandemic on our business, results of operations and financial condition.
Critical Accounting Policies and Estimates
We prepare consolidated financial statements based on 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.
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Estimation of the allowance for loan losses
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 theState 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 the section captioned "Risk Factors" of this Form 10-K. Based on an analysis performed by management atDecember 31, 2020 , 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. Senior management and the Directors' Loan Committee review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly. See additional discussion of the allowance for loan losses in Note 1 to our Consolidated Financial Statements. Integra Acquisition OnJuly 1, 2021 , we, through our wholly-owned subsidiaryT Bancshares , acquired Integra through the merger of Integra with and intoT Bancshares , withT Bancshares surviving the merger. Integra's activity is reported within our Banking segment. Integra is a factoring company that provides financing to smaller transportation companies acrossthe 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 related to the acquisition of Integra, which is reported in non-interest expense on our consolidated statements of income. Performance Summary Net income available to common shareholders totaled$15.5 million , or$2.21 per diluted common share for the year endedDecember 31, 2021 , compared to$9.4 million , or$1.42 per diluted common share for the year endedDecember 31, 2020 , an increase of$6.1 million or 64.9%. The increase in net income available to common shareholders for the year endedDecember 31, 2021 was the result of a$10.1 million increase in net interest income and a$2.9 million increase in non-interest income, offset by a$4.6 million increase in non-interest expense, a$505,000 increase in the provision for loan losses and a$1.8 million increase in income tax expense. Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, this Form 10-K 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. 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. 64
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For the year endedDecember 31, 2021 , annual return on average assets was 3.06%, compared to 2.31% for the prior year, and annual return on average tangible common equity was 45.68%, compared to 37.68% for the prior year. The higher returns on average assets and average tangible common equity for the year endedDecember 31, 2021 was due to increases in income, primarily from increases in net interest income related to acquisition of factored receivables, increases in SBA loans, including PPP loans, and non-interest income, partially offset by increases in non-interest expense. The following table reconciles net income to income available to common shareholders and presents the calculation of return on average tangible common equity: As of and for the As of and for the Year Ended Year Ended (In thousands, except percentages) December 31, 2021 December 31, 2020 Income available to common shareholders $ 15,482 $ 9,373 Average shareholders' equity $ 68,156 $ 53,938 Less: average goodwill 16,129 10,729 Less: average core deposit intangible 885 1,086 Less: average preferred stock 17,250 17,250 Average tangible common equity $ 33,892 $ 24,873 Return on average tangible common equity 45.68 % 37.68 % Total assets grew by$71.6 million , or 13.9%, to$585.0 million as ofDecember 31, 2021 , from$513.4 million as ofDecember 31, 2020 . This increase primarily included the addition of$38.7 million of factored receivables and$10.7 million for goodwill, both resulting from the acquisition of Integra onJuly 1, 2021 , along with increases of$27.2 million for non-PPP SBA loans,$8.1 million for non-SBA loans,$18.9 million for loans held for sale,$13.9 million for investments, and$1.0 million for other real estate owned. The increases were partly offset by decreases of$48.4 million for PPP loans. Shareholders' equity increased$24.8 million , or 41.3%, to$84.8 million as ofDecember 31, 2021 , from$60.0 million as ofDecember 31, 2020 . See analysis of shareholders' equity in the section captioned "Capital Resources and Regulatory Capital Requirements" included elsewhere in this discussion. Results of Operations
Details of the changes in the various components of net income are discussed below.
Net Interest Income Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in net interest income result from changes in volume and spread, and are reflected in 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. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies ofthe United States government, its agencies and various other governmental regulatory authorities. TheFederal Reserve lowered the target range for federal funds two times in 2020, and none during 2021. During 2020, the effective federal funds rate decreased 150 basis points duringMarch 2020 (50 basis points onMarch 3, 2020 and 100 basis points onMarch 15, 2020 ) to zero to 0.25%, where it remained throughDecember 31, 2021 . 65
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The following tables presents 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.
2021 vs 2020
Increase (Decrease) Due to Change in
Average
(In thousands) Rate Volume Total
Interest-bearing deposits and federal funds sold
(10 ) $ (53 )
Securities (134 ) 250 116
Loans, net of unearned discount (1) 3,840 4,603 8,443
Total earning assets 3,663 4,843 8,506
Savings and interest-bearing demand (6 ) 10 4
Money market deposit accounts (154 ) 81 (73 )
Time deposits (1,532 ) (140 ) (1,672 )
FHLB and other borrowings (10 ) 109 99
Subordinated notes - - -
Total interest-bearing liabilities (1,702 ) 60 (1,642 )
Changes in net interest income $ 5,365 $ 4,783 $ 10,148 (1) Include non-accrual loans.
