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What changed in Tectonic Financial, Inc.'s 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of Tectonic Financial, Inc.'s 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+486 added−494 removedSource: 10-K (2025-03-31) vs 10-K (2024-04-01)

Top changes in Tectonic Financial, Inc.'s 2024 10-K

486 paragraphs added · 494 removed · 388 edited across 9 sections

Item 1. Business

Business — how the company describes what it does

96 edited+13 added−17 removed202 unchanged
Biggest changeAs of December 31, 2023, Sanders Morris had approximately $1.2 billion in client advisory assets under management, and client brokerage assets of $2.0 billion, bringing total client assets to $3.2 billion at Sanders Morris. o HWG is an insurance agency registered with the Texas Department of Insurance (“TDI”), and is focused on offering life and disability coverages. o The Bank’s Trust Division provides private trust services, and also includes a TPA services unit providing retirement plan design and administrative services. ● Our Holdco segment, HoldCo, includes the Bank’s immediate parent and related subordinated debt, as well as operations of Tectonic Financial, Inc., the financial holding company that serves as parent for the group overall.
Biggest changeAs of December 31, 2024, Sanders Morris had approximately $1.1 billion in client advisory assets under management, and client brokerage assets of $2.4 billion, bringing total client assets to $3.5 billion at Sanders Morris. HWG is an insurance agency registered with the Texas Department of Insurance (“TDI”), and is focused on offering life and disability coverages. Banking General.
Treasury Secretary’s invocation of the systemic risk exception declared on March 12, 2023, in response to the failure of two insured depository institutions and the appointment of the FDIC as receiver for such failed insured depository institutions, the FDIC adopted a final rule in November 2023 that implements a special assessment to recover the DIF’s losses from protecting uninsured depositors following the closures of such failed insured depository institutions.
Treasury Secretary’s invocation of the systemic risk exception declared on March 12, 2023, in response to the failure of two insured depository institutions in that year and the appointment of the FDIC as receiver for such failed insured depository institutions, the FDIC adopted a final rule in November 2023 that implements a special assessment to recover the DIF’s losses from protecting uninsured depositors following the closures of such failed insured depository institutions.
The new assessment rate schedules will remain in effect unless and until the DIF reserve ratio meets or exceeds 2.0% in order to support growth in the DIF in progressing toward the FDIC's long-term goal of a 2.0% designated reserve ratio for the DIF. FDIC staff may in the future recommend additional assessment rate adjustments if deemed necessary.
The assessment rate schedules will remain in effect unless and until the DIF reserve ratio meets or exceeds 2.0% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2.0% designated reserve ratio for the DIF. FDIC staff may in the future recommend additional assessment rate adjustments if deemed necessary.
The Bank’s principal banking markets include Dallas, Tarrant, Denton, Collin and Rockwall counties in North Texas. However, our business is also national in scope. Our national business includes: banking for small businesses (particularly dental practices), SBA and USDA loans, trust and custodial services, and participant directed recordkeeping and third-party administration.
The Bank’s principal banking markets include Dallas, Tarrant, Denton, Collin and Rockwall counties in North Texas. However, our business is also national in scope. Our national business includes: banking for small businesses (particularly dental practices), SBA and USDA loans, factoring, trust and custodial services, and participant directed recordkeeping and third-party administration.
The Bank’s operations are also subject to various federal laws such as the: ● Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; ● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; ● Fair Credit Reporting Act of 1978 and its amendment, the Fair and Accurate Credit Transactions Act of 2003, governing the use and provision of information to credit reporting agencies; ● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; 23 Table of Contents ● Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and ● Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
The Bank’s operations are also subject to various federal laws such as the: ● Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; ● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; ● Fair Credit Reporting Act of 1978 and its amendment, the Fair and Accurate Credit Transactions Act of 2003, governing the use and provision of information to credit reporting agencies; ● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; ● Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and ● Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Through our insurance agency, HWG, we provide disability and life insurance as a broker. HWG is an insurance agency licensed under the TDI. HWG generates its commissions through the sale of policies as a broker to clients and also receives renewal premiums from past policies sold (and which are renewing).
Through our insurance agency, HWG, we occasionally provide disability and life insurance as a broker. HWG is an insurance agency licensed under the TDI. HWG generates its commissions through the sale of policies as a broker to clients and also receives renewal premiums from past policies sold (and which are renewing).
Tectonic Advisors provides investment advice to the board of director’s trust committee in the management of its $1.9 billion of common pooled funds under a long-term agreement that has been in effect since 2006, the current form of which renewed in December 2022 under an automatic extension clause within the agreement, and was subsequently extended effective January 31, 2023 to a duration that terminates upon the dissolution of either party or upon a mutually agreeable date in the event of a sale of the Company.
Tectonic Advisors provides investment advice to the board of director’s trust committee in the management of its $2.1 billion of common pooled funds under a long-term agreement that has been in effect since 2006, the current form of which renewed in December 2022 under an automatic extension clause within the agreement, and was subsequently extended effective January 31, 2023 to a duration that terminates upon the dissolution of either party or upon a mutually agreeable date in the event of a sale of the Company.
In addition, the Bank may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation). 17 Table of Contents The payment of dividends by the Bank is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and the Bank is generally prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.
In addition, the Bank may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation). 15 Table of Contents The payment of dividends by the Bank is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and the Bank is generally prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.
Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2023, the Bank exceeded all Basel III regulatory minimum capital requirements.
Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2024, the Bank exceeded all Basel III regulatory minimum capital requirements.
This group provides trading, proprietary trading ideas and research, structured solutions and other financial services to clients that include: registered investment advisors, high net worth families and individuals, money managers, hedge funds and others. This business typically charges a commission on trading activity. It competes on the basis of service and solutions. Insurance.
This group provides trading, research, structured solutions and other financial services to clients that include: registered investment advisors, high net worth families and individuals, money managers, hedge funds and others. This business typically charges a commission on trading activity. It competes on the basis of service and solutions. Insurance.
Pursuant to this agreement, Tectonic Advisors provides investment advice, asset allocation advice and third party manager research for the construction of portfolios. Tectonic Advisors provides advice on six common pooled funds, which are combined in various manners to develop different portfolios for investors (ranging from a conservative allocation to an aggressive allocation).
Pursuant to this agreement, Tectonic Advisors provides investment advice, asset allocation advice and third party manager research for the construction of portfolios. Tectonic Advisors provides advice on eight common pooled funds, which are combined in various manners to develop different portfolios for investors (ranging from a conservative allocation to an aggressive allocation).
As of December 31, 2023, the Company did not exceed the levels to be considered to have a concentration in commercial real estate lending and believes its credit administration to be consistent with the aforementioned policy statements and advisory guidance. Brokered Deposit Restrictions .
As of December 31, 2024, the Company did not exceed the levels to be considered to have a concentration in commercial real estate lending and believes its credit administration to be consistent with the aforementioned policy statements and advisory guidance. Brokered Deposit Restrictions .
The final rule requires the Company to adopt a clawback policy within 60 days after such listing standard becomes effective. In accordance with Rule 10D-1 promulgated by the SEC under the Exchange Act and Nasdaq Listing Rule 5608, the Company adopted and implemented a compensation recovery policy, effective as of October 2, 2023. Other Regulations .
The final rule requires the Company to adopt a clawback policy within 60 days after such listing standard becomes effective. In accordance with Rule 10D-1 promulgated by the SEC under the Exchange Act and Nasdaq Listing Rule 5608, the Company adopted and implemented a compensation recovery policy, effective as of October 2, 2023. 21 Table of Contents Other Regulations .
“Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. As of December 31, 2023, the Bank qualified as “well capitalized” under the prompt corrective action rules. Interstate Banking and Branching .
“Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. As of December 31, 2024, the Bank qualified as “well capitalized” under the prompt corrective action rules. Interstate Banking and Branching .
As we seek to expand our business, we face competition in the pursuit of clients interested in our services, the recruitment and retention of wealth management professionals, and the identification and acquisition of other wealth management firms that can be integrated into our group. Our Market Area We are based in Dallas, Texas, which is our largest market.
As we seek to expand our business, we face competition in the pursuit of clients interested in our services, the recruitment and retention of wealth management professionals, and the identification and acquisition of other wealth management firms that can be integrated into our group. 10 Table of Contents Our Market Area We are based in Dallas, Texas, which is our largest market.
These acts contain anti-money laundering and financial transparency laws and mandate the implementation of various regulations applicable to broker-dealers and other financial services companies. Sanders Morris, like the Bank, has established policies, procedures and systems designed to comply with these regulations. Securities Investor Protection Corporation ( “ SIPC ” ) .
These acts contain anti-money laundering and financial transparency laws and mandate the implementation of various regulations applicable to broker-dealers and other financial services companies. Sanders Morris, like the Bank, has established policies, procedures and systems designed to comply with these regulations. Securities Investor Protection Corporation (“SIPC”) .
See “Risk Factors—Risks Related to Our Regulatory Environment—We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.” 22 Table of Contents Regulation Z .
See “Risk Factors—Risks Related to Our Regulatory Environment—We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.” Regulation Z .
The BHC Act also limits the investments and activities of bank holding companies.
Permitted Activities . The BHC Act also limits the investments and activities of bank holding companies.
Under federal law, the Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests.
Loans to Insiders . Under federal law, the Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests.
Further, a decline in a broker-dealer’s net capital below certain “early warning levels,” even though above minimum capital requirements, could cause material adverse consequences for the broker-dealer. Sanders Morris conducts business on a national basis as an introducing firm, using a third-party firm for securities clearing and custody functions. 24 Table of Contents Broker-Dealer Supervision .
Further, a decline in a broker-dealer’s net capital below certain “early warning levels,” even though above minimum capital requirements, could cause material adverse consequences for the broker-dealer. Sanders Morris conducts business on a national basis as an introducing firm, using a third-party firm for securities clearing and custody functions. Broker-Dealer Supervision .
The Bank offers traditional lending services, including commercial and industrial, commercial real estate, construction and, on a very limited basis, consumer loans (each as further described below). The majority of these loans are to commercial enterprises in the Dallas, Texas area. 7 Table of Contents Commercial and Industrial Loans.
The Bank offers traditional lending services, including commercial and industrial, commercial real estate, construction and, on a very limited basis, consumer loans (each as further described below). The majority of these loans are to commercial enterprises in the Dallas, Texas area. Commercial and Industrial Loans.
Sanders Morris is registered in all 50 states and is also subject to regulation under the laws of these jurisdictions. Broker-Dealer Net Capital Rules . As a registered broker-dealer and member of FINRA, Sanders Morris is subject to certain net capital requirements of Rule 15c3-1 under the Exchange Act.
Sanders Morris is registered in all 50 states and is also subject to regulation under the laws of these jurisdictions. 22 Table of Contents Broker-Dealer Net Capital Rules . As a registered broker-dealer and member of FINRA, Sanders Morris is subject to certain net capital requirements of Rule 15c3-1 under the Exchange Act.
The Bank offers financing to smaller transportation companies across the United States primarily through factoring of accounts receivables through its Integra Division. We directly purchase the receivables generated by our clients, primarily transportation companies, at a discount to their face value.
The Bank offers financing to smaller transportation companies across the United States primarily through factoring of accounts receivables through its Integra Division. We directly purchase the receivables generated by our clients, primarily transportation, energy and staffing companies, at a discount to their face value.
As the consolidated assets of the Company are less than $10 billion and the Company does not currently exceed the 5% threshold, this aspect of the Volcker Rule does not have any impact on the Company’s consolidated financial statements at this time. Financial Holding Company Status .
As the consolidated assets of the Company are less than $10 billion and the Company does not currently exceed the 5% threshold, this aspect of the Volcker Rule does not have any impact on the Company’s consolidated financial statements at this time. 12 Table of Contents Financial Holding Company Status .
On October 18, 2022, the FDIC adopted a final rule applicable to all insured depository institutions increasing initial base deposit insurance assessment rate schedules by 2 basis points, beginning in the first quarterly assessment period of 2023. The FDIC also issued a notice maintaining a DIF reserve ratio of 2.0% for 2023.
On October 18, 2022, the FDIC adopted a final rule applicable to all insured depository institutions increasing initial base deposit insurance assessment rate schedules by 2 basis points, beginning in the first quarterly assessment period of 2023. The FDIC also issued notices maintaining a DIF reserve ratio of 2.0% for 2023 and 2024.
Many of the amendments, including those with respect to beneficial ownership, require the Department of Treasury and FinCEN to promulgate rules. 21 Table of Contents On September 29, 2022, FinCEN issued a final rule establishing a beneficial ownership information reporting requirement, pursuant to the CTA.
Many of the amendments, including those with respect to beneficial ownership, require the Department of Treasury and FinCEN to promulgate rules. On September 29, 2022, FinCEN issued a final rule establishing a beneficial ownership information reporting requirement, pursuant to the CTA.
As of December 31, 2023, the Bank qualified as “well capitalized” for purposes of the brokered deposit restrictions. Technology Risk Management, Cybersecurity and Consumer Privacy .
As of December 31, 2024, the Bank qualified as “well capitalized” for purposes of the brokered deposit restrictions. Technology Risk Management, Cybersecurity and Consumer Privacy .
FIRREA also expanded the scope of individuals and entities against which such penalties may be assessed. 15 Table of Contents Dividends, Distributions, Stock Redemptions and Repurchases. Dividends and distributions from our subsidiary companies are the Company’s principal source of cash revenues.
FIRREA also expanded the scope of individuals and entities against which such penalties may be assessed. Dividends, Distributions, Stock Redemptions and Repurchases. Dividends and distributions from our subsidiary companies are the Company’s principal source of cash revenues.
These requirements and restrictions include requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon and restrictions relating to investments and other activities of the Bank. 16 Table of Contents National Banking Associations .
These requirements and restrictions include requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon and restrictions relating to investments and other activities of the Bank. National Banking Associations .
Bank Holding Company Regulation BHC Act . As a registered bank holding company, the Company is required to furnish to the Federal Reserve annual and quarterly reports of its operations and may also be required to furnish such additional information and reports as the Federal Reserve or the FRB may require.
As a registered bank holding company, the Company is required to furnish to the Federal Reserve annual and quarterly reports of its operations and may also be required to furnish such additional information and reports as the Federal Reserve or the FRB may require.
The National Bank Act, among other things: ● restricts investments and other activities of the Bank; ● restricts the nature and amount of loans that the Bank may make and the interest that may be charged; and ● requires the Bank to maintain reserves against deposits. Deposit Insurance .
The National Bank Act, among other things: ● restricts investments and other activities of the Bank; 14 Table of Contents ● restricts the nature and amount of loans that the Bank may make and the interest that may be charged; and ● requires the Bank to maintain reserves against deposits. Deposit Insurance .
SIPC is principally funded through assessments on registered broker-dealers. SIPC protection does not insure against fluctuations in the market value of securities. Regulation BI and Form CRS Relationship Summary ( “ Form CRS ” ).
SIPC is principally funded through assessments on registered broker-dealers. SIPC protection does not insure against fluctuations in the market value of securities. Regulation BI and Form CRS Relationship Summary (“Form CRS”).
In addition, we provide investment advisory and brokerage services through Tectonic Advisors and Sanders Morris. Human Capital Resources We had approximately 199 employees as of December 31, 2023. We believe our employee relations to be good and we have no collective bargaining agreements with any employees.
In addition, we provide investment advisory and brokerage services through Tectonic Advisors and Sanders Morris. Human Capital Resources We had approximately 215 employees as of December 31, 2024. We believe our employee relations to be good and we have no collective bargaining agreements with any employees.
A rebuttable presumption of control arises under the CIBCA where a person (or persons acting in concert) controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank (i) which is a reporting company under the Exchange Act, such as the Company, or (ii) such ownership interest is greater than the ownership interest held by any other person (or persons acting in concert). 14 Table of Contents Permitted Activities .
A rebuttable presumption of control arises under the CIBCA where a person (or persons acting in concert) controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank (i) which is a reporting company under the Exchange Act, such as the Company, or (ii) such ownership interest is greater than the ownership interest held by any other person (or persons acting in concert).
The Bank also analyzes the industry sector to determine the feasibility of the projected income. There is generally an active secondary market for the guaranteed portion of these loans.
The Bank also analyzes the industry sector to determine the feasibility of the projected income. 5 Table of Contents There is generally an active secondary market for the guaranteed portion of these loans.
The Bank offers loans to the dental industry and other small-to-medium sized businesses. The principal referral source of the dental loans is Cain Watters. Most of the partners of Cain Watters are stockholders in the Company, and four partners serve on our board of directors.
