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Home›Financial›TECC FINA: TECTONIC FINANCIAL, INC. Discussion and analysis by management of the financial position and operating results. (form 10-K)

TECC FINA: TECTONIC FINANCIAL, INC. Discussion and analysis by management of the financial position and operating results. (form 10-K)

By Maria Bates
April 7, 2021
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This management's discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. Please see "Cautionary Statement Regarding Forward-Looking
Statements" for a discussion of the uncertainties, risks and assumptions
associated with these statements. The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with
our consolidated financial statements and accompanying notes included elsewhere
in this Annual Report on Form 10-K. Our actual results could differ
significantly from those anticipated in these estimates and in the
forward-looking statements as a result of certain factors, including those
discussed in the section of this Form 10-K captioned "Risk Factors," and
elsewhere in this Form 10-K.



Recent developments related to the COVID-19 pandemic



In March 2020, COVID-19 was declared a pandemic by the World Health Organization
and a national emergency by the President of the United States. The spread of
COVID-19 has created a global public health crisis that has resulted in
unprecedented uncertainty, volatility and disruption in financial markets and in
governmental, commercial and consumer activity in the United States and
globally, including the markets that we serve. Efforts to limit the spread of
COVID-19 have included shelter-in-place orders, the closure of non-essential
businesses, travel restrictions, supply chain disruptions and prohibitions on
public gatherings, among other things, throughout many parts of the United
States and, in particular, the markets in which we operate. The ultimate extent
of the impact of the COVID-19 pandemic on our business, financial condition and
results of operations is currently uncertain and will depend on various
developments and other factors, including, among others, the duration and scope
of the COVID-19 pandemic, the emergence of variants of the COVID-19 virus and
the effectiveness of available vaccines against the variants, as well as
governmental, regulatory and private sector responses to the COVID-19 pandemic,
and the associated impacts on the economy, financial markets and our customers,
employees, vendors and service providers.



Throughout 2020 and in response to the COVID-19 pandemic, we continued to adjust
our business practices, including restricting employee travel, encouraging
employees to work from home where possible, continuing drive-thru only service
at our bank location with specific needs facilitated by appointment, and
implementing social distancing guidelines within our offices. Many of these
measures remain in place due to the continued prevalence of the virus.



The most notable financial impact to the Company's results of operations is the
building of the allowance for loan losses, primarily as a result of continued
deterioration in macroeconomic variables such as unemployment, which are
incorporated into our economic forecasts utilized to calculate our allowance for
loan losses. See the section captioned "Allowance for Loan Losses" included
elsewhere in this discussion for further analysis of the provision for loan
losses. In addition, the Company experienced a significant decrease in brokerage
revenue within non-interest income due to a decrease in private placement and
syndicated offerings, discussed further with the section captioned "Non Interest
Income" included elsewhere in this discussion. In addition to these effects on
the Company's results of operations, the unprecedented uncertainty, volatility
and disruption in financial markets resulting from the spread of COVID-19
continues to have the potential to affect the value of our assets under
management, which could materially affect our investment advisory income, also
included within non-interest income.



In an emergency measure aimed at blunting the economic impact of COVID-19, the
Federal Reserve lowered the target for the federal funds rate to a range of
between zero to 0.25% on March 15, 2020. This action followed a prior reduction
of the targeted federal funds rate to a range of 1.0% to 1.25% on March 3, 2020.



On March 27, 2020, the CARES Act was signed into law. It contains substantial
tax and spending provisions intended to address the impact of the COVID-19
pandemic. The CARES Act included the PPP, a program administered by the SBA,
designed to aid small- and medium-sized businesses, sole proprietors and other
self-employed persons for payroll and certain other permitted expenses, through
federally guaranteed loans distributed through banks. During 2020, as an SBA
Preferred Lender, we originated 922 PPP loans totaling $98.3 million to both
existing and new customers. As of December 31, 2020, the outstanding PPP loan
balances were $82.5 million.



On December 27, 2020, the Coronavirus Response and Relief Supplemental
Appropriations Act ("Coronavirus Relief Act") was signed into law. It contains
significant additional relief programs, including the authorization of new PPP
funding and extended the authority of lenders to make PPP loans through March
31, 2021. Under the revised terms of the PPP, loans may be made to first time
borrowers as well as certain businesses that previously received a PPP loan and
experienced a significant reduction in revenue. The Company is participating in
the new round of the PPP by offering first and second draw loans. As of March
23, 2021, under the new round of PPP, we had received approximately 703
applications amounting to approximately $70.5 million with 628 applications
approved and funded totaling $62.4 million. We believe that we will be just as
effective in this round as the first round in assisting the small businesses in
our markets that continue to be impacted by the pandemic, though we expect to
make fewer PPP loans given the smaller scale and reach of the new round of the
PPP.



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We are also currently participating in the Federal Reserve's PPPLF which,
through December 31, 2020, will extend loans to banks who are loaning money to
small businesses under the PPP. The amount outstanding at December 31, 2020, was
$83.7 million and is non-recourse and secured by the amount of the PPP loans we
originate. The maturity date of a borrowing under the PPPLF is equal the
maturity date of the PPP loan pledged to secure the borrowing and would be
accelerated (i) if the underlying PPP loan goes into default and is sold to the
SBA to realize on the SBA guarantee or (ii) to the extent that any loan
forgiveness reimbursement is received from the SBA. Borrowings under the PPPLF
bear interest at a rate of 0.35% and there are no fees to us.



Federal bank regulatory agencies have issued an interim final rule that permits
banks to neutralize the regulatory capital effects of participating in the PPP
and, if applicable, the PPPLF. Specifically, all PPP loans have a zero percent
risk weight under applicable risk-based capital rules. Additionally, a bank may
exclude all PPP loans pledged as collateral to the PPPLF from its average total
consolidated assets for the purposes of calculating its leverage ratio, while
PPP loans that are not pledged as collateral to the PPPLF will be included.



As a result of the COVID-19 pandemic, we also implemented a short-term loan
modification program to provide temporary payment relief to certain of our
borrowers. This program allowed for a deferral of principal and/or interest
payments for 90 days, which may have been extended for an additional 90 days,
for a maximum of 180 days on a cumulative and successive basis. For borrowers
requiring a longer-term modification following the short-term loan modification
program, we worked with eligible borrowers to modify such loans under Section
4013 of the CARES Act. The outstanding balance at December 31, 2020 of loans
which have received such modifications was approximately $4.3 million.



We believe our response to the pandemic has allowed and continues to allow us to
appropriately support our associates and clients and their communities. The
COVID-19 pandemic contributed to an increased provision for credit losses and a
decrease in brokerage income in 2020, and an extended duration of economic
disruption resulting from the virus could lead to increased net charge-offs and
continued elevated levels of provisioning expense, as well as further decreases
in brokerage income and potentially decrease investment advisory income. We
continue to monitor the impact of the COVID-19 pandemic, the broad distribution,
administration, efficacy and public acceptance of COVID-19 vaccines, the effects
of the CARES Act and Coronavirus Relief Act and the prospects for additional
fiscal stimulus programs closely; however, the extent to which each will impact
our operations and financial results in 2021 remains uncertain, particularly
given the speed and unpredictable nature with which the pandemic is developing
and evolving.



Company Overview



We are a financial holding company headquartered in Dallas, Texas. We provide a
wide array of financial products and services including banking, trust,
investment advisory, securities brokerage, third party administration,
recordkeeping and insurance to individuals, small businesses and institutions in
all 50 states.



In January 2019, the Bank acquired Nolan, a TPA based in Overland Park, Kansas.
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. Nolan has clients in 50 states and is the
administrator for approximately 1,000 retirement plans, which represents an
increase of over 100 plans over the prior year. We believe that the addition of
TPA services allows us to serve our clients more fully and to attract new
clients to our trust platform. Please see Note 18, Nolan Acquisition, to
consolidated financial statements included in the Form 10-K for more
information.



On May 13, 2019, we completed a merger with Tectonic Holdings, through which we
expanded our financial services to include investment advisory, securities
brokerage and insurance services. Pursuant to the merger agreement, as amended
and restated, dated March 28, 2019, by and between the Company and Tectonic
Holdings, Tectonic Holdings merged with and into the Company, with the Company
as the surviving institution. Immediately after the completion of the Tectonic
Merger, the Company completed a 1-for-2 reverse stock split with respect to the
outstanding shares of its common stock. The computations of all share and per
share amounts in this Form 10-K have been adjusted retroactively to reflect the
reverse stock split.



Following the Tectonic Merger, we operate through four main direct and indirect
subsidiaries: (i) 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, 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 (iv) HWG, an insurance agency
registered with the TDI.



The Company completed the underwritten initial public offering of its Series B
preferred stock on May 14, 2019. In connection with the initial public offering,
the Company issued and sold 1,725,000 shares of its Series B preferred stock,
including 225,000 shares sold pursuant to the underwriters' full exercise of
their option to purchase additional shares, at an offering price of $10.00 per
share, for aggregate gross proceeds of $17.25 million before deducting
underwriting discounts and offering expenses, and aggregate net proceeds of
$15.5 million after deducting underwriting discounts and offering expenses.



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Prior to the Tectonic Merger, Sanders Morris and Tectonic Advisors were wholly
owned subsidiaries of Tectonic Holdings, which was under common control with the
Company. The Tectonic Merger has been accounted for as a combination of
businesses under common control in accordance with ASC Topic 805. Under Topic
805, all the assets and liabilities of Tectonic Holdings are carried over to the
books of the Company at their then current carrying amounts, and the
consolidated financial statements have been retrospectively adjusted to reflect
the acquisition of Sanders Morris, HWG and Tectonic Advisors for all periods
subsequent to the date at which the entities were under common control, May 15,
2017. All intercompany transactions and balances are eliminated in
consolidation.