Net interest income increased$10.1 million , or 65.0% to$25.8 million for year endedDecember 31, 2021 . Net interest margin for the year endedDecember 31, 2021 and 2020 was 4.96% and 3.50%, respectively, an increase of 146 basis points. The increase in net interest income and margin was primarily due to the increase in interest-earning assets attributable to the factored receivables acquired in the Integra acquisition, and the timing of recognition of PPP-related SBA fees. Other changes included a decrease in average rates paid on interest-bearing deposits and decrease in average volume of interest-bearing deposits which were replaced by non-interest-bearing deposits and Paycheck Protection Program Liquidity Facility ("PPPLF") borrowings. The average volume of interest-earning assets increased$72.8 million , or 16.3%, from$446.4 million for the year endedDecember 31, 2020 to$519.2 million for the year endedDecember 31, 2021 . The average volume of loans increased$72.2 million , or 19.2%, from$376.1 million for the year endedDecember 31, 2020 to$448.3 million for the year endedDecember 31, 2021 . The increase in the average volume of loans included increases of$41.4 million for organic loan growth,$12.6 million increase of PPP loans, and also the acquired portfolio atJuly 1, 2021 of$18.3 million for factored receivables purchased. The average yield for loans increased 103 basis points from 5.30% for the year endedDecember 31, 2020 to 6.33% for the year endedDecember 31, 2021 . InApril 2020 , we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. In 2020, we funded$98.3 million of PPP loans, all during the second quarter of 2020. As ofDecember 31, 2021 , the entire amount of PPP loans originated in 2020 have been forgiven by the SBA and were paid off or repaid by the borrower. During the year endedDecember 31, 2021 , we funded an additional$66.2 million of PPP loans, of which$32.1 million have been forgiven by the SBA and were paid off or repaid by the borrower. Total outstanding PPP loans were$34.1 million as ofDecember 31, 2021 . During the year endedDecember 31, 2021 , we recognized$4.8 million 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 an increase of$3.0 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 was 7.3% during the year endedDecember 31, 2021 . During the year endedDecember 31, 2021 , we recognized$4.7 million of interest income related to the factored receivables purchased, with an average yield of 25.5%. Of this amount,$492,000 was related to the discount applicable to the fair value of the factored receivables purchased. Without this discount, the average yield was 22.8%. 66
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The average volume of interest-bearing liabilities increased$42.0 million , or 11.6%, from$362.1 million for the year endedDecember 31, 2020 to$404.1 million for the year endedDecember 31, 2021 . The average volume of interest-bearing deposits increased$12.4 million , or 4.0%, from$306.7 million for the year endedDecember 31, 2020 to$319.1 million for the year endedDecember 31, 2021 , and the average interest rate paid on interest-bearing deposits decreased 60 basis points from 1.38% for the year endedDecember 31, 2020 to 0.78% for the year endedDecember 31, 2021 . The average volume of non-interest bearing deposits increased$25.1 million , or 49.0%, from$51.2 million for the year endedDecember 31, 2020 to$76.3 million for the year endedDecember 31, 2021 . The average cost of deposits during the year endedDecember 31, 2021 was impacted by decreases in interest rates paid on money market and time deposits as a result of the aforementioned decrease in market interest rates. The average volume of FHLB and other borrowings increased$29.6 million , or 68.2%, from$43.4 million for the year endedDecember 31, 2020 to$73.0 million for the year endedDecember 31, 2021 , consisting mostly of funding from the PPPLF, at an interest rate of 0.35%, used to fund the PPP loans. The average cost of FHLB and other borrowings decreased 2 basis points from 0.39% for the year endedDecember 31, 2020 to 0.37% for the year endedDecember 31, 2021 . The following table sets forth our average balances of assets, liabilities and shareholders' equity, in addition to the major components of net interest income and our net interest margin, for the years endedDecember 31, 2021 and 2020. Year Ended December 31, 2021 2020 (In thousands, except Average Average Average Average percentages) Balance Interest Yield Balance Interest Yield Assets Interest-bearing deposits and federal funds sold$ 38,634 $ 50 0.13 %$ 46,395 $ 103 0.22 % Securities 32,292 955 2.96 23,868 839 3.52 Loans, net of unearned discount (1) 448,284 28,379 6.33 376,088 19,936 5.30 Total earning assets 519,210 29,384 5.66 446,351 20,878 4.68 Cash and other assets 41,652 29,395 Allowance for loan losses (3,344 ) (2,285 ) Total assets$ 557,518 $ 473,461 Liabilities and Shareholders' Equity Savings and interest-bearing demand$ 13,907 35 0.25 %$ 9,977 31 0.31 % Money market deposit accounts 118,577 432 0.36 96,582 505 0.52 Time deposits 186,647 2,015 1.08 200,159 3,687 1.84 Total interest-bearing deposits 319,131 2,482 0.78 306,718 4,223 1.38 FHLB and other borrowings 73,015 270 0.37 43,411 171 0.39 Subordinated notes 12,000 875 7.29 12,000 875 7.29 Total interest-bearing liabilities 404,146 3,627 0.90 362,129 5,269 1.46 Non-interest-bearing deposits 76,328 51,168 Other liabilities 8,888 6,226 Total liabilities 489,362 419,523 Shareholders' equity 68,156 53,938 Total liabilities and shareholders' equity$ 557,518 $ 473,461 Net interest income$ 25,757 $ 15,609 Net interest spread 4,76 % 3.22 % Net interest margin 4.96 % 3.50 %
(1) Includes non-accrual loans.
Provision for Loan Losses
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.
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For the years endedDecember 31, 2021 and 2020, the provision for loan losses totaled$2.2 million and$1.7 million , respectively. See the section captioned "Allowance for Loan Losses" included elsewhere in this discussion for further analysis of the provision for loan losses. Non-Interest Income
The components of non-interest income were as follows:
Year Ended December 31,
(In thousands) 2021 2020
Trust income $ 6,252 $ 5,118
Gain on sale of loans 101 722
Advisory income 13,472 14,054
Brokerage income 9,644 7,676
Service fees and other income 6,790 5,832
Rental income 365 319
Total $ 36,624 $ 33,721
Total non-interest income for the year ended December 31, 2021 increased $2.9
million , or 8.6%, as compared to the year ended December 31, 2020 . 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. The volatility of the bond and equity
markets impacts the market value of trust assets and the related fees. Trust
income for the year ended December 31, 2021 increased $1.1 million , or 22.2%,
compared to the year ended December 31, 2020 . The fee income increased between
the two years due to an increase in the average market value of the trust assets
over the year ended December 31, 2020 , due to both asset inflows and increases
in asset values.
Gain on sale of loans. Gain on sale of loans primarily reflects the gain from
the sale of the guaranteed portion of SBA 7(a) and USDA loans originated by the
Bank's SBA lending group. Gain on sale of loans decreased $621,000 , or 86.0%,
for the year ended December 31, 2021 , compared to the year ended December 31,
2020 . A strategic decision on the part of management was made during 2017 to
retain more of the guaranteed portion of SBA 7(a) and USDA loans originated to
increase interest income over time. We have followed this strategy, and the
guaranteed portion of fewer SBA and USDA loans were sold after such date, though
we will likely continue to sell the guaranteed portion of certain loans from
time to time. During the year ended December 31, 2020 , there were loan sales
resulting in $722,000 of gain on sale of loans. For the year ended December 31,
2021 , sales of loans decreased, generating only $101,000 .
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. In addition to fees based on a percentage of underlying assets, payments
under certain advisory agreements at Sanders Morris are based on the performance
of the respective account, measured as a percentage of the increase achieved in
the asset values in the respective account. Performance based fees, though the
agreements may remain in place from year to year, are far less predictable,
given the uncertainty of the ability to achieve an increase of the same level as
in prior periods, or at all. For the year ended December 31, 2021 , advisory
income decreased $582,000 , or 4.1%, compared to the year ended December 31,
2020 . This decrease during the year ended December 31, 2021 was primarily due to
a decrease in performance based advisory fees at Sanders Morris totaling $3.5
million , which was partially offset by an increase in advisory fees based on a
percentage of the underlying assets at Tectonic Advisors and Sanders Morris
totaling $2.9 million .
