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What changed in Tectonic Financial, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Tectonic Financial, Inc.'s 2022 and 2023 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 2023 report.

+515 added−518 removedSource: 10-K (2024-04-01) vs 10-K (2023-03-31)

Top changes in Tectonic Financial, Inc.'s 2023 10-K

515 paragraphs added · 518 removed · 363 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

82 edited+17 added−9 removed216 unchanged
Biggest changeIf 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.
Biggest changeThe 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.
The Bank is subject to the provisions of Section 23A and 23B of the Federal Reserve Act (the “Affiliates Act”). Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. In our case, Tectonic Advisors, Sanders Morris, HWG and Cain Watters are all considered affiliates.
The Bank is subject to the provisions of Section 23A and 23B of the Federal Reserve Act (the “Affiliates Act”). Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. In our case, Tectonic Advisors, Sanders Morris, HWG and Cain Watters are all considered affiliates of the Bank.
The federal banking agencies, including the OCC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending.
Commercial Real Estate Lending Concentrations . The federal banking agencies, including the OCC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending.
In addition, the Bank may make investments in held to maturity assets, including certain municipal or state obligations or securities that it believes have a similar risk profile thereto. These investments include, among other things, securities issued pursuant to Property Assessed Clean Energy programs and Public Improvement District/Tax Increment Reinvestment Zone (“PID/TIRZ”) investments.
In addition, the Bank may make investments in held to maturity assets, including certain municipal or state obligations or securities that it believes have a similar risk profile thereto. These investments include, among other things, securities issued pursuant to Property Assessed Clean Energy programs (“PACE”) and Public Improvement District/Tax Increment Reinvestment Zone (“PID/TIRZ”) investments.
However, there can be no assurance that this will be the case in the future and, if it is found that our dividend is not consistent with our capital needs and/or asset quality or if our financial condition deteriorates, we may not be able to pay dividends on B preferred stock.
However, there can be no assurance that this will be the case in the future and, if it is found that our dividend is not consistent with our capital needs and/or asset quality or if our financial condition deteriorates, we may not be able to pay dividends on our Series B preferred stock.
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.
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.
Through the Tectonic Merger, we acquired Tectonic Advisors, LLC (“Tectonic Advisors”) and Sanders Morris Harris LLC (“Sanders Morris”), as well as its subsidiary, HWG Insurance Agency LLC (“HWG”), which expanded our financial services to include investment advisory, securities brokerage, investment banking, and insurance services.
Through the Tectonic Merger, we acquired Tectonic Advisors, LLC (“Tectonic Advisors”) and Sanders Morris LLC (“Sanders Morris”), as well as its subsidiary, HWG Insurance Agency LLC (“HWG”), which expanded our financial services to include investment advisory, securities brokerage, investment banking, and insurance services.
The Bank invests a portion of its assets 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 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.
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 Reserve Bank may require.
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.
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). 13 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). 14 Table of Contents Permitted Activities .
Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of dividends by the Bank if the OCC determines such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain the capital conservation buffer. Regulatory Capital Requirements .
Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of dividends by the Bank if the OCC determines such payment would constitute an unsafe or unsound practice. In addition, under the Basel III rules, institutions that seek the freedom to pay dividends will have to maintain the capital conservation buffer. Regulatory Capital Requirements .
We have approximately 1,900 trust accounts in 48 states . The Bank has established common pooled funds to comingle our clients’ capital to invest in stocks, bonds, exchange-traded funds or other investments and thereby provide a smaller investor with broader diversification and access to professional investment advisors.
We have approximately 1,800 trust accounts in 48 states . The Bank has established common pooled funds to comingle our clients’ capital to invest in stocks, bonds, exchange-traded funds or other investments and thereby provide a smaller investor with broader diversification and access to professional investment advisors.
Our website and the information contained on or accessible through our website is not incorporated by reference into, and is not a part of, this Form 10-K. 12 Table of Contents SUPERVISION AND REGULATION Set forth below is a description of the significant elements of the laws and regulations applicable to the Company and its operating subsidiaries.
Our website and the information contained on or accessible through our website is not incorporated by reference into, and is not a part of, this Form 10-K. 13 Table of Contents SUPERVISION AND REGULATION Set forth below is a description of the significant elements of the laws and regulations applicable to the Company and its operating subsidiaries.
Cain Watters refers certain of its clients to the trust department to provide custodial and fiduciary services for their defined benefit and contribution plans and also their personal assets. Cain Watters is not obligated to make such referrals and refers its clients to other service providers that are competitive with the Bank.
Cain Watters refers certain of its clients to the Trust Division to provide custodial and fiduciary services for their defined benefit and contribution plans and also their personal assets. Cain Watters is not obligated to make such referrals and refers its clients to other service providers that are competitive with the Bank.
FIRREA also expanded the scope of individuals and entities against which such penalties may be assessed. 14 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. 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.
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. 15 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. 16 Table of Contents National Banking Associations .
On some of these loans, the Bank takes a security interest in real estate as a prudent practice and measure and not as the principal collateral for the loan. 7 Table of Contents The Bank will typically make equipment loans for a fixed term of generally not more than 10 years at fixed or variable rates, with the loan fully amortized over the term.
On some of these loans, the Bank takes a security interest in real estate as a prudent practice and measure and not as the principal collateral for the loan. The Bank will typically make equipment loans for a fixed term of generally not more than 10 years at fixed or variable rates, with the loan fully amortized over the term.
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. Loans to Insiders .
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 .
Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s anti-money laundering 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. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.
The principal competitive factors influencing our businesses are: ● expertise and quality of the professional staff; ● reputation in the marketplace; ● existing client relationships; ● performance of investment strategies or product offerings; 11 Table of Contents ● advertising and sales promotion efforts, ● types, quality, and price of our products and services; and ● the technology platform through which a customer accesses our products and services.
The principal competitive factors influencing our businesses are: ● expertise and quality of the professional staff; ● reputation in the marketplace; ● existing client relationships; ● performance of investment strategies or product offerings; ● advertising and sales promotion efforts, ● types, quality, and price of our products and services; and ● the technology platform through which a customer accesses our products and services.
Such requirements relate to, among other things, limitations on the ability of investment advisors to charge performance-based or non-refundable fees to clients, record-keeping and reporting requirements, disclosure requirements, limitations on principal transactions between an advisor or its affiliates and advisory clients, and general anti-fraud prohibitions. 23 Table of Contents ERISA .
Such requirements relate to, among other things, limitations on the ability of investment advisors to charge performance-based or non-refundable fees to clients, record-keeping and reporting requirements, disclosure requirements, limitations on principal transactions between an advisor or its affiliates and advisory clients, and general anti-fraud prohibitions. ERISA .
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 .
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 .
Tectonic Advisors provides investment advice to the Bank’s Trust committee in the management of its $1.6 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 $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.
Through our insurance agency, HWG, we provide disability and life insurance as a broker. HWG is an insurance agency licensed under the Texas Department of Insurance. 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 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).
HWG is currently generating most of its revenues from renewals, and continues to tailor its team to generate new business. 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, 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.
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 .
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 .
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.
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.
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.
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.
As of December 31, 2022, Sanders Morris had approximately $739.3 million in client advisory assets under management, and client brokerage assets of $1.7 billion, bringing total client assets to $2.5 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.
As 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.
The Federal Reserve’s final rule applies to control determinations under the BHC Act, but does not apply to the Change in Bank Control Act, as amended (the “CIBCA”). Change in Bank Control Act .
The Federal Reserve’s final rule applies to control determinations under the BHC Act, but does not apply to the Change in Bank Control Act of 1978, as amended (the “CIBCA”). Change in Bank Control Act .
Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious information maintained by financial institutions. 19 Table of Contents On May 10, 2016, the Financial Crimes Enforcement Network (“FinCEN”) issued a final rule regarding customer due diligence requirements for covered financial institutions in connection with their BSA and anti-money laundering policies.
Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious information maintained by financial institutions. On May 10, 2016, the Financial Crimes Enforcement Network (“FinCEN”) issued a final rule regarding customer due diligence requirements for covered financial institutions in connection with their BSA and AML policies.
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. 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. 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.
Brokered Deposit Restrictions . Well capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and are subject to certain restrictions on the yield paid on such deposits.
Well capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and are subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits.
The Bank has approximately $1.6 billion in market value of trust assets as of December 31, 2022. We currently have six common pooled funds for qualified plans and another three for personal trust (individual) investors.
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.
In addition, we provide investment advisory and brokerage services through Tectonic Advisors and Sanders Morris. Human Capital Resources We had approximately182 employees as of December 31, 2022. 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 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.
As of December 31, 2022, Sanders Morris has approximately $3.0 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, 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.
Bank Regulation The Bank is a national bank chartered under the National Bank Act. The Bank is a member of the Federal Reserve. In addition, its deposits are insured by the FDIC to the maximum extent permitted by law. National banks, such as the Bank, are subject to extensive regulation, supervision and examination by the OCC.
Bank Regulation The Bank is a national bank chartered under the National Bank Act. The Bank is a member of the Federal Reserve. In addition, its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum extent permitted by law. National banks, such as the Bank, are subject to extensive regulation, supervision and examination by the OCC.
The Bank also offers factoring services through its Integra Division. See the discussion of “Factored Receivables” below. SBA and USDA . The Bank originates and services commercial and real estate loans under programs guaranteed by the SBA and the USDA representing approximately 57.9% of the Bank’s total lending services as of December 31, 2022.