Accounting policies and critical estimates



We prepare consolidated financial statements based on GAAP and to customary
practices within the financial services industry. These policies, in certain
areas, require management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. While we
base estimates on historical experience, current information and other factors
deemed to be relevant, actual results could differ from those estimates.



We consider accounting estimates to be critical to reported financial results if
(i) the accounting estimate requires management to make assumptions about
matters that are highly uncertain at the time we make the accounting estimate
and (ii) different estimates that management reasonably could have used for the
accounting estimate in the current period, or changes in the accounting estimate
that are reasonably likely to occur from period to period, could have a material
impact on the financial statements.



Estimated allowance for loan losses



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



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



We also consider other internal and external factors when determining the
allowance for loan losses, which include, but are not limited to, changes in
national and local economic conditions, loan portfolio concentrations, and
trends in the loan portfolio. Given the level of economic disruption and
uncertainty within the State of Texas and the nation as a whole, arising from
the COVID-19 pandemic and volatility, the Company qualitatively adjusted the
analysis for the allowance for loan losses for these and other risk factors as
discussed in the section captioned "Risk Factors" of this Form 10-K. Based on an
analysis performed by management at December 31, 2020, the allowance for loan
losses is believed to be adequate to cover estimated loan losses in the
portfolio as of that date based on the loan loss methodology employed by
management. However, management's judgment is based upon a number of assumptions
about future events, which are believed to be reasonable, but which may or may
not prove valid. Thus, charge-offs in future periods may exceed the allowance
for loan losses or significant additional increases in the allowance for loan
losses may be required.



Senior management and the Directors' Loan Committee review this calculation and
the underlying assumptions on a routine basis not less frequently than
quarterly. See additional discussion of the allowance for loan losses in Note 1
to our Consolidated Financial Statements.



Performance Summary



Net income available to common shareholders totaled $9.4 million, or $1.42 per
diluted common share for the year ended December 31, 2020, compared to $6.5
million, or $0.98 per diluted common share for the year ended December 31, 2019,
an increase of $2.9 million or 44.6%. The increase in net income available to
common shareholders for the year ended December 31, 2020 was the result of a
$3.6 million increase in net interest income and a $3.8 million increase in
non-interest income, offset by a $3.1 million increase in non-interest expense,
a $154,000 increase in the provision for loan losses, a $1.1 million increase in
income tax expense and a $131,000 increase in preferred stock dividends paid.



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Our accounting and reporting policies conform to GAAP and the prevailing
practices in the banking industry. However, this Form 10-K contains financial
information determined by methods other than in accordance with GAAP, which
includes return on average tangible common equity. We calculate return on
average tangible common equity as net income available to common shareholders
(net income less dividends paid on preferred stock) divided by average tangible
common equity. The most directly comparable GAAP financial measure for tangible
common equity is average total shareholders' equity. We believe these non-GAAP
measures and ratios, when taken together with the corresponding GAAP measures
and ratios, provide meaningful supplemental information regarding our
performance. We believe investors benefit from referring to these non-GAAP
measures and ratios in assessing our operating results and related trends, and
when planning and forecasting future periods. However, these non-GAAP measures
and ratios should be considered in addition to, and not as a substitute for or
preferable to, measures and ratios prepared in accordance with GAAP.



For the year ended December 31, 2020, annual return on average assets was 2.31%,
compared to 2.33% for the prior year, and annual return on average tangible
common equity was 37.68%, compared to 34.80% for the prior year. The lower
return on average assets for the year ended December 31, 2020 was due to higher
average assets related primarily to an increase in SBA loans, including PPP
loans. The higher return on average tangible common equity for the year ended
December 31, 2020 was due to increases in income, primarily from increases in
net interest income related to increases in SBA loans, including PPP loans, and
non-interest income, partially offset by increases in non-interest expense.



The following table reconciles net income to income available to common
shareholders and presents the calculation of return on average tangible common
equity:



                                                           As of and for     As of and for
                                                                the               the
                                                            Year Ended        Year Ended
                                                           December 31,      December 31,
(Dollars in thousands)                                         2020              2019
Income available to common shareholders                    $       9,373     $       6,458

Average shareholders' equity                               $      53,938     $      45,554
Less: average goodwill                                            10,729            10,771
Less: average core deposit intangible                              1,086    

1,286

Less: average preferred stock                                     17,250    

14 942

Average tangible common equity                                    24,873    

18 555

Return on average tangible common equity                           37.68 %           34.80 %




Total assets grew by $148.3 million, or 40.6%, to $513.4 million as of December
31, 2020, from $365.1 million as of December 31, 2019. This increase was
primarily due to an increase in SBA loans, including PPP loans of $82.5 million,
and $24.8 million increase in interest-bearing deposits. Our loans held for
investment, net of allowance for loan losses increased $107.9 million, or 37.2%,
to $397.6 million as of December 31, 2020, from $289.7 million as of December
31, 2019. Substantially all loans, with the exception of PPP loans, are secured
by specific collateral, including business assets, consumer assets, and
commercial real estate.



Shareholders' equity increased $9.5 million, or 18.9%, to $60.0 million as of
December 31, 2020, from $50.5 million as of December 31, 2019. See analysis of
shareholders' equity in the section captioned "Capital Resources and Regulatory
Capital Requirements" included elsewhere in this discussion.



Results of Operations


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



Net Interest Income



Net interest income is the difference between interest income on
interest-earning assets, such as loans, investment securities, and
interest-bearing cash, and interest expense on interest-bearing liabilities,
such as deposits and borrowings. Changes in net interest income result from
changes in volume and spread, and are reflected in the net interest margin, as
well as changes in average interest rates. Volume refers to the average dollar
level of interest-earning assets and interest-bearing liabilities. Spread refers
to the difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities. Margin refers to net interest
income divided by average interest-earning assets, and is influenced by the
level and relative mix of interest-earning assets and interest-bearing
liabilities.



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The Federal Reserve influences the general market rates of interest, including
the deposit and loan rates offered by many financial institutions. Interest
rates are highly sensitive to many factors that are beyond the control of the
Company, including changes in the expected rate of inflation, the influence of
general and local economic conditions and the monetary and fiscal policies of
the United States government, its agencies and various other governmental
regulatory authorities. The Federal Reserve lowered the target range for federal
funds rate three times during 2019 and two times in 2020. During 2019, the
effective federal funds rate decreased 50 basis points during the third quarter
of 2019 (25 basis points in each of August and September) and 25 basis points in
October 2019 to end the year at 1.50% to 1.75%. During 2020, the effective
federal funds rate decreased 150 basis points during March 2020 (50 basis points
on March 3, 2020 and 100 basis points on March 15, 2020) to zero to 0.25%, where
it remained through December 31, 2020.



The following tables presents the changes in net interest income and identifies
the changes due to differences in the average volume of interest-earning assets
and interest-bearing liabilities and the changes due to changes in the average
interest rate on those assets and liabilities. The changes in net interest
income due to changes in both average volume and average interest rate have been
allocated to the average volume change or the average interest rate change in
proportion to the absolute amounts of the change in each.



                                                                      2020 vs 2019
                                                          Increase (Decrease) Due to Change in
                                                                         Average
(In thousands)                                         Rate               Volume             Total

Interest-bearing deposits and sale of federal funds (242) $

      75       $      (167 )
Securities                                                   (31 )               92                61
Loans, net of unearned discount (1)                       (2,608 )            5,339             2,731
Total earning assets                                      (2,881 )            5,506             2,625

Savings and interest-bearing demand                           (6 )                7                 1
Money market deposit accounts                               (556 )              220              (336 )
Time deposits                                             (1,127 )              663              (464 )
FHLB and other borrowings                                   (210 )              125               (85 )
Subordinated notes                                           (48 )               (1 )             (49 )
Total interest-bearing liabilities                        (1,947 )            1,014              (933 )

Changes in net interest income                     $        (934 )     $      4,492       $     3,558




  (1) Average loans include non-accrual.




Net interest income increased $3.6 million, or 29.5%, to $15.6 million for year
ended December 31, 2020, compared to the year ended December 31, 2019, due
primarily to an increase in the average volume of loans and decrease in average
rates paid on interest-bearing deposits and borrowings, partly offset by a
decrease in average yields on earning assets and increase in average volume of
interest-bearing deposits and borrowings. Net interest margin decreased 40 basis
points from 3.90 % for the year ended December 31, 2019, to 3.50% for the year
ended December 31, 2020, due primarily to the decrease in average yields on
loans and interest-bearing deposits and federal funds sold, partially offset by
the decrease in average rates paid on interest-bearing deposits and borrowed
funds.