The Bank offers loans to the dental industry and other small-to-medium sized businesses. The principal referral source of the dental loans is Cain Watters. Most of the partners of Cain Watters are shareholders in the Company, and three partners serve on our board of directors.
As a national bank, the Bank is subject to the supervision and regulation of the Office of the Comptroller of the Currency (the “OCC”). Sanders Morris is a registered broker-dealer with the SEC and FINRA, and a registered investment advisor with the SEC. Tectonic Advisors is an SEC registered investment advisor. HWG is an insurance agency registered with the TDI.
As a national bank, the Bank is subject to the supervision and regulation of the Office of the Comptroller of the Currency (the “OCC”). Sanders Morris is a registered broker-dealer with the SEC and FINRA, and a registered investment advisor with the SEC. Tectonic Advisors is an SEC registered investment advisor.
Examples of more flexible terms include longer amortization periods, lower required down payments, and less borrower operating history. These loans are generally secured by equipment, real estate, and other tangible collateral. Loan-to-value ratios may, in some instances, be higher than conventional loans.
These loans generally offer borrowers more flexible terms and conditions than available through conventional commercial loans. Examples of more flexible terms include longer amortization periods, lower required down payments, and less borrower operating history. These loans are generally secured by equipment, real estate, and other tangible collateral. Loan-to-value ratios may, in some instances, be higher than conventional loans.
Sanders Morris can also participate in public offerings as an underwriter, which means that Sanders Morris takes principal risk on the placement of the securities but earns a higher fee. Finally, Sanders Morris has an institutional trading business, which is based in Dallas, Texas.
Sanders Morris participates in syndicates of public offerings, typically as a selling group member. Sanders Morris can also participate in public offerings as an underwriter, which means that Sanders Morris takes principal risk on the placement of the securities but earns a higher fee. Finally, Sanders Morris has an institutional trading business, which is based in Dallas, Texas.
Failure to comply with these sanctions could have serious legal and reputational consequences. Consumer Financial Protection Bureau ( “ CFPB ” ) .
Failure to comply with these sanctions could have serious legal and reputational consequences. Consumer Financial Protection Bureau (“CFPB”) .
The increase in assessment rate schedules is intended to increase the likelihood that the DIF reserve ratio reaches the statutory minimum of 1.35% by September 30, 2028, the statutory deadline set by the Dodd-Frank Act.
The increase in assessment rate schedules is intended to increase the likelihood that the DIF reserve ratio be restored to at least the statutory minimum of 1.35% by September 30, 2028, the statutory deadline set by the Dodd-Frank Act.
At December 31, 2023, the Company had no borrowings with the FHLB or the FRB under the lines of credit. The Bank had $21.0 million, or 3.7% of total liabilities, borrowed under the BTFP, and the debt at T Bancshares, net of debt issuance costs, totaled $12.0 million, or 2.1% of total liabilities. Other Financial Services General.
At December 31, 2024, the Company had no borrowings with the FRB under the lines of credit or the BTFP. The Bank had $10.0 million, or 1.3% of total liabilities, borrowed under FHLB, and the debt at T Bancshares, net of debt issuance costs, totaled $12.0 million, or 1.6% of total liabilities. Other Financial Services General.
Affected institutions must pay such special assessment over eight quarterly assessment periods, the first of which will be reflected on the first quarterly assessment period for January 1 through March 31, 2024, with the first payment due on June 28, 2024. This rule is not applicable for the Company.
Affected institutions must pay such special assessment over eight quarterly assessment periods, the first of which will be reflected on the first quarterly assessment period for January 1 through March 31, 2024, with the first payment due on June 28, 2024.
The disclosure of beneficial ownership information to authorized recipients in accordance with appropriate protocols and oversight will help law enforcement and national security agencies prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity, as well as protect national security. Office of Foreign Assets Control ( “ OFAC ” ) Regulation .
The disclosure of beneficial ownership information to authorized recipients in accordance with appropriate protocols and oversight will help law enforcement and national security agencies prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity, as well as protect national security.
The Bank has approximately $1.9 billion in market value of trust assets as of December 31, 2023. We currently have six common pooled funds for qualified plans and another three for personal trust (individual) investors.
The Bank had approximately $2.1 billion in market value of trust assets as of December 31, 2024. We currently have six common pooled funds for qualified plans and another three for personal trust (individual) investors.
The transactions are structured to provide the clients with immediate working capital when there is a mismatch between trade payable payments to the client for services rendered and the required payment of operating costs, such as fuel and insurance costs, incurred to provide such good or service. The receivables are typically collected 30 to 60 days after delivery. Investments.
The transactions are structured to provide the clients with immediate working capital when there is a mismatch between trade payable payments to the client for services rendered and the required payment of operating costs, such as fuel and insurance costs, incurred to provide such good or service.
In addition, the Bank can access uninvested cash from customers of its trust department by moving portions of it into money market deposits. As of December 31, 2023, the Bank deposits included $31.3 million available from the funds of trust clients.
In addition, the Bank can access uninvested cash from customers of its Trust Division by moving portions of it into money market deposits. As of December 31, 2024, the Bank deposits included $29.4 million available from the funds of trust clients.
Under the OCC’s prompt corrective action regulations, an institution is deemed to be: ● “well capitalized” if it has a total capital ratio of 10.0% or greater, a Tier 1 capital ratio of 8.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 leverage ratio of 5.0% or greater and is not subject to a capital maintenance requirement; ● “adequately capitalized” if it has a total capital ratio of 8.0% or greater, a Tier 1 capital ratio of 6.0% or greater, a CET1 capital ratio of 4.5% or greater and a Tier 1 leverage ratio of 4.0% or greater; ● “undercapitalized” if it has a total capital ratio of less than 8.0%, a Tier 1 capital ratio of less than 6.0%, a CET1 capital ratio of less than 4.5% or a Tier 1 leverage ratio of less than 4.0%; ● “significantly undercapitalized” if it has a total capital ratio of less than 6.0%, a Tier 1 capital ratio of less than 4.0%, a CET1 capital ratio of less than 3.0% or a Tier 1 leverage ratio of less than 3.0%; and ● “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. 18 Table of Contents If the Bank were to become undercapitalized, it would be subject to growth limitations and would be required to submit a capital restoration plan to the OCC.
Under the OCC’s prompt corrective action regulations, an institution is deemed to be: ● “well capitalized” if it has a total capital ratio of 10.0% or greater, a Tier 1 capital ratio of 8.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 leverage ratio of 5.0% or greater and is not subject to a capital maintenance requirement; ● “adequately capitalized” if it has a total capital ratio of 8.0% or greater, a Tier 1 capital ratio of 6.0% or greater, a CET1 capital ratio of 4.5% or greater and a Tier 1 leverage ratio of 4.0% or greater; 16 Table of Contents ● “undercapitalized” if it has a total capital ratio of less than 8.0%, a Tier 1 capital ratio of less than 6.0%, a CET1 capital ratio of less than 4.5% or a Tier 1 leverage ratio of less than 4.0%; ● “significantly undercapitalized” if it has a total capital ratio of less than 6.0%, a Tier 1 capital ratio of less than 4.0%, a CET1 capital ratio of less than 3.0% or a Tier 1 leverage ratio of less than 3.0%; and ● “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
HWG is currently generating most of its revenues from renewals, and continues to tailor its team to generate new business. 11 Table of Contents Competition The market for financial services is rapidly changing and intensely competitive and is likely to become more competitive as the number and types of market entrants increases.
HWG is currently generating most of its revenues from renewals. Competition The market for financial services is rapidly changing and intensely competitive and is likely to become more competitive as the number and types of market entrants increases.
These SEC rules, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations. 20 Table of Contents Under Section 501 of the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer.
Under Section 501 of the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer.
Through Sanders Morris, we serve clients on their investment portfolios as an advisor or broker (often with limited powers of attorney). We also execute trades for institutions and households, and provide investment banking services to corporate entities.
Sanders Morris is a registered broker-dealer with Financial Industry Regulatory Authority (“FINRA”), and registered investment advisor with the SEC. Through Sanders Morris, we serve clients on their investment portfolios as an advisor or broker (often with limited powers of attorney). We also execute trades for institutions and households, and provide investment banking services to corporate entities.
The health and well-being of our employees is a priority for our business. Our full-time officers and employees are provided hospitalization and major medical insurance. We pay a substantial portion of the premiums for these coverages.
The health and well-being of our employees is a priority for our business. Our full-time officers and employees are provided hospitalization and major medical insurance. We pay a substantial portion of the premiums for these coverages. We also provide other basic insurance coverages including dental, life, and long-term disability insurance.
In addition, we also generate substantial revenue from a traditional, commission-based structure where we earn commissions on client purchase and sale transactions. Sanders Morris also serves as a placement agent on a “best efforts” basis of private placements of equity and fixed income securities. Sanders Morris participates in syndicates of public offerings, typically as a selling group member.
Fees and trading commissions are typically charged based on trading activity and/or portfolio size. In addition, we also generate substantial revenue from a traditional, commission-based structure where we earn commissions on client purchase and sale transactions. Sanders Morris also serves as a placement agent on a “best efforts” basis of private placements of equity and fixed income securities.
Additionally, our board of directors has formed a directors’ loan committee with members named by board resolution to provide the following oversight: ● ensure compliance with loan policy, procedures and guidelines as well as appropriate regulatory requirements; ● approve loans with net Bank exposure over $2 million; ● monitor delinquent, non-accrual loans and classified loans; ● monitor loan portfolio concentrations and quality through a variety of metrics; ● monitor our loan servicing and review systems; and ● review the adequacy of the credit loss reserve. 8 Table of Contents We believe we follow a relatively conservative lending policy, but one that we believe permits prudent risks to assist businesses and consumers in our lending market.
Additionally, our board of directors has formed a directors’ loan committee with members named by board resolution to provide the following oversight: ● ensure compliance with loan policy, procedures and guidelines as well as appropriate regulatory requirements; ● approve loans with net Bank exposure over $4 million; ● monitor delinquent, non-accrual loans and classified loans; ● monitor loan portfolio concentrations and quality through a variety of metrics; ● monitor our loan servicing and review systems; and ● review the adequacy of the credit loss reserve.
Cain Watters has referred substantially all of the clients of the Bank’s Trust Division. Cain Watters specializes in providing financial planning, accounting, tax and advisory services to small businesses, principally dental practices.
The Bank generates fees by providing administrative services to the common pooled funds and providing trust services to the plans and the individual investors. Cain Watters has referred substantially all of the clients of the Bank’s Trust Division. Cain Watters specializes in providing financial planning, accounting, tax and advisory services to small businesses, principally dental practices.
The Bank invests a portion of its assets in available for sale securities, which include U.S. Treasuries, U.S. government agencies, mortgage-backed securities, direct obligations of quasi government agencies including Fannie Mae, Freddie Mac, and the Federal Home Loan Bank.
The receivables are typically collected 30 to 60 days after delivery. 7 Table of Contents Investments. The Bank invests a portion of its assets in available for sale securities, which include U.S. Treasuries, U.S. government agencies, mortgage-backed securities, direct obligations of quasi government agencies including Fannie Mae, Freddie Mac, and the Federal Home Loan Bank.
The Company is a legal entity separate and distinct from the Bank. The Company historically has received all of its revenue from distributions from Tectonic Advisors and Sanders Morris. However, to the extent the Company desires to have dividends paid by the Bank, the Bank may be limited in its ability to pay dividends without prior regulatory approval.
The Company is a legal entity separate and distinct from the Bank. To the extent the Company desires to have dividends paid by the Bank, the Bank may be limited in its ability to pay dividends without prior regulatory approval.
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements.
This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements.
Time deposits of $250 thousand and over totaled $109.6 million as of December 31, 2023. The Bank had $50.0 million of brokered deposits through an Insured Cash Sweep One-Way Buy Agreement as of December 31, 2023. Borrowings .
The Bank had $50.0 million of brokered deposits through an Insured Cash Sweep One-Way Buy Agreement as of December 31, 2024. Borrowings .
In addition to services provided to the Bank, Tectonic Advisors provides investment advisory research and due diligence services to Cain Watters under a continuing agreement.
In addition to services provided to the Bank, Tectonic Advisors provides investment advisory research and due diligence services to Cain Watters under a continuing agreement. Tectonic Advisors and Sanders Morris also provide advisory services to high net worth families and other clients.
Tectonic Advisors and Sanders Morris are registered investment advisors regulated by the SEC. They provide investment advisory and due diligence services to their respective clients for an asset-based or a performance-based fee.
We believe that offering TPA services allows us to serve our clients more fully and to attract new clients to our trust platform. Investment Advisory. Tectonic Advisors and Sanders Morris are registered investment advisors regulated by the SEC. They provide investment advisory and due diligence services to their respective clients for an asset-based or a performance-based fee.
Section 23B of the Affiliates Act, among other things, prohibits the Bank from engaging in any transaction with an affiliate unless the transaction is on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. 19 Table of Contents Loans to Insiders .
The Dodd-Frank Act expanded the scope of Section 23A of the Affiliates Act, which now includes investment funds managed by an institution as an affiliate, as well as other procedural and substantive hurdles. 17 Table of Contents Section 23B of the Affiliates Act, among other things, prohibits the Bank from engaging in any transaction with an affiliate unless the transaction is on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
Companies are required to report on Form 8-K any cybersecurity incident they determine to be material within four business days of making that determination. See Item 1C “Cybersecurity” in Part I of this Form 10-K.
Companies are required to report on Form 8-K any cybersecurity incident they determine to be material within four business days of making that determination. See Item 1C “Cybersecurity” in Part I of this Form 10-K. These SEC rules, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s AML compliance when considering regulatory applications filed by the institution, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.
Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s AML compliance when considering regulatory applications filed by the institution, including applications for banking mergers and acquisitions.
HWG monitors compliance with the various state insurance regulators, and also has relationships with third party vendors to ensure compliance and awareness among HWG and its employees of relevant requirements and changes, and emerging regulatory issues.
HWG operates in multiple states/jurisdictions, and as a result, both HWG and its agent(s) are subject to various state regulatory and licensing requirements. HWG monitors compliance with the various state insurance regulators, and also has relationships with third party vendors to ensure compliance and awareness among HWG and its agent(s) of relevant requirements and changes, and emerging regulatory issues.
The Bank strives to generate an attractive risk-adjusted return on assets and capital by providing niche lending services and generating significant non-interest income through its factoring and trust services. Lending services include commercial loans to small- to medium-sized businesses and professional concerns as well as consumers.
The Bank is a full-service commercial bank offering a broad range of commercial and consumer banking services to small- to medium-sized businesses, single-family residential and commercial contractors and consumers. The Bank strives to generate an attractive risk-adjusted return on assets and capital by providing niche lending services and generating significant non-interest income through its factoring and trust services.
Under Texas law, we cannot pay dividends to shareholders if the dividends exceed our surplus or if after giving effect to the dividends, we would be insolvent.
As a Texas corporation, we are restricted under the Texas Business Organizations Code (the “TBOC”) from paying dividends under certain conditions. Under Texas law, we cannot pay dividends to shareholders if the dividends exceed our surplus or if after giving effect to the dividends, we would be insolvent.
Non-compliance with the Advisers Act or other federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines or other similar consequences. 25 Table of Contents Insurance Regulation HWG is an insurance agency registered with the TDI. It provides life, disability, property and casualty insurance to clients.
Non-compliance with the Advisers Act or other federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines or other similar consequences. Insurance Regulation HWG is an insurance agency registered with the TDI. Regulation of insurance brokerage is generally performed at a state, rather than a national, level.
We also provide clients with access to private investments that are sourced by us in consideration for a placement fee or commission. Finally, we provide margin loans offered through our clearing firm (Pershing LLC) and periodically serve as a member of an underwriting or selling group member in public offerings, which we offer to our clients.
Finally, we provide margin loans offered through our clearing firms, Pershing LLC and Interactive Brokers LLC, and periodically serve as a member of an underwriting or selling group member in public offerings, which we offer to our clients.
On July 26, 2023, the SEC adopted final rules that require public companies to promptly disclose material cybersecurity incidents in a Current Report on Form 8-K and detailed information regarding their cybersecurity risk management, strategy, and governance on an annual basis in an Annual Report on Form 10-K.
Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology. 18 Table of Contents On July 26, 2023, the SEC adopted final rules that require public companies to promptly disclose material cybersecurity incidents in a Current Report on Form 8-K and detailed information regarding their cybersecurity risk management, strategy, and governance on an annual basis in an Annual Report on Form 10-K.
As of December 31, 2023, we had, on a consolidated basis, $677.3 million in assets, $494.8 million in total loans held for investment, $26.6 million in loans held for sale, $526.9 million in deposits and $106.9 million in shareholders’ equity. Net income for the year ended December 31, 2023 was $15.2 million.