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, cash held in brokerage accounts which funds
margin lending, and on private placement and syndication activity during the
period. Brokerage income for the year ended December 31, 2021 increased $2.0
million , or 25.6%, compared to the year ended December 31, 2020 . This increase
is primarily due to a recovery in private placement and syndicated offering
activity due to a recovery in demand for these investments and a backlog of this
activity related to a loosening of the travel and contact restrictions put in
place during the peak of the COVID-19 pandemic, and a recovery in traditional
brokerage activity.
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The table below reflects a rollforward of our client assets, which includes both advisory and brokerage assets, as ofDecember 31, 2021 and 2020, and the inflows and outflows and market appreciation during the years then ended. Our brokerage and advisory assets experienced an increase of approximately$1.1 billion , or 24.0%, and$479.2 million , or 11.8%, during the years endedDecember 31, 2021 and 2020, respectively, related to positive net flows and market appreciation. (In thousands) Tectonic Advisors Sanders Morris Total As of January 1, 2020 $ 2,057,570$ 1,987,648 $ 4,045,2181 Client inflows 491,411 951,841 1,443,252 Client outflows (430,773 ) (866,166 ) (1,296,939 ) Net flows 60,638 85,675 146,313 Market appreciation 215,829 117,016 332,844 As of December 31, 2020 2,334,037 2,190,339 4,524,376 Client inflows 531,768 2,110,859 2,642,627 Client outflows (296,819 ) (1,906,936 ) (2,203,755 ) Net flows 234,949 203,923 438,872 Market appreciation 283,994 362,070 646,064 As of December 31, 2021 $ 2,852,980$ 2,756,332 $ 5,609,312 Service fees and other income. Service fees includes fees for deposit-related services, and third party administrative fees related to the acquisition of Nolan. Service fees and other income for the year endedDecember 31, 2021 increased$958,000 , or 16.4%, compared to the year endedDecember 31, 2020 , which was primarily due to an increase in the administrative fees recorded for services provided by Nolan of$755,000 , increase in factoring service fees from the Bank's Integra factoring division of$249,000 , an increase in income distributions from an interest in securities not readily marketable carried at cost basis totaling$183,000 , an increase in consulting fees earned by Sanders Morris'Dallas branch of$76,000 , as well as individually immaterial increases in other bank service fees totaling$28,000 . These increases were offset by a decrease in net loan servicing fees of$132,000 , primarily due to reversal of the servicing asset valuation allowance during the year endedDecember 31, 2020 , a decrease in other income of approximately$71,000 related to a non-recurring referral fee for a loan conversion during 2020, and other individually immaterial decreases in other income and gains and losses on marketable securities at Sanders Morris totaling$38,000 . Rental income. The Company receives monthly rental income from tenants leasing space in the Bank building. Rental income for the year endedDecember 31, 2021 increased$46,000 , or 14.4%, compared to the year endedDecember 31, 2020 due to the granting of rent abatements related to the COVID-19 pandemic during 2020, and an increase in occupancy in 2021 compared to 2020. Non-Interest Expense
The components of non-interest expense were as follows:
Year Ended December 31,
(In thousands) 2021 2020
Salaries and employee benefits
1,837 1,919
Trust expenses 2,416 1,994
Brokerage and advisory direct costs 2,051 2,048
Professional fees 1,539 1,345
Data processing 964 774
Other expense 4,576 3,388
Total $ 38,330 $ 33,699
Total non-interest expense for the year ended December 31, 2021 increased $4.6
million , or 13.7%, compared to the year ended December 31, 2020 . Changes in the
various components of non-interest income are discussed below.
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Salaries and employee benefits. Salaries and employee benefits include employee payroll expense, incentive compensation, health insurance, benefit plans and payroll taxes. Salaries and employee benefits increased$2.7 million , or 12.2%, from$22.2 million for the year endedDecember 31, 2020 to$24.9 million for the year endedDecember 31, 2021 . In our other financial services segment, salaries and employee benefits decreased$133,000 . The decrease was primarily from a decrease in commissions paid at Sanders Morris primarily from a sharp decrease in performance-based advisory fees discussed above under advisory income within non-interest income accounted of$2.7 million , partially offset by increases in incentive bonuses at Sanders Morris related to traditional brokerage, private placement, and syndicated offerings activity of$1.1 million and an increase in salaries, payroll taxes, and other benefits of$126,000 atTectonic Advisors and$472,000 at Sanders Morris. Salaries, bonuses and payroll taxes at the Bank's Nolan division increased$599,000 related to staff increases to accommodate the increase in the number of plans administered and merit increases. Salaries, taxes and other benefits in our trust group within our other financial services segment increased$63,000 . Salaries and employee benefits in our banking segment increased$2.6 million , primarily for annual merit increases, increases in staff including the addition of Integra, and incentive bonuses. Stock-based compensation increased$179,000 , and salaries, taxes and other benefits increased$118,000 . Health insurance related benefits overall increased approximately$232,000 , primarily due to increases in headcount, including the addition of the Bank's Integra factoring division. Workers' compensation coverage increased by$11,000 . Occupancy and equipment expense. Occupancy and equipment expense includes building, furniture, fixtures and equipment depreciation and maintenance costs. Occupancy and equipment expense decreased$82,000 , or 4.2%, from$1.9 million for the year endedDecember 31, 2020 to$1.8 million for the year endedDecember 31, 2021 . The decrease is primarily due to a decrease occupancy and equipment expense in our other financial services division of$197,000 , led by a decrease in rental and common area maintenance expense of$147,000 driven by lower costs related to the COVID-19 pandemic, and depreciation expense of$100,000 from certain fixed assets and software costs that reached full depreciation/amortization early in the second quarter 2020. This was partially offset by increases in parking, repairs and maintenance, and facilities expenses totaling$50,000 . Rent expense in our banking segment increased$115,000 , primarily from the addition of the Bank's Integra factoring division, where we incurred$82,000 in rent expense and an additional$16,000 in facilities and depreciation expense, and an increase in facilities and depreciation expense in our Bank facility of$17,000 . Trust expenses. Trust expenses are incurred in our other financial services segment, and include advisory fees paid on the common trust funds managed by the Company based on the value of the assets held in custody. The volatility of 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 increased by$422,000 for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 based on increases in asset values of the Bank's common trust funds from both net cash inflows and increases in