The average volume of interest-earning assets increased $137.7 million, or
44.6%, for 2020 compared to 2019. The average volume of loans increased $101.1
million, or 36.7%, from $275.0 million for the year ended December 31, 2019, to
$376.1 million for the year ended December 31, 2020. PPP loans account for $63.9
million of the average volume increase. In April 2020, we began originating
loans bearing a 1.00% interest rate to qualified small businesses under the PPP
administered by the SBA under the provisions of the CARES Act, which also had an
impact on liquidity, resulting in an increase of $34.0 million in average
interest-bearing deposits for the year ended December 31, 2020, compared to the
year ended December 31, 2019. The average yield on loans decreased 96 basis
points from 6.26% for the year ended December 31, 2019 to 5.30% for the year
ended December 31, 2020. The yield on loans was negatively impacted by the
aforementioned decrease in market interest rates. During 2020, the recognition
of net deferred PPP loan fees totaling $1.8 million was included as a yield
adjustment, and this amount was included in loan interest income. As a result of
the inclusion of these net fees in interest income, the average yield on PPP
loans was approximately 3.82% during 2020, negatively impacting the average
yield on loans. As of December 31, 2020, we expect to recognize additional PPP
loan related deferred fees (net of deferred origination costs) totaling
approximately $1.6 million as a yield adjustment over the remaining terms of
these loans, most of which is expected to be recognized in 2021. For the year
ended December 31, 2020, net discount accretion for acquired loans resulted in
additional income of $621,000, compared to $458,000 for the year ended December
31, 2019. The average yield on interest-bearing deposits decreased 195 basis
points from 2.17% for the year ended December 31, 2019 to 0.22% for the year
ended December 31, 2020.



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The average volume of interest-bearing liabilities increased $112.3 million, or
45.0%, for 2020 compared to 2019. The average volume of interest-bearing
deposits increased $80.3 million, or 35.5%, to $306.7 million for the year ended
December 31, 2020, compared to $226.4 million for the year ended December 31,
2019, while non-interest bearing deposits increased $15.4 million in 2020
compared to 2019. The average interest rate paid on interest-bearing deposits
decreased 84 basis points from 2.22% for the year ended December 31, 2019 to
1.38% for the year ended December 31, 2020. The average cost of deposits during
the year ended December 31, 2020 was impacted by decreases in interest rates
paid on money market and time deposits as a result of the aforementioned
decrease in market interest rates. The average volume of FHLB and other
borrowings increased $32.0 million, or 279.2%, from $11.4 million for the year
ended December 31, 2019, to $43.4 million for the year ended December 31, 2020,
as funding from the PPPLF program, at an interest rate of 0.35%, was used to
fund the PPP loans. The average cost of FHLB and other borrowings decreased 227
basis points from 2.66% for the year ended December 31, 2019 to 0.39% for the
year ended December 31, 2020.



The following table sets forth our average balances of assets, liabilities and
shareholders' equity, in addition to the major components of net interest income
and our net interest margin, for the years ended December 31, 2020 and 2019.



                                                               Year Ended December 31,
                                                   2020                                      2019
(In thousands, except               Average                     Average       Average                     Average
percentages)                        Balance      Interest        Yield        Balance      Interest        Yield
Assets
Interest-bearing deposits and
federal funds sold                 $  46,395     $     103          0.22 %   $  12,434     $     270          2.17 %
Securities                            23,868           839          3.52        21,221           778          3.67
Loans, net of unearned discount
(1)                                  376,088        19,936          5.30       275,025        17,205          6.26
Total earning assets                 446,351        20,878          4.68       308,680        18,253          5.91
Cash and other assets                 29,395                                    29,890
Allowance for loan losses             (2,285 )                                  (1,089 )
Total assets                       $ 473,461                                 $ 337,481
Liabilities and Shareholders'
Equity
Savings and interest-bearing
demand                             $   9,977            31          0.31 %   $   7,740            30          0.39 %
Money market deposit accounts         96,582           505          0.52        54,609           841          1.54
Time deposits                        200,159         3,687          1.84       164,007         4,151          2.53
Total interest-bearing deposits      306,718         4,223          1.38       226,356         5,022          2.22
FHLB and other borrowings             43,411           171          0.39        11,449           305          2.66
Subordinated notes                    12,000           875          7.29        12,000           875          7.29
Total interest-bearing
liabilities                          362,129         5,269          1.46       249,805         6,202          2.48
Non-interest-bearing deposits         51,168                                    35,786
Other liabilities                      6,226                                     6,336
Total liabilities                    419,523                                   291,927
Shareholders' equity                  53,938                                    45,554
Total liabilities and
shareholders' equity               $ 473,461                                 $ 337,481

Net interest income                              $  15,609                                 $  12,051
Net interest spread                                                 3.22 %                                    3.43 %
Net interest margin                                                 3.50 %                                    3.90 %



(1) Includes loans without accrual accounting.


Provision for Loan Losses



We determined a provision for loan losses that we consider sufficient to
maintain an allowance to absorb probable losses inherent in our portfolio as of
the balance sheet date. For additional information concerning this
determination, see the section captioned "Allowance for Loan Losses" elsewhere
in this discussion.



For the years ended December 31, 2020 and 2019, we recorded a provision for loan
losses totaling $1.7 million and $1.6 million, respectively. See the section
captioned "Allowance for Loan Losses" included elsewhere in this discussion for
further analysis of the provision for loan losses.



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Non-Interest Income


The components of non-interest income were as follows:


                                  Year Ended December 31,
(In thousands)                      2020             2019
Trust income                    $      5,118       $   5,073
Gain on sale of loans                    722             427
Advisory income                       14,054           9,869
Brokerage income                       7,589           9,592
Service fees and other income          5,832           4,507
Rental income                            319             336
Total                           $     33,634       $  29,804




Total non-interest income for the year ended December 31, 2020 increased $3.8
million, or 12.9%, as compared to the year ended December 31, 2019. Changes in
the various components of non-interest income are discussed below.



Trust Income. Trust income is earned for trust services on the value of managed
and non-managed assets held in custody. The volatility of the bond and equity
markets impacts the market value of trust assets and the related fees. Trust
income for the year ended December 31, 2020 increased $45,000, or 0.9%, compared
to the year ended December 31, 2019. The fee income increased between the two
years due to an increase in the average market value of the trust assets over
the year ended December 31, 2020.



Gain on sale of loans. Gain on sale of loans primarily reflects the gain from
the sale of the guaranteed portion of SBA 7(a) and USDA loans originated by the
Bank's SBA lending group. Gain on sale of loans increased $295,000, or 69.1%,
for the year ended December 31, 2020, compared to the year ended December 31,
2019. A strategic decision on the part of management was made during 2017 to
retain more of the guaranteed portion of SBA 7(a) and USDA loans originated to
increase interest income over time. This decision meant that the guaranteed
portion of fewer SBA and USDA loans were sold after such date, declining to
$183,000 for the year ended December 31, 2018. During the fourth quarter 2019,
sales of loans resumed, resulting in $427,000 of gain on sale of loans for the
year ended December 31, 2019, and sales of loans increased further during the
year ended December 31, 2020, to $722,000.



Advisory income. Advisory fees are typically based on a percentage of the
underlying average asset values for a given period, where each percentage point
represents 100 basis points. These revenues are of a recurring nature but are
directly affected by increases and decreases in the values of the underlying
assets. In addition to fees based on a percentage of underlying assets, payments
under certain advisory agreements at Sanders Morris are based on the performance
of the respective account, measured as a percentage of the increase achieved in
the asset values in the respective account. Performance based fees, though the
agreements may remain in place from year to year, are far less predictable,
given the uncertainty of the ability to achieve an increase of the same level as
in prior periods, or at all. For the year ended December 31, 2020, advisory
income increased $4.2 million, or 42.4%, compared to the year ended December 31,
2019. This increase was primarily due to an increase in performance based
advisory fees at Sanders Morris, combined with an increase in the market value
of the assets on which Tectonic Advisors earned advisory fees, during the year
ended December 31, 2020.



Brokerage income. Brokerage revenues are generally based on a per share fee or
commission to trade a share of a particular stock, bond or other security. In
addition, brokerage revenues in this context include private placements,
participation in syndication of public offerings, and certain other brokerage
revenues, including interest earned on margin lending. Brokerage revenue is
dependent on the volume of trading, cash held in brokerage accounts which funds
margin lending, and on private placement and syndication activity during the
period. Brokerage income for the year ended December 31, 2020 decreased $2.0
million, or 20.9%, compared to the year ended December 31, 2019. This decrease
is primarily due to sharp decreases in private placement and syndicated offering
activity due to market instability and the difficulties associated with
performing due diligence during the COVID-19 pandemic, and decreases in activity
in certain segments of traditional brokerage activity.



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The table below reflects a rollforward of our client assets, which includes both
advisory and brokerage assets, as of December 31, 2020 and 2019, and the inflows
and outflows and market appreciation/(depreciation) during the years then ended.
Our brokerage and advisory assets experienced an increase of approximately $479
million, or 11.8%, and $732 million, or 22.1%, during the years ended December
31, 2019 and 2020, respectively, related to positive net flows and market
appreciation.



(In thousands)             Tectonic Advisors       Sanders Morris         Total
As of January 1, 2019     $         1,736,637     $      1,576,214     $  3,312,851
Client inflows                        608,578              634,315        1,242,893
Client outflows                      (511,970 )           (502,303 )     (1,014,273 )
Net flows                              96,608              132,012          228,620
Market appreciation                   224,325              279,422          503,747
As of December 31, 2019             2,057,570            1,987,648        4,045,218
Client inflows                        491,411              951,841        1,443,252
Client outflows                      (430,773 )           (866,166 )     (1,296,939 )
Net flows                              60,638               85,675          146,313
Market appreciation                   215,829              117,016          332,845
As of December 31, 2020   $         2,334,037     $      2,190,339     $  4,524,376




Service fees and other income. Service fees includes fees for deposit-related
services, and third party administrative fees related to the acquisition of
Nolan. Service fees and other income for the year ended December 31, 2020
increased $1.3 million, or 29.4%, compared to the year ended December 31, 2019,
which was primarily due to an increase in the administrative fees recorded for
services provided by Nolan of $800,000, an increase in net loan servicing fees
of $267,000 primarily due to reversal of the servicing asset valuation
allowance, an increase in other income of approximately $124,000 related to a
non-recurring extinguishment of a retirement liability during the second quarter
of 2020, and bad debt expense recognized during the second quarter of 2019 of
approximately $51,000, as well as immaterial fluctuations in other income and
gains and losses on marketable securities at Sanders Morris.



