Notes to Consolidated Financial Statements (Unaudited)
Note 1. Organization and Significant Accounting Policies
Tectonic Financial, Inc. (the “Company,” “we,” “us,” or “our”) is a financial holding company that offers, through its subsidiaries, banking and other financial services including trust, investment advisory, securities brokerage, 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 bank holding company for T Bank, N.A., a national banking association (the “Bank”), (ii) Sanders Morris Harris LLC (“Sanders Morris”), a registered broker-dealer with the Financial Industry Regulatory Authority (“FINRA”) and registered investment advisor with the 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 a main office located at 16200 Dallas Parkway, Dallas, Texas. Our other subsidiaries operate from offices in Houston, Dallas and Plano, Texas. Our Houston, Texas office is located at 600 Travis Street, 59th 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 at 5950 Sherry Lane, Suite 470, Dallas, Texas. Our main office for Tectonic Advisors is in Plano, Texas at 6900 Dallas Parkway, Suite 625, Plano, 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, and The Nolan Company (“Nolan”), operating as a division within the Bank, offers third party administration (“TPA”) 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 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 trust operations in April 2006, which has been amended from time to time, most recently in July 2016. 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, 2021 (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, 2020 in the audited financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 31, 2021 and amended on Form 10-K/A on May 5, 2021.
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, 2021 are not necessarily indicative of results that may be expected for the full year ending December 31, 2021.
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 loan 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.
Earnings per Share. Basic earnings per share (“EPS”) is computed based on the weighted-average number of shares outstanding during each year. 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 following periods:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
(In thousands, except per share data)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net income available to common shareholders
|
|
$
|
3,329
|
|
|
$
|
1,726
|
|
|
$
|
7,239
|
|
|
$
|
3,739
|
|
Average shares outstanding
|
|
|
6,569
|
|
|
|
6,569
|
|
|
|
6,569
|
|
|
|
6,569
|
|
Effect of dilutive shares
|
|
|
62
|
|
|
|
-
|
|
|
|
62
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted shares outstanding
|
|
|
6,631
|
|
|
|
6,569
|
|
|
|
6,631
|
|
|
|
6,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.51
|
|
|
$
|
0.26
|
|
|
$
|
1.10
|
|
|
$
|
0.57
|
|
Diluted earnings per share
|
|
$
|
0.50
|
|
|
$
|
0.26
|
|
|
$
|
1.09
|
|
|
$
|
0.57
|
|
As of June 30, 2021, options to purchase 117,500 shares of common stock, with a weighted average exercise price of $4.30, were included in the computation of diluted net earnings per share, and options to purchase 72,500 shares of common stock, with a weighted average exercise price of $7.10, were excluded from the computation of diluted net earnings per share because their effect was anti-dilutive. In addition, as of June 30, 2021, 210,000 shares of restricted stock grants with a grant date fair value of $4.81 per share which vest from 2023 through 2025 were included in the diluted earnings per share calculation.
Note 2. Securities
A summary of amortized cost and fair value of securities is presented below.
|
|
June 30, 2021
|
|
(In thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
16,140
|
|
|
$
|
8
|
|
|
$
|
235
|
|
|
$
|
15,913
|
|
Mortgage-backed securities
|
|
|
1,966
|
|
|
|
54
|
|
|
|
-
|
|
|
|
2,020
|
|
Total securities available for sale
|
|
$
|
18,106
|
|
|
$
|
62
|
|
|
$
|
235
|
|
|
$
|
17,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property assessed clean energy
|
|
$
|
2,784
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,784
|
|
Securities, restricted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
2,431
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities not readily marketable
|
|
$
|
100
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100
|
|
|
|
December 31, 2020
|
|
(In thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
14,936
|
|
|
$
|
38
|
|
|
$
|
25
|
|
|
$
|
14,949
|
|
Mortgage-backed securities
|
|
|
2,373
|
|
|
|
74
|
|
|
|
-
|
|
|
|
2,447
|
|
Total securities available for sale
|
|
$
|
17,309
|
|
|
$
|
112
|
|
|
$
|
25
|
|
|
$
|
17,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property assessed clean energy
|
|
$
|
5,776
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities, restricted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
2,431
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities not readily marketable
|
|
$
|
100
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100
|
|
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 investments. These investment contracts or bonds located in California and Florida, originate under a contractual obligation between the property owners, the local county administration, and a third-party administrator and sponsor. The assessments are created to fund the purchase and installation of energy saving improvements to the property such as solar panels. Generally, as a property assessment, the total assessment is repaid in installments over a period of 10 to 15 years by the then current property owner(s). Each installment is collected by the County Tax Collector where the property is located. The assessments are an obligation of the property. Securities, restricted consist of Federal Reserve Bank of Dallas (“FRB”) and Federal Home Loan Bank of Dallas (“FHLB”) stock, which are carried at cost.
As of June 30, 2021 and December 31, 2020, securities available for sale with a fair value of $364,000 and $554,000, respectively, were pledged against trust deposit balances held at the Bank.
At each of June 30, 2021 and December 31, 2020, the Bank held FRB stock in the amount of $1.2 million. The Bank held FHLB stock in the amount of $1.2 million at each of June 30, 2021 and December 31, 2020. The FRB stock and FHLB stock were classified as restricted securities.
As of June 30, 2021 and December 31, 2020, the Company held an income interest in a private investment, which is not readily marketable, accounted for under the cost method in the amount of $100,000.
The table below indicates the length of time individual investment securities have been in a continuous loss position as of June 30, 2021:
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
(In thousands)
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
U.S. government agencies
|
|
$
|
13,656
|
|
|
$
|
203
|
|
|
$
|
1,968
|
|
|
$
|
32
|
|
|
$
|
15,624
|
|
|
$
|
235
|
|
The number of investment positions in this unrealized loss position totaled eleven as of June 30, 2021. The Company does not believe these unrealized losses are “other than temporary” as (i) it does not have the intent to sell the securities prior to recovery and/or maturity and, (ii) it is more likely than not that the Company will not have to sell the securities prior to recovery and/or maturity. Accordingly, as of June 30, 2021, no impairment loss has been realized in the Company’s consolidated statements of income.
