UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from ________ to ________
Commission File Number
(Exact name of registrant as specified in its charter)
| |
| |
| (State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐
The number of shares outstanding of the registrant’s Common Stock as of November 11, 2022 was
TECTONIC FINANCIAL, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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Item 1. |
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Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 |
3 |
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Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021 |
4 |
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5 |
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6 |
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Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 |
7 |
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8 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
31 |
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Item 3. |
55 |
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Item 4. |
56 |
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PART II. OTHER INFORMATION |
57 |
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Item 1. |
57 |
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Item 1A. |
57 |
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Item 2. |
57 |
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Item 3. |
57 |
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Item 4. |
57 |
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Item 5. |
57 |
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Item 6. |
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58 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TECTONIC FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, 2022 |
December 31, 2021 |
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(In thousands, except share amounts) |
(Unaudited) |
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ASSETS |
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Cash and due from banks |
$ | $ | ||||||
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Interest-bearing deposits |
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Federal funds sold |
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Total cash and cash equivalents |
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Securities available for sale |
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Securities held to maturity |
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Securities, restricted at cost |
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Securities, not readily marketable |
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Loans held for sale |
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| Loans, net of allowance for loan losses of $ |
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Bank premises and equipment, net |
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Other real estate |
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Core deposit intangible, net |
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Goodwill |
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Deferred tax asset |
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Other assets |
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Total assets |
$ | $ | ||||||
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LIABILITIES |
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Demand deposits: |
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Non-interest-bearing |
$ | $ | ||||||
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Interest-bearing |
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Time deposits |
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Total deposits |
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Borrowed funds |
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Subordinated notes |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (see Note 11) |
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SHAREHOLDERS’ EQUITY |
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| Preferred stock, |
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| Common stock, $ |
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Additional paid-in capital |
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| Treasury stock, at cost; |
( |
) |
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Retained earnings |
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Accumulated other comprehensive loss |
( |
) |
( |
) |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
TECTONIC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(In thousands, except per share data and share amounts) |
2022 |
2021 |
2022 |
2021 |
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Interest Income |
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Loan, including fees |
$ | $ | $ | $ | ||||||||||||
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Securities |
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Federal funds sold |
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Interest-bearing deposits |
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Total interest income |
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Interest Expense |
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Deposits |
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Borrowed funds |
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Total interest expense |
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Net interest income |
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Provision for loan losses |
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Net interest income after provision for loan losses |
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Non-interest Income |
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Trust income |
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Gain on sale of loans |
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Advisory income |
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Brokerage income |
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Service fees and other income |
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Rental income |
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Total non-interest income |
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Non-interest Expense |
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Salaries and employee benefits |
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Occupancy and equipment |
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Trust expenses |
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Brokerage and advisory direct costs |
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Professional fees |
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Data processing |
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Other |
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Total non-interest expense |
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Income before Income Taxes |
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Income tax expense |
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Net Income |
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Preferred stock dividends |
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Net income available to common stockholders |
$ | $ | $ | $ | ||||||||||||
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Earnings per common share: |
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Basic |
$ | $ | $ | $ | ||||||||||||
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Diluted |
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Weighted average common shares outstanding |
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Weighted average diluted shares outstanding |
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See accompanying notes to consolidated financial statements.