Rental income. The Company receives monthly rental income from tenants leasing
space in the Bank building. Rental income for the year ended December 31, 2020
decreased $17,000, or 5.1%, compared to the year ended December 31, 2019 due to
the granting of rent abatements related to the COVID-19 pandemic and one
tenant's lease reaching the end of its term and subsequent nonrenewal during the
second quarter of 2020.



Non-Interest Expense


The components of non-interest expense were as follows:



                                        Year Ended December 31,
(In thousands)                            2020             2019

Salaries and Benefits $ 22,144 $ 18,488
Occupancy and equipment

                      2,339           2,684
Trust expenses                               1,994           2,004
Brokerage and advisory direct costs          2,048           1,765
Professional fees                            1,345           1,701
Data processing                                856             981
Other expense                                2,886           2,896
Total                                 $     33,612       $  30,519




Total non-interest expense for the year ended December 31, 2020 increased $3.1
million, or 10.1%, compared to the year ended December 31, 2019. Changes in the
various components of non-interest income are discussed below.



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Salaries and employee benefits. Salaries and employee benefits include employee
payroll expense, incentive compensation, health insurance, benefit plans and
payroll taxes. Salaries and employee benefits increased $3.6 million, or 19.8%,
from $18.5 million for the year ended December 31, 2019 to $22.1 million for the
year ended December 31, 2020. In our other financial services segment,
commissions paid at Sanders Morris during the fourth quarter related to the
sharp increase in performance-based advisory fees,  discussed above under
advisory income within non-interest income, accounted for $2.7 million of this
increase, offset by decreases in commissions, including those for traditional
brokerage activity, of approximately $150,000. Salaries at the Bank's Nolan
division increased $570,000 related to staff increases to accommodate the
increase in the number of plans administered and merit increases, and salaries
at Tectonic Advisors increased $180,000 related to merit increases and the
conversion of a part-time employee to full-time. These increases were offset by
a decrease in salaries in our trust group within our other financial services
segment of $50,000.  Salaries in our banking division increased $124,000, and
stock-based compensation recognized at our parent company increased $43,000.
Insurance related benefits overall increased approximately $110,000.  The
remaining increase is made up of increases in workers' compensation coverage and
pension administration fees for our qualified plans.



Occupancy and equipment expense. Occupancy and equipment expense includes
building, furniture, fixtures and equipment depreciation and maintenance costs.
Occupancy and equipment expense decreased $345,000, or 12.9%, from $2.7 million
for the year ended December 31, 2019 to $2.3 million for the year ended December
31, 2020. The decrease is primarily due to a group of fixed assets and software
costs reaching full depreciation/amortization early in the second quarter 2020,
which decreased depreciation by $325,000, and a decrease in costs at our Bank
facilities of $40,000, as well as immaterial decreases in rent, parking expense,
property taxes, and repairs. These decreases were offset by an increase in
utilities and telephone expense of $47,000.



Trust expenses. Trust expenses include advisory fees paid on the common trust
funds managed by the Company based on the value of the assets held in custody.
The volatility of the bond and equity markets impacts the market value of trust
assets and the related expenses. The monthly advisory fees are assessed based on
the market value of assets at month-end. Trust expenses decreased by $10,000 for
the year ended December 31, 2020 as compared to the year ended December 31,
2019.



Brokerage and advisory direct costs. Brokerage and advisory direct costs
increased $283,000, or 16.0%, from $1.8 million for the year ended December 31,
2019 to $2.0 million for the year ended December 31, 2020, related to an
increase in clearing firm and other service fees of $162,000, which includes
fees charged on advisory income as well as brokerage income, and an increase of
$183,000 in exchange clearing fees related to certain activities undertaken
where fees tend to be higher. These increases were offset by a decrease in
referral fees of $24,000 and a decrease in information services related to
discontinuance of certain information services of $38,000.



Professional fees. Professional fees, which include legal, consulting, audit and
tax fees, decreased $356,000, or 20.9%, from $1.7 million for the year ended
December 31, 2019 to $1.3 million for the year ended December 31, 2020. The
decreases included a decrease in legal fees of $260,000, which was made up of a
decrease of $165,000 in our other financial services segment, $91,000 in our
banking segment, and $4,000 in our HoldCo segment. These decreases were
primarily related to costs incurred in 2019 related to legal and regulatory
matters at Sanders Morris and legal review of our initial public filings in
2019. Audit and tax consulting expense decreased $117,000, due primarily to fees
for review of our public filings in 2019. Professional fees expense increased
$22,000, related to an increase of $150,000 in consulting expense related to the
participant directed retirement plan platform for trust clients, a portion of
which was related to expense incurred to compensate for a terminated employee,
which was partially offset by a decrease in professional fees of $75,000 at
Sanders Morris related to employee recruitment fees of $45,000 and initial work
on external review of our cybersecurity measures in late, and a decrease in
professional fees in our banking segment of $104,000.



Data processing. Data processing includes costs related to the Company's
operating systems. Data processing expense decreased $125,000, or 12.7% for the
year ended December 31, 2020, compared to the year ended December 31, 2019. The
decrease was due to decreases in data processing expense at the Bank's trust
department of $53,000, and at Sanders Morris and Tectonic Advisors of $38,000,
offset by a $4,000 increase at the Nolan division, and a decrease in data
processing in our banking segment of $36,000, and of $2,000 at our HoldCo
segment.



Other expense. Other expenses include costs for insurance, Federal Deposit
Insurance Corporation ("FDIC") and Office of the Comptroller of the Currency
("OCC") assessments, director fees, and regulatory filing fees related to our
brokerage business, business travel, management fees, and other operational
expenses. Other expense decreased $10,000, or 0.3%, for the year ended December
31, 2020, compared to the year ended December 31, 2019. The decrease includes
decreases in travel, meals and entertainment expense of $290,000 related to the
general decrease in travel and in-person events related to the Covid-19 pandemic
and the downturn in private and syndicated offerings, $300,000 for a settlement
fee related to a client matter at Sanders Morris incurred during the third
quarter of 2019, and $117,000 in management fees to third parties, among other
things. These decreases were partly offset by increases related to our status as
a public filing entity, including $95,000 in our directors' and officers'
insurance, $17,000 in our professional liability coverage, $34,000 in our
directors' fees related to our board being in place for the full year 2020,
$50,000 in filing fees, and $36,000 in compliance costs. Other increases include
$150,000 in FDIC insurance premiums, $80,000 in operating losses, $56,000 in
employee recruitment primarily related to an increase in staffing in the bank's
SBA group, $79,000 in computer services and software licenses, $46,000 in gifts
and donations, and $34,000 in public relations and marketing, among other
things.



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Income Taxes



The income tax expense for the years ended December 31, 2020 and 2019 was $3.0
million and $1.9 million, respectively. The effective income tax rate was 21.5%
and 19.4% for the years ended December 31, 2020 and 2019, respectively. The
effective income tax rate for the year ended December 31, 2019 differed from the
U.S. statutory rate of 21% primarily due to Tectonic Advisors and Sanders
Morris' tax status as partnerships for the periods prior to May 13, 2019, the
date the Tectonic Merger was completed.



Segment Reporting


We have three operational segments: Banking, Other financial services and HoldCo. Our main operating segments are the Bank and Other financial services.

Our Banking operating segment includes both business and consumer banking services. Commercial banking services are primarily provided to small and medium-sized businesses and their employees, which includes a wide range of loan and cash management products. Consumer banking services include loan and deposit services.



Our Other Financial Services segment includes Tectonic Advisors, Sanders Morris,
the Bank's Trust Division, which includes a TPA services unit, and HWG. Through
these business divisions, we offer investment advisory and brokerage services to
individuals and businesses, private trust services, and financial management
services, including personal wealth management, retirement plan design and
administrative services, and insurance brokerage services.



A third operational segment, HoldCo, includes the immediate parent company of the Bank and the associated subordinated debt, as well as the operations of the financial holding company which serves as the parent company for the whole group. Our main sources of income are dividends from our subsidiaries.

The following table presents the key indicators related to our segments:


                                                     Year Ended December 31, 2020
                                                       Other
                                                     Financial
(In thousands)                       Banking          Services          HoldCo         Consolidated
Revenue(1)                         $    17,976     $       32,120     $      (853 )   $       49,243
Net income (loss) before taxes     $     8,032     $        7,808     $    (1,918 )   $       13,922




                                                     Year Ended December 31, 2019
                                                       Other
                                                     Financial
(In thousands)                       Banking          Services          HoldCo         Consolidated
Revenue(1)                         $    13,829     $       28,924     $    

(898) $ 41,855
Net profit (loss) before tax $ 4,153 $ 7,390 ($ 1,762) $ 9,781

(1) Net interest income plus non-interest income



Banking



Income before taxes for the year ended December 31, 2020 increased $3.9 million,
or 93.4%, compared to the year ended December 31, 2019. The increase was
primarily the result of a $3.5 million increase in net interest income and a
$632,000 increase in non-interest income, partly offset by a $154,000 increase
in the provision for loan losses and a $114,000 increase in non-interest
expense.