asset values. Brokerage and advisory direct costs. Brokerage and advisory direct costs increased$3,000 , or less than 1.0%, and were approximately$2.0 million for each the year endedDecember 31, 2020 andDecember 31, 2021 . Brokerage and advisory direct costs are incurred primarily in our other financial services segment, and include the cost of clearing firm services and fees on advisory assets from custodians and certain referral fees, as well as information services related to our advisory and trading activity. Expenses atTectonic Advisors and HWG increased$43,000 and$10,000 , respectively, related to increases in information services and other service fees, which were offset by decreases in referral fees. The increase was offset by a decrease in brokerage and advisory direct costs at Sanders Morris of$50,000 , related to a decrease in clearing firm service fees and fees on advisory assets of$71,000 , offset by an increase in service fees and referral fees of$21,000 . Professional fees. Professional fees, which include legal, consulting, audit and tax fees, increased$194,000 , or 14.4%, from$1.3 million for the year endedDecember 31, 2020 to$1.5 million for the year endedDecember 31, 2021 . The increase included an increase in legal fees of$103,000 , which was made up of an increase of$107,000 and$5,000 in our banking and other financial services segments, respectively, partly offset by a decrease of$9,000 in ourHoldco segment. These increases were primarily related to costs incurred in 2021 related to the acquisition of Integra, and other legal and regulatory matters atTectonic Advisors . Audit and tax consulting expense decreased$28,000 , due primarily to the leveling off of accounting and tax fees following our 2019 initial registration, which increased expenses into 2020. Professional consulting fees expense increased$119,000 , which includes$20,000 within the banking segment for the Integra acquisition, and an increase of$65,000 at ourHoldco segment related to the acquisition of Integra and increases in general consulting expenses, which were partially offset by a decrease in professional fees of$47,000 in our other financial services segment, where fees at the bank related to consulting on our participant direction initiative decreased by$185,000 , which was offset by increases in consulting expense related to initiatives at the bank'sNolan Company division of$133,000 , and other individual immaterial increases totaling$5,000 . 70
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Data processing. Data processing includes costs related to the Company's operating systems. Data processing expense increased$190,000 , or 24.5%, from$774,000 for the year endedDecember 31, 2020 , to$964,000 for the year endedDecember 31, 2021 . The increase was due to increases in data processing expense within the Banking segment of$145,000 , which included costs at Integra of$47,000 and banking core system conversion costs at the Bank's Nolan division of$41,000 , the Bank's trust department of$4,000 , and within the Bank's deposit and lending divisions of$53,000 . Other expense. Other expenses include costs for insurance,Federal Deposit Insurance Corporation ("FDIC") andOffice of the Comptroller of the Currency ("OCC") assessments, director fees, and regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expense increased$1.2 million , or 35.1%, from$3.4 million for the year endedDecember 31, 2020 to$4.6 million for the year endedDecember 31, 2021 . The increase includes increases in software costs and licensing primarily at the Bank, including its Nolan and banking divisions, of$415,000 , advertising and marketing expense across all segments of the Company of$330,000 , including the initiative atTectonic Advisors where we are investing in marketing costs related to assets under management associated with Cain Watters above$2.5 billion , increases in loan and other real estate operating costs at the Bank of$158,000 , increases in bank fees to correspondent banks incurred within the Bank's Integra division of$97,000 , increases in business insurance coverage, including directors and officers coverage, of$89,000 , increases in travel, meals and entertainment expense of$81,000 , and other individually immaterial increases. Income Taxes The income tax expense for the years endedDecember 31, 2021 and 2020 was$4.8 million and$3.0 million , respectively. The effective income tax rate was 22.0% and 21.5% for the years endedDecember 31, 2021 and 2020, respectively. Segment Reporting
We have three operating segments: Banking,
Our Banking operating segment includes both commercial and consumer banking services. 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.
OurOther Financial Services segment includesTectonic Advisors , Sanders Morris, the Bank's Trust Division, which includes a TPA services unit, 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.
A third operating segment,
The following table presents key metrics related to our segments:
Year Ended December 31, 2021
Other
Financial
(In thousands) Banking Services HoldCo Consolidated
Revenue(1) $ 27,639 35,428 (686 ) 62,381
Net income (loss) before taxes $ 13,605 10,547 (2,315 ) 21,837
Year Ended December 31, 2020
Other
Financial
(In thousands) Banking Services HoldCo Consolidated
Revenue(1) $ 17,976 $ 32,207 $ (853 ) $ 49,330
Net income (loss) before taxes $ 8,032 $ 7,808 $ (1,918 ) $ 13,922 (1) Net interest income plus non-interest income
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Table of Contents Banking Income before taxes for the year endedDecember 31, 2021 increased$5.6 million , or 69.4%, compared to the year endedDecember 31, 2020 . The increase was primarily the result of a$10.2 million increase in net interest income, partly offset by a$501,000 decrease in non-interest income, a$505,000 increase in the provision for loan losses and a$3.6 million increase in non-interest expense. Net interest income for the year endedDecember 31, 2021 increased$10.2 million , or 61.7%, compared to the year endedDecember 31, 2020 , primarily due to the increase in interest-earning assets attributable to the factored receivables acquired in the Integra acquisition, and the timing of recognition of PPP-related SBA fees. Other changes included a decrease in average rates paid on interest-bearing deposits and decrease in average volume of interest-bearing deposits which were replaced by non-interest-bearing deposits and Paycheck Protection Program Liquidity Facility ("PPPLF") borrowings. 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 year endedDecember 31, 2021 increased$505,000 , or 29.5%, to$2.2 million , compared to$1.6 million for the year endedDecember 31, 2020 . See "Allowance for Loan Losses" included elsewhere in this discussion. Non-interest income for the year endedDecember 31, 2021 decreased$501,000 , or 33.6%, compared to the year endedDecember 31, 2020 , which was primarily due to a$621,000 decrease in gain on sale of loans and a$132,000 decrease in net loan servicing income (which included a$199,000 credit allowance provision to the valuation of servicing assets recorded in the prior year, a$67,000 decrease in loan servicing fee, partly offset by a$134,000 decrease in servicing asset amortization) and a$71,000 decrease related to a non-recurring referral fee for a loan conversion during 2020. The decreases were partly offset by the recording of$249,000 for factoring servicing fees related to the Integra acquisition during 2021, a$46,000 increase in rental income and a$29,000 increase in other servicing fee income. 