TECTONIC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
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(In thousands) |
2022 |
2021 |
2022 |
2021 |
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Net Income |
$ | $ | $ | $ | ||||||||||||
|
Other comprehensive (loss) income: |
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Change in unrealized (loss) gain on investment securities available for sale |
( |
) |
( |
) |
( |
) |
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Tax effect |
( |
) |
( |
) |
( |
) |
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Other comprehensive (loss) income |
( |
) |
( |
) |
( |
) |
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|
Comprehensive Income |
$ | $ | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
TECTONIC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
|
(In thousands) |
Series B Preferred Stock |
Common Stock |
Additional Paid-in Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total |
|||||||||||||||||||||
|
Balance at January 1, 2021 |
$ | $ | $ | $ | - | $ | $ | $ | ||||||||||||||||||||
|
Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) |
- | ( |
) |
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Net income |
- | - | - | - | - | |||||||||||||||||||||||
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Other comprehensive loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||
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Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
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Balance at March 31, 2021 |
$ | $ | $ | $ | - | $ | $ | ( |
) |
$ | ||||||||||||||||||
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Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) |
- | ( |
) |
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Dividends paid on common stock |
- | - | - | - | ( |
) |
- | ( |
) |
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Net income |
- | - | - | - | - | |||||||||||||||||||||||
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Other comprehensive income |
- | - | - | - | - | |||||||||||||||||||||||
|
Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
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Balance at June 30, 2021 |
$ | $ | $ | $ | - | $ | $ | ( |
) |
$ | ||||||||||||||||||
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Issuance of common stock in acquisition of Integra Funding Solutions, LLC (“Integra”) (Note 17) |
- | - | - | - | ||||||||||||||||||||||||
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Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) |
- | ( |
) |
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Dividends paid on common stock |
- | - | - | - | ( |
) |
- | ( |
) |
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Net income |
- | - | - | - | - | |||||||||||||||||||||||
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Other comprehensive income |
- | - | - | - | - | |||||||||||||||||||||||
|
Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Balance at September 30, 2021 |
$ | $ | $ | $ | - | $ | $ | ( |
) |
$ | ||||||||||||||||||
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Balance at January 1, 2022 |
$ | $ | $ | $ | - | $ | $ | ( |
) |
$ | ||||||||||||||||||
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Exercise of stock options |
- | - | - | - | - | |||||||||||||||||||||||
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Purchase of treasury stock at cost |
- | - | - | ( |
) |
- | - | ( |
) |
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Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) |
- | ( |
) |
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|
Dividends paid on common stock |
- | - | - | - | ( |
) |
- | ( |
) |
|||||||||||||||||||
|
Net income |
- | - | - | - | - | |||||||||||||||||||||||
|
Other comprehensive loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||
|
Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Balance at March 31, 2022 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
|
Recognition of common stock issued related to reduction of note receivable utilized to exercise options |
- | - | - | - | - | |||||||||||||||||||||||
|
Dividends paid on common stock |
- | - | - | - | ( |
) |
- | ( |
) |
|||||||||||||||||||
|
Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) |
- | ( |
) |
|||||||||||||||||||
|
Net income |
- | - | - | - | - | |||||||||||||||||||||||
|
Other comprehensive loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||
|
Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Balance at June 30, 2022 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
|
Exercise of stock options |
- | - | - | - | - | |||||||||||||||||||||||
|
Purchase of treasury stock at cost |
- | - | - | ( |
) |
- | ( |
) |
||||||||||||||||||||
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Recognition of common stock issued related to reduction of note receivable utilized to exercise options |
- | - | - | - | - | |||||||||||||||||||||||
|
Dividends paid on common stock |
- | - | - | - | ( |
) |
- | ( |
) |
|||||||||||||||||||
|
Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) |
- | ( |
) |
|||||||||||||||||||
|
Net income |
- | - | - | - | - | |||||||||||||||||||||||
|
Other comprehensive loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||
|
Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
See accompanying notes to consolidated financial statements.
TECTONIC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended September 30, |
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(In thousands) |
2022 |
2021 |
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Cash Flows from Operating Activities |
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|
Net income |
$ | $ | ||||||
|
Adjustments to reconcile net income to net cash used in operating activities: |
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Provision for loan losses |
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Depreciation and amortization |
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Accretion of discount on loans |
( |
) |
( |
) |
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Core deposit intangible amortization |
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Securities premium amortization, net |
( |
) |
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Origination of loans held for sale |
( |
) |
( |
) |
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Proceeds from payments and sales of loans held for sale |
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Loss on sale of other real estate owned |
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Gain on sale of loans |
( |
) |
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|
Stock based compensation |
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Deferred income taxes |
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Servicing assets, net |