The Bank also offers factoring services through its Integra Division. See the discussion of “Factored Receivables” below. SBA and USDA . The Bank originates and services commercial and real estate loans under programs guaranteed by the SBA and the USDA representing approximately 54.1% of the Bank’s total lending services as of December 31, 2023.
The Dodd-Frank Act prohibits an insured depository institution from purchasing or selling an asset to an executive officer, director, or principal shareholder (or any related interest of such a person) unless the transaction is on market terms, and, if the transaction exceeds 10% of the institution’s capital, it is approved in advance by a majority of the disinterested directors. 18 Table of Contents Commercial Real Estate Lending Concentrations .
The Dodd-Frank Act prohibits an insured depository institution from purchasing or selling an asset to an executive officer, director, or principal shareholder (or any related interest of such a person) unless the transaction is on market terms, and, if the transaction exceeds 10% of the institution’s capital, it is approved in advance by a majority of the disinterested directors.
“Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. As of December 31, 2022, the Bank qualified as “well capitalized” under the prompt corrective action rules. 17 Table of Contents Interstate Banking and Branching .
“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 .
Failure to satisfy the financial holding company requirements could also result in loss of financial holding company status. Tectonic Financial, Inc. made this election in 2019, and became a financial holding company. Source of Strength .
Failure to satisfy the financial holding company requirements could also result in loss of financial holding company status. The Company made this election in 2018, and became a financial holding company. Source of Strength .
In addition to deposits, we utilize advances from the Federal Home Loan Bank of Dallas (the “FHLB”), and other borrowings, such as a line of credit with the Federal Reserve Bank of Dallas (the “FRB”), borrowings under the Paycheck Protection Program Liquidity Facility (“PPPLF”), and long-term subordinated notes as supplementary funding sources to finance our operations.
In addition to deposits, we utilize advances from the Federal Home Loan Bank of Dallas (the “FHLB”), and other borrowings, such as a line of credit with the Federal Reserve Bank of Dallas (the “FRB”) and borrowings under the Bank Term Funding Program (“BTFP”), along with long-term subordinated notes as supplementary funding sources to finance our operations.
Tectonic Advisors works with the Bank’s trust department, and its trust committee, in the management of these common pooled funds and portfolios and meets with the trust department and trust committee on a quarterly basis.
Tectonic Advisors works with the Bank’s Trust Division, and the board of director’s trust committee, in the management of these common pooled funds and portfolios and meets with the Trust Division and trust committee on a quarterly basis.
This agreement was renewed on December 1, 2022 under an automatic extension clause, 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 the sale of the Company.
This agreement was renewed on December 1, 2022 under an automatic extension clause, and was subsequently amended effective January 31, 2023 to provide for termination upon the dissolution of either party or upon a mutually agreeable date in the event of the sale of the Company.
“Unjustified consumer injury” is the principal focus of the FTC Act. UDAP laws and regulations were expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices” referred to as UDAAP, and were delegated to CFPB for rulemaking. The federal banking agencies have the authority to enforce such rules and regulations.
UDAP laws and regulations were expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices” referred to as UDAAP, and were delegated to CFPB for rulemaking. The federal banking agencies have the authority to enforce such rules and regulations.
However, Section 203 of the EGRRCPA, exempts community banks from the restrictions of the Volcker Rule if (i) the community bank, and every entity that controls it, has total consolidated assets equal to or less than $10 billion; and (ii) trading assets and liabilities of the community bank, and every entity that controls it, is equal to or less than 5% of its total consolidated assets.
However, Section 203 of the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) exempts community banks from the restrictions of the Volcker Rule if (i) the community bank, and every entity that controls it, has total consolidated assets equal to or less than $10 billion; and (ii) trading assets and liabilities of the community bank, and every entity that controls it, is equal to or less than 5% of its total consolidated assets.
In accordance with the Dodd-Frank Act and long-standing Federal Reserve policy, a bank holding company is required to act as a source of financial and managerial strength to any subsidiary bank.
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and long-standing Federal Reserve policy, a bank holding company is required to act as a source of financial and managerial strength to any subsidiary bank.
The Bank acquired Integra Factoring Solutions, LLC (“Integra”) on July 1, 2021, and 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 companies, at a discount to their face value.
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%.
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.
As of December 31, 2022, Tectonic Advisors had approximately $2.7 billion in client assets under management (“AUM”) (which includes $1.6 billion of AUM held by the Bank as a fiduciary). o Sanders Morris is a registered broker-dealer with FINRA, and registered investment advisor with the Securities and Exchange Commission (the “SEC”).
As of December 31, 2023, Tectonic Advisors had approximately $3.6 billion in client assets under management (“AUM”) (which includes $1.8 billion of AUM held by the Bank as a fiduciary). o Sanders Morris is a registered broker-dealer with Financial Industry Regulatory Authority (“FINRA”), and registered investment advisor with the Securities and Exchange Commission (the “SEC”).
As of December 31, 2022, the Bank exceeded all Basel III regulatory minimum capital requirements. 16 Table of Contents In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer that consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares and paying discretionary bonuses.
In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer that consists of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares and paying discretionary bonuses.
Further, the Basel III capital rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. 21 Table of Contents In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including the NASDAQ, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including the NASDAQ, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
In general, however, the Bank is able to loan to any one borrower a maximum amount equal to either: ● 15% of the Bank’s capital and surplus and allowance for loan losses; ● 25% of its capital and surplus and allowance for loan losses if the amount that exceeds 15% is secured by cash or readily marketable collateral, as determined by reliable and continuously available price quotations; or ● any amount when the loan is fully secured by a segregated deposit at the Bank and the Bank has perfected its security interest in the deposit. 8 Table of Contents These legal limits will increase or decrease as the Bank’s capital increases or decreases as a result of its earnings or losses, among other reasons.
In general, however, the Bank is able to loan to any one borrower a maximum amount equal to either: ● 15% of the Bank’s capital and surplus and allowance for credit losses; ● 25% of its capital and surplus and allowance for credit losses if the amount that exceeds 15% is secured by cash or readily marketable collateral, as determined by reliable and continuously available price quotations; or ● any amount when the loan is fully secured by a segregated deposit at the Bank and the Bank has perfected its security interest in the deposit.
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.
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.
Regulatory Agencies As a registered bank holding company, the Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and, acting under delegated authority, the Federal Reserve Bank of Dallas (the “Reserve Bank”), pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”).
Regulatory Agencies As a registered bank holding company, the Company is subject to the supervision and regulation of the Federal Reserve and, acting under delegated authority, the FRB, pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”).
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.
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.
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 loan loss reserve.
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.
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.
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.
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, 2022, the Bank deposits included $32.5 million available from the funds of trust clients. In addition, the Bank offers participant-directed retirement accounts in its trust line of business.
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.
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.
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.
The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce.
Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act.
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.
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.
At December 31, 2022, the Company had no borrowings with the FHLB or the FRB under the lines of credit. The bank repaid its PPPLF borrowings from the FRB during 2022 and subordinated debt at T Bancshares, net of debt issuance costs, totaled $12.0 million, or 2.33% of total liabilities. 9 Table of Contents Other Financial Services General.
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.
The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” The Bank had a CRA rating of “satisfactory” as of its most recent CRA assessment.
The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” The Bank had a CRA rating of “satisfactory” as of its most recent CRA assessment. An unsatisfactory CRA record could substantially delay approval or result in denial of an application.
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. 10 Table of Contents In providing investment advisory services to individuals and families, Tectonic Advisors’ and Sanders Morris’ investment advisor representatives first determine the risk profile of the investor, which considers the age, investment time horizon, tolerance for risk and investment objectives.
In providing investment advisory services to individuals and families, Tectonic Advisors’ and Sanders Morris’ investment advisor representatives first determine the risk profile of the investor, which considers the age, investment time horizon, tolerance for risk and investment objectives.
The Bank had $40.0 million of brokered deposits through an Insured Cash Sweep One-Way Buy agreement as of December 31, 2022. Borrowings .
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 partners of Cain Watters own approximately 29.5% of the Company, and four partners of Cain Watters serve on the board of directors of the Company. Third Party Administration. In January 2019, the Bank acquired substantially all of the assets and liabilities of The Nolan Company (“Nolan”), a TPA based in Overland Park, Kansas.
The partners of Cain Watters own approximately 29.3% of the Company, and four partners of Cain Watters serve on the board of directors of the Company. Third Party Administration. The Nolan Company (“Nolan”), a TPA based in Overland Park, Kansas, operates as a department within the Bank doing business under the name of The Nolan Company.
As of December 31, 2022, we had, on a consolidated basis, $612.5 million in assets, $445.8 million in total loans held for investment, $33.9 million in loans held for sale, $493.0 million in deposits and $96.5 million in shareholders’ equity. Net income for the year ended December 31, 2022 was $17.0 million.
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.
These are typically known as the OFAC rules based on their administration by OFAC. The OFAC-administered sanctions targeting countries take many different forms.
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the OFAC rules based on their administration by OFAC. The OFAC-administered sanctions targeting countries take many different forms.
Many of the Bank’s anticipated commercial loans will likely be made to small- to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Factored Receivables. The Bank’s factored receivables portfolio is originated by its Integra Division.
The well-established financial institutions in our primary service area currently make proportionately more loans to medium- to large-sized businesses than the Bank. Many of the Bank’s anticipated commercial loans will likely be made to small- to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Factored Receivables.
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.
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.
In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization.
In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, the Basel III capital rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds.
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). 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.
Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2022, the Bank qualified as “well capitalized” for purposes of the brokered deposit restrictions. Technology Risk Management and Consumer Privacy .
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 .
The Bank does not make any loans to any of its directors, executive officers or their affiliates. Lending Limits. The Bank’s lending activities are subject to a variety of lending limits. Differing limits apply based on the type of loan or the nature of the borrower, including the borrower’s relationship to the Bank.
Interest rates vary depending on our cost of funds, the loan maturity, the degree of risk and other loan terms. The Bank does not make any loans to any of its directors, executive officers or their affiliates. Lending Limits. The Bank’s lending activities are subject to a variety of lending limits.
Other Available Information We file or furnish with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Section 13(a) or 15(d) of the Exchange Act. Electronic copies of our SEC filings are available to the public at the SEC’s website at https://www.sec.gov .
We also provide other basic insurance coverages including dental, life, and long-term disability insurance. 12 Table of Contents Other Available Information We file or furnish with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Section 13(a) or 15(d) of the Exchange Act.
On December 18, 2015, the federal banking agencies jointly issued a “statement on prudent risk management for commercial real estate lending.” As of December 31, 2022, 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 recently published policy statement.
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 .
The final rule requires the Company to adopt a clawback policy within 60 days after such listing standard becomes effective. 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. Other Regulations .
Nolan operates as a department within the Bank doing business under the name of The Nolan Company. Founded in 1979, Nolan provides clients with retirement plan design and administrative services, specializing in ministerial recordkeeping, administration, actuarial and design services for retirement plans of small businesses and professional practices.
Founded in 1979, Nolan provides clients with retirement plan design and administrative services, specializing in ministerial recordkeeping, administration, actuarial and design services for retirement plans of small businesses and professional practices. We believe that offering TPA services allows us to serve our clients more fully and to attract new clients to our trust platform. 10 Table of Contents Investment Advisory.
General economic factors affecting a borrower’s ability to repay include interest, inflation and employment rates, as well as other factors affecting a borrower’s customers, suppliers and employees. The well-established financial institutions in our primary service area currently make proportionately more loans to medium- to large-sized businesses than the Bank.
Borrower creditworthiness is affected by general economic conditions and the strength of the relevant business market segment. General economic factors affecting a borrower’s ability to repay include interest, inflation and employment rates, as well as other factors affecting a borrower’s customers, suppliers and employees.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeWe are subject to stringent capital requirements that may limit our operations and potential growth. ● 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.
Biggest changeWe 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.
In times of improving credit quality, with growth in our loan portfolio, the allowance for loan losses may decrease as a percent of total loans. Changes in economic and market conditions may increase the risk that the allowance would become inadequate if borrowers experience economic and other conditions adverse to their businesses.
In times of improving credit quality, with growth in our loan portfolio, the allowance for credit losses may decrease as a percent of total loans. Changes in economic and market conditions may increase the risk that the allowance would become inadequate if borrowers experience economic and other conditions adverse to their businesses.
In addition, risks associated with failing to maintain effective financial and operational controls as we grow, such as maintaining appropriate loan underwriting procedures, determining adequate allowances and complying with regulatory accounting requirements, including increased loan losses, reduced earnings and potential regulatory penalties and restrictions on growth, all could have a negative effect on our business, financial condition and results of operations.
In addition, risks associated with failing to maintain effective financial and operational controls as we grow, such as maintaining appropriate loan underwriting procedures, determining adequate allowances and complying with regulatory accounting requirements, including increased credit losses, reduced earnings and potential regulatory penalties and restrictions on growth, all could have a negative effect on our business, financial condition and results of operations.
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 loan 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. Our allowance for credit losses may not be sufficient to absorb actual losses.
The account and deposit balances can decrease when clients perceive alternative investments, such as the stock market or real estate, as providing a better risk/return tradeoff. In addition, as interest rates rise, competition for deposits may increase, which could result in clients moving money out of the Bank.
The account and deposit balances can decrease when clients perceive alternative investments, such as the stock market or real estate, as providing a better risk/return tradeoff. In addition, if interest rates rise, competition for deposits may increase, which could result in clients moving money out of the Bank.
These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also reduce collateral values and necessitate further increases to the allowance for loan losses, which could have a material adverse effect on our business, financial condition and results of operations.
These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also reduce collateral values and necessitate further increases to the allowance for credit losses, which could have a material adverse effect on our business, financial condition and results of operations.
Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on commercial, mortgage and consumer loans, residential and commercial real estate (“CRE”), price declines and lower home sales and commercial activity.
Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on commercial, mortgage and consumer loans, residential and commercial real estate, price declines and lower home sales and commercial activity.
Any increases in our risk-weighted assets will require a corresponding increase in our capital to maintain the applicable ratios. In addition, recognized loan losses in excess of amounts reserved for such losses, loan impairments and other factors will decrease our capital, thereby reducing the level of the applicable ratios.
Any increases in our risk-weighted assets will require a corresponding increase in our capital to maintain the applicable ratios. In addition, recognized credit losses in excess of amounts reserved for such losses, loan impairments and other factors will decrease our capital, thereby reducing the level of the applicable ratios.
The regulatory agencies may require us to change classifications or grades on loans, increase the allowance for loan losses with large provisions for loan losses and recognize further loan charge-offs based upon their judgments, which may be different from ours.
The regulatory agencies may require us to change classifications or grades on loans, increase the allowance for credit losses with large provisions for credit losses and recognize further loan charge-offs based upon their judgments, which may be different from ours.
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.
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.
The Federal Reserve’s recent unprecedented rate hikes in response to the inflationary environment may further impact our ability to attract deposits, and could have an adverse effect on our business, financial condition and results of operations as increased interest rates could reduce the demand for loans and affect the ability of our borrowers to repay their indebtedness subjecting us to potential loan losses.
The Federal Reserve’s recent unprecedented rate hikes in response to the inflationary environment may further impact our ability to attract deposits, and could have an adverse effect on our business, financial condition and results of operations as increased interest rates could reduce the demand for loans and affect the ability of our borrowers to repay their indebtedness subjecting us to potential credit losses.
If we were not able to replace such wholesale funding, we may have to liquidate loans, which may be at losses that would have a material adverse effect on our capital, our business and your investment in the Company. 27 Table of Contents We may not be able to grow and maintain our deposit base, and deposit outflow may increase reliance on wholesale borrowings and brokered deposits.
If we were not able to replace such wholesale funding, we may have to liquidate loans, which may be at losses that would have a material adverse effect on our capital, our business and your investment in the Company. 29 Table of Contents We may not be able to grow and maintain our deposit base, and deposit outflow may increase reliance on wholesale borrowings and brokered deposits.
Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations. 45 Table of Contents A natural disaster could harm our business. We have clients across the United States, but concentrations in California (subject to earthquakes and wildfires), Florida (hurricanes) and Texas (hurricanes, tornadoes and flooding).
Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations. 47 Table of Contents A natural disaster could harm our business. We have clients across the United States, but concentrations in California (subject to earthquakes and wildfires), Florida (hurricanes) and Texas (hurricanes, tornadoes, wildfires and flooding).
Our methodology for establishing the adequacy of the allowance for loan losses depends on subjective application of risk grades as indicators of borrowers’ ability to repay. Deterioration in general economic conditions and unforeseen risks affecting clients may have an adverse effect on borrowers’ capacity to repay timely their obligations before risk grades could reflect those changing conditions.
Our methodology for establishing the adequacy of the allowance for credit losses depends on subjective application of risk grades as indicators of borrowers’ ability to repay. Deterioration in general economic conditions and unforeseen risks affecting clients may have an adverse effect on borrowers’ capacity to repay timely their obligations before risk grades could reflect those changing conditions.
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 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.
In the current environment of rising interest rates, our deposits may not be as stable or as interest rate insensitive as similar deposits may have been in the past, and some existing or prospective deposit customers of banks generally, including the Bank, may be inclined to pursue other investment alternatives, which may negatively impact our net interest margin.
In the current environment of elevated interest rates, our deposits may not be as stable or as interest rate insensitive as similar deposits may have been in the past, and some existing or prospective deposit customers of banks generally, including the Bank, may be inclined to pursue other investment alternatives, which may negatively impact our net interest margin.
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. 28 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. 30 Table of Contents Further, rising short-term interest rates are likely to result in declines in both fixed income (bond) and stock prices.
If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models the Company uses for determining its probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs.
If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models the Company uses for determining its probable credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge-offs.
As a result of the Tectonic Merger, a significant portion of our revenue is the result of fee-based services related to investment advisory, trust services, insurance and brokerage activities. This contrasts with many commercial banks that may rely more heavily on interest-based sources of revenue, such as loans.
A significant portion of our revenue is the result of fee-based services related to investment advisory, trust services, insurance and brokerage activities. This contrasts with many commercial banks that may rely more heavily on interest-based sources of revenue, such as loans.
The processes the Company uses to estimate its probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the company’s financial condition and results of operations, depends upon the use of analytical and forecasting models.
The processes the Company uses to estimate its probable credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the company’s financial condition and results of operations, depends upon the use of analytical and forecasting models.
To the extent that Sanders Morris and/or the Bank suffer losses (including, without limitation, loan losses at the Bank), they may fail to meet their minimum capital requirements necessary for them to pay dividends to the Company, which would impact the Company’s ability to pay dividends on the preferred stock.
To the extent that Sanders Morris and/or the Bank suffer losses (including, without limitation, credit losses at the Bank), they may fail to meet their minimum capital requirements necessary for them to pay dividends to the Company, which would impact the Company’s ability to pay dividends on the preferred stock.