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 year endedDecember 31, 2021 increased$3.6 million , or 43.5%, compared to the year endedDecember 31, 2020 . The increase was primarily related to a$2.6 million increase in salaries and employee benefits for annual merit increases, increases in staff including the addition of Integra, and incentive bonuses, a$115,000 increase in occupancy and equipment expense, a$163,000 increase in professional fees (includes$105,000 legal fees for the Integra acquisition), a$145,000 increase in data processing (related to banking core system conversion costs and expenses for the operations of Integra), and a$569,000 increase in other expenses, primarily$266,000 for software development and$225,000 for operations of Integra, along with various other expenses. See the analysis of non-interest expense included in the section captioned "Non-Interest Expense" included elsewhere in this discussion. Other Financial Services Income before taxes for the year endedDecember 31, 2021 increased$2.7 million , or 35.1%, compared to the year endedDecember 31, 2020 . The increase was primarily the result of a$3.2 million increase in non-interest income partly offset by a$482,000 increase in non-interest expense. Non-interest income for the year endedDecember 31, 2021 increased$3.2 million , or 10.0%, compared to the year endedDecember 31, 2020 . The increase was due to increases in brokerage income of$2.0 million , primarily from increases in private placement and syndicated offering activity at Sanders Morris, trust income of$1.1 million , resulting from increases in assets under management, and service fees of$701,000 , from increases in the Bank's Nolan division. These increases were offset by a decrease in advisory fees of$582,000 , which was the result of a decrease in performance based advisory fees of$3.5 million at Sanders Morris, which was partially offset by an increase in advisory fees based on a percentage of the underlying assets atTectonic Advisors and Sanders Morris totaling$2.9 million . See the analysis of non-interest income included in the section captioned "Non-Interest Income" above in this discussion. 72
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Non-interest expense for the year endedDecember 31, 2021 increased$482,000 , or 2.0%, compared to the year endedDecember 31, 2020 . The increase was primarily from an increase in trust expense of$422,000 due to an increase in the Bank's advisory assets under management on which this expense is based, and an increase in other expenses of$368,000 , driven by increases in software licenses of$149,000 related to technology initiatives across the Company, an increase in other operating costs at the Bank's trust department and its Nolan division totaling$86,000 , an increase in business travel, meals and entertainment of$69,000 , increases in marketing and advertising of$76,000 , and an increase in employee recruitment expense of$61,000 , which were offset by a decrease in computer services of$28,000 and in insurance, errors and omissions at Sanders Morris totaling$80,000 , and other individually immaterial fluctuations netting to an increase of$35,000 . In addition, data processing expense increased$45,000 , and brokerage and advisory direct costs increased$3,000 . These increases were partially offset by decreases in occupancy and equipment of$197,000 , related to decreases in depreciation, and in salaries and employee benefits of$152,000 , related to a decrease in commissions and bonus expense at Sanders Morris related to the decrease in performance-based advisory fees on which bonuses were determined, partially offset by increases elsewhere in our other financial services segment related to merit increases and bonuses and staff additions, and an immaterial decrease of$7,000 in our professional fees. See also the analysis of non-interest income included in the section captioned "Non-Interest Expense" included elsewhere in this discussion.HoldCo The net loss before taxes at theHoldCo operating segment increased by$397,000 during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase is the result of an increase in salaries and employee benefits of$275,000 , which includes an increase in stock-based compensation of$155,000 , an increase in other expenses of$251,000 , which includes increases in computer expense of$43,000 , directors and officers coverage of$61,000 , and marketing and advertising of$161,000 , partly offset by a net decrease of$14,000 of various other expenses, an increase in professional fees of$38,000 , and an increase in interest expense of$16,000 . The increase in expenses were partly offset by an increase in service fees and other income of$183,000 . Financial ConditionInvestment 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. Securities are classified as available for sale when we intend to hold for an indefinite period of time but might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported as a separate component of stockholders' equity as other comprehensive income (loss), net of tax. Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. As ofDecember 31, 2021 and 2020, securities available for sale consisted ofU.S. government agency securities and mortgage-backed securities guaranteed byU.S. government agencies. Securities held to maturity consist of Property Assessed Clean Energy ("PACE") andPublic Improvement District/Tax Increment Reinvestment Zone ("PID/TIRZ") investments. These investment contracts or bonds located inTexas ,California andFlorida , 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. Restricted securities consisted of FRB stock, having an amortized cost and fair value of$1.2 million as ofDecember 31, 2021 and 2020, and FHLB stock, having an amortized cost and fair value of$1.3 million as ofDecember 31, 2021 and 2020.
Securities not readily marketable consists of an income interest in a private investment.
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The following presents the amortized cost and fair values of the securities portfolio as of the dates indicated:
As of December 31, 2021 As of December 31, 2020
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
Securities available for sale:
U.S. government agencies $ 15,847 $ 15,402 $ 14,936 $ 14,949
Mortgage-backed securities 1,724 1,754 2,373 2,447
Total securities available for sale
Securities held to maturity: Property assessed clean energy$ 2,731 $ 2,731 $ 5,776 $ 5,776 Public Improvement District & TIRZ 16,942 16,942 - -
Total securities held to maturity
$ 5,776 $ 5,776 Securities, restricted: Other$ 2,432 $ 2,432 $ 2,431 $ 2,431
Securities not readily marketable
$ 100 $ 100 The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of securities available for sale and securities held to maturity as ofDecember 31, 2021 . 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 $ - - %$ 2,016 0.55 % $
10,157 1.07 %
- - 988 3.14 - - 736 2.32 1,724 2.79 Total
$ - - % $ 3,004 1.40 % $ 10,157 1.07 % $ 4,410 1.08 % $ 17,571 1.13 %
Securities held to
maturity:
Property assessed
clean energy $ - - % $ - - % $
- - %
- - 2,707 4.12 - - 14,235 6.02 16,942 5.71
Total $ - - % $ 2,707 4.12 % $ - - % $ 16,966 6.23 % $ 19,673 5.94 %
Securities,
restricted:
Other $ - - % $ - - % $ - - % $ - - % $ 2,432 - %
Securities not
readily marketable $ - - % $ - - % $ - - % $ - - % $ 100 - %