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Net change in: |
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Other assets |
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|
Other liabilities |
( |
) |
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|
Net cash used in operating activities |
( |
) |
( |
) |
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Cash Flows from Investing Activities |
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Acquisition of business, net of cash acquired |
( |
) |
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Purchase of securities held to maturity |
( |
) |
( |
) |
||||
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Purchase of securities available for sale |
( |
) |
( |
) |
||||
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Principal payments, calls and maturities of securities available for sale |
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Principal payments of securities held to maturity |
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Purchase of securities, restricted |
( |
) |
( |
) |
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Proceeds from sale of securities, restricted |
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Proceeds from sales of real estate owned |
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Net change in loans |
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Purchases of premises and equipment |
( |
) |
( |
) |
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Net cash provided by investing activities |
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Cash Flows from Financing Activities |
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Net change in demand deposits |
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Net change in time deposits |
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Proceeds from borrowed funds |
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Repayment of borrowed funds |
( |
) |
( |
) |
||||
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Dividends paid on common stock |
( |
) |
( |
) |
||||
|
Dividends paid on Series B preferred stock |
( |
) |
( |
) |
||||
|
Exercise of stock options |
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|
Repayments on note receivable utilized to exercise stock options |
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|
Purchase of treasury stock at cost |
( |
) |
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|
Net cash (used in) provided by financing activities |
( |
) |
||||||
|
Net change in cash and cash equivalents |
( |
) |
( |
) |
||||
|
Cash and cash equivalents at beginning of period |
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|
Cash and cash equivalents at end of period |
$ | $ | ||||||
|
Non Cash Transactions |
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|
Transfers from loans held for sale to loans held for investment |
$ | $ | ||||||
|
Transfers from loans to other real estate owned |
$ | $ | ||||||
|
Lease liabilities incurred in exchange for right-of-use assets |
$ | $ | ||||||
|
Stock option exercise in exchange for note receivable |
$ | $ | ||||||
|
Supplemental disclosures of cash flow information |
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|
Cash paid during the period for: |
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|
Interest |
$ | $ | ||||||
|
Income taxes |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
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, factoring, third-party administration, recordkeeping and insurance services to individuals, small businesses and institutions across the United States.
We operate through
We are headquartered in Dallas, Texas. The Bank operates through its main office located at 16200 Dallas Parkway, Dallas, Texas. Our other subsidiaries operate from offices in Houston, Dallas and 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 located at 5950 Sherry Lane, Suite 470, Dallas, Texas. Our main office for Tectonic Advisors is in Plano, Texas is located 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. The Nolan Company (“Nolan”), operating as a division within the Bank, offers third party administration (“TPA”) services, and Integra Funding Solutions, LLC (“Integra”), also operating as a division within the Bank, offers factoring services. The Bank’s technological capabilities, including worldwide free ATM withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, allow most customers to be served regardless of their geographic location. The Bank serves its local geographic market which includes Dallas, Tarrant, Denton, Collin and Rockwall counties in Texas which encompass an area commonly referred to as the Dallas/Fort Worth Metroplex. The Bank also serves the dental and other health professional industries through a centralized loan and deposit platform that operates out of its main office in Dallas, Texas. In addition, the Bank serves the small business community by offering loans guaranteed by the U.S. Small Business Administration (“SBA”) and the U.S. Department of Agriculture (“USDA”).
The Bank offers a wide range of deposit services including demand deposits, regular savings accounts, money market accounts, individual retirement accounts, and certificates of deposit with fixed rates and a range of maturity options. Lending services include commercial loans to small- to medium-sized businesses and professional concerns as well as consumers. The Bank also offers trust services. The Bank’s traditional fiduciary services clients primarily consist of clients of Cain, Watters & Associates, LLC (“Cain Watters”). The Bank, Cain Watters and Tectonic Advisors entered into an advisory services agreement related to the Bank’s trust operations in April 2006, which has been amended from time to time, most recently in 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 nine months ended September 30, 2022 (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, 2021 in the audited financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022.
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 nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the full year ending December 31, 2022.
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 September 30, |
Nine months ended September 30, |
|||||||||||||||
|
(In thousands, except per share data) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
|
Net income available to common shareholders |
$ | $ | $ | $ | ||||||||||||
|
Average shares outstanding |
||||||||||||||||
|
Effect of dilutive shares |
||||||||||||||||
|
Average diluted shares outstanding |
||||||||||||||||
|
Basic earnings per share |
$ | $ | $ | $ | ||||||||||||
|
Diluted earnings per share |
$ | $ | $ | $ | ||||||||||||
As of September 30, 2022, options to purchase
Note 2. Securities
A summary of amortized cost and fair value of securities is presented below as of the dates indicated.