As of December 31, 2024 we had, on a consolidated basis, $863.4 million in assets, $660.2 million in total loans held for investment, $47.0 million in loans held for sale, $711.1 million in deposits and $113.4 million in shareholders’ equity. Net income for the year ended December 31, 2024 was $13.9 million.
As of December 31, 2023, Sanders Morris has approximately $2.7 million in net regulatory capital as defined by FINRA to support its broker-dealer activities. Sanders Morris earns revenue by charging fees and trading commissions for managing the investment assets of clients. Fees and trading commissions are typically charged based on trading activity and/or portfolio size.
As of December 31, 2024, Sanders Morris had approximately $2.9 million in net regulatory capital as defined by Financial Industry Regulatory Authority (“FINRA”) to support its broker-dealer activities. 9 Table of Contents Sanders Morris earns revenue by charging fees and trading commissions for managing the investment assets of clients.
The OCC may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the Bank’s capital. In addition, for a capital restoration plan to be acceptable, the Company must guarantee that the Bank will comply with such capital restoration plan.
If the Bank were to become undercapitalized, it would be subject to growth limitations and would be required to submit a capital restoration plan to the OCC. The OCC may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the Bank’s capital.
The Federal Reserve is also required to consider the CRA records of a bank holding company’s controlled banks when considering an application by the bank holding company to acquire a bank or to merge with another bank holding company.
The Federal Reserve is also required to consider the CRA records of a bank holding company’s controlled banks when considering an application by the bank holding company to acquire a bank or to merge with another bank holding company. 20 Table of Contents The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance based evaluation system.
A change in statutes, regulations or regulatory policies applicable to the Company or its operating subsidiaries could have a material effect on our business.
Moreover, these statutes, regulations and policies are continually under review by the U.S. Congress and state legislatures, and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company or its operating subsidiaries could have a material effect on our business.
We believe that the benefit of a common pooled fund is that it provides investors with access to managers that might not be accessible to individual or smaller investors, sometimes with a lower cost than in a mutual fund format.
We believe that the benefit of a common pooled fund is that it provides investors with access to managers that might not be accessible to individual or smaller investors, sometimes with a lower cost than in a mutual fund format. 8 Table of Contents The Bank has retained Tectonic Advisors under a long-term contract to provide investment advisory services in selecting managers and certain investments and constructing the allocations of the common pooled funds.
The Bank provides a courier and mobile banking concierge service throughout the Dallas MSA and offers its customers free usage of any automated teller machine in the world through its debit card.
The Bank provides a courier and mobile banking concierge service throughout the Dallas MSA and offers its customers free usage of any automated teller machine in the world through its debit card. We also offer an on-line only option to open transaction, savings, and certificate deposits that is marketed via the internet to attract consumer deposits.
Loans are generally made in accordance with the Bank’s appraisal and loan policy with the ratio of the loan principal to the value of collateral (typically established by independent appraisal). Consumer Installment Loans. On a limited basis, the Bank makes loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans.
Loans are generally made in accordance with the Bank’s appraisal and loan policy with the ratio of the loan principal to the value of collateral (typically established by independent appraisal). 6 Table of Contents Consumer Installment Loans.
The use of technology-related products, services, delivery channels and processes exposes a bank to various risks, particularly operational, privacy, security, strategic, reputation and compliance risk. Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology.
The use of technology-related products, services, delivery channels and processes exposes a bank to various risks, particularly operational, privacy, security, strategic, reputation and compliance risk.
Consistent with such policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capital position and achieving the objectives of the policy statement.
Consistent with such policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capital position and achieving the objectives of the policy statement. 13 Table of Contents In addition, we are subject to certain restrictions on the making of distributions as a result of the requirement that the Bank maintain an adequate level of capital as described below.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeRisks Related to Our Business: ● Liquidity risk, including our ability to maintain our deposit base or other funding sources, could adversely affect our ability to fund operations and hurt our financial condition. ● We depend on wholesale funding sources, which causes our cost of funds to be higher and poses future funding risks if the Bank becomes less than “well capitalized”, which may require us to liquidate loans or impede our growth. ● We may not be able to grow and maintain our deposit base or other funding sources, and deposit outflows may increase reliance on wholesale borrowings and brokered deposits. ● We are subject to interest rate risk and changes in interest rates could affect our net interest margins and net interest income, the value of assets and obligations, and the availability and cost of capital or liquidity. ● Our securities portfolio is subject to risk of loss; the fair value of our investment securities can fluctuate due to factors outside of our control. ● We are subject to consolidated capital ratio requirements and therefore have to hold additional capital. ● If we are unable to sell additional services and products to existing clients or attract new clients in a manner that is cost-effective and assures client success, we will not be able to grow our business. ● We may not be able to implement aspects of our expansion strategy, which may adversely affect our ability to maintain our historical earnings trends. ● New lines of business or new products and services may subject us to additional risks. ● Acquisitions may subject us to integration risks and other unknown risks. ● Growth of our business could result in increased costs. ● The soundness of other financial institutions could adversely affect us.
Biggest changeRisks Related to Our Business: ● Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally. ● Risks associated with generating most of our loan growth and having most of our loan portfolio in SBA loans, which have higher default rates and credit losses than traditional commercial loans. ● Risks associated with our recent CEO transition at the Bank, which is our largest operating subsidiary. ● Liquidity risk, including our ability to maintain our deposit base or other funding sources, could adversely affect our ability to fund operations and hurt our financial condition. ● We depend on wholesale funding sources, which causes our cost of funds to be higher and poses future funding risks if the Bank becomes less than “well capitalized”, which may require us to liquidate loans or impede our growth. ● We may not be able to grow and maintain our deposit base or other funding sources, and deposit outflows may increase reliance on wholesale borrowings and brokered deposits. 24 Table of Contents ● We are subject to interest rate risk and changes in interest rates could affect our net interest margins and net interest income, the value of assets and obligations, and the availability and cost of capital or liquidity. ● Our securities portfolio is subject to risk of loss; the fair value of our investment securities can fluctuate due to factors outside of our control. ● We are subject to consolidated capital ratio requirements and therefore have to hold additional capital. ● If we are unable to sell additional services and products to existing clients or attract new clients in a manner that is cost-effective and assures client success, we will not be able to grow our business. ● We may not be able to implement aspects of our expansion strategy, which may adversely affect our ability to maintain our historical earnings trends. ● New lines of business or new products and services may subject us to additional risks. ● Acquisitions may subject us to integration risks and other unknown risks. ● Growth of our business could result in increased costs. ● The soundness of other financial institutions could adversely affect us.
This risk includes the risk of retirement of key professionals in leadership roles, including loan officers, members of our SBA team, and financial advisors and brokers. ● The employment market has become increasingly competitive; We may have difficulty attracting and retaining skilled personnel. ● A decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our business, financial position, results of operations and growth prospects. 26 Table of Contents ● Lower trucking margins and revenues negatively impact trucking industry and factoring. ● Our business is concentrated in, and dependent upon, the continued growth and welfare of our primary market, and adverse economic conditions in such market could negatively impact our operations and clients. ● We have a loan concentration related to the acquisition and financing of dental practices. ● A governmental shutdown or curtailment of government guaranteed loan programs could affect a segment of our business. ● We face specific risks associated with retention of unguaranteed portions of SBA loans. ● Commercial lending generally involves a higher degree of risk than retail residential mortgage lending. ● The level of our commercial real estate loan portfolio may subject us to heightened regulatory scrutiny. ● Our factoring services through the Bank’s Integra Division are concentrated in the transportation industry and economic conditions or other factors negatively impacting the transportation industry could adversely affect our factoring business. ● The success of our trust services is dependent upon market fluctuations and a non-diversified source for its growth. ● We are subject to possible claims and litigation pertaining to fiduciary responsibility. ● We could suffer material credit losses.
This risk includes the risk of retirement of key professionals in leadership roles, including loan officers, members of our SBA team, and financial advisors and brokers. ● The employment market has become increasingly competitive; We may have difficulty attracting and retaining skilled personnel. ● A decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our business, financial position, results of operations and growth prospects. ● Lower trucking margins and revenues negatively impact trucking industry and factoring. ● Our business is concentrated in, and dependent upon, the continued growth and welfare of our primary market, and adverse economic conditions in such market could negatively impact our operations and clients. ● We have a loan concentration related to the acquisition and financing of dental practices. ● A governmental shutdown or curtailment of government guaranteed loan programs could affect a segment of our business. ● We face specific risks associated with retention of unguaranteed portions of SBA loans. ● Commercial lending generally involves a higher degree of risk than retail residential mortgage lending. ● The level of our commercial real estate loan portfolio may subject us to heightened regulatory scrutiny. ● Our factoring services through the Bank’s Integra Division are concentrated in the transportation industry and economic conditions or other factors negatively impacting the transportation industry could adversely affect our factoring business. ● The success of our trust services is dependent upon market fluctuations and a non-diversified source for its growth. ● We are subject to possible claims and litigation pertaining to fiduciary responsibility. ● We could suffer material credit losses.
At times, the cost of these funds can exceed the cost of core deposits in our market area as well as digital deposits, which could have a material adverse effect on our net interest income margins. Wholesale funding is subject to certain practical limits such as the FHLB’s and BTFP’s maximum borrowing capacity and our liquidity targets.
At times, the cost of these funds can exceed the cost of core deposits in our market area as well as digital deposits, which could have a material adverse effect on our net interest income margins. Wholesale funding is subject to certain practical limits such as the FHLB’s maximum borrowing capacity and our liquidity targets.
Our maximum borrowing capacity from the FHLB and BTFP is based on the amount and fair market value and face amount, respectively, of commercial loans and securities we can pledge. If we are unable to pledge sufficient collateral to secure funding from the FHLB, we may lose access to this source of liquidity that we have historically relied upon.
Our maximum borrowing capacity from the FHLB is based on the amount and fair market value and face amount, respectively, of commercial loans and securities we can pledge. If we are unable to pledge sufficient collateral to secure funding from the FHLB, we may lose access to this source of liquidity that we have historically relied upon.
Notwithstanding the foregoing, in the event that three-month CME Term SOFR is less than zero, three-month CME Term SOFR shall be deemed to be zero. Therefore, any dividends declared on or after May 15, 2024 may vary from period to period and could be more or less than the fixed rate for the initial period.
Notwithstanding the foregoing, in the event that three-month CME Term SOFR is less than zero, three-month CME Term SOFR shall be deemed to be zero. Therefore, any dividends declared on or after May 15, 2024 will vary from period to period and could be more or less than the fixed rate for the initial period.
If those systems and review processes prove to be ineffective in identifying and managing risks, we could be subjected to increased regulatory scrutiny and regulatory restrictions could be imposed on our business, including on our potential future business lines, as a result of which our business and operating results could be adversely affected. 43 Table of Contents If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, we could be subject to regulatory penalties and the price of the Series B preferred stock may decline.
If those systems and review processes prove to be ineffective in identifying and managing risks, we could be subjected to increased regulatory scrutiny and regulatory restrictions could be imposed on our business, including on our potential future business lines, as a result of which our business and operating results could be adversely affected. 42 Table of Contents If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, we could be subject to regulatory penalties and the price of the Series B preferred stock may decline.
Our levels of nonperforming assets could increase, which could adversely affect our results of operations and financial condition, and could result in losses in the future. ● Our allowance for credit losses may not be sufficient to absorb actual losses. ● The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business conditions, which may impair their ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition. ● Our commercial finance clients, particularly with respect to the Bank’s Integra Division, may lack the operating history, cash flows or balance sheet necessary to support other financing options and may expose us to additional credit risk, especially if our additional controls for such products are ineffective in mitigating such additional risks. ● Certain of our loans are not secured by property but dependent on the earning capacity of the borrower.
Our levels of nonperforming assets could increase, which could adversely affect our results of operations and financial condition, and could result in losses in the future. ● Our allowance for credit losses may not be sufficient to absorb actual losses. 25 Table of Contents ● The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business conditions, which may impair their ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition. ● Our commercial finance clients, particularly with respect to the Bank’s Integra Division, may lack the operating history, cash flows or balance sheet necessary to support other financing options and may expose us to additional credit risk, especially if our additional controls for such products are ineffective in mitigating such additional risks. ● Certain of our loans are not secured by property but dependent on the earning capacity of the borrower.
In addition, if we cease to be a well-capitalized institution for bank regulatory purposes, the interest rates that we pay on deposits and our ability to accept brokered deposits may be restricted. 49 Table of Contents Federal banking agencies periodically conduct examinations of our banking business, including compliance with laws and regulations, and our failure to comply with any supervisory actions which we are, or may become, subject to as a result of such examinations may adversely affect us.
In addition, if we cease to be a well-capitalized institution for bank regulatory purposes, the interest rates that we pay on deposits and our ability to accept brokered deposits may be restricted. 47 Table of Contents Federal banking agencies periodically conduct examinations of our banking business, including compliance with laws and regulations, and our failure to comply with any supervisory actions which we are, or may become, subject to as a result of such examinations may adversely affect us.
Our governing documents include provisions that: ● subject to the rights of the holders of the Series B preferred stock, empower our board of directors, without shareholder approval, to issue our preferred stock, the terms of which, including voting power, are to be set by our board of directors; ● eliminate cumulative voting in elections of directors; ● subject to certain exceptions, permit our board of directors to alter, amend or repeal our amended and restated bylaws or to adopt new bylaws; 58 Table of Contents ● require shareholders that wish to bring business before annual or special meetings of shareholders, or to nominate candidates for election as directors at our annual meeting of shareholders, to provide timely notice of their intent in writing; and ● enable our board of directors to increase, between annual meetings, the number of persons serving as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present at a meeting of directors at which there is a quorum.
Our governing documents include provisions that: ● subject to the rights of the holders of the Series B preferred stock, empower our board of directors, without shareholder approval, to issue our preferred stock, the terms of which, including voting power, are to be set by our board of directors; ● eliminate cumulative voting in elections of directors; ● subject to certain exceptions, permit our board of directors to alter, amend or repeal our amended and restated bylaws or to adopt new bylaws; ● require shareholders that wish to bring business before annual or special meetings of shareholders, or to nominate candidates for election as directors at our annual meeting of shareholders, to provide timely notice of their intent in writing; and ● enable our board of directors to increase, between annual meetings, the number of persons serving as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present at a meeting of directors at which there is a quorum.
Therefore, our operating results are heavily dependent on the financial performance of our investment portfolios and the investment strategies we employ in our investment advisory businesses and even short-term declines in the performance of the investment portfolios we manage for our clients, whatever the cause, could result in a decline in assets under management and a corresponding decline in investment management fees, which would adversely affect our results of operations. 42 Table of Contents We continue to experience pricing pressures in areas of our business which may impair our future revenue and profitability.
Therefore, our operating results are heavily dependent on the financial performance of our investment portfolios and the investment strategies we employ in our investment advisory businesses and even short-term declines in the performance of the investment portfolios we manage for our clients, whatever the cause, could result in a decline in assets under management and a corresponding decline in investment management fees, which would adversely affect our results of operations. 41 Table of Contents We continue to experience pricing pressures in areas of our business which may impair our future revenue and profitability.
Conversely, increases in interest rates, though they could increase our interest margins absent a commensurate rise in our cost of funds, also have the potential to affect borrowers’ ability to repay, particularly for the small and medium sized businesses to which we lend, subjecting us to potential loan losses. This effect could be exacerbated by an inflationary environment.
Conversely, increases in interest rates, though they could increase our interest margins absent a commensurate rise in our cost of funds, also have the potential to affect borrowers’ ability to repay, particularly for the small and medium sized businesses to which we lend, subjecting us to potential credit losses. This effect could be exacerbated by an inflationary environment.
The recognition of a significant charge to earnings in our consolidated financial statements resulting from any impairment of our goodwill or other intangible assets could materially adversely impact our business, financial condition and results of operations. 44 Table of Contents We may elect or be compelled to seek additional capital, but that capital may not be available, or it may be dilutive.
The recognition of a significant charge to earnings in our consolidated financial statements resulting from any impairment of our goodwill or other intangible assets could materially adversely impact our business, financial condition and results of operations. 43 Table of Contents We may elect or be compelled to seek additional capital, but that capital may not be available, or it may be dilutive.
