Enhanced Investments - Financial Portal

Published: 2024-08-14 00:00:00 ET

<<< go to TECTP company page

tectonic20240630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 001-38910

TECTONIC FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Texas

82-0764846

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

16200 Dallas Parkway, Suite 190

Dallas, Texas 75248

(Address of principal executive offices)

(972) 720 - 9000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Series B preferred stock, $0.01 par value per share	TECTP	The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s Common Stock as of August 13, 2024 was 7,070,330 shares.

TECTONIC FINANCIAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		Page

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2024 and 2023	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2024 and 2023	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57
Item 4.	Controls and Procedures	59

PART II. OTHER INFORMATION		60

Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61

SIGNATURES		62

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TECTONIC FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2024			December 31, 2023
(In thousands, except share amounts)	(Unaudited)
ASSETS
Cash and due from banks	$	5,802		$	5,016
Interest-bearing deposits		61,496			52,481
Federal funds sold		962			1,270
Total cash and cash equivalents		68,260			58,767
Securities available for sale		23,446			22,977
Securities held to maturity		23,054			24,194
Securities, restricted at cost		4,229			4,176
Loans held for sale		47,917			26,573
Loans, net of allowance for credit losses of $8,276 and $6,308, respectively		567,367			494,787
Bank premises and equipment, net		4,836			4,758
Core deposit intangible, net		254			359
Goodwill		21,440			21,440
Deferred tax asset		1,179			889
Other assets		15,125			18,426
Total assets	$	777,107		$	677,346

LIABILITIES
Demand deposits:
Non-interest-bearing	$	63,671		$	68,433
Interest-bearing		154,839			150,023
Time deposits		400,573			308,435
Total deposits		619,083			526,891
Borrowed funds		20,000			21,000
Subordinated notes		12,000			12,000
Other liabilities		15,607			10,598
Total liabilities		666,690			570,489
Commitments and contingencies (see Note 11)

SHAREHOLDERS’ EQUITY

Preferred stock, 9.00% fixed to floating rate Series B non-cumulative, perpetual ($0.01 par value; 1,725,000 shares authorized, issued and outstanding at each of June 30, 2024 and December 31, 2023)		17			17
Common stock, $0.01 par value; 40,000,000 shares authorized; 7,186,453 shares issued and 7,076,180 shares outstanding at June 30, 2024 and 7,186,453 shares issued and 7,102,680 shares outstanding at December 31, 2023		72			72
Additional paid-in capital		51,288			51,246
Treasury stock, at cost; 110,273 shares and 83,773 shares as of June 30, 2024, and December 31, 2023		(2,073	)		(1,575	)
Retained earnings		62,929			58,917
Accumulated other comprehensive loss		(1,816	)		(1,820	)
Total shareholders’ equity		110,417			106,857
Total liabilities and shareholders’ equity	$	777,107		$	677,346

See accompanying notes to consolidated financial statements.

Table of Contents

TECTONIC FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data and share amounts)	2024		2023		2024		2023
Interest Income
Loan, including fees	$	13,553	$	10,037	$	25,976	$	19,438
Securities		588		582		1,124		1,014
Federal funds sold		13		10		26		19
Interest-bearing deposits		1,473		625		2,799		1,696
Total interest income		15,627		11,254		29,925		22,167
Interest Expense
Deposits		7,211		4,133		13,814		7,640
Borrowed funds		584		298		1,177		661
Total interest expense		7,795		4,431		14,991		8,301
Net interest income		7,832		6,823		14,934		13,866
Provision for credit losses		1,660		691		2,577		770
Net interest income after provision for credit losses		6,172		6,132		12,357		13,096
Non-interest Income
Trust income		1,843		1,586		3,582		3,099
Gain on sale of loans		-		-		-		581
Advisory income		4,120		3,709		8,058		7,160
Brokerage income		2,128		1,889		3,910		3,779
Service fees and other income		2,563		2,172		5,513		5,389
Rental income		88		76		177		126
Total non-interest income		10,742		9,432		21,240		20,134
Non-interest Expense
Salaries and employee benefits		8,891		7,641		17,533		15,503
Occupancy and equipment		485		476		1,018		946
Trust expenses		580		511		1,190		1,063
Brokerage and advisory direct costs		517		472		1,037		943
Professional fees		468		539		902		1,062
Data processing		289		198		571		406
Other		1,685		1,867		3,438		3,449
Total non-interest expense		12,915		11,704		25,689		23,372
Income before Income Taxes		3,999		3,860		7,908		9,858
Income tax expense		853		839		1,701		2,123
Net Income		3,146		3,021		6,207		7,735
Preferred stock dividends		388		388		776		776
Net income available to common stockholders	$	2,758	$	2,633	$	5,431	$	6,959

Earnings per common share:
Basic	$	0.39	$	0.37	$	0.77	$	0.98
Diluted		0.38		0.36		0.75		0.95

Weighted average common shares outstanding		7,082,576		7,065,961		7,092,337		7,067,414
Weighted average diluted shares outstanding		7,242,663		7,295,499		7,252,424		7,296,953

See accompanying notes to consolidated financial statements.

Table of Contents

TECTONIC FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2024		2023			2024		2023
Net Income	$	3,146	$	3,021		$	6,207	$	7,735
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities available for sale		182		(114	)		5		314
Tax effect		38		(24	)		1		66
Other comprehensive income (loss)		144		(90	)		4		248
Comprehensive Income	$	3,290	$	2,931		$	6,211	$	7,983

See accompanying notes to consolidated financial statements.

Table of Contents

TECTONIC FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)	Series B Preferred Stock		Common Stock		Additional Paid-in Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at January 1, 2023	$	17	$	71	$	50,695	$	(481	)	$	48,564		$	(2,368	)	$	96,498
Cumulative change in accounting principle (adoption of ASC 326)		-		-		-		-			(1,286	)		-			(1,286	)
Balance at January 1, 2023, as adjusted for change in accounting principle (adoption of ASC 326)		17		71		50,695		(481	)		47,278			(2,368	)		95,212
Repayments of note receivable utilized to exercise options		-		-		50		-			-			-			50
Dividends paid on Series B preferred stock		-		-		-		-			(388	)		-			(388	)
Dividends paid on common stock		-		-		-		-			(442	)		-			(442	)
Net income		-		-		-		-			4,714			-			4,714
Other comprehensive income		-		-		-		-			-			338			338
Stock based compensation		-		-		75		-			-			-			75
Balance at March 31, 2023	$	17	$	71	$	50,820	$	(481	)	$	51,162		$	(2,030	)	$	99,559
Purchase of treasury stock at cost		-		-		-		(100	)		-			-			(100	)
Repayments of note receivable utilized to exercise options		-		-		50		-			-			-			50
Dividends paid on Series B preferred stock		-		-		-		-			(388	)		-			(388	)
Dividends paid on common stock		-		-		-		-			(442	)		-			(442	)
Net income		-		-		-		-			3,021			-			3,021
Other comprehensive loss		-		-		-		-			-			(90	)		(90	)
Stock based compensation		-		-		75		-			-			-			75
Balance at June 30, 2023	$	17	$	71	$	50,945	$	(581	)	$	53,353		$	(2,120	)	$	101,685

Balance at January 1, 2024	$	17	$	72	$	51,246	$	(1,575	)	$	58,917		$	(1,820	)	$	106,857
Purchase of treasury stock at cost		-		-		-		(249	)		-			-			(249	)
Dividends paid on Series B preferred stock		-		-		-		-			(388	)		-			(388	)
Dividends paid on common stock		-		-		-		-			(710	)		-			(710	)
Net income		-		-		-		-			3,061			-			3,061
Other comprehensive loss		-		-		-		-			-			(140	)		(140	)
Stock based compensation		-		-		21		-			-			-			21
Balance at March 31, 2024	$	17	$	72	$	51,267	$	(1,824	)	$	60,880		$	(1,960	)	$	108,452
Purchase of treasury stock at cost		-		-		-		(249	)		-			-			(249	)
Dividends paid on Series B preferred stock		-		-		-		-			(388	)		-			(388	)
Dividends paid on common stock		-		-		-		-			(709	)		-			(709	)
Net income		-		-		-		-			3,146			-			3,146
Other comprehensive income		-		-		-		-			-			144			144
Stock based compensation		-		-		21		-			-			-			21
Balance at June 30, 2024	$	17	$	72	$	51,288	$	(2,073	)	$	62,929		$	(1,816	)	$	110,417

See accompanying notes to consolidated financial statements.

Table of Contents

TECTONIC FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
(In thousands)	2024			2023
Cash Flows from Operating Activities
Net income	$	6,207		$	7,735
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for credit losses		2,577			770
Depreciation and amortization		121			118
Amortization of premium (accretion of discount) on loans		39			(9	)
Core deposit intangible amortization		105			105
Securities discount accretion, net		(41	)		(31	)
Origination of loans held for sale		(51,017	)		(24,623	)
Proceeds from payments and sales of loans held for sale		266			6,514
Gain on sale of loans		-			(581	)
Stock based compensation		42			150
Deferred income taxes		(292	)		(55	)
Servicing assets, net		51			(7	)
Net change in:
Other assets		3,251			(482	)
Other liabilities		4,827			(907	)
Net cash used in operating activities		(33,864	)		(11,303	)
Cash Flows from Investing Activities
Purchase of securities available for sale		(203,554	)		(202,892	)
Principal payments, calls and maturities of securities available for sale		203,144			202,037
Principal payments of securities held to maturity		1,127			1,067
Purchase of securities, restricted		(5,043	)		(6,384	)
Proceeds from sale of securities, restricted		4,990			5,755
Net change in loans		(45,606	)		11,795
Purchases of premises and equipment		(199	)		(297	)
Net cash (used in) provided by investing activities		(45,141	)		11,081
Cash Flows from Financing Activities
Net change in demand deposits		53			(1,772	)
Net change in time deposits		92,138			6,757
Proceeds from borrowed funds		205,100			245,800
Repayment of borrowed funds		(206,100	)		(245,800	)
Dividends paid on common stock		(1,419	)		(884	)
Dividends paid on Series B preferred stock		(776	)		(776	)
Repayments on note receivable utilized to exercise stock options		-			100
Purchase of treasury stock at cost		(498	)		(100	)
Net cash provided by financing activities		88,498			3,325
Net change in cash and cash equivalents		9,493			3,103
Cash and cash equivalents at beginning of period		58,767			42,155
Cash and cash equivalents at end of period	$	68,260		$	45,258

Non Cash Transactions
Transfers from loans held for sale to loans held for investment	$	29,407		$	27,681
Lease liabilities incurred in exchange for right-of-use assets	$	117		$	45
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	14,307		$	8,214
Income taxes	$	675		$	2,300

See accompanying notes to consolidated financial statements.

Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Organization and Significant Accounting Policies

Tectonic Financial, Inc. (the “Company,” “we,” “us,” or “our”) is a Texas corporation and registered financial holding company that offers, through its subsidiaries, banking and other financial services including trust, investment advisory, securities brokerage, factoring, third-party administration, recordkeeping and insurance services to individuals, small businesses and institutions across the United States.

We operate through four main direct and indirect subsidiaries: (i) T Bancshares, Inc. (“TBI”), which was incorporated under the laws of the State of Texas on December 23, 2002 to serve as the registered bank holding company for T Bank, N.A., a national banking association (the “Bank”), (ii) Sanders Morris LLC (“Sanders Morris”), a registered broker-dealer with the Financial Industry Regulatory Authority (“FINRA”) and registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”), (iii) Tectonic Advisors, LLC (“Tectonic Advisors”), a registered investment advisor registered with the SEC focused generally on managing money for relatively large, affiliated institutions, and (iv) HWG Insurance Agency LLC (“HWG”), an insurance agency registered with the Texas Department of Insurance (“TDI”).

We are headquartered in Dallas, Texas. The Bank operates through its main office located at 16200 Dallas Parkway, Dallas, Texas. Our other subsidiaries operate from offices in Houston, Dallas and Frisco, Texas. Our Houston, Texas office is located at 600 Travis Street, 59^th Floor, Houston, Texas, and includes the home offices of Sanders Morris and HWG, as well as Tectonic Advisors’ family office services team. Our other Dallas office, which is a branch office of Sanders Morris, is located at 5950 Sherry Lane, Suite 470, Dallas, Texas. The main office for Tectonic Advisors is in Frisco, Texas, and is located at 17 Cowboys Way, Suite 250, Frisco, Texas, and also includes a branch office of HWG.

The Bank offers a broad range of commercial and consumer banking and trust services primarily to small- to medium-sized businesses and their employees, and other institutions. The Nolan Company (“Nolan”), operating as a division within the Bank from Nolan’s office in Overland Park, Kansas, offers third party administration (“TPA”) services, and Integra Funding Solutions, LLC (“Integra”), also operating as a division within the Bank from Integra’s office in Fort Worth, Texas, offers factoring services. The Bank’s technological capabilities, including worldwide free ATM withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, allow most customers to be served regardless of their geographic location. The Bank serves its local geographic market which includes Dallas, Tarrant, Denton, Collin and Rockwall counties in Texas which encompass an area commonly referred to as the Dallas/Fort Worth Metroplex. The Bank also serves the dental and other health professional industries through a centralized loan and deposit platform that operates out of its main office in Dallas, Texas. In addition, the Bank serves the small business community by offering loans guaranteed by the U.S. Small Business Administration (“SBA”) and the U.S. Department of Agriculture (“USDA”).

The Bank offers a wide range of deposit services including demand deposits, regular savings accounts, money market accounts, individual retirement accounts, and certificates of deposit with fixed rates and a range of maturity options. Lending services include commercial loans to small- to medium-sized businesses and professional concerns as well as consumers. The Bank also offers trust services. The Bank’s traditional fiduciary services clients primarily consist of clients of Cain, Watters & Associates, LLC (“Cain Watters”). The Bank, Cain Watters and Tectonic Advisors entered into an advisory services agreement related to the Bank’s trust operations in April 2006, which has been amended from time to time, most recently in January 2023. See Note 12 – Related Parties, to these consolidated financial statements for more information. In addition, the Nolan division of the Bank offers TPA services and provides clients with retirement plan design and administrative services, specializing in ministerial recordkeeping, administration, actuarial and design services for retirement plans of small businesses and professional practices. We believe offering TPA services allows us to serve our clients more fully and to attract new clients to our trust platform.

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2024 (this “Form 10-Q”) include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the SEC. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2023 in the audited financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 1, 2024.

Table of Contents

In the opinion of management, all adjustments that were normal and recurring in nature, and considered necessary, have been included for the fair presentation of the Company’s consolidated financial position and results of operations. Operating results for the three and six months ended June 30, 2024, are not necessarily indicative of results that may be expected for the full year ending December 31, 2024.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period, as well as the disclosures provided. Actual results could be significantly different from those estimates. Changes in assumptions or in market conditions could significantly affect the estimates. The determination of the allowance for credit losses, the fair value of stock options, the fair values of financial instruments and other real estate owned, and the status of contingencies are particularly susceptible to significant change in recorded amounts.

Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation but have no effect on the reported results of operations.

Allowance for Credit Losses. The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective on January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. Management has made a policy election to exclude accrued interest receivable on available for sale securities from the estimate of credit losses and report accrued interest separately in other assets in the Company’s consolidated balance sheets.

The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable incurred loss model under GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $1.4 million which was recognized through a $1.1 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to $5.9 million as of January 1, 2023. In addition, the Company recorded a $237,505 reserve on unfunded commitments which is recorded in other liabilities in the Company’s consolidated balance sheet, and was recognized through a $188,000 adjustment to retained earnings, net of tax.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. Upon adoption, the Company determined that an allowance for credit losses for debt securities was not required. At June 30, 2024 and December 31, 2023, no allowance for credit losses - available-for-sale securities was recorded.

ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), eliminates the accounting guidance for troubled debt restructurings in ASC Subtopic 310-40, Receivables -Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The Company adopted ASU 2022-02 on a modified retrospective basis effective on January 1, 2023. The adoption did not have a significant impact on the Company’s consolidated financial statements.

Earnings per Share. Basic earnings per share (“EPS”) is computed based on the weighted-average number of shares outstanding during the period. Diluted EPS is computed using the weighted-average shares and all potential dilutive shares outstanding during the period. The following table sets forth the computation of basic and diluted EPS for the periods indicated:

Table of Contents

	Three months ended June 30,				Six months ended June 30,
(In thousands, except per share data)	2024		2023		2024		2023
Net income available to common shareholders	$	2,758	$	2,633	$	5,431	$	6,959
Weighted average shares outstanding		7,083		7,066		7,092		7,067
Effect of dilutive shares		160		229		160		230

Weighted average diluted shares outstanding		7,243		7,295		7,252		7,297

Basic earnings per share	$	0.39	$	0.37	$	0.77	$	0.98
Diluted earnings per share	$	0.38	$	0.36	$	0.75	$	0.95

As of June 30, 2024, options to purchase 167,500 shares of common stock, with a weighted average exercise price of $5.51, were included in the computation of diluted net earnings per share. In addition, as of June 30, 2024, 78,000 shares of restricted stock grants with a grant date fair value of $4.81 per share which vest from 2024 through 2025 were included in the diluted earnings per share calculation.

Note 2. Securities

A summary of amortized cost, fair value and allowance for credit losses of securities is presented below as of the dates indicated.