|
September 30, 2022 |
||||||||||||||||
|
(In thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||
|
Securities available for sale: |
||||||||||||||||
|
U.S. Treasuries |
$ | $ | $ | $ | ||||||||||||
|
U.S. government agencies |
||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||
|
Total securities available for sale |
$ | $ | $ | $ | ||||||||||||
|
Securities held to maturity: |
||||||||||||||||
|
Property assessed clean energy |
$ | $ | $ | $ | ||||||||||||
|
Public improvement district/tax increment reinvestment zone |
||||||||||||||||
|
Total securities held to maturity |
$ | $ | $ | $ | ||||||||||||
|
Securities, restricted: |
||||||||||||||||
|
Other |
$ | $ | $ | $ | ||||||||||||
|
Securities not readily marketable |
$ | $ | $ | $ | ||||||||||||
|
December 31, 2021 |
||||||||||||||||
|
(In thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||
|
Securities available for sale: |
||||||||||||||||
|
U.S. government agencies |
$ | $ | $ | $ | ||||||||||||
|
Mortgage-backed securities |
||||||||||||||||
|
Total securities available for sale |
$ | $ | $ | $ | ||||||||||||
|
Securities held to maturity: |
||||||||||||||||
|
Property assessed clean energy |
$ | $ | $ | $ | ||||||||||||
|
Public improvement district/tax increment reinvestment zone |
||||||||||||||||
|
Total securities held to maturity |
$ | $ | $ | $ | ||||||||||||
|
Securities, restricted: |
||||||||||||||||
|
Other |
$ | $ | $ | $ | ||||||||||||
|
Securities not readily marketable |
$ | $ | $ | $ | ||||||||||||
Securities available for sale consist of U.S. government agency securities and mortgage-backed securities guaranteed by U.S. government agencies. Securities held to maturity consist of Property Assessed Clean Energy (“PACE”) and Public Improvement District/Tax Increment Reinvestment Zone (“PID/TIRZ”) investments. These investment contracts or bonds are located in Texas, California and Florida, and originate under a contractual obligation between the property owners, the local county or city administration, and a third-party administrator and sponsor. PACE assessments are created to fund the purchase and installation of energy saving improvements to the property such as solar panels. PID/TIRZ assessments are used to pay for the development costs of a residential subdivision. Generally, as a property assessment, the total assessment is repaid in installments over a period of 5 to 32 years by the then current property owner(s). Each installment is collected by the County or City Tax Collector where the property is located. The assessments are an obligation of the property. Securities, restricted consist of Federal Reserve Bank of Dallas (“FRB”) and Federal Home Loan Bank of Dallas (“FHLB”) stock, which are carried at cost.
As of September 30, 2022 and December 31, 2021, securities available for sale with a fair value of $
As of September 30, 2022 and December 31, 2021, the Bank held FRB stock in the amount of $
As of September 30, 2022 and December 31, 2021, 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 $
The table below indicates the length of time individual investment securities have been in a continuous loss position as of September 30, 2022:
|
Less than 12 months |
12 months or longer |
Total |
||||||||||||||||||||||
|
(In thousands) |
Fair Value |
Unrealized |
Fair Value |
Unrealized |
Fair Value |
Unrealized |
||||||||||||||||||
|
U.S. Treasuries |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
U.S. government agencies |
$ | |||||||||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
The number of investment positions in the unrealized loss position totaled
The amortized cost and estimated fair value of securities available for sale as of September 30, 2022 are presented in the table below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage-backed securities are shown separately since they are not due at a single maturity date.
|
Available for Sale |
||||||||
|
(In thousands) |
Amortized Cost |
Estimated |
||||||
|
Due in one year or less |
$ | $ | ||||||
|
Due after one year through five years |
||||||||
|
Due after five years through ten years |
||||||||
|
Due after ten years |
||||||||
|
Mortgage-backed securities |
||||||||
|
Total |
$ | $ | ||||||
Note 3. Loans and Allowance for Loan Losses
Major classifications of loans held for investment are as follows as of the dates indicated:
|
(In thousands) |
September 30, 2022 |
December 31, 2021 |
||||||
|
Commercial and industrial |
$ | $ | ||||||
|
Consumer installment |
||||||||
|
Real estate – residential |
||||||||
|
Real estate – commercial |
||||||||
|
Real estate – construction and land |
||||||||
|
SBA: |
||||||||
|
SBA 7(a) guaranteed |
||||||||
|
SBA 7(a) unguaranteed |
||||||||
|
SBA 504 |
||||||||
|
USDA |
||||||||
|
Factored Receivables |
||||||||
|
Gross Loans |
||||||||
|
Less: |
||||||||
|
Allowance for loan losses |
||||||||
|
Net loans |
$ | $ | ||||||
Beginning in the second quarter of 2020 and until funding expired on May 31, 2021, the Company participated 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. PPP loans may be forgiven by the SBA and are
As of September 30, 2022, our loan portfolio included $
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
The Company had $
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
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.