Net interest income for the year ended December 31, 2020 increased $3.5 million,
or 27.1%, compared to the year ended December 31, 2019, due to an increase in
the average volume of loans and a decrease in average rates paid on
interest-bearing deposits and borrowings, partly offset by a decrease in average
yields on earning assets and increase in average volume of interest-bearing
deposits and borrowings. See the analysis of net interest income included in the
section captioned "Net Interest Income" included elsewhere in this discussion.



The provision for loan losses for the year ended December 31, 2020 increased
$154,000, or 9.9%, to $1.7 million, compared to $1.6 million for the year ended
December 31, 2019. See "Allowance for Loan Losses" included elsewhere in this
discussion.



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Non-interest income for the year ended December 31, 2020 increased $632,000, or
73.5%, compared to the year ended December 31, 2019, which was primarily due to
a $354,000 increase in service fees, primarily the net loan servicing fees and a
$295,000 increase in gain on sale of loans, partially offset by a $17,000
decrease in rental income, partly offset by. The increase in net loan servicing
income was the result of reversing the allowance valuation allowance for loan
servicing assets during year ended December 31, 2020. 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, 2020 increased $114,000, or
1.4%, compared to the year ended December 31, 2019. The increase was primarily
related to increases in salaries and employee benefits and other operating
expenses or $163,000 and $158,000, respectively, partly offset by decreases in
professional fees of $145,000 and in data processing expense of $36,000, and a
decrease of $26,000 in occupancy and equipment expenses. See the analysis of
non-interest expense included in the section captioned "Non-Interest Expense"
included elsewhere in this discussion.



Other Financial Services



Income before taxes for the year ended December 31, 2020 increased $418,000, or
5.7%, compared to the year ended December 31, 2019. The increase was primarily
the result of a $3.2 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, 2020 increased $3.2 million,
or 11.0%, compared to the year ended December 31, 2019. The increase was
primarily due to increases in advisory fees, including performance-based
advisory fees, totaling $4.2 million, related to increases in our assets under
management and performance of a group of accounts at Sanders Morris on which
performance-based fees are earned, and an increase in service fees and other
income of $969,000, which was primarily related to third party administration
fees at Nolan of $800,000 and an increase in other income of approximately
$124,000 related to a non-recurring extinguishment of a retirement liability
during the second quarter of 2020,and bad debt expense recognized during the
second quarter of 2019 of approximately $51,000, as well as immaterial
fluctuations in other income and gains and losses on marketable securities at
Sanders Morris, and a small increase in trust income. These increases were
partly offset by a decrease in brokerage fees of $2.0 million primarily related
to a sharp decrease in private and syndicated offerings. 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, 2020 increased $2.8
million, or 12.9%, compared to the year ended December 31, 2019. The increase
was due to an increase in salaries and employment benefits of $3.3 million
related to commissions paid at Sanders Morris during the fourth quarter related
to the sharp increase in performance-based advisory fees, and to personnel
increases at Nolan and merit increases, and to increases of $283,000 in
brokerage and advisory direct costs from increases in certain segments of
brokerage activity and related exchange and clearing firm service fees, and
information services expense. These increases were partly offset by decreases in
occupancy and equipment expense of $319,000 related to software that became
fully depreciated as of April 2020, $100,000 in professional fees, $276,000 in
other expenses, $86,000 in data processing expense, and $10,000 in trust
expense. See also the analysis of non-interest income included in the section
captioned "Non-Interest Expense" included elsewhere in this discussion.



HoldCo



The net loss before taxes at the HoldCo operating segment increased by $156,000
during the year ended December 31, 2020 compared to the year ended December 31,
2019. The increase in the loss resulted from an increase in salaries and
employee benefits, and other expenses, partially offset by decreases in
professional fees and payroll processing costs, and the loss recognized in 2019
related to the redemption of the Series A preferred stock, and a decrease in
interest expense on borrowings.



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. Securities are
classified as available for sale when we intend to hold for an indefinite period
of time but might be sold before maturity. Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported as a
separate component of stockholders' equity as other comprehensive income (loss),
net of tax. Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity.



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As of December 31, 2020 and 2019, securities available for sale consisted of
U.S. government agency securities and mortgage-backed securities guaranteed by
U.S. government agencies. Securities held to maturity consisted of Property
Assessed Clean Energy investments. These investment contracts or bonds, located
in California and Florida, originate under a contractual obligation between the
property owners, the local county administration, and a third-party
administrator and sponsor. The assessments are created to fund the purchase and
installation of energy saving improvements to the property, such as solar
panels. Generally, as a property assessment, the total assessment is repaid in
installments over a period of up to 15 years by the then current property
owner(s). Each installment is collected by the County Tax Collector where the
property is located. The assessments are an obligation of the property. Each
assessment is equal in priority to the other property taxes and assessments
associated with the property, including local school, city, and county
ad-valorem taxes.



Restricted securities consisted of FRB stock, having an amortized cost and fair
value of $1.2 million as of December 31, 2020 and 2019, respectively, and FHLB
stock, having an amortized cost and fair value of $1.3 million and $1.2 million
as of December 31, 2020 and 2019, respectively.



Hard-to-market securities consist of interest income in a private placement.

The following table shows the amortized cost and fair values ​​of the securities portfolio on the dates indicated:


                                          As of December 31, 2020              As of December 31, 2019
                                       Amortized           Estimated        Amortized           Estimated
(In thousands)                            Cost            Fair Value           Cost            Fair Value
Securities available for sale:
U.S. government agencies              $     14,936       $      14,949     $     10,684       $      10,731
Mortgage-backed securities                   2,373               2,447            1,925               1,946

Total titles available for sale $ 17,309 $ 17,396 $ 12,609 $ 12,677

Securities held to maturity:
Property assessed clean energy        $      5,776       $       5,776     $      6,349       $       6,349

Securities, restricted:
Other                                 $      2,431       $       2,431     $      2,417       $       2,417

Difficult to negotiate securities $ 100 $ 100 $ 100 $ 100




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The following table summarizes the maturity distribution schedule with
corresponding weighted-average yields of securities available for sale and
securities held to maturity as of December 31, 2020. Yields are calculated based
on amortized cost. Mortgage-backed securities are included in maturity
categories based on their stated maturity date. Expected maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations. Other securities classified as restricted include stock in the FRB
and the FHLB, which have no maturity date. These securities have been included
in the total column only and are not included in the total yield.



                                                                            Maturing
                                                 After One Year          After Five Years
                           One Year                  Through                  Through                  After
                            or Less                Five Years                Ten Years               Ten Years                 Total
(In thousands,
except
percentages)          Amount       Yield        Amount      Yield        Amount       Yield      Amount      Yield       Amount      Yield
Securities
available for
sale:
U.S. government
agencies             $      -            - %   $  1,472       1.11 %   $   

8,995 1.01% $ 4,469 1.05% $ 14,936 1.03% Mortgage Backed Securities

                  -            -        1,074       3.05          

– – 1,299 1.91 2,373 2.43 Total

                $      -            - %   $  2,546       1.93 %   $    8,995       1.01 %   $ 5,768       1.25 %   $ 17,309       1.22 %
Securities held to
maturity:
Property assessed
clean energy         $      -            - %   $    554       6.34 %   $    2,473       5.71 %   $ 2,749       7.32 %   $  5,776       6.54 %
Securities,
restricted:
Other                $      -            - %   $      -          - %   $        -          - %   $     -          - %   $  2,431          - %
Securities not
readily marketable
                     $      -            - %   $      -          - %   $        -          - %   $     -          - %   $    100          - %



Composition of the loan portfolio



Total loans excluding allowance for loan losses, increased $109.5 million, or
37.6%, to $400.5 million at December 31, 2020, compared to $291.1 million at
December 31, 2019. The increase includes PPP loans totaling $82.5 million, or
20.6% of total loans at December 31, 2020. As further discussed below, during
the second quarter of 2020, the Company began originating loans to qualified
small businesses under the PPP administered by the SBA under the provisions of
the CARES Act. Excluding PPP loans, total loans would have otherwise increased
$27.0 million, or 9.3%, from December 31, 2019. SBA loans comprise the largest
group of loans in our portfolio totaling $252.4 million, or 63.0% (53.4%
excluding PPP) of the total loans at December 31, 2019, compared to $169.9
million, or 48.0% at December 31, 2019. Commercial and industrial loans totaled
$79.9 million, or 19.9% (25.1% excluding PPP) of the total loans at December 31,
2020, compared to $85.5 million, or 29.4%, at December 31, 2019. Commercial and
construction real estate loans totaled $52.9 million, or 13.2% (16.6% excluding
PPP), of the total loans at December 31, 2020, compared to $54.8 million, or
18.8%, at December 31, 2019.



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



(In thousands)                      2020          2019          2018          2017          2016
Loans held for investment at
December 31,
Commercial and industrial         $  79,864     $  85,476     $  88,915     $  86,552     $  81,945
Consumer installment                 10,259         3,409         3,636         4,483         3,749
Real estate - residential             4,319         5,232         7,488         6,826         6,531
Real estate - commercial             44,484        46,981        35,221        19,203        20,042
Real estate - construction and
land                                  8,396         7,865         4,653         8,477         6,335
SBA 7(a) guaranteed                 164,687        69,963        33,884        11,826             -
SBA 7(a) unguaranteed                52,179        47,132        44,326        41,373        29,859
SBA 504                              35,553        22,591        13,400        17,109         9,825
USDA                                    801         2,430         3,367         3,415         3,589
Other                                     -             -            17             2             6
Total Loans                       $ 400,542     $ 291,079     $ 234,907     $ 199,266     $ 161,881




The Company initially records the guaranteed portion of the SBA 7(a) and USDA
loans as held for sale at the lower of cost or fair value. Loans held for sale
totaled $14.9 million and $9.9 million at December 31, 2020 and 2019,
respectively. During the year ended December 31, 2020, the Company elected to
reclassify $26.4 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.