The amortized cost and estimated fair value of securities as of June 30, 2021 are presented 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
|
|
|
Estimated
Fair Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
Due in one year or less
|
|
$
|
163
|
|
|
$
|
163
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Due after one year through five years
|
|
|
1,087
|
|
|
|
1,078
|
|
|
|
-
|
|
|
|
-
|
|
Due after five years through ten years
|
|
|
11,188
|
|
|
|
11,061
|
|
|
|
-
|
|
|
|
-
|
|
Due after ten years
|
|
|
3,702
|
|
|
|
3,611
|
|
|
|
2,784
|
|
|
|
2,784
|
|
Mortgage-backed securities
|
|
|
1,966
|
|
|
|
2,020
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
18,106
|
|
|
$
|
17,933
|
|
|
$
|
2,784
|
|
|
$
|
2,784
|
|
Note 3. Loans and Allowance for Loan Losses
Major classifications of loans held for investment are as follows:
(In thousands)
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Commercial and industrial
|
|
$
|
81,446
|
|
|
$
|
79,864
|
|
Consumer installment
|
|
|
3,773
|
|
|
|
10,259
|
|
Real estate – residential
|
|
|
5,336
|
|
|
|
4,319
|
|
Real estate – commercial
|
|
|
52,826
|
|
|
|
44,484
|
|
Real estate – construction and land
|
|
|
7,498
|
|
|
|
8,396
|
|
SBA:
|
|
|
|
|
|
|
|
|
SBA 7(a) guaranteed
|
|
|
173,922
|
|
|
|
164,687
|
|
SBA 7(a) unguaranteed
|
|
|
50,355
|
|
|
|
52,179
|
|
SBA 504
|
|
|
34,852
|
|
|
|
35,553
|
|
USDA
|
|
|
803
|
|
|
|
801
|
|
Gross Loans
|
|
|
410,811
|
|
|
|
400,542
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
3,307
|
|
|
|
2,941
|
|
Net loans
|
|
$
|
407,504
|
|
|
$
|
397,601
|
|
During the second quarter of 2020, the Company began participating in the Paycheck Protection Program (“PPP”) which was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in response to the COVID-19 pandemic and administered by the SBA. The PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA. Therefore, no allowance for loan losses is allocated to PPP loans. Included in SBA 7(a) guaranteed loans at June 30, 2021, were $86.3 million of loans originated under the PPP.
As of June 30, 2021, our loan portfolio included $70.7 million of loans, approximately 17.2% of our total funded loans (21.8% of total funded loans, net of PPP loans) to the dental industry, as compared to $67.2 million of loans, or 16.8% of total funded loans (21.1% of total funded loans, net of PPP loans), at December 31, 2020. The Bank believes that these loans are to credit worthy borrowers and are diversified geographically.
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 $21.1 million and $14.9 million of non-PPP SBA loans held for sale as of June 30, 2021 and December 31, 2020, respectively. During the three and six months ended June 30, 2021, the Company sold $1.1 million of non-PPP SBA loans, resulting in a gain on sale of loans of $101,000. For the three and six months ended June 30, 2021, the Company elected to reclassify $6.2 million and $15.1 million, respectively, 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 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% (100% for PPP loans) 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. Included in the SBA 7(a) loans reflected in this Form 10-Q are the PPP loans originated by the Company and outstanding as of June 30, 2021.
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.
The Company also offers Business & Industry (“B&I”) program loans through the USDA. These loans are similar to the SBA product, except they are guaranteed by the USDA. The guaranteed amount is generally 80%. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the SBA 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market. These loans can be utilized for rural commercial real estate and equipment. The loans can have maturities up to 30 years and the rates can be fixed or variable.
Construction and land development loans are evaluated based on the borrower’s and guarantor’s credit worthiness, past experience in the industry, track record and experience with the type of project being considered, and other factors. Collateral value is determined generally by independent appraisal utilizing multiple approaches to determine value based on property type.
For all 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 management’s opinion, 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:
(In thousands)
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Real estate – commercial
|
|
$
|
154
|
|
|
$
|
158
|
|
SBA guaranteed
|
|
|
2,471
|
|
|
|
1,118
|
|
SBA unguaranteed
|
|
|
1,079
|
|
|
|
517
|
|
Total
|
|
$
|
3,704
|
|
|
$
|
1,793
|
|
The restructuring of a loan is considered a “troubled debt restructuring” if due to the borrower’s financial difficulties, the Company has granted a concession that the Company would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modification of loan terms may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in collateral and other actions intended to minimize potential losses.
The provisions of the CARES Act include an election to temporarily suspend accounting for troubled debt restructurings in certain circumstances, such as extensions or deferrals, related to the COVID-19 pandemic. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and, as extended by the Consolidated Appropriations Act of 2021, ending on the earlier of January 1, 2022 or 60 days after the termination of the COVID-19 national emergency. In 2020, federal banking regulators, in consultation with the Financial Accounting Standards Board (“FASB”), issued interagency statements that included similar guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic that provide that short-term modifications and additional accommodations made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings. The Company elected to adopt these provisions of the CARES Act. At June 30, 2021, there were 2 loans in COVID-19-related deferment with an aggregate outstanding balance of approximately $3.2 million. At December 31, 2020, there were 11 loans in COVID-19-related deferment with an aggregate outstanding balance of approximately $4.3 million.
