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 10, 2023 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, 2023 and December 31, 2022 |
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Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022 |
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Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
35 |
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Item 3. |
61 |
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Item 4. |
62 |
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PART II. OTHER INFORMATION |
63 |
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Item 1. |
63 |
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Item 1A. |
63 |
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Item 2. |
63 |
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Item 3. |
63 |
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Item 4. |
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Item 5. |
63 |
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Item 6. |
64 |
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65 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TECTONIC FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, 2023 |
December 31, 2022 |
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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 credit losses of $ |
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Bank premises and equipment, net |
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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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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) |
2023 |
2022 |
2023 |
2022 |
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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 credit losses |
( |
) |
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Net interest income after provision for credit 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) |
2023 |
2022 |
2023 |
2022 |
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Net Income |
$ | $ | $ | $ | ||||||||||||
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Other comprehensive loss: |
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Change in unrealized loss on securities available for sale |
( |
) |
( |
) |
( |
) |
( |
) |
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Tax effect |
( |
) |
( |
) |
( |
) |
( |
) |
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Other comprehensive loss |
( |
) |
( |
) |
( |
) |
( |
) |
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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 Loss |
Total |
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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 |
- | - | - | - | ( |
) |
- | ( |
) |
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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, 2022 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
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Repayments of note receivable utilized to exercise options |
- | - | - | - | - | |||||||||||||||||||||||
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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 loss |
- | - | - | - | - | ( |
) |
( |
) |
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Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
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Balance at June 30, 2022 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
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Exercise of stock options |
- | - | - | - | - | |||||||||||||||||||||||
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Purchase of treasury stock at cost |
- | - | - | ( |
) |
- | ( |
) |
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Repayments of note receivable utilized to exercise options |
- | - | - | - | - | |||||||||||||||||||||||
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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 |
- | - | - | - | - | |||||||||||||||||||||||
|
Other comprehensive loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||
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Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
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Balance at January 1, 2023 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
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Cumulative change in accounting principle (adoption of ASC 326) |
- | - | - | - | ( |
) |
- | ( |
) |
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Balance at January 1, 2023, as adjusted for change in accounting principle (adoption of ASC 326) |
( |
) |
( |
) |
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Repayments of note receivable utilized to exercise options |
- | - | - | - | - | |||||||||||||||||||||||
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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 March 31, 2023 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
|
Purchase of treasury stock at cost |
- | - | - | ( |
) |
- | - | ( |
) |
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Repayments of note receivable utilized to exercise options |
- | - | - | - | - | |||||||||||||||||||||||
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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 |
- | - | - | - | - | |||||||||||||||||||||||
|
Other comprehensive loss |
- | - | - | - | - | ( |
) |
( |
) |
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|
Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Balance at June 30, 2023 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
|
Repayments of note receivable utilized to exercise options |
- | - | - | - | - | |||||||||||||||||||||||
|
Dividends paid on Series B preferred stock |
- | - | - | - | ( |
) |
- | ( |
) |
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|
Dividends paid on common stock |
- | - | - | - | ( |
) |
- | ( |
) |
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|
Net income |
- | - | - | - | - | |||||||||||||||||||||||
|
Other comprehensive loss |
- | - | - | - | - | ( |
) |
( |
) |
|||||||||||||||||||
|
Stock based compensation |
- | - | - | - | - | |||||||||||||||||||||||
|
Balance at September 30, 2023 |
$ | $ | $ | $ | ( |
) |
$ | $ | ( |
) |
$ | |||||||||||||||||
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) |
2023 |
2022 |
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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 credit losses |
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Depreciation |
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Accretion of discount on loans |
( |
) |
( |
) |
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Core deposit intangible amortization |
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Securities premium accretion, 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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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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Purchase of securities not readily marketable |
( |
) |
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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 |
( |
) |
( |
) |
||||
|
Dividends paid on common stock |
( |
) |
( |
) |
||||
|
Dividends paid on Series B preferred stock |
( |
) |
( |
) |
||||
|
Proceeds from exercise of stock options |
||||||||
|
Repayments on note receivable utilized to exercise stock options |
||||||||
|
Purchase of treasury stock at cost |
( |
) |
( |
) |
||||
|
Net cash provided by (used in) financing activities |
( |
) |
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|
Net change in cash and cash equivalents |
( |
) |
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|
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 |
$ | $ | ||||||
|
Lease liabilities incurred in exchange for right-of-use assets |
$ | $ | ||||||
|
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 Texas corporation and 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 Frisco, 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. The main office for Tectonic Advisors is in Frisco, Texas, and is located at 17 Cowboys Way, Suite 250, Frisco, Texas, and also includes a branch office of HWG.