	June 30, 2024
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
Securities available for sale:
U.S. Treasuries	$	2,945	$	-	$	7	$	-	$	2,938
U.S. government agencies		15,606		-		1,943		-		13,663
Mortgage-backed securities		7,194		-		349		-		6,845
Total securities available for sale	$	25,745	$	-	$	2,299	$	-	$	23,446

Securities held to maturity:
Property assessed clean energy	$	1,322	$	23	$	-	$	-	$	1,345
Public improvement district/tax increment reinvestment zone		21,732		233		213		-		21,752
Total securities held to maturity	$	23,054	$	256	$	213	$	-	$	23,097

Securities, restricted:
Other	$	4,229	$	-	$	-	$	-	$	4,229

	December 31, 2023
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
Securities available for sale:
U.S. Treasuries	$	3,906	$	-	$	12	$	-	$	3,894
U.S. government agencies		15,644		-		2,017		-		13,627
Mortgage-backed securities		5,731		-		275		-		5,456
Total securities available for sale	$	25,281	$	-	$	2,304	$	-	$	22,977

Securities held to maturity:
Property assessed clean energy	$	1,326	$	-	$	72	$	-	$	1,254
Public improvement district/tax increment reinvestment zone		22,868		592		865		-		22,595
Total securities held to maturity	$	24,194	$	592	$	937	$	-	$	23,849

Securities, restricted:
Other	$	4,176	$	-	$	-	$	-	$	4,176

Table of Contents

Securities available for sale consist of U.S. government agency securities and mortgage-backed securities guaranteed by U.S. government agencies. Securities held to maturity consist of Property Assessed Clean Energy (“PACE”) and Public Improvement District/Tax Increment Reinvestment Zone (“PID/TIRZ”) investments. These investment contracts or bonds are located in Texas, California and Florida, and originate under a contractual obligation between the property owners, the local county or city administration, and a third-party administrator and sponsor. PACE assessments are created to fund the purchase and installation of energy saving improvements to the property such as solar panels. PID/TIRZ assessments are used to pay for the development costs of a residential subdivision. Generally, as a property assessment, the total assessment is repaid in installments over a period of 5 to 32 years by the then current property owner(s). Each installment is collected by the County or City Tax Collector where the property is located. The assessments are an obligation of the property. Securities, restricted consist of Federal Reserve Bank of Dallas (“FRB”) and Federal Home Loan Bank of Dallas (“FHLB”) stock, each of which are carried at cost.

During each of the three and six months ended June 30, 2024 and 2023, no securities available for sale were sold, and there were no realized gains or losses recorded on sales for each of the three and six months ended June 30, 2024 and 2023.

As of June 30, 2024 and December 31, 2023, securities available for sale with a fair value of $978,000 and $988,000, respectively, were pledged against trust deposit balances held at the Bank. In March 2023, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) created the Bank Term Funding Program (“BTFP”), which was made available to banks in response to liquidity concerns in the United States banking system. The BTFP allows the par value of available for sale securities to be included as the collateral value. As of June 30, 2024, securities with a par value of $20.1 million were pledged to the Federal Reserve under the BTFP, of which $20.0 million was borrowed against. As of June 30, 2024, there were no securities pledged to secure borrowings at the FHLB.

As of June 30, 2024 and December 31, 2023, the Bank held FRB stock in the amount of $2.2 million. The Bank held FHLB stock in the amount of $2.0 million as of June 30, 2024 and December 31, 2023, all of which were classified as securities, restricted.

The table below indicates the length of time individual investment securities have been in a continuous loss position as of June 30, 2024:

	June 30, 2024
	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities available for sale:
U.S. Treasuries	$	2,938	$	7	$	-	$	-	$	2,938	$	7
U.S. government agencies		-		-		13,663		1,943		13,663		1,943
Mortgage-backed securities		2,610		34		4,235		315		6,845		349
Total	$	5,548	$	41	$	17,898	$	2,258	$	23,446	$	2,299

Beginning January 1, 2023, the Company evaluates all securities quarterly to determine if any debt securities in a loss position require an allowance for credit losses in accordance with ASC 326. The Company had a total of twenty-four (24) investment positions in the unrealized loss position as of June 30, 2024. The Company evaluates whether the decline in fair value has resulted from credit losses or other factors based upon our analysis of the underlying risk characteristics, including credit ratings, such as bond ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Table of Contents

As of June 30, 2024, no allowance for credit losses has been recognized on available for sale and held to maturity securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities are U.S. government agencies who continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

The amortized cost and estimated fair value of securities available for sale as of June 30, 2024 are presented in the table below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage-backed securities are shown separately since they are not due at a single maturity date.

	Available for Sale				Held to Maturity
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,945	$	2,938	$	-	$	-
Due after one year through five years		11,998		10,816		663		656
Due after five years through ten years		578		475		365		367
Due after ten years		3,030		2,372		22,026		22,074
Mortgage-backed securities		7,194		6,845		-		-
Total	$	25,745	$	23,446	$	23,054	$	23,097

Note 3. Loans and Allowance for Credit Losses

Major classifications of loans held for investment are as follows as of the dates indicated:

(In thousands)	June 30, 2024		December 31, 2023
Commercial and industrial	$	79,768	$	82,483
Consumer installment		626		900
Real estate – residential		9,177		8,181
Real estate – commercial		67,232		68,792
Real estate – construction and land		37,367		44,663
SBA:
SBA 7(a) guaranteed		186,015		162,144
SBA 7(a) unguaranteed		78,986		64,858
SBA 504		77,682		41,906
USDA		2,123		2,124
Factored Receivables		36,667		25,044
Gross Loans		575,643		501,095
Less:
Allowance for credit losses		8,276		6,308
Net loans	$	567,367	$	494,787

As of June 30, 2024, our loan portfolio included $74.6 million of loans, or approximately 13.0%, of our total funded loans to the dental industry, as compared to $78.2 million of loans, or 15.6% of total funded loans, as of December 31, 2023. The Bank believes that these loans are to credit worthy borrowers and are diversified geographically.

Accrued interest receivable on loans totaled $3.7 million and $3.1 million at June 30, 2024 and December 31, 2023, respectively, and is included in accrued interest receivable and other assets in the Company’s consolidated balance sheets.

Table of Contents

The Company serves the small business community by offering loans promulgated under the SBA’s 7(a) and 504 loan programs, and loans guaranteed by the USDA. SBA 7(a) and USDA loans are typically guaranteed by each agency in amounts ranging from 75% to 80% of the principal balance. For SBA construction loans, the Company records the guaranteed funded portion of the loans as held for sale. When the SBA loans are fully funded, the Company may sell the guaranteed portion into the secondary market, on a servicing-retained basis, or reclassify from loans held for sale to loans held for investment if the Company determines that holding these loans provide better long-term risk adjusted returns than selling the loans. In calculating gain on the sale of loans, the Company performs an allocation based on the relative fair values of the sold portion and retained portion of the loan. The Company’s assumptions are validated by reference to external market information.

The Company had $47.9 million and $26.6 million of SBA/USDA loans held for sale as of June 30, 2024 and December 31, 2023, respectively. During the three and six months ended June 30, 2024, there were no sales of loans. During the six months ended June 30, 2023, the Company sold the guaranteed portion of one USDA loan totaling $5.8 million, resulting in a gain on sale of loans of $581,000. There were no loan sales during the three months ended June 30, 2023. For the three and six months ended June 30, 2024, the Company elected to reclassify $29.4 million of the SBA 7(a) loans held for sale to loans held for investment.

Loan Origination/Risk Management.

The Company maintains written loan origination policies, procedures, and processes which address credit quality within an acceptable level of risk at several levels including individual loan level, loan type, and loan portfolio levels.

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”). The SBA has designated the Bank as a “Preferred Lender.” As an SBA Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority from the SBA.

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. As of June 30, 2024 and December 31, 2023, the total amount of loans that we sold in the secondary market yet retained the servicing of such loans was $37.6 million and $37.9 million, respectively.

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

Table of Contents

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.

The Bank engages in third-party factoring of certain business’s accounts receivable invoices. The Bank’s factoring clients are primarily in the transportation industry. Each account debtor is credit qualified, confirming credit worthiness and stability, because the underlying debtor represents the substantive underlying credit risk. Some factored receivables are full recourse to and personally guaranteed by the factoring client. In such cases, the client is credit qualified under specific policy guidelines. Concentration limits are set and monitored for aggregate factored receivables, account debtors, and individual factoring clients. In addition, we consider the overall state of each specific industry, currently over-the-road trucking, in our evaluation of the credit worthiness of the factoring client and the underlying debtor.

For all loan types, the Company establishes guidelines for its underwriting criteria including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturity terms.

At the portfolio level, the Company monitors concentrations of loans based on several criteria including loan type, collateral type, industry, geography, and other factors. The Company also performs periodic market research and economic analysis at a local geographic and national level. Based on this research, the Company may from time to time change the minimum or benchmark underwriting criteria applied to the above loan types.

Loans are placed on non-accrual status when, in the opinion of the Company’s management, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower.

Non-accrual loans, segregated by class of loans, were as follows as of the dates indicated:

	June 30, 2024				December 31, 2023
(In thousands)	Total Non-Accrual		Non-Accrual with No Credit Loss Allowance		Total Non-Accrual		Non-Accrual with No Credit Loss Allowance
Commercial and industrial	$	2,470	$	1,783	$	-	$	-
Real estate - residential		122		122		221		221
SBA guaranteed		6,245		6,245		1,951		1,951
SBA unguaranteed		1,780		1,121		251		251
Total	$	10,617	$	9,271	$	2,423	$	2,423

The Company did not recognize any interest income on non-accrual loans during the three and six months ended June 30, 2024 and 2023.

From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of a principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension or a combination thereof, among other things. During the six months ended June 30, 2024, there were no loan modifications of significance. There were no loans that were modified due to the borrowers experiencing financial difficulty in the preceding twelve months that were past due for the three and six months ended June 30, 2024.

Table of Contents

Under ASC 326, the allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged-off against the allowance when they are deemed uncollectible. The Company’s allowance for credit losses for loans consists of two components: (1) a specific valuation allowance based on probable losses on specifically identified loans and (2) a general valuation allowance based on historical credit loss experience, general economic conditions and other qualitative risk factors both internal and external to the Company.

The Company uses the open pool life method to estimate expected losses for all of the Company’s loan pools. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council, except for the dental, SBA and USDA loans, are segregated in separate pools.

Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. In setting the specific valuation allowance, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the Company maintains an internal list of impaired loans, which along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. For certain impaired loans, the Company allocates a specific reserve primarily based on the value of the collateral securing the loan or when the discounted cash flows for the loan is lower than the carrying value of that loan. A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis.

In determining the amount of the general valuation allowance, management considers factors such as historical lifetime credit loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, general economic conditions and other qualitative risk factors both internal and external to the Company and other relevant factors in accordance with ASC Topic 326, “Financial Instruments – Credit Losses.” Historical lifetime credit loss experience is determined by utilizing an open-pool (“cumulative loss rate”) methodology. Adjustments to the historical lifetime credit loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. For all loan pools, management has determined two years represents a reasonable and supportable forecast period and reverts to a historical loss rate over two years on a straight-line basis. Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type, excluding any loan that has a specific reserve allocated to it. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics.

Collateral dependent loans are secured by real estate assets, accounts receivable, inventory and equipment. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses on loans as a specific allocation.

Table of Contents

The Bank had no collateral-dependent loans as of June 30, 2024. The following table presents the amortized cost basis of collateral-dependent loans, which are individually evaluated to determine expected credit losses as of December 31, 2023:

(In thousands)	Real Estate		Business Assets		Total
December 31, 2023
Real estate - residential	$	221	$	-	$	221
SBA unguaranteed		251		-		251
Total	$	472	$	-	$	472

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The Company’s past due loans (including both accruing and non-accruing loans) are as follows as of the dates indicated:

											Total 90
	30-89 Days		90 Days or		Total		Total		Total		Days or More Past Due
(In thousands)	Past Due		More Past Due		Past Due		Current		Loans		Still Accruing
June 30, 2024
Commercial and industrial	$	30	$	604	$	634	$	79,134	$	79,768	$	-
Consumer installment		-		-		-		626		626		-
Real estate – residential		-		-		-		9,177		9,177		-
Real estate – commercial		-		-		-		67,232		67,232		-
Real estate – construction and land		-		-		-		37,367		37,367		-
SBA		897		314		1,211		341,472		342,683		-
USDA		-		-		-		2,123		2,123		-
Factored receivables		802		49		851		35,816		36,667		49
Total	$	1,729	$	967	$	2,696	$	572,947	$	575,643	$	49

December 31, 2023
Commercial and industrial	$	30	$	-	$	30	$	82,453	$	82,483	$	-
Consumer installment		-		-		-		900		900		-
Real estate – residential		93		-		93		8,088		8,181		-
Real estate – commercial		-		-		-		68,792		68,792		-
Real estate – construction and land		-		-		-		44,663		44,663		-
SBA		-		1,167		1,167		267,741		268,908		-
USDA		-		-		-		2,124		2,124		-
Factored receivables		879		147		1,026		24,018		25,044		147
Total	$	1,002	$	1,314	$	2,316	$	498,779	$	501,095	$	147

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including internal credit risk based on past experiences as well as external statistics and factors. Loans are graded in one of six categories: (i) pass, (ii) pass-watch, (iii) special mention, (iv) substandard, (v) doubtful, or (vi) loss. Loans graded as loss are charged-off.

Table of Contents

The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits quarterly. No significant changes were made to the loan risk grading system definitions and allowance for credit loss methodology during the past year. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit. The guaranteed portion of SBA loans that are classified are included in the pass category. The Company’s methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated pass are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in this category are loans to highly credit worthy borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.

Credits rated pass-watch loans have been determined to require enhanced monitoring for potential weaknesses which require further investigation. They have no significant delinquency in the past twelve months. This rating causes the loan to be actively monitored with greater frequency than pass loans and allows appropriate downgrade transition if verifiable adverse events are confirmed. This category may also include loans that have improved in credit quality from special mention but are not yet considered pass loans.

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Guaranteed portions of SBA loans graded substandard are generally on non-accrual due to the limited amount of interest covered by the guarantee, usually 60 days maximum. However, there typically will be no exposure to loss on the principal amount of these guaranteed portions of the loan.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss.

Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future.

Table of Contents

The following table summarizes the amortized cost basis of loans by year of origination and internal ratings as of June 30, 2024:

	Term Loans by Origination Year
(In thousands)	2024		2023		2022		2021		2020		Prior		Revolving Loans		Total
Commercial and industrial
Pass	$	3,166	$	12,147	$	22,727	$	15,563	$	7,249	$	12,185	$	2,206	$	75,243
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		1,504		-		326		332		1,676		-		3,838
Doubtful		-		-		604				83		-		-		687
Total	$	3,166	$	13,651	$	23,331	$	15,889	$	7,664	$	13,861	$	2,206	$	79,768
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Consumer installment
Pass	$	22	$	113	$	108	$	177	$	-	$	146	$	60	$	626
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	22	$	113	$	108	$	177	$	-	$	146	$	60	$	626
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate–- residential
Pass	$	-	$	470	$	4,684	$	2,052	$	920	$	620	$	-	$	8,746
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		308		-		-		-		-		123		-		431
Doubtful		-		-		-		-		-		-		-		-
Total	$	308	$	470	$	4,684	$	2,052	$	920	$	743	$	-	$	9,177
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate–- commercial
Pass	$	4,712	$	6,756	$	12,437	$	18,702	$	4,436	$	20,189	$	-	$	67,232
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	4,712	$	6,756	$	12,437	$	18,702	$	4,436	$	20,189	$	-	$	67,232
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate – construction/land
Pass	$	7,591	$	12,672	$	17,104	$	-	$	-	$	-	$	-	$	37,367
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	7,591	$	12,672	$	17,104	$	-	$	-	$	-	$	-	$	37,367
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
SBA 7a
Pass	$	25,541	$	58,214	$	48,130	$	54,825	$	20,323	$	43,855	$	-	$	250,888
Pass-watch		-		-		197		85		-		578		-		860
Special mention		-		1,035		2,125		390		293		217		-		4,060
Substandard		517		1,699		1,184		1,211		825		3,670		-		9,106
Doubtful		-		-		87		-		-		-		-		87
Loss		-		-		-		-		-		-		-		-
Total	$	26,058	$	60,948	$	51,723	$	56,511	$	21,441	$	48,320	$	-	$	265,001
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	56	$	-	$	56
SBA 504
Pass	$	8,469	$	27,176	$	10,024	$	2,636	$	6,002	$	12,024	$	-	$	66,331
Pass-watch		-		-		7,349		-		-		-		-		7,349
Special mention		-		-		-		-		-		637		-		637
Substandard		-		-		-		-		-		3,365		-		3,365
Doubtful		-		-		-		-		-		-		-		-
Total	$	8,469	$	27,176	$	17,373	$	2,636	$	6,002	$	16,026	$	-	$	77,682
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Table of Contents

	Term Loans by Origination Year
(In thousands)	2024		2023		2022		2021		2020		Prior		Revolving Loans		Total
USDA
Pass	$	-	$	-			$	-	$	-	$	800	$	-	$	800
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		1,323		-		-		-		-		1,323
Doubtful		-		-		-		-		-		-		-		-
Total	$	-	$	-	$	1,323	$	-	$	-	$	800	$	-	$	2,123
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Factored Receivables
Pass	$	36,667	$	-	$	-	$	-	$	-	$	-	$	-	$	36,667
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	36,667	$	-	$	-	$	-	$	-	$	-	$	-	$	36,667
Current period gross write-offs	$	357	$	207	$	5	$	-	$	-	$	-	$	-	$	569
Total
Pass	$	86,168	$	117,548	$	115,214	$	93,955	$	38,930	$	89,819	$	2,266	$	543,900
Pass-watch		-		-		7,546		85		-		578		-		8,209
Special mention		-		1,035		2,125		390		293		854		-		4,697
Substandard		825		3,203		2,507		1,537		1,157		8,834		-		18,063
Doubtful		-		-		691		-		83		-		-		774
Loss		-		-		-		-		-		-				-
Total	$	86,993	$	121,786	$	128,083	$	95,967	$	40,463	$	100,085	$	2,266	$	575,643
Current period gross write-offs	$	357	$	207	$	5	$	-	$	-	$	56	$	-	$	625

The following table summarizes the amortized cost basis of loans by year of origination, internal ratings, and gross write-offs by year of origination as of December 31, 2023:

	Term Loans by Origination Year
(In thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Commercial and industrial
Pass	$	14,632	$	23,938	$	16,625	$	7,769	$	5,229	$	9,289	$	1,847	$	79,329
Pass-watch		-		604		343		231		-		-		-		1,178
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		115		-		1,768		-		1,883
Doubtful		-		-		-		93		-		-		-		93
Total	$	14,632	$	24,542	$	16,968	$	8,208	$	5,229	$	11,057	$	1,847	$	82,483
Current period gross write-offs	$	-	$	214	$	-	$	-	$	-	$	-	$	-	$	214
Consumer installment
Pass	$	275	$	128	$	188	$	52	$	94	$	93	$	70	$	900
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	275	$	128	$	188	$	52	$	94	$	93	$	70	$	900
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate–- residential
Pass	$	470	$	4,679	$	1,944	$	754	$	-	$	207	$	-	$	8,054
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		127		-		127
Doubtful		-		-		-		-		-		-		-		-
Total	$	470	$	4,679	$	1,944	$	754	$	-	$	334	$	-	$	8,181
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Table of Contents

	Term Loans by Origination Year
(In thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
Real estate–- commercial
Pass	$	13,330	$	10,920	$	18,970	$	4,917	$	8,937	$	11,718	$	-	$	68,792
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	13,330	$	10,920	$	18,970	$	4,917	$	8,937	$	11,718	$	-	$	68,792
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate – construction/land
Pass	$	21,358	$	23,305	$	-	$	-	$	-	$	-	$	-	$	44,663
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	21,358	$	23,305	$	-	$	-	$	-	$	-	$	-	$	44,663
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
SBA 7a
Pass	$	40,937	$	47,509	$	49,245	$	14,946	$	12,782	$	22,533	$	-	$	187,952
Pass-watch		749		3,209		9,343		7,137		5,267		5,704		-		31,409
Special mention		-		127		576		1,364		1,217		2,550		-		5,834
Substandard		-		466		-		129		356		800		-		1,751
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		56		-		56
Total	$	41,686	$	51,311	$	59,164	$	23,576	$	19,622	$	31,643	$	-	$	227,002
Current period gross write-offs	$	-	$	-	$	-	$	-	$	58	$	270	$	-	$	328
SBA 504
Pass	$	4,186	$	7,235	$	6,755	$	7,512	$	6,610	$	9,608	$	-	$	41,906
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	4,186	$	7,235	$	6,755	$	7,512	$	6,610	$	9,608	$	-	$	41,906
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
USDA
Pass	$	-	$	1,320	$	-	$	-	$	-	$	804	$	-	$	2,124
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	-	$	1,320	$	-	$	-	$	-	$	804	$	-	$	2,124
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Factored Receivables
Pass	$	25,044	$	-	$	-	$	-	$	-	$	-	$	-	$	25,044
Pass-watch		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Total	$	25,044	$	-	$	-	$	-	$	-	$	-	$	-	$	25,044
Current period gross write-offs	$	510	$	128	$	-	$	-	$	-	$	-	$	-	$	638
Total
Pass	$	120,232	$	119,034	$	93,727	$	35,950	$	33,652	$	54,252	$	1,917	$	458,764
Pass-watch		749		3,813		9,686		7,368		5,267		5,704		-		32,587
Special mention		-		127		576		1,364		1,217		2,550		-		5,834
Substandard		-		466		-		244		356		2,695		-		3,761
Doubtful		-		-		-		93		-		-		-		93
Loss		-		--				-		-		56				56
Total	$	120,981	$	123,440	$	103,989	$	45,019	$	40,492	$	65,257	$	1,917	$	501,095
Current period gross write-offs	$	510	$	342	$	-	$	-	$	58	$	270	$	-	$	1,180

Table of Contents

The following table details activity in the allowance for credit losses on loans by portfolio segment for the three and six months ended June 30, 2024 and 2023.

(In thousands)	Commercial and Industrial		Consumer Installment			Real Estate Residential			Real Estate Commercial			Real Estate Construction and Land			SBA			USDA		Factored Receivables			Total
Three months ended:
June 30, 2024
Beginning Balance	$	2,231	$	15		$	91		$	746		$	142		$	2,814		$	22	$	669		$	6,730
Provision for credit losses		203		(1	)		(1	)		(64	)		46			1,372			-		67			1,622
Charge-offs		-		-			-			-			-			-			-		(212	)		(212	)
Recoveries		-		-			-			-			-			17			-		119			136
Net recoveries (charge-offs)		-		-			-			-			-			17			-		(93	)		(76	)
Ending balance	$	2,434	$	14		$	90		$	682		$	188		$	4,203		$	22	$	643		$	8,276

June 30, 2023
Beginning Balance	$	2,344	$	27		$	47		$	591		$	112		$	2,160		$	18	$	574		$	5,873
Provision for credit losses		110		(6	)		10			22			(61	)		484			-		158			717
Charge-offs		-		-			-			-			-			(328	)		-		(190	)		(518	)
Recoveries		-		-			-			-			-			13			-		53			66
Net charge-offs		-		-			-			-			-			(315	)		-		(137	)		(452	)
Ending balance	$	2,454	$	21		$	57		$	613		$	51		$	2,329		$	18	$	595		$	6,138

(In thousands)	Commercial and Industrial			Consumer Installment			Real Estate Residential			Real Estate Commercial			Real Estate Construction and Land			SBA			USDA			Factored Receivables			Total
Six months ended:
June 30, 2024
Beginning Balance	$	2,495		$	18		$	71		$	616		$	143		$	2,484		$	19		$	462		$	6,308
Provision for credit losses		(61	)		(4	)		19			66			45			1,745			3			582			2,395
Charge-offs		-			-			-			-			-			(56	)		-			(569	)		(625	)
Recoveries		-			-			-			-			-			30			-			168			198
Net charge-offs		-			-			-			-			-			(26	)		-			(401	)		(427	)
Ending balance	$	2,434		$	14		$	90		$	682		$	188		$	4,203		$	22		$	643		$	8,276

June 30, 2023
Beginning Balance	$	1,302		$	14		$	79		$	899		$	55		$	1,505		$	51		$	608		$	4,513
Impact of adoption ASC 326		1,042			13			(32	)		(308	)		57			651			(33	)		-			1,390
Provision for credit losses		110			(6	)		10			22			(61	)		484			-			201			760
Charge-offs		-			-			-			-			-			(328	)		-			(298	)		(626	)
Recoveries		-			-			-			-			-			17			-			84			101
Net charge-offs		-			-			-			-			-			(311	)		-			(214	)		(525	)
Ending balance	$	2,454		$	21		$	57		$	613		$	51		$	2,329		$	18		$	595		$	6,138

Management continues to closely monitor for credit changes resulting from the uncertain forecasted economic conditions, the continued rising interest rate environment, and the persistent high inflation levels in the United States and our market areas, and potential recession in the United States and our market areas. Additional provisions for credit losses may be necessary in future periods.

Table of Contents

Note 4. Leases

The Company leases certain office facilities and office equipment under operating leases. Certain of the leases contain provisions for renewal options, escalation clauses based on increases in certain costs incurred by the lessor, as well as free rent periods and tenant improvement allowances. The Company amortizes office lease incentives and rent escalations on a straight-line basis over the life of the respective leases. The Company has obligations under operating leases that expire between 2024 and 2034 with initial non-cancellable terms in excess of one year.

We recognize our operating leases on our consolidated balance sheet. Right-of-use assets represent our right to utilize the underlying asset during the lease term, while lease liability represents the obligation to make periodic lease payments over the life of the lease. As of June 30, 2024 and December 31, 2023, right-of-use assets totaled $2.2 million and $2.6 million, respectively, and are reported as other assets on our accompanying consolidated balance sheets. The related lease liabilities as of June 30, 2024 and December 31, 2023 totaled $2.3 million and $2.7 million, respectively, and are reported in other liabilities on our accompanying consolidated balance sheets. As of June 30, 2024, the weighted average remaining lease term is sixty-two (62) months, and the weighted average discount rate is 4.03%.

As of June 30, 2024, the minimum rental commitments under these noncancelable operating leases are as follows:

(In thousands)
2024	$	367
2025		769
2026		509
2027		228
2028		178
2029 and thereafter		524
Total minimum rental payments		2,575
Less: Interest		(282	)
Present value of lease liabilities	$	2,293

The Company currently receives rental income from seven tenants in its headquarters building for office space the Company does not occupy. Aggregate future minimum rentals to be received under non-cancelable leases as of June 30, 2024 through 2031 were as follows:

(In thousands)
2024	$	178
2025		372
2026		303
2027		236
2028		122
2029 and thereafter		148
Total minimum rental payments	$	1,359

Note 5. Goodwill and Core Deposit Intangible

Goodwill and core deposit intangible assets were as follows as of the dates indicated:

(In thousands)	June 30, 2024		December 31, 2023
Goodwill	$	21,440	$	21,440
Core deposit intangible, net		254		359

Core deposit intangible is amortized on a straight-line basis over the initial estimated lives of the deposits, which range from five (5) to twelve (12) years. The core deposit intangible amortization totaled $52,000 and $105,000 for the three and six months ended June 30, 2024 and 2023, respectively.

Table of Contents

The carrying basis and accumulated amortization of the core deposit intangible as of June 30, 2024 and December 31, 2023 were as follows:

(In thousands)	June 30, 2024			December 31, 2023
Gross carrying basis	$	1,708		$	1,708
Accumulated amortization		(1,454	)		(1,349	)
Net carrying amount	$	254		$	359

The estimated amortization expense of the core deposit intangible remaining as of June 30, 2024 is as follows:

(In thousands)
2024	$	105
2025		149
Total	$	254

Note 6. Deposits

Deposits were as follows as of the dates indicated:

(In thousands, except percentages)	June 30, 2024				December 31, 2023
Non-interest bearing demand	$	63,671	10	%	$	68,433	13	%
Interest-bearing demand (NOW)		4,439	1			4,295	1
Money market accounts		144,885	23			139,596	25
Savings accounts		5,515	1			6,132	2
Time deposits		400,573	65			308,435	59
Total	$	619,083	100	%	$	526,891	100	%

The aggregate amount of demand deposit overdrafts that have been reclassified as loans as of June 30, 2024 and December 31, 2023 was insignificant.

Note 7. Borrowed Funds and Subordinated Notes

The Company has a blanket lien credit line with the FHLB with borrowing capacity of $54.5 million secured by commercial loans. The Company determines its borrowing needs and utilizes overnight advance accordingly at varying terms. The Company had no borrowings with FHLB as of June 30, 2024 and December 31, 2023.

The Company also has a credit line with the FRB with borrowing capacity of $38.8 million, secured by commercial loans. The Company had no borrowings under this line from the FRB as of June 30, 2024 and December 31, 2023.

As part of the BTFP, the Federal Reserve offered loans of up to one year in length to banks and other eligible depository institutions pledging U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral, which are assessed at par value. The Bank pledged AFS securities with par value of $20.1 million to provide additional liquidity to meet the needs of depositors as of June 30, 2024. Borrowings related to the BTFP was $20.0 million and $21.0 million as of June 30, 2024 and December 31, 2023, respectively, with an interest rate of 4.85% and maturing on December 26, 2024.

As of June 30, 2024 and December 31, 2023, T Bancshares had outstanding subordinated notes for $8.0 million issued in 2017 (the “2017 Notes”) bearing an interest rate of three-month CME Term SOFR plus a tenor spread adjustment of 0.26161% plus 5.125%, with interest payable quarterly and maturing on July 20, 2027, at which all principal is due. As of June 30, 2024 and December 31, 2023, the interest rate on the 2017 Notes was 10.70% and 10.78%, respectively. T Bancshares also had an outstanding subordinated note for $4.0 million issued in 2018 (the “2018 Note”) bearing an interest rate of three-month CME Term SOFR plus a tenor spread adjustment of 0.26161% plus 4.348%, payable quarterly, and maturing on March 31, 2028. As of June 30, 2024 and December 31, 2023, the interest rate on the 2018 Note was 9.93% and 10.00%, respectively. Each of the 2017 Notes and the 2018 Note 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.

Table of Contents

Note 8. Benefit Plans

The Company funds certain costs for medical benefits in amounts determined at the discretion of management. The Company has a retirement savings 401(k) plan covering substantially all employees of the Bank, and a second plan covering substantially all employees of Sanders Morris, Tectonic Advisors and the Company.

Under the plans, the Company matches 100% of the employee’s contribution on the first 1% of the plan participant’s compensation, and 50% of the plan participant’s contribution on the next 5% of the plan participant’s compensation. An eligible plan participant may contribute up to the annual maximum contribution allowed for a given year under guidance from the Internal Revenue Service. At its discretion, the Company may also make additional annual contributions to the plans. Any discretionary contributions are allocated to plan participants in the proportion of plan participant contributions to the total contributions of all participants in the plans. No discretionary contributions were made during the three and six months ended June 30, 2024 and 2023.

The amount of employer contributions charged to expense under the two plans was $228,000 and $460,000 for the three and six months ended June 30, 2024, respectively, and $175,000 and 383,000 for the three and six months ended June 30, 2023, respectively, and is included in salaries and employee benefits on the consolidated statements of income. There were no accruals payable to the plans as of June 30, 2024 and December 31, 2023.

Note 9. Income Taxes

Income tax expense was approximately $853,000 and $1.7 million for the three and six months ended June 30, 2024, respectively, and $839,000 and $2.1 million for the three and six months ended June 30, 2023, respectively. The Company’s effective income tax rate was 21.3% and 21.5% for the three and six months ended June 30, 2024, respectively, and 21.7% and 21.5% for the three and six months ended June 30, 2023, respectively. The effective tax rate is affected by the income tax effects of nondeductible expenses related to stock options among other things.

Net deferred tax assets totaled $1.2 million and $889,000 at June 30, 2024 and December 31, 2023, respectively. The Company files U.S. federal and state income tax returns.

Note 10. Stock Compensation Plans

The Company’s board of directors and common stock shareholders adopted the Tectonic Financial, Inc. 2017 Equity Incentive Plan (the “Plan”) in May 2017 in connection with the Company’s acquisition of TBI. The Plan was amended and restated by the Company’s board of directors and common stock shareholders effective March 27, 2019 in connection with the Company’s initial public offering. The Plan is administered by the Compensation Committee of the Company’s board of directors and authorizes the granting of stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants in order to promote the success of the Company’s business. Incentive stock options may be granted only to employees of the Company, or a parent or subsidiary of the Company. The Company reserved 750,000 authorized shares of common stock for the Plan. The term of each stock option is no longer than 10 years from the date of the grant.

The Company accounts for stock-based employee compensation plans using the fair value-based method of accounting. The fair value of each stock option award is estimated on the date of grant by a third party using a closed form option valuation (Black-Scholes) model. The fair value of each grant award was estimated on the date of grant by a third party using the market approach based on the application of latest 12-month Company metrics to guideline public company multiples.

On September 27, 2021, 40,000 shares of restricted stock of the Company with an exercise price of $10.00 per share and an intrinsic value of $6.92 per share were granted with a contract life through December 31, 2021. Sanders Morris issued a full recourse secured promissory note at the time of the grant. These shares of restricted stock vested immediately, and were exercised on October 29, 2021, with the grantees utilizing the proceeds of the promissory note from Sanders Morris to fund the exercise price. This note receivable is recognized within a contra-equity account, with payments by the grantees reducing this balance as they occur. As of March 31, 2024 and December 31, 2023, there were no amounts outstanding under this note receivable. The shares were subject to a right of repurchase by the Company under certain circumstances, which right expired on December 31, 2023.

There were no stock options exercised, granted, vested, or forfeited during each of the three and six months ended June 30, 2024 and 2023, respectively.

Table of Contents

The number of options outstanding at each of June 30, 2024 and December 31, 2023 was 167,500, and the weighted average exercise price at each of June 30, 2024 and December 31, 2023 was $5.51. The weighted average contractual life as of June 30, 2024 and December 31, 2023 was 2.87 years and 3.37 years, respectively. Stock options outstanding at the end of the period had immaterial aggregate intrinsic values. The weighted-average grant date fair value of the options at each of June 30, 2024 and December 31, 2023 was $1.98.

As of June 30, 2024, all 167,500 stock options outstanding were vested, and there was no unrecognized compensation cost. The Company recorded compensation expense on a straight-line basis over the vesting periods, and for the 40,000 shares of restricted stock granted September 27, 2021, over the right of repurchase period. The Company recorded no salaries and employee benefits expense on our consolidated statements of income in connection with the Plan for the three and six months ended June 30, 2024, and recorded expense of $20,000 and $40,000 for the three and six months ended June 30, 2023, respectively, related to the stock options.

The Company granted restricted stock awards totaling 210,000 shares of common stock on September 30, 2020. The vesting schedules vary by award, with all of the awards vesting over a three-year period from 2023 through 2025.

As of June 30, 2024, 78,000 awarded shares of restricted stock were outstanding, and the grant date fair value was $4.81. None of the outstanding restricted stock awards were vested as of June 30, 2024 and December 31, 2023. The weighted average contractual life as of June 30, 2024 and December 31, 2023 was 0.68 years and 1.18 years, respectively. The Company is recording compensation expense on a straight-line basis over the respective vesting periods. The Company recorded salaries and employee benefits expense on our consolidated statements of income in connection with the Plan of approximately $21,000 and $42,000 for the three and six months ended June 30, 2024, respectively, and $55,000 and $110,000 for the three and six months ended June 30, 2023, respectively, related to the restricted stock awards. As of June 30, 2024, there was $56,000 of unrecognized compensation cost related to the restricted stock awards.

Note 11. Commitments and Contingencies

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its 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 consolidated balance sheets. The Company’s 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. The Company uses the same credit policies in making commitments and conditional obligations as it does 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 following table summarizes loan commitments as of the dates indicated:

(In thousands)	June 30, 2024		December 31, 2023
Undisbursed loan commitments	$	66,836	$	45,743
Standby letters of credit		162		162
Total	$	66,998	$	45,905

Allowance For Credit Losses – Off-Balance-Sheet Credit Exposures. The allowance for credit losses for off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur, and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 4 – Loans and Allowance for Credit Losses, as if such commitments were funded.

Table of Contents

The following table details activity in the allowance for credit losses for off-balance-sheet commitments for the periods indicated.