As of June 30, 2021 and December 31, 2020, there were no loans identified as troubled debt restructurings. There were no new troubled debt restructurings during the six months ended June 30, 2021 and the year ended December 31, 2020.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The Company’s impaired loans and related allowance is summarized in the following table:
|
|
Unpaid
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Principal
|
|
|
With No
|
|
|
With
|
|
|
Recorded
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
(In thousands)
|
|
Balance
|
|
|
Allowance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Commercial and industrial
|
|
$
|
98
|
|
|
$
|
98
|
|
|
$
|
-
|
|
|
$
|
98
|
|
|
$
|
-
|
|
|
$
|
66
|
|
|
$
|
2
|
|
SBA
|
|
|
10,790
|
|
|
|
7,226
|
|
|
|
-
|
|
|
|
7,226
|
|
|
|
-
|
|
|
|
6,397
|
|
|
|
21
|
|
Total
|
|
$
|
10,888
|
|
|
$
|
7,324
|
|
|
$
|
-
|
|
|
$
|
7,324
|
|
|
$
|
-
|
|
|
$
|
6,463
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Commercial and industrial
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
-
|
|
Real estate – construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
313
|
|
|
|
-
|
|
SBA
|
|
|
6,649
|
|
|
|
2,976
|
|
|
|
-
|
|
|
|
2,976
|
|
|
|
-
|
|
|
|
3,206
|
|
|
|
61
|
|
Total
|
|
$
|
6,649
|
|
|
$
|
2,976
|
|
|
$
|
-
|
|
|
$
|
2,976
|
|
|
$
|
-
|
|
|
$
|
3,529
|
|
|
$
|
61
|
|
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 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 90
|
|
|
|
30-89 Days
|
|
|
90 Days or
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
Days Past Due
|
|
(In thousands)
|
|
Past Due
|
|
|
More Past Due
|
|
|
Past Due
|
|
|
Current
|
|
|
Loans
|
|
|
Still Accruing
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
81,446
|
|
|
$
|
81,446
|
|
|
$
|
-
|
|
Consumer installment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,773
|
|
|
|
3,773
|
|
|
|
-
|
|
Real estate – residential
|
|
|
214
|
|
|
|
-
|
|
|
|
214
|
|
|
|
5,122
|
|
|
|
5,336
|
|
|
|
-
|
|
Real estate – commercial
|
|
|
-
|
|
|
|
154
|
|
|
|
154
|
|
|
|
52,672
|
|
|
|
52,826
|
|
|
|
-
|
|
Real estate – construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,498
|
|
|
|
7,498
|
|
|
|
-
|
|
SBA
|
|
|
-
|
|
|
|
518
|
|
|
|
518
|
|
|
|
258,611
|
|
|
|
259,129
|
|
|
|
-
|
|
USDA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
803
|
|
|
|
803
|
|
|
|
-
|
|
Total
|
|
$
|
214
|
|
|
$
|
672
|
|
|
$
|
886
|
|
|
$
|
409,925
|
|
|
$
|
410,811
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79,864
|
|
|
$
|
79,864
|
|
|
$
|
-
|
|
Consumer installment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,259
|
|
|
|
10,259
|
|
|
|
-
|
|
Real estate – residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,319
|
|
|
|
4,319
|
|
|
|
-
|
|
Real estate – commercial
|
|
|
121
|
|
|
|
158
|
|
|
|
279
|
|
|
|
44,205
|
|
|
|
44,484
|
|
|
|
-
|
|
Real estate – construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,396
|
|
|
|
8,396
|
|
|
|
-
|
|
SBA
|
|
|
-
|
|
|
|
1,635
|
|
|
|
1,635
|
|
|
|
250,784
|
|
|
|
252,419
|
|
|
|
-
|
|
USDA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
|
|
801
|
|
|
|
-
|
|
Total
|
|
$
|
121
|
|
|
$
|
1,793
|
|
|
$
|
1,914
|
|
|
$
|
398,628
|
|
|
$
|
400,542
|
|
|
$
|
-
|
|
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.
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 loan 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 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.
The following table summarizes the Company’s internal ratings of its loans as of the dates indicated:
(In thousands)
|
|
Pass
|
|
|
Pass-
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
80,911
|
|
|
$
|
437
|
|
|
$
|
-
|
|
|
$
|
98
|
|
|
$
|
-
|
|
|
$
|
81,446
|
|
Consumer installment
|
|
|
3,773
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,773
|
|
Real estate – residential
|
|
|
5,122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
214
|
|
|
|
-
|
|
|
|
5,336
|
|
Real estate – commercial
|
|
|
52,672
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
|
|
-
|
|
|
|
52,826
|
|
Real estate – construction and land
|
|
|
7,498
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,498
|
|
SBA
|
|
|
251,938
|
|
|
|
1,631
|
|
|
|
2,287
|
|
|
|
3,273
|
|
|
|
-
|
|
|
|
259,129
|
|
USDA
|
|
|
803
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
803
|
|
Total
|
|
$
|
402,717
|
|
|
$
|
2,068
|
|
|
$
|
2,287
|
|
|
$
|
3,739
|
|
|
$
|
-
|
|
|
$
|
410,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
79,134
|
|
|
$
|
730
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79,864
|
|
Consumer installment
|
|
|
10,259
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,259
|
|
Real estate – residential
|
|
|
4,319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,319
|
|
Real estate – commercial
|
|
|
44,326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158
|
|
|
|
-
|
|
|
|
44,484
|
|
Real estate – construction and land
|
|
|
8,396
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,396
|
|
SBA
|
|
|
243,533
|
|
|
|
5,242
|
|
|
|
1,794
|
|
|
|
1,850
|
|
|
|
-
|
|
|
|
252,419
|
|
USDA
|
|
|
801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
Total
|
|
$
|
390,768
|
|
|
$
|
5,972
|
|
|
$
|
1,794
|
|
|
$
|
2,008
|
|
|
$
|
-
|
|
|
$
|
400,542
|
|
The activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2021 and 2020 is presented below. Management has evaluated the adequacy of the allowance for loan losses by estimating the losses in various categories of the loan portfolio.
