TECC FINA: TECTONIC FINANCIAL, INC. Discussion and analysis by management of the financial position and operating results. (form 10-K)
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
March 2020, COVID-19 was declared a pandemic by the World Health Organizationand 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 Statesand 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 Statesand, 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 Reservelowered 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 millionto 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 millionwith 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. 59
We are also currently participating in the
Federal Reserve'sPPPLF 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 millionand 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, 2020of 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, Nolanprovides 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. Nolanhas 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 Holdingsmerged 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 Texason December 23, 2002to 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 SECfocused 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 $10.00per share, for aggregate gross proceeds of $17.25 millionbefore deducting underwriting discounts and offering expenses, and aggregate net proceeds of $15.5 millionafter deducting underwriting discounts and offering expenses. 60
Prior to the Tectonic Merger,
Sanders Morrisand Tectonic Advisorswere 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 Holdingsare 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 Advisorsfor 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 Texasand 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 $1.42per diluted common share for the year ended December 31, 2020, compared to $6.5 million, or $0.98per diluted common share for the year ended December 31, 2019, an increase of $2.9 millionor 44.6%. The increase in net income available to common shareholders for the year ended December 31, 2020was the result of a $3.6 millionincrease in net interest income and a $3.8 millionincrease in non-interest income, offset by a $3.1 millionincrease in non-interest expense, a $154,000increase in the provision for loan losses, a $1.1 millionincrease in income tax expense and a $131,000increase in preferred stock dividends paid. 61
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, 2020was 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, 2020was 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 $ 6,458Average shareholders' equity $ 53,938 $ 45,554Less: average goodwill 10,729 10,771 Less: average core deposit intangible 1,086
Less: average preferred stock 17,250
Average tangible common equity 24,873
Return on average tangible common equity 37.68 % 34.80 % Total assets grew by
$148.3 million, or 40.6%, to $513.4 millionas of December 31, 2020, from $365.1 millionas 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 millionincrease 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 millionas of December 31, 2020, from $289.7 millionas 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 millionas of December 31, 2020, from $50.5 millionas 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. 62
Federal Reserveinfluences 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 Statesgovernment, its agencies and various other governmental regulatory authorities. The Federal Reservelowered 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 2019to 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, 2020and 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
$ (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 millionfor 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 millionfor the year ended December 31, 2019, to $376.1 millionfor the year ended December 31, 2020. PPP loans account for $63.9 millionof 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 millionin 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, 2019to 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 millionwas 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 millionas 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 $458,000for 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, 2019to 0.22% for the year ended December 31, 2020. 63
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 millionfor the year ended December 31, 2020, compared to $226.4 millionfor the year ended December 31, 2019, while non-interest bearing deposits increased $15.4 millionin 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, 2019to 1.38% for the year ended December 31, 2020. The average cost of deposits during the year ended December 31, 2020was 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 millionfor the year ended December 31, 2019, to $43.4 millionfor 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, 2019to 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, 2020and 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 $ 1030.22 % $ 12,434 $ 2702.17 % 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 $ 337,481Liabilities and Shareholders' Equity Savings and interest-bearing demand $ 9,97731 0.31 % $ 7,74030 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 $ 337,481Net interest income $ 15,609 $ 12,051Net 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, 2020and 2019, we recorded a provision for loan losses totaling $1.7 millionand $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. 64
Table of Contents Non-Interest Income
The components of non-interest income were as follows:
Year Ended December 31, (In thousands) 2020 2019 Trust income
$ 5,118 $ 5,073Gain 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 $ 29,804Total non-interest income for the year ended December 31, 2020increased $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, 2020increased $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 USDAloans 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 USDAloans originated to increase interest income over time. This decision meant that the guaranteed portion of fewer SBA and USDAloans were sold after such date, declining to $183,000for the year ended December 31, 2018. During the fourth quarter 2019, sales of loans resumed, resulting in $427,000of 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 Advisorsearned 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, 2020decreased $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. 65
Table of Contents The table below reflects a rollforward of our client assets, which includes both advisory and brokerage assets, as of
December 31, 2020and 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, 2019and 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 $ 3,312,851Client 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 $ 4,524,376Service 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, 2020increased $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 Nolanof $800,000, an increase in net loan servicing fees of $267,000primarily due to reversal of the servicing asset valuation allowance, an increase in other income of approximately $124,000related 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, 2020decreased $17,000, or 5.1%, compared to the year ended December 31, 2019due 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