	Three months ended June 30,					Six months ended June 30,
(In thousands)	2024		2023			2024		2023
Beginning balance	$	336	$	273		$	192	$	-
Impact of adopting ASC 326		-		-			-		238
Provision for off-balance sheet credit losses		38		(25	)		182		10
Ending balance	$	374	$	248		$	374	$	248

The Company is involved in various regulatory inspections, inquiries, investigations and proceedings, and litigation matters that arise from time to time in the ordinary course of business. The process of resolving matters through litigation or other means is inherently uncertain, and it is possible that an unfavorable resolution of these matters, will adversely affect the Company, its results of operations, financial condition and cash flows. The Company’s regular practice is to expense legal fees as services are rendered in connection with legal matters, and to accrue for liabilities when payment is probable.

The Company, through its wholly owned subsidiary Sanders Morris, has uncommitted financing arrangements with clearing brokers that finance its customer accounts, certain broker-dealer balances, and firm trading positions. Although these customer accounts and broker-dealer balances are not reflected on the consolidated balance sheets for financial reporting purposes, Sanders Morris has generally agreed to indemnify these clearing brokers for losses they may sustain in connection with the accounts, and therefore, retains risk on these accounts. Sanders Morris is required to maintain certain cash or securities on deposit with its clearing brokers. Deposits with clearing organizations were $250,000 at each of June 30, 2024 and December 31, 2023.

Note 12. Related Parties

Advisors’ service agreements: In January 2006, the Company entered into a services agreement (the “Tectonic Advisors-CWA Services Agreement”) with Cain Watters. The owners of Cain Watters together hold approximately 30% of the voting ownership in the Company. Under the Tectonic Advisors-CWA Services Agreement, Cain Watters pays the Company for due diligence and research services on investment alternatives available to Cain Watters’ clients. The Company earned $75,000 and $121,000 during the three and six months ended June 30, 2024, respectively, and $28,000 and $53,000 for the three and six months June 30, 2023, respectively, under the Tectonic Advisors-CWA Services Agreement. These fees are included in investment advisory and other related services in the accompanying consolidated statements of income. The Company had $195,000 and $95,000 in fees payable related to these services at each of June 30, 2024 and December 31, 2023, which is included in other liabilities on the consolidated balance sheets.

CWA Fee Allocation Agreement: In January 2006, Tectonic Advisors entered into an agreement (the “Fee Allocation Agreement”) with Cain Watters with reference to its advisory agreement with the Bank. Tectonic Advisors had $217,000 and $215,000 payable to Cain Watters related to this agreement at June 30, 2024 and December 31, 2023, respectively, which are included in other liabilities on the accompanying consolidated balance sheets.

As of June 30, 2024 and December 31, 2023, certain officers, directors and their affiliated companies had depository accounts with the Bank totaling approximately $5.8 million and $7.7 million, respectively. None of those deposit accounts have terms more favorable than those available to any other depositor. There were no loans outstanding to directors of the Bank or their affiliated companies as of June 30, 2024 and December 31, 2023.

Note 13. Regulatory Matters

The Company and the Bank are 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 business, results of operations and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under GAAP, regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Table of Contents

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and tier 1 capital to risk-weighted assets, common equity Tier 1 (“CET1”) capital to total risk-weighted assets, and of tier 1 capital to average assets. To be categorized as “well-capitalized” under the prompt corrective action framework, the Bank must maintain (i) a Total risk-based capital ratio of 10%; (ii) a Tier 1 risk-based capital ratio of 8%; (iii) a Tier 1 leverage ratio of 5%; and (iv) a CET1 risk-based capital ratio of 6.5%.

The Basel III minimum capital ratio requirements and additional capital conservation buffers as applicable to the Company and the Bank as of June 30, 2024 are summarized in the table below.

	BASEL III Minimum for Capital Adequacy Requirements			BASEL III Additional Capital Conservation Buffer			BASEL III Ratio with Capital Conservation Buffer
Total Risk Based Capital (total capital to risk weighted assets)		8.0	%		2.5	%		10.5	%
Tier 1 Risk Based Capital (tier 1 to risk weighted assets)		6.0	%		2.5	%		8.5	%
Common Equity Tier 1 Risk Based (CET1 to risk weighted assets)		4.5	%		2.5	%		7.0	%
Tier 1 Leverage Ratio (tier 1 to average assets)		4.0	%		-	%		4.0	%

Accordingly, a financial institution may be considered “well-capitalized” under the FDIC’s prompt corrective action framework, but not satisfy the buffered Basel III capital ratios. As of June 30, 2024 and December 31, 2023, the Company met the definition of “well-capitalized” under the applicable regulations of the Federal Reserve and the Bank’s regulatory capital ratios were in excess of the capital conservation buffer and the levels established for “well-capitalized” institutions under the FDIC’s regulatory framework for prompt corrective action and the Basel III capital guidelines.

The regulatory capital ratios of the Company and the Bank are as follows as of the dates indicated:

	Actual					Minimum Capital Required–- Basel III					Required to be Considered Well Capitalized
(In thousands, except percentages)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2024
Total Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)	$	96,891		19.09	%	$	53,306		10.50	%	$	50,768		10.00	%
T Bank, N.A.		97,617		19.43			52,751		10.50			50,239		10.00
Tier 1 Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		90,517		17.83			43,153		8.50			40,614		8.00
T Bank, N.A.		91,308		18.17			42,703		8.50			40,191		8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		73,267		14.43			35,538		7.00			32,999		6.50
T Bank, N.A.		91,308		18.17			35,167		7.00			32,655		6.50
Tier 1 Capital (to Average Assets)
Tectonic Financial, Inc. (consolidated)		90,517		11.78			30,748		4.00			38,435		5.00
T Bank, N.A.		91,308		12.01			30,405		4.00			38,007		5.00

As of December 31, 2023
Total Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)	$	92,385		20.90	%	$	46,415		10.50	%	$	44,205		10.00	%
T Bank, N.A.		92,957		21.29			45,835		10.50			43,652		10.00
Tier 1 Capital (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		86,847		19.65			37,574		8.50			35,364		8.00
T Bank, N.A.		87,488		20.04			37,105		8.50			34,922		8.00
Common Equity Tier 1 (to Risk Weighted Assets)
Tectonic Financial, Inc. (consolidated)		69,597		15.74			30,944		7.00			28,733		6.50
T Bank, N.A.		87,488		20.04			30,557		7.00			28,374		6.50
Tier 1 Capital (to Average Assets)
Tectonic Financial, Inc. (consolidated)		86,847		13.97			24,861		4.00			31,076		5.00
T Bank, N.A.		87,488		14.26			24,534		4.00			30,667		5.00

Table of Contents

Dividend Restrictions. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared (including those on the Series A preferred stock) would cause the regulatory capital of the Bank and/or the Company to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. As of June 30, 2024, approximately $28.5 million was available for the declaration of dividends by the Bank to the Company without prior approval of regulatory agencies and still maintain its “well-capitalized” status. In addition, as a Texas corporation, we are restricted under the Texas Business Organizations Code from paying dividends under certain conditions. Under Texas law, we cannot pay dividends to shareholders if the dividends exceed our surplus or if after giving effect to the dividends, we would be insolvent.

In addition to the regulatory requirements of the federal banking agencies, Sanders Morris and Tectonic Advisors are subject to the regulatory framework applicable to registered investment advisors under the SEC’s Division of Investment Management, and additionally, Sanders Morris is regulated by FINRA, which, among other requirements, imposes minimums on its net regulatory capital.

Note 14. Operating Segments

The Company’s reportable segments consist of “Banking,” “Other Financial Services,” and “HoldCo” operations.

The “Banking” segment consists of operations relative to the Company’s full service banking operations, including providing depository and lending services to individual and business customers, and other related banking services, along with services provided through the factoring operations of the Bank’s Integra division.

The “Other Financial Services” segment includes managed and directed brokerage, investment advisory services, including related trust company operations, third party administration, and life and disability insurance brokerage services to both individuals and businesses.

The “HoldCo” operations include the operations and subordinated debt held at the Bank’s immediate parent, as well as the activities of the financial holding company which serves as TBI’s parent.

The tables below present the financial information for each segment that is specifically identifiable, or based on allocations using internal methods, for the three and six months ended June 30, 2024 and 2023:

(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated
Three Months Ended June 30, 2024
Income Statement
Total interest income	$	15,627	$	-	$	-		$	15,627
Total interest expense		7,473		-		322			7,795
Provision for credit losses		1,660		-		-			1,660
Net interest income (loss) after provision for credit losses		6,494		-		(322	)		6,172
Non-interest income		388		10,354		-			10,742
Depreciation and amortization expense		102		8		3			113
All other non-interest expense		5,116		6,495		1,191			12,802
Income (loss) before income tax	$	1,664	$	3,851	$	(1,516	)	$	3,999

Goodwill and other intangibles	$	19,344	$	2,350	$	-		$	21,694
Total assets	$	763,652	$	12,815	$	640		$	777,107

Table of Contents

(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated
Six Months Ended June 30, 2024
Income Statement
Total interest income	$	29,925	$	-	$	-		$	29,925
Total interest expense		14,347		-		644			14,991
Provision for credit losses		2,577		-		-			2,577
Net interest income (loss) after provision for credit losses		13,001		-		(644	)		12,357
Non-interest income		752		20,488		-			21,240
Depreciation and amortization expense		204		17		5			226
All other non-interest expense		10,083		12,988		2,392			25,463
Income (loss) before income tax	$	3,466	$	7,483	$	(3,041	)	$	7,908

Goodwill and other intangibles	$	19,344	$	2,350	$	-		$	21,694
Total assets	$	763,652	$	12,815	$	640		$	777,107

(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated
Three Months Ended June 30, 2023
Income Statement
Total interest income	$	11,254	$	-	$	-		$	11,254
Total interest expense		4,149		-		282			4,431
Provision for credit losses		691		-		-			691
Net interest income (loss) after provision for credit losses		6,414		-		(282	)		6,132
Non-interest income		376		9,056		-			9,432
Depreciation and amortization expense		102		9		-			111
All other non-interest expense		4,207		6,638		748			11,593
Income (loss) before income tax	$	2,481	$	2,409	$	(1,030	)	$	3,860

Goodwill and other intangibles	$	19,554	$	2,350	$	-		$	21,904
Total assets	$	608,982	$	12,042	$	1,024		$	622,048

(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated
Six Months Ended June 30, 2023
Income Statement
Total interest income	$	22,167	$	-	$	-		$	22,167
Total interest expense		7,754		-		547			8,301
Provision for credit losses		770		-		-			770
Net interest income (loss) after provision for credit losses		13,643		-		(547	)		13,096
Non-interest income		1,261		18,873		-			20,134
Depreciation and amortization expense		198		25		-			223
All other non-interest expense		8,209		13,544		1,396			23,149
Income (loss) before income tax	$	6,497	$	5,304	$	(1,943	)	$	9,858

Goodwill and other intangibles	$	19,554	$	2,350	$	-		$	21,904
Total assets	$	608,982	$	12,042	$	1,024		$	622,048

Table of Contents

Note 15. Fair Value of Financials Instruments

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

	●	Level 1 Inputs–- Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
	●	Level 2 Inputs–- Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
	●	Level 3 Inputs–- Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities in the Level 1 or Level 3 inputs.

The following table summarizes securities available for sale measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, as of the dates indicated:

(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
As of June 30, 2024
Securities available for sale:
U.S. Treasuries	$	-	$	2,938	$	-	$	2,938
U.S. government agencies		-		13,663		-		13,663
Mortgage-backed securities		-		6,845		-		6,845
As of December 31, 2023
Securities available for sale:
U.S. Treasuries	$	-	$	3,894	$	-	$	3,894
U.S. government agencies		-		13,627		-		13,627
Mortgage-backed securities		-		5,456		-		5,456

Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.

The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods. During the three and six months ended June 30, 2024 and 2023, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

Table of Contents

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Financial assets measured at fair value on a non-recurring basis during the reported periods include impaired loans and loans held for sale.

Collateral dependent loan. The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent loans primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount. During the reported periods, there was no allowance for credit losses for collateral-dependent loans.

The valuation of our not readily marketable investment securities which are classified as Level 3 are based on the Company’s own assumptions and inputs that are both significant to the fair value measurement, and are unobservable.

Our assessment of the significance of a particular input to the Level 3 fair value measurements in their entirety requires judgment and considers factors specific to the assets. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future.

Loans held for sale. Loans held for sale include the guaranteed portion of SBA and USDA loans and are reported at the lower of cost or estimated fair value. Fair value for SBA and USDA loans is based on market indications available in the market. There were no impairments reported for the periods presented.

Non-financial assets measured at fair value on a non-recurring basis during the reported periods include other real estate owned which, upon initial recognition, was re-measured and reported at fair value through a charge-off to the allowance for credit losses. Additionally, foreclosed assets which, subsequent to their initial recognition, are re-measured at fair value through a write-down included in other non-interest expense. Regulatory guidelines require the Company to reevaluate the fair value of foreclosed assets on at least an annual basis. The fair value of foreclosed assets, upon initial recognition and impairment, are re-measured using Level 2 inputs based on observable market data. Estimated fair value of other real estate is based on appraisals. Appraisers are selected from the list of approved appraisers maintained by management. As of June 30, 2024 and December 31, 2023, there were no foreclosed assets. There were no foreclosed assets re-measured during each of the three and six months ended June 30, 2024 and 2023.

The methods and assumptions used to estimate fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, restricted securities, accrued interest receivable and accrued interest payable. The estimated fair value of demand and savings deposits is the carrying amount since rates are regularly adjusted to market rates and amounts are payable on demand. For borrowed funds and variable rate loans or deposits that re-price frequently and fully, the estimated fair value is the carrying amount. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. For loans held for sale, the estimated fair value is based on market indications for similar assets in the active market. The estimated fair value of other financial instruments and off-balance-sheet loan commitments approximate cost and are not considered significant to this presentation.

The Company adds a servicing asset when loans are sold and the servicing is retained, and uses the amortization method for the treatment of the servicing asset. The servicing asset is carried at lower of cost or fair value. Loan servicing assets do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using a discounted cash flow model having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy. During the three and six months ended June 30, 2024, there was no sale of loans. During the six months ended June 30, 2023, the Company added servicing assets totaling $38,000 in connection with the sale of a $5.8 million USDA loan. For the six months ended June 30, 2024, the Company reversed $38,000 of valuation allowance for the servicing assets (recorded during the three months ended March 31, 2024). There was no allowance provision for servicing assets for each of the three and six months ended June 30, 2023.

Table of Contents

FASB ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value approximates carrying value for cash and cash equivalents and accrued interest. The methodologies for other financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are discussed below.

Securities held to maturity. The securities in this category include PACE and PID/TIRZ investments. These investment contracts or bonds originate under a contractual obligation between the property owners, the local county administration, and a third-party administrator and sponsor. The fair value of these investments are estimated using observable market inputs in a discounted cash flow analysis.

Loans. The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality.

Deposits. The fair values of demand deposits, savings deposits are, by definition, equal to the amount payable on demand and, therefore, approximate their carrying amounts. The fair values for time deposits are estimated using a discounted cash flow calculation that utilizes interest rates currently being offered on time deposits with similar contractual maturities.

Borrowed Funds. The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments. The estimated fair value approximates carrying value for variable-rate junior subordinated deferrable interest debentures that reprice quarterly.

Loan Commitments, Standby and Commercial Letters of Credit. Our lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.

Carrying amounts and estimated fair values of other financial instruments by level of valuation input were as follows as of the dates indicated:

	June 30, 2024
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	68,260	$	68,260
Level 2 inputs:
Securities available for sale		23,446		23,446
Securities, restricted		4,229		4,229
Loans held for sale		47,917		52,203
Accrued interest receivable		4,527		4,527
Level 3 inputs:
Securities held to maturity		23,054		23,097
Loans, net		567,367		558,337
Servicing asset		290		290
Financial liabilities:
Level 1 inputs:
Non-interest bearing deposits		63,671		63,671
Level 2 inputs:
Interest bearing deposits		555,412		556,197
Borrowed funds		20,000		20,000
Subordinated notes		12,000		12,000
Accrued interest payable		1,597		1,597

Table of Contents

	December 31, 2023
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	58,767	$	58,767
Level 2 inputs:
Securities available for sale		22,977		22,977
Securities, restricted		4,176		4,176
Loans held for sale		26,573		28,671
Accrued interest receivable		4,829		4,829
Level 3 inputs:
Securities held to maturity		24,194		23,849
Loans, net		494,787		484,848
Servicing asset		321		321
Financial liabilities:
Level 1 inputs:
Non-interest bearing deposits		68,433		68,433
Level 2 inputs:
Interest bearing deposits		458,458		459,549
Borrowed funds		21,000		21,000
Subordinated notes		12,000		12,000
Accrued interest payable		913		913

Note 16. Recent Accounting Pronouncements

ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, though early adoption is permitted. The Company will update its segment related disclosures upon adoption.

ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. ASU 2023-09 is effective for us on January 1, 2025, though early adoption is permitted. The Company will update its income tax disclosures upon adoption.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2024 (this “Form 10-Q”), as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 1, 2024 (the “2023 Form 10-K”).