Loan Origination/Risk Management. The Company has certain lending policies and
procedures in place that are designed to maximize loan income with an acceptable
level of risk. Management reviews and approves these policies and procedures on
an annual basis and makes changes as appropriate. Management receives and
reviews monthly reports related to loan originations, loan quality,
concentrations of credit, loan delinquencies and nonperforming and potential
problem loans. Diversification in the loan portfolio is a means of managing risk
associated with fluctuations in economic conditions, both by type of loan and
geographic location.



Commercial and industrial loans, which are predominantly loans to dentists, are
underwritten based on historical and projected income of the business and
individual borrowers and guarantors. The Company utilizes a comprehensive global
debt service coverage analysis to determine debt service coverage ratios. This
analysis compares global cash flow of the borrowers and guarantors on an
individual credit to existing and proposed debt after consideration of personal
and business related other expenses. Collateral is generally a lien on all
available assets of the business borrower including intangible assets. Credit
worthiness of individual borrowers and guarantors is established through the use
of credit reports and credit scores.



Consumer loans are evaluated on the basis of credit worthiness as established
through the use of credit reports and credit scores. Additional credit quality
indicators include borrower debt to income ratios based on verifiable income
sources.



Real estate mortgage loans are evaluated based on collateral value as well as
global debt service coverage ratios based on historical and projected income
from all related sources including the collateral property, the borrower, and
all guarantors where applicable.



The Company originates SBA loans which are sometimes sold into the secondary
market. The Company continues to service these loans after sale and is required
under the SBA programs to retain specified amounts. The two primary SBA loan
programs that the Company offers are the basic SBA 7(a) loan guaranty program
and the SBA 504 loan program in conjunction with junior lien financing from a
Certified Development Company ("CDC"). During the year ended December 31, 2020,
the Bank added two additional business development officers to its SBA personnel
and began development on an updated SBA loan processing platform to enhance
efficiency.



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



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



The SBA has designated the Bank as “Preferred Lender”. As a preferred lender, the Bank has been delegated loan approval, closing, and most management and liquidation powers from the SBA.



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



Construction and land development loans are evaluated based on the borrower's
and guarantor's credit worthiness, past experience in the industry, track record
and experience with the type of project being considered, and other factors.
Collateral value is determined generally by independent appraisal utilizing
multiple approaches to determine value based on property type.



For all types of loans, the company establishes guidelines for its underwriting criteria, including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturities.



Loan concentrations are considered to exist when there are amounts loaned to
multiple borrowers engaged in similar activities that would cause them to be
similarly impacted by economic or other conditions. As of December 31, 2020, our
loan portfolio included $67.2 million of loans, approximately 16.8% (21.1%
excluding PPP) of our total funded loans, to the dental industry, compared to
$69.2 million, or 23.8% of total funded loans, as of December 31, 2019. We
believe that these loans are to credit worthy borrowers and are diversified
geographically.



Paycheck Protection Program



In April 2020, we began originating loans to qualified small businesses under
the PPP administered by the SBA under the provisions of the CARES Act. Loans
covered by the PPP may be eligible for loan forgiveness for certain costs
incurred related to payroll, group health care benefit costs and qualifying
mortgage, rent and utility payments. The remaining loan balance after
forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the
PPP loans include the following (i) maximum amount limited to the lesser of $10
million or an amount calculated using a payroll-based formula, (ii) maximum loan
term of two years, (iii) interest rate of 1.00%, (iv) no collateral or personal
guarantees are required, (v) no payments are required for six months following
the loan disbursement date and (vi) loan forgiveness up to the full principal
amount of the loan and any accrued interest, subject to certain requirements
including that no more than 40% of the loan forgiveness amount may be
attributable to non-payroll costs. In return for processing and booking the
loan, the SBA will pay the lender a processing fee tiered by the size of the
loan (5% for loans of not more than $350 thousand; 3% for loans more than $350
thousand and less than $2 million; and 1% for loans of at least $2 million).
During the three months ended June 30, 2020, we originated $98.3 million of PPP
loans, and received $4.4 million of related fees from the SBA. We deferred $3.4
million of the fees, net of $966,000 which was offset against the costs incurred
to originate these loans. Through December 31, 2020, we recognized $1.8 million
of the deferred fees in income. There were no PPP loans originated from July 1,
2020 through December 31, 2020.



We are also participating in the PPPLF which, through June 30, 2021, will extend
loans to banks who are loaning money to small businesses under the PPP. The
total amount borrowed under the PPPLF as of December 31, 2020 was $83.7 million
and is non-recourse and secured by an equal amount of the PPP loans we
originated. The maturity date of a borrowing under the PPPLF is equal to the
maturity date of the PPP loan pledged to secure the borrowing and would be
accelerated (i) if the underlying PPP loan goes into default and is sold to the
SBA to realize on the SBA guarantee or (ii) to the extent that any loan
forgiveness reimbursement is received from the SBA. Borrowings under the PPPLF
will bear interest at a rate of 0.35%.



Federal bank regulatory agencies have issued an interim final rule that permits
banks to neutralize the regulatory capital effects of participating in the PPP
and, if applicable, the PPPLF. Specifically, all PPP loans have a zero percent
risk weight under applicable risk-based capital rules. Additionally, a bank may
exclude all PPP loans pledged as collateral to the PPPLF from its average total
consolidated assets for the purposes of calculating its leverage ratio, while
PPP loans that are not pledged as collateral to the PPPLF will be included.



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As of December 31, 2020, 39.9% of the loan portfolio, or $159.9 million, matured
or re-priced within one year or less. The following table presents the
contractual maturity ranges for commercial, consumer and real estate loans
outstanding as of December 31, 2020 and 2019, and also presents for each
maturity range the portion of loans that have fixed interest rates or variable
interest rates over the life of the loan in accordance with changes in the
interest rate environment as represented by the base rate:



                                                               As of December 31, 2020
                                              Over 1 Year through 5 Years                  Over 5 Years
                                                                 Floating or                        Floating or
                         One Year or                             Adjustable                         Adjustable
(In thousands)              Less            Fixed Rate              Rate           Fixed Rate          Rate            Total
Commercial and
industrial              $      11,330     $         9,631       $       6,937     $     51,391     $         575     $  79,864
Consumer installment            6,015               4,231                   -               13                 -        10,259
Real estate -
residential                       768               3,551                   -                -                 -         4,319
Real estate -
commercial                      3,410               7,628              23,790            2,130             7,526        44,484
Real estate -
construction and land           1,690               2,344               4,159               20               183         8,396
SBA 7(a) guaranteed            69,968              80,951              13,286              482                 -       164,687
SBA 7(a) unguaranteed          45,387                  29               4,878            1,239               646        52,179
SBA 504                        20,513                   -              11,274                -             3,766        35,553
USDA                              801                   -                   -                -                 -           801
Total                   $     159,882     $       108,365       $      64,324     $     55,275     $      12,696     $ 400,542




                                                               As of December 31, 2019
                                              Over 1 Year through 5 Years                  Over 5 Years
                                                                Floating or                         Floating or
                         One Year or                             Adjustable                         Adjustable
(In thousands)              Less            Fixed Rate              Rate           Fixed Rate          Rate            Total
Commercial and
industrial              $      15,117     $        7,060       $        8,880     $     54,419     $           -     $  85,476
Consumer installment            3,070                339                    -                -                 -         3,409
Real estate -
residential                     1,258              3,974                    -                -                 -         5,232
Real estate -
commercial                      4,602             12,974               21,287            1,998             6,120        46,981
Real estate -
construction and land           4,121                 99                3,645                -                 -         7,865
SBA 7(a) guaranteed            59,065                115               10,004              779                 -        69,963
SBA 7(a) unguaranteed          42,094                 38                4,498              502                 -        47,132
SBA 504                         8,456                  -               11,747                -             2,388        22,591
USDA                            2,430                  -                    -                -                 -         2,430
Total                   $     140,213     $       24,599       $       60,061     $     57,698     $       8,508     $ 291,079



The expected contractual principal repayments of loans do not reflect the actual life of these assets. The average loan term is lower than their average contractual terms due to early repayments.



Loans acquired in acquisitions are initially recorded at fair value with no
carryover of the related allowance for credit losses. The fair value of the
loans is determined using market participant assumptions in estimating the
amount and timing of principal and interest cash flows initially expected to be
collected on the loans and discounting those cash flows at an appropriate market
rate of interest. Under the accounting model for acquired loans, the excess of
cash flows expected to be collected over the carrying amount of the loans,
referred to as the "accretable yield," is accreted into interest income over the
life of the loans.



Non-performing Assets



Our primary business segments are banking and other financial services, and as
outlined above, the banking segment's primary business is lending. That activity
entails potential loan losses, the magnitude of which depends on a variety of
economic factors affecting borrowers which are beyond our control. While we have
instituted underwriting guidelines and policies and credit review procedures to
protect us from avoidable credit losses, some losses will inevitably occur. The
COVID-19 pandemic has contributed to an increased risk of delinquencies,
defaults and foreclosures. Through the date of this filing, the Company has not
experienced any loan charge-offs caused by the economic impact from the COVID-19
pandemic.