Additionally, natural disasters could negatively impact the values of collateral securing our borrowers’ loans and interrupt our borrowers’ abilities to conduct their business in a manner to support their debt obligations, either of which could result in losses and increased provisions for loan losses for us.
Additionally, natural disasters could negatively impact the values of collateral securing our borrowers’ loans and interrupt our borrowers’ abilities to conduct their business in a manner to support their debt obligations, either of which could result in losses and increased provisions for credit losses for us.
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.
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.
These loans include practice acquisition loans, dental equipment loans, and dental facility loans. We had no charge-offs during 2022 and 2021 in our dental portfolio assets. We believe that these loans are conservatively underwritten to credit worthy borrowers and are diversified geographically.
These loans include practice acquisition loans, dental equipment loans, and dental facility loans. We had no charge-offs during 2023 and 2022 in our dental portfolio assets. We believe that these loans are conservatively underwritten to credit worthy borrowers and are diversified geographically.
Factoring for small-sized trucking businesses constituted the vast majority of our total factoring portfolio as of December 31, 2022, 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, 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.
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. 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. 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.
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.
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.
A regulatory action against us could have a material adverse effect on our business, results of operations, financial condition and prospects. 47 Table of Contents 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.
A regulatory action against us could have a material adverse effect on our business, results of operations, financial condition and prospects. 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.
Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of clients’ funds and securities, capital structure of securities firms, record-keeping, and the conduct of directors, officers, and employees. 48 Table of Contents As investment advisors, Sanders Morris and Tectonic Advisors are subject to the Advisers Act.
Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of clients’ funds and securities, capital structure of securities firms, record-keeping, and the conduct of directors, officers, and employees. As investment advisors, Sanders Morris and Tectonic Advisors are subject to the Advisers Act.
Accordingly, any losses suffered by the Company or any of its subsidiaries, particularly loan losses at the Bank, might have a material adverse effect on the Company, including on the ability of the Company to pay dividends on the preferred stock.
Accordingly, any losses suffered by the Company or any of its subsidiaries, particularly credit losses at the Bank, might have a material adverse effect on the Company, including on the ability of the Company to pay dividends on the preferred stock.
Any such failure in the Company’s analytical or forecasting models could have a material adverse effect on the Company’s business, financial condition and results of operations. 41 Table of Contents We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired.
Any such failure in the Company’s analytical or forecasting models could have a material adverse effect on the Company’s business, financial condition and results of operations. We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired.
Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which could materially affect our results of operations and capital adequacy.
Maintaining the adequacy of our allowance for credit losses may require that we make significant and unanticipated increases in our provisions for credit losses, which could materially affect our results of operations and capital adequacy.
The Series B preferred stock may rank junior to preferred stock issued in the future that by its terms is expressly senior in rights and preferences to the Series B preferred stock, although the affirmative vote or consent of the holders of at least 662∕3% of all outstanding shares of the Series B preferred stock is required to authorize or issue any shares of stock senior in rights and preferences to the Series B preferred stock.
The Series B preferred stock may rank junior to preferred stock issued in the future that by its terms is expressly senior in rights and preferences to the Series B preferred stock, although the affirmative vote or consent of the holders of at least 66 2 ∕3% of all outstanding shares of the Series B preferred stock is required to authorize or issue any shares of stock senior in rights and preferences to the Series B preferred stock.
Although we have not experienced any material claims or litigation pertaining to fiduciary responsibility, the occurrence of any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. 35 Table of Contents We could suffer material credit losses.
Although we have not experienced any material claims or litigation pertaining to fiduciary responsibility, the occurrence of any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. We could suffer material credit losses.
Due to these potential effects, the tightening employment market could have a material adverse impact on our business, financial condition and results of operations. 32 Table of Contents 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.
Due to these potential effects, the tightening employment market could have a material adverse impact on our business, financial condition and results of operations. 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.
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.
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.
A trade war or other governmental action related to tariffs or international trade agreements or policies, as well as the current conflict in Ukraine and COVID-19 or other potential epidemics or pandemics, have the potential to negatively impact our and/or our customers’ costs, demand for our customers’ products, and/or the U.S. economy or certain sectors thereof and, thus, adversely affect our business, financial condition, and results of operations.
A trade war or other governmental action related to tariffs or international trade agreements or policies, as well as the current conflict in Ukraine and the Middle East or other potential epidemics or pandemics, have the potential to negatively impact our and/or our customers’ costs, demand for our customers’ products, and/or the U.S. economy or certain sectors thereof and, thus, adversely affect our business, financial condition, and results of operations.
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.
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.
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.
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.
New competition could reduce the demand for HWG’s insurance products, which could have a material adverse effect on our financial condition and results of operations. 40 Table of Contents A failure to appropriately identify and address potential conflicts of interest could adversely affect our businesses.
New competition could reduce the demand for HWG’s insurance products, which could have a material adverse effect on our financial condition and results of operations. A failure to appropriately identify and address potential conflicts of interest could adversely affect our businesses.
For the year ended December 31, 2022, 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, 2023, consolidated non-interest income represented approximately 59.3% of our consolidated gross revenue (which is net interest income plus non-interest income).
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, 2022, the Bank had approximately $1.6 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, 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.
Risks 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 maintain our deposit base or other funding sources. ● 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. ● 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. ● 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. ● 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.
Risks 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.
In such case, the ability of the Company to pay dividends on and/or redeem the Series B preferred stock may be negatively impacted. 51 Table of Contents Dividends on the Series B preferred stock are discretionary and non-cumulative, and our future ability to pay dividends is subject to restrictions.
In such case, the ability of the Company to pay dividends on and/or redeem the Series B preferred stock may be negatively impacted. Dividends on the Series B preferred stock are discretionary and non-cumulative, and our future ability to pay dividends is subject to restrictions.
Negative public opinion regarding us or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business. 24 Table of Contents ● Growth of our business could result in increased 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. ● We depend on key personnel, and may have difficulty identifying, attracting and retaining necessary personnel to execute our business strategy and successfully expand our operations.
Negative public opinion regarding us or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business. ● 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. ● We depend on key personnel, and may have difficulty identifying, attracting and retaining necessary personnel to execute our business strategy and successfully expand our operations.
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, the Bank Term Funding Program (BTFP) and the issuance of additional equity securities and/or debt.
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, the BTFP and the issuance of additional equity securities and/or debt.
As discussed above, the FOMC repeatedly raised their target benchmark interest rate in 2022, resulting in subsequent prime rate increases of 425 basis points between March and December of 2022, and further resulting in a significant increase in market interest rates during the year ended December 31, 2022.
As discussed above, the FOMC repeatedly raised their target benchmark interest rate in 2022 and 2023, resulting in subsequent prime rate increases of 525 basis points between March of 2022 and July of 2023, and further resulting in a significant increase in market interest rates during the year ended December 31, 2023.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.
New lines of business or new products and services may subject us to additional risk. From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.
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. 54 Table of Contents Holders of the Series B preferred stock have limited voting rights.
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.
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, 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 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.
Recognizing that many of our loans individually represent a significant percentage of our total allowance for loan 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 loan 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. 39 Table of Contents Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for credit losses.
Cain Watters provides advisory services to approximately 2,750 dental practices 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 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.
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. ● 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. ● We face specific risks associated with retention of unguaranteed portions of SBA loans. ● 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. 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.
Notwithstanding the foregoing, in the event that three-month LIBOR or its replacement is less than zero, three-month LIBOR 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 may vary from period to period and could be more or less than the fixed rate for the initial period.
Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. As of December 31, 2022, our loan portfolio included $83.9 million of loans to the dental industry, representing approximately 18.6% of our total funded loans.
Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. As of December 31, 2023, `our loan portfolio included $78.2 million of loans to the dental industry, representing approximately 15.6% of our total funded loans.
There are many factors that may affect the market price and trading volume of the Series B preferred stock, including, without limitation: • actual or anticipated fluctuations in our operating results, financial condition or asset quality; • changes in economic or business conditions; • the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve; • recommendations by securities analysts; • operating and stock price performance of companies that investors deemed comparable to us; • additional or anticipated sales of the Series B preferred stock or other securities by us or our existing shareholders; • additions or departures of key personnel; • perceptions in the marketplace regarding our competitors or us; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; • other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and • other news, announcements or disclosures (whether by us or others) related to us, our competitors, our primary markets or the financial services industry. 55 Table of Contents The stock market and, in particular, the market for financial institution stocks have experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies.
There are many factors that may affect the market price and trading volume of the Series B preferred stock, including, without limitation: ● actual or anticipated fluctuations in our operating results, financial condition or asset quality; ● changes in economic or business conditions; ● the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve; ● recommendations by securities analysts; ● operating and stock price performance of companies that investors deemed comparable to us; ● additional or anticipated sales of the Series B preferred stock or other securities by us or our existing shareholders; ● additions or departures of key personnel; ● perceptions in the marketplace regarding our competitors or us; ● significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; ● other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and ● other news, announcements or disclosures (whether by us or others) related to us, our competitors, our primary markets or the financial services industry.
Our future growth will largely depend on our ability to maintain and grow our deposit base and our ability to retain our trust clients, who provide deposits. As of December 31, 2022, the Bank had a loan to deposit ratio of 90.1%.
Our future growth will largely depend on our ability to maintain and grow our deposit base and our ability to retain our trust clients, who provide deposits. As of December 31, 2023, the Bank had a loan to deposit ratio of 93.9%.