Cautionary Notice Regarding Forward-Looking Statements

Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including our current views, expectations, intentions, beliefs, or strategies regarding the future. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may differ materially from those in or implied by such forward-looking statements due to the factors discussed under the section entitled “Risk Factors,” in our 2023 Form 10-K, including, but not limited to, the following:

●

potential recession in the United States and our market areas;

●

the impacts related to or resulting from bank failures and any continuation of uncertainty in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other mitigation efforts taken by governmental agencies in response thereto;

●

liquidity risks, including those related to having enough liquid assets to meet depositor demands;

●

risks associated with generating deposits from retail sources without a branch network so that we can fund our loan portfolio and growth;

●

our ability to maintain a strong core deposit base or other low-cost funding sources;

●

risks associated with higher cost deposits relative to our peer group, which has an impact on our net interest margin and profits;

●

increased competition for deposits and related changes in deposit customer behavior;

●

risks associated with the persistent inflationary pressures, or the resurgence of elevated levels of inflation, in the United States and our market areas, and its impact on market interest rates, the economy and credit quality;

●

the adequacy of the allowance for credit losses;

●

the impact of changes in market interest rates, whether due to continued elevated interest rates or potential reduction in interest rates and a resulting decline in net interest income;

●

fluctuation in the value of our investment securities;

●

changes in the economy generally and the regulatory response thereto;

●

changes in the economy of the State of Texas, our primary market;

●

increases in unemployment rates in the United States and our market areas;

●

risks associated with implementing aspects of our expansion strategy, whether through additional services and products or acquisitions;

●

the need to hold more capital in order to comply with consolidated capital ratios;

●

our ability to raise additional capital, particularly during times of stress;

●

competition from other banks, financial institutions and wealth and investment management firms and our ability to retain our clients;

●

risks associated with having one referral source, Cain Watters & Associates, LLC (“Cain Watters”), comprise a substantial part of our business;

●

our reliance on key personnel and the ability to attract and retain the personnel necessary to implement our business plan;

●

risks specific to commercial loans and borrowers (particularly dental and U.S. Small Business Administration (“SBA”) loans), including the risk of declines in commercial real estate prices or deterioration in value of the general business assets that secure such loans;

●

our ability to continue to originate loans (including SBA loans);

●

impairment of our goodwill or other intangible assets;

●

claims and litigation pertaining to our fiduciary responsibilities;

●

generating investment returns for our wealth management, brokerage and other customers that are satisfactory to them;

●

our ability to manage our credit risk;

●

regulatory scrutiny related to our loan portfolio, including commercial real estate;

●

the earnings capacity of our borrowers;

●

our inability to identify and address potential conflicts of interest;

●

our ability to maintain effective internal control over financial reporting;

●

the accuracy of estimates and assumptions;

●

the development of an active, liquid market for the Series B preferred stock;

Table of Contents

●

the soundness of other counterparty financial institutions and certain securities brokerage firms;

●

technological change in the banking, investment, brokerage and insurance industry;

●

our ability to protect against and manage cybersecurity risk, including cyber incidents or other failures, disruptions or breaches of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber attacks;

●

our reliance on communications, information, operating and financial control systems technology and related services from third-party service providers;

●

severe weather, natural disasters and epidemics and pandemics;

●

the effects of acts of war or terrorism, or the threat thereof, geopolitical instability, outbreaks of hostilities, other international or domestic calamities, and other external events or matters beyond our control;

●

environmental liabilities;

●

regulation of the financial services industry;

●

legislative changes or the adoption of tax reform policies;

●

uncertainty regarding United States fiscal debt and budget matters;

●

political instability and changes in tariffs and trade barriers;

●

compliance with laws and regulations, supervisory actions, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), capital requirements, the Bank Secrecy Act, anti-money laundering laws, consumer laws, and other statutes and regulations;

●

regulation of broker-dealers and investment advisors;

●

the enactment of regulations relating to privacy, information security and data protection;

●

legal and regulatory examinations, proceedings, investigations and inquiries, fines and sanctions;

●

future issuances of preferred stock or debt securities and its impact on the Series B preferred stock;

●

our ability to manage our existing and future preferred stock and indebtedness;

●

our ability to pay dividends;

●

the continuation of securities analysts coverage of the Company;

●

our management and board of directors have significant control over our business;

●

risks related to being a “controlled company” under NASDAQ rules;

●

the costs and expenses of being a public company; and

●

changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, current and future governmental monetary and fiscal policies, including the uncertain impacts of ongoing quantitative tightening and current and future policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the Biden administration.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-Q and the risk factors set forth in our 2023 Form 10-K. Due to these and other possible uncertainties and risks, the Company can give no assurance that the results contemplated in the forward-looking statements will be realized and readers are cautioned not to place undue reliance on any such forward-looking statements. Any forward-looking statement reflects only information known to us as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by applicable law. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

Other Available Information

We file or furnish with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Section 13(a) or 15(d) of the Exchange Act. Electronic copies of our SEC filings are available to the public at the SEC’s website at www.sec.gov. In addition, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports required by Section 13(a) or 15(d) of the Exchange Act are available through our website, www.t.financial, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

The Company routinely posts important information for investors on its website, www.t.financial. The Company intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company’s website, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.

Our website and the information contained on or accessible through our website is not incorporated by reference into, and is not a part of, this Form 10-Q.

Table of Contents

General

We are a Texas corporation and registered 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, qualified plan recordkeeping and insurance services to individuals, small businesses and institutions across the United States.

The following discussion and analysis presents our consolidated financial condition as of June 30, 2024 and December 31, 2023, and our consolidated results of operations for the three and six months ended June 30, 2024 and 2023. The discussion should be read in conjunction with our financial statements and the notes related thereto in this Form 10-Q and in the audited financial statements in our 2023 Form 10-K.

We operate through four main direct and indirect subsidiaries: (i) T Bancshares, Inc. (“TBI”), which was incorporated under the laws of the State of Texas on December 23, 2002 to serve as the registered bank holding company for T Bank, N.A. a national banking association (the “Bank”), (ii) Sanders Morris LLC (“Sanders Morris”), a registered broker-dealer with the Financial Industry Regulatory Authority (“FINRA”), and registered investment advisor with the SEC, (iii) Tectonic Advisors, LLC (“Tectonic Advisors”), a registered investment advisor registered with the SEC focused generally on managing money for relatively large, affiliated institutions, and (iv) HWG Insurance Agency LLC (“HWG”), an insurance agency registered with the Texas Department of Insurance (“TDI”).

Critical Accounting Policies and Estimates

We prepare consolidated financial statements based on accounting principles generally accepted in the United States (“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.

As discussed in Note 1 – Organization and Significant Accounting Policies in the accompanying notes to the Company’s consolidated financial statements, the Company adopted ASU 2016-13, Financial Instruments–- Credit Losses (Topic 326) (ASC 326): Measurement of Credit Losses on Financial Instruments, effective on January 1, 2023, pursuant to the delayed adoption allowable for smaller reporting companies, and replaces allowance allocations calculated in accordance with ASC Topic 310, Receivables, and allowance allocations calculated in accordance with FASB ASC Topic 450, Contingencies discussed in the 2023 Form 10-K. Upon adoption of the current expected credit loss (“CECL”) methodology, the Company recorded an increase of $1.4 million to the allowance for credit losses for loans and $237,505 to the allowance for credit losses for unfunded commitments. In addition, the Company recognized a cumulative effect reduction to retained earnings totaling $1.3 million, net of a recorded deferred tax asset of $341,662. See the discussion in Note 1–- Organization and Significant Accounting Policies and Note 3–- Loans and Allowance for Credit Losses in the accompanying notes to the Company’s consolidated financial statements for more details on the impact of the Company’s adoption of the CECL methodology, including related accounting policies.

Performance Summary

Net income available to common shareholders increased $125,000, or 4.7%, to $2.76 million for the three months ended June 30, 2024, compared to $2.63 million for the three months ended June 30, 2023. Earnings per diluted common share were $0.38 and $0.36 for the three months ended June 30, 2024 and 2023, respectively. Net income available to common shareholders decreased $1.5 million, or 22.0%, to $5.43 million for the six months ended June 30, 2024, compared to $6.96 million for the six months ended June 30, 2023. Earnings per diluted common share were $0.75 and $0.95 for the six months ended June 30, 2024 and 2023, respectively. The increase in net income available to common shareholders for the three months ended June 30, 2024 was primarily the result of a $1.0 million increase in net interest income and a $1.3 million increase in non-interest income, partly offset by a $969,000 increase in the provision for credit losses, a $1.2 million increase in non-interest expense and a $14,000 increase in income tax expense. The decrease in net income available to common shareholders for the six months ended June 30, 2024 was primarily the result of a $1.8 million increase in the provision for credit losses and a $2.3 million increase in non-interest expense, partly offset by a $1.1 million increase in net interest income, a $1.1 million increase in non-interest income and a $422,000 decrease in income tax expense. Details of the changes in the various components of net income are discussed below.

Table of Contents

For the three months ended June 30, 2024, annual return on average assets was 1.61%, compared to 1.95% for the same period in the prior year, and annual return on average equity was 11.59%, compared to 12.08% for the same period in the prior year. For the six months ended June 30, 2024, annual return on average assets was 1.64%, compared to 2.42% for the same period in the prior year, and annual return on average equity was 11.57%, compared to 15.76% for the same period in the prior year.

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, this Form 10-Q 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. We calculate average tangible common equity as average shareholders’ equity less average goodwill, average core deposit intangible and average preferred stock. 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.

The following table presents non-GAAP reconciliations of annual return on average tangible common equity as of and for the periods indicated:

(Dollars in thousands)	As of and for the Three Months Ended June 30, 2024			As of and for the Three Months Ended June 30, 2023			As of and for the Six Months Ended June 30, 2024			As of and for the Six Months Ended June 30, 2023
Income available to common shareholders (a)	$	2,758		$	2,633		$	5,431		$	6,959

Average shareholders’ equity	$	109,136		$	100,331		$	107,842		$	98,950
Less: average goodwill		21,440			21,440			21,440			21,440
Less: average core deposit intangible		288			498			314			524
Less: average preferred stock		17,250			17,250			17,250			17,250
Average tangible common equity (b)	$	70,158		$	61,143		$	68,838		$	59,736
Annual return on average tangible common equity (a)/(b)		15.81	%		17.27	%		15.87	%		23.49	%

Total assets increased $99.8 million, or 14.7%, to $777.1 million as of June 30, 2024, from $677.3 million as of December 31, 2023. This increase was primarily due to increases of $72.6 million in loans held for investment, $21.3 million in loans held for sale and $9.5 million in cash and cash equivalents, offset by decreases of $3.3 million in other assets and $1.1 million in securities held to maturity. Substantially all loans are secured by specific collateral, including business assets, consumer assets, and commercial real estate.

Shareholders’ equity increased $3.5 million, or 3.3%, to $110.4 million as of June 30, 2024, from $106.9 million as of December 31, 2023. See the analysis of shareholders’ equity in the section captioned “Capital Resources and Regulatory Capital Requirements” included below.

Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023

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

Net Interest Income

Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in net interest income result from changes in volume and spread, and are reflected in 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.

Table of Contents

The following tables present 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.

Three Months Ended June 30, 2024 and 2023

	Three Months Ended
	June 30, 2024 vs June 30, 2023
	Increase (Decrease) Due to Change in
(In thousands)	Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	44		$	807		$	851
Securities		(16	)		22			6
Loans, net of unearned discount ⁽¹⁾		1,090			2,426			3,516
Total earning assets		1,118			3,255			4,373

Savings and interest-bearing demand		(1	)		(2	)		(3	)
Money market deposit accounts		195			298			493
Time deposits		887			1,701			2,588
FHLB and other borrowings		(2	)		248			246
Subordinated notes		40			-			40
Total interest-bearing liabilities		1,119			2,245			3,364

Changes in net interest income	$	(1	)	$	1,010		$	1,009

(1)

Average loans include non-accrual.

Net interest income increased $1.0 million, or 14.8%, from $6.8 million for the three months ended June 30, 2023 to $7.8 million for the three months ended June 30, 2024. The increase in net interest income was primarily due to increases in the average volume of and yield on loans and an increase in the average volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve). The impact of these items was partly offset by increases in the average volume and cost of time deposits. Net interest margin for the three months ended June 30, 2024 and 2023 was 4.22% and 4.73%, respectively, a decrease of 51 basis points.

The average volume of interest-earning assets increased $167.3 million, or 28.9%, from $578.8 million for the three months ended June 30, 2023, to $746.1 million for the three months ended June 30, 2024. The increase for the three months ended June 30, 2024 included a $105.9 million, or 22.1%, increase in the average volume of loans, a $59.2 million, or 119.5%, increase in the average volume of interest-bearing deposits and federal funds sold and a $2.1 million, or 4.2%, increase in securities.

The average yield on interest-earning assets increased 62 basis points from 7.80% for the three months ended June 30, 2023 to 8.42% for the three months ended June 30, 2024 due to the increasing market interest rate environment over the respective periods. The average yield for loans increased 92 basis points from 8.41% for the three months ended June 30, 2023 to 9.33% for the three months ended June 30, 2024. The average yield on interest-bearing deposits and fed funds sold increased 36 basis points from 5.14% for the three months ended June 30, 2023, to 5.50% for the three months ended June 30, 2024, and the average yield on securities decreased 12 basis points from 4.60% for the three months ended June 30, 2023 to 4.48% for the three months ended June 30, 2024.

Table of Contents

The average volume of interest-bearing liabilities increased $171.8 million, or 40.7%, from $422.7 million for the three months ended June 30, 2023, to $594.5 million for the three months ended June 30, 2024. The increase for the three months ended June 30, 2024 included a $151.6 million, or 37.0%, increase in the average volume of interest-bearing deposits and a $20.3 million, or 1,779.0%, increase in the average volume of FHLB and other borrowings. The increase in borrowings is related to the $21 million advance from FRB for the BTFP. The average rate paid on interest-bearing liabilities increased 107 basis points from 4.20% for the three months ended June 30, 2023 to 5.27% for the three months ended June 30, 2024. The average interest rate paid on interest-bearing deposits increased 112 basis points from 4.05% for the three months ended June 30, 2023, to 5.17% for the three months ended June 30, 2024. The average volume of non-interest-bearing deposits decreased $16.9 million, or 19.5%, from $86.3 million for the three months ended June 30, 2023 to $69.4 million for the three months ended June 30, 2024. The average cost of FHLB and other borrowings decreased 71 basis points from 5.63% for the three months ended June 30, 2023 to 4.92% for the three months ended June 30, 2024 and the average cost of the subordinated debt increased 136 basis points from 9.43% for the three months ended June 30, 2023 to 10.79% for the three months ended June 30, 2024 due to the applicable interest rates on the outstanding subordinated debt transitioning from fixed to floating.

Six Months Ended June 30, 2024 and 2023

	Six Months Ended
	June 30, 2024 vs June 30, 2023
	Increase (Decrease) Due to Change in
(In thousands)	Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	243		$	867		$	1,110
Securities		69			41			110
Loans, net of unearned discount ⁽¹⁾		2,687			3,851			6,538
Total earning assets		2,999			4,759			7,758

Savings and interest-bearing demand		3			(6	)		(3	)
Money market deposit accounts		714			661			1,375
Time deposits		2,110			2,692			4,802
FHLB and other borrowings		(10	)		429			419
Subordinated notes		97			-			97
Total interest-bearing liabilities		2,914			3,776			6,690

Changes in net interest income	$	85		$	983		$	1,068

(1)

Average loans include non-accrual.

Net interest income increased $1.0 million or 7.2%, from $13.9 million for the six months ended June 30, 2023 to $14.9 million for the six months ended June 30, 2024. The increase in net interest income was primarily due to increases in the average volume and yield on loans and to a lesser extent an increase in the average volume and the average interest yield of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve). The impact of these items was partly offset by increases in the average volume and cost of time deposits and money market deposits and an increase in the average volume of borrowings. Net interest margin for the six months ended June 30, 2024 and 2023 was 4.18% and 4.65%, respectively, a decrease of 47 basis points.

The average volume of interest-earning assets increased $117.5 million, or 19.5%, from $601.3 million for the six months ended June 30, 2023, to $718.8 million for the six months ended June 30, 2024. The increase for the six months ended June 30, 2024 included an $83.7 million, or 17.5%, increase in the average volume of loans, a $31.8 million, or 44.4%, increase in the average volume of interest-bearing deposits and federal funds sold and a $1.9 million, or 3.8%, increase in securities.

The average yield on interest-earning assets increased 94 basis points from 7.43% for the six months ended June 30, 2023 to 8.37% for the six months ended June 30, 2024 due to the increasing market interest rate environment over the respective periods. The average yield for loans increased 110 basis points from 8.18% for the six months ended June 30, 2023 to 9.28% for the six months ended June 30, 2024. The average yield on interest-bearing deposits and fed funds sold increased 67 basis points from 4.83% for the six months ended June 30, 2023, to 5.50% for the six months ended June 30, 2024, and the average yield on securities increased 26 basis points from 4.03% for the six months ended June 30, 2023 to 4.29% for the six months ended June 30, 2024.

Table of Contents

The average volume of interest-bearing liabilities increased $144.1 million, or 33.6%, from $428.6 million for the six months ended June 30, 2023, to $572.7 million for the six months ended June 30, 2024. The increase for the six months ended June 30, 2024 included a $126.5 million, or 30.7%, increase in the average volume of interest-bearing deposits and a $17.5 million, or 413.7%, increase in the average volume of FHLB and other borrowings. The average rate paid on interest-bearing liabilities increased 135 basis points from 3.91% for the six months ended June 30, 2023 to 5.26% for the six months ended June 30, 2024. The average interest rate paid on interest-bearing deposits increased 141 basis points from 3.74% for the six months ended June 30, 2023, to 5.15% for the six months ended June 30, 2024. The average volume of non-interest-bearing deposits decreased $38.9 million, or 36.9%, from $105.5 million for the six months ended June 30, 2023 to $66.6 million for the six months ended June 30, 2024. The average cost of FHLB and other borrowings decreased 51 basis points from 5.43% for the six months ended June 30, 2023 to 4.92% for the six months ended June 30, 2024 and the average cost of the subordinated debt increased 160 basis points from 9.19% for the six months ended June 30, 2023 to 10.79% for the six months ended June 30, 2024 due to the applicable interest rates on the outstanding subordinated debt transitioning from fixed to floating.

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 three months ended June 30, 2024 and 2023.