The Bank offers a broad range of commercial and consumer banking and trust services primarily to small- to medium-sized businesses and their employees, and other institutions. The Nolan Company (“Nolan”), operating as a division within the Bank from Nolan’s office in Overland Park, Kansas, offers third party administration (“TPA”) services, and Integra Funding Solutions, LLC (“Integra”), also operating as a division within the Bank from Integra’s office in Fort Worth, Texas, offers factoring services. The Bank’s technological capabilities, including worldwide free ATM withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, allow most customers to be served regardless of their geographic location. The Bank serves its local geographic market which includes Dallas, Tarrant, Denton, Collin and Rockwall counties in Texas which encompass an area commonly referred to as the Dallas/Fort Worth Metroplex. The Bank also serves the dental and other health professional industries through a centralized loan and deposit platform that operates out of its main office in Dallas, Texas. In addition, the Bank serves the small business community by offering loans guaranteed by the U.S. Small Business Administration (“SBA”) and the U.S. Department of Agriculture (“USDA”).
The Bank offers a wide range of deposit services including demand deposits, regular savings accounts, money market accounts, individual retirement accounts, and certificates of deposit with fixed rates and a range of maturity options. Lending services include commercial loans to small- to medium-sized businesses and professional concerns as well as consumers. The Bank also offers trust services. The Bank’s traditional fiduciary services clients primarily consist of clients of Cain, Watters & Associates, LLC (“Cain Watters”). The Bank, Cain Watters and Tectonic Advisors entered into an advisory services agreement related to the Bank’s trust operations in April 2006, which has been amended from time to time, most recently in 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, 2023 (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, 2022 in the audited financial statements included within our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 31, 2023.
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, 2023, are not necessarily indicative of results that may be expected for the full year ending December 31, 2023.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period, as well as the disclosures provided. Actual results could be significantly different from those estimates. Changes in assumptions or in market conditions could significantly affect the estimates. The determination of the allowance for credit losses, the fair value of stock options, the fair values of financial instruments and other real estate owned, and the status of contingencies are particularly susceptible to significant change in recorded amounts.
Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation.
New Accounting Pronouncements. The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective on January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. In addition, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. Management has made a policy election to exclude accrued interest receivable on available for sale securities from the estimate of credit losses and report accrued interest separately in other assets in the consolidated balance sheets.
The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable incurred loss model under GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of $
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses for debt securities was not required.
ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), eliminates the accounting guidance for troubled debt restructurings in ASC Subtopic 310-40, Receivables -Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The Company adopted ASU 2022-02 on a modified retrospective basis effective on January 1, 2023. The adoption did not have a significant impact on the consolidated financial statements.
|
Three months ended September 30, |
Nine months ended September 30, |
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|
(In thousands, except per share data) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
|
Net income available to common shareholders |
$ | $ | $ | $ | ||||||||||||
|
Weighted average shares outstanding |
||||||||||||||||
|
Effect of dilutive shares |
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|
Weighted average diluted shares outstanding |
||||||||||||||||
|
Basic earnings per share |
$ | $ | $ | $ | ||||||||||||
|
Diluted earnings per share |
$ | $ | $ | $ | ||||||||||||
As of September 30, 2023, options to purchase
Note 2. Securities
|
September 30, 2023 |
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|
(In thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Allowance for Credit Losses |
Estimated Fair Value |
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|
Securities available for sale: |
||||||||||||||||||||
|
U.S. Treasuries |
$ | $ | $ | $ | $ | |||||||||||||||
|
U.S. government agencies |
||||||||||||||||||||
|
Mortgage-backed securities |
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Total securities available for sale |
$ | $ | $ | $ | $ | |||||||||||||||
|
Securities held to maturity: |
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|
Property assessed clean energy |
$ | $ | $ | $ | $ | |||||||||||||||
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Public improvement district/tax increment reinvestment zone |
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Total securities held to maturity |
$ | $ | $ | $ | $ | |||||||||||||||
|
Securities, restricted: |
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Other |
$ | $ | $ | $ | $ | |||||||||||||||
|
Securities not readily marketable |
$ | $ | $ | $ | $ | |||||||||||||||
|
December 31, 2022 |
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|
(In thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Allowance for Credit 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: |
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Other |
$ | $ | $ | $ | - | $ | ||||||||||||||
|
Securities not readily marketable |
$ | $ | $ | $ | - | $ | ||||||||||||||
During the three and nine months ended September, 2023 and 2022, no securities available for sale were sold, and there were no realized gains or losses recorded on sales for the three and nine months ended September, 2023 and 2022.
As of September 30, 2023 and December 31, 2022, securities available for sale with a fair value of $
As of September 30, 2023 and December 31, 2022, the Bank held FRB stock in the amount of $
As of September 30, 2023 and December 31, 2022, 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 $
| September 30, 2023 | ||||||||||||||||||||||||
|
Less than 12 months |
12 months or longer |
Total |
||||||||||||||||||||||
|
(In thousands) |
Fair Value |
Unrealized |
Fair Value |
Unrealized |
Fair Value |
Unrealized |
||||||||||||||||||
|
Securities available for sale: |
||||||||||||||||||||||||
|
U.S. Treasuries |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
U.S. government agencies |
||||||||||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Securities held to maturity: |
||||||||||||||||||||||||
|
Public improvement district/tax increment reinvestment zone |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Beginning January 1, 2023, the Company evaluates all securities quarterly to determine if any debt securities in a loss position require an allowance for credit losses in accordance with ASC 326. The Company had a total of
As of September 30, 2023, no allowance for credit losses has been recognized on available for sale and held to maturity securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities are U.S. government agencies who continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.