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 LIBOR or its replacement, plus a spread of 672.0 basis points per annum.
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.
Securities analysts may not continue coverage on us, or may publish an unfavorable report. The trading market for the Series B preferred stock depends, in part, on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts.
The trading market for the Series B preferred stock depends, in part, on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts.
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.
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.
As a result, you may not have the same protections afforded to shareholders of companies that are subject to such requirements. ● The interests of our controlling shareholders may not coincide with yours and with whose decisions you may disagree. ● Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition that you may favor or an attempted replacement of our board of directors or management. ● We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make the Series B preferred stock less attractive to investors. ● An investment in the Series B preferred stock is not an insured deposit and is subject to risk of loss.
As a result, you may not have the same protections afforded to shareholders of companies that are subject to such requirements. ● The interests of our controlling shareholders may not coincide with yours and with whose decisions you may disagree. ● Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition that you may favor or an attempted replacement of our board of directors or management. ● We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make the Series B preferred stock less attractive to investors. ● An investment in the Series B preferred stock is not an insured deposit and is subject to risk of loss. 28 Table of Contents Risks 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.
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.
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.
The FOMC have raised interest rates another 75 basis points thus far in 2023. 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, 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.
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, 2022, our CRE 1 Concentration level was 22.5% and our CRE 2 Concentration level was 141.00%.
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%.
During the year ended December 31, 2022, the Federal Open Market Committee (“FOMC”) of the Federal Reserve repeatedly raised their target benchmark interest rate in response to the ongoing inflationary environment in the United States, resulting in subsequent prime rate increases of 425 basis points between March and December of 2022.
In 2022 and 2023, the Federal Open Market Committee (“FOMC”) of the Federal Reserve repeatedly raised their target benchmark interest rate in response to the ongoing inflationary environment in the United States, resulting in subsequent prime rate increases of 525 basis points between March of 2022 and July of 2023.
We use certain non-core, wholesale funding sources, including the FHLB advances and deposit listing services. As of December 31, 2022, our use of such wholesale funding sources amounted to approximately $220 million, or 44.1% of total funding.
We use certain non-core, wholesale funding sources, including the FHLB advances and deposit listing services. As of December 31, 2023, our use of such wholesale funding sources amounted to approximately $286 million, or 51.8% of total funding.
Underperformance or market declines in our investments could reduce our revenue and impair our growth in a number of ways: ● existing clients may withdraw funds from our wealth management business in favor of better performing products; ● asset-based advisory fees could decline as a result of a decrease in the value of assets under management; ● our ability to attract funds from existing and new clients might diminish; ● firms with which we have business relationships may terminate their relationships with us; and ● our wealth managers and investment advisors may depart, whether to join a competitor or otherwise. 39 Table of Contents Even when market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our asset managers and the particular investments that they make.
Underperformance or market declines in our investments could reduce our revenue and impair our growth in a number of ways: ● existing clients may withdraw funds from our wealth management business in favor of better performing products; ● asset-based advisory fees could decline as a result of a decrease in the value of assets under management; ● our ability to attract funds from existing and new clients might diminish; ● firms with which we have business relationships may terminate their relationships with us; and ● our wealth managers and investment advisors may depart, whether to join a competitor or otherwise.
Risks Related to an Investment in the Series B Preferred Stock: ● The Series B preferred stock is subordinate to our existing and future indebtedness, which could adversely impact our ability to pay dividends on the Series B preferred stock. ● The Series B preferred stock may be junior in rights and preferences to our future preferred stock.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. ● Uncertainty related to the London Interbank Offer Rate (“LIBOR”) and its replacement may adversely affect the value of the Series B preferred stock. ● 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 anytime 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. 26 Table of Contents ● 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.
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.
These clients also, by their nature, are often able to exert pricing pressure, and this, combined with strong competitive forces in the markets for our services, has resulted in, and may continue to result in, significant pressure to reduce the fees we charge for our services in both our asset servicing and asset management business lines. 38 Table of Contents The business operations of Sanders Morris may face limitations due to net capital requirements.
These clients also, by their nature, are often able to exert pricing pressure, and this, combined with strong competitive forces in the markets for our services, has resulted in, and may continue to result in, significant pressure to reduce the fees we charge for our services in both our asset servicing and asset management business lines.
We intend to avail ourselves of certain of these other exemptions for as long as we remain a “controlled company.” Accordingly, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all of NASDAQ’s corporate governance requirements, which could make our stock less attractive to investors or otherwise harm our stock price. 56 Table of Contents We are controlled by the majority shareholders, whose interests may not coincide with yours and with whose decisions you may disagree.
We intend to avail ourselves of certain of these other exemptions for as long as we remain a “controlled company.” Accordingly, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all of NASDAQ’s corporate governance requirements, which could make our stock less attractive to investors or otherwise harm our stock price.
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.
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 legal lending limits may impair our ability to attract borrowers and ability to compete with larger financial institutions. ● The level of our commercial real estate loan portfolio may subject us to heightened regulatory scrutiny. ● 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. ● 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.
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.
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.
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.
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.
Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects. 57 Table of Contents The obligations associated with being a public company require significant resources and management attention, which increase our costs of operations and may divert focus from our business operations.
Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
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.
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.
As of December 31, 2022, our nonperforming loans (which consist of non-accrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings that are not performing in accordance with their modified terms) totaled $2.8 million. We had no other real estate owned at December 31, 2022.
As of December 31, 2023, our nonperforming loans (which consist of non-accrual loans, loans past due 90 days or more and still accruing interest and loan modifications to borrowers experiencing financial difficulty that are not performing in accordance with their modified terms) totaled $2.6 million. We had no other real estate owned at December 31, 2023.
If SOFR does not prove to be widely used in securities that are similar or comparable to the Series B preferred stock, the trading price of those securities may be adversely affected. 53 Table of Contents Potential conflicts of interest in connection with replacing LIBOR.
If SOFR does not prove to be widely used in securities that are similar or comparable to the Series B preferred stock, the trading price of those securities may be adversely affected.
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.
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.
The non-credit portion of unrealized losses on the Bank’s available for sale securities portfolio are booked to Accumulated Other Comprehensive Income (“AOCI”), a component of shareholders' equity, and unrealized losses net of the related tax effect as of December 31, 2022 totaled $2.4 million, which represents approximately 3.0% 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, 2023 totaled $1.8 million, which represents approximately 1.7% of our total capital.

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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 February 2024 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, 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.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeHowever, 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. 59 Table of Contents PART II
Biggest changeHowever, 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

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 59 PART II 60 Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities 60 Item 6. [Reserved] 60 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 61 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 81 Item 8.
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.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeHolders of Record As of March 29, 2023, we had 98 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.
Biggest changeHolders 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.
Securities Authorized for Issuance Under Equity Compensation Plans Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2022, 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, 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.
During the year ended 2022, 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 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.

Item 7. Management's Discussion & Analysis

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

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Biggest changeThe table below presents a summary of the Company’s net loan loss experience and provisions to the ALLL for the period indicated: (In thousands, except percentages) 2022 2021 2020 2019 2018 Balance at January 1, $ 4,152 $ 2,941 $ 1,408 $ 874 $ 386 Charge-offs: Commercial and industrial 337 - - 214 1 Consumer installment - - - - - SBA 7(a) 43 952 218 858 266 Factored receivables 617 168 - - - Total charge-offs 997 1,120 218 1,072 267 Recoveries: Commercial and industrial 31 37 33 30 - Consumer installment - - - - - Real estate – construction and land - - - - - SBA 7(a) 22 20 9 21 30 Factored receivables 41 60 - - - Total recoveries 94 117 42 51 30 Net charge-offs 903 1,003 176 1,021 237 Provision for loan losses 1,264 2,214 1,709 1,555 725 Balance at December 31, $ 4,513 $ 4,152 $ 2,941 $ 1,408 $ 874 Loans at year-end $ 450,332 $ 428,747 $ 400,542 $ 291,079 $ 234,907 Average loans 458,980 448,284 376,088 275,025 231,385 Net charge-offs/average loans 0.20 % 0.22 % 0.05 % 0.37 % 0.10 % Allowance for loan losses/year-end loans 1.00 0.97 0.73 0.48 0.37 Total provision for loan losses/average loans 0.28 0.49 0.45 0.57 0.31 76 Table of Contents The following tables set forth the allocation of the allowance as of the date indicated and the percentage of loans in each category to total gross loans as of the date indicated: At December 31, 2022 2021 2020 2019 2018 (In thousands, except percentages) Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Commercial and industrial $ 1,301 $ 1,154 $ 928 $ 501 $ 419 Consumer installment 14 15 91 27 27 Real estate – residential 79 76 52 22 27 Real estate – commercial 899 869 527 347 210 Real estate – construction and land 55 40 100 76 34 SBA 1,505 1,324 1,225 435 157 USDA 52 20 18 - - Factored receivables 608 654 - - - Total allowance for loan losses $ 4,513 $ 4,152 $ 2,941 $ 1,408 $ 874 2022 2021 2020 2019 2018 %(1) %(1) %(1) %(1) %(1) Commercial and industrial 20.6 % 19.4 % 19.9 % 29.4 % 37.9 % Consumer installment 0.2 0.3 2.6 1.2 1.5 Real estate – residential 1.2 1.3 1.1 1.8 3.2 Real estate – commercial 14.2 14.7 11.1 16.1 15.0 Real estate – construction and land 0.9 0.6 2.1 2.7 2.0 SBA 57.4 54.5 63.0 48.0 39.0 USDA 0.5 0.2 0.2 0.8 1.4 Factored receivables 5.0 9.0 - - - Total allowance for loan losses 100 % 100 % 100 % 100 % 100 % (1) Percentage of loans in each category to total loans Deposits Deposits are attracted principally from our primary geographic market area with the exception of time deposits, which, due to the Company’s attractive rates, are attracted from across the nation.