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 $ 30,519Total non-interest expense for the year ended December 31, 2020increased $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. 66
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 millionfor the year ended December 31, 2019to $22.1 millionfor 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 millionof this increase, offset by decreases in commissions, including those for traditional brokerage activity, of approximately $150,000. Salaries at the Bank's Nolandivision increased $570,000related to staff increases to accommodate the increase in the number of plans administered and merit increases, and salaries at Tectonic Advisorsincreased $180,000related 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 millionfor the year ended December 31, 2019to $2.3 millionfor 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 $10,000for the year ended December 31, 2020as 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 millionfor the year ended December 31, 2019to $2.0 millionfor 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 $183,000in 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 $24,000and 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 millionfor the year ended December 31, 2019to $1.3 millionfor 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 $165,000in our other financial services segment, $91,000in our banking segment, and $4,000in our HoldCosegment. 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 $150,000in 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 $75,000at Sanders Morris related to employee recruitment fees of $45,000and 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 Advisorsof $38,000, offset by a $4,000increase at the Nolandivision, and a decrease in data processing in our banking segment of $36,000, and of $2,000at our HoldCosegment. 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 $290,000related to the general decrease in travel and in-person events related to the Covid-19 pandemic and the downturn in private and syndicated offerings, $300,000for a settlement fee related to a client matter at Sanders Morris incurred during the third quarter of 2019, and $117,000in 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 $95,000in our directors' and officers' insurance, $17,000in our professional liability coverage, $34,000in our directors' fees related to our board being in place for the full year 2020, $50,000in filing fees, and $36,000in compliance costs. Other increases include $150,000in FDICinsurance premiums, $80,000in operating losses, $56,000in employee recruitment primarily related to an increase in staffing in the bank's SBA group, $79,000in computer services and software licenses, $46,000in gifts and donations, and $34,000in public relations and marketing, among other things. 67
Table of Contents Income Taxes The income tax expense for the years ended
December 31, 2020and 2019 was $3.0 millionand $1.9 million, respectively. The effective income tax rate was 21.5% and 19.4% for the years ended December 31, 2020and 2019, respectively. The effective income tax rate for the year ended December 31, 2019differed from the U.S.statutory rate of 21% primarily due to Tectonic Advisorsand 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,
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.
Other Financial Servicessegment 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,
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 ) $ 49,243Net income (loss) before taxes $ 8,032 $ 7,808 $ (1,918 ) $ 13,922Year Ended December 31, 2019 Other Financial (In thousands) Banking Services HoldCo Consolidated Revenue(1) $ 13,829 $ 28,924$
Net profit (loss) before tax
(1) Net interest income plus non-interest income
Banking Income before taxes for the year ended
December 31, 2020increased $3.9 million, or 93.4%, compared to the year ended December 31, 2019. The increase was primarily the result of a $3.5 millionincrease in net interest income and a $632,000increase in non-interest income, partly offset by a $154,000increase in the provision for loan losses and a $114,000increase in non-interest expense. Net interest income for the year ended December 31, 2020increased $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, 2020increased $154,000, or 9.9%, to $1.7 million, compared to $1.6 millionfor the year ended December 31, 2019. See "Allowance for Loan Losses" included elsewhere in this discussion. 68
Non-interest income for the year ended
December 31, 2020increased $632,000, or 73.5%, compared to the year ended December 31, 2019, which was primarily due to a $354,000increase in service fees, primarily the net loan servicing fees and a $295,000increase in gain on sale of loans, partially offset by a $17,000decrease 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, 2020increased $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 $163,000and $158,000, respectively, partly offset by decreases in professional fees of $145,000and in data processing expense of $36,000, and a decrease of $26,000in 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, 2020increased $418,000, or 5.7%, compared to the year ended December 31, 2019. The increase was primarily the result of a $3.2 millionincrease in non-interest income partly offset by a $2.8 millionincrease in non-interest expense. Non-interest income for the year ended December 31, 2020increased $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 Nolanof $800,000and an increase in other income of approximately $124,000related 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 millionprimarily 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, 2020increased $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 millionrelated 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 Nolanand merit increases, and to increases of $283,000in 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 $319,000related to software that became fully depreciated as of April 2020, $100,000in professional fees, $276,000in other expenses, $86,000in data processing expense, and $10,000in trust expense. See also the analysis of non-interest income included in the section captioned "Non-Interest Expense" included elsewhere in this discussion. HoldCoThe net loss before taxes at the HoldCooperating segment increased by $156,000during the year ended December 31, 2020compared 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 SecuritiesThe 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. 69
December 31, 2020and 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 Californiaand 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 millionas of December 31, 2020and 2019, respectively, and FHLB stock, having an amortized cost and fair value of $1.3 millionand $1.2 millionas of December 31, 2020and 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 $ 10,731Mortgage-backed securities 2,373 2,447 1,925 1,946
Total titles available for sale