	Three Months Ended June 30,
	2024								2023
(In thousands, except percentages)	Average Balance			Interest		Average Yield			Average Balance			Interest		Average Yield
Assets
Interest-bearing deposits and federal funds sold	$	108,740		$	1,486		5.50	%	$	49,531		$	635		5.14	%
Securities		52,837			588		4.48			50,717			582		4.60
Loans, net of unearned discount ⁽¹⁾		584,521			13,553		9.33			478,586			10,037		8.41
Total earning assets		746,098			15,627		8.42			578,834			11,254		7.80
Cash and other assets		48,845								47,350
Allowance for credit losses		(6,793	)							(5,849	)
Total assets	$	788,150							$	620,335
Liabilities and Shareholders’ Equity
Savings and interest-bearing demand	$	10,595			12		0.46	%	$	12,602			15		0.48	%
Money market deposit accounts		145,033			1,864		5.17			121,513			1,371		4.53
Time deposits		405,474			5,335		5.29			275,417			2,747		4.00
Total interest-bearing deposits		561,102			7,211		5.17			409,532			4,133		4.05
FHLB and other borrowings		21,402			262		4.92			1,139			16		5.63
Subordinated notes		12,000			322		10.79			12,000			282		9.43
Total interest-bearing liabilities		594,504			7,795		5.27			422,671			4,431		4.20
Non-interest-bearing deposits		69,408								86,274
Other liabilities		15,102								11,059
Total liabilities		679,014								520,004
Shareholders’ equity		109,136								100,331
Total liabilities and shareholders’ equity	$	788,150							$	620,335

Net interest income				$	7,832							$	6,823
Net interest spread							3.15	%							3.60	%
Net interest margin							4.22	%							4.73	%

(1)

Includes non-accrual loans.

Table of Contents

	Six Months Ended June 30,
	2024								2023
(In thousands, except percentages)	Average Balance			Interest		Average Yield			Average Balance			Interest		Average Yield
Assets
Interest-bearing deposits and federal funds sold	$	103,368		$	2,825		5.50	%	$	71,586		$	1,715		4.83	%
Securities		52,640			1,124		4.29			50,702			1,014		4.03
Loans, net of unearned discount ⁽¹⁾		562,759			25,976		9.28			479,040			19,438		8.18
Total earning assets		718,767			29,925		8.37			601,328			22,167		7.43
Cash and other assets		49,456								47,897
Allowance for credit losses		(6,546	)							(5,409	)
Total assets	$	761,677							$	643,816
Liabilities and Shareholders’ Equity
Savings and interest-bearing demand	$	10,234			24		0.47	%	$	12,633			27		0.43	%
Money market deposit accounts		146,694			3,776		5.18			120,849			2,401		4.01
Time deposits		381,966			10,014		5.27			278,872			5,212		3.77
Total interest-bearing deposits		538,894			13,814		5.15			412,354			7,640		3.74
FHLB and other borrowings		21,764			533		4.92			4,237			114		5.43
Subordinated notes		12,000			644		10.79			12,000			547		9.19
Total interest-bearing liabilities		572,658			14,991		5.26			428,591			8,301		3.91
Non-interest-bearing deposits		66,647								105,496
Other liabilities		14,530								10,779
Total liabilities		653,835								544,866
Shareholders’ equity		107,842								98,950
Total liabilities and shareholders’ equity	$	761,677							$	643,816

Net interest income				$	14,934							$	13,866
Net interest spread							3.11	%							3.53	%
Net interest margin							4.18	%							4.65	%

Provision for Credit Losses

As discussed in Note 1 – Organization and Significant Accounting Policies in the accompanying notes to the Company’s consolidated financial statements, the Company adopted the CECL accounting standard effective on January 1, 2023. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans and held-to-maturity debt securities, as well as off-balance sheet credit exposures. Provision for credit losses is determined by management as the amount to be added to the allowance for credit losses for various types of financial instruments to bring the allowance for credit losses to a level deemed appropriate by management to absorb expected credit losses over the lives of the respective financial instruments. Management actively monitors the Company’s asset quality and provides appropriate provisions based on such factors as historical loss experience, current conditions and reasonable and supportable forecasts.

Financial instruments are charged-off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, forecasted economic conditions continue to remain uncertain due to the continued elevated interest rate environment and persistent inflationary pressures in the United States and our market areas. Accordingly, future provisions to the allowance for credit losses may be necessary if economic conditions differ from the assumptions used in making the determination.

Table of Contents

The following table presents the components of provision for credit losses for the periods indicated:

	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2024		2023			2024		2023
Provision for credit losses related to:
Loans	$	1,622	$	717		$	2,395	$	760
Off-balance sheet credit exposures		38		(26	)		182		10
Total	$	1,660	$	691		$	2,577	$	770

Provision expense for loans is generally reflective of change in loan volume and mix as well as charge-offs or specific reserves taken during the respective period. Provision expense is also impacted by the economic outlook and changes in macroeconomic variables. The provision expense recorded for the three and six months ended June 30, 2024 was driven by increased loan volume and required specific reserves. See “Allowance for Credit Losses,” below, for further analysis of our provision for credit losses related to loans.

Changes in the allowance for off-balance sheet credit exposures are generally driven by the remaining unfunded loan commitments expected to fund loans and to changes in the assumptions to project loss rates.

Non-Interest Income

The components of non-interest income were as follows for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Trust income	$	1,843	$	1,586	$	3,582	$	3,099
Gain on sale of loans		-		-		-		581
Advisory income		4,120		3,709		8,058		7,160
Brokerage income		2,128		1,889		3,910		3,779
Service fees and other income		2,563		2,172		5,513		5,389
Rental income		88		76		177		126
Total	$	10,742	$	9,432	$	21,240	$	20,134

Total non-interest income for the three and six months ended June 30, 2024 increased $1.3 million, or 13.9%, and $1.1 million, or 5.5%, respectively, compared to the same periods in the prior year. Material 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. Volatility in the bond and equity markets impacts the market value of trust assets and the related fees. Trust income for the three and six months ended June 30, 2024 increased $257,000, or 16.2% and $483,000, or 15.6%, respectively, compared to the same periods in the prior year. The increase in trust income between the periods is due to an increase in the value of trust assets over the three and six months ended June 30, 2024 compared to the same periods in the prior year. Volatility related to overall economic expectations, impacts of geo-political instability related to the wars in Ukraine and the Middle East, the potential for continued supply-chain disruptions, and regulatory action, including continued elevated market interest rates by the Federal Reserve aimed at tempering the persistent inflationary pressures in the United States, all of which are likely to impact the bond and equity markets, or other factors, could result in future net decreases in the average values of our assets held in custody, and/or in a decrease in net flows to our assets held in custody, decreasing our trust income.

Gain on sale of loans. The gain on sale of loans primarily reflects the gain from the sale of the guaranteed portion of SBA 7(a) and USDA loans originated by the Bank’s SBA lending group. There were no loan sales, and therefore no gain on sale of loans, during the three months ended June 30, 2024. For the six months ended June 30, 2024, gain on sale of loans decreased $581,000, or 100%, compared to the same period in the prior year, during which there was a gain on sale of loans resulting from the sale of $5.8 million of USDA loans.

Table of Contents

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. For the three and six months ended June 30, 2024, advisory income increased $411,000, or 11.1% and $898,000, or 12.5%, respectively, compared to the same periods in the prior year. The increase in advisory income between the two periods is due to increases in advisory assets between the two periods from net inflows and market appreciation of our advisory assets. Similar to our trust income, changes in the value of our assets under management will result in comparable changes in our advisory income. In addition to volatility related to general economic expectations, regulatory action, including the effects of the persistent inflationary pressures in the United States and of elevated market interest rates by the Federal Reserve aimed at tempering such inflationary pressures, as well as supply chain disruptions related to geo-political instability, including the ongoing wars in Ukraine and the Middle East, are likely to continue to put pressure on the financial markets and the value of and/or net inflows to our assets under management, potentially decreasing our advisory income.

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 revenues, including interest earned on margin lending. Brokerage revenue is dependent on the volume of trading, and on private placement and syndication activity during the period, and in the case of margin lending, on asset volumes and interest rates. Brokerage income for the three and six months ended June 30, 2024, increased $239,000, or 12.7% and $131,000, or 3.5%, respectively, compared to the same periods in the prior year. The majority of the increase was related primarily to an increase of $367,000 and $578,000 in over-the-counter commissions during the three and six months ended June 30, 2024, respectively, over the same periods in the prior year, combined with an increase of $49,000 in syndicate income during each the three and six months ended June 30, 2024 over the same periods in the prior year. These increases were partially offset by decreases in income from margin participation interest of $185,000 and $459,000 during the three and six months ended June 30, 2024, respectively, and a decrease in insurance commissions of $16,000 and $58,000, respectively, and other immaterial increases of $25,000 and $21,000, respectively, during the three and six months ended June 30, 2024. Expectations of economic disruption related to regulatory action with respect to interest rates and to geo-political factors, among other factors, could lead to continued stagnant offering activity given price uncertainty in the face of volatile markets and the potential for interest rates to remain elevated in the mid-term, which amount to additional risks for companies considering offering activity.

The table below reflects a rollforward of our client assets from December 31, 2022 through June 30, 2024, which includes both advisory and brokerage assets, and the inflows and outflows and net market appreciation from December 31, 2023 through June 30, 2024. Our brokerage and advisory assets experienced an increase of approximately $872 million, or 13.6%, between June 30, 2023 and June 30, 2024, related to positive net flows and market appreciation.

(In thousands)	Client Assets
As of December 31, 2022	$	5,199,471
Client inflows		1,190,825
Client outflows		(764,419	)
Net flows		426,406
Market appreciation		769,386
As of June 30, 2023	$	6,395,263
Client inflows		1,224,522
Client outflows		(781,864	)
Net flows		442,658
Market appreciation		51,771
As of December 31, 2023	$	6,889,692
Client inflows		834,301
Client outflows		(976,377	)
Net flows		(142,076	)
Market appreciation		520,130
As of June 30, 2024	$	7,267,746

Table of Contents

Service fees and other income. Service fees include fees for deposit-related services, loan servicing, third-party administration fees, and other income. Service fees and other income for the three and six months ended June 30, 2024 increased $391,000, or 18.0%, and $124,000, or 2.3%, respectively, compared to the same periods in the prior year. The increases were primarily the result of increases in pension administration fees of $383,000 and $369,000, related to increases in the amount of work billed during the three and six months ended June 30, 2024, respectively, as compared to the same periods in the prior year. In addition, during the three and six months ended June 30, 2024, interest income on Sanders Morris Pershing accounts increased $20,000 and $35,000, respectively. Offsetting these increases, during the three and six months ended June 30, 2024, consulting fees at Sanders Morris decreased $14,000 and $28,000, respectively, and service fees, including loan servicing fees, decreased $1,000 during the three months ended June 30, 2024, and increased $19,000 during the six months ended June 30, 2024. In addition, during the six months ended June 30, 2023, other income decreased from the recovery of unclaimed funds at Sanders Morris of $264,000 during the first quarter of 2023. Other immaterial fluctuations netted to an increase of $3,000 for the three months ended June 30, 2024 and a decrease of $7,000 for the six months ended June 30, 2024, respectively, compared to the same periods in the prior year.

Rental income. The Company receives monthly rental income from tenants leasing space in the Bank building. Rental income for the three and six months ended June 30, 2024 increased $12,000, or 15.8% and $51,000, or 40.5%, respectively, compared to the same periods in the prior year. The increase was related to concessions given to tenants during the three and six months ended June 30, 2023.

Non-Interest Expense

The components of non-interest expense were as follows for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2024		2023		2024		2023
Salaries and employee benefits	$	8,891	$	7,641	$	17,533	$	15,503
Occupancy and equipment		485		476		1,018		946
Trust expenses		580		511		1,190		1,063
Brokerage and advisory direct costs		517		472		1,037		943
Professional fees		468		539		902		1,062
Data processing		289		198		571		406
Other		1,685		1,867		3,438		3,449
Total	$	12,915	$	11,704	$	25,689	$	23,372

Total non-interest expense for the three and six months ended June 30, 2024 increased $1.2 million, or 10.3% and $2.3 million, or 9.9%, respectively, compared to the same periods in the prior year, due to increases in salaries and employee benefits, occupancy expense, trust expense, brokerage expense, and data processing expense, which were partially offset by decreases professional fees expense and other expense. Material changes in the various components of non-interest income are discussed below.

Salaries and employee benefits. Salaries and employee benefits for the three and six months ended June 30, 2024 increased $1.3 million, or 16.4%, and $2.0 million, or 13.1%, respectively, compared to the same periods in the prior year. The increases were primarily due to increases in salaries and related payroll expenses in our Banking segment of $794,000 and $1.6 million, respectively, due to increases in staff headcount and related signing bonuses, primarily in the Bank’s SBA division, as well as cost of living and merit increases. The increase in salaries and employee benefits in the HoldCo segment of $485,000 and $968,000, respectively, was partially offset by the decrease in Tectonic Advisors, within the Other Financial Services segment, of $386,000 and $813,000, respectively. Effective with the third quarter 2023, the technology and accounting teams were moved from Tectonic Advisors to HoldCo, which accounted for a portion of these variances. The balance of the increases in our HoldCo segment for the three and six months ended June 30, 2024, approximately $357,000 and $245,000, respectively, is due to an increase in headcount and merit increases, as well as increases in insurance benefit premiums. Within the Other Financial Services segment, in addition to the variances at Tectonic Advisors discussed above, salaries and employee benefits for the three and six months ended June 30, 2024 at the Bank’s trust department increased $64,000 and $149,000, respectively, and at the Bank’s Nolan division increased $105,000 and $244,000, respectively, due to an increase in headcount, staffing changes, and merit and cost of living increases, as well as increases in benefit premiums. The increase at Sanders Morris for the three months ended June 30, 2024 of $188,000 was due to an increase in bonuses earned on commissions, syndicate and private placement deals related to the increase in brokerage revenue between the two periods. The decrease at Sanders Morris for the six months ended June 30, 2024 of $95,000 was due to a decrease in payroll taxes of $126,000 due to an over-accrual of payroll taxes at year end and a decrease in other employee benefits expense, including stock compensation recognized, of $81,000, offset by an increase in commission and bonuses of $112,000, related to the increase in brokerage revenue over the six months ended June 30, 2024 compared to the same period in the prior year.

Table of Contents

Occupancy and equipment expense. Occupancy and equipment expenses for the three and six months ended June 30, 2024 increased $9,000, or 1.9% and $72,000, or 7.6%, respectively, compared to the same periods in the prior year. The increases were related to increases totaling $27,000 and $68,000, respectively, at the HoldCo segment, primarily due to the technology team moving from the Other Financial Services segment to the HoldCo segment effective with the third quarter of 2023, which were partially offset by resulting decreases in the Other Financial Services segment of $19,000 and $7,000, respectively, for the three and six months ended June 30, 2024. The net increase for these two segments combined relates to the movement of our Plano office to Frisco, Texas in March of 2023. In our Banking segment, there was a net immaterial increase of $1,000 for the three months ended June 30, 2024, where an increase in Bank facilities expense offset a decrease in telephone expense, and a net increase of $11,000 for the six months ended, June 30, 2024, where an increase in Bank facilities of $18,000 and an increase in depreciation of $6,000 were partially offset by a decrease in telephone expense of $13,000.

Trust expenses. Trust expenses are incurred in our other financial services segment, and include advisory fees paid on the common trust funds managed by the Company based on the value of the assets held in custody. Volatility in 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 for the three and six months ended June 30, 2024 increased $69,000, or 13.5% and $127,000, or 11.9%, respectively, compared to the same periods in the prior year due to an increase in the value of trust assets for the three and six months ended June 30, 2024 over the value during the same periods in the prior year.

Brokerage and advisory direct costs. Brokerage and advisory direct costs for the three and six months ended June 30, 2024 increased $45,000, or 9.5% and $94,000, or 10%, respectively, compared to the same periods in the prior year. The increase for the three and six months ended June 30, 2024 related primarily to increases in clearing fees, service fees and information service fees at Sanders Morris and Tectonic Advisors of $47,000 and $98,000, respectively, offset by other immaterial decreases of $2,000 and $4,000, respectively.

Professional fees. Professional fees, which include legal, consulting, audit and tax fees, for the three and six months ended June 30, 2024, decreased $71,000, or 13.2% and $160,000, or 15.1%, respectively, compared to the same periods in the prior year. The decreases were the result of decreases of $58,000 and $87,000, respectively, in our HoldCo segment, decreases of $17,000 and $80,000, respectively, in our Banking segment, offset by increases of $4,000 and $8,000, respectively, in our Other Financial Services segment. The decreases in the HoldCo segment for the three and six months ended June 30, 2024, were primarily due to a decrease in professional fees of $179,000 and $142,000, respectively, related to technology platform work in 2023 using robotic process automation, which carries a higher cost, but led to significant and ongoing time savings for our Trust team, offset by an increase in audit and tax consulting of $117,000 and $52,000, respectively, related to an increase in our audit fees and differences in timing recognition, and increases in legal fees of $4,000 for each the three and six months ended June 30, 2024. The decreases in the Banking segment for the three and six months ended June 30, 2024, were primarily due to decreases in legal fees of $17,000 and $77,000, respectively, primarily related to loan collections activity in 2023 and various other matters, including our regulatory filings, and decreases of $7,000 and $13,000, respectively, in audit and tax consulting fees, offset by increases in professional fees of $7,000 and $10,000, respectively. The increases for the three and six months ended June 30, 2024, in our Other Financial Services segment was primarily due to an increase in professional fees of $39,000 and $43,000, respectively, related to technology work on our investment services portal, offset by decreases in legal fees of $19,000 and $20,000, respectively, and decreases in audit and tax consulting fees of $14,000 and $16,000, respectively, compared to the same periods in the prior year.

Data processing. Data processing includes costs related to the Company’s operating systems. Data processing expenses for the three and six months ended June 30, 2024, increased $91,000, or 46.0% and $165,000, or 40.6%, respectively, compared to the same periods in the prior year. The increases were the result of increases of $78,000 and $144,000, respectively, in our Banking segment and increases of $13,000 and $21,000, respectively, in the Trust and Nolan divisions within our Other Financial Services segment. The increases in our Banking segment resulted from discounts provided by the Bank’s core system vendor related to the change in the core system during 2021, which discounts were exhausted in Q1 2023. The increase in our Other Financial Services segment was related primarily to an increase in costs at the Bank’s trust division of $10,000 and $18,000, and at the Nolan division of $4,000 and $3,000, for the three and six months ended June 30, 2024, respectively.