Biggest changeThe 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 gain on sale of loans primarily reflects the gain from the sale of the guaranteed portion of SBA 7(a) and USDA loans originated by the Bank’s SBA lending group.
Gain on sale of loans. The gain on sale of loans primarily reflects the gain from the sale of the guaranteed portion of SBA 7(a) and USDA loans originated by the Bank’s SBA lending group.
Our primary operating segments are Banking and Other Financial Services. Our Banking operating segment includes both commercial and consumer banking services. Commercial banking services are provided primarily to small- to medium-sized businesses and their employees, which includes a wide array of lending and cash management products. Consumer banking services include lending and depository services.
Our primary operating segments are Banking and Other Financial Services. Our Banking operating segment includes both commercial and consumer banking services, which includes Integra. Commercial banking services are provided primarily to small- to medium-sized businesses and their employees, which includes a wide array of lending and cash management products. Consumer banking services include lending and depository services.
Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for possible loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations.
Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for possible credit losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations.
The following table presents our regulatory capital ratios, as well as those of the Bank, as of the dates indicated: (In thousands) December 31, 2022 December 31, 2021 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, 2023 December 31, 2022 Amount Ratio Amount Ratio Tectonic Financial, Inc.
Changes in the various components of non-interest income are discussed below. 67 Table of Contents Salaries and employee benefits. Salaries and employee benefits include employee payroll expense, incentive compensation, health insurance, benefit plans and payroll taxes.
Changes in the various components of non-interest income are discussed below. 70 Table of Contents Salaries and employee benefits. Salaries and employee benefits include employee salaries and related payroll expense, incentive compensation, health insurance, benefit plans and payroll taxes.
The increase in net interest income was primarily due to an increase in the average yield and average volume on total earning assets, partly offset by an increase in the average rate paid on money market deposit accounts and time deposits and an increase in the average volume of deposits.
The increase in net interest income was primarily due to an increase in the average yield and average volume on total earning assets, partly offset by an increase in the average rate paid on interest-bearing deposit accounts and an increase in the average volume of deposits.
As of December 31, 2022, non-performing assets consisted of SBA non-accrual loans totaling $2.4 million, of which all except $100,000 was guaranteed by the SBA, and commercial real estate loans totaling $138,000. Loans are considered past due when principal and interest payments have not been received as of the date such payments are contractually due.
As of December 31, 2023, non-performing assets consisted of SBA non-accrual loans totaling $2.4 million, of which all except $251,000 was guaranteed by the SBA, and commercial real estate loans totaling $221,000. Loans are considered past due when principal and interest payments have not been received as of the date such payments are contractually due.
The Bank also offers lending services, including commercial loans to small-to medium-sized businesses and professional concerns, as well as consumers, The Nolan Company (“Nolan”), operating from its office in Overland Park, Kansas as a division within the Bank, offers third party administration (“TPA”) services, and Integra Funding Solutions, LLC (“Integra”), operating from its Fort Worth, Texas office as a division within the Bank, offers factoring services.
The Bank also offers lending services, including commercial loans to small-to medium-sized businesses and professional concerns, as well as consumers, Nolan, operating from its office in Overland Park, Kansas as a division within the Bank, offers third party administration (“TPA”) services, and Integra, operating from its Fort Worth, Texas office as a division within the Bank, offers factoring services.
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, 2022 and 2021. The Company also has a credit line with the FRB with borrowing capacity of $30.0 million, which is secured by commercial loans.
The Company determines its borrowing needs and renews the advances accordingly at varying terms. The Company had no borrowings with FHLB as of December 31, 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 Bank offers a broad range of commercial and consumer banking and trust services primarily to small- to medium-sized businesses and their employees, and other institutions. The Bank’s traditional fiduciary services clients primarily consist of clients of Cain Watters & Associates L.L.C. (“Cain Watters”).
The Bank offers a broad range of commercial and consumer banking and trust services primarily to small- to medium-sized businesses and their employees, and other institutions. The Bank’s traditional fiduciary services clients primarily consist of clients of Cain Watters.
Salaries, bonuses and payroll taxes at the Bank’s Nolan division increased $862,000 related to staff increases to accommodate the increase in the number of plans administered and merit increases.
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.
Loans past due 90 days or more and still accruing interest totaled $206,000 in residential real estate and $132,000 in factored receivables as of December 31, 2022, compared to $400,000 as of December 31, 2021, which solely included factored receivables. Foreclosed assets represent property acquired as the result of borrower defaults on loans.
Loans past due 90 days or more and still accruing interest totaled $147,000 in factored receivables as of December 31, 2023, compared to $206,000 in residential real estate and $132,000 in factored receivables as of December 31, 2022. Foreclosed assets represent property acquired as the result of borrower defaults on loans.
Changes in net interest income result from changes in volume and spread, and are reflected in the net interest margin, as well as changes in average interest rates. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
Changes in net interest income result from changes in volume and spread, and are reflected in the net interest margin, as well as changes in average interest rates. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities.
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 $42.2 million, or 6.9% of total assets, as of December 31, 2022.
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.
Loans held for sale totaled $33.9 million and $33.8 million at December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, the Company elected to reclassify $55.4 million of the SBA loans held for sale to held for investment. The Company determined that holding these loans provides better long-term risk adjusted returns than selling the loans.
Loans held for sale totaled $26.6 million and $33.9 million at December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, the Company elected to reclassify $52.6 million of the SBA loans held for sale to held for investment. The Company determined that holding these loans provides better long-term risk adjusted returns than selling the loans.
As of December 31, 2022 and 2021, the Company 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 converts 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 $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.
See the analysis of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion. Other Financial Services Income before taxes for the year ended December 31, 2022 increased $617,000, or 5.9%, compared to the year ended December 31, 2021.
See the analysis of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion. Other Financial Services Income before taxes for the year ended December 31, 2023, increased $1.1 million, or 9.9%, compared to the year ended December 31, 2022.
Changes in the various components of non-interest income are discussed below. Trust Income. Trust income is earned from trust services on the value of managed and non-managed assets held in custody. The volatility of the bond and equity markets impacts the market value of trust assets and the related fees.
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.
Loans are placed on non-accrual status when management has concerns relating to the ability to collect the loan interest and generally when such loans are 90 days or more past due. Accrued interest is charged off and no further interest is accrued. Subsequent payments received on non-accrual loans are recorded as reductions of principal.
Loans are placed on non-accrual status when management has concerns relating to the ability to collect the loan interest and generally when such loans are 90 days or more past due. Accrued interest is charged off and no further interest is accrued.
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, 2022, advisory income increased $77,000, or 0.6%, compared to the year ended December 31, 2021.
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.
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.
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 analysis of non-interest income included in the section captioned “Non-Interest Income” above in this discussion. Non-interest expense for the year ended December 31, 2022 increased $2.7 million, or 11.0%, compared to the year ended December 31, 2021.
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.
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, 2022, increased $2.1 million, or 21.9%, compared to the year ended December 31, 2021.
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.
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.
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.
We provide a wide array of financial products and services including banking, trust, investment advisory, securities brokerage, factoring, third-party administration, qualified plan recordkeeping and insurance services to individuals, small businesses and institutions across the United States. We operate through four main direct and indirect subsidiaries: (i) T Bancshares, Inc.
We provide a wide array of financial products and services including banking, trust, investment advisory, securities brokerage, factoring, third-party administration, qualified plan recordkeeping and insurance services to individuals, small businesses and institutions across the United States.
Critical Accounting Policies and Estimates We prepare consolidated financial statements based on GAAP and to customary practices within the financial services industry. These policies, in certain areas, require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
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.
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.
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.
While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. 61 Table of Contents We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain at the time we make the accounting estimate and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain at the time we make the accounting estimate and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements.
Tier 1 Capital (to Average Assets) $ 76,767 13.47 % $ 63,302 12.06 % Common Equity Tier 1 (to Risk Weighted Assets) 76,767 19.29 63,302 17.70 Tier 1 Capital (to Risk Weighted Assets) 76,767 19.29 63,302 17.70 Total Capital (to Risk Weighted Assets) 81,279 20.42 67,454 18.87 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) $ 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.
The increase was primarily from a increase in incentive bonuses at Sanders Morris related to traditional brokerage, private placement, and syndicated offerings activity of $1.6 million, offset by a decrease in commission salaries of $559,000, and an increase in salaries, payroll taxes, and other benefits of $543,000 at Tectonic Advisors and $213,000 at Sanders Morris.
The decrease was primarily from a decrease in incentive bonuses at Sanders Morris related to decreases in traditional brokerage, private placement, and syndicated offerings activity of $2.4 million, offset by an increase in commission salaries of $64,000, and an increase in salaries, payroll taxes, and other benefits of $196,000.
See also the analysis of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion. 70 Table of Contents HoldCo The net loss before taxes at the HoldCo operating segment increased by $503,000 during the year ended December 31, 2022 compared to the year ended December 31, 2021.
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.
This increase during the year ended December 31, 2022, was primarily due an increase in advisory fees based on a percentage of the underlying assets at Tectonic Advisors totaling $378,000, partially offset by a decrease in advisory fees based on a percentage of underlying assets at Sanders Morris Harris totaling $301,000. Brokerage income.