(In thousands)
|
|
Commercial and Industrial
|
|
|
Consumer Installment
|
|
|
Real Estate Residential
|
|
|
Real Estate Commercial
|
|
|
Real Estate Construction and Land
|
|
|
SBA
|
|
|
USDA
|
|
|
Total
|
|
Three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
1,037
|
|
|
$
|
100
|
|
|
$
|
46
|
|
|
$
|
581
|
|
|
$
|
111
|
|
|
$
|
1,264
|
|
|
$
|
19
|
|
|
$
|
3,158
|
|
Provision for loan losses
|
|
|
92
|
|
|
|
(50
|
)
|
|
|
30
|
|
|
|
157
|
|
|
|
(6
|
)
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
141
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
8
|
|
Net recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
8
|
|
Ending balance
|
|
$
|
1,129
|
|
|
$
|
50
|
|
|
$
|
76
|
|
|
$
|
738
|
|
|
$
|
105
|
|
|
$
|
1,190
|
|
|
$
|
19
|
|
|
$
|
3,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
955
|
|
|
$
|
75
|
|
|
$
|
43
|
|
|
$
|
575
|
|
|
$
|
138
|
|
|
$
|
435
|
|
|
$
|
-
|
|
|
$
|
2,221
|
|
Provision for loan losses
|
|
|
144
|
|
|
|
15
|
|
|
|
15
|
|
|
|
112
|
|
|
|
41
|
|
|
|
148
|
|
|
|
-
|
|
|
|
475
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(149
|
)
|
|
|
-
|
|
|
|
(149
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Net charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(148
|
)
|
|
|
-
|
|
|
|
(148
|
)
|
Ending balance
|
|
$
|
1,099
|
|
|
$
|
90
|
|
|
$
|
58
|
|
|
$
|
687
|
|
|
$
|
179
|
|
|
$
|
435
|
|
|
$
|
-
|
|
|
$
|
2,548
|
|
(In thousands)
|
|
Commercial and Industrial
|
|
|
Consumer Installment
|
|
|
Real Estate Residential
|
|
|
Real Estate Commercial
|
|
|
Real Estate Construction and Land
|
|
|
SBA
|
|
|
USDA
|
|
|
Total
|
|
Six months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
928
|
|
|
$
|
91
|
|
|
$
|
52
|
|
|
$
|
527
|
|
|
$
|
100
|
|
|
$
|
1,225
|
|
|
$
|
18
|
|
|
$
|
2,941
|
|
Provision for loan losses
|
|
|
201
|
|
|
|
(41
|
)
|
|
|
24
|
|
|
|
211
|
|
|
|
5
|
|
|
|
168
|
|
|
|
1
|
|
|
|
569
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(215
|
)
|
|
|
-
|
|
|
|
(215
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
Net charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(203
|
)
|
|
|
-
|
|
|
|
(203
|
)
|
Ending balance
|
|
$
|
1,129
|
|
|
$
|
50
|
|
|
$
|
76
|
|
|
$
|
738
|
|
|
$
|
105
|
|
|
$
|
1,190
|
|
|
$
|
19
|
|
|
$
|
3,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
501
|
|
|
$
|
27
|
|
|
$
|
22
|
|
|
$
|
347
|
|
|
$
|
76
|
|
|
$
|
435
|
|
|
$
|
-
|
|
|
$
|
1,408
|
|
Provision for loan losses
|
|
|
565
|
|
|
|
63
|
|
|
|
36
|
|
|
|
340
|
|
|
|
103
|
|
|
|
156
|
|
|
|
-
|
|
|
|
1,263
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(160
|
)
|
|
|
-
|
|
|
|
(160
|
)
|
Recoveries
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
37
|
|
Net recoveries (charge-offs)
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(156
|
)
|
|
|
-
|
|
|
|
(123
|
)
|
Ending balance
|
|
$
|
1,099
|
|
|
$
|
90
|
|
|
$
|
58
|
|
|
$
|
687
|
|
|
$
|
179
|
|
|
$
|
435
|
|
|
$
|
-
|
|
|
$
|
2,548
|
|
The Company’s allowance for loan losses as of June 30, 2021 and December 31, 2020 by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:
(In thousands)
|
|
Commercial and Industrial
|
|
|
Consumer Installment
|
|
|
Real Estate Residential
|
|
|
Real Estate Commercial
|
|
|
Real Estate Construction and Land
|
|
|
SBA
|
|
|
USDA
|
|
|
Total
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Loans collectively evaluated for impairment
|
|
|
1,129
|
|
|
|
50
|
|
|
|
76
|
|
|
|
738
|
|
|
|
105
|
|
|
|
1,190
|
|
|
|
19
|
|
|
|
3,307
|
|
Ending balance
|
|
$
|
1,129
|
|
|
$
|
50
|
|
|
$
|
76
|
|
|
$
|
738
|
|
|
$
|
105
|
|
|
$
|
1,190
|
|
|
$
|
19
|
|
|
$
|
3,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Loans collectively evaluated for impairment
|
|
|
928
|
|
|
|
91
|
|
|
|
52
|
|
|
|
527
|
|
|
|
100
|
|
|
|
1,225
|
|
|
|
18
|
|
|
|
2,941
|
|
Ending balance
|
|
$
|
928
|
|
|
$
|
91
|
|
|
$
|
52
|
|
|
$
|
527
|
|
|
$
|
100
|
|
|
$
|
1,225
|
|
|
$
|
18
|
|
|
$
|
2,941
|
|
The Company’s recorded investment in loans as of June 30, 2021 and December 31, 2020 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:
(In thousands)
|
|
Commercial and Industrial
|
|
|
Consumer Installment
|
|
|
Real Estate Residential
|
|
|
Real Estate Commercial
|
|
|
Real Estate Construction and Land
|
|
|
SBA
|
|
|
USDA
|
|
|
Total
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
98
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,226
|
|
|
$
|
-
|
|
|
$
|
7,324
|
|
Loans collectively evaluated for impairment
|
|
|
81,348
|
|
|
|
3,773
|
|
|
|
5,336
|
|
|
|
52,826
|
|
|
|
7,498
|
|
|
|
251,903
|
|
|
|
803
|
|
|
|
403,487
|
|
Ending balance
|
|
$
|
81,446
|
|
|
$
|
3,773
|
|
|
$
|
5,336
|
|
|
$
|
52,826
|
|
|
$
|
7,498
|
|
|
$
|
259,129
|
|
|
$
|
803
|
|
|
$
|
410,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,976
|
|
|
$
|
-
|
|
|
$
|
2,976
|
|
Loans collectively evaluated for impairment
|
|
|
79,864
|
|
|
|
10,259
|
|
|
|
4,319
|
|
|
|
44,484
|
|
|
|
8,396
|
|
|
|
249,443
|
|
|
|
801
|
|
|
|
397,566
|
|
Ending balance
|
|
$
|
79,864
|
|
|
$
|
10,259
|
|
|
$
|
4,319
|
|
|
$
|
44,484
|
|
|
$
|
8,396
|
|
|
$
|
252,419
|
|
|
$
|
801
|
|
|
$
|
400,542
|
|
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 2021 and 2024 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, 2021 and December 31, 2020, right-of-use assets totaled $694,000 and $963,000, respectively, and are reported as other assets on our accompanying consolidated balance sheets. The related lease liabilities totaled $752,000 and $1.0 million, respectively, and are reported in other liabilities on our accompanying consolidated balance sheet. As of June 30, 2021, the weighted average remaining lease term is nineteen months, and the weighted average discount rate is 4.62%.
As of June 30, 2021, the minimum rental commitments under these noncancelable operating leases are as follows (in thousands):
2021
|
|
$
|
304
|
|
2022
|
|
|
395
|
|
2023
|
|
|
76
|
|
2024
|
|
|
7
|
|
Total minimum rental payments
|
|
|
782
|
|
Less: Interest
|
|
|
(30
|
)
|
Present value of lease liabilities
|
|
$
|
752
|
|
The Company currently receives rental income from nine 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, 2021 were $886,000 through 2027.