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Non-performing assets include non-accrual loans, loans 90 days or more past due
and still accruing, and foreclosed assets. Non-performing assets totaled $1.8
million as of December 31, 2020, compared to $6.0 million as of December 31,
2019. As of December 31, 2020, non-performing assets consisted of SBA
non-accrual loans totaling $1.6 million, of which $1.1 million was guaranteed by
the SBA, and commercial real estate loans of $158,000. As of December 31, 2019,
non-performing assets consisted of SBA non-accrual loans totaling $6.0 million,
of which $4.9 million was guaranteed by the SBA, and one commercial and
industrial loan of $60,000.



Loans are considered past due when principal and interest payments have not been
received as of the date such payments are contractually due. Loans are placed on
non-accrual status when management has concerns relating to the ability to
collect the loan interest and generally when such loans are 90 days or more past
due. Accrued interest is charged off and no further interest is accrued.
Subsequent payments received on non-accrual loans are recorded as reductions of
principal. A loan is considered impaired when it is probable that not all
principal and interest amounts will be collected according to the original loan
contract. There were no loans past due 90 days or more and still accruing
interest as of December 31, 2020 and 2019.



Foreclosed assets represent property acquired as the result of borrower defaults
on loans. Foreclosed assets are recorded at estimated fair value, less estimated
selling costs, at the time of foreclosure. Write-downs occurring at foreclosure
are charged against the allowance for possible loan losses. On an ongoing basis,
properties are appraised as required by market indications and applicable
regulations. Write-downs are provided for subsequent declines in value and are
included in other non-interest expense along with other expenses related to
maintaining the properties. There were no foreclosed assets as of December 31,
2020 and 2019.


The following table presents certain information regarding non-performing assets and restructured loans by type, including the ratios of these loans to total assets on the dates indicated:


                                                           At December 31,
(In thousands, except
percentages)                        2020          2019          2018          2017          2016
Non-accrual loans:
Commercial and industrial         $       -     $      60     $       -     $       -     $      39
Real estate - commercial                158
SBA guaranteed                        1,118         4,892         2,252         2,186             -
SBA unguaranteed                        517         1,039           293           124             -
Total non-accrual loans               1,793         5,991         2,545         2,310            39
Loans past due 90 days and
accruing                                  -             -             -             -             -
Foreclosed assets                         -             -             -             -             -
Total non-performing assets       $   1,793     $   5,991     $   2,545     $   2,310     $      39
As a % of total loans and
foreclosed assets                      0.45 %        2.06 %        1.08 %        1.16 %        0.02 %
As a % of total assets                 0.35          1.64          0.82          0.84          0.02




Restructured loans are considered "troubled debt restructurings" if, due to the
borrower's financial difficulties, we have granted a concession that we would
not otherwise consider. This may include a transfer of real estate or other
assets from the borrower, a modification of loan terms, or a combination of the
two. Modifications of terms that could potentially qualify as a troubled debt
restructuring include reduction of contractual interest rate, extension of the
maturity date at a contractual interest rate lower than the current market rate
for new debt with similar risk, or a reduction of the face amount of debt,
either forgiveness of principal or accrued interest. As of December 31, 2020 and
2019, we had no loans considered to be a troubled debt restructuring.



As noted in Note 4, "Loans and Allowance for Loan Losses," Section 4013 of the
CARES Act provides financial institutions the option to suspend TDR accounting
under GAAP in certain circumstances and the Company has elected that option. The
Company has worked proactively with customers experiencing financial challenges
from the COVID-19 pandemic. As of December 31, 2020, the Company had granted
principal and interest payment deferrals related to COVID-19 to 11 borrowers
representing approximately $4.3 million, or 5.7% of its outstanding loans. All
loans remain accruing.



We lend to customers operating in certain industries that have been, and are
expected to be, more significantly impacted by the effects of the COVID-19
pandemic. These include the dental, hotel/lodging, automobile wash, and child
care industries, among others. We are continuing to monitor these industries and
the respective borrowers closely given the general decrease in business activity
and the effects of the efforts to limit the spread of COVID-19.



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Provision for losses on loans and leases



Loans are reported net of the allowance for loan losses on our balance sheet.
The allowance for loan losses totaled $2.9 million and $1.4 million, at December
31, 2020 and 2019, respectively. During the year ended December 31, 2020, the
Company had charge-offs of $218,000 and recoveries of $42,000. During the year
ended December 31, 2019, the Company had charge-offs of $1.1 million and
recoveries of $51,000.



Under accounting standards for business combinations, acquired loans are
recorded at fair value with no credit loss allowance on the date of acquisition.
A provision for credit losses is recorded in periods after the date of
acquisition for the emergence of new probable and estimable losses on
acquired non-credit impaired loans. As of December 31, 2020, acquired loans
required a credit loss allowance totaling $508,000. As of December 31, 2019, we
had no acquired loans requiring a credit loss allowance.



Based on an analysis performed by management at December 31, 2020, the allowance
for loan losses is believed to be adequate to cover estimated loan losses in the
portfolio as of that date based on the loan loss methodology employed by
management. However, management's judgment is based upon a number of assumptions
about future events, which are believed to be reasonable, but which may or may
not prove valid. Thus, charge-offs in future periods may exceed the allowance
for loan losses or significant additional increases in the allowance for loan
losses may be required.


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

(In

thousands, except percentages) 2020 2019 2018

 2017          2016
Balance at January 1,            $   1,408     $     874     $     386     $   1,695     $   1,564
Charge-offs:
Commercial and industrial                -           214             1             9           391
Consumer installment                     -             -             -             -            97
SBA 7(a)                               218           858           266           360             -
Total charge-offs                      218         1,072           267           369           488
Recoveries:
Commercial and industrial               33            30             -             8            19
Consumer installment                     -             -             -             -             -
Real estate - construction and
land                                     -             -             -             -            10
SBA 7(a)                                 9            21            30             1             1
Total recoveries                        42            51            30             9            30
Net charge-offs                        176         1,021           237           360           458
Provision for loan losses            1,709         1,555           725           736           589
Reduction related to
acquisition of predecessor               -             -             -        (1,685 )           -
Balance at December 31,          $   2,941     $   1,408     $     874     $     386     $   1,695
Loans at year-end                $ 400,542     $ 291,079     $ 234,907     $ 199,266     $ 161,881
Average loans                      376,088       275,025       231,385       193,482       163,580
Net charge-offs/average loans         0.05 %        0.37 %        0.10 %        0.19 %        0.28 %
Allowance for loan
losses/year-end loans                 0.73          0.48          0.37          0.19          1.05
Total provision for loan
losses/average loans                  0.45          0.57          0.31          0.38          0.36




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The following tables set forth the allocation of the allowance as of the date
indicated and the percentage of loans in each category to total gross loans as
of the date indicated:



                                                                           At December 31,
                                          2020             2019               2018                  2017                2016
                                       Allowance        Allowance                                                    Allowance
(In thousands)                           Amount           Amount        Allowance Amount      Allowance Amount         Amount
Commercial and industrial             $        928     $        501     $             419     $             237     $        985
Consumer installment                            91               27                    27                    13               17
Real estate - residential                       52               22                    27                    16               79
Real estate - commercial                       527              347                   210                    25              241
Real estate - construction and land            100               76                    34                    27               77
SBA                                          1,225              435                   157                    68              296
USDA                                            18                -                     -                     -                -

Total allowance for loan losses $ 2,941 $ 1,408 $

          874     $             386     $      1,695




                                       2020       2019       2018       2017       2016
                                       %(1)      %(1)       %(1)       %(1)       %(1)
Commercial and industrial               19.9 %     29.4 %     37.9 %     43.4 %     50.6 %
Consumer installment                     2.6        1.2        1.5        2.3        2.3
Real estate - residential                1.1        1.8        3.2        3.4        4.0
Real estate - commercial                11.1       16.1       15.0        9.6       12.4
Real estate - construction and land      2.1        2.7        2.0        4.3        3.9
SBA                                     63.0       48.0       39.0       35.3       24.6
USDA                                     0.2        0.8        1.4       

1.7 2.2 Total allowance for loan losses 100% 100% 100% 100% 100%

(1) Percentage of loans in each category in relation to total loans


Deposits



Deposits are attracted principally from our primary geographic market area with
the exception of time deposits, which, due to the Company's attractive rates,
are attracted from across the nation. The Company offers a broad selection of
deposit products, including demand deposit accounts, NOW accounts, money market
accounts, regular savings accounts, term certificates of deposit and retirement
savings plans (such as IRAs). Deposit account terms vary, with the primary
differences being the minimum balance required, the time period the funds must
remain on deposit, and the associated interest rates. Management sets the
deposit interest rates periodically based on a review of deposit flows and a
survey of rates among competitors and other financial institutions. The Company
relies on customer service and long-standing relationships with customers to
attract and retain deposits, and also on CD listing services. During the second
quarter of 2020, we received $40.0 million in brokered deposits through an ICS
One-Way Buy agreement to provide liquidity to fund PPP loan originations. This
brokered deposit is included in our money market accounts as of December 31,
2020.



Total deposits increased $64.4 million, or 22.7%, to $348.0 million as of
December 31, 2020, from $283.6 million as of December 31, 2019. The following
table sets forth our average deposit account balances, the percentage of each
type of deposit to total deposits, and average cost of funds for each category
of deposits for the periods indicated:



                                  Year Ended December 31,                       Year Ended December 31,
                                           2020                                          2019

(In thousands, except average percentage of the average percentage of the average percentages)

              Balance        Deposits          Rate         Balance        Deposits          Rate
Non-interest-bearing
deposits                 $  51,168             14.3 %         0.00 %   $  35,786             13.7 %         0.00 %
Savings and
interest-bearing
demand                       9,977              2.8           0.31         7,740              2.9           0.39
Money market accounts       96,582             27.0           0.52        54,609             20.8           1.54
Time deposits              200,159             55.9           1.84       164,007             62.6           2.53
Total deposits           $ 357,886            100.0 %         1.18 %   $ 262,142            100.0 %         1.92 %




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The following table shows the maturity of our term deposits of $ 100,000 or more at December 31, 2020 and 2019:


(In thousands)                           December 31, 2020       December 31, 2019
Three months or less                    $            44,661     $            30,305
Over three months through six months                 16,959                 

37 203

Over six months through twelve months                47,050                  70,665
Over twelve months                                   58,230                  39,831
Total                                   $           166,900     $           178,004




Borrowings


From December 31, 2020 and 2019, loans total $ 95.7 million and $ 24.0 million, respectively.