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.
Commercial and construction real estate loans totaled $67.8 million, or 15.1% of the total loans at December 31, 2022, compared to $65.6 million, or 15.3% (16.6% excluding PPP), of the total loans at December 31, 2021.
Commercial and construction real estate loans totaled $113.5 million, or 22.6%, of the total loans at December 31, 2023, compared to $67.8 million, or 15.1%, of the total loans at December 31, 2022.
We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods.
We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods.
As of December 31, 2022, the Bank qualified as “well capitalized” under the prompt corrective action regulations of Basel III and the OCC. 78 Table of Contents Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).
Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).
Non-Interest Expense The components of non-interest expense were as follows: Year Ended December 31, (In thousands) 2022 2021 Salaries and employee benefits $ 31,093 $ 24,947 Occupancy and equipment 1,707 1,837 Trust expenses 2,243 2,416 Brokerage and advisory direct costs 2,015 2,051 Professional fees 1,480 1,539 Data processing 794 964 Other expense 5,473 4,576 Total $ 44,805 $ 38,330 Total non-interest expense for the year ended December 31, 2022 increased $6.5 million, or 16.9%, compared to the year ended December 31, 2021.
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.
Treasuries $ 1,990 $ 1,953 $ - $ - U.S. government agencies 15,715 13,088 15,847 15,402 Mortgage-backed securities 5,925 5,592 1,724 1,754 Total securities available for sale $ 23,630 $ 20,633 $ 17,571 $ 17,156 Securities held to maturity : Property assessed clean energy $ 1,596 $ 1,722 $ 2,731 $ 2,731 Public improvement district/TIRZ 23,666 24,760 16,942 16,942 Total securities held to maturity $ 25,262 $ 26,482 $ 19,673 $ 19,673 Securities, restricted: Other $ 3,496 $ 3,496 $ 2,432 $ 2,432 Securities not readily marketable $ 100 $ 100 $ 100 $ 100 71 Table of Contents The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of securities available for sale and securities held to maturity as of December 31, 2022.
Treasuries $ 3,906 $ 3,894 $ 1,990 $ 1,953 U.S. government agencies 15,644 13,627 15,715 13,088 Mortgage-backed securities 5,731 5,456 5,925 5,592 Total securities available for sale $ 25,281 $ 22,977 $ 23,630 $ 20,633 Securities held to maturity : Property assessed clean energy $ 1,326 $ 1,254 $ 1,596 $ 1,722 Public improvement district/TIRZ 22,868 22,595 23,666 24,760 Total securities held to maturity $ 24,194 $ 23,849 $ 25,262 $ 26,482 Securities, restricted: Other $ 4,176 $ 4,176 $ 3,496 $ 3,496 Securities not readily marketable $ - $ - $ 100 $ 100 75 Table of Contents The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of securities available for sale and securities held to maturity as of December 31, 2023.
(“T Bancshares”) which was incorporated under the laws of the State of Texas on December 23, 2002 to serve as the bank holding company for the Bank, (ii) Sanders Morris Harris LLC (“Sanders Morris”), a registered broker-dealer with FINRA, and registered investment advisor with the SEC, (iii) Tectonic Advisors, LLC (“Tectonic Advisors”) a registered investment advisor registered with the SEC focused generally on managing money for relatively large, affiliated institutions and investment advisors, as well as for their clients, and (iv) HWG Insurance Agency LLC (“HWG”), an insurance agency registered with the Texas Department of Insurance (“TDI”).
We operate through four main direct and indirect subsidiaries: (i) T Bancshares, Inc. which was incorporated under the laws of the State of Texas on December 23, 2002 to serve as the bank holding company for the Bank, (ii) Sanders Morris, a registered broker-dealer with FINRA, and registered investment advisor with the SEC, (iii) Tectonic Advisors a registered investment advisor registered with the SEC focused generally on managing money for relatively large, affiliated institutions and investment advisors, as well as for their clients, and (iv) HWG, an insurance agency registered with the TDI.
Securities not readily marketable consists of an income interest in a private investment. The following presents the amortized cost and fair values of the securities portfolio as of the dates indicated: As of December 31, 2022 As of December 31, 2021 (In thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Securities available for sale : U.S.
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.
As of December 31, 2022, 60.8% of the loan portfolio, or $274.0 million, matured or re-priced within one year or less.
As of December 31, 2023, 65.8% of the loan portfolio, or $329.5 million, matured or re-priced within one year or less.
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.
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.
The increase was offset by a decrease in brokerage and advisory direct costs at Sanders Morris and HWG of $72,000, related to a decrease in clearing firm service fees, fees on advisory assets and referral fees of $97,000, offset by an increase in information services and service fees of $25,000. Professional fees .
The decrease in brokerage and advisory direct costs related to decreases 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 decrease was primarily the result of a $3.4 million increase in non-interest expense, partly offset by a $1.7 million increase in net interest income, a $247,000 increase in non-interest income, and a $950,000 decrease in the provision for loan losses.
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.
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.
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.
Sanders Morris is also regulated by FINRA, which, among other requirements, imposes minimums on its net regulatory capital. As of December 31, 2022, Sanders Morris is in compliance with FINRA’s net regulatory capital requirements. Liquidity Our liquidity relates to our ability to maintain a steady flow of funds to support our ongoing operating, investing and financing activities.
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.
The average interest rate paid on interest-bearing liabilities increased 64 basis points from 0.90% for the year ended December 31, 2021, to 1.54% for the year ended December 31, 2022. The average interest rate paid on interest-bearing deposits increased 58 basis points from 0.78% for the year ended December 31, 2021, to 1.36% for the year ended December 31, 2022.
The average interest rate paid on interest-bearing liabilities increased 285 basis points from 1.54% for the year ended December 31, 2022, to 4.39% for the year ended December 31, 2023. The average interest rate paid on interest-bearing deposits increased 287 basis points from 1.36% for the year ended December 31, 2022, to 4.23% for the year ended December 31, 2023.
Salaries and employee benefits increased $6.1 million, or 24.6%, from $24.9 million for the year ended December 31, 2021 to $31.1 million for the year ended December 31, 2022. In our other financial services segment, salaries and employee benefits increased $2.8 million.
Salaries and employee benefits for the year ended December 31, 2023, increased $195,000, or 0.6%, compared to the year ended December 31, 2022. In our Other Financial Services segment, salaries and employee benefits decreased $2.2 million.
Non-interest income for the year ended December 31, 2022 increased $247,000, or 24.9%, compared to the year ended December 31, 2021.
Non-interest income for the year ended December 31, 2023, increased $812,000, or 65.6%, compared to the year ended December 31, 2022.
Trust expenses are incurred in our other financial services segment, and include advisory fees paid on the common trust funds managed by the Company based on the value of the assets held in custody. The volatility of the bond and equity markets impacts the market value of trust assets and the related expenses.
The 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 increase was primarily the result of a $3.4 million increase in non-interest income partly offset by a $2.8 million increase in non-interest expense. Non-interest income for the year ended December 31, 2022 increased $3.4 million, or 9.5%, compared to the year ended December 31, 2021.
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 includes $60.0 million for non-PPP SBA loans, $9.6 million for commercial and industrial loans and $2.4 million for real estate loans. The increases were partly offset by a $34.1 million decrease for SBA PPP loans and a $16.2 million decrease in factored receivables.
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.
Trust income for the year ended December 31, 2022, decreased $154,000, or 2.5%, compared to the year ended December 31, 2021.
Trust income for the year ended December 31, 2023, increased $344,000, or 5.6%, compared to the year ended December 31, 2022.
Net interest income for the year ended December 31, 2022 increased $1.7 million, or 6.5%, compared to the year ended December 31, 2021.
Net interest income for the year ended December 31, 2023, increased $166,000, or 0.6%, compared to the year ended December 31, 2022.
Securities available for sale are carried at fair value, with unrealized holding gains and losses reported as a separate component of stockholders’ equity as other comprehensive income (loss), net of tax. Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
Securities are classified as available for sale when we intend to hold for an indefinite period of time but might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported as a separate component of stockholders’ equity as other comprehensive income (loss), net of tax.
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, 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.
These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets.
These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets. Our exposure to credit loss in the event of non-performance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.
Results of Operations Details of the changes in the various components of net income are discussed below. 63 Table of Contents Net Interest Income Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings.
Net Interest Income Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings.
Commercial and industrial loans totaled $92.9 million, or 20.6% of the total loans at December 31, 2022, compared to $83.3 million, or 19.4% (21.1% excluding PPP) of the total loans at December 31, 2021.
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.
The following table presents key metrics related to our segments: Year Ended December 31, 2022 (In thousands) Banking Other Financial Services HoldCo Consolidated Revenue(1) $ 29,630 $ 38,788 $ (897 ) $ 67,521 Net income (loss) before taxes $ 13,106 $ 11,164 $ (2,818 ) $ 21,452 Year Ended December 31, 2021 ( In thousands ) Banking Other Financial Services HoldCo Consolidated Revenue(1) $ 27,639 $ 35,428 $ (686 ) $ 62,381 Net income (loss) before taxes $ 13,605 $ 10,547 $ (2,315 ) $ 21,837 (1) Net interest income plus non-interest income 69 Table of Contents Banking Income before taxes for the year ended December 31, 2022 decreased $499,000, or 3.7%, compared to the year ended December 31, 2021.