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Table of Contents Loan Portfolio Composition Total loans excluding allowance for loan losses, increased$28.2 million , or 7.0%, to$428.7 million atDecember 31, 2021 , compared to$400.5 million atDecember 31, 2020 . The increase includes$29.8 million for non-PPP SBA loans,$8.1 million for non-SBA loans and$38.7 million for factored receivables related to the Integra acquisition in July of 2021. The increases were partly offset by$48.4 million decrease in the SBA PPP loans. Excluding the decrease of PPP loans, total loans would have otherwise increased$76.6 million , or 24.1%, fromDecember 31, 2020 . SBA loans comprise the largest group of loans in our portfolio totaling$233.9 million , or 54.5% (50.6% excluding PPP) of the total loans atDecember 31, 2021 , compared to$252.4 million , or 63.0% (53.4% excluding PPP) atDecember 31, 2020 . The SBA PPP loans decreased$48.4 million , or 58.7%, from$82.5 million atDecember 31, 2020 to$34.1 million atDecember 31, 2021 . Commercial and industrial loans totaled$83.3 million , or 19.4% (21.1% excluding PPP) of the total loans atDecember 31, 2021 , compared to$79.9 million , or 19.9%, atDecember 31, 2020 (25.1% excluding PPP). Commercial and construction real estate loans totaled$65.6 million , or 15.3% (16.6% excluding PPP), of the total loans atDecember 31, 2021 , compared to$52.9 million , or 13.2% (16.6% excluding PPP), atDecember 31, 2020 . The following table sets forth the composition of our loans held for investment: (In thousands) 2021 2020 2019 2018 2017 Loans held for investment atDecember 31 , Commercial and industrial$ 83,348 $ 79,864 $ 85,476 $ 88,915 $ 86,552 Consumer installment 1,099 10,259 3,409 3,636 4,483 Real estate - residential 5,452 4,319 5,232 7,488 6,826 Real estate - commercial 62,966 44,484 46,981 35,221 19,203 Real estate - construction and land 2,585 8,396 7,865 4,653 8,477 SBA 7(a) guaranteed 145,983 164,687 69,963 33,884 11,826 SBA 7(a) unguaranteed 52,524 52,179 47,132 44,326 41,373 SBA 504 35,348 35,553 22,591 13,400 17,109 USDA 806 801 2,430 3,367 3,415 Factored receivables 38,636 - - - - Other - - - 17 2 Total loans$ 428,747 $ 400,542 $ 291,079 $ 234,907 $ 199,266 The Company initially records the guaranteed portion of the SBA 7(a) andUSDA loans as held for sale at the lower of cost or fair value. Loans held for sale totaled$33.8 million and$14.9 million atDecember 31, 2021 and 2020, respectively. During the year endedDecember 31, 2021 , the Company elected to reclassify$42.8 million of the SBA loans held for sale to held for investment. The Company determined that holding these loans provides better long-term risk adjusted returns than selling the loans. Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis and makes changes as appropriate. Management receives and reviews monthly reports related to loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geographic location. 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 aCertified Development Company ("CDC"). 75
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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% 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. The SBA 504 program is an economic development-financing program providing long-term, low down payment loans to businesses. Typically, an SBA 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 SBA 504 loans that meet a public policy goal.
The SBA has designated the Bank as a "Preferred Lender". As a Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority from the SBA.
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.
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.
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 ofDecember 31, 2021 , our loan portfolio included$67.3 million of loans, approximately 15.7% (17.1% excluding PPP) of our total funded loans, to the dental industry, compared to$67.2 million of loans, approximately 16.8% (21.1% excluding PPP), as ofDecember 31, 2020 . We believe that these loans are to credit worthy borrowers and are diversified geographically. Paycheck Protection Program InApril 2020 , we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of$10 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of two or five years, depending on the date of origination, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required for six months following the loan disbursement date and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 40% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking the loan, the SBA will pay the lender a processing fee tiered by the size of the loan (5% for loans of not more than$350 thousand ; 3% for loans more than$350 thousand and less than$2 million ; and 1% for loans of at least$2 million ). During the year endedDecember 31, 2020 , we funded$98.3 million of PPP loans which have been forgiven by the SBA and were paid off or repaid by the borrower as ofDecember 31, 2021 . The Consolidated Appropriations Act, 2021, which was signed into law onDecember 27, 2020 , allocated an additional$284 billion to the SBA to fund a second round of PPP and extended the application period for the PPP toMarch 31, 2021 . The PPP application period was later extended to the earlier ofMay 31, 2021 , or such date when all PPP funds are exhausted. During the year endedDecember 31, 2021 , we originated$66.2 million of PPP loans. As ofDecember 31, 2021 , approximately$32.1 million of the PPP loans originated in 2021 have been forgiven by the SBA and were paid off or repaid by the borrower, leaving an outstanding balance of$34.1 million as ofDecember 31, 2021 . 76
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We also participated in the PPPLF which, throughJune 30, 2021 , extended loans to bankswho are loaning money to small businesses under the PPP. The total amount borrowed under the PPPLF as ofDecember 31, 2021 was$34.5 million and is non-recourse and secured by an equal amount of the PPP loans we originated. The maturity date of a borrowing under the PPPLF is equal to the maturity date of the PPP loan pledged to secure the borrowing and would be accelerated (i) if the underlying PPP loan goes into default and is sold to the SBA to realize on the SBA guarantee or (ii) to the extent that any loan forgiveness reimbursement is received from the SBA. Borrowings under the PPPLF will bear interest at a rate of 0.35%. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the PPP and, if applicable, the PPPLF. Specifically, all PPP loans have a zero percent risk weight under applicable risk-based capital rules. Additionally, a bank may exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPPLF will be included. As ofDecember 31, 2021 , 52.9% of the loan portfolio, or$226.6 million , matured or re-priced within one year or less. The following table presents the contractual maturity ranges for loans outstanding as ofDecember 31, 2021 , and also presents portion of loans that have fixed interest rates or floating adjustable interest rates over the life of the loan in accordance with changes in the interest rate environment: Maturity
Distribution of Loan Portfolio
Over One Over Five Over
One Year Year Through Years Through Fifteen Total Loans
(In thousands) or Less Five Years Fifteen Years Years 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
Floating or
Adjustable
(In thousands) Fixed Rate 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.