We may incur significant losses due to ineffective risk management processes and strategies. ● If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed. ● Our estimates and assumptions in the preparation of our financial statements may not be accurate. ● We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired. ● We may elect or be compelled to seek additional capital, but that capital may not be available, or it may be dilutive. ● We face intense competition from larger banks and financial institutions that could hurt our business. ● A third party systems failure could significantly disrupt our business, result in regulatory action against us, or limit our growth. ● Fraudulent activity, breaches of our information security, and cybersecurity attacks could adversely affect our ability to conduct our business, manage our exposure to risk, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause legal or reputational harm. ● Factoring products offered by the Bank’s Integra Division may expose us to an increased risk of fraud. ● We rely on client and counterparty information, which subjects us to risks if that information is not accurate or is incomplete. ● Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations. ● The Company is subject to environmental risks associated with owning real estate or collateral. 27 Table of Contents Risks Related to Our Regulatory Environment: ● We are subject to extensive government regulation and supervision, which could constrain our growth and profitability. ● Recent bank failures and the related negative impact on customer confidence in the safety and soundness of the banking industry may adversely affect our business, earnings and financial condition. ● Federal banking agencies periodically conduct examinations of our banking business, and our failure to comply with any supervisory actions which we are, or may become, subject to as a result of such examinations may adversely affect us. ● We are subject to numerous laws designed to protect consumers and failure to comply with these laws could lead to a wide variety of sanctions. ● We face a risk of noncompliance and enforcement action with the BSA and other anti-money laundering laws. ● Additional regulations and rule making impacting the transportation industry may have a disproportionate impact on the small-to-mid-sized trucking businesses that comprise our primary transportation factoring clients and adversely affect the factoring business conducted by the Bank’s Integra Division. ● Sanders Morris and Tectonic Advisors are subject to substantial regulation and failure to comply with applicable requirements will adversely affect our business. ● Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities. ● We can be subject to legal and regulatory proceedings, investigations and inquiries related to conduct risk.
We may incur significant losses due to ineffective risk management processes and strategies. ● If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed. ● Our estimates and assumptions in the preparation of our financial statements may not be accurate. ● We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired. ● We may elect or be compelled to seek additional capital, but that capital may not be available, or it may be dilutive. ● We face intense competition from larger banks and financial institutions that could hurt our business. ● A third party systems failure could significantly disrupt our business, result in regulatory action against us, or limit our growth. ● Fraudulent activity, breaches of our information security, and cybersecurity attacks could adversely affect our ability to conduct our business, manage our exposure to risk, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause legal or reputational harm. ● Factoring products offered by the Bank’s Integra Division may expose us to an increased risk of fraud. ● We rely on client and counterparty information, which subjects us to risks if that information is not accurate or is incomplete. ● Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations. ● The Company is subject to environmental risks associated with owning real estate or collateral. 26 Table of Contents Risks Related to Our Regulatory Environment: ● We are subject to extensive government regulation and supervision, which could constrain our growth and profitability. ● Federal banking agencies periodically conduct examinations of our banking business, and our failure to comply with any supervisory actions which we are, or may become, subject to as a result of such examinations may adversely affect us. ● We are subject to numerous laws designed to protect consumers and failure to comply with these laws could lead to a wide variety of sanctions. ● We face a risk of noncompliance and enforcement action with the BSA and other anti-money laundering laws. ● Additional regulations and rule making impacting the transportation industry may have a disproportionate impact on the small-to-mid-sized trucking businesses that comprise our primary transportation factoring clients and adversely affect the factoring business conducted by the Bank’s Integra Division. ● Sanders Morris and Tectonic Advisors are subject to substantial regulation and failure to comply with applicable requirements will adversely affect our business. ● Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities. ● We can be subject to legal and regulatory proceedings, investigations and inquiries related to conduct risk.
Holders of the Series B preferred stock have limited voting rights. Holders of the Series B preferred stock have no voting rights with respect to matters that generally require the approval of our common shareholders.
Holders of the Series B preferred stock have no voting rights with respect to matters that generally require the approval of our common shareholders.
Thus, revenues have declined, on a per truck basis, for most trucking companies by 30% or more from their peak in 2021, causing a significant decline in the amount of factored receivables. Further, diesel prices – a key cost of trucking companies – have continued to stay at elevated levels.
Thus, revenues have declined, on a per truck basis, for most trucking companies by 30% or more from their peak in 2021, causing a significant decline in the amount of over the road factored receivables. Further, diesel prices – a key cost of trucking companies – have continued to stay at elevated levels.
The industry did see some relief as the price of diesel fell in 2023, but prices remain elevated as compared to prices in 2021. Our business is concentrated in, and dependent upon, the continued growth and welfare of our primary market, and adverse economic conditions in such market could negatively impact our operations and clients.
The industry did see some relief as the price of diesel fell in 2024, but prices remain elevated as compared to prices in 2021. Our business is concentrated in, and dependent upon, the continued growth and welfare of our primary market, and adverse economic conditions in such market could negatively impact our operations and clients.
The Series B preferred stock is not a savings account, deposit or other obligation of any of our bank or nonbank subsidiaries and is not insured or guaranteed by the FDIC or any other government agency. Your investment is subject to investment risk, and you must be capable of affording the loss of your entire investment.
The Series B preferred stock is not a savings account, deposit or other obligation of any of our bank or nonbank subsidiaries and is not insured or guaranteed by the FDIC or any other government agency. Your investment is subject to investment risk, and you must be capable of affording the loss of your entire investment. Item 1B.
However, in the event that the Cain Watters’ relationship does not continue (for whatever reason) to refer client to the Bank’s trust department, such a change could have a material adverse effect on the future growth and, thus, profits and operations of the Company.
However, in the event that the Cain Watters’ relationship does not continue (for whatever reason) to refer client to the Bank’s Trust Division, such a change could have a material adverse effect on the future growth and, thus, profits and operations of the Company.
Increased ESG-related compliance costs could result in increases to our overall operational costs. Significant revenues and profits are generated as a result of our relationship with Cain Watters, and a change in the relationship or decline in Cain Watters ’ business could adversely affect us.
Increased ESG-related compliance costs could result in increases to our overall operational costs. Significant revenues and profits are generated as a result of our relationship with Cain Watters, and a change in the relationship or decline in Cain Watters’ business could adversely affect us.
Factoring for small-sized trucking businesses constituted the vast majority of our total factoring portfolio as of December 31, 2023, calculated based on the gross receivables from the purchase of invoices from such trucking businesses compared to our total gross receivables in the purchase of factored receivables as of such date.
Factoring for small-sized trucking businesses constituted the vast majority of our total factoring portfolio as of December 31, 2024, calculated based on the gross receivables from the purchase of invoices from such trucking businesses compared to our total gross receivables in the purchase of factored receivables as of such date.
If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as returns on assets and equity. Our allowance for credit losses may not be sufficient to absorb actual losses.
If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as returns on assets and equity. 38 Table of Contents Our allowance for credit losses may not be sufficient to absorb actual losses.
We face operational risk arising from mistakes made in the confirmation or settlement of transactions or from transactions not being properly recorded, evaluated, or accounted. 45 Table of Contents If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to clients, regulatory intervention, or reputational damage.
We face operational risk arising from mistakes made in the confirmation or settlement of transactions or from transactions not being properly recorded, evaluated, or accounted. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to clients, regulatory intervention, or reputational damage.
If market interest rates continue to rise, the market value of the fixed income bond portfolio will decrease, resulting in unrealized losses, and depending on the extent of the rise in interest rates, the increase in unrealized losses could be significant over the short-term.
If market interest rates rise, the market value of the fixed income bond portfolio will decrease, resulting in unrealized losses, and depending on the extent of the rise in interest rates, the increase in unrealized losses could be significant over the short-term.
The inability of our or our clearing brokers’ or custodians’ systems to accommodate an increasing volume of transactions could also constrain our ability to expand our business. We are exposed to cybersecurity risks associated with our internet-based systems and online commerce security, and our information systems could experience an interruption, failure, breach in security, or cyber-attack.
The inability of our or our clearing brokers’ or custodians’ systems to accommodate an increasing volume of transactions could also constrain our ability to expand our business. 44 Table of Contents We are exposed to cybersecurity risks associated with our internet-based systems and online commerce security, and our information systems could experience an interruption, failure, breach in security, or cyber-attack.
Increased market volatility may materially and adversely affect the market price of the Series B preferred stock, which could make it difficult to sell your shares at the volume, prices and times desired. Securities analysts may not continue coverage on us, or may publish an unfavorable report.
Increased market volatility may materially and adversely affect the market price of the Series B preferred stock, which could make it difficult to sell your shares at the volume, prices and times desired. 53 Table of Contents Securities analysts may not continue coverage on us, or may publish an unfavorable report.
Also, changes in interest rates might impact the values of equity and debt securities under management and administration, which may have a negative impact on fee income. 30 Table of Contents Further, rising short-term interest rates are likely to result in declines in both fixed income (bond) and stock prices.
Also, changes in interest rates might impact the values of equity and debt securities under management and administration, which may have a negative impact on fee income. Further, rising short-term interest rates are likely to result in declines in both fixed income (bond) and stock prices.
As described in further detail in the description of the Series B preferred stock attached to this Form 10-K, the annual dividend rate on the Series B preferred stock commencing on May 15, 2024 will equal three-month CME Term SOFR, plus a spread of 672 basis points per annum.
As described in further detail in the description of the Series B preferred stock attached to this Form 10-K, commencing on May 15, 2024, the annual dividend rate on the Series B preferred stock equals three-month CME Term SOFR, plus a spread of 672 basis points per annum.
Failure to successfully manage these risks in the integration, development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations. Acquisitions may subject us to integration risks and other unknown risks.
Failure to successfully manage these risks in the integration, development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations. 32 Table of Contents Acquisitions may subject us to integration risks and other unknown risks.
Recognizing that many of our loans individually represent a significant percentage of our total allowance for credit losses, adverse collection experience in a relatively small number of loans could require an increase in our allowance. 39 Table of Contents Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for credit losses.
Recognizing that many of our loans individually represent a significant percentage of our total allowance for credit losses, adverse collection experience in a relatively small number of loans could require an increase in our allowance. Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for credit losses.
We may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all. The Company is subject to environmental risks associated with owning real estate or collateral.
We may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all. 46 Table of Contents The Company is subject to environmental risks associated with owning real estate or collateral.
However, to the extent that there is a decline in the dental industry in general, we may incur significant losses in our loan portfolio as a result of this concentration. A governmental shutdown or curtailment of government guaranteed loan programs could affect a segment of our business.
However, to the extent that there is a decline in the dental industry in general, we may incur significant losses in our loan portfolio as a result of this concentration. 36 Table of Contents A governmental shutdown or curtailment of government guaranteed loan programs could affect a segment of our business.
Any noncompliance could have a material adverse effect on our business, financial condition, and results of operations. Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
Any noncompliance could have a material adverse effect on our business, financial condition, and results of operations. 49 Table of Contents Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
The Series B preferred stock may be redeemed by us at our option, either in whole or in part, for cash, on any dividend payment date on or after May 15, 2024, or in whole, but not in part, at any time within 90 days following a Regulatory Capital Treatment Event.
The Series B preferred stock may be redeemed by us at our option, either in whole or in part, for cash, on any dividend payment date, or in whole, but not in part, at any time within 90 days following a Regulatory Capital Treatment Event.
In addition, a change in these net capital rules or new rules affecting the scope, coverage, calculation, or amount of the net capital requirements, or a significant operating loss or significant charge against net capital, could have similar effects. The wealth management, trust and brokerage business is highly competitive.
In addition, a change in these net capital rules or new rules affecting the scope, coverage, calculation, or amount of the net capital requirements, or a significant operating loss or significant charge against net capital, could have similar effects. 40 Table of Contents The wealth management, trust and brokerage business is highly competitive.
Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth and may encourage current borrowers to repay loans early. All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable.
Further, elevated interest rates generally reduce loan demand and may result in slower loan growth and may encourage current borrowers to repay loans early. All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable.
In addition, we are subject to regulatory supervision with respect to these trust services that may restrain our growth and profitability. 38 Table of Contents We are subject to possible claims and litigation pertaining to fiduciary responsibility. Clients could make claims and take legal action pertaining to our performance of our fiduciary responsibilities.
In addition, we are subject to regulatory supervision with respect to these trust services that may restrain our growth and profitability. We are subject to possible claims and litigation pertaining to fiduciary responsibility. Clients could make claims and take legal action pertaining to our performance of our fiduciary responsibilities.
A continued lessening of investor interest in actively managed equity funds could decrease demand for and/or pricing on our investment services. 41 Table of Contents We are a small firm. Many of our competitors have more personnel and financial resources than we do.
A continued lessening of investor interest in actively managed equity funds could decrease demand for and/or pricing on our investment services. We are a small firm. Many of our competitors have more personnel and financial resources than we do.
Subject to the approval of the Federal Reserve (if then required), at our option, we may redeem the Series B preferred stock at any time, either in whole or in part, for cash, on any dividend payment date on or after May 15, 2024.
Beginning on May 15, 2024 and subject to the approval of the Federal Reserve (if then required), at our option, we may redeem the Series B preferred stock at any time, either in whole or in part, for cash, on any dividend payment date.
Additional risks and uncertainties that management is not aware of, or that management currently deems immaterial, may also impair the Company ’ s business operations. This Form 10-K is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected.
Additional risks and uncertainties that management is not aware of, or that management currently deems immaterial, may also impair the Company’s business operations. This Form 10-K is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected.
We offer traditional fiduciary services such as serving as executor, trustee, agent, administrator or custodian for individuals, nonprofit organizations, employee benefit plans and organizations. As of December 31, 2023, the Bank had approximately $1.9 billion in trust assets. The level of assets under management is significantly impacted by the market value of the assets.
We offer traditional fiduciary services such as serving as executor, trustee, agent, administrator or custodian for individuals, nonprofit organizations, employee benefit plans and organizations. As of December 31, 2024, the Bank had approximately $2.1 billion in trust assets. The level of assets under management is significantly impacted by the market value of the assets.
Our commercial finance clients, particularly with respect to the Bank ’ s Integra factoring division, may lack the operating history, cash flows or balance sheet necessary to support other financing options and may expose us to additional credit risk, especially if our additional controls for such products are ineffective in mitigating such additional risks.
Our commercial finance clients, particularly with respect to the Bank’s Integra factoring division, may lack the operating history, cash flows or balance sheet necessary to support other financing options and may expose us to additional credit risk, especially if our additional controls for such products are ineffective in mitigating such additional risks.
Further, if we are unable to or do not pay dividends on the Series B preferred stock, the market price of the Series B preferred stock may decline. The Series B preferred stock may be junior in rights and preferences to our future preferred stock.
Further, if we are unable to or do not pay dividends on the Series B preferred stock, the market price of the Series B preferred stock may decline. 50 Table of Contents The Series B preferred stock may be junior in rights and preferences to our future preferred stock.
In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability. 46 Table of Contents We are subject to certain operating risks related to employee error and customer, employee and third party misconduct and fraudulent activity, which could harm our reputation and business.
In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability. We are subject to certain operating risks related to employee error and customer, employee and third party misconduct and fraudulent activity, which could harm our reputation and business.
If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment. Some statements in the following risk factors constitute forward-looking statements. Please refer to “ Cautionary Note Regarding Forward-Looking Statements ” elsewhere in this Form 10-K.
If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment. Some statements in the following risk factors constitute forward-looking statements. Please refer to “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Form 10-K.
We incur substantial legal, accounting, administrative and other costs and expenses related to operating as a public company, and these costs may be higher when we no longer qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”).
We incur substantial legal, accounting, administrative and other costs and expenses related to operating as a public company, and these costs will be higher because we no longer qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) .
Any increase in the allowance for credit losses required by these regulatory agencies could have a negative effect on our results of operations and financial condition. Our legal lending limits may impair our ability to attract borrowers and ability to compete with larger financial institutions. Our per client lending limit at December 31, 2023, was approximately $13.9 million.
Any increase in the allowance for credit losses required by these regulatory agencies could have a negative effect on our results of operations and financial condition. Our legal lending limits may impair our ability to attract borrowers and ability to compete with larger financial institutions. Our per client lending limit at December 31, 2024, was approximately $15.1 million.
We understand that the factors that the Federal Reserve will consider in evaluating a proposed redemption, or a request that we be permitted to redeem the Series B preferred stock without replacing it with common equity Tier 1 capital or additional Tier 1 capital instruments, include its evaluation of the overall level and quality of our capital components, considered in light of our risk exposures, earnings and growth strategy, and other supervisory considerations, although the Federal Reserve may change these factors at any time.
We understand that the factors that the Federal Reserve will consider in evaluating a proposed redemption, or a request that we be permitted to redeem the Series B preferred stock without replacing it with common equity Tier 1 capital or additional Tier 1 capital instruments, include its evaluation of the overall level and quality of our capital components, considered in light of our risk exposures, earnings and growth strategy, and other supervisory considerations, although the Federal Reserve may change these factors at any time. 52 Table of Contents Holders of the Series B preferred stock have limited voting rights.