The following table presents key metrics related to our segments: Year Ended December 31, 2023 (In thousands) Banking Other Financial Services HoldCo Consolidated Revenue(1) $ 30,608 $ 37,854 $ (1,297 ) $ 67,165 Net income (loss) before taxes $ 11,920 $ 12,273 $ (5,137 ) $ 19,056 Year Ended December 31, 2022 ( In thousands ) Banking Other Financial Services HoldCo Consolidated Revenue(1) $ 29,630 $ 38,788 $ (897 ) $ 67,521 Net income (loss) before taxes $ 13,106 $ 11,164 $ (2,818 ) $ 21,452 (1) Net interest income plus non-interest income 72 Table of Contents Banking Income before taxes for the year ended December 31, 2023, decreased $1.2 million, or 9.0%, compared to the year ended December 31, 2022.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party.
Salaries, taxes and other benefits in our trust group within our other financial services segment increased $186,000 related to staffing additions to accommodate additional recordkeeping clients, as well as a decrease in reliance on third-party consultants.
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.
Non-Interest Income The components of non-interest income were as follows: Year Ended December 31, (In thousands) 2022 2021 Trust income $ 6,098 $ 6,252 Gain on sale of loans - 101 Advisory income 13,549 13,472 Brokerage income 11,754 9,644 Service fees and other income 8,293 6,790 Rental income 346 365 Total $ 40,040 $ 36,624 Total non-interest income for the year ended December 31, 2022, increased $3.4 million, or 9.3%, as compared to the year ended December 31, 2021.
Non-Interest Income The components of non-interest income were as follows: Year Ended December 31, (In thousands) 2023 2022 Trust income $ 6,442 $ 6,098 Gain on sale of loans 581 - Advisory income 14,910 13,549 Brokerage income 7,527 11,754 Service fees and other income 10,037 8,293 Rental income 307 346 Total $ 39,804 $ 40,040 Total non-interest income for the year ended December 31, 2023, decreased $236,000, or 0.6%, as compared to the year ended December 31, 2022.
Under the accounting model for acquired loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield,” is accreted into interest income over the life of the loans.
Under the accounting model for acquired loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield,” is accreted into interest income over the life of the loans. 78 Table of Contents Non-performing Assets Our primary business segments are banking and other financial services, and as outlined above, the banking segment’s primary business is lending.
Occupancy and equipment expenses include building, furniture, fixtures and equipment depreciation and maintenance costs. Occupancy and equipment expenses decreased $130,000, or 7.1%, from $1.8 million for the year ended December 31, 2021 to $1.7 million for the year ended December 31, 2022.
Occupancy and equipment expense . Occupancy and equipment expenses include building, furniture, fixtures and equipment depreciation and maintenance costs. Occupancy and equipment expenses for the year ended December 31, 2023, increased $277,000, or 16.2%, compared to the year ended December 31, 2022.
PPP loans had a zero balance at December 31, 2022, compared to $34.1 million at December 31, 2021. SBA loans comprise the largest group of loans in our portfolio totaling $258.3 million, or 57.4% of the total loans at December 31, 2022, compared to $233.9 million, or 54.5% (50.6% excluding PPP) of the total loans at December 31, 2021.
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.
As of December 31, 2022, the Company and the Bank met all capital adequacy requirements to which they were subject.
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.
Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions, and competition.
While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions, and competition.
In addition to the on balance sheet liquidity available, the Company has lines of credit with the FHLB and the FRB, which provide the Company with a source of off-balance sheet liquidity. As of December 31, 2022, the Company’s borrowing capacity with the FHLB was $56.0 million, or 9.2% of assets, none of which was utilized.
In addition to the on balance sheet liquidity available, the Company has lines of credit with the FHLB and the FRB, which provide the Company with a source of off-balance sheet liquidity.
In addition, the Bank serves the small business community by offering loans guaranteed by the Small Business Administration (“SBA”) and the U.S. Department of Agriculture (“USDA”).
In addition, the Bank serves the small business community by offering loans guaranteed by the SBA and the USDA.
The assessments are an obligation of the property. Restricted securities consisted of FRB stock, having an amortized cost and fair value of $2.2 million and $1.2 million as of December 31, 2022 and 2021, respectively, and FHLB stock, having an amortized cost and fair value of $1.3 million as of December 31, 2022 and 2021.
Restricted securities consisted of FRB stock, having an amortized cost and fair value of $2.2 million as of December 31, 2023 and 2022, and FHLB stock, having an amortized cost and fair value of $2.0 million and $1.3 million as of December 31, 2023 and 2022, respectively. Securities not readily marketable consists of an income interest in a private investment.
A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the original loan contract.
Subsequent payments received on non-accrual loans are recorded as reductions of principal, and interest income is recorded only after principal recovery is reasonably assured. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the original loan contract.
Net interest income increased $1.7 million, or 6.6% from $25.8 million for the year ended December 31, 2021, to $27.5 million for year ended December 31, 2022. Net interest margin for the year ended December 31, 2022 and 2021 was 5.06% and 4.96%, respectively, an increase of 10 basis points.
Net interest income decreased $120,000, or 0.4% from $27.5 million for the year ended December 31, 2022, to $27.4 million for year ended December 31, 2023. Net interest margin for the year ended December 31, 2023 and 2022 was 4.58% and 5.06%, respectively, a decrease of 48 basis points.
See also the analysis of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion. Financial Condition Investment Securities The primary purpose of the Company’s investment portfolio is to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against borrowings, and to control interest rate risk.
Financial Condition Investment Securities The primary purpose of the Company’s investment portfolio is to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against borrowings, and to control interest rate risk. In managing the portfolio, the Company seeks to attain the objectives of safety of principal, liquidity, diversification, and maximized return on investment.
The following table reconciles net income to income available to common shareholders and presents the calculation of return on average tangible common equity: (In thousands, except percentages) As of and for the Year Ended December 31, 2022 As of and for the Year Ended December 31, 2021 Income available to common shareholders $ 15,478 $ 15,482 Average shareholders’ equity $ 90,194 $ 68,156 Less: average goodwill 21,440 16,129 Less: average core deposit intangible 681 885 Less: average preferred stock 17,250 17,250 Average tangible common equity $ 50,823 $ 33,892 Return on average tangible common equity 30.45 % 45.68 % Total assets grew by $27.5 million, or 4.7%, to $612.5 million as of December 31, 2022, from $585.0 million as of December 31, 2021.
However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, measures and ratios prepared in accordance with GAAP. 65 Table of Contents The following table reconciles net income to income available to common shareholders and presents the calculation of return on average tangible common equity: (In thousands, except percentages) As of and for the Year Ended December 31, 2023 As of and for the Year Ended December 31, 2022 Income available to common shareholders $ 13,667 $ 15,478 Average shareholders’ equity $ 101,176 $ 90,194 Less: average goodwill 21,440 21,440 Less: average core deposit intangible 472 681 Less: average preferred stock 17,250 17,250 Average tangible common equity $ 62,014 $ 50,823 Return on average tangible common equity 22.04 % 30.45 % Total assets grew by $64.8 million, or 10.6%, to $677.3 million as of December 31, 2023, from $612.5 million as of December 31, 2022.
The borrowing capacity with the FRB was $30.0 million, or 4.9% of assets, of which none was utilized or outstanding as of December 31, 2022.
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.
Tier 1 Capital (to Average Assets) $ 76,805 13.27 % $ 62,794 11.82 % Common Equity Tier 1 (to Risk Weighted Assets) 59,555 14.80 45,544 12.62 Tier 1 Capital (to Risk Weighted Assets) 76,805 19.09 62,794 17.40 Total Capital (to Risk Weighted Assets) 81,317 20.21 66,946 18.55 T Bank, N.A.
Tier 1 Capital (to Average Assets) $ 86,847 13.97 % $ 76,805 13.27 % Common Equity Tier 1 (to Risk Weighted Assets) 69,597 15.74 59,555 14.80 Tier 1 Capital (to Risk Weighted Assets) 86,847 19.65 76,805 19.09 Total Capital (to Risk Weighted Assets) 92,385 20.90 81,317 20.21 T Bank, N.A.
The average yield on interest-earning assets increased 49 basis points from 5.66% for the year ended December 31, 2021 to 6.15% for the year ended December 31, 2022.
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 volume of interest-bearing deposits increased $43.3 million, or 13.6%, from $319.1 million for the year ended December 31, 2021, to $362.5 million for the year ended December 31, 2022.
The average volume of interest-earning assets increased $54.5 million, or 10.0%, from $542.6 million for the year ended December 31, 2022, to $597.1 million for the year ended December 31, 2023.
Our brokerage and advisory assets experienced a decrease of approximately $409.8 million, or 7.3%, and an increase of $1.1 billion, or 24.0%, during the years ended December 31, 2022 and 2021, respectively.
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%.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

4 edited+1 added−3 removed12 unchanged
Biggest changeThe 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 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.
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, 2022: Change in Interest Rates (basis points) % Change in Net Interest Income +200 9.20 +100 4.60 -100 (3.51 ) -200 (7.03 ) 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, 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.
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 Impact of Inflation Our consolidated financial statements and related notes included elsewhere in this Form 10-K have been prepared in accordance with GAAP.
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
The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, liquidity, business strategies and other factors.
The committee formulates strategies based on appropriate levels of interest rate risk.
Removed
These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession. Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets.
Added
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.
Removed
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation.
Removed
In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity. 82 Table of Contents

Other TECTP 10-K year-over-year comparisons