|
Available for Sale |
Held to Maturity |
|||||||||||||||
|
(In thousands) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
|
Due in one year or less |
$ | $ | $ | $ | ||||||||||||
|
Due after one year through five years |
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Due after five years through ten years |
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|
Due after ten years |
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|
Mortgage-backed securities |
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|
Total |
$ | $ | $ | $ | ||||||||||||
Note 3. Loans and Allowance for Credit Losses
|
(In thousands) |
September 30, 2023 |
December 31, 2022 |
||||||
|
Commercial and industrial |
$ | $ | ||||||
|
Consumer installment |
||||||||
|
Real estate – residential |
||||||||
|
Real estate – commercial |
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|
Real estate – construction and land |
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SBA: |
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SBA 7(a) guaranteed |
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SBA 7(a) unguaranteed |
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|
SBA 504 |
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USDA |
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Factored Receivables |
||||||||
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Gross Loans |
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Less: |
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|
Allowance for credit losses |
||||||||
|
Net loans |
$ | $ | ||||||
As of September 30, 2023, our loan portfolio included $
Accrued interest receivable on loans totaled $
Loans with carrying amounts of $
The Company had $
Loan Origination/Risk Management.
The Company maintains written loan origination policies, procedures, and processes which address credit quality within an acceptable level of risk at several levels including individual loan level, loan type, and loan portfolio levels.
Commercial and industrial loans, which are predominantly loans to dentists, are underwritten based on historical and projected income of the business and individual borrowers and guarantors. The Company utilizes a comprehensive global debt service coverage analysis to determine debt service coverage ratios. This analysis compares global cash flow of the borrowers and guarantors on an individual credit to existing and proposed debt after consideration of personal and business-related other expenses. Collateral is generally a lien on all available assets of the business borrower including intangible assets. Credit worthiness of individual borrowers and guarantors is established through the use of credit reports and credit scores.
Consumer loans are evaluated on the basis of credit worthiness as established through the use of credit reports and credit scores. Additional credit quality indicators include borrower debt to income ratios based on verifiable income sources.
Real estate mortgage loans are evaluated based on collateral value as well as global debt service coverage ratios based on historical and projected income from all related sources including the collateral property, the borrower, and all guarantors where applicable.
The Company originates SBA loans which are sometimes sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The
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 the opinion of the Company’s management, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period of repayment performance by the borrower.
|
(In thousands) |
September 30, 2023 |
December 31, 2022 |
||||||
|
Non-accrual loans: |
||||||||
|
Real estate – residential |
$ | $ | ||||||
|
SBA guaranteed |
||||||||
|
SBA unguaranteed |
||||||||
|
Total |
$ | $ | ||||||
There was no allowance for credit losses for non-accrual loans as of September 30, 2023. The Company did not recognize any interest income on non-accrual loans during the three and nine months ended September 30, 2023 and 2022.
From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of a principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension or a combination thereof, among other things. During the three and nine months ended September 30, 2023, the Company provided one modification to extend the maturity date of a SBA loan with an outstanding balance of $
|
(In thousands) |
Residential Real Estate |
|||
|
Real estate – residential |
$ | |||
|
SBA unguaranteed |
||||
|
Total |
$ | |||
Prior to the adoption of ASC 326, loans were 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 was allocated, if necessary, so that the loan was 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.
|
Unpaid |
Recorded |
Recorded |
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|
Contractual |
Investment |
Investment |
Total |
Average |
Interest |
|||||||||||||||||||||||
|
Principal |
With No |
With |
Recorded |
Related |
Recorded |
Income |
||||||||||||||||||||||
|
(In thousands) |
Balance |
Allowance |
Allowance |
Investment |
Allowance |
Investment |
Recognized |
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|
Year Ended December 31, 2022 |
||||||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
|
SBA |
||||||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
|
30-89 Days |
90 Days or |
Total |
Total |
Total |
90 Or More Days Past Due |
|||||||||||||||||||
|
(In thousands) |
Past Due |
More Past Due |
Past Due |
Current |
Loans |
Still Accruing |
||||||||||||||||||
|
September 30, 2023 |
||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||
|
Real estate – residential |
||||||||||||||||||||||||
|
Real estate – commercial |
||||||||||||||||||||||||
|
Real estate – construction and land |
||||||||||||||||||||||||
|
SBA 7a |
||||||||||||||||||||||||
|
SBA 504 |
||||||||||||||||||||||||
|
USDA |
||||||||||||||||||||||||
|
Factored Receivables |
||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
December 31, 2022 |
||||||||||||||||||||||||
|
Commercial and industrial |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
|
Consumer installment |
||||||||||||||||||||||||
|
Real estate – residential |
||||||||||||||||||||||||
|
Real estate – commercial |
||||||||||||||||||||||||
|
Real estate – construction and land |
||||||||||||||||||||||||
|
SBA 7a |
||||||||||||||||||||||||
|
SBA 504 |
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