Securities held to maturity: Property assessed clean energy
$ 5,776 $ 5,776 $ 6,349 $ 6,349Securities, restricted: Other $ 2,431 $ 2,431 $ 2,417 $ 2,417
Difficult to negotiate securities
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 $ - - % $ 1,4721.11 % $
- - 1,074 3.05
– – 1,299 1.91 2,373 2.43 Total
$ - - %
$ 2,5461.93 % $ 8,9951.01 % $ 5,7681.25 % $ 17,3091.22 % Securities held to maturity: Property assessed clean energy $ - - % $ 5546.34 % $ 2,4735.71 % $ 2,7497.32 % $ 5,7766.54 % 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 millionat December 31, 2020, compared to $291.1 millionat 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. 71
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 $ 81,945Consumer 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 $ 161,881The Company initially records the guaranteed portion of the SBA 7(a) and USDAloans as held for sale at the lower of cost or fair value. Loans held for sale totaled $14.9 millionand $9.9 millionat December 31, 2020and 2019, respectively. During the year ended December 31, 2020, the Company elected to reclassify $26.4 millionof 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. 72
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 millionfor regular 504 loans and $5.5 millionfor 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 millionof 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 millionor 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 thousandand 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 millionof PPP loans, and received $4.4 millionof related fees from the SBA. We deferred $3.4 millionof the fees, net of $966,000which was offset against the costs incurred to originate these loans. Through December 31, 2020, we recognized $1.8 millionof the deferred fees in income. There were no PPP loans originated from July 1, 2020through 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, 2020was $83.7 millionand 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. 73
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, 2020and 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 $ 79,864Consumer 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 $ 400,542As 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$ - $ 85,476Consumer 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. 74
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 millionas of December 31, 2020, compared to $6.0 millionas 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 millionwas 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 millionwas 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, 2020and 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, 2020and 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$ - $ - $ 39Real 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 $ 39As 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, 2020and 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. 75
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 millionand $1.4 million, at December 31, 2020and 2019, respectively. During the year ended December 31, 2020, the Company had charge-offs of $218,000and recoveries of $42,000. During the year ended December 31, 2019, the Company had charge-offs of $1.1 millionand 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:
thousands, except percentages) 2020 2019 2018
2017 2016 Balance at January 1,
$ 1,408 $ 874 $ 386 $ 1,695 $ 1,564Charge-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 $ 1,695Loans at year-end $ 400,542 $ 291,079 $ 234,907 $ 199,266 $ 161,881Average 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 76
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 $ 985Consumer 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
874 $ 386
$ 1,6952020 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 millionin 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 millionas of December 31, 2020, from $283.6 millionas 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, 20202019
(In thousands, except average percentage of the average percentage of the average percentages)
Balance Deposits Rate Balance Deposits Rate Non-interest-bearing deposits
$ 51,16814.3 % 0.00 % $ 35,78613.7 % 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 $ 357,886100.0 % 1.18 % $ 262,142100.0 % 1.92 % 77
The following table shows the maturity of our term deposits of
(In thousands) December 31, 2020 December 31, 2019 Three months or less $ 44,661 $ 30,305 Over three months through six months 16,959
Over six months through twelve months 47,050 70,665 Over twelve months 58,230 39,831 Total $ 166,900 $ 178,004 Borrowings
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 $ -
$ 12,000FRB borrowings (PPPLF) 83,690 - Subordinated notes 12,000 12,000 $ 95,690 $ 24,000The Company has a credit line with the FHLB with borrowing capacity of $36.0 millionsecured 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 millionwith an interest rate of 1.45% and a $10.0 millionsix 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
In connection with the Federal Reserve PPPLF program, the Company has
$83.7 millionof PPP loans available to be pledged, of which the entire $83.7 millionwas pledged to the Federal Reserveand borrowed as of December 31, 2020, at an interest rate of 0.35%. The amount outstanding at December 31, 2020is 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, 2020and 2019, the Company also had subordinated notes totaling $12.0 million, consisting of $8.0 millionissued in 2017 bearing an interest rate of 7.125%, payable semi-annually and maturing on July 20, 2027, and $4.0 millionissued 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 millionto $60.0 millionas of December 31, 2020, from $50.5 millionas of December 31, 2019. The increase included net income of $10.9 million, $14,000net after-tax increase in other comprehensive income related to the market value of the securities available for sale, and $151,000related to stock compensation expense. Use of capital included $1.6 millionof dividends paid on the Series B preferred stock. 78
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) $ 48,04611.66 % $ 38,30111.20 % 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) $ 47,07111.58 % $ 38,54111.09 % 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'snet 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. 79
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 billionin 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. Treasurysecurities and other high grade investments) or in a Bank money market account. Only cash which is fully insured by the FDICis 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 millionof cash could be held at the Bank in deposit accounts fully insured by the FDIC. As of December 31, 2020, the entire $23.9 millionwas held at the Bank, leaving no balance available to the Bank. As of December 31, 2020, Sanders Morris and Tectonic Advisorsheld approximately $5.9 millionin 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 $ 271,379The 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
$ 6,614 $ 19,880Standby letters of credit 162 - - - 162 80
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