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



                          December 31,       December 31,
(In thousands)                2020               2019
Borrowings:
FHLB borrowings          $            -     $       12,000
FRB borrowings (PPPLF)           83,690                  -
Subordinated notes               12,000             12,000
                         $       95,690     $       24,000




The Company has a credit line with the FHLB with borrowing capacity of $36.0
million secured by commercial loans. The Company determines its borrowing needs
and renews the advances accordingly at varying terms. The Company had no
borrowings with FHLB as of December 31, 2020. As of December 31, 2019, the
Company had an overnight advance of $2.0 million with an interest rate of 1.45%
and a $10.0 million six month fixed term advance with an interest rate of 2.18%
and maturity date of January 27, 2020. At maturity, the term advance was rolled
into the overnight advance and subsequently paid off.



The Company also has a line of credit with the FRB with a borrowing capacity of $ 27.0 million, which is secured by commercial loans. There was no outstanding loan on the FRB line of credit at December 31, 2020 and 2019.



In connection with the Federal Reserve PPPLF program, the Company has $83.7
million of PPP loans available to be pledged, of which the entire $83.7 million
was pledged to the Federal Reserve and borrowed as of December 31, 2020, at an
interest rate of 0.35%. The amount outstanding at December 31, 2020 is
non-recourse and secured by the amount of the PPP loans still outstanding.  The
maturity date of a borrowing under the PPPLF is equal to the maturity date of
the PPP loan pledged to secure the borrowing and would be accelerated (i) if the
underlying PPP loan goes into default and is sold to the SBA to realize on the
SBA guarantee or (ii) to the extent that any loan forgiveness reimbursement is
received from the SBA. Borrowings under the PPPLF are included under borrowed
funds on the Company's consolidated balance sheet and bear interest at a rate of
0.35%.



As of December 31, 2020 and 2019, the Company also had subordinated notes
totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an
interest rate of 7.125%, payable semi-annually and maturing on July 20, 2027,
and $4.0 million issued in 2018 bearing an interest rate of 7.125%, payable
semi-annually and maturing on March 31, 2028. The subordinated notes are
unsecured and subordinated in right of payment to the payment of our existing
and future senior indebtedness and structurally subordinated to all existing and
future indebtedness of our subsidiaries.



Capital resources and regulatory capital requirements



Shareholders' equity increased $9.5 million to $60.0 million as of December 31,
2020, from $50.5 million as of December 31, 2019. The increase included net
income of $10.9 million, $14,000 net after-tax increase in other comprehensive
income related to the market value of the securities available for sale, and
$151,000 related to stock compensation expense. Use of capital included $1.6
million of dividends paid on the Series B preferred stock.



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Together with the Bank, the Company is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's and, accordingly, the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
As of December 31, 2020, the Company and the Bank met all capital adequacy
requirements to which they were subject. As of December 31, 2020, the Bank
qualified as "well capitalized" under the prompt corrective action regulations
of Basel III and the OCC.



Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined in the regulations), common equity Tier 1
capital (as defined in the regulations) to risk-weighted assets, and of Tier 1
capital (as defined in the regulations) to average assets (as defined in the
regulations).


The following table presents our regulatory capital ratios, as well as those of the Bank, on the dates indicated:


(In thousands)                          December 31, 2020                December 31, 2019
                                      Amount           Ratio           Amount           Ratio
Tectonic Financial, Inc.
Tier 1 Capital (to Average
Assets)                            $     48,046           11.66 %   $     38,301           11.20 %
Common Equity Tier 1 (to Risk
Weighted Assets)                         30,796           11.01           21,051            8.20
Tier 1 Capital (to Risk Weighted
Assets)                                  48,046           17.17           38,301           14.92
Total Capital (to Risk Weighted
Assets)                                  50,987           18.22           39,709           15.47

T Bank, N.A.
Tier 1 Capital (to Average
Assets)                            $     47,071           11.58 %   $     38,541           11.09 %
Common Equity Tier 1 (to Risk
Weighted Assets)                         47,071           17.17           38,541           15.16
Tier 1 Capital (to Risk Weighted
Assets)                                  47,071           17.17           38,541           15.16
Total Capital (to Risk Weighted
Assets)                                  50,012           18.25           39,949           15.71




In addition to the regulatory requirements of the federal banking agencies,
Sanders Morris is subject to the regulatory framework applicable to registered
investment advisors under the SEC's Division of Investment Management. Sanders
Morris is also regulated by FINRA, which, among other requirements, imposes
minimums on its net regulatory capital. As of December 31, 2020, Sanders Morris
is in compliance with FINRA's net regulatory capital requirements.



Liquidity



Our liquidity relates to our ability to maintain a steady flow of funds to
support our ongoing operating, investing and financing activities. Our board of
directors establishes policies and analyzes and manages liquidity to ensure that
adequate funds are available to meet normal operating requirements in addition
to unexpected customer demands for funds, such as high levels of deposit
withdrawals or loan demand, in a timely and cost-effective manner. The most
important factor in the preservation of liquidity is maintaining public
confidence that facilitates the retention and growth of a large, stable supply
of core deposits and funds. Ultimately, public confidence is generated through
profitable operations, sound credit quality and a strong capital position.
Liquidity management is viewed from a long-term and a short-term perspective as
well as from an asset and liability perspective. We monitor liquidity through a
regular review of loan and deposit maturities and forecasts, incorporating this
information into a detailed projected cash flow model.



The Bank's liquidity is monitored by its management, the Asset-Liability
Committee and its board of directors who review historical funding requirements,
current liquidity position, sources and stability of funding, marketability of
assets, options for attracting additional funds, and anticipated future funding
needs, including the level of unfunded commitments.



The Company's primary sources of funds are retail, small business, custodial,
wholesale commercial deposits, loan repayments, maturity of investment
securities, other short-term borrowings, and other funds provided by operations.
While scheduled loan repayments and maturing investments are relatively
predictable, deposit flows and loan prepayments are more influenced by interest
rates, general economic conditions, and competition. The Company will maintain
investments in liquid assets based upon management's assessment of (1) the need
for funds, (2) expected deposit flows, (3) yields available on short-term liquid
assets, and (4) objectives of the asset/liability management program.



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The Company had cash and cash equivalents of $46.9 million, or 9.1% of total
assets, as of December 31, 2020. 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, 2020, the Company's borrowing capacity with the FHLB was $36.0 million, or
7.0% of assets, none of which was utilized. The borrowing capacity with the FRB
was $27.0 million, or 5.3% of assets, of which none was utilized or outstanding
as of December 31, 2020. The Company's trust operations serve in a fiduciary
capacity for approximately $1.5 billion in total market value of assets as of
December 31, 2020. Some of these custody assets are invested in cash. This cash
is maintained either in a third-party money market mutual fund (invested
predominately in U.S. Treasury securities and other high grade investments) or
in a Bank money market account. Only cash which is fully insured by the FDIC is
maintained at the Bank. This cash can be moved readily between the Bank and the
third party money market mutual fund. As of December 31, 2020, approximately
$23.9 million of cash could be held at the Bank in deposit accounts fully
insured by the FDIC. As of December 31, 2020, the entire $23.9 million was held
at the Bank, leaving no balance available to the Bank. As of December 31, 2020,
Sanders Morris and Tectonic Advisors held approximately $5.9 million in their
accounts at the Bank, which is eliminated on the financial statements and in the
cash and cash equivalents as stated above.



Off-balance sheet arrangements and contractual obligations



We are a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of our customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the accompanying balance sheets. Our
exposure to credit loss in the event of non-performance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. We
follow the same credit policies in making commitments and conditional
obligations as we do for on-balance sheet instruments.



Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The amount of credit extended is based on management's credit
evaluation of the customer and, if deemed necessary, may require collateral.



Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers.


The following table shows the future contractual obligations to make future payments, excluding interest, for the periods indicated:


                                                             As of December 31, 2020
                                  Less than         One to          Over Three to       Over Five
(In thousands)                     One Year       Three Years        Five Years           Years          Total
FHLB borrowings                   $        -     $           -     $             -     $         -     $       -
FRB borrowings                             -            83,690                   -               -        83,690
Subordinated notes                         -                 -                   -          12,000        12,000
Time deposits                        113,504            49,423              11,698               -       174,625
Minimum lease payments                   586               471                   7               -         1,064
Total                             $  114,090     $     133,584     $        11,705     $    12,000     $ 271,379




The following table presents contractual financial commitments for the periods
indicated, however some of these commitments may expire unused or only partially
used, so the total amounts do not necessarily reflect future cash requirements.



                                                              As of December 31, 2020
                                   Less than         One to          Over Three to       Over Five
(In thousands)                     One Year        Three Years        Five Years           Years          Total

Undisbursed loan commitments $ 9,648 $ 107

  3,511     $     6,614     $  19,880
Standby letters of credit                 162                 -                   -               -           162




                                       80

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Contents

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