Note 5. Goodwill and Core Deposit Intangible
Goodwill and core deposit intangible assets were as follows:
(In thousands)
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Goodwill
|
|
$
|
10,729
|
|
|
$
|
10,729
|
|
Core deposit intangible, net
|
|
|
878
|
|
|
|
979
|
|
Core deposit intangible is amortized on a straight line basis over the initial estimated lives of the deposits, which range from five to twelve years. The core deposit intangible amortization totaled $50,000 and $101,000 for each of the three and six months ended June 30, 2021 and 2020, respectively.
The carrying basis and accumulated amortization of the core deposit intangible as of June 30, 2021 and December 31, 2020 were as follows:
(In thousands)
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Gross carrying basis
|
|
$
|
1,708
|
|
|
$
|
1,708
|
|
Accumulated amortization
|
|
|
(830
|
)
|
|
|
(729
|
)
|
Net carrying amount
|
|
$
|
878
|
|
|
$
|
979
|
|
The estimated amortization expense of the core deposit intangible remaining as of June 30, 2021 is as follows:
(In thousands)
|
|
|
|
|
2021 remaining
|
|
$
|
101
|
|
2022
|
|
|
208
|
|
2023
|
|
|
210
|
|
2024
|
|
|
210
|
|
2025
|
|
|
149
|
|
Total
|
|
$
|
878
|
|
Note 6. Deposits
Deposits were as follows:
(In thousands, except percentages)
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Non-interest bearing demand
|
|
$
|
77,835
|
|
|
|
20
|
%
|
|
$
|
57,112
|
|
|
|
16
|
%
|
Interest-bearing demand (NOW)
|
|
|
5,289
|
|
|
|
1
|
|
|
|
5,060
|
|
|
|
2
|
|
Money market accounts
|
|
|
114,440
|
|
|
|
30
|
|
|
|
105,079
|
|
|
|
30
|
|
Savings accounts
|
|
|
9,196
|
|
|
|
3
|
|
|
|
6,139
|
|
|
|
2
|
|
Time deposits
|
|
|
177,236
|
|
|
|
46
|
|
|
|
174,625
|
|
|
|
50
|
|
Total
|
|
$
|
383,996
|
|
|
|
100
|
%
|
|
$
|
348,015
|
|
|
|
100
|
%
|
Time deposits of $250,000 and over totaled $77.1 million and $59.6 million as of June 30, 2021 and December 31, 2020, respectively.
As of June 30, 2021, the scheduled maturities of time deposits were as follows:
(In thousands)
|
|
|
|
|
2021
|
|
$
|
57,366
|
|
2022
|
|
|
89,836
|
|
2023
|
|
|
16,805
|
|
2024
|
|
|
7,234
|
|
2025
|
|
|
5,503
|
|
Thereafter
|
|
|
492
|
|
Total
|
|
$
|
177,236
|
|
The aggregate amount of demand deposit overdrafts that have been reclassified as loans as of June 30, 2021 and December 31, 2020 was insignificant.
Note 7. Borrowed Funds and Subordinated Notes
The Company has a blanket lien credit line with the FHLB with borrowing capacity of $49.7 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, 2021 and December 31, 2020.
The Company also has a credit line with the FRB with borrowing capacity of $25.0 million, which is secured by commercial loans. The Company had no borrowings under this line from the FRB at June 30, 2021 and December 31, 2020. As part of the CARES Act, the FRB offered secured discounted borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility (“PPPLF”). At June 30, 2021, the Bank pledged $87.5 million of PPP loans to the FRB under the PPPLF to borrow $87.5 million of funds at a rate of 0.35%, with maturities ranging from April 2022 through May 2026. PPP loans pledged as collateral for the PPPLF are excluded from the average assets used in the Company’s leverage ratio calculation.
As of June 30, 2021 and December 31, 2020, the Company also had subordinated notes totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an interest rate of 7.125% payable semi-annually and maturing on July 20, 2027, and $4.0 million issued in 2018 bearing an interest rate of 7.125% payable semi-annually and maturing on March 31, 2028. The subordinated notes are unsecured and subordinated in right of payment to the payment of our existing and future senior indebtedness and structurally subordinated to all existing and future indebtedness of our subsidiaries.
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 employee’s compensation, and 50% of the employee’s contribution on the next 5% of the employee’s compensation. An eligible employee 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 employees in the proportion of employee 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, 2021 and 2020.
The amount of employer contributions charged to expense under the two plans was $112,000 and $275,000 for the three and six months ended June 30, 2021, respectively, and $101,000 and $224,000 for the three and six months ended June 30, 2020, respectively, and is included in salaries and employee benefits on the consolidated statements of income. There was no accrual payable to the plans as of June 30, 2021 and December 31, 2020.
Note 9. Income Taxes
Income tax expense was $1.1 million and $2.3 million for the three and six months ended June 30, 2021, respectively, and $587,000 and $1.3 million for the three and six months ended June 30, 2020, respectively. The Company’s effective income tax rate was 22.4% and 22.5% for the three and six months ended June 30, 2021, respectively, compared to 21.7% and 22.3% for the same periods in the prior year, respectively.
Net deferred tax assets totaled $290,000 and $83,000 at June 30, 2021 and December 31, 2020, respectively.
The Company files U.S. federal and state income tax returns.
Note 10. Stock Compensation Plans
The board of directors and shareholders adopted the Tectonic Financial, Inc. 2017 Equity Incentive Plan (“Plan”) in May 2017 in connection with the Company’s acquisition of TBI. The Plan was amended and restated by the Company and its 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. There were no issues, forfeitures or exercises in the Plan during the three and six months ended June 30, 2021 and 2020.
The number of options outstanding and the weighted average exercise price, respectively, as of both June 30, 2021 and December 31, 2020 was 190,000 and $5.37. The weighted average contractual life as of June 30, 2021 and December 31, 2020 was 5.87 years and 6.37 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 as of June 30, 2021 and December 31, 2020 was $1.94.