The Company began providing factoring services for the energy industry and the staffing industry during 2023, and as of December 31, 2023, these services constitute approximately 10% of the Company’s total factoring portfolio.
The Company began providing factoring services for the energy industry and the staffing industry during 2023, and as of December 31, 2024, these services constitute approximately 30% of the Company’s total factoring portfolio.
Cain Watters provides advisory services to approximately 2,900 dental professionals across the United States and plays a meaningful role in referring trust, TPA, participant directed 401k plans and lending business to the Bank.
Cain Watters provides advisory services to approximately 3,100 dental professionals across the United States and plays a meaningful role in referring trust, TPA, participant directed 401k plans and lending business to the Bank.
Dividends on the Series B preferred stock will vary beginning on May 15, 2024 and any dividends declared may be less than the initial fixed annual rate in effect prior to May 15, 2024. ● The Series B preferred stock may be redeemed at our option, and you may not be able to reinvest the redemption price you receive in a similar security. ● Investors should not expect us to redeem the Series B preferred stock on or any time after the date it becomes redeemable. ● Holders of the Series B preferred stock have limited voting rights. ● A liquid market for the Series B preferred stock may not be sustained, which may impair your ability to sell your shares. ● The market price of the Series B preferred stock may become subject to substantial fluctuations. ● Securities analysts may not continue coverage on us. ● The Series B preferred stock is not rated. ● Subject to regulatory requirements and the terms of the Series B preferred stock, the Company may, and currently intends to, pay dividends on its common stock and any such payment reduces the capital of the Company available to the Series B preferred stock. ● Our management and board of directors have significant control over our business. ● We are a “controlled company” within the meaning of the rules of NASDAQ, and as such, we qualify for exemptions from certain corporate governance requirements.
Additional issuances of preferred stock or securities convertible into preferred stock may dilute existing holders. ● Dividends on the Series B preferred stock are discretionary and non-cumulative, and our future ability to pay dividends is subject to restrictions. ● Dividends on the Series B preferred stock vary and any dividends declared may be less than the initial fixed annual rate in effect prior to May 15, 2024. ● The Series B preferred stock may be redeemed at our option, and you may not be able to reinvest the redemption price you receive in a similar security. ● Investors should not expect us to redeem the Series B preferred stock on or any time after the date it becomes redeemable. ● Holders of the Series B preferred stock have limited voting rights. ● A liquid market for the Series B preferred stock may not be sustained, which may impair your ability to sell your shares. ● The market price of the Series B preferred stock may become subject to substantial fluctuations. ● Securities analysts may not continue coverage on us. ● The Series B preferred stock is not rated. ● Subject to regulatory requirements and the terms of the Series B preferred stock, the Company may, and currently intends to, pay dividends on its common stock and any such payment reduces the capital of the Company available to the Series B preferred stock. 27 Table of Contents ● Our management and board of directors have significant control over our business. ● We are a “controlled company” within the meaning of the rules of Nasdaq, and as such, we qualify for exemptions from certain corporate governance requirements.
As of December 31, 2023, the fair value of our investment securities portfolio was $46.8 million. The Bank invests a portion of its assets in U.S. Treasuries, U.S. government agencies, mortgage-backed securities, direct obligations of quasi government agencies including Fannie Mae, Freddie Mac, and the FHLB, and federal funds sold.
As of December 31, 2024, the fair value of our investment securities portfolio was $45.3 million. The Bank invests a portion of its assets in U.S. Treasuries, U.S. government agencies, mortgage-backed securities, direct obligations of quasi government agencies including Fannie Mae, Freddie Mac, and the FHLB, and federal funds sold.
We are a “ controlled company ” within the meaning of the rules of NASDAQ, and as such, we qualify for exemptions from certain corporate governance requirements. As a result, you may not have the same protections afforded to shareholders of companies that are subject to such requirements.
We are a “controlled company” within the meaning of the rules of NASDAQ, and as such, we qualify for exemptions from certain corporate governance requirements. As a result, you may not have the same protections afforded to shareholders of companies that are subject to such requirements.
The non-credit portion of unrealized losses on the Bank’s available for sale securities portfolio are booked to AOCI, a component of shareholders' equity, and unrealized losses net of the related tax effect as of December 31, 2023 totaled $1.8 million, which represents approximately 1.7% of our total capital.
The non-credit portion of unrealized losses on the Bank’s available for sale securities portfolio are booked to AOCI, a component of shareholders’ equity, and unrealized losses net of the related tax effect as of December 31, 2024 totaled $1.6 million, which represents approximately 1.4% of our total capital.
Any of these results could materially and adversely affect our business, financial condition, results of operations and prospects. 50 Table of Contents Additional regulations and rule making impacting the transportation industry may have a disproportionate impact on the small-to-mid-sized trucking businesses that comprise our primary transportation factoring clients and adversely affect the factoring business conducted by the Bank ’ s Integra factoring division.
Any of these results could materially and adversely affect our business, financial condition, results of operations and prospects. Additional regulations and rule making impacting the transportation industry may have a disproportionate impact on the small-to-mid-sized trucking businesses that comprise our primary transportation factoring clients and adversely affect the factoring business conducted by the Bank’s Integra factoring division.
Interest rates are highly sensitive to many factors that are beyond our control, including (among others) general and regional and local economic conditions, the monetary policies of the Federal Reserve, bank regulatory requirements, competition from other banks and financial institutions and a change over time in the mix of our loans and investment securities, on the one hand, and on our deposits and other liabilities, on the other hand.
As interest rates change, net interest income is affected. 30 Table of Contents Interest rates are highly sensitive to many factors that are beyond our control, including (among others) general and regional and local economic conditions, the monetary policies of the Federal Reserve, bank regulatory requirements, competition from other banks and financial institutions and a change over time in the mix of our loans and investment securities, on the one hand, and on our deposits and other liabilities, on the other hand.
To the extent that this reserve is not adequate to cover losses, the Bank will suffer losses to its capital base and such losses could be material. Commercial lending generally involves a higher degree of risk than retail residential mortgage lending.
The Bank has a reserve for such unguaranteed portion of SBA loans. To the extent that this reserve is not adequate to cover losses, the Bank will suffer losses to its capital base and such losses could be material. Commercial lending generally involves a higher degree of risk than retail residential mortgage lending.
Certain of our loans are not secured by property but dependent on the earning capacity of the borrower. Certain of our loans are not collateralized or fully collateralized by tangible property, but are made on the basis of the cash flow (earnings) being generated by the borrower.
Certain of our loans are not collateralized or fully collateralized by tangible property, but are made on the basis of the cash flow (earnings) being generated by the borrower.
Uncertainties continue regarding the potential for a renegotiation of international trade agreements and the effect of the legislation enacted by the recent presidential administration, and the impact such actions and the policies of the administration of President Joseph Biden may have on economic and market conditions.
Uncertainties continue regarding the potential for a renegotiation of international trade agreements and the effect of the legislation enacted by the past presidential administration, and the impact such actions and the policies of the administration of President Donald Trump may have on economic and market conditions.
As of December 31, 2023, our total liabilities were approximately $570.5 million, and we may incur additional indebtedness in the future to increase our capital resources or fund strategic acquisitions or other business efforts.
As of December 31, 2024, our total liabilities were approximately $750.0 million, and we may incur additional indebtedness in the future to increase our capital resources or fund strategic acquisitions or other business efforts.
Wicker, other members of management and partners of Cain Watters, and certain other existing shareholders (collectively, the “Majority Shareholders”) currently own more than 50% of our outstanding shares of common stock.
Clapp, Thomas Sanders, other members of the board, management and partners of Cain Watters, and certain other existing shareholders (collectively, the “Majority Shareholders”) currently own more than 50% of our outstanding shares of common stock.
If we are unable to retain our key employees or attract, recruit, integrate, or retain other skilled professionals in the future, our business could suffer materially in the future. The employment market has become increasingly competitive; We may have difficulty attracting and retaining skilled personnel. The employment market has become increasingly competitive over the past two years.
If we are unable to retain our key employees or attract, recruit, integrate, or retain other skilled professionals in the future, our business could suffer materially in the future. 34 Table of Contents The employment market has become increasingly competitive; We may have difficulty attracting and retaining skilled personnel.
Reputation risk, or the risk to our business, earnings and capital from negative public opinion is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities.
Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities.
We derive a substantial portion of our revenue from the efforts of our professional team, including loan officers, members of our SBA team, and financial advisors and brokers. Therefore, our future success depends, in large part, on our ability to attract, recruit, and retain qualified financial services professionals.
The employment market has become increasingly competitive over the past few years. We derive a substantial portion of our revenue from the efforts of our professional team, including loan officers, members of our SBA team, and financial advisors and brokers. Therefore, our future success depends, in large part, on our ability to attract, recruit, and retain qualified financial services professionals.
Although our clients’ business and financial interests may extend beyond our primary market, adverse conditions that affect our primary market could reduce our growth rate, affect the ability of our clients to repay their loans, affect the value of collateral underlying our loans, affect our ability to attract deposits, affect the ability of our clients to make additional investments or cause such clients to withdraw their investments, affect the value of our assets under management and generally affect our business, financial condition, results of operations and future prospects. 36 Table of Contents We have a loan concentration related to the acquisition and financing of dental practices.
Although our clients’ business and financial interests may extend beyond our primary market, adverse conditions that affect our primary market could reduce our growth rate, affect the ability of our clients to repay their loans, affect the value of collateral underlying our loans, affect our ability to attract deposits, affect the ability of our clients to make additional investments or cause such clients to withdraw their investments, affect the value of our assets under management and generally affect our business, financial condition, results of operations and future prospects.
In such an instance, management should employ heightened risk management practices, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. As of December 31, 2023, our CRE 1 Concentration level was 84.33% and our CRE 2 Concentration level was 112.7%.
In such an instance, management should employ heightened risk management practices, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. As of December 31, 2024, our CRE 1 Concentration level was 87.0% and our CRE 2 Concentration level was 123.3%.
In addition, Tectonic Advisors generates a substantial portion of its revenues and profits under a long-term contract to provide advisory and due diligence services to assist in the management of assets of clients of Cain Watters.
In addition, Tectonic Advisors generates a substantial portion of its revenues and profits under a long-term contract to provide advisory and due diligence services to assist in the management of assets of clients of Cain Watters and Cain Watters has referred almost entirely all of the clients of Nolan and the Bank’s Trust Division.
For the year ended December 31, 2023, consolidated non-interest income represented approximately 59.3% of our consolidated gross revenue (which is net interest income plus non-interest income).
For the year ended December 31, 2024, consolidated non-interest income represented approximately 58.5% of our consolidated gross revenue (which is net interest income plus non-interest income).
We are controlled by the majority shareholders, whose interests may not coincide with yours and with whose decisions you may disagree. A. Haag Sherman, George L. Ball, Darrell W. Cain, Steven B. Clapp, Thomas Sanders, Daniel C.
We are controlled by the majority shareholders, whose interests may not coincide with yours and with whose decisions you may disagree. A. Haag Sherman, Darrell W. Cain, Steven B.
Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations. 52 Table of Contents We can be subject to legal and regulatory proceedings, investigations and inquiries related to conduct risk.
Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.
However, if such controls are ineffective in controlling this additional risk or if we fail to follow the procedures we have established for managing this additional risk, we could be exposed to additional losses with respect to such product lines that could have an adverse effect on our business, financial condition and results of operations.
However, if such controls are ineffective in controlling this additional risk or if we fail to follow the procedures we have established for managing this additional risk, we could be exposed to additional losses with respect to such product lines that could have an adverse effect on our business, financial condition and results of operations. 39 Table of Contents Certain of our loans are not secured by property but dependent on the earning capacity of the borrower.
Such an occurrence could impact the returns we realize on the factoring activity conducted by the Bank’s Integra factoring division or result in a decrease in the overall amount of factoring activity conducted by the Bank’s Integra factoring division and could have an adverse effect on our business, financial condition and results of operations.
Such an occurrence could impact the returns we realize on the factoring activity conducted by the Bank’s Integra Division or result in a decrease in the overall amount of factoring activity conducted by the Bank’s Integra Division and could have an adverse effect on our business, financial condition and results of operations. 48 Table of Contents Sanders Morris and Tectonic Advisors are subject to substantial regulation.
However, under certain circumstances, a poor examination or a violation brought to the SEC’s or FINRA’s attention can result in an administrative proceeding. 51 Table of Contents The SEC, FINRA, and state securities commissions may conduct administrative proceedings that can result in: ● censure, fines, or civil penalties; ● issuance of cease-and-desist orders; ● deregistration, suspension, or expulsion of a broker-dealer or investment advisor; ● suspension or disqualification of the broker-dealer’s officers or employees; ● prohibition against engaging in certain lines of business; and ● other adverse consequences.
The SEC, FINRA, and state securities commissions may conduct administrative proceedings that can result in: ● censure, fines, or civil penalties; ● issuance of cease-and-desist orders; ● deregistration, suspension, or expulsion of a broker-dealer or investment advisor; ● suspension or disqualification of the broker-dealer’s officers or employees; ● prohibition against engaging in certain lines of business; and ● other adverse consequences.
These events include, but are not limited to: retaining key employees and clients, achieving anticipated synergies, meeting expectations and otherwise realizing the undertaking’s anticipated benefits; litigation resulting from circumstances occurring at the acquired entity prior to the date of acquisition; loan downgrades and credit loss provisions resulting from underwriting of certain acquired loans determined not to meet our credit standards; personnel changes that cause instability within a department; and other events relating to the performance of our business. 32 Table of Contents Mergers and acquisitions frequently result in the recording of goodwill and other intangible assets, which are subject to potential impairments in the future and that could harm our financial results.
These events include, but are not limited to: retaining key employees and clients, achieving anticipated synergies, meeting expectations and otherwise realizing the undertaking’s anticipated benefits; litigation resulting from circumstances occurring at the acquired entity prior to the date of acquisition; loan downgrades and credit loss provisions resulting from underwriting of certain acquired loans determined not to meet our credit standards; personnel changes that cause instability within a department; and other events relating to the performance of our business.
If our ability to obtain funds from these sources becomes limited, these sources become restricted or are eliminated, or the costs of those funds increase, or we are unable to effectively manage the repayment and maturity schedules of our loans and investment securities, whether due to factors that affect us specifically, including our financial performance, or due to factors that affect the financial services industry in general, including weakening economic conditions or negative views and expectations about the prospects for the financial services industry as a whole, then our ability to grow our banking and investment advisory and trust businesses would be harmed, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Potential alternative sources of liquidity include the sale of loans, the acquisition of national market non-core deposits, the issuance of additional collateralized borrowings such as the FHLB, advances, access to the Federal Reserve discount window and the issuance of additional equity securities and/or debt. 29 Table of Contents If our ability to obtain funds from these sources becomes limited, these sources become restricted or are eliminated, or the costs of those funds increase, or we are unable to effectively manage the repayment and maturity schedules of our loans and investment securities, whether due to factors that affect us specifically, including our financial performance, or due to factors that affect the financial services industry in general, including weakening economic conditions or negative views and expectations about the prospects for the financial services industry as a whole, then our ability to grow our banking and investment advisory and trust businesses would be harmed, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
If any ratings are assigned to the Series B preferred stock in the future or if we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for or the market value of the Series B preferred stock. 57 Table of Contents Our management and board of directors have significant control over our business.
If any ratings are assigned to the Series B preferred stock in the future or if we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for or the market value of the Series B preferred stock.
The rates on these digital accounts can be highly competitive and may increase our cost of funds, which could have a material adverse effect on our net interest income margins. Listing service deposit rates are very market sensitive.
We further expect to increase our core funding as we develop the capacity for consumers to open on-line digital accounts. The rates on these digital accounts can be highly competitive and may increase our cost of funds, which could have a material adverse effect on our net interest income margins. Listing service deposit rates are very market sensitive.
However, our nonperforming assets may continue to remain at low levels or we may experience increases in nonperforming assets in the future. Our nonperforming assets adversely affect our net income in various ways.
We had no other real estate owned at December 31, 2024. However, our nonperforming assets may continue to remain at low levels or we may experience increases in nonperforming assets in the future. Our nonperforming assets adversely affect our net income in various ways.
We are subject to stringent capital requirements that may limit our operations and potential growth. We are subject to various regulatory capital requirements on a consolidated basis, and at both the Bank and Sanders Morris separately.
See “Supervision and Regulation” for additional information regarding the supervisory and regulatory issues facing the Company. We are subject to stringent capital requirements that may limit our operations and potential growth. We are subject to various regulatory capital requirements on a consolidated basis, and at both the Bank and Sanders Morris separately.