Construction and land development loans are evaluated based on the borrower’s and guarantor’s credit worthiness, past experience in the industry, track record and experience with the type of project being considered, and other factors. Collateral value is determined generally by independent appraisal utilizing multiple approaches to determine value based on property type.
The Bank engages in third-party factoring of certain business’s accounts receivable invoices. The Bank’s factoring clients are primarily in the transportation industry. Each account debtor is credit qualified, confirming credit worthiness and stability, because the underlying debtor represents the substantive underlying credit risk. Some factored receivables are full recourse to and personally guaranteed by the factoring client. In such cases, the client is credit qualified under specific policy guidelines. Concentration limits are set and monitored for aggregate factored receivables, account debtors, and individual factoring clients. In addition, we consider the overall state of each specific industry, currently over-the-road trucking, in our evaluation of the credit worthiness of the factoring client and the underlying debtor.
For all loan types, the Company establishes guidelines for its underwriting criteria including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturity terms.
At the portfolio level, the Company monitors concentrations of loans based on several criteria including loan type, collateral type, industry, geography, and other factors. The Company also performs periodic market research and economic analysis at a local geographic and national level. Based on this research, the Company may from time to time change the minimum or benchmark underwriting criteria applied to the above loan types.
Loans are placed on non-accrual status when, in 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 as of the dates indicated:
|
(In thousands) |
September 30, 2022 |
December 31, 2021 |
||||||
|
Non-accrual loans: |
||||||||
|
Real estate – commercial |
$ | $ | ||||||
|
SBA guaranteed |
||||||||
|
SBA unguaranteed |
||||||||
|
Total |
$ | $ | ||||||
The restructuring of a loan is considered a “troubled debt restructuring” (“TDR”) 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.
Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 310-40 Receivables – Troubled Debt Restructurings by Creditors, and Interagency Statements issued by the federal banking regulators, in consultation with the FASB, certain short-term loan modifications and additional accommodations made on a good faith basis in response to COVID-19 (as defined by the guidance) to borrowers who were current prior to any relief are not considered TDRs. Additionally, under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, banks may elect to suspend the requirement for certain loan modifications to be categorized as a TDR. In response to the COVID-19 pandemic, the Company implemented prudent modifications allowing for primarily short-term payment deferrals or other payment relief to borrowers with pandemic-related economic hardships, where appropriate, that complied with the above guidance. As such, the Company's TDR loans noted above do not include loans with modifications to borrowers impacted by COVID-19. As of September 30, 2022, there were no loans on deferment due to the COVID-19 pandemic.
As of September 30, 2022 and December 31, 2021, there were no loans identified as TDRs. There were no new TDRs during the three and nine months ended September 30, 2022 or the year ended December 31, 2021.
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 as of the dates indicated:
|
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 |
|||||||||||||||||||||
|
September 30, 2022 |
Nine Months Ended |
|||||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
|
SBA |
||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
|
December 31, 2021 |
Year Ended |
|||||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
|
SBA |
||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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 as of the dates indicated:
|
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 |
||||||||||||||||||
|
September 30, 2022 |
||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||
|
Real estate – residential |
||||||||||||||||||||||||
|
Real estate – commercial |
||||||||||||||||||||||||
|
Real estate – construction and land |
||||||||||||||||||||||||
|
SBA |
||||||||||||||||||||||||
|
USDA |
||||||||||||||||||||||||
|
Factored Receivables |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
December 31, 2021 |
||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||
|
Real estate – residential |
||||||||||||||||||||||||
|
Real estate – commercial |
||||||||||||||||||||||||
|
Real estate – construction and land |
||||||||||||||||||||||||
|
SBA |
||||||||||||||||||||||||
|
USDA |
||||||||||||||||||||||||
|
Factored receivables |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 |
||||||||||||||||||
|
September 30, 2022 |
||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||
|
Real estate – residential |
||||||||||||||||||||||||
|
Real estate – commercial |
||||||||||||||||||||||||
|
Real estate – construction and land |
||||||||||||||||||||||||
|
SBA |
||||||||||||||||||||||||
|
USDA |
||||||||||||||||||||||||
|
Factored Receivables |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||