As of June 30, 2021, all 190,000 stock options outstanding were vested, and compensation has been fully recognized. As of June 30, 2021, no options were exercised. The Company recorded compensation expense on a straight-line basis over the vesting periods. The Company recorded salaries and employee benefits expense on our consolidated statements of income in connection with the Plan of $8,000 and $24,000 for the three and six months ended June 30, 2021, respectively, and $34,000 and $58,000 for the three and six months ended June 30, 2020, 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, 2021, all 210,000 awarded shares were outstanding, and the grant date fair value was $4.81. The weighted average contractual life as of June 30, 2021 and December 31, 2020 was 2.97 years and 3.46 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 $70,000 and $139,000 for the three and six months ended June 30, 2021, respectively, related to the restricted stock awards. No salaries and benefits expense was recognized related to the restricted stock awards during the three and six months ended June 30, 2020. As of June 30, 2021, there was $799,000 of unrecognized compensation cost related to the 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 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:
(In thousands)
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Undisbursed loan commitments
|
|
$
|
23,167
|
|
|
$
|
19,880
|
|
Standby letters of credit
|
|
|
207
|
|
|
|
162
|
|
Total
|
|
$
|
23,374
|
|
|
$
|
20,042
|
|
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 as of June 30, 2021 and December 31, 2020.
Employment Agreements
The Company is party to amended and restated employment agreements with Patrick Howard, President and Chief Operating Officer of the Company, and Ken Bramlage, Executive Vice President and Chief Financial Officer of the Company. In addition, the Company entered into an employment agreement with A. Haag Sherman, Chief Executive Officer of the Company, in connection with the Company’s merger with Tectonic Holdings and its initial public offering. Messrs. Sherman and Howard’s employment agreements have a four year term and Mr. Bramlage’s employment agreement has a three year term. Each employment agreement is automatically renewable for an additional one-year term unless either party elects not to renew.
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 31% 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 $180,000 and $484,000 during the three and six months ended June 30, 2021, respectively, and $489,000 and $912,000 during the three and six months ended June 30, 2020, 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 no amounts receivable at June 30, 2021, and $43,000 in fees receivable related to these services at December 31, 2020, which is included in other assets 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 $198,000 payable to Cain Watters related to this agreement at June 30, 2021 and December 31, 2020, respectively, which are included in other liabilities on the accompanying consolidated balance sheets.
As of June 30, 2021, certain officers, directors and their affiliated companies had depository accounts with the Bank totaling approximately $5.1 million. None of those deposit accounts have terms more favorable than those available to any other depositor.
As of June 30, 2021, the Bank had PPP loans to certain of its directors and their affiliated companies totaling $2.8 million in the aggregate. These loans were made to the Bank’s directors and their affiliated companies on the same terms as all other loans originated by the Bank under the PPP. In addition, these loans were approved by the board of directors of the Bank in accordance with the Bank’s regulatory and policy requirements.
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.
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%.
In addition, the Basel III regulatory capital reforms (“Basel III”) implemented a capital conservation buffer of 2.5% that was fully implemented as of January 1, 2019. The Basel III minimum capital ratio requirements as applicable to the Company and the Bank as of June 30, 2021 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 prompt corrective action framework, but not satisfy the buffered Basel III capital ratios. As of June 30, 2021, the Bank’s regulatory capital ratios are in excess of the capital conservation buffer and the levels established for “well capitalized” institutions under the Basel III Rules.
The regulatory capital ratios of the Company and the Bank are as follows:
|
|
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, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tectonic Financial, Inc. (consolidated)
|
|
$
|
58,497
|
|
|
|
20.85
|
%
|
|
$
|
29,462
|
|
|
|
10.50
|
%
|
|
$
|
28,059
|
|
|
|
10.00
|
%
|
T Bank, N.A.
|
|
|
56,590
|
|
|
|
20.34
|
|
|
|
29,214
|
|
|
|
10.50
|
|
|
|
27,823
|
|
|
|
10.00
|
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tectonic Financial, Inc. (consolidated)
|
|
|
55,190
|
|
|
|
19.67
|
|
|
|
23,850
|
|
|
|
8.50
|
|
|
|
22,447
|
|
|
|
8.00
|
|
T Bank, N.A.
|
|
|
53,283
|
|
|
|
19.15
|
|
|
|
23,650
|
|
|
|
8.50
|
|
|
|
22,258
|
|
|
|
8.00
|
|
Common Equity Tier 1 (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tectonic Financial, Inc. (consolidated)
|
|
|
37,940
|
|
|
|
13.52
|
|
|
|
19,641
|
|
|
|
7.00
|
|
|
|
18,238
|
|
|
|
6.50
|
|
T Bank, N.A.
|
|
|
53,283
|
|
|
|
19.15
|
|
|
|
19,476
|
|
|
|
7.00
|
|
|
|
18,085
|
|
|
|
6.50
|
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tectonic Financial, Inc. (consolidated)
|
|
|
55,190
|
|
|
|
12.43
|
|
|
|
17,755
|
|
|
|
4.00
|
|
|
|
22,194
|
|
|
|
5.00
|
|
T Bank, N.A.
|
|
|
53,283
|
|
|
|
12.18
|
|
|
|
17,496
|
|
|
|
4.00
|
|
|
|
21,870
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tectonic Financial, Inc. (consolidated)
|
|
$
|
50,987
|
|
|
|
18.22
|
%
|
|
$
|
29,379
|
|
|
|
10.50
|
%
|
|
$
|
27,980
|
|
|
|
10.00
|
%
|
T Bank, N.A.
|
|
|
50,012
|
|
|
|
18.25
|
|
|
|
28,782
|
|
|
|
10.50
|
|
|
|
27,411
|
|
|
|
10.00
|
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tectonic Financial, Inc. (consolidated)
|
|
|
48,046
|
|
|
|
17.17
|
|
|
|
23,783
|
|
|
|
8.50
|
|
|
|
22,384
|
|
|
|
8.00
|
|
T Bank, N.A.
|
|
|
47,071
|
|
|
|
17.17
|
|
|
|
23,299
|
|
|
|
8.50
|
|
|
|
21,929
|
|
|
|
8.00
|
|
Common Equity Tier 1 (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tectonic Financial, Inc. (consolidated)
|
|
|
30,796
|
|
|
|
11.01
|
|
|
|
19,586
|
|
|
|
7.00
|
|
|
|
18,187
|
|
|
|
6.50
|
|
T Bank, N.A.
|
|
|
47,071
|
|
|
|
17.17
|
|
|
|
19,188
|
|
|
|
7.00
|
|
|
|
17,817
|
|
|
|
6.50
|
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tectonic Financial, Inc. (consolidated)
|
|
|
48,046
|
|
|
|
11.66
|
|
|
|
16,480
|
|
|
|
4.00
|
|
|
|
20,601
|
|
|
|
5.00
|
|
T Bank, N.A.
|
|
|
47,071
|
|
|
|
11.58
|
|
|
|
16,257
|
|
|
|
4.00
|
|
|
|
20,322
|
|
|
|
5.00
|
|
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, 2021, approximately $19.3 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.