Table of Contents

Other. Other expenses include costs for insurance, Federal Deposit Insurance Corporation (“FDIC”) and Office of the Comptroller of the Currency (“OCC”) assessments, director fees, regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expenses for the three and six months ended June 30, 2024 decreased $182,000, or 9.7% and $11,000, or 0.3%, respectively, compared to the same periods in the prior year. The decreases for the three and six months ended June 30, 2024 included decreases of $227,000 and $292,000 in our Other Financial Services segment, which were partially offset by increases in our Banking segment of $53,000 and $229,000, respectively. Other operating expenses in the HoldCo segment decreased $8,000 for the three months ended June 30, 2024 and increased $52,000 for the six months ended June 30, 2024. The decreases in the Other Financial Services segment were related to decreases of $189,000 and $284,000, respectively, in advertising and marketing, due to changes in our fee sharing agreement with Cain Waters during 2023, decreases of $29,000 and $65,000, respectively, in software, licenses, and computer services, and decreases of $15,000 and $27,000 in travel expenses, offset by increases in errors and omissions of $18,000 and $127,000, respectively, primarily from a relatively large trading error during the first three months of 2024, and other individually immaterial decreases of $12,000 and $43,000, respectively. The increases for the three and six months ended June 30, 2024 in our Banking segment of $53,000 and $229,000, respectively, included increases of $59,000 and $138,000, respectively, for advertising and marketing expense, related to our radio marketing and increasing social media based marketing, increases of $102,000 and $131,000, respectively, in software development for the Bank’s lending and Integra divisions, increases of $5,000 and $21,000, respectively, in bank charges, increases of $8,000 and $15,000, respectively, in travel and lodging, increases of $6,000 and $13,000, respectively, payroll processing fees, offset by decreases of $139,000 and $138,000, respectively, in recruitment fees, and other immaterial increases of $11,000 and $50,000, respectively. The decrease of $8,000 for the three months ended June 30, 2024 in our HoldCo segment was primarily the result of a decrease of $35,000 in marketing expenses, a decrease of $14,000 in computer supplies, a decrease of $13,000 in insurance expense, offset by an increase of $27,000 in software licenses related to technology initiatives across the company, an increase of $15,000 in travel and lodging, and a net increase in individually immaterial expenses of $12,000, compared to the same period in the prior year. The increase of $52,000 for the six months ended June 30, 2024 in our HoldCo segment was primarily the result of an increase of $53,000 in software licenses related to technology initiatives across the company, an increase of $27,000 in travel and lodging, and an increase of $15,000 in postage related to marketing, offset by a decrease of $35,000 in other marketing expenses, a decrease of $17,000 in computer services, and a net increase in immaterial accounts of $9,000, compared to the same period in the prior year.

Income Taxes

Income tax expense for the three and six months ended June 30, 2024 was approximately $853,000 and $1.7 million, respectively, compared to $839,000 and $2.1 million, respectively, for the same periods in the prior year. The effective income tax rate was 21.3% and 21.5%, for the three and six months ended June 30, 2024, respectively, compared to 21.7% and 21.6%, respectively, for the same periods in the prior year. The effective tax rates are affected by the income tax effects of nondeductible expenses related to stock options among other things.

Segment Reporting

We have three operating segments: Banking, Other Financial Services and HoldCo. Our primary operating segments are Banking and Other Financial Services.

Our Banking segment includes both commercial and consumer banking services, and factoring services through the Bank’s Integra division. Commercial banking services are provided primarily to small to medium-sized businesses and their employees, which includes a wide array of lending and cash management products. Consumer banking services include lending and depository services. Factoring services are provided primarily to small over-the-road trucking businesses.

Our Other Financial Services segment includes Tectonic Advisors, Sanders Morris, the Bank’s trust division, which includes the Bank’s Nolan division and a participant directed recordkeeping team, 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.

Our HoldCo segment includes the Bank’s immediate parent and related subordinated debt, as well as operations of the financial holding company that serves as parent for the group overall. Our principal source of revenue is dividends from our subsidiaries.

Table of Contents

The following table presents key metrics related to our segments as of the periods indicated:

	Three Months Ended June 30, 2024									Six Months Ended June 30, 2024
(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated		Banking		Other Financial Services		HoldCo			Consolidated
Revenue(1)	$	8,542	$	10,354	$	(322	)	$	18,574	$	16,330	$	20,488	$	(644	)	$	36,174
Income (Loss ) Before Taxes	$	1,664	$	3,851	$	(1,516	)	$	3,999	$	3,466	$	7,483	$	(3,041	)	$	7,908

	Three Months Ended June 30, 2023									Six Months Ended June 30, 2023
(In thousands)	Banking		Other Financial Services		HoldCo			Consolidated		Banking		Other Financial Services		HoldCo			Consolidated
Revenue(1)	$	7,481	$	9,056	$	(282	)	$	16,255	$	15,674	$	18,873	$	(547	)	$	34,000
Income (Loss ) Before Taxes	$	2,481	$	2,409	$	(1,030	)	$	3,860	$	6,497	$	5,304	$	(1,943	)	$	9,858

(1)

Net interest income plus non-interest income

Banking

Income before taxes for the three and six months ended June 30, 2024 decreased $817,000, or 32.9%, and $3.0 million, or 46.7%, respectively, compared to the same periods in the prior year. The decrease for the three months ended June 30, 2024 was primarily the result of a $969,000 increase in the provision for credit losses and a $909,000 increase in non-interest expense, partly offset by a $1.0 million increase net interest income and a $12,000 increase in non-interest income. The decrease for the six months ended June 30, 2024 was primarily the result of a $1.8 million increase in the provision for credit losses, a $1.9 million increase in non-interest expense and a $509,000 decrease in non-interest income, partly offset by a $1.2 million increase net interest income.

Net interest income for the three and six months ended June 30, 2024 increased $1.0 million, or 14.8%, and $1.2 million, or 8.1%, respectively, compared to the same periods in the prior year. The increase in net interest income was primarily due to increases in the average volume of and yield on loans and an increase in the average volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve). The impact of these items was partly offset by increases in the average interest volume of and cost of interest-bearing liabilities. The average yield on interest earning assets was impacted by changes in market interest rates and changes in the mix of interest-earning assets. See “Net Interest Income,” above, for further analysis of net interest income.

The provision for credit losses for the three and six months ended June 30, 2024 totaled $1.7 million and $2.6 million, respectively, compared $691,000 and $770,000, respectively, for the same periods in the prior year. The increase was primarily a result of increased loan volume and required specific reserves. See “Provision for Credit Losses,” above, and “Allowance for Credit Losses,” below, for further analysis of credit loss provision related to loans and off-balance sheet commitments.

Non-interest income for the three months ended June 30, 2024 increased $12,000, or 3.2%, respectively, compared to the same period in the prior year which was entirely due to an increase in rental income. Non-interest income for the six months ended June 30, 2024 decreased $509,000, or 40.4%, compared to the same period in the prior year which due to a $581,000 gain on sale of a USDA loan during the three months ended March 31, 2023, partly offset by a $21,000 increase in deposit and factoring fees and a $51,000 increase in rental income related to concessions given to tenants during the six months ended June 30, 2023. 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 three and six months ended June 30, 2024 increased $909,000, or 21.1% and $1.9 million, or 22.4%, respectively, compared to the same periods in the prior year, respectively. Salaries and employee benefits increased $794,000 and $1.6 million for the three and six months ended June 30, 2024, compared to the same periods in the prior year respectively, primarily due to increases in staff with the expansion of our SBA lending and Integra factoring along with increases in annual merit and market increases. Occupancy and equipment expense increased $1,000 and $10,000 for the three and six months ended June 30, 2024, compared to the same periods in the prior year, respectively, primarily due to increase in facilities repairs and maintenance expense. Professional fees decreased $17,000 and $81,000 for the three and six months ended June 30, 2024, compared to the same periods in the prior years, respectively, primarily due to higher legal fees expensed for the three and six months ended June 30, 2023 related to loan collections and various other matters, along with lower audit fees recorded during the three and six months ended June 30, 2024. Data processing expense increased $78,000 and $144,000 for the three and six months ended June 30, 2024, compared to the same periods in the prior years, respectively, as a result of a reduction of discounts provided by the Bank’s core system vendor related to the change in the core system during 2021, along with normal annual increase in data processing costs. Other expenses increased $53,000 and $229,000 for the three and six months ended June 30, 2024, compared to the same periods in the prior years, respectively, which included increases of $59,000 $138,000 for advertising and marketing costs primarily in our Integra division, $102,000 and $131,000 for software development in our lending and Integra divisions, $8,000 and $26,000 for travel and meals, and decreases of $139,000 and $138,000 in employee recruitment fees, for the three and six months ended June 30, 2024 compared to the same periods in the prior year, respectively, among other things. See “Non-Interest Expense,” above, for further analysis of non-interest expense.

Table of Contents

Other Financial Services

Income before taxes for the three and six months ended June 30, 2024 increased $1.4 million, or 59.9%, and $2.2 million, or 41.1%, respectively, compared to the same periods in the prior year. The increases for the three and six months ended June 30, 2024 were the result of increases in noninterest income of $1.3 and $1.6 million, respectively, and decreases in noninterest expense of $144,000 and $564,000, respectively, compared to the same periods in the prior year.

Non-interest income for the three and six months ended June 30, 2024 increased $1.3 million, or 14.3%, and $1.6 million, or 8.6%, respectively, compared to the same periods in the prior year. The increases were due to increases in advisory income of $411,000 and $898,000, respectively, and increases in trust income of $257,000 and $483,000, respectively, both of which were related to market increases in asset values and net asset inflows to our investment platform. Service fees and other income increased by $391,000 and $103,000, respectively, between the two periods, primarily related to increases in third party pension administration fees from the Bank’s Nolan division of $383,000 and $369,000, respectively, which were partially offset for the six months ended June 30, 2024 by a decrease in miscellaneous income related to a recovery of unclaimed funds at Sanders Morris of $264,000 during the first quarter 2023. In addition, brokerage income for the three and six months ended June 30, 2024 increased by $239,000 and $131,000, respectively, with the majority of the increase relating primarily to increases of $367,000 and $578,000 in over-the-counter commissions during the three and six months ended June 30, 2024, respectively, over the same periods in the prior year, combined with a modest increase in syndicate income and other immaterial increases. These increases were partially offset by decreases in income from margin participation interest of $185,000 and $459,000 during the three and six months ended June 30, 2024, respectively, related to the decreased appetite for margin lending given persistently high interest rates, and a modest decrease in insurance commission. See “Non-Interest Income,” above for further analysis of non-interest income.

Non-interest expense for the three and six months ended June 30, 2024 decreased $144,000, or 2.2%, and $564,000, or 4.2%, respectively, compared to the same periods in the prior year. The decreases for the three and six months ended June 30, 2024 were primarily related to decreases in salaries and employee benefits of $29,000 and $515,000, respectively, and other operating costs of $227,000 and $292,000, respectively, and in occupancy and equipment expense of $19,000 and $7,000, respectively. These decreases were partially offset by increases for the three and six months ended June 30, 2024 in trust expense of $69,000 and $127,000, in brokerage and advisory direct costs of $45,000 and $94,000, respectively, as well as increases in professional fees of $4,000 and $8,000, respectively, and in data processing expense of $13,000 and $21,000, respectively. The decreases in salaries and employee benefits expense for the three and six months ended June 30, 2024 was related to decreases of $386,000 and $813,000, respectively, at Tectonic Advisors primarily from the transition of accounting and technology personnel to Tectonic Financial within the HoldCo segment, which were partially offset for the three and six months ended June 30, 2024 by increases at the Bank’s Trust and Nolan divisions of $64,000 and $105,000, respectively, related to increases in salary expense from merit increases and in increased benefits expense, and for the three months ended June 30, 2024, by an increase at Sanders Morris of $188,000 related to increases in commissions and bonuses related to syndicated offering activity and increases in general brokerage activity, which increased commissions expense. Salary and benefits expense at Sanders Morris decreased by $95,000 for the six months ended June 30, 2024 related to a decrease in payroll taxes of $126,000 due to an over-accrual of payroll taxes at year end 2023, offset by an increase in commission and bonuses of $112,000, related to the increase in brokerage revenue over the six months ended June 30, 2024 compared to the same period in the prior year. The decreases in other operating costs for the three and six months ended June 30, 2024 were primarily related to decreases in marketing expense related to the change in our fee sharing agreement with Cain Watters, and to an increase in expense related to trading errors, particularly for the six months ended June 30, 2024 related to a trading error during the first quarter 2024. The increases in trust expense related to increases in the value of trust assets at the Bank, on which those fees are based, from market appreciation and positive net flows, compared to the same periods in the prior year. The increase in brokerage and advisory direct costs were primarily the result of increase in brokerage and offering activity at Sanders Morris, which increased clearing and service fees and execution charges, and increases in information services fees primarily related to an increase in headcount at Tectonic Advisors. There were less material increases to data processing expense and professional fees. See “Non-Interest Expense,” above, for further analysis of non-interest.

Table of Contents

HoldCo

The loss before taxes for the three and six months ended June 30, 2024 increased $486,000, or 47.2% and $1.1 million, or 56.5%, respectively, compared to the same periods in the prior year. Interest expense increased $40,000 and $97,000, respectively, solely due to increases in interest rates on our subordinated debt. Non-interest expense increased $446,000 and $1.0 million for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year, primarily due to increases in salaries and employee benefits of $485,000 and $968,000, respectively, related to the transition of accounting and technology personnel to Tectonic Financial, which is within the Company’s HoldCo segment, from Tectonic Advisors, whose activity is within the Company’s Other Financial Services segment, to better reflect the function of those personnel given they serve departments across the Company, as well as an increase in headcount. In addition, occupancy and equipment expense increased $27,000 and $68,000 related primarily to increases in rent, common area maintenance and parking totaling $24,000 and $52,000 from increases in headcount on our technology team, which offices in our Houston office, as well as the buildout of the technology team’s space in Houston, which increased depreciation expense and repairs and maintenance expense for the three and six months ended June 30, 2024. These increases were offset by a decrease in professional fees for the three and six months ended June 30, 2024 of $58,000 and $87,000, respectively, driven by professional fees related to projects involving robotic process automation. Other operating expense decreased $8,000 and increased $52,000 for the three and six months ended June 30, 2024, respectively, related to increases in software and software license expense and in postage expense related to marketing campaigns during the six months ended June 30, 2024. These increases were offset by decreases in marketing expense and insurance expense of $35,000 and $13,000, respectively, for each the three and six months ended June 30, 2024. See “Non-Interest Income,” above, and “Non-Interest Expense,” above, for further analyses of non-interest income and non-interest expense included in the respectively titled sections above.

Financial Condition

Investment Securities

The primary purpose of the Company’s investment portfolio is to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against borrowings, and to control interest rate risk. In managing the portfolio, the Company seeks to attain the objectives of safety of principal, liquidity, diversification, and maximized return on investment.

As of June 30, 2024, securities available for sale consisted of U.S. Treasuries, U.S. government agency securities and mortgage-backed securities guaranteed by U.S. government agencies. Securities held to maturity consist of Property Assessed Clean Energy (“PACE”) and PID/TIRZ investments. These investment contracts or bonds located in Texas, California and Florida, originate under a contractual obligation between the property owners, the local county or city administration, and a third-party administrator and sponsor. PACE assessments are created to fund the purchase and installation of energy saving improvements to the property such as solar panels. PID/TIRZ assessments are used to pay for the development costs of a residential subdivision. Generally, as a property assessment, the total assessment is repaid in installments over a period of 5 to 32 years by the then current property owner(s). Each installment is collected by the County or City Tax Collector where the property is located. The assessments are an obligation of the property.

Securities, restricted consisted of FRB stock, having an amortized cost and fair value of $2.2 million as of June 30, 2024 and December 31, 2023, and FHLB stock, having an amortized cost and fair value of $2.0 million as of June 30, 2024 and December 31, 2023, respectively.

Table of Contents

The following table presents the amortized cost and fair values of the Company’s securities portfolio as of the dates indicated:

	As of June 30, 2024				As of December 31, 2023
(In thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities available for sale:
U.S. Treasuries	$	2,945	$	2,938	$	3,906	$	3,894
U.S. government agencies		15,606		13,663		15,644		13,627
Mortgage-backed securities		7,194		6,845		5,731		5,456
Total securities available for sale	$	25,745	$	23,446	$	25,281	$	22,977

Securities held to maturity:
Property assessed clean energy	$	1,322	$	1,345	$	1,326	$	1,254
Public improvement district/TIRZ		21,732		21,752		22,868		22,595
Total securities held to maturity	$	23,054	$	23,097	$	24,194	$	23,849

Securities, restricted:
Other	$	4,229	$	4,229	$	4,176	$	4,176

The Company evaluates all available for sale securities in unrealized loss positions to determine if any securities resulted from credit factors or other factors. In making this assessment, the Company considers the underlying risk characteristics, including credit ratings, and other qualitative factors for each security type in the portfolio. The issuers of these securities are U.S. government agencies and continue to make timely principal and interest payments under the contractual terms of the securities. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. Due to the low risk in these U.S. government guaranteed securities, no allowance for credit losses for available-for-sale securities was recognized as of June 30, 2024.