Sanders Morris and Tectonic Advisors are subject to substantial regulation. If we fail to comply with applicable requirements, our business will be adversely affected. Tectonic Advisors and Sanders Morris are subject to extensive regulation under both federal and state laws.
If we fail to comply with applicable requirements, our business will be adversely affected. Tectonic Advisors and Sanders Morris are subject to extensive regulation under both federal and state laws. Sanders Morris is registered as a broker-dealer with the SEC and FINRA; Tectonic Advisors and Sanders Morris are registered with the SEC as investment advisors.
Some degree of general instability in the broad commercial real estate market may occur in the coming quarters as loans are refinanced at higher interest rates and in markets with higher vacancy rates under current economic conditions.
Some degree of general instability in the broad commercial real estate market may occur in the coming quarters as loans are refinanced at higher interest rates and in markets with higher vacancy rates under current economic conditions. Instability and uncertainty in the commercial real estate markets could have a material adverse effect on our financial condition and results of operations.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeThis includes performing due diligence and assessment of each provider’s cybersecurity posture as well as periodic re-assessments. ● Security Training and Awareness . We provide ongoing education and training to employees regarding cybersecurity threats and the role they play in helping prevent and detect these threats.
Biggest changeThis includes performing due diligence and assessment of each provider’s cybersecurity posture as well as periodic re-assessments. 56 Table of Contents ● Security Training and Awareness . We provide ongoing education and training to employees regarding cybersecurity threats and the role they play in helping prevent and detect these threats.
Our program leverages industry standards and frameworks and is designed to protect the confidentiality, integrity, and availability of our information assets and systems. The Information Security Program is led by the Chief Information Security Officer ("CISO"), who reports to the Chief Executive Officer. The CISO has oversight of the Company’s risk management framework, which includes the Information Security Program.
Our program leverages industry standards and frameworks and is designed to protect the confidentiality, integrity, and availability of our information assets and systems. The Information Security Program is led by the Chief Information Security Officer (“CISO”), who reports to the Chief Executive Officer. The CISO has oversight of the Company’s risk management framework, which includes the Information Security Program.
Through ongoing communication with these teams, the CISO monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents in real time, and reports such incidents to leadership when appropriate pursuant to internal guidelines governing the reporting of such events. 60 Table of Contents ● Threat and Vulnerability Management .
Through ongoing communication with these teams, the CISO monitors the prevention, detection, mitigation, and remediation of cybersecurity incidents in real time, and reports such incidents to leadership when appropriate pursuant to internal guidelines governing the reporting of such events. ● Threat and Vulnerability Management .
Additionally, the Technology Committee of our board of directors reviews our cyber security risk profile on at least an annual basis. 61 Table of Contents
Additionally, the Technology Committee of our board of directors reviews our cyber security risk profile on at least an annual basis.
We also share and receive threat intelligence with government agencies, the Financial Services Information Sharing and Analysis Center ("FS-ISAC") and cybersecurity vendors and leaders in the cybersecurity industry. ● Infrastructure and Data Protection .
We also share and receive threat intelligence with government agencies, the Financial Services Information Sharing and Analysis Center (“FS-ISAC”) and cybersecurity vendors and leaders in the cybersecurity industry. ● Infrastructure and Data Protection .

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe also lease space at: (a) 600 Travis, Houston, Texas 77002, comprising 14,402 square feet (expires in April 2026) for offices of Sanders Morris, Tectonic Advisors and HWG, (b) 17 Cowboys Way, Frisco, Texas 75034, comprising 2,141 square feet (expires in January 2034) for offices of Tectonic Advisors and HWG, (c) 5950 Sherry Lane, Suite 470, Dallas, Texas 75225, comprising 2,508 square feet, which lease expires in August 2029 for offices of Sanders Morris’s Dallas branch, (d) 8900 Indian Creek Parkway, Overland Park, Kansas 66210, comprising 4,947 square feet, which lease expires in May 2027 for offices of the Bank’s Nolan division, and (e) 6300 Ridglea Place, Fort Worth, Texas 76116, comprising 4,139 square feet, which lease expires in January 2027 for offices of the Bank’s Integra factoring division.
Biggest changeWe also lease space at: (a) 600 Travis, Houston, Texas 77002, comprising 14,402 square feet (expires in April 2026) for offices of Sanders Morris, Tectonic Advisors and HWG, (b) 17 Cowboys Way, Suite 250, Frisco, Texas 75034, comprising 2,141 square feet (expires in January 2034) for offices of Tectonic Advisors and HWG, (c) 5950 Sherry Lane, Suite 470, Dallas, Texas 75225, comprising 2,508 square feet, which lease expires in August 2029 for offices of Sanders Morris’s Dallas branch, (d) 8900 Indian Creek Parkway, Overland Park, Kansas 66210, comprising 4,947 square feet, which lease expires in May 2027 for offices of the Bank’s Nolan division, and (e) 6300 Ridglea Place, Fort Worth, Texas 76116, comprising 4,139 square feet, which lease expires in January 2027 for offices of the Bank’s Integra Division.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeBased on the information presently available, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business’s financial condition or results of operations of the Company on a consolidated basis.
Biggest changeBased on the information presently available, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the financial condition or results of operations of the Company on a consolidated basis.
However, changes in circumstances or additional information could result in additional accruals or resolution of these matters in excess of established accruals, which could adversely affect our financial condition, results of operations or cash flows, potentially materially. Item 4. Mine Safety Disclosures. Not applicable. 62 Table of Contents PART II
However, changes in circumstances or additional information could result in additional accruals or resolution of these matters in excess of established accruals, which could adversely affect our financial condition, results of operations or cash flows, potentially materially. Item 4. Mine Safety Disclosures. Not applicable. 57 Table of Contents PART II
Item 3. Legal Proceedings. We are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of its business.
Item 3. Legal Proceedings. We are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of our business.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 62 PART II 63 Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities 63 Item 6. [Reserved] 63 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 64 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 85 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 57 PART II Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities 58 Item 6. [Reserved] 58 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 59 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 80 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeItem 5. Market for Registrant ’ s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities. Market Information There is no established public trading market for our common stock. Our Series B preferred stock is quoted on the NASDAQ Global Market under the symbol “TECTP”.
Biggest changeItem 5. Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities. Market Information There is no established public trading market for our common stock. Our Series B preferred stock is quoted on the Nasdaq Global Market under the symbol “TECTP”.
Securities Authorized for Issuance Under Equity Compensation Plans Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2023, segregated between stock-based compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, is presented in the table below.
Securities Authorized for Issuance Under Equity Compensation Plans Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2024, segregated between stock-based compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, is presented in the table below.
During the year ended 2023, and after declaring and paying dividends on our Series B preferred stock, our board of directors declared and paid certain quarterly dividends on our common stock, which is not registered with the SEC, and does not trade publicly.
During the year ended 2024, and after declaring and paying dividends on our Series B preferred stock, our board of directors declared and paid certain quarterly dividends on our common stock, which is not registered with the SEC, and does not trade publicly.
Plan Category Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) Weighted average exercise price of outstanding options, warrants, and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in (a)) Equity compensation plans approved by security holders: 2017 Equity Incentive Plan 337,500 $ 5.51 340,000
Plan Category Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) Weighted average exercise price of outstanding options, warrants, and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in (a)) Equity compensation plans approved by security holders: 2017 Equity Incentive Plan 156,500 $ 5.23 365,000
Holders of Record As of March 27, 2024, we had 100 holders of record of our common stock. Dividends Although we intend to pay dividends on the Series B preferred stock, dividends on the Series B preferred stock are not cumulative or mandatory.
Holders of Record As of March 27, 2025, we had 91 holders of record of our common stock. Dividends Although we intend to pay dividends on the Series B preferred stock, dividends on the Series B preferred stock are not cumulative or mandatory.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeYear Ended December 31, 2023 2022 (In thousands, except percentages) Average Balance Interest Average Yield Average Balance Interest Average Yield Assets Interest-bearing deposits and federal funds sold $ 54,770 $ 2,764 5.05 % $ 37,032 $ 613 1.66 % Securities 50,874 2,091 4.11 46,576 1,887 4.05 Loans, net of unearned discount (1) 491,448 41,612 8.47 458,980 30,885 6.73 Total earning assets 597,092 46,467 7.78 542,588 33,385 6.15 Cash and other assets 48,320 49,995 Allowance for credit losses (5,743 ) (4,192 ) Total assets $ 639,669 $ 588,391 Liabilities and Shareholders ’ Equity Savings and interest-bearing demand $ 12,041 56 0.47 % $ 16,287 49 0.30 % Money market deposit accounts 132,471 6,153 4.64 129,972 1,639 1.26 Time deposits 275,540 11,540 4.19 216,196 3,252 1.50 Total interest-bearing deposits 420,052 17,749 4.23 362,455 4,940 1.36 FHLB and other borrowings 2,951 161 5.46 8,730 53 0.61 Subordinated notes 12,000 1,196 9.97 12,000 911 7.59 Total interest-bearing liabilities 435,003 19,106 4.39 383,185 5,904 1.54 Non-interest-bearing deposits 92,230 104,170 Other liabilities 11,260 10,842 Total liabilities 538,493 498,197 Shareholders’ equity 101,176 90,194 Total liabilities and shareholders’ equity $ 639,669 $ 588,391 Net interest income $ 27,361 $ 27,481 Net interest spread 3.39 % 4.61 % Net interest margin 4.58 % 5.06 % (1) Includes non-accrual loans.
Biggest changeYear Ended December 31, 2024 2023 (In thousands, except percentages) Average Balance Interest Average Yield Average Balance Interest Average Yield Assets Interest-bearing deposits and federal funds sold $ 90,277 $ 4,844 5.37 % $ 54,770 $ 2,764 5.05 % Securities 52,677 2,272 4.31 50,874 2,091 4.11 Loans, net of unearned discount (1) 613,955 56,512 9.20 491,448 41,612 8.47 Total earning assets 756,909 63,628 8.41 597,092 46,467 7.78 Cash and other assets 49,119 48,320 Allowance for credit losses (7,525 ) (5,743 ) Total assets $ 798,503 $ 639,669 Liabilities and Shareholders’ Equity Savings and interest-bearing demand $ 10,084 48 0.48 % $ 12,041 56 0.47 % Money market deposit accounts 152,368 7,657 5.03 132,471 6,153 4.64 Time deposits 412,925 21,736 5.26 275,540 11,540 4.19 Total interest-bearing deposits 575,377 29,441 5.12 420,052 17,749 4.23 FHLB and other borrowings 18,045 887 4.92 2,951 161 5.46 Subordinated notes 12,000 1,284 10.70 12,000 1,196 9.97 Total interest-bearing liabilities 605,422 31,612 5.22 435,003 19,106 4.39 Non-interest-bearing deposits 67,804 92,230 Other liabilities 15,189 11,260 Total liabilities 688,415 538,493 Shareholders’ equity 110,088 101,176 Total liabilities and shareholders’ equity $ 798,503 $ 639,669 Net interest income $ 32,016 $ 27,361 Net interest spread 3.19 % 3.39 % Net interest margin 4.23 % 4.58 % (1) Includes non-accrual loans. 62 Table of Contents Provision for Credit Losses As discussed in Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements, the Company adopted the CECL accounting standard effective on January 1, 2023.
In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of other liabilities in our consolidated balance sheets.
In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of other liabilities in our consolidated balance sheets.
While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors.
While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors.
While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets.
While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets.
The Company’s primary sources of funds are retail, small business, custodial, commercial deposits, loan repayments, maturity of investment securities, other short-term borrowings, and other funds provided by operations. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets.
The Company’s primary sources of funds are retail, small business, custodial, commercial deposits, brokered deposits, loan repayments, maturity of investment securities, other short-term borrowings, and other funds provided by operations. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets.
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 Dallas, Texas.
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 Dallas, Texas.
Provision expense is also impacted by the economic outlook and changes in macroeconomic variables. The provision expense recorded for the year ended December 31, 2023 and 2022 driven by the loss rate and charge-offs. See “Allowance for Credit Losses” elsewhere in this discussion for further analysis of our provision for credit losses related to loans.
Provision expense is also impacted by the economic outlook and changes in macroeconomic variables. The provision expense recorded for the year ended December 31, 2024 and 2023 driven by the loss rate and charge-offs. See “Allowance for Credit Losses” elsewhere in this discussion for further analysis of our provision for credit losses related to loans.
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.
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.
As of December 31, 2023, the Company and the Bank met all capital adequacy requirements to which they were subject. As of December 31, 2023, the Bank qualified as “well capitalized” under the prompt corrective action regulations of Basel III and the OCC.
As of December 31, 2024, the Company and the Bank met all capital adequacy requirements to which they were subject. As of December 31, 2024, the Bank qualified as “well capitalized” under the prompt corrective action regulations of Basel III and the OCC.
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 and HoldCo. Our banking operating segment encompasses both commercial and consumer banking services, as well as factoring services.
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 two operating segments: Banking and Other Financial Services. Our Banking segment encompasses both commercial and consumer banking services, as well as factoring services.
The following presents the amortized cost and fair values of the securities portfolio as of the dates indicated: As of December 31, 2023 As of December 31, 2022 (In thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Securities available for sale : U.S.
The following presents the amortized cost and fair values of the securities portfolio as of the dates indicated: As of December 31, 2024 As of December 31, 2023 (In thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Securities available for sale: U.S.
The following table presents our regulatory capital ratios, as well as those of the Bank, as of the dates indicated: (In thousands) December 31, 2023 December 31, 2022 Amount Ratio Amount Ratio Tectonic Financial, Inc.
The following table presents our regulatory capital ratios, as well as those of the Bank, as of the dates indicated: (In thousands) December 31, 2024 December 31, 2023 Amount Ratio Amount Ratio Tectonic Financial, Inc.
The remaining variances in our occupancy and equipment expense were individually immaterial. 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 remaining variances in our occupancy and equipment expense were individually immaterial. 65 Table of Contents 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.
Our Other Financial Services segment includes the activities of Tectonic Advisors, Sanders Morris, the Bank’s Trust Division, which includes Nolan, and HWG. Our HoldCo 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.
Our Other Financial Services segment includes the activities of Tectonic Advisors, Sanders Morris, the Bank’s Trust Division, which includes Nolan, and HWG. A third category, HoldCo and Other, 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.
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, 2023, advisory income increased $1.4 million, or 10%, compared to the year ended December 31, 2022.
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, 2024, advisory income increased $3.4 million, or 23.1%, compared to the year ended December 31, 2023.
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 $58.8 million, or 8.7% of total assets, as of December 31, 2023.
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 $63.7 million, or 7.4% of total assets, as of December 31, 2024.
Changes in the allowance for off-balance sheet credit exposures are generally driven by the remaining unfunded loan commitments expected to fund loans and to changes in the assumptions to project loss rates. The credit provision for the year ended December 31, 2023 was due to decreased outstanding loan commitments to fund.
Changes in the allowance for off-balance sheet credit exposures are generally driven by the remaining unfunded loan commitments expected to fund loans and to changes in the assumptions to project loss rates. The credit provision for the year ended December 31, 2024 was due to increased outstanding loan commitments to fund.
As of December 31, 2023, Sanders Morris is in compliance with FINRA’s net regulatory capital requirements. 83 Table of Contents Liquidity Our liquidity relates to our ability to maintain a steady flow of funds to support our ongoing operating, investing and financing activities.
As of December 31, 2024, Sanders Morris is in compliance with FINRA’s net regulatory capital requirements. 78 Table of Contents Liquidity Our liquidity relates to our ability to maintain a steady flow of funds to support our ongoing operating, investing and financing activities.
Salaries, taxes and other benefits in our trust group within our Other Financial Services segment increased $222,000 related to staffing additions to accommodate additional recordkeeping clients and duplication of personnel during staff changes as well as retention bonuses.
Salaries, taxes and other benefits in our trust group within our Other Financial Services segment increased $205,000 related to staffing additions to accommodate additional recordkeeping clients and duplication of personnel during staff changes, as well as the amortization of retention bonuses.
As of December 31, 2023, the target range for the federal funds rate was 5.25% to 5.50%. 66 Table of Contents The following table 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.
As of December 31, 2024, the target range for the federal funds rate was 4.25% to 4.50%. The following table 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 following table presents the components of provision for credit losses: Year Ended December 31, (In thousands) 2023 2022 Provision for credit losses related to: Loans $ 1,333 $ 1,264 Held to maturity securities - - Off-balance sheet credit exposures (45 ) - Total $ 1,288 $ 1,264 68 Table of Contents Provision expense for loans is generally reflective of change in loan volume and mix as well as charge-offs or specific reserves taken during the respective period.