The “Other Financial Services” segment includes managed and directed brokerage, investment advisory services, including related trust company operations, third party administration, and 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, 2021 and 2020:
(In thousands)
|
|
Banking
|
|
|
Other Financial Services
|
|
|
HoldCo
|
|
|
Consolidated
|
|
Three Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
6,216
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,216
|
|
Total interest expense
|
|
|
669
|
|
|
|
-
|
|
|
|
219
|
|
|
|
888
|
|
Provision for loan losses
|
|
|
141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
Net-interest income (loss) after provision for loan losses
|
|
|
5,406
|
|
|
|
-
|
|
|
|
(219
|
)
|
|
|
5,187
|
|
Non-interest income
|
|
|
275
|
|
|
|
8,025
|
|
|
|
-
|
|
|
|
8,300
|
|
Depreciation and amortization expense
|
|
|
92
|
|
|
|
36
|
|
|
|
-
|
|
|
|
128
|
|
All other non-interest expense
|
|
|
2,608
|
|
|
|
5,628
|
|
|
|
336
|
|
|
|
8,572
|
|
Income (loss) before income tax
|
|
$
|
2,981
|
|
|
$
|
2,361
|
|
|
$
|
(555
|
)
|
|
$
|
4,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles
|
|
$
|
9,257
|
|
|
$
|
2,350
|
|
|
$
|
-
|
|
|
$
|
11,607
|
|
Total assets
|
|
$
|
546,818
|
|
|
$
|
10,228
|
|
|
$
|
376
|
|
|
$
|
557,422
|
|
(In thousands)
|
|
Banking
|
|
|
Other Financial Services
|
|
|
HoldCo
|
|
|
Consolidated
|
|
Six Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
12,530
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,530
|
|
Total interest expense
|
|
|
1,401
|
|
|
|
-
|
|
|
|
437
|
|
|
|
1,838
|
|
Provision for loan losses
|
|
|
569
|
|
|
|
-
|
|
|
|
-
|
|
|
|
569
|
|
Net-interest income (loss) after provision for loan losses
|
|
|
10,560
|
|
|
|
-
|
|
|
|
(437
|
)
|
|
|
10,123
|
|
Non-interest income
|
|
|
459
|
|
|
|
17,072
|
|
|
|
85
|
|
|
|
17,616
|
|
Depreciation and amortization expense
|
|
|
184
|
|
|
|
74
|
|
|
|
-
|
|
|
|
258
|
|
All other non-interest expense
|
|
|
4,742
|
|
|
|
11,708
|
|
|
|
686
|
|
|
|
17,136
|
|
Income (loss) before income tax
|
|
$
|
6,093
|
|
|
$
|
5,290
|
|
|
$
|
(1,038
|
)
|
|
$
|
10,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles
|
|
$
|
9,257
|
|
|
$
|
2,350
|
|
|
$
|
-
|
|
|
$
|
11,607
|
|
Total assets
|
|
$
|
546,818
|
|
|
$
|
10,228
|
|
|
$
|
376
|
|
|
$
|
557,422
|
|
(In thousands)
|
|
Banking
|
|
|
Other Financial Services
|
|
|
HoldCo
|
|
|
Consolidated
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
4,722
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,722
|
|
Total interest expense
|
|
|
1,241
|
|
|
|
-
|
|
|
|
218
|
|
|
|
1,459
|
|
Provision for loan losses
|
|
|
475
|
|
|
|
-
|
|
|
|
-
|
|
|
|
475
|
|
Net-interest income (loss) after provision for loan losses
|
|
|
3,006
|
|
|
|
-
|
|
|
|
(218
|
)
|
|
|
2,788
|
|
Non-interest income
|
|
|
191
|
|
|
|
6,363
|
|
|
|
22
|
|
|
|
6,576
|
|
Depreciation and amortization expense
|
|
|
92
|
|
|
|
51
|
|
|
|
-
|
|
|
|
143
|
|
All other non-interest expense
|
|
|
1,369
|
|
|
|
4,917
|
|
|
|
234
|
|
|
|
6,520
|
|
Income (loss) before income tax
|
|
$
|
1,736
|
|
|
$
|
1,395
|
|
|
$
|
(430
|
)
|
|
$
|
2,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles
|
|
$
|
9,458
|
|
|
$
|
2,350
|
|
|
$
|
-
|
|
|
$
|
11,808
|
|
Total assets
|
|
$
|
520,439
|
|
|
$
|
9,117
|
|
|
$
|
319
|
|
|
$
|
529,875
|
|
(In thousands)
|
|
Banking
|
|
|
Other Financial Services
|
|
|
HoldCo
|
|
|
Consolidated
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
9,838
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,838
|
|
Total interest expense
|
|
|
2,521
|
|
|
|
-
|
|
|
|
437
|
|
|
|
2,958
|
|
Provision for loan losses
|
|
|
1,263
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,263
|
|
Net-interest income (loss) after provision for loan losses
|
|
|
6,054
|
|
|
|
-
|
|
|
|
(437
|
)
|
|
|
5,617
|
|
Non-interest income
|
|
|
653
|
|
|
|
14,002
|
|
|
|
22
|
|
|
|
14,677
|
|
Depreciation and amortization expense
|
|
|
186
|
|
|
|
158
|
|
|
|
-
|
|
|
|
344
|
|
All other non-interest expense
|
|
|
3,400
|
|
|
|
10,268
|
|
|
|
474
|
|
|
|
14,142
|
|
Income (loss) before income tax
|
|
$
|
3,121
|
|
|
$
|
3,576
|
|
|
$
|
(889
|
)
|
|
$
|
5,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles
|
|
$
|
9,458
|
|
|
$
|
2,350
|
|
|
$
|
-
|
|
|
$
|
11,808
|
|
Total assets
|
|
$
|
520,439
|
|
|
$
|
9,117
|
|
|
$
|
319
|
|
|
$
|
529,875
|
|
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 Accounting Standards Codification (“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:
(In thousands)
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total
Fair Value
|
|
As of June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
$
|
15,913
|
|
|
$
|
-
|
|
|
$
|
15,913
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
2,020
|
|
|
|
-
|
|
|
|
2,020
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
$
|
14,949
|
|
|
$
|
-
|
|
|
$
|
14,949
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
2,447
|
|
|
|
-
|
|
|
|
2,447
|
|
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, 2021, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.