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 June 30, 2024. 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 securities, 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. Treasuries	$	2,945		4.73	%	$	-		-	%	$	-		-	%	$	-		-	%	$	2,945		4.73	%
U.S. government agencies		-		-	%		11,999		3.62	%		75		1.35	%		3,532		5.40	%		15,606		0.93	%
Mortgage-backed securities		5		3.30	%		2,479		2.64	%		893		4.89	%		3,817		4.10	%		7,194		3.80	%
Total	$	2,950		4.73	%	$	14,478		1.42	%	$	968		2.77	%	$	7,349		2.53	%	$	25,745		2.17	%
Securities held to maturity:
Property assessed clean energy	$	-		-	%	$	-		-	%	$	365		6.87	%	$	957		7.24	%	$	1,322		7.14	%
Public improvement district/TIRZ		-		-	%		663		4.12	%		-		-	%		21,069		6.27	%		21,732		6.20	%
Total	$	-		-	%	$	663		4.12	%	$	365		6.87	%	$	22,026		6.31	%	$	23,054		6.26	%

Table of Contents

Loan Portfolio Composition

Total loans excluding allowance for credit losses, increased $74.5 million to $575.6 million at June 30, 2024, compared to $501.1 million at December 31, 2023. The increase includes $73.8 million for SBA loans, $11.6 million increase in factored receivables, partly offset by a $7.9 million decrease in real estate loans, $2.7 million decrease in commercial and industrial loans and $274,000 decrease in consumer loans. SBA loans comprise the largest group of loans in our portfolio totaling $342.7 million, or 59.5%, of the total loans at June 30, 2024, compared to $268.9 million, or 53.7% of the total loans at December 31, 2023. Real estate loans totaled $113.8 million, or 19.8%, of the total loans at June 30, 2024, compared to $121.7 million, or 24.3% of the total loans at December 31, 2023.

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

(In thousands, except percentages)	June 30, 2024				December 31, 2023
Commercial and industrial	$	79,768	13.8	%	$	82,483	16.5	%
Consumer installment		626	0.1			900	0.2
Real estate – residential		9,177	1.6			8,181	1.6
Real estate – commercial		67,232	11.7			68,792	13.7
Real estate – construction and land		37,367	6.5			44,663	8.9
SBA 7(a) guaranteed		186,015	32.3			162,144	32.4
SBA 7(a) unguaranteed		78,986	13.7			64,858	12.9
SBA 504		77,682	13.5			41,906	8.4
USDA		2,123	0.4			2,124	0.4
Factored Receivables		36,667	6.4			25,044	5.0
Total Loans	$	575,643	100.0	%	$	501,095	100.0	%

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 and factor clients 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.

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.

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.

Nonperforming assets include nonaccrual loans, accruing loans and factored receivables greater than 90 days past due, and foreclosed assets. The following table sets forth certain information regarding non-performing loans by type, including ratios of such loans to total assets as of the dates indicated:

	June 30, 2024					December 31, 2023
(In thousands, except percentages)	Amount		Loan Category to Total Assets			Amount		Loan Category to Total Assets
Non-accrual loans:
Commercial and industrial	$	2,470		0.43	%	$	93		0.02	%
Real estate–- residential		122		0.02			128		0.02
SBA guaranteed		6,245		1.08			1,951		0.39
SBA unguaranteed		1,780		0.31			251		0.05
Total non-accrual loans		10,617		1.84			2,423		0.48
Factored receivables past due 90 days		49		0.01			147		0.03
Total non-performing assets	$	10,666		1.85	%	$	2,570		0.51	%

Table of Contents

Allowance for Credit Losses

As discussed in Note 1 – Organization and Significant Accounting Policies in the accompanying notes to consolidated financial statements, our policies and procedures related to accounting for credit losses changed on January 1, 2023 in connection with the adoption of the CECL methodology as codified in ASC 326. In the case of loans and securities, allowances for credit losses are contra-asset valuation accounts, calculated in accordance with ASC 326, that are deducted from the amortized cost basis of these assets to present the net amount expected to be collected. When management deems all or a portion of a loan to be uncollectible, the appropriate amount is charged-off against the allowance. Subsequent recoveries, if any, are credited to the allowance. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of other liabilities in our consolidated balance sheets. The amount of each allowance account represents management’s best estimate of CECL on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting policies, refer to Note 1 – Organization and Significant Accounting Policies and Note 3–- Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statements.

For all loan pools, management has determined two years represents a reasonable and supportable forecast period and reverts to a historical loss rate over two years on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the two year forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The allowance for credit losses for each segment is measured through the use of the open pool method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Management qualitatively adjusts model results for risk factors (“Q-Factor”) that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factors and other qualitative adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) staff experience; (iii) changes in volume and trends in classified loans, delinquencies and nonaccruals; (iv) concentration risk; (v) trends in underlying collateral values; (vi) external factors such as competition, legal and regulatory environment; and (vii) economic conditions.

Upon the adoption of ASC 326 effective on January 1, 2023, the total amount of the allowance for credit losses for loans estimated using the CECL methodology increased $1.4 million compared to the total amount of the allowance for credit losses for loans estimated as of December 31, 2022 using the prior incurred loss model under GAAP.

Table of Contents

The following table sets forth the allocation of the allowance for credit losses as of the date indicated and the percentage of allocated possible loan losses in each category to total gross loans as of the dates indicated:

(In thousands, except percentages)	June 30, 2024					December 31, 2023
Allocated:	Amount		Loan Category to Gross Loans			Amount		Loan Category to Gross Loans
Commercial and industrial	$	2,434		13.8	%	$	2,495		16.5	%
Consumer installment		14		0.1			18		0.2
Real estate – residential		90		1.6			71		1.6
Real estate – commercial		682		11.7			616		13.7
Real estate – construction and land		188		6.5			143		8.9
SBA		4,203		59.5			2,484		53.7
USDA		22		0.4			19		0.4
Factored Receivables		643		6.4			462		5.0
Total allowance for credit losses	$	8,276		100.0	%	$	6,308		100.0	%

The table below presents a summary of the Company’s net loan loss experience and provisions to the allowance for credit losses for the periods indicated:

	As of and for the Three Months Ended						As of and for the Six Months Ended
	June 30						June 30
(In thousands, except percentages)	2024			2023			2024			2023
Average loans outstanding	$	584,521		$	478,586		$	562,759		$	479,040
Gross loans held for investment outstanding at end of period	$	575,643		$	465,703		$	575,643		$	465,703
Allowance for credit losses at beginning of period	$	6,730		$	5,873		$	6,308		$	4,513
Impact of adopting ASC 326		-			-			-			1,390
Provision for credit losses		1,622			717			2,395			760
Charge offs:
Commercial and industrial		-			-			-			-
SBA 7(a)		-			328			56			328
Factored Receivables		212			190			569			298
Total charge-offs		212			518			625			626
Recoveries:
SBA 7(a)		17			13			30			17
Factored Receivables		119			53			168			84
Total recoveries		136			66			198			101
Net charge-offs		(76	)		(452	)		(427	)		(525	)
Allowance for credit losses at end of period	$	8,276		$	6,138		$	8,276		$	6,138
Ratio of allowance for loans to end of period loans		1.44	%		1.32	%		1.44	%		1.32	%
Ratio of net charge-offs to average loans		0.01	%		0.09	%		0.08	%		0.11	%

Sources of Funds

General

Deposits, loan and investment security repayments and prepayments, proceeds from the sale of securities, and cash flows generated from operations are the primary sources of our funds for lending, investing, and other general purposes. Loan repayments are generally a relatively stable source of funds, while deposit inflows and outflows tend to fluctuate with prevailing interest rates, markets and economic conditions, and competition.

Table of Contents

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. As of June 30, 2024, deposits include a $50.0 million brokered deposit through an Insured Cash Sweep One-Way Buy agreement.

Total deposits increased $92.2 million, or 17.5%, to $619.1 million as of June 30, 2024, as compared to $526.9 million as of December 31, 2023. 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:

	For the six months ended June 30,
	2024								2023
(In thousands, except percentages)	Average Balance		Percent of Deposits			Average Rate			Average Balance		Percent of Deposits			Average Rate
Non-interest-bearing deposits	$	66,647		11.0	%		0.00	%	$	105,496		20.4	%		0.00	%
Savings and interest-bearing demand		10,234		1.7			0.47			12,633		2.4			0.43
Money market accounts		146,694		24.2			5.18			120,849		23.3			4.01
Time deposits		381,966		63.1			5.27			278,872		53.9			3.77
Total deposits	$	605,541		100.00	%		4.59	%	$	517,850		100.00	%		2.98	%

The following table provides information on the maturity distribution of the time deposits exceeding the FDIC insurance limit of $250,000 as of June 30, 2024:

(In thousands)	Over $250,000
Maturing
Three months or less	$	15,857
Over three months to six months		15,125
Over six months to 12 months		65,643
Over 12 months		7,862
Total	$	104,487

Estimated amount of uninsured deposits totaled approximately $57.6 million, or 9.3% of total deposits, as of June 30, 2024.

Borrowings

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

(In thousands)	June 30, 2024		December 31, 2023
Borrowings:
FHLB borrowings	$	-	$	-
FRB borrowings		20,000		-
Subordinated notes		12,000		12,000
Total	$	32,000	$	12,000

The Company has a credit line with the FHLB with borrowing capacity of $54.5 million secured by commercial loans. The Company determines its borrowing needs and renews the advances accordingly at varying terms. The Company had no borrowings with FHLB as of June 30, 2024 and December 31, 2023.

Table of Contents

As part of the BTFP, the FRB offered loans of up to one year in length to banks and other eligible depository institutions pledging U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral, which are assessed at par value. The Bank pledged AFS securities with par value of $20.1 million to provide additional liquidity to meet the needs of depositors as of June 30, 2024. The Company had $20.0 million borrowings related to the BTFP as of June 30, 2024.

As of June 30, 2024 and December 31, 2023, the Company also had subordinated notes totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an interest rate of three month CME Term SOFR plus a tenor spread adjustment of 0.26161% plus 5.125%, with interest payable quarterly and maturing on July 20, 2027, at which all principal is due, and $4.0 million issued in 2018 bearing a fixed interest rate of three-month CME Term SOFR plus a tenor spread adjustment of 0.26161% plus 4.348%, payable quarterly, 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 $3.5 million, or 3.3%, to $110.4 million as of June 30, 2024, from $106.9 million as of December 31, 2023. The increase included net income of $6.2 million, $42,000 related to stock compensation expenses and $4,000 net after-tax increase in accumulated other comprehensive loss. The increases were partly offset by the repurchase of common stock in the amount of $498,000 and dividends paid on the Series B preferred stock and paid on the common stock in the amounts of $776,000 and $1.4 million, respectively.

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 June 30, 2024, the Company and the Bank met all capital adequacy requirements to which they were subject. As of June 30, 2024 and December 31, 2023, the Company met the definition of “well-capitalized” under the applicable regulations of the Federal Reserve and the Bank’s regulatory capital ratios were in excess of the capital conservation buffer and the levels established for “well-capitalized” institutions under the FDIC’s regulatory framework for prompt corrective action and the Basel III capital guidelines.

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

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

(In thousands, except percentages)	June 30, 2024					December 31, 2023
	Amount		Ratio			Amount		Ratio
Tectonic Financial, Inc.
Tier 1 Capital (to Average Assets)	$	90,517		11.78	%	$	86,847		13.97	%
Common Equity Tier 1 (to Risk Weighted Assets)		73,267		14.43			69,597		15.74
Tier 1 Capital (to Risk Weighted Assets)		90,517		17.83			86,847		19.65
Total Capital (to Risk Weighted Assets)		96,891		19.09			92,385		20.90

T Bank, N.A.
Tier 1 Capital (to Average Assets)	$	91,308		12.01	%	$	87,488		14.26	%
Common Equity Tier 1 (to Risk Weighted Assets)		91,308		18.17			87,488		20.04
Tier 1 Capital (to Risk Weighted Assets)		91,308		18.17			87,488		20.04
Total Capital (to Risk Weighted Assets)		97,617		19.43			92,957		21.29

Table of Contents

Sanders Morris is regulated by FINRA, which, among other requirements, imposes minimums on its net regulatory capital. As of June 30, 2024, Sanders Morris is in compliance with its net regulatory capital requirement.

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.

As of June 30, 2024, the Company had approximately $61.5 million held in an interest-bearing account at the FRB. The Company has the ability to borrow funds as members of the FHLB and the FRB. As of June 30, 2024, the Company’s borrowing capacity with the FHLB was $54.5 million based upon loan collateral pledged to the FHLB, of which none was utilized as of June 30, 2024.

The borrowing capacity on the discount line of credit with the FRB was $38.8 million, of which none was utilized as of June 30, 2024. During March 2023, the Federal Reserve created the BTFP, which was made available to banks in response to liquidity concerns in the United States banking system. The BTFP allows the whole par value of available for sale securities to be included as the collateral value. As of June 30, 2024, securities with a par value of $20.1 million were pledged to the Federal Reserve under this program, of which $20.0 million was borrowed against. In addition, the Company has approximately $183.4 million of SBA guaranteed loans held for investment that could be sold to investors.

Management believes that the Company has adequate liquidity to meet its obligations. However, if general economic conditions, potential recession in the United States and our market areas, the impacts related to or resulting from recent bank failures and any continuation of the recent uncertainty in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other mitigation efforts taken by government agencies in response thereto, increased competition for deposits and related changes in deposit customer behavior, changes in market interest rates, the persistence of the current inflationary environment in the United States and our market areas, or other events, cause these sources of external funding to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company’s operations and growth.

Off-Balance Sheet Arrangements

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.

Table of Contents

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.

As of June 30, 2024, we had commitments to extend credit and standby letters of credit of approximately $66.8 million and $162,000, respectively.

Allowance For Credit Losses–- Off-Balance-Sheet Credit Exposures. The allowance for credit losses for off-balance sheet credit exposures is calculated under the CECL model, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. Off-balance sheet credit exposures primarily consist of amounts available under outstanding commitments to extend credit and letters of credit detailed above. The allowance for credit losses for off-balance sheet credit exposures is estimated by loan segment at each balance sheet date using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur based on historical utilization rates. Upon adoption of ASC 326 on January 1, 2023, the impact of adoption was $238,000 to the allowance for credit losses for off-balance-sheet credit exposure. The allowance for credit losses on off-balance-sheet credit exposures totaled $374,000 and $192,000 at June 30, 2024 and December 31, 2023, respectively. During the three and six months ended June 30, 2024, we recognized a credit loss expense related to off-balance-sheet credit exposures totaling $38,000 and $182,000, respectively. During the three months ended June 30, 2023, we reversed $25,000 credit loss expense, and during the six months ended June 30, 2023, we recognized a credit loss expense totaling $10,000. Further information regarding our policies and methodology used to estimate the allowance for credit losses for off-balance-sheet credit exposures is presented in Note 11 – Commitments and Contingencies in the accompanying notes to consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity and Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability management policy provides management with guidelines for effective funds management and we have established a measurement system for monitoring the net interest rate sensitivity position.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage exposure to interest rates by structuring the balance sheet in the ordinary course of business. We use no off-balance-sheet financial instruments to manage interest rate risk.

Our exposure to interest rate risk is managed by the Bank’s Asset Liability Committee in accordance with policies approved by the Bank’s board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, liquidity, business strategies and other factors.

The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. We employ methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.

Table of Contents

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On at least an annual basis, we run various stress tests to measure the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously, and ramped rates change over a twelve-month and twenty-four month horizon based upon parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Additionally, we run non-parallel simulation involving analysis of interest income and expense under various changes in the shape of the yield curve.

The following table summarizes the impact of an instantaneous, sustained simulated change in net interest income over a 12-month horizon as of June 30, 2024:

Change in Interest Rates (basis points)	% Change in Net Interest Income
+200		6.84
+100		3.40
-100		(4.06	)
-200		(7.08	)

We have found that, historically, interest rates on deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis, meaning that process by which we measure the gap between interest rate sensitive assets verses interest rate sensitive liabilities. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this Form 10-Q have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession. Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in market interest rates by the Federal Reserve generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity.

Table of Contents

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, an evaluation was performed by the Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) were effective at the end of the period covered by this Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2024 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of its business. Based on the information presently available, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business’s financial condition or results of operations of the Company on a consolidated basis.

Item 1A. Risk Factors.

In evaluating an investment in any of our securities, investors should consider carefully, among other things, information under the heading “Cautionary Notice Regarding Forward-Looking Statements” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-Q and the risk factors previously disclosed under the heading “Risk Factors” in Part I, Item 1A of our 2023 Annual Report on Form 10-K. Management believes there have been no material changes in the risk factors disclosed under Item 1A., “Risk Factors,” of the Company’s 2023 Form 10-K. The risks described in our 2023 Form 10-K and our subsequent quarterly reports are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None during the quarter ended June 30, 2024.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

During the three months ended June 30, 2024, none of the directors or officers of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.

Table of Contents

Item 6. Exhibits and Financial Statement Schedules.

Exhibit No.		Description of Exhibit

3.1		Amended and Restated Certificate of Formation (incorporated by reference from Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-1/A filed with the SEC on May 9, 2019 (File No. 333-230949))
3.2		Certificate of Designation of 10.0% Series A Non-Cumulative Perpetual Preferred Stock (incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on May 16, 2019 (File No. 001-38910))
3.3		Certificate of Designation of 9.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock (incorporated by reference from Exhibit 3.2 to the Current Report on Form 8-K filed with the SEC on May 16, 2019 (File No. 001-38910))
3.4		Certificate of Amendment to effect Reverse Stock Split (incorporated by reference from Exhibit 3.3 to the Current Report on Form 8-K filed with the SEC on May 16, 2019 (File No. 001-38910))
3.5		Amended and Restated Bylaws (incorporated by reference from Exhibit 3.5 to Amendment No. 1 to the Registration Statement on Form S-1/A filed with the SEC on May 6, 2019 (File No. 333-230949))
31.1		Rule 13a-14(a) Certification of Principal Executive Officer*
31.2		Rule 13a-14(a) Certification of Principal Financial Officer*
32.1		Section 1350 Certification**

101.INS		Inline XBRL Instance Document*
101.SCH		Inline XBRL Taxonomy Extension Schema Document*
101.CAL		Inline XBRL Taxonomy Extension Label Calculation Linkbase Document*
101.DEF		Inline XBRL Taxonomy Definition Linkbase*
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase*
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith
**	Furnished herewith

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TECTONIC FINANCIAL, INC.

Date: August 14, 2024	By:	/s/ A. Haag Sherman
		A. Haag Sherman Chief Executive Officer/Principal Executive Officer

	By:	/s/ Ken Bramlage
		Ken Bramlage Executive Vice President and Chief Financial Officer/Principal Financial Officer