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Loans acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Under the accounting model for acquired loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the "accretable yield," is accreted into interest income over the life of the loans. 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 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 the COVID-19 pandemic. Non-performing assets include non-accrual loans, loans 90 days or more past due and still accruing, and foreclosed assets. Non-performing assets totaled$3.7 million as ofDecember 31, 2021 , compared to$1.8 million as ofDecember 31, 2020 . As ofDecember 31, 2021 , non-performing assets consisted of SBA non-accrual loans totaling$2.0 million , all of which was guaranteed by the SBA, and commercial real estate loans totaling$149,000 . As ofDecember 31, 2020 , non-performing assets consisted of SBA non-accrual loans totaling$1.6 million , of which$1.1 million was guaranteed by the SBA, and commercial real estate loans of$158,000 . 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. Accrued interest is charged off and no further interest is accrued. Subsequent payments received on non-accrual loans are recorded as reductions of principal. 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. Loans past due 90 days or more and still accruing interest totaled$400,000 as ofDecember 31, 2021 , which solely included factored receivables. There were no loans past due 90 days or more and still accruing interest atDecember 31, 2020 . 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. Foreclosed assets as ofDecember 31, 2021 totaled$1.1 million , which included two SBA loans that were foreclosed on during the year endedDecember 31, 2021 . There were no foreclosed assets as ofDecember 31, 2020 .
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:
At December 31 ,
(In thousands, except percentages) 2021 2020 2019
2018 2017 Non-accrual loans: Commercial and industrial $ - $ -$ 60 $ - $ - Real estate - commercial 149 158 SBA guaranteed 2,039 1,118 4,892 2,252 2,186 SBA unguaranteed - 517 1,039 293 124 Total non-accrual loans 2,188 1,793 5,991 2,545 2,310 Factored receivables past due 90 days 400 - - - - Foreclosed assets 1,079 - - - - Total non-performing assets$ 3,667 $ 1,793 $ 5,991 $ 2,545 $ 2,310 As a % of total loans 0.86 % 0.45 % 2.06 % 1.08 % 1.16 % As a % of total assets 0.63 0.35 1.64 0.82 0.84 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 ofDecember 31, 2021 and 2020, we had no loans considered to be a troubled debt restructuring. 78
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As noted in Note 4, "Loans and Allowance for Loan Losses," Section 4013 of the CARES Act provides financial institutions the option to suspend TDR 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 ofDecember 31, 2021 , the Company had granted principal and interest payment deferrals related to COVID-19 to two borrowers representing approximately$679,000 . Both loans remain accruing. AtDecember 31, 2020 , there were 11 loans in COVID-19-related deferment with an aggregate outstanding balance of approximately$4.3 million . We lend to customers operating in certain industries that have been, and are expected to be, more significantly impacted by the effects of the COVID-19 pandemic. These include the dental, hotel/lodging, automobile wash, and child care industries, among others. We are continuing to monitor these industries and the respective borrowers closely given the general decrease in business activity and the effects of the efforts to limit the spread of COVID-19.
Allowance for Loan and Lease Losses
Loans are reported net of the allowance for loan losses on our balance sheet. The allowance for loan losses totaled$4.2 million and$2.9 million , atDecember 31, 2021 and 2020, respectively. During the year endedDecember 31, 2021 , the Company had charge-offs of$1.1 million and recoveries of$117,000 . During the year endedDecember 31, 2020 , the Company had charge-offs of$218,000 and recoveries of$42,000 . Based on an analysis performed by management atDecember 31, 2021 , the allowance for loan losses is believed to be adequate to cover estimated loan losses in the portfolio as of that date based on the loan loss methodology employed by management. However, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, charge-offs in future periods may exceed the allowance for loan losses or significant additional increases in the allowance for loan losses may be required.
The table below presents a summary of the Company's net loan loss experience and provisions to the ALLL for the period indicated:
(In thousands, except percentages) 2021 2020 2019 2018 2017 Balance at January 1,$ 2,941 $ 1,408 $ 874 $ 386 $ 1,695 Charge-offs: Commercial and industrial - - 214 1 9 Consumer installment - - - - - SBA 7(a) 952 218 858 266 360 Factored receivables 168 - - - - Total charge-offs 1,120 218 1,072 267 369 Recoveries: Commercial and industrial 37 33 30 - 8 Consumer installment - - - - - Real estate - construction and land - - - - - SBA 7(a) 20 9 21 30 1 Factored receivables 60 - - - - Total recoveries 117 42 51 30 9 Net charge-offs 1,003 176 1,021 237 360 Provision for loan losses 2,214 1,709 1,555 725 736 Reduction related to acquisition of predecessor - - - - (1,685 ) Balance at December 31,$ 4,152 $ 2,941 $ 1,408 $ 874 $ 386 Loans at year-end$ 428,747 $ 400,542 $ 291,079 $ 234,907 $ 199,266 Average loans 448,284 376,088 275,025 231,385 193,482 Net charge-offs/average loans 0.22 % 0.05 % 0.37 % 0.10 % 0.19 % Allowance for loan losses/year-end loans 0.97 0.73 0.48 0.37 0.19 Total provision for loan losses/average loans 0.49 0.45 0.57 0.31 0.38 79
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The following tables set forth the allocation of the allowance as of the date
indicated and the percentage of loans in each category to total gross loans as
of the date indicated:
At December 31,
2021 2020 2019 2018 2017
Allowance Allowance Allowance
(In thousands, except percentages) Amount Amount Amount Allowance Amount Allowance Amount Commercial and industrial
$ 1,154 $ 928 $ 501 $ 419 $ 237 Consumer installment 15 91 27 27 13 Real estate - residential 76 52 22 27 16 Real estate - commercial 869 527 347 210 25 Real estate - construction and land 40 100 76 34 27 SBA 1,324 1,225 435 157 68 USDA 20 18 - - - Factored receivables 654 - - - -
Total allowance for loan losses
1,408 $ 874 $ 386
2021 2020 2019 2018 2017
%(1) %(1) %(1) %(1) %(1)
Commercial and industrial 19.4 % 19.9 % 29.4 % 37.9 % 43.4 %
Consumer installment 0.3 2.6 1.2 1.5 2.3
Real estate - residential 1.3 1.1 1.8 3.2 3.4
Real estate - commercial 14.7 11.1 16.1 15.0 9.6
Real estate - construction and land 0.6 2.1 2.7 2.0 4.3
SBA 54.5 63.0 48.0 39.0 35.3
USDA 0.2 0.2 0.8 1.4 1.7
Factored receivables 9.0 - - - - Total allowance for loan losses 100 % 100 % 100 % 100 % 100 %
(1) Percentage of loans in each category to total loans 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 ICS One-Way Buy agreement to provide liquidity to fund PPP loan originations. This brokered deposit is included in our money market accounts as ofDecember 31, 2021 . 80
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Total deposits increased$96.2 million , or 27.6%, to$444.2 million as ofDecember 31, 2021 , from$348.0 million as ofDecember 31, 2020 . 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: Year EndedDecember 31 , Year EndedDecember 31, 2021 2020
(In thousands, except Average Percent of Average Average Percent of Average percentages)
Balance Deposits Rate Balance Deposits Rate
Non-interest-bearing
deposits $ 76,328 19.3 % 0.00 % $ 51,168 14.3 % 0.00 %
Savings and
interest-bearing
demand 13,907 3.5 0.25 9,977 2.8 0.31
Money market accounts 118,577 30.0 0.36 96,582 27.0 0.52
Time deposits 186,647 47.2 1.08 200,159 55.9 1.84
Total deposits $ 395,459 100.0 % 0.63 % $ 357,886 100.0 % 1.18 %
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 December 31, 2021 :
(In thousands) Insured Uninsured Total
Maturing
Three months or less $ 24,544 $ 20,050 $ 44,594
Over three months to six months 13,569 18,503 32,072
Over six months to 12 months 62,922 27,081 90,003
Over 12 months 33,155 7,560 40,715
Total $ 134,190 $ 73,194 $ 207,384
Borrowings
The table below presents balances of each of the borrowing facilities as of the
dates indicated:
December 31, December 31,
(In thousands) 2021 2020
Borrowings:
FHLB borrowings $ - $ -
FRB borrowings (PPPLF) 34,521 83,690
Subordinated notes 12,000 12,000
$ 46,521 $ 95,690
The Company has a credit line with the FHLB with borrowing capacity of $52.5
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 December 31, 2021 and 2020.