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.
Impaired loans. As of June 30, 2021 and December 31, 2020, there were no impaired loans that were reduced by specific valuation allowances.
The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent impaired 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 were no discounts for collateral-dependent impaired 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 loan 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, 2021 and December 31, 2020, there were no foreclosed assets. There were no foreclosed assets re-measured during the three and six months ended June 30, 2021 and 2020.
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 six months ended June 30, 2021, the Company added servicing assets totaling $19,000 in connection with the sale of $1.1 million in loans. During the six months ended June 30, 2020, the Company added servicing assets totaling $92,000 in connection with the sale of $6.2 million in loans. For the three and six months ended June 20, 2020, there was a credit provision of $100,000 to the valuation allowance for servicing assets. There was no allowance provision for the three and six months ended June 30, 2021.
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 are Property Assessed Clean Energy 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. These investments have no readily determinable fair value.
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:
|
|
June 30, 2021
|
|
(In thousands)
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Level 1 inputs:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,868
|
|
|
$
|
79,868
|
|
Level 2 inputs:
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
17,933
|
|
|
|
17,933
|
|
Securities, restricted
|
|
|
2,431
|
|
|
|
2,431
|
|
Loans held for sale
|
|
|
21,147
|
|
|
|
23,931
|
|
Accrued interest receivable
|
|
|
2,084
|
|
|
|
2,084
|
|
Level 3 inputs:
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
2,784
|
|
|
|
2,784
|
|
Securities not readily marketable
|
|
|
100
|
|
|
|
100
|
|
Loans, net
|
|
|
407,504
|
|
|
|
400,170
|
|
Servicing asset
|
|
|
704
|
|
|
|
704
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Level 1 inputs:
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
77,835
|
|
|
|
77,835
|
|
Level 2 inputs:
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
306,161
|
|
|
|
312,457
|
|
Borrowed funds
|
|
|
99,544
|
|
|
|
99,544
|
|
Accrued interest payable
|
|
|
599
|
|
|
|
599
|
|
|
|
December 31, 2020
|
|
(In thousands)
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Level 1 inputs:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46,868
|
|
|
$
|
46,868
|
|
Level 2 inputs:
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
17,396
|
|
|
|
17,396
|
|
Securities, restricted
|
|
|
2,431
|
|
|
|
2,431
|
|
Loans held for sale
|
|
|
14,864
|
|
|
|
16,462
|
|
Accrued interest receivable
|
|
|
2,440
|
|
|
|
2,440
|
|
Level 3 inputs:
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
5,776
|
|
|
|
5,776
|
|
Securities not readily marketable
|
|
|
100
|
|
|
|
100
|
|
Loans, net
|
|
|
397,601
|
|
|
|
389,143
|
|
Servicing asset
|
|
|
809
|
|
|
|
809
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Level 1 inputs:
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
57,112
|
|
|
|
57,112
|
|
Level 2 inputs:
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
290,903
|
|
|
|
292,174
|
|
Borrowed funds
|
|
|
95,690
|
|
|
|
95,690
|
|
Accrued interest payable
|
|
|
599
|
|
|
|
599
|
|
Note 16. Recent Accounting Pronouncements
Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and 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 an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 became effective for most public companies on January 1, 2020, subject to a company’s election to defer implementation due to the COVID-19 pandemic. On July 17, 2019, the FASB proposed to delay the implementation of the current expected credit loss standard (“CECL”) methodology for certain companies including smaller reporting companies (“SRCs”). The Company is a SRC as defined by the SEC. The proposed delay of the implementation of the CECL methodology by FASB was subject to a comment period. At the October 16, 2019 FASB meeting, the FASB voted unanimously to delay the effective date of CECL adoption for SRCs to January 1, 2023. The Company has developed processes for assessment and documentation, model development and validation. While the Company generally expects that the implementation of ASU 2016-13 and the CECL methodology may increase their allowance for loan losses balance, the adoption will be significantly influenced by the composition, characteristics and quality of the loan portfolio along with the prevailing economic conditions and forecasts as of the adoption date.
ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will be effective for the Company on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on the Company’s consolidated financial statements.
ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs.” ASU 2020-08 clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates. ASU 2020-8 became effective for the Company on January 1, 2021 and did not have a significant impact on the Company’s consolidated financial statements.
Note 17. Subsequent Event
On July 1, 2021, we through our wholly-owned subsidiary TBI, acquired Integra Funding Solutions, LLC, a Texas limited liability company (“Integra”), through the merger of Integra with and into TBI, with TBI surviving the merger. Integra is a factoring company that provides financing to smaller transportation companies across the United States principally by purchasing their accounts receivable at a discount and then collecting such receivables at face value. We believe that the addition of this small business lending vertical will provide the Bank with additional breadth in its lending platform and enable the Bank to continue to prudently grow its balance sheet and generate relatively attractive returns on its assets.
Pursuant to the terms of and subject to the conditions set forth in the Agreement and Plan of Merger (the “Merger Agreement”), the transaction provided for the payment to the members of Integra of (a) an amount of cash equal to (i) $2,458,777, subject to certain adjustments described in the Merger Agreement which totaled $739,521, and (b) 453,203 shares of the Company’s common stock.
A summary of the preliminary estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:
(Dollars in thousands)
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Assets acquired:
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Factored receivables
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$
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33,734
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Other assets
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|
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441
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Premises and equipment
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|
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24
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Loans receivable
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1,134
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|
|
|
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35,333
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|
Liabilities assumed:
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|
|
|
|
Deposits
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|
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2,551
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|
Other liabilities
|
|
|
226
|
|
Borrowings
|
|
|
28,927
|
|
|
|
|
31,704
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Fair value of net assets acquired
|
|
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3,629
|
|
Consideration:
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Cash paid
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3,198
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Common stock
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|
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10,651
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Total consideration
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13,849
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Goodwill
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$
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10,220
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