The following table presents the components of provision for credit losses: Year Ended December 31, (In thousands) 2024 2023 Provision for credit losses related to: Loans $ 4,583 $ 1,333 Held to maturity securities - - Off-balance sheet credit exposures 265 (45 ) Total $ 4,848 $ 1,288 Provision expense for loans is generally reflective of change in loan volume and mix as well as charge-offs or specific reserves taken during the respective period.
The decrease is primarily due to a decrease in brokerage and advisory direct costs at Sanders Morris and HWG of $73,000, related to a decrease in exchange clearing fees, advisory clearing fees and referral fees of $177,000, offset by an increase in clearing firm service fees, execution charges, information services and service fees of $104,000.
The increase is primarily due to an increase in brokerage and advisory direct costs at Sanders Morris and HWG of $141,000, related to an increase in clearing firm service fees, exchange clearing fees, advisory clearing fees service fees and execution charges of $184,000, offset by a decrease in information services and referral fees of $43,000.
Borrowings The table below presents balances of each of the borrowing facilities as of the dates indicated: December 31, (In thousands) 2023 2022 Borrowings: FHLB borrowings $ - $ - FRB borrowings (BTFP) 21,000 - Subordinated notes 12,000 12,000 $ 33,000 $ 12,000 The Company has a credit line with the FHLB with borrowing capacity of $56.8 million secured by commercial loans.
Borrowings The table below presents balances of each of the borrowing facilities as of the dates indicated: December 31, (In thousands) 2024 2023 Borrowings: FHLB borrowings $ 10,000 $ - FRB borrowings (BTFP) - 21,000 Subordinated notes 12,000 12,000 $ 22,000 $ 33,000 The Company has a credit line with the FHLB with borrowing capacity of $67.0 million secured by commercial loans.
Income Taxes Income tax expense was $3.8 million, for an effective tax rate of 20.1%, for the year ended December 31, 2023, compared to $4.4 million, for an effective tax rate of 20.6%, for the year ended December 31, 2022.
Income Taxes Income tax expense was $4.4 million, for an effective tax rate of 23.9%, for the year ended December 31, 2024, compared to $3.8 million, for an effective tax rate of 20.1%, for the year ended December 31, 2023.
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, 2023 and 2022. The Company also has a credit line with the FRB with borrowing capacity of $43.5 million, which is secured by commercial loans.
The Company determines its borrowing needs and renews the advances accordingly at varying terms. The Company had $10.0 million borrowings with FHLB as of December 31, 2024 and no borrowing with FHLB as of December 31, 2023. The Company also has a credit line with the FRB with borrowing capacity of $38.6 million, which is secured by commercial loans.
Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operation. 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.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. 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.
Performance Summary Net income available to common shareholders decreased by $1.8 million, or 11.6%, to $13.7 million for the year ended December 31, 2023 from $15.5 million for the year ended December 31, 2022. Earnings per diluted common share were $1.87 and $2.11 for the years ended December 31, 2023 and 2022, respectively.
Performance Summary Net income available to common shareholders decreased by $1.6 million, or 11.6%, to $12.1 million for the year ended December 31, 2024 from $13.7 million for the year ended December 31, 2023. Earnings per diluted common share were $1.68 and $1.87 for the years ended December 31, 2024 and 2023, respectively.
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 ended December 31, 2023, increased $2.1 million, or 14.0%, compared to the year ended December 31, 2022.
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 ended December 31, 2024, increased $4.1 million, or 23.4%, compared to the year ended December 31, 2023.
Non-interest expense increased $2.0 million, which included an increase in salaries and employee benefits of $1.4 million, primarily related to the movement of accounting and technology staff from Tectonic Advisors to Tectonic Financial, Inc., to allow for more accurate allocation of costs given that these personnel frequently work on matters across the business.
Non-interest expense increased $884,000, or 23.0%, which included an increase in salaries and employee benefits of $724,000, primarily related to the movement of accounting and technology staff from Tectonic Advisors to Tectonic Financial, Inc. in July of 2023 to allow for more accurate allocation of costs given that these personnel frequently work on matters across the business.
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.
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.
Trust expenses for the year ended December 31, 2023, increased by $22,000, or 1.0%, compared to the year ended December 31, 2022, based on increases in asset values of the Bank’s common trust funds. Brokerage and advisory direct costs .
Trust expenses for the year ended December 31, 2024, increased by $246,000, or 10.9%, compared to the year ended December 31, 2023, based on increases in asset values of the Bank’s common trust funds. Brokerage and advisory direct costs .
For the year ended December 31, 2023, annual return on average assets was 2.38%, compared to 2.89% for the prior year, and annual return on average equity was 15.04%, compared to 18.88% for the prior year. Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry.
For the year ended December 31, 2024, annual return on average assets was 1.75%, compared to 2.38% for the prior year, and annual return on average equity was 12.66%, compared to 15.04% for the prior year. Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry.
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.
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.
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.
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.
Service fees include fees for deposit-related services and third-party administrative fees from the Bank’s Nolan division. Service fees and other income for the year ended December 31, 2023, increased $1.7 million, or 21.0%, compared to the year ended December 31, 2022.
Service fees include fees for deposit-related services and third-party administrative fees from the Bank’s Nolan Division. Service fees and other income for the year ended December 31, 2024, increased $511,000, or 5.1%, compared to the year ended December 31, 2023.
Data processing expenses for the year ended December 31, 2023, increased $147,000, or 18.5%, compared to the year ended December 31, 2022. The increase was due to increases in data processing expenses within the Banking segment of $125,000 and an increase of $22,000 in our Other Financial Services segment.
Data processing expenses for the year ended December 31, 2024, increased $231,000, or 24.5%, compared to the year ended December 31, 2023. The increase was due to increases in data processing expenses within the Banking segment of $175,000 and an increase of $57,000 in our Other Financial Services segment.
All intercompany transactions and balances are eliminated in consolidation. 64 Table of Contents Critical Accounting Policies and Estimates We prepare consolidated financial statements based on GAAP and 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.
Critical Accounting Policies and Estimates We prepare consolidated financial statements based on GAAP and 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.
The provision for credit losses for the year ended December 31, 2023, increased $24,000, or 1.9%, compared to the year ended December 31, 2022. See “Provision for Credit Losses” and “Allowance for Credit Losses” included elsewhere in this discussion for further analysis of credit loss provision related to loans and off-balance sheet commitments.
The provision for credit losses for the year ended December 31, 2024, increased $3.6 million, or 276.4%, compared to the year ended December 31, 2023. See “Provision for Credit Losses” and “Allowance for Credit Losses” included elsewhere in this discussion for further analysis of credit loss provision related to loans and off-balance sheet commitments.
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.
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.
This increase during the year ended December 31, 2023, was primarily due an increase in advisory fees based on a percentage of the underlying assets at Tectonic Advisors totaling $1.1 million and an increase in advisory fees based on a percentage of underlying assets at Sanders Morris totaling $261,000. Brokerage income.
This increase during the year ended December 31, 2024, was primarily due to an increase in advisory fees based on a percentage of the assets under management at Tectonic Advisors totaling $1.5 million and an increase in performance advisory fees at Sanders Morris totaling $1.4 million. Brokerage income.
Our brokerage and advisory assets experienced an increase of approximately $1.7 billion, or 33.5%, and an increase of $409.8 million, or 7.3%, during the years ended December 31, 2023 and 2022, respectively. The increase for the year ended December 31, 2023 was related to market appreciation of $821 million, or 15.8%, and positive net flows of $869 million, or 16.7%.
Our brokerage and advisory assets experienced an increase of approximately $967.7 million, or 14.1%, and an increase of $1.7 billion, or 32.5%, during the years ended December 31, 2024 and 2023, respectively. The increase for the year ended December 31, 2024 was related to market appreciation of $398.3 million, or 5.8%, and positive net flows of $569.5 million, or 8.3%.
As of December 31, 2023 (In thousands) Less than One Year One to Three Years Over Three to Five Years Over Five Years Total Undisbursed loan commitments $ 8,411 $ 2,041 $ 111 $ 35,180 $ 45,743 Standby letters of credit 162 - - - 162 Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures The allowance for credit losses for off-balance sheet credit exposures is calculated under the CECL model, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit.
As of December 31, 2024 (In thousands) Less than One Year One to Three Years Over Three to Five Years Over Five Years Total Undisbursed loan commitments $ 12,024 $ 25 $ - $ 60,294 $ 72,343 Standby letters of credit 162 - - - 162 Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures The allowance for credit losses for off-balance sheet credit exposures is calculated under the CECL model , representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit.
The increase includes $10.6 million for SBA loans, $48.3 million for real estate loans and $2.6 million increase in factored receivables. The increases were partly offset by a $10.5 million decrease in commercial and industrial loans.
The increase includes $143.0 million for SBA loans, $17.2 million for real estate loans and a $10.9 million increase in factored receivables. The increases were partly offset by a $2.4 million decrease in commercial and industrial loans.
SBA loans comprise the largest group of loans in our portfolio totaling $268.9 million, or 53.7% of the total loans at December 31, 2023, compared to $258.3 million, or 57.4%, of the total loans at December 31, 2022.
SBA loans comprise the largest group of loans in our portfolio totaling $411.9 million, or 61.5% of the total loans, at December 31, 2024, compared to $268.9 million, or 53.7% of the total loans, at December 31, 2023.
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, 2023, from an increase in asset values of $326.2 million between the two periods from net asset inflows to the Bank’s Trust Division of $71.8 million and asset appreciation of $254.4 million.
Trust 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, 2024, from an increase in asset values of $205.5 million between the two periods from net asset inflows to the Bank’s Trust Division of $30.3 million and asset appreciation of $175.2 million.
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, 2023, decreased $4.2 million, or 36.0%, compared to the year ended December 31, 2022.
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, 2024, increased $569,000, or 7.6%, compared to the year ended December 31, 2023.
The following table sets forth the allocation of the allowance for credit losses, the percentage of loans in each category to total gross loans and the ratio of allowance allocated to loans in each category as of the date indicated: December 31, 2023 December 31, 2022 (In thousands, except percentages) Allocated Allowance % of Loan Portfolio ACL to Loans Allocated Allowance % of Loan Portfolio ACL to Loans Commercial and industrial $ 2,495 16.5 % 3.0 % $ 1,301 20.6 % 1.4 % Consumer installment 18 0.2 2.0 14 0.2 1.3 Real estate – residential 71 1.6 0.9 79 1.2 1.4 Real estate – commercial 616 13.7 0.9 899 14.2 1.4 Real estate – construction and land 143 8.9 0.3 55 0.9 1.4 SBA 2,484 53.7 0.9 1,505 57.4 0.6 USDA 19 0.4 0.9 52 0.5 2.3 Factored receivables 462 5.0 1.8 608 5.0 2.7 Total Loans $ 6,308 100.0 % 1.3 % $ 4,513 100.0 % 1.0 % The table below presents a summary of the Company’s net loan credit experience and provisions to the allowance for credit losses for the period indicated: As of and for the Year Ended December 31 (In thousands, except percentages) 2023 2022 Average loans outstanding $ 491,448 $ 458,980 Gross loans held for investment outstanding at end of period $ 501,095 $ 450,332 Allowance for credit losses at beginning of period $ 4,513 $ 4,152 Impact of adopting ASC 326 1,390 - Provision for credit losses 1,333 1,264 Charge offs: Commercial and industrial (214 ) (337 ) SBA 7(a) (329 ) (43 ) Factored Receivables (637 ) (617 ) Total charge-offs (1,180 ) (997 ) Recoveries: Commercial and industrial 14 31 SBA 7(a) 69 22 Factored Receivables 169 41 Total recoveries 252 94 Net charge-offs (928 ) (903 ) Allowance for credit losses at end of period $ 6,308 $ 4,513 Ratio of allowance to end of period loans 1.26 % 1.00 % Ratio of net charge-offs to average loans 0.19 % 0.20 % 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 following table sets forth the allocation of the allowance for credit losses, the percentage of loans in each category to total gross loans and the ratio of allowance allocated to loans in each category as of the date indicated: December 31, 2024 December 31, 2023 (In thousands, except percentages) Allocated Allowance % of Loan Portfolio ACL to Loans Allocated Allowance % of Loan Portfolio ACL to Loans Commercial and industrial $ 2,418 11.9 % 3.0 % $ 2,495 16.5 % 3.0 % Consumer installment 19 0.1 3.3 18 0.2 2.0 Real estate – residential 91 1.2 1.1 71 1.6 0.9 Real estate – commercial 820 11.5 1.0 616 13.7 0.9 Real estate – construction and land 115 8.1 0.3 143 8.9 0.3 SBA 5,149 61.5 1.2 2,484 53.7 0.9 USDA 22 0.3 1.0 19 0.4 0.9 Factored receivables 549 5.4 1.5 462 5.0 1.8 Total Loans $ 9,183 100.0 % 1.4 % $ 6,308 100.0 % 1.3 % 75 Table of Contents The table below presents a summary of the Company’s net loan credit experience and provisions to the allowance for credit losses for the period indicated: As of and for the Year Ended December 31 (In thousands, except percentages ) 2024 2023 Average loans outstanding $ 613,955 $ 491,448 Gross loans held for investment outstanding at end of period $ 669,367 $ 501,095 Allowance for credit losses at beginning of period $ 6,308 $ 4,513 Impact of adopting ASC 326 - 1,390 Provision for credit losses 4,583 1,333 Charge offs: Commercial and industrial (12 ) (214 ) SBA 7(a) (1,238 ) (329 ) Factored Receivables (818 ) (637 ) Total charge-offs (2,068 ) (1,180 ) Recoveries: Commercial and industrial - 14 SBA 7(a) 76 69 Factored Receivables 284 169 Total recoveries 360 252 Net charge-offs (1,708 ) (928 ) Allowance for credit losses at end of period $ 9,183 $ 6,308 Ratio of allowance to end of period loans 1.37 % 1.26 % Ratio of net charge-offs to average loans 0.28 % 0.19 % 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.
As of December 31, 2023, the Company’s borrowing capacity with the FHLB was $56.8 million, or 8.4% of assets, none of which was utilized, and borrowing capacity with the FRB was $43.5 million, or 6.4% of assets.
As of December 31, 2024, the Company’s borrowing capacity with the FHLB was $67.0 million, or 7.8% of assets, of which $10.0 million was utilized, and borrowing capacity with the FRB was $38.6 million, or 4.5% of assets, of which none was utilized.
The following table sets forth certain information regarding non-performing assets by type, including ratios of such loans to total assets as of the dates indicated: December 31, (In thousands, except percentages) 2023 2022 Non-accrual loans: Commercial and industrial $ 93 $ - Real estate – commercial 128 138 SBA guaranteed 1,951 2,221 SBA unguaranteed 251 107 Total non-accrual loans 2,423 2,466 Real estate – residential past due 90 days - 206 Factored receivables past due 90 days 147 132 Foreclosed assets - - Total non-performing assets $ 2,570 $ 2,804 As a % of total loans 0.51 % 0.65 % As a % of total assets 0.38 0.48 79 Table of Contents Allowance for Credit Losses As discussed in Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements, our policies and procedures related to accounting for credit losses changed on January 1, 2023, in connection with the adoption of the CECL methodology as codified in ASC 326.
The following table sets forth certain information regarding non-performing assets by type, including ratios of such loans to total loans as of the dates indicated: December 31, 2024 December 31, 2023 (In thousands, except percentages) Amount Loan Category to Total Loans Amount Loan Category to Total Loans Non-accrual loans : Commercial and industrial $ 2,278 0.34 % $ 93 0.02 % Real estate – residential 119 0.02 128 0.02 SBA guaranteed 11,374 1.70 1,951 0.39 SBA unguaranteed 2,137 0.32 251 0.05 Total non-accrual loans 15,908 2.38 2,423 0.48 Commercial and industrial past due 90 days 18 - - 0.00 Factored receivables past due 90 days 12 - 147 0.03 Total non-performing assets $ 15,938 2.38 % $ 2,570 0.51 % Allowance for Credit Losses As discussed in Note 1 – Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements, our policies and procedures related to accounting for credit losses changed on January 1, 2023, in connection with the adoption of the CECL methodology as codified in ASC 326.
The decrease was primarily the result of a $2.1 million increase in non-interest expense and a $24,000 increase in the provision for credit losses, partly offset by a $166,000 increase in net interest income and an $812,000 increase in non-interest income.
The decrease was primarily the result of a $4.1 million increase in non-interest expense, a $3.6 million increase in the provision for credit losses and a $282,000 decrease in non-interest income, partly offset by a $4.7 million increase in net interest income.