The Company also has a credit line with the FRB with borrowing capacity of
In connection with the Federal Reserve PPPLF program, the Company had$34.5 million pledged to theFederal Reserve and borrowed as ofDecember 31, 2021 . The amount outstanding atDecember 31, 2021 is non-recourse and secured by the amount of the PPP loans still outstanding. The maturity date of a borrowing under the PPPLF is equal to the maturity date of the PPP loan pledged to secure the borrowing and would be accelerated (i) if the underlying PPP loan goes into default and is sold to the SBA to realize on the SBA guarantee or (ii) to the extent that any loan forgiveness reimbursement is received from the SBA. Borrowings under the PPPLF are included under borrowed funds on the Company's consolidated balance sheet and bear interest at a rate of 0.35%. As ofDecember 31, 2021 and 2020, 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 onJuly 20, 2027 , and$4.0 million issued in 2018 bearing an interest rate of 7.125%, payable semi-annually and maturing onMarch 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. 81
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Capital Resources and Regulatory Capital Requirements
Shareholders' equity increased$24.8 million , or 41.3%, to$84.8 million as ofDecember 31, 2021 , from$60.0 million as ofDecember 31, 2020 . The increase included net income of$17.0 million ,$396,000 net after-tax decrease in other comprehensive income related to the market value of the securities available for sale, and$330,000 related to stock compensation expense. In addition, shares of Company common stock in the amount of$10.7 million were issued as part of the consideration paid for the acquisition of Integra. Use of capital during the year endedDecember 31 ,2021 included$1.6 million of dividends paid on the Series B preferred stock and$1.3 million of dividends paid on the common stock. 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 ofDecember 31, 2021 , the Company and the Bank met all capital adequacy requirements to which they were subject. As ofDecember 31, 2021 , 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) December 31, 2021 December 31, 2020
Amount Ratio Amount Ratio
Tectonic Financial, Inc.
Tier 1 Capital (to Average Assets) $ 63,794 11.82 % $ 48,046 11.66 %
Common Equity Tier 1 (to Risk Weighted
Assets) 45,544 12.62 30,796 11.01
Tier 1 Capital (to Risk Weighted Assets) 62,794 17.40 48,046 17.17
Total Capital (to Risk Weighted Assets) 66,946 18.55 50,987 18.22
T Bank, N.A.
Tier 1 Capital (to Average Assets) $ 63,302 12.06 % $ 47,071 11.58 %
Common Equity Tier 1 (to Risk Weighted
Assets) 63,302 17.70 47,071 17.17
Tier 1 Capital (to Risk Weighted Assets) 63,302 17.70 47,071 17.17
Total Capital (to Risk Weighted Assets) 67,454 18.87 50,012 18.25
In addition to the regulatory requirements of the federal banking agencies,
Sanders Morris is subject to the regulatory framework applicable to registered
investment advisors under the SEC's Division of Investment Management . Sanders
Morris is also regulated by FINRA , which, among other requirements, imposes
minimums on its net regulatory capital. As of December 31, 2021 , Sanders Morris
is in compliance with FINRA's net regulatory capital requirements.
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.
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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. The Company had cash and cash equivalents of$46.0 million , or 7.9% of total assets, as ofDecember 31, 2021 . In addition to the on balance sheet liquidity available, the Company has lines of credit with the FHLB and the FRB, which provide the Company with a source of off-balance sheet liquidity. As ofDecember 31, 2021 , the Company's borrowing capacity with the FHLB was$52.5 million , or 9.0% of assets, none of which was utilized. The borrowing capacity with the FRB was$19.1 million , or 3.3% of assets, of which none was utilized or outstanding as ofDecember 31, 2021 . In addition, as ofDecember 31, 2021 , the Company had approximately$112.1 million of SBA guaranteed loans held for investment that could be sold to investors
Off-Balance Sheet Arrangements and Contractual Obligations
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets. Our exposure to credit loss in the event of non-performance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We follow the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of credit extended is based on management's credit evaluation of the customer and, if deemed necessary, may require collateral. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The following table presents future contractual obligations to make future payments, excluding interest, for the periods indicated:
As of December 31, 2021
Less than One to Over Three to Over Five
(In thousands) One Year Three Years Five Years Years Total
FHLB borrowings $ - $ - $ - $ - $ -
FRB borrowings 83 - 34,438 - 34,521
Subordinated notes - - - 12,000 12,000
Time deposits 166,669 34,358 6,357 - 207,384
Minimum lease payments 549 482 411 54 1,496
Total $ 167,301 $ 34,840 $ 41,206 $ 12,054 $ 255,401
The following table presents contractual financial commitments for the periods
indicated, however some of these commitments may expire unused or only partially
used, so the total amounts do not necessarily reflect future cash requirements.
As of December 31, 2021
Less than One to Over Three to Over Five
(In thousands) One Year Three Years Five Years Years Total
Undisbursed loan commitments
106 $ 22,626 $ 33,704
Standby letters of credit 282 - - - 282
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