During 2023, the FRB offered loans of up to one year in length under the BTFP to banks and other eligible depository institutions pledging U.S treasures, agency debt and mortgage-backed securities, and other qualifying assets as collateral, which are assessed at par value.
The company had no borrowings from the FRB at December 31, 2024 and 2023. As part of the BTFP, the Federal Reserve offered loans of up to one year in length to banks and other eligible depository institutions pledging U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral, which are assessed at par value.
See also the analysis of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion. HoldCo The net loss before taxes at the HoldCo operating segment increased by $2.3 million, or 82.3%, during the year ended December 31, 2023, compared to the year ended December 31, 2022.
See also the analysis of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion. HoldCo and Other The net loss before taxes at HoldCo and Other increased by $871,000, or 17.0%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.
Salaries, bonuses and payroll taxes at Tectonic Advisors decreased $614,000, due to the move of the technology and accounting staff to the HoldCo segment, where salaries, bonuses and payroll taxes increased $1.4 million.
Salaries, bonuses and payroll taxes at Tectonic Advisors decreased $658,000, due to the move of the technology and accounting staff to the HoldCo and Other category, where salaries, bonuses and payroll taxes increased $725,000.
The increase was primarily due to a $581,000 gain on sale of a USDA loan during 2023, $165,000 increase for loan servicing fees, and a $121,000 increase in deposit service fees and other, partly offset by a $39,000 decrease in rental income due to abatements given to tenants during the first two quarters of 2023 and a $16,000 decrease in other miscellaneous income.
The decrease was primarily due to a $347,000 decrease in gain on sale of SBA/USDA loans, $115,000 decrease for loan servicing fees, partly offset by a $118,000 increase in factoring fees, a $14,000 increase in deposit service fees and a $51,000 increase in rental income due to abatements given to tenants during the first two quarters of 2023.
Other expenses include costs for insurance, FDIC and OCC assessments, director fees, and regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expenses for the year ended December 31, 2023, increased $1.1 million, or 20.5%, compared to the year ended December 31, 2022.
Other expense . Other expenses include costs for insurance, FDIC and OCC assessments, directors’ fees, and regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expenses for the year ended December 31, 2024, increased $714,000, or 10.8%, compared to the year ended December 31, 2023.
This increase was primarily due to increases of $49.0 million in loans held for investment, $16.6 million in cash and cash equivalents and $3.9 million in investments, partly offset by a decrease of $7.3 million in loans held for sale.
This increase was primarily due to increases of $165.4 million in loans held for investment, $20.4 million in loans held for sale and $5.0 million in cash and cash equivalents, partly offset by a decrease of $4.1 million in investments.
The increase during 2023 included a $32.5 million, or 7.1%, increase in the average volume of loans, a $17.7 million, or 47.9%, increase in average volume interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), and a $4.3 million, or 9.2%, increase in the average volume of securities.
The increase during 2024 included a $122.5 million, or 24.9%, increase in the average volume of loans, a $35.5 million, or 64.8%, increase in average volume interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), and a $1.8 million, or 3.5%, increase in the average volume of securities.
The average yield for loans increased 174 basis points from 6.73% for the year ended December 31, 2022, to 8.47% for the year ended December 31, 2023. The average yield on interest-bearing deposits increased 339 basis points from 1.66% for the year ended December 31, 2022, to 5.05% for the year ended December 31, 2023.
The average yield for loans increased 73 basis points from 8.47% for the year ended December 31, 2023, to 9.20% for the year ended December 31, 2024. The average yield on interest-bearing deposits increased 32 basis points from 5.05% for the year ended December 31, 2023, to 5.37% for the year ended December 31, 2024.
The following table sets forth the composition of our loans held for investment as of the dates indicated: December 31, 2023 2022 (In thousands, except percentages) Amount Percent Amount Percent Commercial and industrial $ 82,483 16.5 % $ 92,946 20.6 % Consumer installment 900 0.2 1,058 0.2 Real estate – residential 8,181 1.6 5,566 1.2 Real estate – commercial 68,792 13.7 63,924 14.2 Real estate – construction and land 44,663 8.9 3,873 0.9 SBA 7(a) guaranteed 162,144 32.4 149,374 33.2 SBA 7(a) unguaranteed 64,858 12.9 56,268 12.5 SBA 504 41,906 8.4 52,668 11.7 USDA 2,124 0.4 2,235 0.5 Factored Receivables 25,044 5.0 22,420 5.0 Total Loans $ 501,095 100.0 % $ 450,332 100.0 % 76 Table of Contents The Company initially records the guaranteed portion of the SBA 7(a) and USDA loans as held for sale at the lower of cost or fair value.
The following table sets forth the composition of our loans held for investment as of the dates indicated: December 31, 2024 2023 (In thousands, except percentages) Amount Percent Amount Percent Commercial and industrial $ 80,069 11.9 % $ 82,483 16.5 % Consumer installment 573 0.1 900 0.2 Real estate – residential 8,209 1.2 8,181 1.6 Real estate – commercial 76,739 11.5 68,792 13.7 Real estate – construction and land 53,844 8.0 44,663 8.9 SBA 7(a) guaranteed 231,931 34.7 162,144 32.4 SBA 7(a) unguaranteed 96,466 14.4 64,858 12.9 SBA 504 83,520 12.5 41,906 8.4 USDA 2,120 0.3 2,124 0.4 Factored Receivables 35,896 5.4 25,044 5.0 Total Loans $ 669,367 100.0 % $ 501,095 100.0 % The Company initially records the guaranteed portion of the SBA 7(a) and USDA loans as held for sale at the lower of cost or fair value.
The average yield on securities increased 6 basis points from 4.05% for the year ended December 31, 2022, to 4.11% for the year ended December 31, 2023. The average volume of interest-bearing liabilities increased $51.8 million, or 13.5%, from $383.2 million for the year ended December 31, 2022, to $435.0 million for the year ended December 31, 2023.
The average yield on securities increased 20 basis points from 4.11% for the year ended December 31, 2023, to 4.31% for the year ended December 31, 2024. The average volume of interest-bearing liabilities increased $170.4 million, or 39.2%, from $435.0 million for the year ended December 31, 2023, to $605.4 million for the year ended December 31, 2024.
Brokerage and advisory direct costs for the year ended December 31, 2023, decreased $79,000, or 3.9%, compared to the year ended December 31, 2022.
Brokerage and advisory direct costs for the year ended December 31, 2024, increased $190,000, or 9.8%, compared to the year ended December 31, 2023.
Commercial and industrial loans totaled $82.5 million, or 16.5%, of the total loans at December 31, 2023, compared to $92.9 million, or 20.6%, of the total loans at December 31, 2022.
Commercial and industrial loans totaled $80.1 million, or 12% of the total loans, at December 31, 2024, compared to $82.5 million, or 16.5% of the total loans, at December 31, 2023.
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. There were no foreclosed assets as of December 31, 2023, and 2022.
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.
Gain on sale of loans increased $581,000 during the year ended December 31, 2023, during which there was a gain on sale of loans resulting from the sale of $5.8 million of USDA loans. Advisory income .
Gain on sale of loans decreased $347,000 during the year ended December 31, 2024, or 59.7%, related to the gain on sale of $3.8 million of USDA loans, compared to the year ended December 31, 2023, during which there was a gain on sale of loans resulting from the sale of $5.8 million of USDA loans. Advisory income .
Changes in the various components of non-interest income are discussed below. Trust Income. Trust income is earned from trust services provided by the Bank on the value of managed and non-managed assets held in custody. Changes in asset values and the volatility of the bond and equity markets impact the market value of trust assets and the related fees.
Changes in the various components of non-interest income are discussed below. 63 Table of Contents Trust Income. Trust income is earned from trust services provided by the Bank on the value of managed and non-managed assets held in custody.
The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The two primary SBA loan programs that the Company offers are the basic SBA 7(a) loan guaranty program and the SBA 504 loan program in conjunction with junior lien financing from a Certified Development Company (“CDC”).
The two primary SBA loan programs that the Company offers are the basic SBA 7(a) loan guaranty program and the SBA 504 loan program in conjunction with junior lien financing from a Certified Development Company (“CDC”).
The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2023 and 2022 primarily due to the effect of the income tax effects associated with stock-based compensation, among other things, and their relative proportion to total pre-tax net income. Segment Reporting We have three operating segments: Banking, Other Financial Services and HoldCo.
The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2024 and 2023 primarily due to the effect of the income tax effects associated with state income tax and with stock-based compensation, among other things, and their relative proportion to total pre-tax net income. 66 Table of Contents Segment Reporting The Company’s primary reportable segments consist of Banking and Other Financial Services which have been determined based on our organizational structure.
The average yield on interest-earning assets increased 163 basis points from 6.15% for the year ended December 31, 2022, to 7.78% for the year ended December 31, 2023, due to the increasing rate environment, and changes in the mix of interest-earning assets.
The average yield on interest-earning assets increased 63 basis points from 7.78% for the year ended December 31, 2023, to 8.41% for the year ended December 31, 2024, due to the changes in market interest rates and changes in the mix of interest-earning assets.
Non-Interest Expense The components of non-interest expense were as follows: Year Ended December 31, (In thousands) 2023 2022 Salaries and employee benefits $ 31,288 $ 31,093 Occupancy and equipment 1,984 1,707 Trust expenses 2,265 2,243 Brokerage and advisory direct costs 1,936 2,015 Professional fees 1,813 1,480 Data processing 941 794 Other expense 6,594 5,473 Total $ 46,821 $ 44,805 Total non-interest expense for the year ended December 31, 2023, increased $2.0 million, or 4.5%, compared to the year ended December 31, 2022.
Non-Interest Expense The components of non-interest expense were as follows: Year Ended December 31, (In thousands) 2024 2023 Salaries and employee benefits $ 37,022 $ 31,288 Occupancy and equipment 2,008 1,984 Trust expenses 2,511 2,265 Brokerage and advisory direct costs 2,126 1,936 Professional fees 1,773 1,813 Data processing 1,172 941 Other expense 7,308 6,594 Total $ 53,920 $ 46,821 Total non-interest expense for the year ended December 31, 2024, increased $7.1 million, or 15.2%, compared to the year ended December 31, 2023.
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.
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.
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.
Construction and land development loans are evaluated based on the borrower’s and guarantor’s credit worthiness, past experience in the industry, track record and experience with the type of project being considered, and other factors. Collateral value is determined generally by independent appraisal utilizing multiple approaches to determine value based on property type.
The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The allowance for credit losses for each segment is measured through the use of the open pool method. Loans that do not share risk characteristics are evaluated on an individual basis.
The allowance for credit losses for each segment is measured through the use of the open pool method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation.
The Company had $21.0 million of borrowings related to the BTFP as of December 31, 2023. 82 Table of Contents As of December 31, 2023 and 2022, T Bancshares had subordinated notes totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an interest rate of three month LIBOR plus 5.125%, with interest payable quarterly and maturing on July 20, 2027, at which all principal is due, and $4.0 million issued in 2018 bearing interest rate of 7.125% payable semi-annually up to July 17, 2023, after which it converted to three month LIBOR plus 5.125%, with interest payable quarterly and maturing on March 31, 2028, at which all principal is due.
The Company had no borrowings under the BTFP as of December 31, 2024. 77 Table of Contents As of December 31, 2024 and 2023, T Bancshares had subordinated notes totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an interest rate of three month CME Term SOFR plus a tenor spread adjustment of 0.26161% plus 5.125%, with interest payable quarterly and maturing on July 20, 2027, at which all principal is due, and $4.0 million issued in 2018 bearing interest rate of three month CME Term SOFR plus a tenor spread adjustment of 0.26161% plus 4.348%, with interest payable quarterly and maturing on March 31, 2028, at which all principal is due.
Tier 1 Capital (to Average Assets) $ 87,488 13.97 % $ 76,767 13.47 % Common Equity Tier 1 (to Risk Weighted Assets) 87,488 20.04 76,767 19.29 Tier 1 Capital (to Risk Weighted Assets) 87,488 20.04 76,767 19.29 Total Capital (to Risk Weighted Assets) 92,957 21.29 81,279 20.42 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.
Tier 1 Capital (to Average Assets) $ 93,548 11.46 % $ 87,488 14.26 % Common Equity Tier 1 (to Risk Weighted Assets) 93,548 16.62 87,488 20.04 Tier 1 Capital (to Risk Weighted Assets) 93,548 16.62 87,488 20.04 Total Capital (to Risk Weighted Assets) 100,615 17.88 92,957 21.29 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.
The decrease in net interest income was primarily due to an increase in the average interest rate paid on interest-bearing liabilities as a result of the continued interest rate increases, and increases in the average volume of time deposits, partly offset by an increase in the average yield and average volume of loans and interest-bearing deposits (primarily amounts held in an interest-bearing account at the FRB), and to a lesser extent an increase in the average volume of securities.
The increase in net interest income was primarily due to an increase in the average volume of and average yield of loans and an increase in the average volume of and to a lesser extent the increase in the average yield of interest-bearing deposits (primarily amounts held in an interest-bearing account at the FRB).
The increase was primarily the result of a $934,000 decrease in non-interest income which was offset by a $2.0 million decrease in non-interest expense. Non-interest income for the year ended December 31, 2023 decreased $934,000, or 2.4%, compared to the year ended December 31, 2022.
The increase was primarily the result of a $5.4 million increase in non-interest income which was offset by a $2.1 million increase in non-interest expense. 68 Table of Contents Non-interest income for the year ended December 31, 2024 increased $5.4 million, or 14.4%, compared to the year ended December 31, 2023.
Salaries, bonuses and payroll taxes at the Bank’s Nolan division increased $347,000 related to staff increases and overtime pay to accommodate the increase in the number of plans administered and merit increases.
Salaries and employee benefits at the Bank’s Nolan division increased $329,000 related to staff increases and overtime pay to accommodate the increase in the number of plans administered and merit increases, as well as increases in the cost of health insurance.
Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the two year forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the two year forecast period.
Management believes these sources represent a reliable and cost-efficient alternative funding source for the Company. However, to the extent that our condition or reputation deteriorates, or to the extent that there are significant changes in market interest rates which we do not elect to match, we may experience an outflow of brokered deposits.
However, to the extent that our condition or reputation deteriorates, or to the extent that there are significant changes in market interest rates which we do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding.
The increases were partly offset by the repurchase of common stock in the amount of $1.1 million and dividends paid on the Series B preferred stock and on the common stock in the amounts of $1.6 million and $2.0 million, respectively, and a $1.3 million reduction in retained earnings related to the adoption of ASC326 on January 1, 2023.
The increases were partly offset by the repurchase of stock options and common stock in the amount of $1.3 million and $1.6 million, respectively, and dividends paid on the Series B preferred stock and on the common stock in the amounts of $1.9 million and $2.8 million, respectively.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeIn determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, liquidity, business strategies and other factors. 85 Table of Contents The Asset Liability Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings.
Biggest changeThe Asset Liability Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings.
Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies. 86 Table of Contents
Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies. 81 Table of Contents
The Company’s asset liability management model indicated that it was in an asset sensitive position in terms of its income simulation as of December 31, 2023.
The Company’s asset liability management model indicated that it was in an asset sensitive position in terms of its income simulation as of December 31, 2024.
The following table summarizes the impact of an instantaneous, sustained simulated change in net interest income over a 12-month horizon as of December 31, 2023: Change in Interest Rates (basis points) % Change in Net Interest Income +200 20.71 +100 15.97 -100 6.83 -200 2.82 We have found that, historically, interest rates on deposits change more slowly than changes in the discount and federal funds rates.
The following table summarizes the impact of an instantaneous, sustained simulated change in net interest income over a 12-month horizon as of December 31, 2024 Change in Interest Rates (basis points) % Change in Net Interest Income +200 8.99 +100 4.49 -100 (4.20 ) -200 (7.85 ) We have found that, historically, interest rates on deposits change more slowly than changes in the discount and federal funds rates.
We manage exposure to interest rates by structuring the balance sheet in the ordinary course of business. We use no off-balance-sheet financial instruments to manage interest rate risk. Our exposure to interest rate risk is managed by the Bank’s Asset Liability Committee in accordance with policies approved by the Bank’s board of directors.
We use no off-balance-sheet financial instruments to manage interest rate risk. Our exposure to interest rate risk is managed by the Bank’s Asset Liability Committee in accordance with policies approved by the Bank’s board of directors. The committee formulates strategies based on appropriate levels of interest rate risk.
These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.
Removed
The committee formulates strategies based on appropriate levels of interest rate risk.
Added
The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. 80 Table of Contents We manage exposure to interest rates by structuring the balance sheet in the ordinary course of business.
Added
In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, liquidity, business strategies and other factors.

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